PAETEC Holding Corp. Announces Third Quarter 2007 Results

Business Wire, Nov 8, 2007

FAIRPORT, N.Y. -- PAETEC Holding Corp. (NASDAQ GS: PAET) today announced third quarter 2007 financial and operating results. "We are very pleased with our third quarter results, highlighted by strong revenue growth, as well as continued margin and free cash flow expansion," said PAETEC Chairman and CEO Arunas A. Chesonis. "We have completed our second full quarter since closing the US LEC transaction and continue to be gratified with the rapid integration of our operations and the progress we have made on our continuing integration of back office systems." Highlights of the quarter include the following:

* Revenue of $283.9 million, which represented a 91% increase over third quarter 2006 revenue of $148.4 million;

* Adjusted EBITDA* of $53.8 million, which represented a 188% increase over third quarter 2006 adjusted EBITDA of $18.7 million;

* Free cash flow(*) of $35.5 million, which represented the 19th consecutive quarter in which PAETEC Holding or its predecessor generated positive free cash flow;

* Successful completion on July 10, 2007 of amendments to PAETEC's existing bank credit facility and a $300 million senior notes offering;

* Net loss of $(5.1) million largely due to the expense of $4.3 million on the extinguishment of debt in connection with the senior notes offering, and an increase in depreciation and amortization expense of $8.2 million, due to the catch up of expenses associated with the acquired US LEC intangible assets, compared to a third quarter 2006 net loss of $(1.5) million;

* A quarter-end cash balance of $105.5 million;

* An increase of 120% in the number of access line equivalents in service, from 1.26 million as of December 31, 2006, to 2.76 million as of September 30, 2007; and

* Announced agreements to acquire McLeodUSA Incorporated and Allworx Corp.

Quarterly Performance

Total revenue for third quarter 2007 increased 91% to $283.9 million from $148.4 million for third quarter 2006, principally due to the addition of US LEC's results. Adjusted EBITDA for the third quarter 2007 increased 188% to $53.8 million over adjusted EBITDA of $18.7 million for the third quarter 2006. Adjusted EBITDA margin, which represents adjusted EBITDA as a percentage of total revenue, was 19.0% for the third quarter 2007 compared to an adjusted EBITDA margin of 12.6% for the third quarter 2006. Network operating leverage and merger-related synergies continued to positively impact adjusted EBITDA margin. Third quarter 2006 adjusted EBITDA results were negatively affected by an acceleration of management compensation of $4.9 million incurred in connection with PAETEC's June 2006 leveraged recapitalization.

Network Services, which accounted for 82% of PAETEC's third quarter 2007 total revenue, experienced strong growth, increasing 101% year over year to $234 million. US LEC's operations, PAETEC's rapidly growing MPLS VPN product, and its core integrated voice and data T1 sales all contributed to the positive results. Carrier Services represented 14% of third quarter 2007 revenues and grew 77% year over year to $40.1 million, largely reflecting the addition of US LEC's operations. Integrated solutions accounted for the remaining 4% of third quarter revenues. This business, which tends to generate uneven results on a quarterly basis, experienced a 5% increase in revenue over third quarter 2006 to $10.2 million.

Net loss for third quarter 2007 was $(5.1) million compared to a net loss of $(1.5) million for third quarter 2006. The current quarter's net loss was largely attributable to expense of $4.3 million incurred on extinguishment of credit facility debt with the proceeds of the senior notes offering, as well as $8.2 million in increased depreciation and amortization expense due to the catch-up of amortization expense associated with acquired US LEC intangible assets. For third quarter 2007, depreciation and amortization expense of $35.2 million increased significantly from third quarter 2006 primarily due to the depreciation of a larger asset base associated with the US LEC merger and the increased amortization expense described above. Increased debt levels resulting primarily from the US LEC transaction increased interest expense for third quarter 2007 to $18.0 million from $10.0 million in third quarter 2006.

PAETEC ended the third quarter 2007 with 102.5 million common shares outstanding. PAETEC's fully diluted common share count of approximately 125 million as of September 30, 2007 remained substantially unchanged from June 30, 2007. The fully diluted share count as of the end of the third quarter 2007 reflected that the company had approximately 12.7 million common shares subject to outstanding stock options, 7.6 million common shares represented by outstanding restricted stock units, and 2.2 million common shares subject to outstanding warrants.

Pro Forma Quarterly Performance

Actual total revenue for third quarter 2007 increased 11.8% to $283.9 million over the pro forma revenue of $253.8 million which the combined company would have had for third quarter 2006 if the US LEC merger had occurred on July 1, 2006 (without giving effect to any pro forma adjustments or unrealized synergies). Actual adjusted EBITDA for third quarter 2007 increased 64% to $53.8 million over the adjusted EBITDA of $32.9 million which the combined company would have generated for the third quarter 2006 on the same pro forma basis (including the $4.9 million in recapitalization related expenses incurred by PAETEC in the third quarter 2006). Actual adjusted EBITDA margin of 19.0% for third quarter 2007 increased from a pro forma adjusted EBITDA margin of 13.0% for third quarter 2006, largely as a result of merger-related synergies and continued operating leverage of the company's network and employee base. Actual net loss for third quarter 2007 was $(5.1) million compared to a pro forma net loss of $(10.2) million for third quarter 2006. Adjusted EBITDA and net income for the third quarter 2006 reflected a negative impact of $4.9 million as a result of leveraged recapitalization completed in June 2006. For third quarter 2007, actual depreciation and amortization expense increased 64% to $35.2 million from third quarter 2006 pro forma depreciation and amortization expense of $21.4 million. Actual Interest expense increased 18.4% to $18.0 million from the pro forma interest expense of $15.2 million for third quarter 2006.