PAETEC Q1 2007 Results

PAETEC  announced 2007 first quarter financial and operating results. As previously announced, PAETEC Corp. completed its merger with US LEC Corp. on February 28, 2007, creating one of the largest competitive telecommunications providers in the United States. Highlights of the combined company’s 2007 first quarter, which includes the results of US LEC’s operations only for March 2007, included:

  • Revenue of $194.0 million, which represented a 37.8% increase over first quarter 2006 revenue of $140.8 million;
  • Adjusted EBITDA* of $34.2 million, which represented a 52.5% increase over 2006 first quarter adjusted EBITDA of $22.4 million;
  • Net loss of <$5.8> million versus $12.5 million in net income in 2006 first quarter;
  • Free cash flow of $19.0 million, which represented the 17th consecutive quarter in which PAETEC Holding or its predecessor generated positive free cash flow; and
  • 145.4% increase in the number of access lines in service, from 1,038,024 as of March 31, 2006, to 2,547,456 as of March 31, 2007.


Quarterly Performance
Total revenue for the 2007 first quarter increased 37.8% to $194.0 million from $140.8 million for the 2006 first quarter. Adjusted EBITDA for the 2007 first quarter increased 52.5% to $34.2 million over adjusted EBITDA for the 2006 first quarter of $22.4 million. Adjusted EBITDA margin, which represents adjusted EBITDA as a percentage of total revenue, was 17.6% for the 2007 first quarter versus an adjusted EBITDA margin of 15.9% for the 2006 first quarter. Net loss for the 2007 first quarter was <$5.8> million compared to net income of $12.5 million for the first quarter of 2006, resulting primarily from the write-off of $9.8 million in debt issuance costs related to prior credit facilities that were terminated on February 28, 2007, as part of the merger closing transactions. Increased depreciation and amortization expense of $5.6 million and increased interest expense of $11.8 million also contributed to the change and resulted primarily from the depreciation of US LEC’s assets in the combined company’s results of operations from March 1, 2007, and increased debt levels incurred in connection with PAETEC’s June 2006 leveraged recapitalization and in connection with the merger.

The increase in revenue-and subsequently adjusted EBITDA-was driven by an increase in network services revenue of 42.3%. Network services revenue outpaced overall revenue growth as our rapidly growing MPLS VPN product sales continue to complement historically strong integrated voice and data T1 sales. The rapid growth in network services revenue offset the integrated services revenue growth of 1.1% as that business line has an annual revenue cycle and tends to provide uneven results on a quarterly basis. Carrier Services had a 28.5% growth rate period to period due primarily to the addition of the US LEC carrier services segment. For the 2007 first quarter operating results, US LEC results accounted for $37.4 million in revenue.

Sequential Performance
2007 first quarter revenue of $194.0 million represented an increase of 28.1% over 2006 fourth quarter revenues and reflected the addition of US LEC results for March 2007 and continued access line additions. As previously mentioned, access line growth has been generated through robust MPLS VPN and integrated voice and data T1 sales.

Adjusted EBITDA of $34.2 million for 2007 first quarter represented a 33.8% increase over adjusted EBITDA for the 2006 fourth quarter, also reflecting the addition of US LEC results for March 2007, as well as solid expense management coupled with the strong revenue growth.

Capital Expenditures
PAETEC Holding continues to invest in the enhancement of its network and product offerings. Capital expenditures for the 2007 first quarter increased to $15.2 million from $12.3 million in the 2006 first quarter. Approximately $2.1 million in capital expenditures resulted from the inclusion of US LEC’s capital expenditures for March 2007. The remaining capital expenditures for the 2007 first quarter were associated with investments in the PAETEC Holding network, including expansion in the switching and information technology infrastructure. The 2006 quarter included the implementation of the new 5ESS switch in Newark N.J. during that period.

Financing and Liquidity Update
Concurrently with the closing of the merger, PAETEC Holding closed on its new $850 million credit facility consisting of a $50 million five-year revolving credit facility and an $800 million six-year term loan facility. As of March 31, 2007, the revolver remained undrawn, there was $800 million outstanding under the term loan and PAETEC Holding had $53.4 million of cash on hand.

Pro Forma Financial Snapshot
If the historical results of operations of PAETEC Corp. were combined with the historical results of operations of US LEC Corp. as if the merger had occurred on January 1, 2006, and without giving effect to any pro forma adjustments or unrealized synergies, PAETEC Holding’s revenue would have increased to $267.6 million for the 2007 first quarter from $243.6 million for the 2006 first quarter, yielding a growth rate of 9.9%. Adjusted EBTIDA would have demonstrated an increase of $11.4 million, or 30.6%, from $37.2 million in the 2006 first quarter to $48.6 million in the 2007 first quarter, reflecting solid expense management coupled with the revenue growth as well as some initial synergies achieved as a result of the US LEC merger. The increase in pro forma adjusted EBITDA also would have resulted in an increase in pro forma adjusted EBITDA margins, from 15.3% in the 2006 first quarter to 18.1% in the 2007 first quarter.

Full Year 2007 Outlook
If the merger had occurred on January 1, 2007 and, accordingly, US LEC’s operations were included for all of 2007, PAETEC Holding anticipates that for the full year 2007 the combined company would generate the full year 2007 results below.

Full Year 2007 ($ in millions)
Revenue $1,110 to $1,125
Adjusted EBTIDA $195 to $205
Capital Expenditures $80 to $90

PAETEC Holding anticipates that actual results for full year 2007 (which as noted above will include only ten months of US LEC operations) will include revenue in the range of $1,037 million to $1,052 million, adjusted EBITDA in the range of $181 million to $191 million and capital expenditures in the range of $75 million to $85 million.

Forward-Looking Statements
Except for statements that present historical facts, this release contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In some cases, you can identify these statements by such forward-looking words as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,” “will” and “would,” or similar expressions. These statements, which include PAETEC’s forecasts of total revenue, adjusted EBTIDA and capital expenditures involve known and unknown risks, uncertainties and other factors that may cause PAETEC’s actual operating results, financial position, levels of activity or performance to be materially different from those expressed or implied by such forward-looking statements. Some of these risks, uncertainties and factors are discussed under the caption “Risk Factors” in PAETEC’s 2006 Annual Report on Form 10-K and in PAETEC’s subsequently filed SEC reports. They include, but are not limited to, the following risks, uncertainties and other factors: changes in regulation and the regulatory environment; competition in the markets in which PAETEC operates; the continued availability of necessary network elements from competitors; PAETEC’s ability to manage and expand its business and execute its acquisition strategy, to adapt its product and service offerings to changes in customer preferences, and to convert its existing network to a network with more advanced technology; effects of network failures, systems breaches, natural catastrophes and other service interruptions; and PAETEC’s ability to service its indebtedness and to raise capital in the future. PAETEC disclaims any obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

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