PEER 1 Hosting Reports Fourth Quarter and Year End Results for Fiscal 2010

VANCOUVER, Sept. 23 /CNW/ - PEER 1 Network Enterprises, Inc. (TSX:PIX), operating as PEER 1 Hosting, a leading provider of online IT infrastructure, today announced the results for the three and 12 months ended June 30, 2010.  All amounts are stated in US dollars.

Selected Financial Highlights Comparing the Years Ended June 30, 2010 and 2009

  • Revenue increased 6.1% to $97.9 million from $92.3 million;
  • Gross profit decreased 1.6% to $39.1 million from $39.7 million;
  • Operating income decreased 39.6% to $7.4 million from $12.3 million;
  • Normalized EBITDA was $24.1 million, down from $27.8 million; and
    • Net income decreased to $2.2 million from $5.7 million.

    Selected Operational Highlights for Fiscal 2010

    • Launched US$40 million flagship data centre in Toronto, Ontario.  This data centre is more than 40,000 square feet and equipped to offer all three hosting solutions - colocation, dedicated hosting and managed hosting - under one roof. The building is separated into four sections called Performance Optimized Data Centre (POD) - with each POD having the capacity of approximately 250 cabinets.  The first POD was built with a capital cost of approximately US$11.2 million and includes 7,500 square feet of data centre space and 8,000 square feet of office space, and inventory, network and storage areas to support the data centre;
    • Acquired Atlanta-based VIA Net.Works USA, Inc., a provider of primarily dedicated and managed hosting solutions built around the Microsoft platform for small and medium sized businesses;
    • Selected EMC® Atmos TM as the foundation of PEER 1's new cloud storage service. PEER 1 will be offering its customers in the Atlanta and San Antonio data centres this network accessible data storage service in the second half of calendar year 2010;
    • Named Company of the Year at the 2010 Technology Impact Awards hosted by the BC Technology Industry Association (BCTIA); and
      • Announced intention to commence a Normal Course Issuer Bid that will permit PEER 1 Hosting to repurchase for cancellation up to 6,064,731 common shares, representing 5% of PEER 1 Hosting's issued and outstanding shares as at April 12, 2010.

      Selected Operational Highlights Subsequent to Year End

      • Announced a relationship with Microsoft Corp to offer customers fully featured, enterprise-level email services;
      • Announced the availability of the industry's first large-scale, hosted graphics processing unit (GPU) Cloud;
      • 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. Under the agreement, Capgemini is taking approximately one full Performance Optimized Data Centre (POD) of space; and
        • 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) No. 70 for service organizations and the Canadian Institute of Chartered Accountants (CICA) Section 5970.

        "Fiscal 2010 marked a year of strategic investment in infrastructure, products and geographic expansion to support accelerated growth and enhanced market positioning as economic conditions improve," said Fabio Banducci, President and CEO of PEER 1 Hosting.  "On this basis, we launched our new state of the art data centre in the greater Toronto area, which almost immediately began attracting anchor clients, while also continuing to expand our solution set, adding value for both existing and potential clients. We also extended our core hosting services to Europe by establishing a physical presence in the United Kingdom. With these pieces of our strategy in place we are well positioned to both invest in and drive additional growth in fiscal 2011 and beyond."

        Review of the Three and Twelve Months Ended June 30, 2010

        Revenue increased to $25.59 million for the three months ended June 30, 2010 from $22.52 million for the three months ended June 30, 2009. Revenue increased to $97.92 million for the year ended June 30, 2010 from $92.31 million for the year ended June 30, 2009. The increase in the three and twelve month periods is primarily attributable to the increase in value of the Canadian dollar against the US dollar, organic growth and the acquisition of VIA which contributed $0.53 million and $0.61 million in revenue for the three and twelve month periods ended June 30, 2010, respectively. The increase in revenue for the three months ended June 30, 2010 compared to the three months ended June 30, 2009 as a result of the increase in value of Canadian dollar denominated sales totaled $0.59 million. When adjusted for the exchange rates in effect in the prior year period, revenue for the three months ended June 30, 2010 was $24.99 million. Taking into account the effect of the differing exchange rates between the Canadian and US dollars for the comparative period, revenue increased by 10.99% for the three months ended June 30, 2010. When adjusted for the exchange rates in effect during the period, revenue for the year ended June 30, 2010 was $96.15 million. Taking into account the effect of the differing exchange rates between the Canadian and US dollars for the comparative period, revenue increased by 4.16% for the year ended June 30, 2010.

        Colocation revenues increased to 3.49 million in the three months ended June 30, 2010 from $3.07 million for the three months ended June 30, 2009. Colocation revenue increased to $13.56 million year ended June 30, 2010 compared to $12.07 million for the year ended June 30, 2009. The increase is primarily attributable to the improvement in value of the Canadian dollar against the US dollar and organic growth. The effect on revenue of the increase in value of the Canadian dollar against the US dollar was $0.28 million for the three month period and $0.83 million for the twelve month period ended June 30, 2010.

        Bandwidth revenues increased to $2.26 million for the three months ended June 30, 2010 compared to $2.01 million for the three months ended June 30, 2009. Bandwidth revenues increased to $8.67 million for the year ended June 30, 2010 compared to $8.35 million for the year ended June 30, 2009. The increases in revenue are primarily attributable to the increased value of the Canadian dollar against the US dollar but were partially offset by pricing pressures in the market in the full year period. The effect on revenue of the decrease in value of the Canadian dollar against the US dollar was $0.22 million for the three months ended June 30, 2010. The effect on revenue from the increase in value of the Canadian dollar against the US dollar was $0.66 million for the twelve months ended June 30, 2010 respectively.

        Hosting Services revenues increased to $18.45 million for the three months ended June 30, 2010 from $16.22 million. Hosting Services revenues increased to $70.17 million for the year ended June 30, 2010 from $67.23 million for the year ended June 30, 2009.  The increase for the quarter and year ended June 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 $20.15 million of revenue for the year ended June 30, 2010 compared with $17.60 million of revenues for the year ended June 30, 2009. This change is primarily related to organic growth and favorable foreign exchange effects of $1.77 million for the year ended June 30, 2010. The foreign exchange effects in revenue largely provide a natural hedge which offset exchange effects on expenses incurred in Canadian operations.

        Consolidated cost of sales increased to $16.15 million for the three months ended June 30, 2010 from $13.25 million for the three months ended June 30, 2009. Cost of sales as a percentage of revenue increased to 63.12% for the three months ended June 30, 2010 from 58.86% for the three months ended June 30, 2009.  During the twelve months ended June 30, 2010, the Company incurred costs of $0.65 million related to its UK expansion that are included in cost of sales. 

        The increase in cost of sales compared to the same period in the prior year is primarily due to increased staff costs of $0.54 million, increased depreciation costs of $0.62 million, increased software license costs of $0.48 million, increased rent costs of $0.48 million associated with data centre expansion in the UK (started April 2009) and facility premises from the VIA acquisition (started March 2010), increased power costs of $0.52 million, increased repairs and maintenance costs of $0.11 million and increased service level adjustment costs of $0.13 million . Revenue increased 13.63% for the three months ended June 30, 2010, compared to the three months ended June 30, 2009 while cost of sales increased 21.85% in the same period. The increase in cost of sales as a percentage of revenue is attributable to increased rent cost, a result of data centre expansions, and increased staffing cost compared to the prior year.

        Cost of sales increased by $6.26 million for the year ended June 30, 2010 from $52.56 million for the year ended June 30, 2009.  During the twelve months ended June 30, 2010, the Company incurred costs $1.82 million related to its UK expansion which are included in cost of sales.  Cost of sales as a percentage of revenue increased to 60.07% for the year ended June 30, 2010 from 56.94% for the year ended June 30, 2009. 

        The increase in cost of sales for the twelve months ended June 30, 2010 compared to the same period in the prior year is primarily due to increased staff costs of $1.15 million, increased depreciation costs of $1.77 million, increased software license costs of $0.92 million, increased power costs of $0.91 million, increased repairs and maintenance costs of $0.59 million, increased service level adjustment costs of $0.38 million and increased rent costs of $1.61 million associated with data centre expansion in the UK,  Toronto  and Herndon Virginia, offset in part by decreased costs of $1.14 million for bandwidth.

        Total operating expenses increased to $8.9 million for the three months ended June 30, 2010 from $6.75 million for the three months ended June 30, 2009. Operating expenses as a percentage of revenue was 34.79% for the three months ended June 30, 2010 and 29.97% for the three months ended June 30, 2009. The increase in total operating expenses for the three months ended June 30, 2010 is primarily due to higher staff and training costs of $0.78 million, higher advertising and marketing expenses of $0.68 million and higher commissions of $0.19 million related to PEER 1 Hosting's marketing and sales initiatives to support organic growth and leveraged growth, higher expense for professional services of $0.18 million, higher bad debt expense of $0.14 million and higher travel expense of $0.13 million partly offset by decreased amortization expense of $0.24 million. Total operating expense for the quarter ended June 30, 2010 is comprised of $3.88 million (2009: $2.64 million) sales and marketing expenses, $4,11 million (2009: $3.58 million) general and administrative expenses, and $0.91 million (2009: $0.52 million) expenses in Technology and Customer relations. During the three months ended June 30, 2010, the company incurred $0.78 million related to its UK expansion which are included in operating expenses, $0.34 million of which are categorized as general and administrative expenses and $0.42 million of which are categorized as selling and advertising expenses.

        Total operating expenses increased $4.24 million to $31.66 million for the year ended June 30, 2010 from $27.42 million for the year ended June 30, 2009.  Operating expenses as a percentage of revenue increased to 32.33% for the year ended June 30, 2010 from 29.70% for the year ended June 30, 2009.  The increase in operating expenses for the year ended June 30, 2010 is largely attributable to $2.91 million higher staff and training cost, increased commission expenses of $0.99 million attributable to new sales, increased travel expenses of $0.28 million, increased insurance expenses of $0.07 million and $0.69 million higher advertising expenses offset in part by $0.50 million lower amortization, $0.07 million in decreased bad debt expense, lower stock based compensation of $0.10 million, $0.32 million lower professional service expenses. 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 twelve months ended June 30, 2010 is comprised of $13.17 million (2009: $10.51 million) sales and marketing expenses, $15.42 (2009: $15.01 million) general and administrative expenses, and $3.07 million (2009: $1.9 million) expenses in Technology and Customer relations. During the twelve months ended June 30, 2010, the company incurred $2.36 million related to its UK expansion which are included in operating expenses, $0.91 million of which are categorized as general and administrative expenses and $1.42 million of which are categorized as selling & marketing expenses. 

        Normalized EBITDA was $4.9 million for the three months ended June 30, 2010, compared with $6.5 million in the prior year period. Normalized EBITDA for the year ended June 30, 2010 was $24.1 million compared with $27.8 million in the prior year.  

        Net income for the year ended June 30, 2010 decreased to $2.2 million, compared with $5.7million for 2009.  Earnings per share for the year ended June 30, 2010 was $0.02, compared with $0.05 for 2009.

        As at June 30, 2010, PEER 1 Hosting had cash and cash equivalents of $2.3 million, compared with $15.7 million at June 30, 2009.

        The Company had a working capital deficit of $7.14 million at June 30, 2010 compared to working capital of $4.77 million as at June 30, 2009.  The decrease in working capital is primarily due to investments in property and equipment and the VIA acquisition. The Company anticipates current liquidity and cash generated from operations to be sufficient to fund operations for the foreseeable future.  As at June 30, 2010, the Company had available US$18 million from its US$25 million credit facility.

        PEER 1 Hosting had 119,752,334 common shares issued and outstanding as at September 20, 2010.

        EBITDA Reconciliation

        (unaudited - prepared by management)        
        (in $ thousands) Three Months Ended Twelve Months Ended
          30-Jun-10 30-Jun-09 30-Jun-10 30-Jun-09
                 
        Net Profit (loss)                     (371)                    577               2,241              5,722
        Income tax expense                      532                 1,046               3,193              4,661
        Interest expense                      351                    928               1,338              2,194
        Amortization - licences, fixed assets and deferred network costs                   3,885                 3,498             14,509            13,243
        Stock based compensation                      499                    456               2,183              2,282
        Loss (gain) on disposal of assets                         (3)                     (26)                   (74)                  (47)
        Loss on Derivative                        -                        -                    111                   -  
        Amortization of deferred gain                       (19)                     (19)                  (78)                  (79)
        Foreign exchange loss (gain)                        40                        2                  304                (130)
        EBITDA                   4,914                 6,462             23,727            27,846
        Gain - Insurance recovery                        -                        -                    (93)                   -  
        Settlement of legal claim                        -                        -                    440                   -  
        Normalized EBITDA                   4,914                 6,462             24,074            27,846

        Conference Call

        PEER 1 Hosting will hold a conference call today, Thursday, September 23, 2010 at 5:30 p.m. Eastern Daylight Time (EDT), to discuss the results for 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 (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 Thursday, September 30, 2010, at midnight. To access the archived conference call, dial (416) 849-0833 or 1-800-642-1687 and enter the reservation number: 11275940 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=3225640

        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: href="http://www.peer1.com/">www.peer1.com or href="http://www.peer1hosting.co.uk/">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
        As at June 30, 2010 and 2009
        (in thousands of United States dollars)

          2010   2009
        Assets        
        Current:        
            Cash and cash equivalents $ 2,321  $ 15,744
          Accounts receivable   3,249   3,449
          Income tax receivable   623   -
          Future income tax asset   97   237
          Prepaid expenses   1,655   1,130
              7,945   20,560
          Other assets   2,688   2,692
          Future income tax asset   1,900   1,042
          Property and equipment   53,237   36,856
          Equipment under capital lease   986   1,013
          Goodwill   2,363   1,715
          Intangible assets   3,527   2,552
            $ 72,646 $ 66,430
        Liabilities        
        Current:        
          Accounts payable and accrued liabilities $ 9,114 $ 7,936
          Deferred revenue   2,216   2,886
          Current portion of deferred gain   79   79
          Current portion of deferred lease inducements   126   138
          Current portion of derivative liabilities   170   89
          Current portion of notes payable   3,000   2,250
          Current portion of obligations under capital lease   376   211
          Income taxes payable   -   2,200
              15,081   15,789
        Deferred gain   414   493
        Deferred lease inducements   557   664
        Derivative liabilities   170   179
        Notes payable   16,404   12,303
        Obligation under capital lease   232   363
            32,858   29,791
        Shareholders' equity   39,788   36,639
          $ 72,646 $ 66,430
        Commitments and contingencies        

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

               
            2010 2009
            Number Amount Number Amount
        SHARE CAPITAL          
        Common shares          
          Balance at beginning of year 119,314,323  $        26,950   118,504,368 $        26,539
          Stock options exercised 422,011   278 131,670 70
          Warrants exercised 1,628,286   781 678,285 341
          Purchase of shares for cancellation pursuant to normal course issuer bid   (1,642,786)   (378) - -
          Balance at end of year 119,721,834   27,631 119,314,323 26,950
        CONTRIBUTED SURPLUS          
          Balance at beginning of year     4,766   2,509
          Stock-based compensation     2,183   2,282
          Stock options exercised     (145)   (25)
        Balance at end of year     6,804   4,766
        Warrants          
          Balance at beginning of year 2,461,619   493 3,139,904 678
          Warrants exercised (1,628,286)   (407) (678,285) (185)
          Balance at end of year 833,333   86 2,461,619 493
        RETAINED EARNINGS          
          Balance at beginning of year     4,709   (1,013)
          Net income     2,241   5,722
          Purchase of shares for cancellation pursuant to normal course issuer bid     (1,331)   -
        Balance at end of year     5,619   4,709
                     
        ACCUMULATED OTHER COMPREHENSIVE INCOME          
          Balance at beginning of year     (279)   (11)
          Other comprehensive loss     (73)   (268)
        Balance at end of year     (352)   (279)
        Total - shareholders' equity   $        39,788   $        36,639

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

              2010 2009
        Revenue    
          Colocation Services $        27,751  $        25,080
          Hosting Services 70,172 67,229
            97,923 92,309
               
        Cost of revenue 58,819 52,560
        Gross profit 39,104 39,749
        Operating expenses 31,663 27,419
        Operating income before other items 7,441 12,330
        Other items:    
            Interest income (19) (70)
            Settlement of legal claim 440 -
            Gain on insurance recovery (93) -
            Gain on disposal of property and equipment (74) (47)
            Loss on derivative 111 -
            Foreign exchange loss (gain) 304 (130)
            Interest expense - long term 1,338 2,194
            2,007 1,947
        Income before income taxes 5,434 10,383
        Future income tax expense (recovery) (646) 655
        Current income tax expense 3,839 4,006
        Income tax expense 3,193 4,661
        Net income $          2,241 $          5,722
        Other comprehensive income:    
          Change in unrealized fair value of derivatives designated as cash flow hedges   (73) (268)
        Comprehensive income $          2,168 $          5,454
               
        Net income attributable to:    
            Common shares $          2,241 $          5,722
        Comprehensive income attributable to:    
            Common shares 2,168 5,454
        Basic and diluted earnings per share $            0.02 $            0.05
                             
               

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

                  2010 2009
        Operating Activities:    
          Net income $        2,241  $           5,722
          Adjustments for non-cash items:      
            Amortization of property and equipment 13,857 11,880
            Amortization of intangible assets  652 1,363
            Increase in accrued interest - 82
            Bad debt expense 583 650
            Gain on disposal of property and equipment (74) (47)
            Insurance recovery (93) -
            Amortization of deferred gain (78) (79)
            Amortization of deferred loan origination fees 250 774
            Future income tax expense (recovery) (646) 655
            Stock-based compensation included in income 2,183 2,282
            Decrease in deferred lease inducements (119) (71)
          Changes in non-cash working capital:    
            Increase in accounts receivable (30) (47)
            Increase in prepaid expenses (464) (329)
            Increase (decrease) in accounts payable and accrued liabilities  1,145 (992)
            Increase (decrease) in income taxes payable (2,822) 765
            Decrease in deferred revenue (951) (667)
        Cash flows from operating activities 15,634 21,941
        Investing Activities:    
            Acquisition of subsidiary, net of cash acquired (534) -
            Investment in other assets (133) (56)
            Acquisition of property and equipment (30,257) (14,451)
            Acquisition of intangible assets (1,627) (1,511)
            Proceeds on disposition of equipment  74 47
        Cash flows used in investing activities (32,477) (15,971)
        Financing Activities:    
            Proceeds from line of credit 7,000 -
            Proceeds from notes payable - 15,000
            Repayments of notes payable (2,250) (16,158)
            Payment of capital lease obligations (278) (199)
            Issuance of capital stock 506 201
            Purchase of shares for cancellation pursuant    
             to normal course issuer bid (1,710) -
        Cash flows from (used in) financing activities 3,268 (1,156)
        Foreign exchange gain (loss) on cash and cash equivalents 152 (96)
        Increase (decrease) in cash and cash equivalents (13,423) 4,814
        Cash and cash equivalents, beginning 15,744 11,026
        Cash and cash equivalents, ending $        2,321 $         15,744

        SOURCE PEER 1 Network Enterprises, Inc.

        For further information: For further information:

        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

Organization Profile

PEER 1 Network Enterprises, Inc.

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