PEER 1 Hosting Reports Fiscal 2011 First Quarter Results

VANCOUVER, Nov. 10 /PRNewswire-FirstCall/ - PEER 1 Network Enterprises, Inc. (TSX:PIX), operating as PEER 1 Hosting, a leading provider of online IT infrastructure, today announced its results for the three months ended September 30, 2010.  All amounts are stated in US dollars.

Selected Financial Highlights Comparing the First Quarters Ended September 30, 2010 and 2009

• Revenue increased 12.6% to $26.3 million from $23.4 million;
• Gross profit increased 4.2% to $10.1 million from $9.7 million;
• Operating income decreased 51.3% to $1.2 million from $2.5 million;
• Normalized EBITDA was $6.02 million, down from $6.5 million; and
• Net income decreased to $0.36 million from $1.3 million.

Operational Highlights for the First Quarter

• Signed a multi-year colocation agreement with Capgemini Canada Inc., a member of the Capgemini Group, a leading global provider of consulting, technology and outsourcing services;
• Announced its participation in the VMware Service Provider Program (VSPP) to offer customers Private Cloud solutions.  VMWare is the industry standard for server virtualization.  It allows PEER 1 Hosting customers to divide one physical server into multiple smaller virtual servers, all running on the same hardware;
• Completed two independent audits of its selected controls, processes and procedures in compliance with the American Institute of Certified Public Accountants' ("AICPA") Statement on Auditing Standards (SAS) # 70 for service organizations and the Canadian Institute of Chartered Accountants (CICA) Section 5970.  These audits covered the period from January 1, 2010 to June 30, 2010 and are commonly referred to within the hosting industry as a Type II Audit;
• Announced that IBM Canada is a PEER 1 Hosting platinum level colocation reseller;
• Launched the PEER 1 Hosting Partner Directory, subsequent to the end of the quarter, enabling existing PEER 1 Hosting partners to connect and build relationships with potential customers using the directory database;
• Announced plans to proceed with the build out of PODs B and C at its flagship data center in the Greater Toronto Area at an expected capital cost of $14.50 million; and
• Subsequent to quarter end, announced entry into a credit agreement with a syndicate for lenders for a US$45 million non-revolving term facility and a US$30 million revolving credit facility.

"In the first quarter we began to see improvements in financial performance based on investments made in the prior fiscal year," said Fabio Banducci, President and CEO of PEER 1 Hosting.  "Ours is a capital intensive business and we anticipate seeing a return on the infrastructure investments made in fiscal 2010 and the period subsequent to year end, in combination with key new business wins and solution launches, in the second half of fiscal 2011. Subsequent to quarter end, we entered into credit agreement providing us with a source of non-dilutive capital that will allow us to execute on our broader growth strategy."

Financial Review for the Three Months Ended September 30, 2010 and 2009

Revenue increased to $26.33 million for the three months ended September 30, 2010 from $23.37 million for the three months ended September 30, 2009.  The increase in revenue is primarily attributable to organic growth, the effect of the increase in value of the Canadian dollar against the US dollar, and from the VIA Net.Works USA, Inc. ("VIA") acquisition. When adjusted for the exchange rates in effect during the period, revenue for the three months ended September 30, 2010 was $26.07 million. Taking into account the effect of the differing exchange rates between the Canadian and US dollars for the comparative period, revenue increased by 11.54% for the three months ended September 30, 2010.

Colocation revenue increased to $3.48 million three months ended September 30, 2010 compared with $3.31 million for the three months ended September 30, 2009.  The increases in colocation revenue are attributable to organic growth as well as the increase in the value of the Canadian dollar against the US dollar.  PEER 1 Hosting's efforts to secure additional data centre space are ongoing.  The effect on revenue from the increase in value of the Canadian dollar against the US dollar was $0.17 million for the three months ended September 30, 2010.

Bandwidth revenues increased to $2.19 million for the three months ended September 30, 2010 compared with $2.02 million for the three months ended September 30, 2009. The increases in revenue are primarily attributable to the increased value of the Canadian dollar against the US dollar, partly offset by pricing pressures in the market. The effect on revenue from the increase in value of the Canadian dollar against the US dollar was $0.09 million for the three months ended September 30, 2010.

Hosting Services revenues increased to $19.24 million for the three months ended September 30, 2010 from $16.75 million for the three months ended September 30, 2009.  The increase for the three months ended September 30, 2010 is attributable to organic growth and additional revenue from the VIA acquisition. Hosting Services revenues have not been materially impacted by foreign exchange effects as virtually all Hosting Services sales are currently denominated in US dollars.

PEER 1 Hosting's Canadian operations accounted for $5.48 million of revenue for the three months ended September 30, 2010 compared with $4.73 million of revenues for the three months ended September 30, 2009. This change is primarily related to organic growth and favorable foreign exchange effects of $0.26 million for the three months ended September 30, 2010. The foreign exchange effects on revenue largely provide a natural hedge which offset exchange effects on expenses incurred in Canadian operations.

Cost of sales increased by $2.55 million for the three months ended September 30, 2010 from $13.71 million for the three months ended September 30, 2009.  During the three months ended September 30, 2010, the Company incurred costs $0.83 million related to its UK expansion which are included in cost of sales.  Cost of sales as a percentage of revenue increased to 61.75% for the three months ended September 30, 2010 from 58.66% for the three months ended September 30, 2009. 

The increase in cost of sales for the three months ended September 30, 2010 compared to the same period in the prior year is primarily due to increased staff costs of $0.19 million, increased depreciation costs of $1.05 million, increased software license costs of $0.11 million, increased power costs of $0.37 million, increased repairs and maintenance costs of $0.17 million, increased bandwidth costs of $0.17 million and increased rent costs of $0.54 million associated with data center expansion in the UK and Toronto.

Total operating expenses increased $1.68 million to $8.84 million for the three months ended September 30, 2010 from $7.14 million for the three months ended September 30, 2009.  Operating expenses as a percentage of revenue increased to 33.67% for the three months ended September 30, 2010 from 30.74% for the three months ended September 30, 2009.  The increase in operating expenses for the three months ended September 30, 2010 is largely attributable to $0.84 million higher staff and training cost, increased commission expenses of $0.32 million attributable to new sales, increased professional services of $0.39 million, increased rent of $0.05 million, increased office expenses of $0.06 million, increased property tax of $0.04 million, increased travel expenses of $0.03 million, increased insurance expenses of $0.02 million and $0.54 million higher advertising expenses, offset in part by $0.16 million lower amortization, $0.05 million in decreased bad debt expense and lower stock based compensation of $0.11 million. The decrease in bad debt expense reflects a lower 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. Total operating expense for the three months ended September 30, 2010 is comprised of $3.95 million (2009: $2.98 million) sales and marketing expenses, $3.72 million (2009: $3.52 million) general and administrative expenses, and $1.19 million (2009: $0.69 million) in expenses for Technology and Customer relations. During the three months ended September 30, 2010, the company incurred $0.76 million related to its UK expansion which are included in operating expenses, $0.29 million of which are categorized as general and administrative expenses and $0.47 million of which are categorized as selling and marketing expenses.

Normalized EBITDA was $6.02 million for the three months ended September 30, 2010, compared with $6.5 million in the prior year period.

Net income for the quarter ended September 30, 2010 decreased to $0.36 million, compared with $1.27 million for the same period in 2009. Earnings per share for the quarter ended September 30, 2010 were $0.00, compared with $0.01 for 2009.

As at September 30, 2010, the Company had cash and cash equivalents of $2.36 million, compared to $2.32 million as at June 30, 2010.

The Company had a working capital deficit of $4.01 million at September 30, 2010 compared to working capital deficit of $7.14 million as at June 30, 2010.  The increase in working capital is primarily due to additional drawdown on the line of credit partly offset by investments in property and equipment. The Company anticipates current liquidity and cash generated from operations to be sufficient to fund operations for the foreseeable future.  As at September 30, 2010, the Company had available US$12 million from its US$25 million credit facility.

PEER 1 Hosting had 119,642,119 common shares issued and outstanding as at November 10, 2010.   

EBITDA Reconciliation

Conference Call

PEER 1 Hosting will hold a conference call Wednesday, November 10, 2010 at 5:30pm Eastern Time (ET), to discuss the results the first quarter of fiscal 2011. 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 (647) 427-7450 or 1-888-231-8191.  Please connect approximately 15 minutes prior to the beginning of the call. The conference call will be archived for replay until November 17, 2010, at midnight. To access the archived conference call, dial (416) 849-0833 or 1-800-642-1687 and enter the reservation number: 22690588 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=3298020

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 Hosting reports EBITDA because it is a key measure used by management to evaluate the Company's performance. PEER 1 Hosting believes that EBITDA is useful supplemental information, as it provides an indication of the results generated by PEER 1 Hosting'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 Hosting, or as a measure of the company's liquidity and cash flows. PEER 1 Hosting'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 Hosting's EBITDA calculations.

About PEER 1 Hosting
PEER 1 Hosting believes in the limitless opportunity of the Internet, and the business growth potential it provides for its more than 10,000 customers. As a global online IT hosting provider, PEER 1 Hosting offers a reliable high performance Internet network supporting scalable managed hosting, dedicated hosting through the ServerBeach brand, and colocation solutions. Backed by its 100 percent uptime guarantee and 24x7x365 FirstCall Support™, PEER 1 Hosting ensures customers' online presence is always fast, always available. Since 1999, PEER 1 Hosting has grown to include 17 state-of-the-art data centres and points-of-presence throughout North America and Europe. The company's headquarters are in Vancouver, Canada, with European operations headquartered in Southampton, UK.  PEER 1 Hosting shares are traded on the TSX under the symbol PIX. For more information visit: www.peer1.com or www.peer1hosting.co.uk.

Forward Looking Statements
Statements in this release relating to matters that are not historical fact are forward-looking statements based on current expectations, forecasts and assumptions that involve risks and uncertainties that could cause actual outcomes and results to differ materially. Factors that could cause or contribute to such differences include, but are not limited to, general economic conditions, changes in technology, reliance on third party manufacturing, managing rapid growth, global sales risks, limited intellectual property protection and other risks and uncertainties described in PEER 1 Hosting's public filings with securities regulatory authorities.

PEER 1 NETWORK ENTERPRISES, INC.
Consolidated Balance Sheets
September 30, 2010
(in thousands of United States dollars)

PEER 1 NETWORK ENTERPRISES, INC.
Consolidated Statements of Shareholders' Equity
For the Three Months Ended September 30, 2010 and 2009
(in thousands of United States dollars except number of shares)

PEER 1 NETWORK ENTERPRISES, INC.
Consolidated Statements of Operations
For the Three Months Ended September 30, 2010 and 2009
(in thousands of United States dollars, except per share amounts)

PEER 1 NETWORK ENTERPRISES, INC.
Consolidated Statements of Cash Flows
For the Three Months Ended September 30, 2010 and 2009
(in thousands of United States dollars)

SOURCE Peer 1 Network Enterprises, Inc.