Zayo Group Holdings, Inc. Reports Financial Results for the Second Fiscal Quarter Ended December 31, 2014

Second Fiscal Quarter 2015 Financial Highlights

  • Zayo Group generated quarterly revenue of $323.9 million, a $3.3 million increase from the previous quarter, representing 4% annualized sequential growth;
  • Adjusted EBITDA for the second fiscal quarter was $189.7 million, which was $6.7 million higher than the prior quarter, representing 15% annualized sequential growth;
  • Quarterly revenue and Adjusted EBITDA increased by $46.9 million and $28.0 million, respectively compared to the second quarter of fiscal year 2014.
  • Excluding the impact of foreign currency exchange rates, annualized revenue and EBITDA growth would have been 7% and 17%, respectively.

BOULDER, Colo.--()--Zayo Group Holdings, Inc. (“Zayo”, “ZGH” or “the Company”) (NYSE: ZAYO), a leading provider of bandwidth infrastructure and network-neutral colocation and connectivity services, announced results for the three months ended December 31, 2014.

Second fiscal quarter revenue of $323.9 million grew 4% over the previous quarter on an annualized basis. Adjusted EBITDA of $189.7 million increased 15% over the previous quarter on an annualized basis. Operating income for the quarter increased $136.6 million from the previous quarter, and net income increased by $114.3 million from the previous quarter. Revenue and Adjusted EBITDA growth was negatively impacted by the strengthening of the US Dollar over the British Pound and Euro.

During the three months ended December 31, 2014, capital expenditures were $129.5 million, which included adding 853 route miles and 561 buildings to the network, as compared to capital expenditures of $115.3 million for the previous quarter. The Company had $163.6 million of cash and $241.4 million available under its revolving credit facility as of December 31, 2014.

Recent Developments

Early Redemption of Senior Notes

On December 15, 2014, the Company redeemed $75.0 million of its outstanding 8.125% Senior Secured Notes at a price of 108.125% of the principal amount and $174.4 million of its outstanding 10.125% Senior Unsecured Notes at a price of 110.125% (collectively, the “Note Redemption”). As part of the Note Redemption, the Company recognized a loss on extinguishment of debt of $30.9 million resulting from payment of an early redemption call premium of $23.8 million and expensing $7.1 million in net unamortized debt issuance costs.

Acquisition of IdeaTek

On December 3, 2014, the Company entered into a stock purchase agreement with the shareholders of IdeaTek Systems, Inc. ("IdeaTek"). The acquisition of IdeaTek closed on January 1, 2015. Upon the close of the IdeaTek acquisition, the Company acquired all of the equity interest in IdeaTek. The purchase price, subject to certain post-closing adjustments, was $52.0 million and was paid with cash on hand.

The IdeaTek acquisition added 1,800 route miles to the Company’s network in Kansas, and includes a dense metro footprint in Wichita, Kansas. The network spans across Kansas and connects to approximately 600 cellular towers and over 100 additional buildings.

Pending Acquisition of Latisys

On January 13, 2015, the Company entered into an acquisition agreement to acquire the operating units of Latisys Holdings, LLC (“Latisys”), a colocation and infrastructure as a service (“IaaS”) provider for a price of $675.0 million. The Latisys acquisition will be funded with senior unsecured indebtedness (see below) and is expected to close within the quarter ended March 31, 2015, subject to customary approvals.

The Latisys acquisition will add colocation and IaaS services through eight datacenters across five markets in Northern Virginia, Chicago, Denver, Orange County and London. The acquired datacenters currently total over 185,000 square feet of billable space and 33 megawatts of critical power.

Senior Unsecured Notes Offering

On January 23, 2015, Zayo Group, LLC and Zayo Capital (collectively, the “Issuers”), completed a private offering (the “Notes Offering”) exempt from registration under the Securities Act of 1933, as amended, of $700.0 million aggregate principal amount of 6.00% senior unsecured notes due 2023. The net proceeds from the Notes Offering will be used to fund the purchase price to be paid in connection with the Company’s pending acquisition of the operating units of Latisys. Any excess net proceeds will be used for general corporate purposes, which may include repayment of indebtedness, acquisitions, working capital and capital expenditures.

 

Second Fiscal Quarter Financial Results- Unaudited

 

Three Months Ended December 31, 2014 and September 30, 2014

 
($ in millions)    

Three months ended

December 31,

   

September 30,

2014

2014
Revenue $ 323.9 $ 320.6

Annualized revenue growth

4

%

Operating income/(loss) $ 97.1 $ (39.5 )
Loss from operations before income taxes $ (0.6 ) $ (101.1 )
(Benefit)/provision for income taxes $ (4.4 ) $ 9.4
Net income/(loss) $ 3.8 $ (110.5 )
 

Adjusted EBITDA

$ 189.7 $ 183.0

Annualized Adjusted EBITDA growth

15

%
Adjusted EBITDA margin

59

% 57 %
 
Unlevered free cash flow $ 60.2 $ 67.7
 
Levered free cash flow/(deficit) $ (5.8 ) $ 2.9
 

Three Months Ended December 31, 2014 and December 31, 2013

 

ZGH Summary Results

($ in millions)

 

Three months ended

December 31,

 

December 31,

2014

2013
Revenue $ 323.9 $ 277.0

Revenue growth

17 %
Operating income $ 97.1 $ 22.6
Loss from operations before income taxes $ (0.6 ) $ (29.2 )
(Benefit)/provision for income taxes $ (4.4 ) $ 8.4
Net income/(loss) $ 3.8 $ (36.8 )
 
Adjusted EBITDA $ 189.7 $ 161.7
Adjusted EBITDA growth 17 %
Adjusted EBITDA margin 59 % 58 %
 
Unlevered free cash flow $ 60.2 $ 73.4
 
Levered free cash flow/(deficit) $ (5.8 ) $ 54.0
 

Conference Call

Zayo will hold a conference call to report second quarter 2015 results at 11:00 a.m. EST, February 11, 2015. The dial in number for the call is (800) 732-6870. A live webcast of the call can be found in the investor relations section of Zayo’s website or can be accessed directly at https://cc.readytalk.com/cc/s/registrations/new?cid=1w3pqeehymrk. During the call, the Company will review an earnings supplement presentation that summarizes the financial results of the quarter, which can be found at http://www.zayo.com/investors/earnings-releases.

About Zayo

Based in Boulder, Colorado, Zayo Group Holdings, Inc. provides comprehensive bandwidth infrastructure services in over 300 markets through the US and Europe. Zayo delivers a full suite of lit services and dark fiber products to wireline and wireless customers, data centers, Internet content providers, high-bandwidth enterprises, and government agencies across its robust 82,000 route mile network. The company also offers 37 carrier-neutral colocation facilities across the US and France. Please visit www.zayo.com for more information about Zayo.

Forward Looking Statements

Information contained in this supplemental presentation 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 Zayo Group Holdings, Inc.’s (“the Company” or “ZGH”) 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 final prospectus dated October 17, 2014. 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, 2014 included in the Company’s Quarterly Report on Form 10-Q to be filed with the SEC on February 11, 2015 and for the year ended June 30, 2014 included in the Company’s final prospectus filed with the SEC on October 17, 2014.

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, unlevered free cash flow, adjusted unlevered free cash flow, and levered free cash flow.

Adjusted EBITDA is defined as earnings/(loss) from continuing 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 an intercompany loan, and non-cash income/(loss) on equity and cost method investments. Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by revenue. Unlevered free cash flow is defined as Adjusted EBITDA minus purchases of property and equipment, net of stimulus grants. Levered free cash flow is defined as operating cash flow minus purchases of property and equipment, net of stimulus grants. These measures 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.

We use Adjusted EBITDA to evaluate our operating performance and liquidity, and we use levered free cash flow as a measure to evaluate cash generated through normal operating activities. In addition to Adjusted EBITDA, management uses unlevered free cash flow, which measures the ability of Adjusted EBITDA to cover capital expenditures. Adjusted EBITDA is a performance rather than cash flow measure. Correlating our capital expenditures to our Adjusted EBITDA does not imply that we will be able to fund such capital expenditures solely with cash from operations. In addition to these measures, 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.

Unlevered free cash flow and 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, levered 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, unlevered free cash flow, adjusted unlevered free cash flow, 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 a quantitative reconciliation of unlevered free cash flow and levered free cash flow to net cash flows 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 Historical Financial Data & Reconciliations section of this presentation. A glossary of terms used throughout is available under the investor section of the Company’s website at http://www.zayo.com/investors.

 

Consolidated Financial Information- Unaudited

Consolidated Statements of Operations

 
     

Three months ended

   

Six months ended

($ in millions)

December 31,

December 31,

2014

 

2013

2014

 

2013

Revenue $ 323.9 $ 277.0 $ 644.5 $ 545.1
Operating costs and expenses
Operating costs (excluding depreciation and amortization) 97.8 86.0 205.1 166.0
Selling, general and administrative expenses 32.1 86.7 188.9 162.8
Depreciation and amortization   96.9   81.7   192.9   162.7
Total operating costs and expenses  

226.8

 

254.4

 

586.9

 

491.5

Operating income  

97.1

 

22.6

 

57.6

 

53.6

Other expenses
Interest expense (53.4 ) (50.3 ) (100.3 ) (101.8 )
Loss on extinguishment of debt (30.9 ) (1.9 ) (30.9 ) (1.9 )
Foreign currency (loss)/gain on intercompany loans (13.3 ) 0.2 (27.9 ) 0.8
Other (expense)/income, net   (0.1 )   0.2   (0.2 )   0.3
Total other expenses, net   (97.7 )   (51.8 )   (159.3 )   (102.6 )
Loss from operations before income taxes (0.6 ) (29.2 ) (101.7 ) (49.0 )
(Benefit)/provision for income taxes   (4.4 )   8.4   5.0   17.7
Net income/(loss) from continuing operations   3.8   (37.6 )   (106.7 )   (66.7 )
Earnings from discontinued operations, net of income taxes     0.8     2.5
Income/(loss) $ 3.8 $ (36.8 ) $ (106.7 ) $ (64.2 )
 
 

Consolidated Balance Sheets

 
($ in millions)

December 31,

     

June 30,

2014

2014

Assets

Current assets
Cash and cash equivalents $ 163.6 $ 297.4

Trade receivables, net of allowance of $3.6 and $3.7 as of December 31, 2014 and June 30, 2014, respectively

71.8 59.0
Due from related parties 0.1
Prepaid expenses 26.2 25.6
Deferred income taxes, net 160.3 160.4
Other assets   6.2   2.4

Total current assets

428.1 544.9
 
Property and equipment, net 2,930.6 2,821.4
Intangible assets, net 719.4 709.7
Goodwill 868.7 845.3
Debt issuance costs, net 74.7 89.4

Other assets

  42.4   39.7

Total assets

$

5,063.9

$

5,050.4

 

Liabilities and stockholders' equity

Current liabilities
Current portion of long-term debt $ 20.5 $ 20.5
Accounts payable 31.5 27.0
Accrued liabilities 162.4 162.5
Accrued interest 57.1
Capital lease obligations, current 3.2 2.4
Deferred revenue, current   74.2   75.4

Total current liabilities

291.8 344.9
 
Long-term debt, non-current 2,961.9 3,219.7
Capital lease obligations, non-current 26.4 22.9
Deferred revenue, non-current 548.9 496.9
Stock-based compensation liability 2.0 392.4
Deferred income taxes, net 136.1 134.9
Other long-term liabilities   21.8   22.3

Total liabilities

3,988.9

4,634.0

 

Stockholders' equity

Preferred stock, $0.001 par value--50,000,000 shares authorized; no shares issued and outstanding as of December 31, 2014 and June 30, 2014, respectively

 

Common Stock, $0.001 par value--850,000,000 shares authorized; issued and outstanding 239,008,679 shares and 223,000,000 shares as of December 31, 2014 and June 30, 2104, respectively 0.2 0.2
Additional paid-in capital 1,519.7 755.4
Accumulated other comprehensive (loss)/income (6.6 ) 14.4
Accumulated deficit (438.3 ) (331.6 )
Note receivable from shareholder     (22.0 )

Total stockholders' equity

 

1,075.0

 

416.4

Total liabilities and stockholders' equity

$

5,063.9

$

5,050.4

 
   

Consolidated Statements of Cash Flows

($ in millions)

Six months ended

December 31,

2014

     

2013

Cash flows from operating activities

Net loss $

(106.7

) $

(64.2

)
Earnings from discontinued operations, net of income taxes    

2.5

Loss from continuing operations

(106.7

)

(66.7

)

Adjustments to reconcile net loss to net cash provided by operating activities of continuing operations

Depreciation and amortization 192.9 162.7
Loss on extinguishment of debt 30.9 1.9
Non-cash interest expense 9.4 10.5
Non-cash loss on investments 0.5
Stock-based compensation 117.1 99.9
Amortization of deferred revenue (34.6 ) (26.2 )
Additions to deferred revenue 84.1 47.4
Provision for bad debts 0.9 0.8
Foreign currency loss/(gain) on intercompany loans 27.9 (0.8 )
Deferred income taxes (0.7 ) 15.6

Changes in operating assets and liabilities, net of acquisitions

Trade receivables (5.0 ) 14.8
Prepaid expenses 0.2 1.7
Accounts payable and accrued liabilities (67.5 ) (16.8 )
Other assets and liabilities   (7.5 )   (5.4 )

Net cash provided by operating activities of continuing operations

  241.9   239.4

Cash flows from investing activities

Purchases of property and equipment (244.8 ) (175.0 )
Acquisition of Neo Telecoms, net of cash acquired (73.9 )
Acquisition of Colo Facilities Atlanta, net of cash acquired (52.5 )
Acquisition of FiberLink, LLC, net of cash acquired (43.1 )
Acquisition of Access Communications, Inc. (0.1 ) (40.1 )
Acquisition of Corelink Data Centers, LLC, net of cash acquired     (0.3 )

Net cash used in investing activities of continuing operations

  (371.3 )   (258.5 )

Cash flows from financing activities

Proceeds from debt 150.0
Proceeds from revolving credit facility 45.0
Proceeds from initial public offering 304.2
Direct costs associated with initial public offering (22.2 )
Distribution to parent (1.2 )
Principal payments on long-term debt (259.7 ) (8.5 )
Payment of early redemption fees on debt extinguished (23.8 )
Principal repayments on capital lease obligations (1.3 ) (5.9 )
Payments on revolving credit facility (45.0 )
Payment of debt issuance costs     (1.7 )

Net cash (used in)/provided by financing activities of continuing operations

  (2.8 )   132.7

Cash flows from continuing operations

  (132.2 )   113.6

Cash flows from discontinued operations

Operating activities 6.4
Investing activities (2.3 )
Financing activities     (2.5 )

Cash flows from discontinued operations

   

1.6

Effect of changes in foreign exchange rates on cash   (1.6 )   0.2
Net (decrease)/increase in cash and cash equivalents   (133.8 )   115.4
Continuing operations:
Cash and cash equivalents, beginning of year $ 297.4 $ 91.3
Cash flows from continuing operations (132.2 ) 113.6
Cash flows from discontinued operations 1.6
Effect of changes in foreign exchange rates on cash   (1.6 )   0.2

Cash and cash equivalents, end of period

$

163.6

$

206.7

 
   

Reconciliation of Non-GAAP Financial Measures

($ in millions) Three months ended
December 31,    

September 30,

   

December 31,

2014 2014

2013

Reconciliation of Adjusted EBITDA:
Income/(loss) from continuing operations $ 3.8 $ (110.5 ) $ (37.6 )
Loss on extinguishment of debt 30.9 1.9
Interest expense 53.4 46.9 50.3
Provision/(benefit) for income taxes (4.4 ) 9.4 8.4
Depreciation and amortization 96.9 96.0 81.7
Transaction costs 1.3 3.4 0.2
Stock-based compensation (6.0 ) 123.1 57.0
Foreign currency loss/(gain) on intercompany loans 13.3 14.7 (0.2 )
Non-cash loss on investments   0.5    
Adjusted EBITDA $ 189.7 $ 183.0 $ 161.7
 
Reconciliation of unlevered free cash flow:
Net cash provided by operating activities $ 123.7 $ 118.2 $ 142.3
Cash paid for income taxes 2.1 8.7 0.6
Cash paid for interest, net of capitalized interest 71.1 73.6 16.8
Non-liquidating distribution to common unit holders 10.0
Transaction costs 1.3 3.4 0.2
Provision for bad debts (0.3 ) (0.6 ) 0.4
Additions to deferred revenue (40.9 ) (43.2 ) (23.4 )
Amortization of deferred revenue 17.3 17.3 13.6
Other changes in operating assets and liabilities   15.4   5.6   1.2
Adjusted EBITDA   189.7   183.0   161.7
Purchases of property and equipment, net   (129.5 )   (115.3 )   (88.3 )
Unlevered free cash flow, as defined $ 60.2 $ 67.7 $ 73.4
 
Reconciliation of levered free cash flow:

Net cash flows provided by operating activities from continuing operations

$ 123.7 $ 118.2 $ 142.3
Purchases of property and equipment, net   (129.5 )   (115.3 )   (88.3 )
Levered free cash flow/(deficit), as defined $ (5.8 ) $ 2.9 $ 54.0
 

Contacts

Zayo Group Holdings
Stacey Finerman, 303-414-2545
stacey.finerman@zayo.com

Contacts

Zayo Group Holdings
Stacey Finerman, 303-414-2545
stacey.finerman@zayo.com