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Zayo Group Holdings, Inc. Reports Financial Results for the Second Fiscal Quarter Ended December 31, 2017

Press Release

Second Fiscal Quarter 2018 Financial Highlights

  • $653.5 million of consolidated revenue; including $530.0 million from
    the Communications Infrastructure segments and $123.5 million from the
    Allstream segment;
  • Net income of $11.5 million, including $10.6 million from the
    Communications Infrastructure segments and $0.9 million from the
    Allstream segment;
  • $329.9 million of adjusted EBITDA, including $300.0 million from
    Communications Infrastructure and $29.9 million from the Allstream
    segment;
  • Bookings of $7.9 million, gross installs of $7.6 million, churn of
    1.2% and net installs of $1.6 million, all on a monthly recurring
    revenue (MRR) and monthly amortized revenue (MAR) basis, excluding the
    Allstream segment.
  • Adjusted unlevered free cash flow of $124.3million.

BOULDER, Colo. –
Zayo Group Holdings, Inc. (“Zayo” or “the Company”) (NYSE: ZAYO), a
global leader in Communications Infrastructure, announced results for
the three months ended December 31, 2017.

Second quarter operating income increased by $8.6 million and net income
decreased by $11.7 million over the previous quarter primarily due to
the provision for income taxes. Income tax expense increased by $17.5
million in the second quarter, largely due to the impact from tax reform
under the Tax Cut and Jobs Act of 2017 of $44.1 million partially
offset by a $28.5 million release of a valuation allowance on deferred
tax assets for certain foreign subsidiaries. Basic and diluted net
income per share during the second fiscal quarter was $0.05. During the
three months ended December 31, 2017, capital expenditures were $193.4
million.

As of December 31, 2017, the Company had $280.8 million of cash and
$442.0 million available under its revolving credit facility.

Recent Developments

Acquisition of Spread Networks

On November 26, 2017, the Company entered into a definitive agreement to
acquire Spread Networks, LLC, a privately owned telecommunications
provider that owns and operates a 825-mile, high-fiber count long haul
route connecting New York and Chicago, for $127.0 million in cash
(subject to post-closing adjustments). The all-cash transaction is
expected to be funded with cash on hand and debt and is expected to
close in the first calendar quarter of 2018, subject to customary
closing conditions.

Acquisition of Optic Zoo Networks

On January 18, 2018, the Company completed the CAD $31.0 million (or
$24.9 million) cash acquisition of Vancouver-based Optic Zoo Networks.
Optic Zoo Networks owns and operates high-capacity fiber
in Vancouver and has achieved a significant penetration of customers,
with a focus on the digital media sector. The transaction adds 103 route
miles and more than 100 on-net buildings to the
Company’s Vancouver footprint.

Acquisition of Neutral Path Communications

On January 28, 2018, the Company entered into an agreement to acquire
substantially all of the assets of Neutral Path Communications and Near
North Partners for $31.5 million. The purchase price is subject to net
working capital and other customary adjustments, as well as a contingent
payment based on sales performance through June 30, 2018. Neutral Path
is a long haul infrastructure provider, operating a fiber network in the
Midwest. The transaction will add 452 owned plus additional leased route
miles to the Company’s extensive North American network, including a
unique, high-count fiber route from Minneapolis to Omaha.

Second Fiscal Quarter Financial Results

Three Months Ended December 31, 2017 and September 30, 2017

(in millions)

 
        Three months ended
December 31, 2017     September 30, 2017
Revenue $ 653.5 $ 643.5
Annualized revenue growth 6 %
Operating income 104.0 95.4
 
Income from operations before income taxes 34.4 28.6
Provision for income taxes   22.9     5.4  
Net income $ 11.5   $ 23.2  
 
Adjusted EBITDA $ 329.9 $ 316.6
Annualized Adjusted EBITDA growth 17 %
Adjusted EBITDA margin 50 % 49 %
 
Levered free cash flow/(deficit) $ (5.7 ) $ 75.4
 

Three Months Ended December 31, 2017 and December 31, 2016

(in millions)

 
        Three months ended
December 31, 2017     December 31, 2016
Revenue $ 653.5 $ 506.7
Annual revenue growth 29 %
Operating income 104.0 90.7
 
Income from operations before income taxes 34.4 20.0
Provision for income taxes   22.9     0.2  
Net income $ 11.5   $ 19.8  
 
Adjusted EBITDA $ 329.9 $ 263.4
Annual Adjusted EBITDA growth 25 %
Adjusted EBITDA margin 50 % 52 %
 
Levered free cash flow/(deficit) $ (5.7 ) $ (43.9 )
 

Conference Call

Zayo will hold a conference call to report the second fiscal quarter
2018 results at 5:00 p.m. EST, February 7, 2018. To participate on the
live call, listeners in the U.S. may dial 866-737-5498 and international
listeners may dial 412-858-4607; please request to join the Zayo Group
call. During the call, the Company will review an earnings presentation
that summarizes the financial, operational and commercial highlights of
the quarter. This earnings presentation, a live webcast of the
conference call, and a supplemental earnings presentation will be made
available through the Investor Relations section of the Company’s
website at investors.zayo.com.

About Zayo

Zayo Group Holdings, Inc. (NYSE: ZAYO) provides communications
infrastructure solutions, including fiber and bandwidth connectivity,
colocation and cloud infrastructure to the world’s leading businesses.
Customers include wireless and wireline carriers, media and content
companies and finance, healthcare and other large enterprises. Zayo’s
127,000-mile network in North America and Europe includes extensive
metro connectivity to thousands of buildings and data centers. In
addition to high-capacity dark fiber, wavelength, Ethernet and other
connectivity solutions, Zayo offers colocation and cloud infrastructure
in its carrier-neutral data centers. Zayo provides users with flexible,
customized solutions and self-service through Tranzact, an innovative
online platform for managing and purchasing bandwidth. For more
information, visit zayo.com.

Forward Looking Statements

Information contained in this earnings release that is not historical by
nature constitutes “forward-looking statements” which can be identified
by the use of forward-looking terminology such as “believes,” “expects,”
“plans,” “intends,” “estimates,” “projects,” “could,” “may,” “will,”
“should,” or “anticipates” or the negatives thereof, other variations
thereon or comparable terminology, or by discussions of strategy. No
assurance can be given that future results expressed or implied by the
forward-looking statements will be achieved and actual results may
differ materially from those contemplated by the forward-looking
statements. Such statements are based on management’s current
expectations and beliefs and are subject to a number of risks and
uncertainties that could cause actual results to differ materially from
those expressed or implied by the forward-looking statements. These
risks and uncertainties include, but are not limited to, those relating
to the Company’s financial and operating prospects, current economic
trends, future opportunities, ability to retain existing customers and
attract new ones, outlook of customers, and strength of competition and
pricing. In addition, there is risk and uncertainty in the Company’s
acquisition strategy including our ability to integrate acquired
companies and assets. Specifically, there is a risk associated with our
recent acquisitions, and the benefits thereof, including financial and
operating results and synergy benefits that may be realized from these
acquisitions and the timeframe for realizing these benefits. Other
factors and risks that may affect our business and future financial
results are detailed in the “Risk Factors” section of our Annual Report
on Form 10-K filed on August 22, 2017 (our “Annual Report”). We caution
you not to place undue reliance on these forward-looking statements,
which speak only as of their respective dates. We undertake no
obligation to publicly update or revise forward-looking statements to
reflect events or circumstances after releasing this supplemental
information or to reflect the occurrence of unanticipated events, except
as required by law.

This earnings release should be read together with the Company’s
unaudited condensed consolidated financial statements and notes thereto
for the quarter ended December 31, 2017 included in the Company’s
Quarterly Report on Form 10-Q to be filed with the SEC on February 7,
2018 and the Company’s audited consolidated financial statements and
notes thereto for the year ended June 30, 2017 included in the Company’s
Annual Report.

Non-GAAP Financial Measures

The Company provides financial measures that are not defined under
generally accepted accounting principles in the United States, or GAAP,
including Adjusted EBITDA, Adjusted EBITDA Margin, adjusted unlevered
free cash flow and levered free cash flow.

Adjusted EBITDA, as defined below and in Note 15 – Segment Reporting
of our consolidated financial statements and notes thereto included in
our Annual Report on Form 10-K, is the primary measure used by our chief
operating decision maker to evaluate segment operating performance.

Adjusted EBITDA is defined as earnings/(loss) from operations before
interest, income taxes, depreciation and amortization (“EBITDA”)
adjusted to exclude acquisition or disposal-related transaction costs,
losses on extinguishment of debt, stock-based compensation, unrealized
foreign currency gains/(losses) on intercompany loans, and non-cash
income/(loss) on equity and cost method investments. Adjusted EBITDA
Margin is defined as Adjusted EBITDA divided by revenue. Adjusted
unlevered free cash flow is defined as Adjusted EBITDA less purchases of
property and equipment, net of stimulus grants, plus additions to
deferred revenue, less non-cash monthly amortized revenue. Levered free
cash flow is defined as net cash provided by operating activities less
purchases of property and equipment, net of stimulus grants. Adjusted
unlevered free cash flow and levered free cash flow are not measurements
of our financial performance under GAAP and should not be considered in
isolation or as alternatives to net income, net cash flows provided by
operating activities, total net cash flows or any other performance
measures derived in accordance with GAAP or as alternatives to net cash
flows from operating activities or total net cash flows as measures of
our liquidity.

Adjusted EBITDA is a performance rather than cash flow measure. In
addition to Adjusted EBITDA, management uses adjusted unlevered free
cash flow, which measures the ability of Adjusted EBITDA to cover
capital expenditures. We use levered free cash flow as a measure to
evaluate cash generated through normal operating activities. These
metrics are among the primary measures used by management for planning
and forecasting future periods. We believe the presentation of Adjusted
EBITDA is relevant and useful for investors because it allows investors
to view results in a manner similar to the method used by management and
makes it easier to compare our results with the results of other
companies that have different financing and capital structures. We
believe that the presentation of levered free cash flow is relevant and
useful to investors because it provides a measure of cash available to
pay the principal on our debt and pursue acquisitions of businesses or
other strategic investments or uses of capital.

We also monitor Adjusted EBITDA because our subsidiaries have debt
covenants that restrict their borrowing capacity that are based on a
leverage ratio, which utilizes a modified EBITDA, as defined in our
credit agreement and the indentures governing our notes. The modified
EBITDA is consistent with our definition of Adjusted EBITDA; however, it
includes the pro forma Adjusted EBITDA of and expected cost synergies
from the companies acquired by us during the quarter for which the debt
compliance certification is due. Adjusted EBITDA results, along with the
quantitative and qualitative information, are also utilized by
management and our Compensation Committee, as an input for determining
incentive payments to employees.

Adjusted EBITDA has limitations as an analytical tool and should not be
considered in isolation from, or as a substitute for, analysis of our
results of operations and operating cash flows as reported under GAAP.
For example, Adjusted EBITDA:

  • does not reflect capital expenditures, or future requirements for
    capital and major maintenance expenditures or contractual commitments;
  • does not reflect changes in, or cash requirements for, our working
    capital needs;
  • does not reflect the interest expense, or the cash requirements
    necessary to service the interest payments, on our debt; and
  • does not reflect cash required to pay income taxes.

Adjusted unlevered free cash flow has limitations as an analytical tool
and should not be considered in isolation from, or as a substitute for,
analysis of our results as reported under GAAP. For example, adjusted
unlevered free cash flow:

  • does not reflect changes in, or cash requirements for, our working
    capital needs;
  • does not reflect the interest expense, or the cash requirements
    necessary to service the interest payments, on our debt; and
  • does not reflect cash required to pay income taxes.

Levered free cash flow has limitations as an analytical tool and should
not be considered in isolation from, or as a substitute for, analysis of
our results as reported under GAAP. For example, levered free cash flow:

  • does not reflect principal payments on debt;
  • does not reflect principal payments on capital lease obligations;
  • does not reflect dividend payments, if any; and
  • does not reflect the cost of acquisitions.

Our computation of Adjusted EBITDA, and levered free cash flow may not
be comparable to other similarly titled measures computed by other
companies because all companies do not calculate these measures in the
same fashion.

Because we have acquired numerous entities since our inception and
incurred transaction costs in connection with each acquisition, borrowed
money in order to finance our operations and acquisitions, and used
capital and intangible assets in our business, and because the payment
of income taxes is necessary if we generate taxable income after the
utilization of our net operating loss carry forwards, any measure that
excludes these items has material limitations. As a result of these
limitations, these measures should not be considered as a measure of
discretionary cash available to us to invest in the growth of our
business or as a measure of our liquidity. See “Reconciliation of
Non-GAAP Financial Measures” for a quantitative reconciliation of
Adjusted EBITDA to net income/(loss) and for quantitative
reconciliations of adjusted unlevered free cash flow and levered free
cash flow, each to net cash provided by operating activities.

Annualized revenue and annualized Adjusted EBITDA are derived by
multiplying the total revenue and Adjusted EBITDA, respectively, for the
most recent quarterly period by four. Our computations of annualized
revenue and annualized Adjusted EBITDA may not be representative of our
actual annual results.

Measures referred to as being calculated on a constant currency basis
are intended to present the relevant information assuming a constant
exchange rate between the two periods being compared. Such metrics are
calculated by applying the currency exchange rates used in the
preparation of the prior period financial results to the subsequent
period results.

Tables reconciling non-GAAP measures are included in the Reconciliation
of Non-GAAP Financial Measures section of this presentation. A glossary
of terms used throughout is available under the investor section of the
Company’s website at http://investors.zayo.com/glossary.

 
Consolidated Financial Information

Consolidated Statements of Operations

(in millions, except per share data)

 
    Three months ended December 31,     Six months ended December 31,
2017     2016 2017     2016
Revenue $ 653.5   $ 506.7   $ 1,297.0   $ 1,011.6  
Operating costs and expenses
Operating costs (excluding depreciation and amortization) 232.0 179.9 467.7 353.7
Selling, general and administrative expenses 121.6 104.7 249.9 210.3
Depreciation and amortization   195.9     131.4     380.0     269.9  
Total operating costs and expenses   549.5     416.0     1,097.6     833.9  
Operating income   104.0     90.7     199.4     177.7  
Other expenses
Interest expense (73.1 ) (53.7 ) (146.7 ) (107.0 )
Loss on extinguishment of debt (4.9 )
Foreign currency gain/(loss) on intercompany loans 3.1 (17.4 ) 13.9 (28.6 )
Other income, net   0.4     0.4     1.3     0.2  
Total other expenses, net   (69.6 )   (70.7 )   (136.4 )   (135.4 )
Income from operations before income taxes 34.4 20.0 63.0 42.3
Provision for income taxes   22.9     0.2     28.3     6.8  
Net income $ 11.5   $ 19.8   $ 34.7   $ 35.5  
 
Weighted-average shares used to compute net income per share:
Basic 247.4 243.1 246.9 242.9
Diluted 249.3 245.6 249.2 244.9
Net income per share:
Basic $ 0.05 $ 0.08 $ 0.14 $ 0.15
Diluted $ 0.05 $ 0.08 $ 0.14 $ 0.14
 
 

Consolidated Balance Sheets

(in millions, except share amounts)

 
        December 31,     June 30,
2017 2017
Assets
Current assets
Cash and cash equivalents $ 280.8 $ 220.7
Trade receivables, net of allowance of $8.7 and $9.5 as of December
31, 2017 and June 30, 2017, respectively
233.8 191.6
Prepaid expenses 67.4 68.3
Other assets   24.4     34.0  
Total current assets 606.4 514.6
Property and equipment, net 5,129.4 5,016.0
Intangible assets, net 1,302.8 1,188.6
Goodwill 1,712.9 1,840.2
Deferred income taxes, net 38.0 38.3
Other assets   146.4     141.7  
Total assets $ 8,935.9   $ 8,739.4  
Liabilities and stockholders’ equity
Current liabilities
Accounts payable $ 42.7 $ 72.4
Accrued liabilities 330.5 325.4
Accrued interest 73.0 63.5
Current portion of long-term debt 5.0 5.0
Capital lease obligations, current 8.4 8.0
Deferred revenue, current   152.0     146.0  
Total current liabilities 611.6 620.3
Long-term debt, non-current 5,538.6 5,532.7
Capital lease obligation, non-current 89.8 93.6
Deferred revenue, non-current 989.9 989.7
Deferred income taxes, net 147.7 40.2
Other long-term liabilities   48.0     52.4  
Total liabilities 7,425.6 7,328.9
 
Stockholders’ equity

Preferred stock, $0.001 par value – 50,000,000 shares authorized;
no shares issued and outstanding as of December 31, 2017 and June
30, 2017, respectively

Common stock, $0.001 par value – 850,000,000 shares authorized;
248,105,766 and 246,471,551 shares issued and outstanding as of
December 31, 2017 and June 30, 2017, respectively
0.2 0.2
Additional paid-in capital 1,931.2 1,884.0
Accumulated other comprehensive income 23.3 5.4
Accumulated deficit   (444.4 )   (479.1 )
Total stockholders’ equity   1,510.3     1,410.5  
Total liabilities and stockholders’ equity $ 8,935.9   $ 8,739.4  
 
 

Consolidated Statement of Cash Flows

(in millions)

 
        Six months ended December 31,
2017     2016
Cash flows from operating activities
Net income $ 34.7 $ 35.5
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 380.0 269.9
Loss on extinguishment of debt 4.9
Non-cash interest expense 4.8 5.1
Stock-based compensation 51.3 66.5
Amortization of deferred revenue (66.4 ) (55.6 )
Foreign currency (gain)/loss on intercompany loans (13.9 ) 28.6
Deferred income taxes 19.7 (0.5 )
Provision for bad debts 2.3 1.4
Non-cash loss on investments 0.3 0.5
Changes in operating assets and liabilities, net of acquisitions
Trade receivables (41.5 ) (16.5 )
Accounts payable and accrued liabilities 29.2 (33.0 )
Additions to deferred revenue 61.9 84.3
Other assets and liabilities   (10.8 )   16.3  
Net cash provided by operating activities   456.5     402.5  
Cash flows from investing activities
Purchases of property and equipment (386.8 ) (421.9 )
Cash paid for acquisitions, net of cash acquired (1.3 )
Other   (0.2 )   1.5  
Net cash used in investing activities   (387.0 )   (421.7 )
Cash flows from financing activities
Proceeds from debt 312.8
Principal payments on long-term debt (313.2 )
Principal payments on capital lease obligations (4.0 ) (2.0 )
Payment of debt issue costs (3.4 ) (0.7 )
Cash paid for Santa Clara acquisition financing arrangement   (2.6 )    
Net cash used in financing activities   (10.4 )   (2.7 )
Net cash flows 59.1 (21.9 )
Effect of changes in foreign exchange rates on cash   1.0     (4.8 )
Net increase/(decrease) in cash and cash equivalents 60.1 (26.7 )
Cash and cash equivalents, beginning of year   220.7     170.7  
Cash and cash equivalents, end of period $ 280.8   $ 144.0  
Supplemental disclosure of non-cash investing and financing
activities:
Cash paid for interest, net of capitalized interest $ 136.3 $ 97.3
Cash paid for income taxes $ 3.1 $ 6.0
Non-cash purchases of equipment through capital leasing $ 0.3 $ 37.9
(Decrease)/increase in accounts payable and accrued expenses for
purchases of property and equipment
$ (47.4 ) $ 22.7
 
 

Reconciliation of Non-GAAP Financial Measures

(in millions)

 
Adjusted EBITDA and Cash Flow Reconciliation     Three months ended
December 31, 2017     September 30, 2017     December 31, 2016
Reconciliation of Adjusted EBITDA:
Net income $ 11.5 $ 23.2 $ 19.8
Interest expense 73.1 73.6 53.7
Provision for income taxes 22.9 5.4 0.2
Depreciation and amortization 195.9 184.1 131.4
Transaction costs 5.9 8.3 6.2
Stock-based compensation 23.5 27.8 34.5
Loss on extinguishment of debt 4.9
Foreign currency (gain)/loss on intercompany loans (3.1 ) (10.8 ) 17.4
Non-cash loss on investments   0.2     0.1     0.2  
Adjusted EBITDA $ 329.9   $ 316.6   $ 263.4  
 
Reconciliation of adjusted unlevered free cash flow:
Net cash provided by operating activities $ 187.7 $ 268.8 $ 169.7
Cash paid for income taxes 1.7 1.4 4.1
Cash paid for interest, net of capitalized interest 82.0 54.3 84.1
Transaction costs 5.9 8.3 6.2
Provision for bad debts (1.5 ) (0.8 ) (0.5 )
Additions to deferred revenue (21.4 ) (40.5 ) (43.4 )
Amortization of deferred revenue 33.6 32.8 28.1
Other changes in operating assets and liabilities   41.9     (7.7 )   15.1  
Adjusted EBITDA   329.9     316.6     263.4  
Purchases of property and equipment (193.4 ) (193.4 ) (213.6 )
Additions to deferred revenue 21.4 40.5 43.4
Amortization of deferred revenue   (33.6 )   (32.8 )   (28.1 )
Adjusted unlevered free cash flow $ 124.3   $ 130.9   $ 65.1  
 
Reconciliation of levered free cash flow:
Net cash provided by operating activities $ 187.7 $ 268.8 $ 169.7
Purchases of property and equipment, net   (193.4 )   (193.4 )   (213.6 )
Levered free cash flow/(deficit), as defined $ (5.7 ) $ 75.4   $ (43.9 )
 
 
Adjusted EBITDA and Cash Flow Reconciliation     Three months ended December 31, 2017
Zayo Consolidated     Allstream    

Consolidated
Excluding
Allstream

Reconciliation of Adjusted EBITDA:
Net income $ 11.5 $ 0.9 $ 10.6
Interest expense 73.1 3.9 69.2
Provision for income taxes 22.9 22.9
Depreciation and amortization 195.9 19.5 176.4
Transaction costs 5.9 2.2 3.7
Stock-based compensation 23.5 3.4 20.1
Foreign currency gain on intercompany loans (3.1 ) (3.1 )
Non-cash loss on investments   0.2         0.2  
Adjusted EBITDA $ 329.9   $ 29.9   $ 300.0  
 
Reconciliation of levered free cash flow:
Net cash provided by operating activities $ 187.7 $ 16.2 $ 171.5
Purchases of property and equipment, net   (193.4 )   (2.9 )   (190.5 )
Levered free cash flow/(deficit), as defined $ (5.7 ) $ 13.3   $ (19.0 )

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Zayo Group Holdings, Inc.
Media:
Shannon
Paulk
, 303-577-5897
Corporate Communications
press@www.zayo.com
or
Investors:
Brad
Korch
, 720-306-7556
Investor Relations
IR@www.zayo.com