Earnings Call PresentationFiscal Year 2019 Q2NYSE: ZAYO@ZayoGroup
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 our financial and operating prospects, current economic trends, future opportunities, ability to retain existing customers and attract new ones, our acquisition strategy and ability to integrate acquired companies and assets, outlook of customers, reception of new products and technologies, strength of competition and pricing, and potential organizational strategies that we may opt to pursue in the future. 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 and most recent Form 10-Q filed with the Securities and Exchange Commission. 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.
In addition to this presentation and our filings with the SEC, the Company provides a glossary of terms used throughout and a supplemental earnings presentation, both of which are available under the investor section of the Company’s website at http://www.zayo.com/investors. The supplemental earnings presentation includes definitions and tables reconciling non-GAAP measures used in this presentation, including the quantitative reconciliation of Adjusted EBITDA to net income/(loss) and quantitative reconciliations of adjusted unlevered free cash flow and levered free cash flow, each to net cash provided by operating activities.
Safe Harbor
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DAN CARUSOChairman and Chief Executive Officer
Dec18q financial highlights
Bookings and Net Installs showed momentum
● $8.3M Net Bookings, 2nd strongest in Zayo history● $7.8M Gross Installs, 2nd highest in Zayo history● Churn at $6.2M / 1.2%, down from prior quarter● Net Installs at $1.6M imply a 4% growth rate
Revenue increased 5% (1% recurring Revenue growth, 2% in constant currency)
EBITDA increased 7% (5% recurring EBITDA growth)
Strong EBITDA margin of 56%, and aUFCF of 22%
LFCF positive at $22M
4EXCLUDES ALLSTREAM
1 Growth rates presented are QoQ annualized growth
Net New Sales (Bookings)
Averaged $8.3M Bookings in 2018, up 11% YoY vs. $7.5M in 2017
5EXCLUDES ALLSTREAM
2nd highest Bookings in company history
Solid capital profile
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Strong payback of 17 months
Contract Value vs. CapEx on Bookings
Net New Sales (Bookings) Stratification
71% of Net Sales has <12 month payback
6EXCLUDES ALLSTREAM
Traction on recent investments
7
Technology Company
Purchased 14 long haul routes spanning 8,000 route miles
Leverages recently announced Columbus to Ashburn and Dallas to Atlanta routes
Cumulative IRR on new routes now mid single digits
Secured 2nd tenant on last quarter’s long haul route investment
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2nd highest gross install quarter
Project >$8.0M in Mar19q
Gross Installations
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Service Activation Pipeline up 11% YoY
Service Activation Pipeline
EXCLUDES ALLSTREAM
9
Churn declined, remains in 1.2% range
Churn likely to remain in ~1.2% range in CY2019
Continue to move towards long-term goal of 1.1%
Churn
9EXCLUDES ALLSTREAM
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3.6% annualized growth from Net Installs
10EXCLUDES ALLSTREAM
Net Installations
1 Implied by the current quarter pace of Net Installs, calculated as Net Installs annualized ($1.6M*4 = $4.0M), divided by the beginning quarter run-rate $177.5M=3.6%)
Revenue, aEBITDA up 5% and 7% annualized
11
Maintaining healthy 56% aEBITDA margin
Revenue
aEBITDA
11EXCLUDES ALLSTREAM
FX headwinds dampened recurring revenue growth
Healthy 22% aUFCF margin
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Capital Expenditures
aUFCF LFCF
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Steady QoQ Capital Expenditures and Net Capital
Lower LFCF from higher scheduled Dec18q cash interest payments
EXCLUDES ALLSTREAM
Internal Analysis
● Lens for split includes customer in addition to product; when applied, most of Layer 2/3 remains in Network
● Dec18q metrics signal on path to accelerated growth
Feedback
● Strategic customers value Zayo’s broad product portfolio and solution set; view Zayo as strong across all Network products
● Public Investors: Like notion of infra focus, clear REIT pathway, and simplicity, but concerned about disruption and distraction
Market Conditions
● Cash flow and stability important, especially given increasingly volatile market
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Announcing Unleash provided opportunity for feedback
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● Simplify execution
● Focus on Network business as crown jewel
● Expand scope & independence of zColo
● Advance Allstream’s path to value creation
Board and management evaluating all available alternatives for achieving these goals and maximizing shareholder value
Strong conviction in Unleash tenets
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Simplify execution
Zayo
Network
zColo
● Internal benefit from less granularity of external reporting
● Eliminates fiber transfer pricing for Transport, Enterprise
● External benefit from more straightforward communications
Allstream
Zayo
Fiber Solutions
Transport
Enterprise
zColo
Allstream
New Old
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1616
Focus on Network as crown jewel
Network(Pro forma1)
● Compelling financial profile - stable, recurring revenue model yields attractive, predictable cash flows
● Global fiber footprint with unparalleled metro/regional depth and International reach – strong competitive moat
● Diversified, blue-chip customer base comprised of the largest, most sophisticated users of bandwidth
● Powerful secular trends provide multiple growth drivers
Percent of Revenue
1 Pro forma for movement of some Network customers into Allstream, Cloud into zColo, and network services tied to colo customers into zColo
Dec18q LQA Revenue $1.7-1.8 billion
EBITDA Margin 56%+ EBITDA margin
aUFCF Margin 20 - 25%+
Implied Growth from Net Installs 5%
Expand scope & independence of zColo
1717
● Position zColo to operate as more stand-alone colo business
● Move Cloud Infrastructure into zColo
● Move network services that are associated with colo customers into zColo
zColo(Pro forma1)
Percent of Revenue
1 Pro forma for movement of some Network customers into Allstream, Cloud into zColo, and network services tied to colo customers into zColo
Dec18q LQA Revenue $270 - 280 million
EBITDA Margin 45-50% EBITDA margin
aUFCF Margin 0 - 10%
Implied Growth from Net Installs (2-3%)
Position for REIT optionality
● Treating work associated with REIT conversion as a priority; REIT potential remains for both Network and zColo
● Awaiting feedback on PLR request; shutdown a factor in timing
● No material federal cash taxes until FY 2024 / 2025
● Have ample time to resolve Allstream prior to any REIT conversion
● Earliest possible REIT conversion 2021 / 2022
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Maintain strong 56%+ EBITDA and 20-25%+ aUFCF margins while continuing customer driven network expansion
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● Grow Network business at current 5% rate and beyond while scrutinizing expenses to drive further netex and opex efficiencies
● Maintain emphasis on <12 month payback deals; lean into strategic investments (E-Rate, Mobile Infrastructure, Long-haul Fiber) that leverage our existing assets in conjunction with new builds, delivering strong FCF yields and attractive returns on invested capital
Matt SteinfortChief Financial Officer
Segment CY2019
Network
Implied Growth from Net Installs1 4-6%
EBITDA Margin 56%+ EBITDA margin
Cash Flow 20-25%+ aUFCF margin
zColo Cloud
Implied Growth from Net Installs Flat to low growth
EBITDA Margin 45-50% EBITDA margin
Cash Flow 0-10% aUFCF margin
AllstreamReduce reliance on Network; Generate $8-10M in
quarterly cash; Continue evaluating separation opportunities
CY2019 Guidance
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1 Calculated as Net Installs annualized, divided by the beginning quarter run-rate; actual revenue growth will lag the Implied Growth from Net Installs
Segments
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Dec18q financial results
1 pro forma annualized growth for revenue and Adjusted EBITDA are calculated as if the acquisitions occurred on the first day of the quarter preceding the respective quarter in which the acquisitions closed2 Dec18q EPS is based on 237.1 and 238.8 million weighted average shares outstanding for basic and diluted, respectively, for the quarter
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Note: all financials normalize for the adoption of the new accounting standard, Revenue from Contracts with Customers
$1.9B of net operating loss carryforwards
No material federal cash taxes until 2024/2025
Strong Balance sheet
Debt Schedule¹
Gross leverage of 4.8x within 3-5X target
1
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¹2020 tranche representative of $210M revolver draw as of 12/31/18
Simplifying investor communications
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● Segment level reporting for Network, zColo and Allstream
● For Network and zColo, continue to report:
○ Revenue and aEBITDA
○ Capital, Net Capital, aUFCF, LFCF, AFFO
○ Net Installs and Implied Revenue Growth
● Provide color on Bookings, Gross Installs, and Churn trends
ZAYO ANALYST DAYWE ARE ONLY GETTING STARTED
March 14, 20198:00 AM - 1:30 PM
E-TOWN HALL | BOULDER, COEMAIL [email protected] TO REQUEST INVITE
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