PAETEC Holding Corp. Announces Fourth Quarter and Full Year 2007 Results

Business Wire, Feb 28, 2008

FAIRPORT, N.Y. -- PAETEC Holding Corp. (NASDAQ GS: PAET) today announced fourth quarter and full year 2007 financial and operating results. "2007 was an exciting year for PAETEC, finishing on a very positive note with strong fourth quarter results," said PAETEC Chairman and CEO, Arunas A. Chesonis. "2008 marks PAETEC's 10th anniversary, and we plan to see more of the same consistent, high quality growth that our employees, customers, and investors have come to expect from us." Highlights of the 2007 quarter and full year include the following:

* Fourth quarter revenue of $288.6 million, which represented a 91% increase over fourth quarter 2006 revenue of $151.5 million;

* Fourth quarter adjusted EBITDA* of $55.7 million, which represented a 118% increase over fourth quarter 2006 adjusted EBITDA of $25.6 million;

* Fourth quarter free cash flow(*) of $26.5 million, which represented the 20th consecutive quarter in which PAETEC or its predecessor generated positive free cash flow;

* Fourth quarter net income of $15.5 million compared to fourth quarter 2006 net income of $2.6 million;

* For the year, revenue of $1.04 billion and adjusted EBITDA of $196.2 million, up 78% and 114%, respectively, from 2006;

* For the year, net income of $10.5 million compared to 2006 net income of $7.8 million;

* A year-end cash balance of $112.6 million;

* An increase of 129% in the number of access line equivalents in service, from 1.26 million as of December 31, 2006, to 2.88 million as of December 31, 2007.

Quarterly Results

Total revenue for fourth quarter 2007 increased 91% to $288.6 million from $151.5 million for fourth quarter 2006, principally due to the addition of US LEC's results, as well as continued strength in multi-site MPLS VPN sales. Adjusted EBITDA for fourth quarter 2007 increased 118% to $55.7 million over adjusted EBITDA of $25.6 million for fourth quarter 2006. Adjusted EBITDA margin, which represents adjusted EBITDA as a percentage of total revenue, was 19.3% for fourth quarter 2007 compared to an adjusted EBITDA margin of 16.9% for fourth quarter 2006. Continued operating leverage of the company's network and employee base and synergies related to the US LEC acquisition, which was completed on February 28, 2007, continued to positively impact adjusted EBITDA margin, as PAETEC achieved its targeted acquisition-related synergy goals for the year.

Network services, which accounted for 82% of fourth quarter 2007 total revenue, experienced strong growth, increasing 98% year-over-year to $235.8 million. US LEC's operations, increasing MPLS VPN sales, and continued strength in core integrated voice and data T-1 sales all contributed to the positive results. Carrier services represented 14% of fourth quarter 2007 revenues and grew 75% year-over-year to $40.0 million, largely reflecting the addition of US LEC's operations. Integrated solutions accounted for the remaining 4% of fourth quarter 2007 revenues. This business, which tends to generate uneven results on a quarterly basis, experienced a 33% increase in revenue over fourth quarter 2006 to $12.8 million.

Net income for fourth quarter 2007 increased to $15.5 million compared to net income of $2.6 million for fourth quarter 2006, primarily as a result of approximately $15 million in purchase accounting adjustments to depreciation and amortization and to stock-based compensation associated with the US LEC acquisition. Fourth quarter 2007 included a reduction to depreciation and amortization of approximately $17 million to recognize the finalization of valuations and related useful life assessments of tangible and intangible assets acquired through US LEC, offset in part by $2 million of additional stock-based compensation expense to recognize the finalization of the valuation of stock options assumed in the US LEC acquisition. Increased debt levels resulting primarily from the US LEC acquisition increased interest expense for fourth quarter 2007 to $17.4 million from $10.2 million for fourth quarter 2006.

PAETEC ended fourth quarter 2007 with 103.1 million common shares outstanding. PAETEC's fully diluted common share count of approximately 125 million as of December 31, 2007, remained substantially unchanged from September 30, 2007.

Pro Forma Quarterly Comparison

Total revenue of $288.6 million for fourth quarter 2007 represented an increase of 10.7% compared to pro forma combined PAETEC/US LEC total revenue of $260.8 million for fourth quarter 2006. Adjusted EBITDA of $55.7 million for fourth quarter 2007 represented an increase of 27% compared to pro forma adjusted EBITDA of $44.0 million for fourth quarter 2006. Adjusted EBITDA margin was 19.3% for fourth quarter 2007 compared to pro forma adjusted EBITDA margin of 16.9% for fourth quarter 2006, largely as a result of continued operating leverage of the company's network and employee base and acquisition-related synergies.

Net income was $15.5 million for fourth quarter 2007 compared to pro forma net income of $0.5 million for fourth quarter 2006. Depreciation and amortization expense of $5.9 million for fourth quarter 2007 represented a decrease of 72% compared to fourth quarter 2006 pro forma depreciation and amortization expense of $21.3 million, primarily due to the finalization of valuations and related adjustments of tangible and intangible assets acquired in the US LEC acquisition. Interest expense of $17.4 million for fourth quarter 2007 represented an increase of 16.4% compared to pro forma interest expense of $14.9 million for fourth quarter 2006.