Q9 Networks Reports Third Quarter 2008 Results



    
    -   Revenue of $16.9 million, a 16% increase over the same quarter 2007
        and a 6% increase over the previous quarter
    -   Adjusted EBITDA of $3.9 million, a 4% decrease from the same quarter
        2007 and a 15% decrease from the previous quarter
    -   Loss before taxes of $0.2 million, compared to income before taxes of
        $1.0 million for the same quarter 2007 and income before taxes of
        $0.7 million in the previous quarter
    -   Revenue under contract entering the fourth quarter 2008 was
        $15.1 million, an increase of 7% over the previous quarter
    -   On August 24, 2008, Q9 announced it has agreed to be acquired by
        ABRY Partners at $17.05 per share in cash
    

    TORONTO, Sept. 11 /CNW/ - Q9 Networks Inc. (TSX:Q) today announced its
quarterly results for the three and nine months ended July 31, 2008.
    Revenue for the third quarter 2008 was $16.9 million, a 16% increase over
third quarter 2007 revenue of $14.6 million and an increase of 6% or
$0.9 million from second quarter 2008 revenue of $16.0 million (all figures
expressed in Canadian dollars).
    Revenue under contract entering the fourth quarter 2008 increased to
$15.1 million, up 7% over revenue under contract of $14.1 million at the
beginning of the third quarter 2008. Revenue under contract does not include
contracts signed but not yet installed.
    Co-location revenue for the third quarter 2008 was $8.9 million, managed
services revenue was $5.2 million and managed bandwidth revenue was
$2.3 million. Set-up and other fees were $0.5 million.
    Adjusted EBITDA for the third quarter 2008 was $3.9 million, a 4%
decrease from the third quarter of 2007 and a decrease of $0.7 million or 15%
compared to the previous quarter. Please see the attached schedule for the
Company's Adjusted EBITDA definition and reconciliation.
    Net loss for the third quarter 2008 was $0.2 million, compared to net
income of $0.5 million in the third quarter 2007 and net income of
$0.3 million in the second quarter 2008. Basic and diluted loss per share for
the third quarter 2008 was $0.01, compared to basic and diluted earnings per
share of $0.02 and $0.01 in the third quarter 2007 and second quarter 2008,
respectively.
    Cash flow generated from operations for the third quarter 2008 was
$7.0 million. Q9 ended the quarter with cash, cash equivalents and short-term
investments of $35.7 million, an increase of $4.5 million from the previous
quarter. Other than $0.3 million in notes payable to an equipment supplier, Q9
had no debt outstanding.
    Q9 did not purchase any shares under its Normal Course Issuer Bid program
during the quarter.
    Subsequent to quarter-end, Q9 announced it had acquired a building and
land in Calgary, Alberta to house its third data centre in the city. Q9
invested $20 million in the building and land and intends to invest up to
$30 million more to build out an initial capacity of 1,200 cabinet
equivalents. The first phase of capacity in this facility is expected to open
in the summer of 2009. The acquisition was partially funded through a
$15 million mortgage bearing an interest rate of 8.2 per cent per annum,
repayable on August 20, 2016.
    On August 24, 2008, the Company entered into a definitive acquisition
agreement with CDC Acquisition Corp. ("ABRY"), an affiliate of ABRY Partners,
LLC, whereby ABRY will offer to acquire all of the outstanding common shares
of the Company at a price of $17.05 cash per common share. The total equity
value of the transaction is approximately $361 million on a fully diluted
basis. The transaction will be implemented by way of a court-approved plan of
arrangement and is subject to certain conditions including receipt of
shareholder and court approval. If the Company's shareholders approve the
acquisition, the requisite court approval is obtained and other conditions are
met, the closing is expected to take place in the fourth calendar quarter of
2008. Following closing of the potential transaction, the Company's common
shares will be de-listed and will no longer be publicly traded. If the Company
terminates the acquisition agreement with ABRY in order to accept a superior
acquisition proposal, it must pay a fee of approximately $6.3 million if such
termination occurs during the go-shop period or following the go-shop period
where the superior acquisition proposal is from a third party with whom
discussions commenced prior to the expiration of the go-shop period (an
"Excluded Party") or approximately $10.8 million if such termination occurs
following the go-shop period with anyone other than an Excluded Party. A copy
of the acquisition agreement is available at www.sedar.com.
    There can be no assurance that the conditions to the acquisition
agreement will be satisfied in accordance with their terms, and/or the parties
to the acquisition agreement will complete the plan of arrangement under the
specified terms. In such cases, the proposed transaction could be modified,
restructured or terminated, as applicable. Failure to complete the proposed
transaction could have a material adverse impact on the Company's share price.
The Company may incur significant costs if the proposed transaction is not
completed. If the proposed transaction is completed, the Company may also
incur fees and costs prior to closing.
    "Q9 delivered an excellent third quarter with revenue reaching an
all-time high," said Osama Arafat, CEO, Q9 Networks. "I am pleased with the
growth across all data centres, particularly Calgary, which continues to see
very strong demand. I am further pleased to report that planning for the
initial build out of capacity in our recently announced third Calgary data
centre is well underway. With contracted revenue of more than $15 million and
healthy demand from new and existing customers, we have excellent momentum
entering the fourth quarter."

    Non-GAAP Measures

    The Company reports Adjusted EBITDA because it is a key measure used by
management to evaluate the Company's performance. The Company believes that
Adjusted EBITDA is useful supplemental information as it provides an
indication of the results generated by the Company's main business activities
prior to taking into consideration how those activities are financed and taxed
and also prior to taking into consideration asset amortization and other
non-cash expenses. Adjusted EBITDA is not a recognized measure under Canadian
GAAP, and accordingly investors are cautioned that Adjusted EBITDA should not
be construed as an alternative to net earnings or loss determined in
accordance with Canadian GAAP as an indicator of the financial performance of
the Company or as a measure of the Company's liquidity and cash flows. The
Company's method of calculating Adjusted EBITDA differs from other issuers
and, accordingly, Adjusted EBITDA may not be comparable to similar measures
presented by other issuers. Please see the attached schedule for the Company's
Adjusted EBITDA definition and reconciliation.
    Prior to the second quarter of fiscal 2007, the Company used the term
EBITDA for this key measure. For the purposes of reporting the second quarter
of fiscal 2007 results, the Company started using the term Adjusted EBITDA and
added back total stock-based compensation expense in determining Adjusted
EBITDA. Previously, the Company included only stock-based compensation expense
related to the nominal exercise options issued at the time of its IPO as
described in note 7 to the third quarter 2008 financial statements. Beginning
in the first quarter of fiscal 2008, the Company changed the method of
calculating Adjusted EBITDA by reclassifying from interest income, net
(referred to as investment income, net in fiscal 2007), realized and
unrealized gains and losses on short-term investments and included them as
reconciling items to Adjusted EBITDA.

    Forward Looking Statements

    This media release includes certain forward-looking statements that are
based upon current expectations, which involve risks and uncertainties
associated with our business and the economic environment in which the
business operates. Any statements contained herein that are not statements of
historical facts may be deemed to be forward-looking statements. For example,
the words anticipate, believe, plan, estimate, expect, intend, should and
similar expressions are intended to identify forward-looking statements.
Should one or more of the risks and uncertainties materialize or should the
underlying assumptions prove incorrect, actual results or events may differ
materially from current expectations. Please refer to the Risks section at the
end of Q9's third quarter 2008 MD&A, dated September 11, 2008, which can be
found on the Company's website at www.Q9.com or through SEDAR. Q9 does not
intend, and disclaims any obligation, except as required by law, to update or
revise any forward-looking statements whether as a result of new information,
future events or otherwise.

    About Q9 Networks

    Q9 Networks is a leading Canadian provider of outsourced data centre
infrastructure for organizations with mission-critical IT operations. Q9's
data centres and network are backed by an industry leading SLA which
guarantees 100 per cent network and power availability. Q9 managed services,
including: bandwidth, dedicated servers, firewalls, load balancing, virtual
private networking (VPN) and back-up/restore, enable the rapid provisioning
and scalability of client infrastructure.

    

    Q9 NETWORKS INC.
    Balance Sheets
    (In thousands)
    (Unaudited)
    -------------------------------------------------------------------------
                                                       July 31,   October 31,
                                                          2008          2007
    -------------------------------------------------------------------------
    Assets

    Current assets:
      Cash and cash equivalents                     $   12,437    $    5,956
      Short-term investments                            23,246        36,922
      Accounts receivable                                4,493         4,552
      Unbilled revenue                                     878           593
      Future tax asset                                   3,416         2,554
      Prepaid expenses                                   1,189           686
      -----------------------------------------------------------------------
                                                        45,659        51,263

    Restricted cash                                          -            50

    Other assets                                         1,105         1,101

    Future tax asset                                         -         1,795

    Property and equipment                              91,257        87,226

    -------------------------------------------------------------------------
                                                    $  138,021    $  141,435
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Liabilities and Shareholders' Equity

    Current liabilities:
      Accounts payable and accrued liabilities      $    7,672    $   12,003
      Deferred revenue                                   6,685         5,923
      Notes payable                                        274           403
      -----------------------------------------------------------------------
                                                        14,631        18,329

    Deferred revenue                                     1,503         1,032

    Deferred gain on sale of property                      990         1,049

    Leasehold inducements                                1,024         1,209

    Asset retirement obligations                         1,209         1,111

    Deferred rent                                        1,827         1,605

    Shareholders' equity:
      Capital stock:
        Common shares                                  144,484       145,452
      Contributed surplus                                2,241         1,072
      Deficit                                          (29,888)      (29,424)
      -----------------------------------------------------------------------
                                                       116,837       117,100

    -------------------------------------------------------------------------
                                                    $  138,021    $  141,435
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    Q9 NETWORKS INC.
    Statements of Operations
    (In thousands, except per share amounts)
    (Unaudited)

    -------------------------------------------------------------------------
                                 Three months ended       Nine months ended
                                      July 31,                July 31,
                                    2008        2007        2008        2007
    -------------------------------------------------------------------------

    Revenue:
      Co-location              $   8,912   $   7,363   $  24,518   $  19,883
      Managed services             5,226       5,034      15,657      14,476
      Managed bandwidth            2,303       1,939       6,823       5,668
      Set-up and other fees          495         307       1,731         850
      -----------------------------------------------------------------------
                                  16,936      14,643      48,729      40,877

    Cost of revenue               12,149      10,230      34,492      28,113
    -------------------------------------------------------------------------
    Gross profit                   4,787       4,413      14,237      12,764

    Expenses:
      Sales and marketing          1,849       1,643       4,928       4,845
      General and
       administrative              3,092       2,084       8,258       6,908
      Amortization of property
       and equipment                 193         206         579         670
      -----------------------------------------------------------------------
                                   5,134       3,933      13,765      12,423
    -------------------------------------------------------------------------
    Income (loss) from
     operations                     (347)        480         472         341

    Investment income, net           196         486         834       1,592
    -------------------------------------------------------------------------

    Income (loss) before
     income taxes                   (151)        966       1,306       1,933

    Income tax expense:
      Current                          -           -           -           1
      Future                          14         482         933       1,410
    -------------------------------------------------------------------------
                                      14         482         933       1,411
    -------------------------------------------------------------------------
    Net income (loss) and
     comprehensive income
     (loss)                         (165)        484         373         522

    Deficit, beginning of
     period                      (29,723)    (26,860)    (29,424)    (26,122)

    Repurchase of shares               -        (777)       (837)     (1,553)

    -------------------------------------------------------------------------
    Deficit, end of period     $ (29,888)   $(27,153)   $(29,888)   $(27,153)
    -------------------------------------------------------------------------

    Earnings (loss) per share:
      Basic                    $   (0.01)  $    0.02   $    0.02   $    0.03
      Diluted                      (0.01)       0.02        0.02        0.02

    Weighted average number of
     shares outstanding:
      Basic                       20,845      21,216      20,889      20,669
      Diluted                     20,845      21,363      20,925      21,263
    -------------------------------------------------------------------------



    Q9 NETWORKS INC.
    Statements of Cash Flows
    (In thousands)
    (Unaudited)

    -------------------------------------------------------------------------
                                 Three months ended       Nine months ended
                                      July 31,                July 31,
                                    2008        2007        2008        2007
    -------------------------------------------------------------------------
    Cash provided by (used in):

    Operating activities:
      Net income (loss)        $    (165)  $     484   $     373   $     522
      Items not involving cash:
        Amortization of
         property and equipment    3,827       3,231      10,884       8,451
        Amortization of other
         assets                       12          11          32          32
        Gain on sale of
         property                    (20)        (20)        (59)        (59)
        Accretion expense             33          28          98          82
        Unrealized gain
         (loss) on short-term
         investments                   1          17         (18)         26
        Loss on disposal of
         property and equipment        -           -           3           -
        Net non-cash rent
         expense                     (13)         50          37         245
        Stock-based
         compensation expense        405         344       1,257       1,491
        Future income taxes           14         482         933       1,410
      Change in non-cash
       operating working
       capital                     2,907         525       2,966         947
      -----------------------------------------------------------------------
                                   7,001       5,152      16,506      13,147

    Financing activities:
      Issuance of notes payable      161         225         536       1,103
      Repayment of notes
       payable                      (173)       (326)       (664)       (810)
      Repurchase of shares             -        (176)     (2,272)     (1,692)
      Proceeds upon exercise
       of options                      1          35          34       3,831
      -----------------------------------------------------------------------
                                     (11)       (242)     (2,366)      2,432

    Investing activities:
      Purchase of property and
       equipment                  (2,433)     (6,274)    (21,133)    (31,072)
      Purchase of short-term
       investments               (23,111)   (110,431)    (68,492)   (255,413)
      Sale of short-term
       investments                22,918     114,603      81,958     273,345
      Increase in other assets       (12)        (12)        (42)       (184)
      Decrease in restricted
       cash                            -         180          50         180
      -----------------------------------------------------------------------
                                  (2,638)     (1,934)     (7,659)    (13,144)
    -------------------------------------------------------------------------

    Increase in cash and cash
     equivalents                   4,352       2,976       6,481       2,435

    Cash and cash equivalents,
     beginning of period           8,085       5,420       5,956       5,961

    -------------------------------------------------------------------------
    Cash and cash equivalents,
     end of period             $  12,437   $   8,396   $  12,437   $   8,396
    -------------------------------------------------------------------------
    Cash and cash equivalents
     is comprised of:
      Cash on hand and cash in
       the bank                $  12,195   $   8,396   $  12,195   $   8,396
      Money market mutual funds      242           -         242           -
    -------------------------------------------------------------------------
                               $  12,437   $   8,396   $  12,437   $   8,396
    -------------------------------------------------------------------------

    Supplemental cash flow
     information:
      Interest received        $     231   $     752   $   1,064   $   2,102
      Interest paid                    6          12          21          31
      Income taxes paid                -           -           -           1

    Supplemental disclosure of
     non-cash financing and
     investing activities:
      Effect of acquisition of
       property and equipment
       in accounts payable and
        accrued liabilities            9       1,129       6,215       4,775
      Effect of repurchase of
       shares in accounts
       payable and accrued
       liabilities                     -      (1,247)        345      (1,271)
    -------------------------------------------------------------------------



    Q9 NETWORKS INC.
    Adjusted EBITDA(1) Reconciliation
    (In thousands)
    (Unaudited)

    -------------------------------------------------------------------------
                                 Three months ended      Nine months ended
                                      July 31,                July 31,
                                    2008        2007        2008        2007
    -------------------------------------------------------------------------

    Net income (loss) for the
     period                    $    (165)  $     484   $     373   $     522
      Interest income, net(2)       (197)       (513)       (810)     (1,653)
      Income tax expense              14         482         933       1,411
      Amortization                 3,819       3,222      10,857       8,424
      -----------------------------------------------------------------------
    EBITDA                         3,471       3,675      11,353       8,704
      Stock-based compensation
       expense                       405         344       1,257       1,491
      Accretion expense               33          28          98          82
      Realized (gain) loss on
       short-term
       investments(2)                  -          10          (6)         35
      Unrealized (gain) loss on
       short-term
       investments(2)                  1          17         (18)         26
    -------------------------------------------------------------------------
    Adjusted EBITDA            $   3,910 $     4,074   $   12,684  $  10,338
    -------------------------------------------------------------------------
    Note 1: Adjusted EBITDA means earnings before interest income and
    expense, income tax expense, amortization, stock-based compensation
    expense, accretion expense, and realized and unrealized gains and losses
    on short-term investments.

    Note 2: Realized and unrealized gains and losses on short-term
    investments have been reclassified from interest income, net (referred to
    as investment income, net in fiscal 2007 Adjusted EBITDA reconciliation)
    and included as reconciling items to Adjusted EBITDA.

    





For further information:

For further information: Kevin Spikes, Director of Corporate & Investor
Relations, Q9 Networks, Toronto: (416) 848-3311, Toll Free: 1-888-696-2266,
kevin.spikes@Q9.com, www.Q9.com

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