PEER 1 Reports Fiscal 2010 First Quarter Results

2010-01-12

VANCOUVER, BC – November 12, 2009 – PEER 1 Network Enterprises, Inc. (TSX:PIX), a leading provider of online IT infrastructure, today announced the results for the three months ended September 30, 2009. All amounts are stated in US dollars.

Selected financial highlights for the quarter ended September 30, 2009:

Revenue decreased .55 % to $23.4 million from $23.5 million in the prior year period. On a sequential basis adjusted for changes in the exchange rate during the sequential quarter, total revenue increased 2.6% from the fourth quarter of fiscal 2009;
Gross profit decreased 7.7% to $9.7 million from $10.5 million in the prior year period;
Operating income decreased 29.2% to $2.5 million from $3.5 million in the prior year period;
Normalized EBITDA for the quarter was $6.5 million, down from $7.4 million in the prior year period but flat on a sequential basis when compared with the fourth quarter of fiscal 2009;
Income before income taxes decreased 29.3% to $2.2 million from $3.11 million in the prior year period; and
Net income decreased to $1.3 million from $1.7 million in the prior year period.

Operational highlights for the first quarter:

Launched an image backup and bare metal recovery (BMR) service for its managed hosting customers. The BMR functionality will be provided by software from Cristie Software and will be fully managed by PEER 1 along with standard managed backup plans.

Welcomed Ken Rotman and Mitch Green to the board of directors in connection with Clairvest completing the purchase of 20,538,470 shares of PEER 1 from Celerity Partners on August 28, 2009

“Our relatively stable results on a year over year basis reflect the strength of our existing business even as we operate through a period of reduced economic activity,” said Fabio Banducci, President and CEO of PEER 1. ”Modest growth on a sequential basis, coupled with an ongoing investment in our future growth, suggests PEER 1 is well positioned to benefit as overall economic conditions continue to improve in the quarters ahead.”

First Quarter Review

Revenues decreased to $23.4 million for the three months ended September 30, 2009, compared with $23.5 million for the same period in 2008. The decrease in revenue is primarily attributable to the effect of the decline in the value of the Canadian dollar against the US dollar. When adjusted for the exchange rates in effect during the period, revenue for the three months ended September 30, 2009 was $23.62 million, an increase of .5%.

Hosting Services revenues decreased to $16.75 million for the three months ended September 30, 2009 compared with $16.79 million for the same period in 2008. The decrease is attributable to reduced customer demand for hosting services due to the economic downturn. Hosting Services revenues have not been materially impacted by foreign exchange effects as virtually all Hosting Services sales are currently denominated in US dollars.

Co-location revenues increased to $3.31 million for the three months ended September 30, 2009 compared with $3.14 million for the same period in 2008. The increase in revenue is attributable to organic growth which will be constrained until the build out of phase one at the new Toronto area data center is completed, partly offset by the decreased value of the Canadian dollar against the US dollar. PEER 1’s efforts to secure additional data centre space are ongoing. The effect on revenue of the decrease in value of the Canadian dollar against the US dollar was $0.11 million for the three months ended September 30, 2009.

Bandwidth revenues decreased to $2.02 million for the three months ended September 30, 2009 compared with $2.38 million for the same period in 2008. The decreases in revenue are attributable to the decreased value of the Canadian dollar against the US dollar, pricing pressures, and reduced overage charges as customers experienced lower bandwidth requirements due to the economic downturn. The effect on revenue of the decrease in value of the Canadian dollar against the US dollar was $0.1 million for the three months ended September 30, 2009.

Cost of sales increased $0.67 million to $13.71 million for the three months ended September 30, 2009 compared with $13.04 million for the same period in 2008. During the three months ended September 30, 2009, the Company incurred cost of $0.25 million related to its UK expansion which are included in cost of sales. The increase is due to increases in: staff costs of $0.23 million, depreciation costs of $0.36 million, software license costs of $0.15 million, power costs of $0.01 million, repairs and maintenance costs of $0.02 million, and rent costs of $0.37 million associated with data center expansion in Toronto (started October 2008) and Herndon (started January 2009), and partially offset by decreased costs of $0.48 million for bandwidth.

Cost of sales as a percentage of revenue increased to 58.66% for the three months ended September 30, 2009 compared with 55.46% for the same period in 2008. The increase is attributable to increased costs including staffing, power, depreciation and facilities rent during the three months ended September 30, 2009 compared to the same period last year. Revenue decreased 0.55% for the three months ended September 30, 2009, compared with the three months ended September 30, 2008 while cost of sales increased 5.18% in the same period.

Total operating expenses increased $0.22 million to $7.19 million for the three months ended September 30, 2009 compared with $6.97 million for the same period in 2008. During the three months ended September 30, 2009, the Company incurred cost of $0.61 million related to its UK expansion which are included in operating expenses. Operating expenses as a percentage of revenue increased to 30.74% for the three months ended September 30, 2009 from 29.64% for the three months ended September 30, 2008. The increase is attributable to $0.78 million higher staff and training cost, $0.05 million higher bonus expense, $0.08 million higher amortization, $0.02 million in increased bad debt expense, increased commission expenses of $0.08 million and, offset in part by lower stock based compensation of $0.24 million, $0.38 million lower legal and other professional service expenses and $0.24 million lower advertising expenses. The increase in bad debt expense reflects a higher estimated expense for doubtful accounts that is based on management’s review of specific customer payment history, the age of the accounts receivable and collection trends. The Company will continue to monitor receivables and bad debts given the recent economic downturn.

Normalized EBITDA for the three months ended September 30, 2009 decreased to $6.5 million, compared with $7.4 million in the same period in 2008.

Net income for the three months ended September 30, 2009 decreased to $1.3 million, from $1.7 million for the same period in 2008. On a sequential basis, net income increased by $0.7 million. Earnings per share were $0.01 for the quarters ended September 30, 2009, and September 30, 2008.

On September 30, 2009, the Company had cash and cash equivalents of $11.75 million compared with $15.74 million on June 30, 2009. The current portion of the Company's notes payable on September 30, 2009 was $3.0 million.

The Company had working capital of $1.3 million on September 30, 2009 compared with a working capital of $4.77 million on June 30, 2009. The Company anticipates current liquidity and cash generated from operations to be sufficient to fund operations for the foreseeable future.

The Company has 121,219,911 common shares issued and outstanding on November 12, 2009.

Subsequent Events

Subsequent events to September 30, 2009:

On October 9, 2009, PEER 1 announced a partnership with Alert Logic, Inc., in which PEER 1 will provide integrated IT-compliant intrusion detection and log management services for its e-commerce customers using Alert Logic’s cloud-based IT compliance and security solutions. By partnering with Alert Logic, PEER 1 can ensure IT compliance for Managed Hosting customers who subscribe to the service, without the customer having to invest in security infrastructure or monitoring resources. Alert Logic will provide its Threat Manager and Log Manager solutions to address intrusion detection, vulnerability scanning and log management requirements within PCI DSS (Payment Card Industry Data Security Standard).

EBITDA Reconciliation (Calendar)

EBITDA Reconcilation
(unaudited - prepared by management)
(in $ thousands)	Three Months Ended
	30-Sep-09	30-Sep-08

Net Profit	1,267	1,726
Income tax expense	927	1,385
Interest expense	313	424
Amortization - licences, fixed assets and deferred network costs	3,474	3,044
Stock based compensation	562	805
Loss (gain) on disposal of assets	(12)	(3)
Amortization of deferred gain	(19)	(20)
Foreign exchange loss	80	7
EBITDA	6,592	7,368

Gain - insurance recovery	(93)	-
Normalized EBITDA	6,499	7,368

Conference Call

PEER 1 will hold a conference call today, Thursday, November 12, 2009 at 5:30 p.m. EST, to discuss the results of the first quarter of fiscal 2010. The Company’s full Financial Statements and Management's Discussion and Analysis are available on its website at http://www.peer1.com/investors/

To access the conference call by telephone, dial 416-644-3431 or 800-733-7560. Please connect approximately 15 minutes prior to the beginning of the call. The conference call will be archived for replay until Thursday, November 19, 2009, at midnight. To access the archived conference call, dial 416-640-1917 or 877-289-8525 and enter the reservation number: 4181713 followed by the number sign.

A live audio webcast of the conference call will be available at:

http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=2883100
Please connect at least 15 minutes prior to the conference call to ensure adequate time for any software download that may be required to join the webcast. The webcast will be archived at the above website for 90 days.

Non-GAAP Measures

PEER 1 reports EBITDA because it is a key measure used by management to evaluate the Company’s performance. PEER 1 believes that EBITDA is useful supplemental information, as it provides an indication of the results generated by PEER 1’s main business activities prior to taking into consideration how those activities are financed and expensed. EBITDA is not a recognized measure under Canadian GAAP, and accordingly investors are cautioned that EBITDA should not be construed as an alternative to net earnings or loss determined in accordance with Canadian GAAP as an indicator of financial performance of PEER 1, or as a measure of the company’s liquidity and cash flows. PEER 1’s method of calculating EBITDA may differ from other issuers and, accordingly, EBITDA may not be comparable to similar measures presented by other issuers. The schedule above sets out PEER 1’s EBITDA calculations.

About PEER 1

PEER 1 believes in the limitless opportunity of the Internet, and the business growth potential it provides for its more than 10,000 customers. As a leading online IT infrastructure provider, PEER 1 offers a reliable high performance Internet network, supporting scalable managed hosting, dedicated hosting through the ServerBeach brand, and co-location solutions. Backed by its 100 percent uptime guarantee and 24x7x365 FirstCall Support™, PEER 1 ensures customers' online presence is always fast, always available. Since 1999, PEER 1 has grown to include 16 datacenters located in 13 cities across North America and the United Kingdom. The Company's headquarters are in Vancouver, Canada and the stock is traded on the TSX under the symbol PIX. For more information visit: www.peer1.com.

For investor inquiries please contact:
David Feick
The Equicom Group
+1 (403) 218-2839
dfeick@equicomgroup.com

For media inquiries please contact:
Marcela Peake
PEER 1,
+1 (604) 909-6428
mpeake@peer1.com

PEER 1 NETWORK ENTERPRISES, INC.
Consolidated Balance Sheet
September 30, 2009
(in thousands of United States dollars)

	September 30,		June 30,
	2009		2009
Assets
Current:
Cash and cash equivalents	$	11,754	$	15,744
Accounts receivable		3,891		3,449
Future income tax asset		234		237
Prepaid expenses		1,217		1,130
Income taxes receivable		223		-
		17,319		20,560
Other assets		2,782		2,692
Future income tax asset		1,338		1,042
Property and equipment		41,409		36,856
Equipment under capital lease		963		1,013
Goodwill		1,715		1,715
Intangible assets		2,552		2,552
	$	68,078	$	66,430
Liabilities
Current:
Accounts payable and accrued liabilities	$	9,474	$	7,936
Deferred revenue		2,969		2,886
Current portion of deferred gain		79		79
Current portion of deferred lease inducements		134		138
Current portion of derivative liabilities		127		89
Current portion of notes payable		3,000		2,250
Current portion of obligations under capital lease		233		211
Income taxes payable		-		2,200
		16,016		15,789
Deferred gain		473		493
Deferred lease inducements		632		664
Derivative liabilities		223		179
Notes payable		11,601		12,303
Obligation under capital lease		335		363
		29,280		29,791
Shareholders’ equity		38,798		36,639
	$	68,078	$	66,430

PEER 1 NETWORK ENTERPRISES, INC.
Consolidated Statements of Shareholders’ Equity
For the Three Months Ended September 30, 2009
(in thousands of United States dollars except number of shares)

	Three Months Ended
	September 30, 2009			September 30, 2008
	Number		Amount	Number		Amount
SHARE CAPITAL
Common shares
Balance at beginning of period	119,314,323	$	26,950	118,504,368	$	26,539
Stock options exercised	113,375		59	70,004		31
Warrants exercised	1,628,286		781	678,285		341
Balance at end of period	121,055,984		27,790	119,252,657		26,911
Warrants
Balance at beginning of period	2,461,619		493	3,139,904		678
Warrants expired/exercised	(1,628,286)		(407)	(678,285)		(185)
Balance at end of period	833,333		86	2,461,619		493
Total – share capital	121,889,317		27,876	121,714,276		27,404
CONTRIBUTED SURPLUS
Balance at beginning of period			4,766			2,509
Stock-based compensation			563			805
Options exercised and shares distributed under the stock option plan			(22)			(11)
Balance at end of period			5,307			3,303
RETAINED EARNINGS
Balance at beginning of period			4,709			(1,013)
Net income			1,267			1,726
Balance at end of period			5,976			713
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at beginning of period			(279)			(11)
Other comprehensive income			(82)			-
Balance at end of period			(361)			(11)
Total - shareholders’ equity		$	38,798		$	31,409

PEER 1 NETWORK ENTERPRISES, INC.
Consolidated Statement of Operations
For the Three Months Ended September 30, 2009
(in thousands of United States dollars, except per share amounts)

	Three Months Ended
	September 30, 2009		September 30, 2008
Revenue
Colocation Services	$	6,628	$	6,715
Hosting Services		16,746		16,789
		23,374		23,504

Cost of revenue		13,711		13,036
Gross profit		9,663		10,468
Operating expenses		7,185		6,967
Operating income before other items		2,478		3,501
Other items:
Interest income		(4)		(38)
Gain on insurance recovery		(93)		-
Gain on disposal of property and equipment		(12)		(3)
Foreign exchange loss		80		7
Interest expense – long term		313		424
		284		390
Income before income taxes		2,194		3,111
Future income tax expense (recovery)		(297)		289
Current income tax expense		1,224		1,096
Income tax expense		927		1,385
Net income	$	1,267	$	1,726
Other comprehensive income:
Change in unrealized fair value of derivatives designated as cash flow hedges		(82)		-
Comprehensive income	$	1,185	$	1,726

Net income attributable to:
Common shares	$	1,267	$	1,726
Comprehensive income attributable to:
Common shares	$	1,185	$	-

Basic and diluted earnings per share	$	0.01	$	0.01

Weighted average number of shares outstanding:
Basic	119,508,564		118,703,525
Diluted	123,296,839		123,344,996

PEER 1 NETWORK ENTERPRISES, INC.
Consolidated Statement of Cash Flows
For the Three Months Ended September 30, 2009
(in thousands of United States dollars)

	Three Months Ended
	September 30, 2009		September 30, 2008
Operating Activities:
Net income	$	1,267	$	1,726
Adjustments for non-cash items:
Amortization of property and equipment		3,151		2,654
Amortization of intangible assets		323		390
Increase in accrued interest and accretion of convertible debt		-		18
Bad debt expense		158		136
Gain on disposal of property and equipment		(12)		(3)
Amortization of deferred gain		(19)		(20)
Gain on insurance		(93)		-
Amortization of deferred loan origination fees		49		123
Future income tax expense		(297)		289
Stock-based compensation included in income for the period		562		805
Decrease in deferred lease inducements		(36)		(36)
Changes in non-cash working capital:
Increase accounts receivable		(507)		(1,521)
Increase in prepaid expenses		(87)		(100)
Decrease in accounts payable and accrued liabilities		(158)		(1,509)
Decrease in income taxes payable		(2,423)		(821)
Increase in deferred revenue		84		19
Cash flows from operating activities		1,962		2,150
Investing Activities:
Investment in other assets		(91)		22
Acquisition of property and equipment		(5,958)		(3,997)
Acquisition of intangible assets		(324)		(399)
Proceeds on disposition of equipment		12		3
Cash flows used in investing activities		(6,361) )		(4,371)
Financing Activities:
Repayments of notes payable		-		(800)
Payment of capital lease obligations		(55)		(54)
Issuance of capital stock		411		176
Cash flows from (used in) financing activities		356		(678)
Foreign exchange gain on cash and cash equivalents		53		40
Increase in cash and cash equivalents		(3,990)		(2,859)
Cash and cash equivalents, beginning		15,744		11,026
Cash and cash equivalents, ending	$	11,754	$	8,167