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Press Release -- November 10th, 2011
Source: Zayo Group
Tags: Earnings, Equipment, Expansion, Merger, Metro Fiber

Zayo Group, LLC Reports Financial Results for the First Fiscal Quarter Ended September 30, 2011

(Source: MARKETWIRE)trackingZayo Group, LLC ("Zayo Group" or "the Company") announced results for the three months ended September 30, 2011.The Company has experienced sequential quarter revenue and Adjusted EBITDA growth since inception. First quarter growth was largely a function of organic growth associated with the continued trend of positive net installations.

During the three months ended September 30, 2011, the Company made net capital expenditures of $28.6 million, which included adding 740 route miles and 149 buildings to the network. The Company had $20.8 million of cash and $93.6 million available under its revolving credit agreement on September 30, 2011.

Financial Highlights

--  Zayo Group generated quarterly revenue of $78.4 million; a $0.6
    million sequential quarter increase representing 3% annualized
    sequential quarter growth
--  Gross profit for the quarter increased by $0.7 million from the
    previous quarter reaching $60.3 million for a gross profit percentage
    of 77%
--  Adjusted EBITDA for the quarter was $38.0 million, which was $0.8
    million higher than the prior quarter, representing a 9% annualized
    increase
--  Net earnings of $3.1 million for the quarter were $7.9 million lower
    than the $11.0 million net earnings for the previous quarter
--  Quarterly revenue and Adjusted EBITDA increased by $15.5 million and
    $12.4 million, respectively, over the first quarter of fiscal year
    2011
--  Net earnings increased by $3.4 million from the first quarter of
    fiscal year 2011

Recent Developments

Pending Acquisitions

On October 6, 2011, the Company entered into a Stock Purchase Agreement (the "Agreement") with 360networks Corporation, 360networks (fiber holdco) ltd., and 360networks (fiber subco) ltd. (collectively, the "Sellers").

Upon the close of the transaction contemplated by the Agreement, Zayo will acquire 100 percent of the outstanding capital stock of 360networks holdings (USA) inc. ("360networks"), a wholly owned subsidiary of the Sellers (the "Acquisition"). The purchase price, subject to certain adjustments at closing and post-closing, is $345.0 million. The Agreement is subject to customary closing conditions (including regulatory approval) and provides for customary representations, warranties, covenants and agreements, including, among others, that each party will use commercially reasonable efforts to complete the acquisition.

In connection with the Agreement, Zayo has obtained a debt commitment letter that, subject to customary closing conditions, commits certain lenders to provide financing to the Company in an amount sufficient to permit Zayo, together with cash on hand, to make all payments required to be made to the Sellers in connection with the closing of the Acquisition.

360networks operates over 18,000 route miles of intercity and metro fiber network across 22 states and British Columbia. 360networks' intercity network interconnects over 70 markets across the central and western United States, including 23 Zayo fiber markets and a number of new markets such as Albuquerque, Bismarck, Des Moines, San Francisco, San Diego and Tucson. In addition to its intercity network, 360networks operates over 800 route miles of metropolitan fiber networks across 26 markets, including Seattle, Denver, Colorado Springs, Omaha, Sacramento, and Salt Lake City.

First Quarter Financial Results

Three Months Ended September 30, 2011 and June 30, 2011

Figure 1.0

                                                                            
Zayo Group Summary Results                                                  
($ in millions)                                     Three months ended      
                                              ----------------------------- 
                                              September 30,      June 30,   
                                                   2011            2011     
                                              -------------   ------------- 
Revenue                                       $        78.4   $        77.8 
  Annualized revenue growth                               3%                
Gross profit                                           60.3            59.6 
  Gross profit %                                         77%             77%
Operating income                                       16.9            25.2 
Earnings from continuing operations before                                  
 taxes                                                  7.7            16.0 
Provision for income taxes                              4.6             5.0 
                                              -------------   ------------- 
Net earnings                                  $         3.1   $        11.0 
                                              =============   ============= 

Adjusted EBITDA                               $        38.0   $        37.2 
Purchases of property and equipment                    28.6            24.9 
                                              -------------   ------------- 
Unlevered free cash flow                      $         9.4   $        12.3 
                                              =============   ============= 
  Annualized EBITDA growth                                9%                
  Adjusted EBITDA margin                                 48%             48%

The sequential quarterly revenue increase of $0.6 million was affected by revenue from certain infrequent transactions recorded in the previous quarter, including a large fiber asset sale. The Company generated additional monthly revenue of $1.7 million associated with gross installations accepted in the quarter ended September 30, 2011. This increase in revenue related to organic growth was partially offset by total customer churn of $1.0 million in monthly revenue during the quarter. Approximately 77% of churn processed was related to hard disconnects; 12% was related to negative price changes; and 11% was associated with upgrades. The Company's gross profit percentage and Adjusted EBITDA margin were in line with the prior quarter.

Net earnings decreased by $7.9 million in the quarter ended September 30, 2011 as compared to the previous quarter. The decrease in net earnings is largely attributed to changes in the Company's quarterly stock-based compensation expense. The common units granted to employees and directors are classified as liabilities and are re-measured at each reporting date. In the quarter ended June 30, 2011, the Company recorded a $4.5 million credit to stock-based compensation expense as a result of the issuance of Class E common units during the quarter, which diluted the value of other vested common units outstanding. In the quarter ended September 30, 2011, the Company recorded $3.7 million of stock-based compensation expense as a result of continued vesting of common units and an increase in equity value as measured at the reporting date.

Three Months Ended September 30, 2011 and September 30, 2010

Figure 1.1

                                                                            
Zayo Group Summary Results                                                  
($ in millions)                                     Three months ended      
                                              ----------------------------- 
                                              September 30,   September 30, 
                                                   2011            2010     
                                              -------------   ------------- 
Revenue                                       $        78.4   $        62.9 
  Revenue growth                                         25%                
Gross profit                                           60.3            45.9 
  Gross profit %                                         77%             73%
Operating income                                       16.9             8.7 
Earnings from continuing operations before                                  
 taxes                                                  7.7             2.2 
Provision for income taxes                              4.6             2.8 
Earnings from discontinued operations, net of                               
 income taxes                                             -             0.3 
                                              -------------   ------------- 
Net earnings/(loss)                           $         3.1   $        (0.3)
                                              =============   ============= 

Adjusted EBITDA                               $        38.0   $        25.6 
Purchases of property and equipment                    28.6            21.1 
                                              -------------   ------------- 
Unlevered free cash flow                      $         9.4   $         4.5 
                                              =============   ============= 
  EBITDA growth                                          48%                
  Adjusted EBITDA margin                                 48%             41%

Revenue increased $15.5 million over the first quarter of fiscal year 2011 principally as a result of the October 1, 2010 merger with American Fiber Systems Holding Corp. ("AFS"). Organic growth related to sales efforts and expansion of the network also contributed to the increase. As a result of internal sales efforts since September 30, 2010, the Company has entered into $443.0 million of gross new sales contracts which will represent an additional $6.7 million in monthly revenue once installation on those contracts is accepted. Since September 30, 2010, the amount of gross installations accepted resulted in additional monthly revenue of $6.1 million as of September 30, 2011. This increase in revenue related to our organic growth was partially offset by total customer churn of $3.9 million in monthly revenue since September 30, 2010.

Gross profit increased $14.4 million over the first quarter of fiscal year 2011, as a result of the AFS transaction and organic revenue growth. Gross profit percentage for the quarter ended September 30, 2011, was approximately four percentage points above the same period last year primarily as a result of a higher percentage of our newly installed revenue being on-net. The ratio also benefited from synergies realized related to our previous acquisitions.

Adjusted EBITDA increased $12.4 million as compared to the first quarter of fiscal year 2011, due to the Adjusted EBITDA contribution from organic revenue growth, the AFS transaction, synergies realized, and cost savings initiatives, including reduced franchise fees resulting from favorable renegotiations on existing franchise agreements.

Net earnings increased by $3.4 million on a year over year basis primarily due to the increase in operating income associated with the AFS transaction, organic revenue growth and synergies realized from previous acquisitions.

Conference Call

Zayo Group will hold a conference call to report fiscal year first quarter 2012 results at 11:00 a.m. EST, November 10, 2011. The dial in number for the call is (800) 682-8539.

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