- Revenue of $274.5 million, which represented an 89% increase over second quarter 2006 revenue of $145.6 million;
- Adjusted EBITDA* of $52.5 million, which represented a 109% increase over second quarter 2006 adjusted EBITDA of $25.1 million;
- Net income of $6.0 million compared to a $<5.8> million net loss in second quarter 2006;
- Free cash flow* of $31.5 million, which represented the 18th consecutive quarter in which PAETEC Holding or its predecessor generated positive free cash flow;
- Ended the quarter with a cash balance of $84.5 million;
- An increase of 141% in the number of access line equivalents in service, from 1.10 million as of June 30, 2006 to 2.65 million as of June 30, 2007; and
- Successful completion on July 10, 2007 of amendments to PAETEC’s existing bank credit facility and a $300 million senior note offering priced at the end of the quarter.
PAETEC Holding Corp. (NASDAQ GS: PAET) today announced second quarter 2007 financial and operating results. “Our first full quarter as a publicly traded company is one that we are excited about. PAETEC enjoyed the best financial quarter in our company’s history,” said PAETEC Chairman and CEO Arunas A. Chesonis. “We continued to see significant growth and interest in our data and VoIP product offerings, while also benefiting from the synergies being realized from the US LEC merger.”
Total revenue for second quarter 2007 increased 89% to $274.5 million from $145.6 million for second quarter 2006, principally due to the addition of US LEC’s results. Adjusted EBITDA for the second quarter 2007 increased 109% to $52.5 million over adjusted EBITDA for the second quarter 2006 of $25.1 million. Adjusted EBITDA margin, which represents adjusted EBITDA as a percentage of total revenue, was 19.1% for the second quarter 2007 compared to an adjusted EBITDA margin of 17.3% for the second quarter 2006. Network operating leverage and merger-related synergies largely accounted for the increase in adjusted EBITDA margins.
Network Services, which accounted for 83% of PAETEC’s second quarter 2007 total revenue, experienced strong growth, increasing 100% year over year to $228 million. US LEC’s operations, PAETEC’s fast growing MPLS VPN product, and its integrated voice and data T1 sales all contributed to the positive results. Carrier Services represented 14% of second quarter 2007 revenues and grew 75% year over year to $37.5 million, largely reflecting the addition of US LEC’s operations as well as solid 19% internal growth. Integrated Services accounted for the remaining 3% of second quarter revenues and experienced an 11% decline year over year. Integrated Services continues to have an annual revenue cycle and tends to provide uneven results on a quarterly basis.
Net income for second quarter 2007 was $6.0 million compared to a net loss of $<5.8> million for the second quarter of 2006. Last year’s reported net loss was largely attributable to the company’s leveraged recapitalization that resulted in $14.8 million in additional expenses. For second quarter 2007, depreciation and amortization expense was $20.9 million and interest expense was $18.5 million, both up significantly year over year primarily from the depreciation of a larger asset base associated with the merger, as well as increased debt levels as a result of the transaction.
PAETEC ended the second quarter 2007 with 100.9 million common shares outstanding. A fully diluted share count as of the end of the second quarter 2007 also would reflect that the Company had approximately 14.1 million common shares subject to outstanding stock options, 7.5 million common shares represented by outstanding restricted stock units (RSUs), and 2.6 million common shares subject to outstanding warrants, amounting to a total of 24.2 million additional fully diluted common shares. As a result, PAETEC’s fully diluted common share count was approximately 125 million as of June 30, 2007.
Pro Forma Quarterly Performance
Total revenue for second quarter 2007 increased 9% to $274.5 million over the pro forma revenue of $252.3 million that the combined company would have had for second quarter 2006 assuming the US LEC merger had occurred on April 1, 2006 (without giving effect to any pro forma adjustments or unrealized synergies). Adjusted EBITDA for second quarter 2007 increased 31% to $52.5 million over the adjusted EBITDA of $40.2 million that the combined company would have generated for the second quarter 2006 on the same pro forma basis. Adjusted EBITDA margin of 19.1% for second quarter 2007 increased from a pro forma adjusted EBITDA margin of 15.9% for second quarter 2006, largely as a result of merger-related synergies and continued operating leverage of the company’s network and employee base. Net income for second quarter 2007 was $6.0 million compared to a pro forma net loss of <$8.9> million for second quarter of 2006. Last year’s pro forma net loss was largely attributable to PAETEC’s June 2006 leveraged recapitalization that resulted in $14.8 million in additional expenses. For second quarter 2007, depreciation and amortization expense increased 1% from second quarter 2006 pro forma depreciation and amortization expense to $20.9 million. Interest expense nearly doubled to $18.5 million from the pro forma interest expense for second quarter 2006.
Integration efforts related to the US LEC merger to date have focused on network consolidation, the segmentation of sales distribution channels, the rebranding of marketing materials, and the integration of job functions and personnel policies. The majority of synergies were expected from savings in network costs and streamlining of certain SG&A components, which have largely been completed. PAETEC continues to expect that it will be able to realize a total of $25 million in merger-related synergies for 2007, as well as an additional $15 million for 2008.
“Integration with the former US LEC is proceeding very well, with several milestones – such as the June merger of our respective data networks – occurring faster than anticipated,” said EJ Butler, Jr., chief operating officer for PAETEC. “Our focus now and for the balance of the year is on the integration of systems, back office processes, and employee training. Continued progress should bring the availability of our entire product suite over the combined company footprint during the fourth quarter.”
Capital Expenditures PAETEC continues to invest in the enhancement of its network and product offerings. Capital expenditures for second quarter 2007 increased to $21.0 million, or 8% of total revenue, from $9.8 million, or 7% of total revenue, for second quarter 2006. Capital expenditures increased 26% from the $16.7 million in pro forma combined capital expenditures applied by PAETEC and US LEC in second quarter 2006 (or 7% of total combined revenues). Capital expenditures for second quarter 2007 were associated with investments in the PAETEC network, including expansion in the switching and information technology infrastructure.
Cash flow, Financing, and Liquidity
PAETEC reported second quarter 2007 free cash flow of $31.5 million, which increased 106% from $15.3 million in second quarter 2006. PAETEC also ended the quarter with a cash balance of $84.5 million, up from a first quarter 2007 level of $53.4 million, largely due to increased cash flow from operations as well as cash received from the exercise of stock options. Cash flow provided by operations was $36.0 million in second quarter 2007 and $<3.7> million used in operations in second quarter 2006.
As of June 30, 2007, PAETEC’s $50 million revolver remained undrawn and $798 million was outstanding under its credit facility term loan. On July 10, 2007, PAETEC closed on two advantageous financing transactions that did not result in any increase in total debt. PAETEC completed its sale of $300 million 9.5% Senior Notes due 2015 and used the proceeds from this issue to pay down its existing term loan from $798 to $498 million. In conjunction with the paydown, PAETEC amended its existing credit facility to consist of a $50 million revolver and a $500 million term loan.
With these transactions, PAETEC:
- Introduced itself to a new debt investor class-the high yield bond market;
- Layered in long-term debt to better position its balance sheet for growth;
- Reduced its overall cost of capital, with the expectation that its annual interest expense will decrease by approximately $3 million;
- Increased its incremental term loan facility permitted under its bank credit facility from $100 million to $225 million; and
- Obtained debt covenant modifications that provide it with additional operational and financial flexibility.
Full Year 2007 Outlook
“The business continues to track as expected and we remain confident leading into the second half of 2007,” said Keith Wilson, PAETEC’s chief financial officer. “Our EBITDA margin increased significantly year-over-year, and we expect the positive trends to continue. As a result, we are pleased to reaffirm our 2007 guidance.” The table below highlights PAETEC’s revenue, adjusted EBITDA, and capital expenditure expectations on both a reported basis and on the pro forma basis described above, assuming the US LEC merger had occurred on January 1, 2007 instead of February 28, 2007.
|($ in millions)||FY 2007 (actual)||FY 2007 (pro forma)|
|Revenue||$1,037 to $1,052||$1,110 to $1,125|
|Adjusted EBITDA||$181 to||$195 to $205|
|Capital Expenditures||$75 to $85||$80 to $90|
Conference Call As previously announced, PAETEC will host a conference call with the investment community today at 8:30 a.m. EDT. Chairman and CEO Arunas Chesonis, Chief Financial Officer Keith Wilson, and Chief Operating Officer EJ Butler, Jr., will be participating. A live webcast and a replay of the call will be available at http://www.paetec.com.
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 EBITDA, capital expenditures, merger-related synergies and free cash flow 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.
PAETEC (NASDAQ GS: PAET) is personalizing business communications for medium-sized and large businesses, enterprise organizations and institutions across the United States. We offer a comprehensive suite of voice, data, and IP services, as well as enterprise communications management software, network security solutions, CPE, and managed services. For more information, visit http://www.paetec.com.
* Adjusted EBITDA, as defined by PAETEC, represents net income before interest, provision for taxes, depreciation and amortization, change in fair value of Series A convertible redeemable preferred stock conversion rights, stock-based compensation, loss on extinguishment of debt, leveraged recapitalization costs, integration/restructuring costs and, with respect to pro forma adjusted EBITDA, loss related to investment in ETV. Free cash flow, as defined by PAETEC, consists of adjusted EBITDA less capital expenditures (purchases of property and equipment). Neither adjusted EBITDA nor free cash flow is a measurement of financial performance under accounting principles generally accepted in the United States. For additional information as to PAETEC’s reasons for including these measures, for a quantitative reconciliation of the differences between adjusted EBITDA and net loss (income), as net loss (income) is calculated in accordance with generally accepted accounting principles, and for a quantitative reconciliation of free cash flow to net cash provided by (used in) operating activities, as net cash provided by (used in) operating activities is calculated in accordance with generally accepted accounting principles, see the accompanying tables.