Earnings Call Presentation Zayo Group Holdings, Inc. Fiscal Year - - PowerPoint PPT Presentation

Earnings Call Presentation

Zayo Group Holdings, Inc.

Fiscal Year 2016 Q2

NYSE: ZAYO @ZayoGroup

2

Safe Harbor

Information contained in this 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 Annual Report or Form 10-K filed with the Securities and Exchange Commission (“SEC”) on September 18, 2015. We caution you not to place undue reliance on these forward-looking statements, which speak only as of their respective dates. We undertake no

• bligation 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. In addition to this presentation and our filings with the SEC, the Company provides a supplemental earnings presentation, pricing supplement and a glossary of terms used throughout. All of which can be found under the investor section of the Company’s website at http://www.zayo.com/investors.

2

Dan Caruso Chairman & Chief Executive Officer

3

4

FY 2Q16 Highlights

25th consecutive quarter of consecutive revenue growth 6% organic recurring revenue growth

record gross installs of $6.4M and near-record net installs of $2.2M bookings of $6.8M closed Viatel (UK/EU fiber) and Stream (Dallas colo) acquisitions signed Allstream acquisition

Zayo at a Glance

7,442,113 fiber miles 95,178 route miles 1,949 employees 135 QBHC Customers 6.7k customers 54% of rev from enterprise & content 46% carriers & wireless Products 37% Dark Fiber Solutions 46% Network Connectivity 16% Colo & Cloud Infrastructure 1% Other International Network Unique Metro Fiber Datacenters Leading Fiber & Datacenter Consolidator 37 acquisitions to date 5 since Jan 2015 Growth

5

Our assets What we do Track record

55 zColo datacenters >590k billable sf People Financial1

$

19,341 buildings 149 avg metro fiber count $1.5B revenue $876M adjusted EBITDA Value Creation 25 consecutive quarters of sequential revenue growth2 $1.1B invested equity since 2007 inception ~$6.3B equity value3 >5x return

6

% Revenue % EBITDA % of Adj. UFCF

Dark Fiber Leased raw fiber Mobile Infrastructure Tower/small cell backhaul Subtotal Dark Fiber Solutions Wavelengths 1G, 2.5G, 10G & 100G waves Ethernet Switched & dedicated service IP Services Internet access & transit SONET Legacy carrier-grade service Subtotal Network Connectivity

1

30% 37% 71% 7% 8%

• 60%

37% 45% 11% 19% 16% 4% 11% 11% 25% 9% 8% 17% 6% 6% 20% 46% 41% 66% Interconnect-Oriented Colo Space, power & interconnects Cloud Services Infrastructure-as-a- Service Subtotal

13% 12% 20% 3% 2% 2% 16% 13% 22% Colocation & Cloud Infrastructure

Segments & Products

$324 $367 $370

$0 $50 $100 $150 $200 $250 $300 $350 $400

Revenue

Q2 Financial Highlights

>98% of revenue is recurring 3% QoQ annualized total revenue growth

 4% in constant currency

6% QoQ annualized recurring revenue growth

 7% in constant currency

$190 $215 $219

$0 $50 $100 $150 $200 $250

Adjusted EBITDA

7% QoQ annualized total EBITDA growth 12% QoQ annualized recurring EBITDA growth

7

Q2 Financial Highlights Cont.

$130 $159 $172

Purchases of Property & Equipment

Net AFFO

(capturing churn replacement)

$85 $127 $98

Levered FCF

>90% of capex growth-related

net AFFO1 of $98M or 27% of revenue

($26M) of quarterly levered free cash flow

($130) ($159) ($172) 124 195 146 ($6) $36 ($26)

• 2%

• 7%

8

Q2 Operational Highlights

Net Installations

($3.7) ($3.8) ($4.2)

• 1.3%
• 1.3%
• 1.3%
• 1.2%
• 1.3%
• 1.2%
• 1.1%
• 1.2%

$5.5 $6.0 $6.4

Gross Installations Churn Processed

$1.8 $2.2 $2.2

record gross install quarter at $6.4M near-record $2.2M net installs net installs imply 7% annualized recurring revenue growth rate1

9

Q2 Operational Highlights Cont.

$104.8 $119.8 $123.5

$0 $50 $100 $150

Last day of quarter run-rate

(MRR+MAR)

12% QoQ annualized revenue run-rate growth

 14% in constant currency

6% excluding December 31, 2015 acquisitions

 7% in constant currency record service activation pipeline represents

12% of revenue run-rate 47 months average remaining contract term

$11.0 $14.0 $14.4

$0 $5 $10 $15 $20

Service Activation Pipeline

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$5.2 $6.4 $6.8

$0.0 $1.0 $2.0 $3.0 $4.0 $5.0 $6.0 $7.0 $8.0

Q2 Operational Highlights Cont.

$227 $404 $474 ($96) ($134) ($312)

($450) ($250) ($50) $150 $350 $550 $750

Contract Value vs. Capex on Bookings

CY15 bookings grew >20% YOY

~2/3 of bookings have <12 month payback 13% associated with speculative projects

total bookings contract value >1.5x the associated committed capex average payback of 42 months includes $0.9M of speculative project bookings

Net New Sales (Bookings) Stratification

11

Q2 Commercial Highlights

12

FTT market expansion and small cell acceleration drove >90% of committed speculative projects in quarter

Large Atlanta FTT Project

fiber network to increase by >1,000 route miles adding ~500 towers

~$100M of committed capex

391 1,200 2,224

500 1,000 1,500 2,000 2,500

In Service - SC Under Construction - SC

Small Cells

committed to build >1,000 incremental small cells

~$75M in committed capex 85% QoQ growth

Q2 Commercial Highlights Cont.

13

Bookings leverage completed and in-process FTT builds

leverages fiber from in-process FTT build customer migrating from legacy lit service to Zayo dark fiber

$121k MRR, >12 month payback

leverages existing network from completed FTT build multiple, diverse 100G metro waves for high- throughput datacenter connectivity

$75k MRR, <12 month payback

Metro Dark Fiber / Municipal Government Customer Metro Waves / Internet Services Customer

Q2 Commercial Highlights Cont.

14

Bookings also leverage long-haul assets and international scale

Ethernet Private Line / International Law Firm

10G & 1G diverse

circuits connecting 11 US offices

$71k MRR, >12 month

payback

IP Services / Content Infrastructure

IP via 2x 100G ports significant upgrade at primary datacenter locations

$40k MRR, <12 month

payback

Metro Dark Fiber / Alternative Carrier

dark fiber connectivity in 9 US & UK/EU metro markets leverages international tier 1 metro footprint

$59k MRR, <12 month

payback

Ken desGarennes Chief Financial Officer

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Q2 Financial Results

16

($ in millions) December 31, March 31, June 30, September 30, December 31, 2014 2015 2015 2015 2015

Revenue Zayo Dark Fiber Solutions 129.7 133.5 135.3 135.0 137.7 Zayo Network Connectivity 161.7 163.0 163.0 167.0 168.7 Zayo Colocation & Cloud Infrastructure 27.0 38.5 57.6 58.3 58.5 Other 5.5 5.7 6.0 6.5 4.7 Corporate/Intercompany Elimination 0.0 0.0 0.0 0.0 0.0 Zayo Group Holdings Revenue $323.9 $340.7 $361.9 $366.8 $369.6

Annualized revenue growth 4% 21% 25% 5% 3% Pro-forma annualized revenue growth 1 4% 6% 5% 5% 3%

Operating income/(loss) 97.1 56.7 54.7 52.1 58.7 Net Earnings/(loss) 3.8 (53.7) 5.1 (15.2) (10.8) EPS (basic and diluted) 0.02 (0.22) 0.02 (0.06) (0.04) EBITDA Zayo Dark Fiber Solutions 89.6 92.6 96.8 96.6 99.1 Zayo Network Connectivity 85.6 85.7 85.0 88.7 89.9 Zayo Colocation & Cloud Infrastructure 13.4 19.5 27.8 28.4 29.0 Other 1.1 1.2 1.3 1.7 0.9 Corporate/Intercompany Elimination 0.0 0.0 0.0 0.0 0.0 Zayo Group Holdings Adjusted EBITDA $189.7 $199.0 $210.9 $215.4 $218.9

Annualized Adjusted EBITDA growth 15% 20% 24% 9% 7% Pro-forma annualized Adjusted EBITDA growth 1 15% 10% 7% 9% 7% Adjusted EBITDA margin 59% 58% 58% 59% 59% Three Months Ended

17

Recent Acquisitions

Transform Zayo into pan-North America and European infrastructure provider

closed December 31, 2015 for $17M Dallas datacenter adds 36k billable square feet closed December 31, 2015 for $101M

24.2x pre-synergy LQA multiple  9.0x post-synergy

expect synergies to be substantially realized within CY16 adds 4.7k intercity and 560 metro miles of fiber

Viatel Allstream

closed January 15, 2016 for $298M

3.7x pre-synergy LQA multiple

adds 12.5k of intercity and 5.5k metro miles of fiber

Stream Dallas Colo Facility

Equity

18

size authorized

$500M

term

6 months

(expires May 9, 2016)

shares repurchased in Q2

356k

associated capital used

$8.4M

public float PE & Management post-2009 investors & management pre-2009 investors Estimated Shareholder Base Share Repurchase Program

Since November 16, 1015 waiver, estimate ~30M shares have transferred from private equity ownership

243.9M shares outstanding1

$326 $1,639 $1,430 $350

$0 $1,000 $2,000 $3,000 $4,000

Balance Sheet

6.375% 6.000% 10.125% L+275

ample liquidity including $441M of revolver capacity

$1.1B of net operating loss carry

forwards

19 ($M) Interest Rate

Debt Schedule1

4.3x gross leverage >75% fixed rate incl. rate swap >50% is unsecured

leverage neutral $400M incremental term loan (L+350 bps / 1% floor) closed in January to fund Allstream

($ in millions) December 31, December 31, 2014 2015

Consolidated Balance Sheet Data Cash and cash equivalents 164 176 Property and equipment, net 2,931 3,626 Total assets 4,989 6,274 Long-term debt and capital lease

• bligations,

including current portion 2,937 3,702 Total Stockholders' equity 1,075 1,248

• $6.0

$46.1 $42.9

Stock-Based Comp

20

Performance oriented stock-based compensation

post-IPO RSU plans based primarily

• n measured equity IRR and share

price performance pre-IPO plan non-dilutive to current shares outstanding

Stock Based Compensation

Consolidation

21

remain active & opportunistic CY15 was consistent with historical pace of acquisitions focused on fiber and datacenter targets targeting both North America & Europe ample debt capacity for additional deals

37 closed acquisitions totaling >$5 billion

For detailed Supplemental Earnings Information presentation, please visit:

investors.zayo.com

Q&A

Segment-Level Results

Revenue Stratification

Estimated Capital and Upfront Expenditures associated with Net New Sales (Bookings) less Upfront Charges

Zayo Dark Fiber Solutions revenue stratification & operational data

• 0.6%
• 0.7%
• 0.8%
• 0.7%
• 0.8%
• 0.7%
• 0.6%
• 0.8%

Churn Processed Gross Installations

Net Installations

Net New Sales (Bookings)

24

Segment Information

Purchases of Property and Equipment

Adjusted EBITDA

• 14%

Net Capital1

Adj Unlevered FCF3

• 7%

Unlevered Free Cash Flow (FCF)2

25

Segment Information

Zayo Dark Fiber Solutions cash flow stratification

Revenue Stratification

Net New Sales (Bookings)

• 1.8%
• 1.6%
• 1.6%
• 1.6%
• 1.6%
• 1.4%
• 1.4%
• 1.5%

Churn Processed Gross Installations

Net Installations

Estimated Capital and Upfront Expenditures associated with Net New Sales (Bookings) less Upfront Charges

26

Segment Information

Zayo Network Connectivity revenue stratification & operational data

Purchases of Property and Equipment

Adjusted EBITDA

Net Capital1

Adj Unlevered FCF3

Unlevered Free Cash Flow (FCF)2

27

Segment Information

Zayo Network Connectivity cash flow stratification

Revenue Stratification

Estimated Capital and Upfront Expenditures associated with Net New Sales (Bookings) less Upfront Charges

• 1.2%
• 1.2%
• 1.2%
• 1.0%
• 1.3%
• 1.3%
• 1.1%
• 1.1%

Churn Processed Gross Installations

Net Installations

Net New Sales (Bookings)

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Segment Information

Zayo Colo and Cloud Infrastructure revenue stratification & operational data

Purchases of Property and Equipment

Adjusted EBITDA

Net Capital1

Adj Unlevered FCF3

Unlevered Free Cash Flow (FCF)2

29

Segment Information

Zayo Colo and Cloud Infrastructure cash flow stratification

Reconciliations

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, levered free cash flow, adjusted funds from operations, and net adjusted funds from operations. 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 intercompany loans, 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. Adjusted unlevered free cash flow is defined as Adjusted EBITDA minus 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 operating cash flow minus purchases of property and equipment, net of stimulus grants. Adjusted funds from operations (“AFFO”) is defined as earnings/(loss) from continuing operations before depreciation and amortization, unrealized foreign currency gains/(losses) on intercompany loans, stock-based compensation, acquisition or disposal-related transaction costs, losses on extinguishment of debt, non-cash income/(loss) on equity and cost investments, non-cash monthly amortized revenue, less cash payments related to maintenance capital expenditures. Net AFFO is defined as AFFO plus upfront customer payments from less than twelve month payback on net new sales less cash payments related to capital expenditures for (i) less than twelve month payback on net new sales and (ii) network capacity. 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

• perating 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 believe the presentation of AFFO and Net AFFO is useful to investors by providing measures presented by certain datacenter and cellular tower REITs (and some non-REITs) with which we are sometimes compared. 31

Non-GAAP Financial Measures

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

• perations 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 have limitations as analytical tools and should not be considered in isolation from,

• r as a substitute for, analysis of our results as reported under GAAP. For example, 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, AFFO, and Net AFFO have 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, AFFO, and Net AFFO:

• 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.

32

Non-GAAP Financial Measures

Our computation of Adjusted EBITDA, unlevered free cash flow, adjusted unlevered free cash flow, levered free cash flow, AFFO, and Net AFFO 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 carryforwards, 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

• f our liquidity. See “Reconciliation of Non-GAAP Financial Measures” for a quantitative reconciliation of Adjusted EBITDA, AFFO,

and Net AFFO to net income/(loss) and for a quantitative reconciliation of unlevered free cash flow, adjusted 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 such 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.

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Reconciliation

Net (Loss)/Income to Adjusted EBITDA

34

Reconciliation

35

Segment Net (Loss)/Earnings to Adjusted EBITDA

($ in millions)

Cash from Operating Activities to UFCF, Adjusted UFCF & LFCF

36

Reconciliation

AFFO & Net AFFO

37

Reconciliation