PEER 1 Hosting Reports Fiscal 2011 First Quarter Results

VANCOUVER, Nov. 10 /CNW/ - 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) No. 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

EBITDA Reconciliation
(unaudited - prepared by management)
(in $ thousands)	Three Months Ended
	30-Sep-10	30-Sep-09
Net Profit Income tax expense Interest expense Amortization - licences, fixed assets and deferred network costs Stock based compensation Loss (gain) on disposal of assets Amortization of deferred gain Foreign exchange loss	356                      569                      364                   4,365                      457                      (16)                      (20)                      (53)	1,267                    927                    313                 3,474                    562                    (12)                    (19)                     80
EBITDA	6,022	6,592
Gain - insurance recovery	-	(93)
Normalized EBITDA	6,022	6,499

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 [phone] 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 [phone] 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)

		September 30, 2010						June 30, 2010
Assets
Current:
	Cash and cash equivalents	$	2,361		$			2,321
	Accounts receivable		3,219					3,249
	Income tax receivable		1689					623
	Future income tax asset		94					97
	Prepaid expenses		3,548					1,655
			10,911					7,945
Other assets			2,531					2,688
Future income tax asset			2,310					1,900
Property and equipment			55,710					53,237
Equipment under capital lease			920					986
Goodwill			2,363					2,363
Intangible assets			3,722					3,527
		$	78,467		$			72,646
Liabilities
Current:
	Accounts payable and accrued liabilities	$	9,039		$			9,114
	Deferred revenue		2,347					2,216
	Current portion of deferred gain		79					79
	Current portion of deferred lease inducements		126					126
	Current portion of derivative liabilities		201					170
	Current portion of notes payable		3,000					3,000
	Current portion of obligations under capital lease		378					376
			15,170					15,081
Deferred gain			394					414
Deferred lease inducements			539					557
Derivative liabilities			151					170
Notes payable			21,709					16,404
Obligation under capital lease			143					232
			38,106					32,858
Shareholders' equity			40,361					39,788
		$	78,467		$			72,646

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)

		Three months ended
		September 30, 2010				September 30, 2009
		Number			Amount			Number			Amount
SHARE CAPITAL
Common shares
	Balance at beginning of period	119,721,834			$        27,631			119,314,323			$        26,950
	Stock options exercised	47,285			47			113,375			59
	Warrants exercised	-			-			1,628,286			781
	Purchase of shares for cancellation pursuant to normal course issuer bid	(189,500)			(44)			-			-
	Balance at end of period	119,579,619			27,634			121,055,984			27,790
CONTRIBUTED SURPLUS
	Balance at beginning of period				6,804						4,766
	Stock-based compensation				457						563
	Stock options exercised				(21)						(22)
Balance at end of period					7,240						5,307
Warrants
	Balance at beginning of period	833,333			86			2,461,619			493
	Warrants exercised	-			-			(1,628,286)			(407)
	Balance at end of period	833,333			86			833,333			86
RETAINED EARNINGS
	Balance at beginning of period				5,619						4,709
	Net income				356						1,267
	Purchase of shares for cancellation pursuant to normal course issuer bid				(211)						-
Balance at end of period					5,764						5,976
ACCUMULATED OTHER COMPREHENSIVE INCOME
	Balance at beginning of period				(352)						(279)
	Other comprehensive loss				(11)						(82)
Balance at end of period					(363)						(361)
Total - shareholders' equity					$       40,361						$        38,798

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)

		September 30, 2010				September 30, 2009
Revenue
	Colocation Services	$          7,093				$           6,628
	Hosting Services	19,235				16,746
		26,328				23,374
Cost of revenue		16,257				13,711
Gross profit		10,071				9,663
Operating expenses		8,864				7,185
Operating income before other items		1,207				2,478
Other items:
	Interest income	(13)				(4)
	Gain on insurance recovery					(93)
	Gain on disposal of property and equipment	(16)				(12)
	Foreign exchange loss (gain)	(53)				80
	Interest expense - long term	364				313
		282				284
Income before income taxes		925				2,194
Future income tax expense (recovery)		(371)				(297)
Current income tax expense		940				1,224
Income tax expense		569				927
Net income		$             356				$          1,267
Other comprehensive income:
	Change in unrealized fair value of derivatives designated as cash flow hedges	(11)				(82)
Comprehensive income		$             345				$          1,185
Net income attributable to:
	Common shares	$             356				$          1,267
Comprehensive income attributable to:
	Common shares	345				1,185
Basic and diluted earnings per share		$            0.00				$            0.01
Weighted average number of shares outstanding:
	Basic	119,733,661				119,508,564
	Diluted	120,728,588				123,296,839

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)

			Three months ended
			September 30, 2010				September 30, 2009
Operating Activities:
	Net income		$               356				$           1,267
	Adjustments for non-cash items:
		Amortization of property and equipment	4,249				3,151
		Amortization of intangible assets	116				323
		Increase in accrued interest	-				-
		Bad debt expense	112				158
		Gain on disposal of property and equipment	(16)				(12)
		Gain on insurance	-				(93)
		Amortization of deferred gain	(20)				(19)
		Amortization of deferred loan origination fees	55				49
		Future income tax recovery	(371)				(297)
		Stock-based compensation included in income	457				562
		Decrease in deferred lease inducements	(18)				(36)
	Changes in non-cash working capital:
		Increase in accounts receivable	(81)				(507)
		Increase in prepaid expenses	(1,893)				(87)
		Decrease in accounts payable and accrued liabilities	(1,573)				(158)
		Decrease in income taxes payable	(1,066)				(2,423)
		Decrease in deferred revenue	131				84
Cash flows from operating activities			438				1,962
Investing Activities:
		Acquisition of subsidiary, net of cash acquired					-
		Investment in other assets	157				(91)
		Acquisition of property and equipment	(5,216)				(5,958)
		Acquisition of intangible assets	(256)				(324)
		Proceeds on disposition of equipment	16				12
Cash flows used in investing activities			(5,299)				(6,361)
Financing Activities:
		Proceeds from line of credit	6,000				-
		Repayments of notes payable	(750)				-
		Payment of capital lease obligations	(99)				(55)
		Issuance of capital stock	26				411
		Purchase of shares for cancellation pursuant to normal course issuer bid	(255)				-
Cash flows from (used in) financing activities			4,922				356
Foreign exchange gain (loss) on cash and cash equivalents			(21)				53
Increase (decrease) in cash and cash equivalents			40				(3,990)
Cash and cash equivalents, beginning			2,321				15,744
Cash and cash equivalents, ending			$            2,361				$          11,754

For further information:

For investor inquiries please contact:
David Feick
The Equicom Group
[phone]
[email protected]

For media inquiries please contact:
Marcela Peake
PEER 1
[phone]
[email protected]