Zayo Group Holdings, Inc. Reports Financial Results for the Third Fiscal Quarter Ended March 31, 2019

Third Fiscal Quarter 2019 Financial Highlights

  • $647.2 million of consolidated revenue; including $555.2 million from
    the Communications Infrastructure segments and $92.0 million from the
    Allstream segment.
  • Net income of $34.7 million, including $39.2 million from the
    Communications Infrastructure segments and a net loss of $4.5 million
    from the Allstream segment;
  • $321.3 million of adjusted EBITDA, including $306.9 million from
    Communications Infrastructure and $14.4 million from the Allstream
    segment.
  • Net installs of $1.7 million on a monthly recurring revenue (MRR) and
    monthly amortized revenue (MAR) basis, excluding the Allstream segment.
  • Adjusted unlevered free cash flow of $133.9 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 March 31, 2019.

Third quarter net income increased by $4.5 million over the previous
quarter. Basic and diluted net income per share during the third fiscal
quarter was $0.15. During the three months ended March 31, 2019, capital
expenditures were $206.4 million.

As of March 31, 2019, the Company had $179.7 million of cash and $271.5
million available under its revolving credit facility.

Recent Developments

Revolving Credit Facility Borrowings

On April 3, 2019, Zayo Group, LLC and Zayo Capital (the “Borrowers”)
entered into Extension Amendment No. 1 to the Credit Agreement (the
“Extension Amendment”) with respect to the Revolver. Under the terms of
the Extension Amendment, the maturity date of the revolving credit
facility was extended from April 17, 2020 to the earliest of
(i) April 17, 2023, (ii) six months prior to the maturity date of the
Borrowers’ $500.0 million term loan tranche, which matures on
January 19, 2021, subject to the refinancing thereof with debt having a
maturity date no earlier than April 17, 2023 or repayment in full, and
(iii) six months prior to the maturity date of the Borrower’s 6.00%
senior unsecured notes, which mature on April 1, 2023, subject to the
refinancing thereof with debt having a maturity date no earlier than
April 17, 2023 or repayment in full. No other terms of the Credit
Agreement were amended.

Significant Merger Development

On May 8, 2019, the Company, Front Range TopCo, Inc. (“Parent”), a
Delaware corporation and Front Range BidCo, Inc., a Delaware corporation
and a wholly owned subsidiary of Parent (“Merger Sub”) entered into an
Agreement and Plan of Merger (the “Merger Agreement”) to be acquired by
a consortium of private equity firms including Digital Colony Partners,
LP, EQT Fund Manager S.à r.l. and Devonshire Investors (Delaware) LLC
(the “Consortium”). Upon the close of the Merger (defined below), the
Company will operate as a privately-held company. Parent and Merger Sub
were formed by the Consortium.

The Merger Agreement provides that, among other things and upon the
terms and subject to the conditions of the Merger Agreement, (i) Merger
Sub will be merged with and into the Company (the “Merger”), with the
Company surviving and continuing as the surviving corporation in the
Merger and a wholly owned subsidiary of Parent, and (ii) at the
effective time of the Merger, each outstanding share of common stock of
the Company, par value $0.001 per share (“Common Stock”) (other than
Common Stock owned by Parent, Merger Sub or any wholly owned subsidiary
of Parent or Merger Sub or held in the treasury of the Company, all of
which shall be canceled without any consideration being exchanged
therefor or shares of Company Common Stock held by holders who have made
a valid demand for appraisal in accordance with Section 262 of the
Delaware General Corporation Law) will be converted into the right to
receive an amount equal to $35.00 per share in cash (the “Merger
Consideration”).

The closing of the Merger is subject to customary closing conditions,
including (i) the adoption of the Merger Agreement by the holders of not
less than a majority of the outstanding shares of Company Common Stock,
(ii) the receipt of specified required regulatory approvals, (iii) the
absence of any law or order enjoining or prohibiting the Merger or
making it illegal, (iv) the accuracy of the representations and
warranties contained in the Merger Agreement (subject to “material
adverse effect” and materiality qualifications) and (v) compliance with
covenants in the Merger Agreement in all material respects. The closing
of the Merger is not subject to a financing condition. The Merger is
expected to close in the first half of 2020.

Third Fiscal Quarter Financial Results

 

Three Months Ended March 31, 2019 and December 31, 2018

(in millions)

      Three Months Ended
March 31, 2019     December 31, 2018
Revenue $ 647.2 $ 639.1
Annualized revenue growth 5%
Operating income 131.6 144.7
 
Income from operations before income taxes 52.7 52.7
Provision for income taxes   18.0   22.5
Net income $ 34.7 $ 30.2
 
Adjusted EBITDA $ 321.3 $ 321.2
Annualized Adjusted EBITDA growth 0.1%
Adjusted EBITDA margin 50% 50%
 
Levered free cash flow $ 47.2 $ 28.4
 
 

Three Months Ended March 31, 2019 and March 31, 2018

(in millions)

Three Months Ended March 31,
2019 2018
Revenue $ 647.2 $ 649.0
Year-over-year revenue growth -0.3%
Operating income 131.6 105.5
 
Income from operations before income taxes 52.7 44.5
Provision for income taxes   18.0   21.0
Net income   34.7   23.5
 
Adjusted EBITDA 321.3 319.4
Year-over-year Adjusted EBITDA growth 1%
Adjusted EBITDA margin 50% 49%
 
Levered free cash flow 47.2 67.7
 

Conference Call

Zayo announced today that it is cancelling the third fiscal quarter 2019
results conference call and webcast originally scheduled for 5:00 p.m.
EDT, May 9, 2019. The earnings presentation 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 mission-critical
bandwidth to the world’s most impactful companies, fueling the
innovations that are transforming our society. Zayo’s 130,000-mile
network in North America and Europe includes extensive metro
connectivity to thousands of buildings and data centers. Zayo’s
communications infrastructure solutions include dark fiber, private data
networks, wavelengths, Ethernet, dedicated Internet access, and
colocation services. Zayo owns and operates a Tier 1 IP Backbone and 51
carrier-neutral data centers. Through its Cloudlink service, Zayo
provides low latency private connectivity that attaches enterprises to
their public cloud environments. Zayo serves wireless and wireline
carriers, media, tech, content, finance, healthcare and other large
enterprises. For more information, visit zayo.com.

Forward Looking Statements

Certain statements made herein, including, for example, statements
regarding the benefits of the transaction, certainty of the transaction,
the anticipated timing of the transaction and future results or
expectations of the Company, are “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, Section 21E of the
Securities Exchange Act of 1934 (the “Exchange Act”) and the Private
Securities Litigation Reform Act of 1995. These forward-looking
statements typically include words such as “believes,” “expects,”
“plans,” “intends,” “estimates,” “projects,” “could,” “may,” “will,”
“should,” or “anticipates” or the negatives thereof, other variations
thereon or comparable terminology. 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, many of which are beyond our control, and
are not guarantees of future results or achievements. Consequently, no
forward-looking statements may be guaranteed and there can be no
assurance that the actual results or developments anticipated by such
forward looking statements will be realized or, even if substantially
realized, that they will have the expected consequences to, or effects
on, the Company or its businesses or operations. As a result, you should
not place undue reliance on any such statements and caution must be
exercised in relying on forward-looking statements.

The following factors, among others, could cause actual results to
differ materially from those described in these forward-looking
statements: the occurrence of any event, change or other circumstances
that could give rise to the delay or termination of the Merger
Agreement; the outcome or length of any legal proceedings that have
been, or will be, instituted related to the Merger Agreement; the
inability to complete the Merger due to the failure to timely or at all
obtain stockholder approval for the Merger or the failure to satisfy
other conditions to completion of the Merger, including the receipt on a
timely basis or at all of any required regulatory clearances related to
the Merger; the failure of Parent to obtain or provide on a timely basis
or at all the necessary financing as set forth in the equity commitment
letters delivered pursuant to the Merger Agreement; risks that the
proposed transaction disrupts current plans and operations and the
potential difficulties in employee retention as a result of the Merger;
the effects of local and national economic, credit and capital market
conditions on the economy in general; and the other risks and
uncertainties described herein, as well as those risks and uncertainties
discussed from time to time in our other reports and other public
filings with the Securities and Exchange Commission (the “SEC”) as
described below. The foregoing review of important factors that could
cause actual events to differ from expectations should not be construed
as exhaustive.

Additional information concerning these and other factors that could
affect our forward-looking statements, see our risk factors, as they may
be amended from time to time, set forth in our filings with the SEC,
including our Annual Report on Form 10-K for the fiscal year ended June
30, 2018, and in any subsequent Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K or other filings with the SEC. Our SEC filings are
available publicly on the SEC’s website at www.sec.gov,
on the Company’s website at https://investors.zayo.com
or by contacting the investor relations department of the Company.
Except to the extent required by applicable law, we disclaim any
obligation to update any forward-looking statement, whether as a result
of new information, future events or otherwise.

Additional Information about the Proposed Merger And Where To Find It

In connection with the proposed Merger, the Company will file a proxy
statement on Schedule 14A with the SEC. Additionally, the Company plans
to file other relevant materials with the SEC in connection with the
proposed Merger. This earnings release is not a substitute for the proxy
statement or any other document which the Company may file with the SEC.
The definitive proxy statement will be sent or given to the stockholders
of the Company and will contain important information about the proposed
Merger and related matters. INVESTORS IN AND SECURITY HOLDERS OF THE
COMPANY ARE URGED TO READ THE PROXY STATEMENT AND ANY OTHER RELEVANT
DOCUMENTS THAT ARE FILED OR FURNISHED OR WILL BE FILED OR WILL BE
FURNISHED WITH THE SEC, AS WELL AS ANY AMENDMENTS OR SUPPLEMENTS TO
THESE DOCUMENTS, CAREFULLY AND IN THEIR ENTIRETY BEFORE MAKING ANY
VOTING OR INVESTMENT DECISION WITH RESPECT TO THE PROPOSED MERGER
BECAUSE THEY CONTAIN OR WILL CONTAIN IMPORTANT INFORMATION ABOUT THE
MERGER, RELATED MATTERS AND THE PARTIES TO THE MERGER. The materials to
be filed by the Company with the SEC may be obtained free of charge at
the SEC’s website at www.sec.gov
or by contacting the investor relations department of the Company.

Participants in the Solicitation

This earnings release does not constitute a solicitation of a proxy from
any stockholder with respect to the proposed Merger. However, the
Company and its directors and executive officers may be deemed to be
participants in the solicitation of proxies from Company stockholders in
connection with the proposed Merger. Investors and security holders may
obtain more detailed information regarding the names, affiliations and
interests of the Company’s executive officers and directors in the
solicitation by reading the Company’s Annual Report on Form 10-K for the
fiscal year ended June 30, 2018, the Company’s definitive proxy
statement on Schedule 14A for the 2018 Annual Meeting of Stockholders
and the proxy statement and other relevant materials filed with the SEC
in connection with the Merger if and when they become available.
Additional information concerning the interests of the Company’s
participants in the solicitation, which may, in some cases, be different
than those of the Company’s stockholders generally, will be set forth in
the proxy statement relating to the Merger when it becomes available.
You may obtain free copies of these documents as described in the
preceding paragraph filed, with or furnished to the SEC. All such
documents, when filed or furnished, are available free of charge at the
SEC’s website at www.sec.gov
or by contacting the investor relations department of the Company.

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 March 31,       Nine Months Ended March 31,
2019     2018 2019     2018
Revenue $ 647.2   $ 649.0   $ 1,927.4   $ 1,945.2  
Operating costs and expenses
Operating costs (excluding depreciation and amortization) 226.3 234.9 676.7 702.6
Selling, general and administrative expenses (excluding depreciation
and amortization )
128.1 117.7 375.7 368.0
Depreciation and amortization   161.2     190.9     475.9     570.4  
Total operating costs and expenses   515.6     543.5     1,528.3     1,641.0  
Operating income   131.6     105.5     399.1     304.2  
Other expenses
Interest expense (86.4 ) (75.3 ) (252.6 ) (222.0 )
Loss on extinguishment of debt (4.9 )
Foreign currency gain/(loss) on intercompany loans 7.1 13.9 (5.8 ) 27.8
Other income, net   0.4     0.4     7.3     1.7  
Total other expenses, net   (78.9 )   (61.0 )   (251.1 )   (197.4 )
Income from operations before income taxes 52.7 44.5 148.0 106.8
Provision for income taxes   18.0     21.0     61.0     46.8  
Net income $ 34.7   $ 23.5   $ 87.0   $ 60.0  
Weighted-average shares used to compute net income per share:
Basic 234.9 248.1 239.5 247.3
Diluted 235.8 249.7 240.9 248.7
Net income per share:
Basic and diluted $ 0.15 $ 0.09 $ 0.36 $ 0.24
 

Consolidated Balance Sheets

(in millions, except share amounts)

 
      March 31,       June 30,
2019 2018
Assets
Current assets
Cash and cash equivalents $ 179.7 $ 256.7
Trade receivables, net of allowance of $16.9 and $11.1 as of March
31, 2019 and June 30, 2018, respectively
216.9 235.6
Prepaid expenses 71.7 74.1
Other current assets 42.8 29.7
Assets held for sale       41.8  
Total current assets 511.1 637.9
Property and equipment, net 5,679.1 5,427.6
Intangible assets, net 1,142.3 1,212.1
Goodwill 1,709.4 1,719.1
Deferred income taxes, net 30.7 37.6
Other assets   191.2     175.6  
Total assets $ 9,263.8   $ 9,209.9  
Liabilities and stockholders’ equity
Current liabilities
Accounts payable $ 47.5 $ 45.9
Accrued liabilities 298.2 312.3
Accrued interest 85.4 72.6
Current portion of long-term debt 5.0 5.0
Capital lease obligations, current 9.2 11.9
Deferred revenue, current 170.8 162.9
Liabilities associated with assets held for sale       6.1  
Total current liabilities 616.1 616.7
Long-term debt, non-current 5,864.1 5,690.1
Capital lease obligation, non-current 171.5 121.6
Deferred revenue, non-current 1,135.9 1,076.3
Deferred income taxes, net 178.6 147.1
Other long-term liabilities   50.7     57.8  
Total liabilities 8,016.9 7,709.6
 
Stockholders’ equity
Preferred stock, $0.001 par value – 50,000,000 shares authorized; no
shares issued and outstanding as of March 31, 2019 and June 30,
2018, respectively
Common stock, $0.001 par value – 850,000,000 shares authorized;
235,583,764 and 246,438,483 shares issued and outstanding as of
March 31, 2019 and June 30, 2018, respectively
0.2 0.2
Additional paid-in capital 1,554.0 1,881.6
Accumulated other comprehensive loss (28.3 ) (15.5 )
Accumulated deficit   (279.0 )   (366.0 )
Total stockholders’ equity   1,246.9     1,500.3  
Total liabilities and stockholders’ equity $ 9,263.8   $ 9,209.9  
 

Contacts

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

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