Zayo Group Holdings, Inc. Reports Financial Results for the Second Fiscal Quarter Ended December 31, 2018

Second Fiscal Quarter 2019 Financial Highlights

  • $639.1 million of consolidated revenue; including $542.4 million from
    the Communications Infrastructure segments and $96.7 million from the
    Allstream segment.
  • Net income of $30.2 million, including $36.1 million from the
    Communications Infrastructure segments and a net loss of $5.9 million
    from the Allstream segment;
  • $321.2 million of adjusted EBITDA, including $303.6 million from
    Communications Infrastructure and $17.6 million from the Allstream
    segment.
  • Bookings of $8.3 million, gross installs of $7.8 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 $132.3 million.

BOULDER, Colo.–(BUSINESS WIRE)–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, 2018.

Second quarter net income increased by $8.1 million over the previous
quarter. Basic and diluted net income per share during the second fiscal
quarter was $0.13. During the three months ended December 31, 2018,
capital expenditures were $202.2 million.

As of December 31, 2018, the Company had $176.4 million of cash and
$231.8 million available under its revolving credit facility. Refer to
“Recent Developments” below for information on borrowings subsequent to
December 31, 2018.

Recent Developments

Share Repurchases and Revolving Credit Facility Borrowings

Under the Company’s share repurchase authorization, during the three
months ended December 31, 2018, the Company repurchased 12,967,663
shares of its outstanding common stock at an average price of $31.02, or
$402.3 million. The share repurchase authorization expired on November
7, 2018, with the Company having repurchased $496.0 million under the
authorization. The share repurchases were partially funded by an
aggregate amount of $250.0 million of borrowings under the Company’s
revolving credit facility during the quarter. The Company paid down
$40.0 million on the revolving credit facility in December, resulting in
$231.8 million in availability under the revolving credit facility as of
December 31, 2018.

In January 2019, the Company borrowed $25.0 million under the Revolver
and subsequently repaid $25.0 million, leaving $231.8 million available
under the Revolver.

Strategic Initiatives

On November 7, 2018, the Company announced plans to separate into two
publicly traded companies – one to focus on providing communications
infrastructure and another to leverage infrastructure to provide
solutions for enterprise customers – with the core tenets of the plan
being simplification of the business and a focus on a communications
infrastructure business. The Company is evaluating multiple options that
will achieve the core tenets of the plan and maximize shareholder value.

         

Second Fiscal Quarter Financial Results

 

Three Months Ended December 31, 2018 and September 30, 2018

(in millions)

Three months ended
December 31, 2018 September 30, 2018
Revenue $ 639.1 $ 641.1
Annualized revenue growth -1 %
Operating income 144.7 122.8
 
Income from operations before income taxes 52.7 42.6
Provision for income taxes   22.5     20.5  
Net income $ 30.2   $ 22.1  
 
Adjusted EBITDA $ 321.2 $ 319.4
Annualized Adjusted EBITDA growth 2 %
Adjusted EBITDA margin 50 % 50 %
 
Levered free cash flow $ 28.4 $ 59.3
         

Three Months Ended December 31, 2018 and December 31, 2017

(in millions)

 
Three months ended December 31,
2018 2017
Revenue $ 639.1 $ 653.1
Year-over-year revenue growth -2 %
Operating income 144.7 103.2
 
Income from operations before income taxes 52.7 33.6
Provision for income taxes   22.5     20.4  
Net income   30.2     13.2  
 
Adjusted EBITDA 321.2 328.9
Year-over-year Adjusted EBITDA growth -2 %
Adjusted EBITDA margin 50 % 50 %
 
Levered free cash flow/(deficit) 28.4 (5.5 )
 

Conference Call

Zayo will hold a conference call to report the second fiscal quarter
2019 results at 5:00 p.m. EST, February 7, 2019. 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
130,000-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, such as our
proposed restructuring activities and potential REIT conversion
including our ability to successfully combine our divisions and the
feasibility and timing of any REIT conversion. 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 24, 2018 (as amended by the Form 10-K/A filed with the Securities
and Exchange Commission (“SEC”) on September 20, 2018, 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, 2018 included in the Company’s
Quarterly Report on Form 10-Q to be filed with the SEC and the Company’s
audited consolidated financial statements and notes thereto for the year
ended June 30, 2018 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 16 – Segment Reporting
of our consolidated financial statements and notes thereto included in
our Annual Report, 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, gains/(losses) on
business dispositions 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
make 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 earnings release and in a
supplemental earnings presentation. A glossary of terms used throughout
and the supplemental earnings presentation are available under the
investor section of the Company’s website at http://investors.zayo.com.

               

Consolidated Financial Information

Consolidated Statements of Operations

(in millions, except per share data)

 
Three months ended December 31, Six months ended December 31,
2018 2017 2018 2017
Revenue $ 639.1   $ 653.1   $ 1,280.2   $ 1,296.2  
Operating costs and expenses
Operating costs (excluding depreciation and amortization) 222.0 232.0 450.4 467.7
Selling, general and administrative expenses (excluding depreciation
and amortization )
125.5 122.2 247.6 250.3
Depreciation and amortization   146.9     195.7     314.7     379.5  
Total operating costs and expenses   494.4     549.9     1,012.7     1,097.5  
Operating income   144.7     103.2     267.5     198.7  
Other expenses
Interest expense (84.0 ) (73.1 ) (166.2 ) (146.7 )
Loss on extinguishment of debt (4.9 )
Foreign currency (loss)/gain on intercompany loans (8.3 ) 3.1 (12.9 ) 13.9
Other income, net   0.3     0.4     6.9     1.3  
Total other expenses, net   (92.0 )   (69.6 )   (172.2 )   (136.4 )
Income from operations before income taxes 52.7 33.6 95.3 62.3
Provision for income taxes   22.5     20.4     43.0     25.8  
Net income $ 30.2   $ 13.2   $ 52.3   $ 36.5  
Weighted-average shares used to compute net income per share:
Basic
Diluted 237.1 247.4 241.8 246.9
Net income per share: 238.8 249.3 243.5 249.2

Basic

$

0.13

$

0.05

$ 0.22 $

0.15

Diluted

$

0.13

$

0.05

$

0.21

$

0.15

 
         

Consolidated Balance Sheets

(in millions, except share amounts)

 
December 31, June 30,
2018 2018
Assets
Current assets
Cash and cash equivalents $ 176.4 $ 256.7
Trade receivables, net of allowance of $12.2 and $11.1 as of
December 31, 2018 and June 30, 2018, respectively
202.8 235.6
Prepaid expenses 74.7 74.1
Other current assets 26.1 29.7
Assets held for sale     41.8  
Total current assets 480.0 637.9
Property and equipment, net 5,582.3 5,427.6
Intangible assets, net 1,163.8 1,212.1
Goodwill 1,706.6 1,719.1
Deferred income taxes, net 33.3 37.6
Other assets   171.4     175.6  
Total assets $ 9,137.4   $ 9,209.9  
Liabilities and stockholders’ equity
Current liabilities
Accounts payable $ 48.2 $ 45.9
Accrued liabilities 253.3 312.3
Accrued interest 72.7 72.6
Current portion of long-term debt 5.0 5.0
Capital lease obligations, current 16.0 11.9
Deferred revenue, current 167.3 162.9
Liabilities associated with assets held for sale       6.1  
Total current liabilities 562.5 616.7
Long-term debt, non-current 5,902.6 5,690.1
Capital lease obligation, non-current 165.9 121.6
Deferred revenue, non-current 1,101.8 1,076.3
Deferred income taxes, net 172.3 147.1
Other long-term liabilities   50.5     57.8  
Total liabilities 7,955.6 7,709.6
 
Stockholders’ equity
Preferred stock, $0.001 par value – 50,000,000 shares authorized; no
shares issued and outstanding as of December 31, 2018 and June 30,
2018, respectively
Common stock, $0.001 par value – 850,000,000 shares authorized;
234,851,738 and 246,438,483 shares issued and outstanding as of
December 31, 2018 and June 30, 2018, respectively
0.2 0.2
Additional paid-in capital 1,530.7 1,881.6
Accumulated other comprehensive loss (35.4 ) (15.5 )
Accumulated deficit   (313.7 )   (366.0 )
Total stockholders’ equity   1,181.8     1,500.3  
Total liabilities and stockholders’ equity $ 9,137.4   $ 9,209.9  
 
         

Consolidated Statement of Cash Flows

(in millions)

 
Six Months Ended December 31,
2018 2017
Cash flows from operating activities
Net income $ 52.3 $ 36.5
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 314.7 379.5
Loss on extinguishment of debt 4.9
Gain on sale of Scott Rice Telephone (“SRT”) (5.5 )
Non-cash interest expense 5.0 4.8
Stock-based compensation 52.9 51.3
Amortization of deferred revenue (74.3 ) (65.6 )
Foreign currency loss/(gain) on intercompany loans 12.9 (13.9 )
Deferred income taxes 32.4 17.2
Provision for bad debts 4.1 2.3
Non-cash loss on investments 0.6 0.3
Changes in operating assets and liabilities, net of acquisitions
Trade receivables 22.9 (41.5 )
Accounts payable and accrued liabilities (26.9 ) 29.2
Additions to deferred revenue 81.1 61.9
Other assets and liabilities   0.2     (10.2 )
Net cash provided by operating activities   472.4     456.7  
Cash flows from investing activities
Purchases of property and equipment (384.7 ) (386.8 )
Proceeds from sale of SRT, net of cash held in escrow 39.0
Other       (0.2 )
Net cash used in investing activities   (345.7 )   (387.0 )
Cash flows from financing activities
Proceeds from debt 250.0 312.8
Principal payments on long-term debt (42.5 ) (313.2 )
Principal payments on capital lease obligations (4.0 ) (4.0 )
Payment of debt issue costs (3.4 )
Common stock repurchases (402.5 )
Cash paid for Santa Clara acquisition financing arrangement and other   (4.6 )   (2.6 )
Net cash used in financing activities   (203.6 )   (10.4 )
Net cash flows (76.9 ) 59.3
Effect of changes in foreign exchange rates on cash   (6.8 )   1.0  
Net increase in cash, cash equivalents and restricted cash (83.7 ) 60.3
Cash, cash equivalents and restricted cash, beginning of year   261.3     225.2  
Cash, cash equivalents and restricted cash, end of period $ 177.6   $ 285.5  
 
Supplemental disclosure of non-cash investing and financing
activities:
Cash paid for interest, net of capitalized interest $ 153.1 $ 136.3
Cash paid for income taxes $ 2.7 $ 3.1
Non-cash purchases of equipment through capital leasing $ 53.0 $ 0.3
Non-cash purchases of equipment through nonmonetary exchange $ 31.1 $ 10.7
Decrease in accounts payable and accrued expenses for purchases of
property and equipment
$ (26.8 ) $ (47.4 )
 
               
Reconciliation of cash, cash equivalents, and restricted cash: December 31, 2018 June 30, 2018 December 31, 2017 June 30, 2017
Cash and cash equivalents $ 176.4 $ 256.7 $ 280.8 $ 220.7
Restricted cash included in other assets   1.2   4.6   4.7   4.5
Total cash, cash equivalents and restricted cash $ 177.6 $ 261.3 $ 285.5 $ 225.2
 
           

Reconciliation of Non-GAAP Financial Measures

(in millions)

 
Adjusted EBITDA and Cash Flow Reconciliation Three months ended
December 31, 2018 September 30, 2018 December 31, 2017
Reconciliation of Adjusted EBITDA:
Net income $ 30.2 $ 22.1 $ 13.2
Interest expense 84.0 82.2 73.1
Provision for income taxes 22.5 20.5 20.4
Depreciation and amortization 146.9 167.8 195.7
Transaction costs 2.8 0.7 5.9
Stock-based compensation 26.2 26.7 23.5
Foreign currency loss/(gain) on intercompany loans 8.3 4.6 (3.1 )
Gain on business disposition (5.5 )
Non-cash loss on investments   0.3     0.3     0.2  
Adjusted EBITDA $ 321.2   $ 319.4   $ 328.9  
 
Reconciliation of adjusted unlevered free cash flow:
Net cash provided by operating activities $ 230.6 $ 241.8 $ 187.9
Cash paid for interest, net of capitalized interest 89.7 63.4 82.0
Cash paid for income taxes 0.7 2.0 1.7
Transaction costs 2.8 0.7 5.9
Provision for bad debts (2.6 ) (1.5 ) (1.5 )
Additions to deferred revenue (50.6 ) (30.5 ) (21.4 )
Amortization of deferred revenue 37.3 37.0 33.2
Other changes in operating assets and liabilities   13.3     6.5     41.1  
Adjusted EBITDA   321.2     319.4     328.9  
Purchases of property and equipment (202.2 ) (182.5 ) (193.4 )
Additions to deferred revenue 50.6 30.5 21.4
Amortization of deferred revenue   (37.3 )   (37.0 )   (33.2 )
Adjusted unlevered free cash flow $ 132.3   $ 130.4   $ 123.7  
 
Reconciliation of levered free cash flow:
Net cash provided by operating activities $ 230.6 $ 241.8 $ 187.9
Purchases of property and equipment, net   (202.2 )   (182.5 )   (193.4 )
Levered free cash flow/(deficit), as defined $ 28.4   $ 59.3   $ (5.5 )
 
           
Adjusted EBITDA and Cash Flow Reconciliation Three months ended December 31, 2018

Zayo
Consolidated

Allstream

Consolidated
Excluding
Allstream

Reconciliation of Adjusted EBITDA:
Net income/(loss) $ 30.2 $ (5.9 ) $ 36.1
Interest expense 84.0 4.1 79.9
Provision for income taxes 22.5 0.6 21.9
Depreciation and amortization 146.9 18.6 128.3
Transaction costs 2.8 0.2 2.6
Stock-based compensation 26.2 26.2
Foreign currency loss on intercompany loans 8.3 8.3
Non-cash loss on investments   0.3         0.3  
Adjusted EBITDA $ 321.2   $ 17.6   $ 303.6  
 
Reconciliation of levered free cash flow:
Net cash provided by operating activities $ 230.6 $ 10.9 $ 219.7
Purchases of property and equipment, net   (202.2 )   (4.5 )   (197.7 )
Levered free cash flow, as defined $ 28.4   $ 6.4   $ 22.0  
 

Contacts

Zayo
Investor Relations:
(720) 306-7556
[email protected]

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