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Press release from CNW Group

PEER 1 Hosting Reports Fiscal 2011 Third Quarter Results

Wednesday, May 11, 2011

PEER 1 Hosting Reports Fiscal 2011 Third Quarter Results16:00 EDT Wednesday, May 11, 2011VANCOUVER, May 11 /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 and nine months ended March 31, 2011.  All amounts are stated in US dollars unless otherwise noted.Selected Financial Highlights Comparing the Third Quarters Ended March 31, 2011 and 2010Revenue increased 14.6% to $28.73 million from $25.1 million;Gross profit increased 6.0% to $10.8 million from $10.2 million;Operating income decreased 80.5% to $0.4 million from $2.2 million;Normalized EBITDA was $6.6 million, up from $6.4 million; andNet loss was $1.31 million down from net income of $0.46 million.Recent Operational HighlightsCommenced build out of the first phase (POD A) of a 50,000 square foot, scalable, green datacenter in Portsmouth, United Kingdom;Completed build out and fully commissioned POD B at the Toronto data centre turning it over to key customer Capgemini Canada; andSubsequent to quarter end, announced the arrival of the Company's IPv6 enabled 10GB backbone network."In the third quarter we continued to aggressively invest in key, strategic infrastructure that will support future growth, advancing the staged build out of POD C in our Toronto data centre and commencing work on POD A at our new UK facility," said Fabio Banducci, President and CEO of PEER 1 Hosting.  "These facilities will not only drive capacity improvements but also position us to capitalize on significant growth opportunities in the key North American and  EMEA markets."Financial Review for the Three and Nine Months Ended March 31, 2011 and 2010Revenue increased to $28.73 million for the three months ended March 31, 2011 from $25.07 million (or 14.61%) for the three months ended March 31, 2010. Revenue increased to $82.94 million for the nine months ended March 31, 2011 from $72.34 million (or 14.66%) for the nine months ended March 31, 2010. 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 nine months ended March 31, 2011 was $82.11 million. Taking into account the effect of the differing exchange rates between the Canadian and US dollars for the comparative period, revenue increased by 13.74% for the three months and 13.52% for the nine months ended March 31, 2011.Colocation revenue increased to $4.19 million and $11.23 million for the three and nine months ended March 31, 2011 compared with $3.41 million and $10.07 million for the three and nine months ended March 31, 2010, respectively.  The increase in colocation revenue is attributable to organic growth as well as the increase in the value of the Canadian dollar against the US dollar.  The effect on revenue from the increase in value of the Canadian dollar against the US dollar was $0.14 million and $0.53 million for the three and nine months ended March 31, 2011, respectively.Bandwidth revenue decreased to $2.21 for the three months ended March 31, 2011 compared with $2.29 million for the three months ended March 31, 2010. Bandwidth revenue increased to $6.68 million for the nine months ended March 31, 2011 compared with $6.41 million for the nine months ended March 31, 2010. The increase in revenue is primarily attributable to the increased value of the Canadian dollar against the US dollar, and increased bandwidth consumption 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 $0.08 million and $0.29 million for the three and nine months ended March 31, 2011, respectively.Hosting Services revenues increased to $20.66 million and $60.44 million for the three and nine months ended March 31, 2011 from $17.92 million and $51.72 million for the three and nine months ended March 31, 2011, respectively.  The increase for the three and nine months ended March 31, 2011 is attributable to organic growth and additional revenue from the VIA acquisition of approximately $0.5 million and $1.5 million for the three and nine months ended March 31, 2011 respectively. 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 $6.97 million of revenue for the three months ended March 31, 2011 compared with $5.17 million of revenue for the three months ended March 31, 2010. The Company's Canadian operations accounted for $18.51 million of revenue for the nine months ended March 31, 2011 compared to $14.86 million of revenue for the nine months ended March 31, 2010. This change is primarily related to organic growth and favorable foreign exchange effects of $0.22 million and $0.83 million for the three months and nine months ended March 31, 2011. 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 $3.05 million for the three months ended March 31, 2011 from $14.85 million for the three months ended March 31, 2010.  During the three months ended March 31, 2011, the Company incurred costs of $1.25 million related to its further expansion in the United Kingdom, which are included in cost of sales.  Cost of sales as a percentage of revenue increased to 62.33% for the three months ended March 31, 2011 from 59.25% for the three months ended March 31, 2010.The increase in cost of sales for the three months ended March 31, 2011 compared to the same period in the prior year is primarily due to increased staff costs of $0.07 million, increased depreciation costs of $1.29 million, increased software license costs of $0.21 million, increased power costs of $0.46 million, increased SLA and Charge backs of $0.22 million, increased bandwidth  costs of $0.27 million and increased rent costs of $0.54 million associated with data center expansion in the United Kingdom and Toronto.Cost of sales increased to $51.09 million for the nine months ended March 31, 2011 from $42.67 million for the nine months ended March 31, 2010.  Cost of sales as a percentage of revenue increased to 61.60% for the nine months ended March 31, 2011 from 58.99% for the nine months ended March 31, 2010.The increase in cost of sales for the nine months ended March 31, 2011 compared with the same period in the prior year is primarily due to increased staff costs of $0.37 million, increased depreciation costs of $3.35 million, increased software license costs of $0.65 million, increased power costs of $1.48 million, increased repairs and maintenance costs of $0.22 million, increased SLA and Charge backs of $0.1 million, increased bandwidth  costs of $0.63 million and increased rent costs of $1.63 million associated with data center expansion in the United Kingdom and Toronto.Total operating expenses increased by $2.35 million to $10.4 million for the three months ended March 31, 2011 from $8.05 million for the three months ended March 31, 2010.  Operating expenses as a percentage of revenue increased to 36.2% for the three months ended March 31, 2011 from 32.10% for the three months ended March 31, 2010.  The increase in operating expenses for the three months ended March 31, 2011 is largely attributable to $0.98 million higher staff and training cost, increased commission expenses of $0.45 million, increased professional services of $0.06 million, increased rent of $0.07 million, increased office expenses of $0.12 million, increased property tax of $0.03 million, increased bonus expenses of $0.17 million, increased amortization expense of $0.35 million, increased travel expenses of $0.05 million, higher insurance expenses of $0.01 million and $0.33 million higher advertising expenses, in part offset by lower stock based compensation of $0.14 million, lower bad debt expense of $0.12 million, and bank and credit card charges of $0.02 million. Total operating expense for the three months ended March 31, 2011 is comprised of $4.74 million (2010: $3.32 million) sales and marketing expenses, $4.39 million (2010: $3.95 million) general and administrative expenses, and $1.27 million (2010: $0.78 million) in expenses for technology and customer relations. During the three months ended March 31, 2011, the company incurred $0.97 million related to its United Kingdom expansion which are included in operating expenses, $0.33 million of which are categorized as general and administrative expenses and $0.63 million of which are categorized as selling and marketing expenses.Total operating expenses increased by $6.2 million to $28.96 million for the nine months ended March 31, 2011 from $22.76 million for the nine months ended March 31, 2010.  Operating expenses as a percentage of revenue increased to 34.91% for the nine months ended March 31, 2011 from 31.47% for the nine months ended March 31, 2010.  The increase in operating expenses for the nine months ended March 31, 2011 is largely attributable to $3.06 million higher staff and training cost, increased commission expenses of $0.9 million attributable to new sales, increased professional services of $0.54 million, increased rent of $0.18 million, increased office expenses of $0.23 million, increased property tax of $0.13 million, increased insurance expenses of $0.03 million, increased travel expenses of $0.03 million, increased amortization expenses of $0.18 million and $1.19 million higher advertising expenses offset in part by $0.09 million lower stock based compensation, $0.15 million in decreased bad debt expense, lowered bank and credit card charges $0.02 million and lower bonus expense of $0.01 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 nine months ended March 31, 2011 is comprised of $12.67 million (2010: $9.29 million) sales and marketing expenses, $12.62 million (2010: $11.31 million) general and administrative expenses, and $3.67 million (2010: $2.16 million) in expenses for Technology and Customer relations. During the nine months ended March 31, 2011, the company incurred $2.57 million related to its United Kingdom expansion which are included in operating expenses, $0.98 million of which are categorized as general and administrative expenses and $1.57 million of which are categorized as selling and marketing expenses.Normalized EBITDA was $6.6 million for the three months ended March 31, 2011, compared with $6.4 million in the prior year period.Net loss for the quarter ended March 31, 2011 was $1.31 million, compared to net income $0.46 million for the same period in 2010. Net loss for the nine month period ended March 31, 2011 was $1.6 million, compared to net income of $2.6 million for the same period in 2010.The Company had working capital of $15.95 million at March 31, 2011 compared to a 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 credit facilities, 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 March 31, 2011, the Company had available $12.81 million from its $75 million credit facilities.PEER 1 Hosting had 120,576,370 common shares issued and outstanding as at May 6, 2011.EBITDA Reconciliation   (unaudited - prepared by management)  (in $ thousands)Three Months Ended 31-Mar-1131-Mar-10   Net Profit (Loss)        (1,311)               459 Income tax expense                    698         775 Interest expense                721                  338 Amortization - licences, fixed assets and deferred network costs         5,288      3,642 Stock based compensation         482                 620 Loss (gain) on disposal of assets                 (8)                 (29)Amortization of deferred gain        (20)                  (20)Loss on Derivative                       -                   111 Foreign exchange loss                325                  75 EBITDA             6,175               5,971    Commission - one time                   375  Settlement of legal claim                       -                  440 Normalized EBITDA             6,550                6,411Conference CallPEER 1 Hosting will hold a conference call Wednesday, May 11, 2011 at 5:30pm Eastern Time (ET), to discuss the results the third 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 May 18, 2011, at midnight. To access the archived conference call, dial (416) 849-0833 or 1-800-642-1687 and enter the reservation number: 64120554 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=3513400Please connect at least 10 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 MeasuresPEER 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 HostingPEER 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 18 state-of-the-art data centers 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 StatementsStatements 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 SheetMarch 31, 2011(in thousands of United States dollars)  March 31,2011June 30, 2010Assets    Current:     Cash and cash equivalents$23,503$2,321 Accounts receivable 4,919 3,249 Income tax receivable 1,088 623 Future income tax asset 228 97 Prepaid expenses 2,415 1,655  32,153 7,945Other assets 2,321 2,688Future income tax asset 2,684 1,900Property and equipment 71,078 53,237Equipment under capital lease 789 986Goodwill 2,363 2,363Intangible assets 4,123 3,527 $115,511$72,646Liabilities    Current:     Accounts payable and accrued liabilities$9,517$9,114 Deferred revenue 2,707 2,216 Current portion of deferred gain 79 79 Current portion of deferred lease inducements 126 126 Current portion of derivative liabilities 111 170 Current portion of notes payable 3,333 3,000 Current portion of obligations under capital lease 328 376  16,201 15,081Deferred gain 355 414Deferred lease inducements 502 557Derivative liabilities 424 170Notes payable 57,780 16,404Obligation under capital lease 17 232  75,279 32,858Shareholders' equity  40,232 39,788 $115,511$72,646PEER 1 NETWORK ENTERPRISES, INC.Consolidated Statements of Shareholders' EquityFor the Three and Nine Months Ended March 31, 2011(in thousands of United States dollars except number of shares)  Three months ended Nine months ended March 31, 2011March 31, 2010 March 31, 2011March 31, 2010 NumberAmountNumberAmount NumberAmountNumberAmountSHARE CAPITAL          Common shares          Balance at beginning of period119,645,665$    27,693121,260,741$    27,942 119,721,834$    27,631119,314,323$    26,950 Stock options exercised          56,972           6733,879            14        170,303         173       352,011          225 Warrants exercised       833,333          422-              -        833,333          422    1,628,286          781 Purchase of shares for cancellation pursuant to normal course issuer bid                  -              --              - (189,500)(44)                  -              - Balance at end of period120,535,970     28,182121,294,620    27,956 120,535,970     28,182121,294,620     27,956          CONTRIBUTED SURPLUS          Balance at beginning of period        7,877        5,709        6,804        4,766 Stock-based compensation            482           619        1,598       1,684 Stock options exercised           (51)    (5)  (94) (127) Balance at end of period       8,308        6,323        8,308       6,323          Warrants           Balance at beginning of period      833,333           86833,333           86       833,333           86    2,461,619         493 Warrants exercised      (833,333)       (86)-             - (833,333)(86)(1,628,286)(407) Balance at end of period--833,333           86 -             -       833,333           86RETAINED EARNINGS          Balance at beginning of period        5,592        6,862          5,619         4,709 Net income (1, 311)           459  (1,127)         2,612 Purchase of shares for cancellation pursuant to normal course issuer bid             -               -  (211)                - Balance at end of period       4,281        7,321          4,281         7,321ACCUMULATED OTHER COMPREHENSIVE INCOME          Balance at beginning of period         (11) (315)  (352) (279) Other comprehensive income (loss)        (528) (38)  (187) (74) Balance at end of period        (539) (353)  (539) (353) Total - shareholders' equity $   40,232    $    41,333  $    40,232 $    41,333PEER 1 NETWORK ENTERPRISES, INC.Consolidated Statement of OperationsFor the Three and Nine Months Ended March 31, 2011(in thousands of United States dollars, except per share amounts)  Three months ended Nine months ended March 31, 2011March 31, 2010 March 31, 2011March 31, 2010Revenue      Colocation Services$              8,067$              7,143 $           22,501$            20,616 Hosting Services             20,662             17,923              60,442             51,721              28,729             25,066              82,943             72,337Cost of revenue             17,906             14,852              51,094             42,670Gross profit             10,823             10,214              31,849             29,667Operating expenses             10,401               8,047              28,959             22,761Operating income before other items                   422               2,167                2,890               6,906Other items:       Interest income(3)(2) (17)(8)  Gain on insurance recovery                      -                     -                      -(93) Gain on disposal of property and equipment(8)(29) (36)(71)  Loss on legal settlement                    440                    24                  440  Loss on derivative                      -                 111                      -                   111  Foreign exchange loss                  325                   75                  531                  264  Interest expense - long term                  721                 338               1,950                  987                1,035                  933               2,452               1,630Income before income taxes(613)               1,234                  438               5,276Future income tax recovery(35)(212) (883)(712)Current income tax expense                  733                 987                2,448               3,376Income tax expense                  698                  775                1,565               2,664Net income (loss)$            (1,311)$                 459 $            (1,127)$              2,612Other comprehensive income:      Change in unrealized fair value of derivatives designated as cash flow hedges(528)(38) (187)(74)Comprehensive income$           (1,839)$                 421 $(1,314)$             2,538       Net income (loss) attributable to:       Common shares$            (1,311)$                 459 $            (1,127)$             2,612Comprehensive income attributable to:       Common shares(1,839)                  421 (1,314)              2,538Basic and diluted earnings (loss) per share$              (0.01)$               0.00 $             (0.01)$             0.02Weighted average number of shares outstanding:      Basic  120,042,547121,274,770 119,938,894120,653,339 Diluted  120,042,547124,338,272 119,938,894124,316,811PEER 1 NETWORK ENTERPRISES, INC.Consolidated Statement of Cash FlowsFor the Three and Nine Months Ended March 31, 2011(in thousands of United States dollars)  Three months ended Nine months ended March 31,2011March 31, 2010 March 31, 2011March 31, 2010Operating Activities:      Net income (loss)$     (1,311) $           459  $     (1,127)                               $        2,612 Adjustments for non-cash items:       Amortization of property and equipment         5,042         3,560         13,685       10,055  Amortization of intangible assets             246              82             472           569  Ineffective portion of cash flow hedge                 -             283               -  Bad debt expense              89            174             271            388  Gain on disposal of property and equipment(8)(29) (36)(71)  Gain on insurance               -               -                -(93)  Amortization of deferred gain(20)(20) (59)(59)  Amortization of deferred loan origination fees              61              74            408            191  Future income tax recovery(35)(212) (883)(712)  Stock-based compensation included in income             482            620         1,598         1,684  Decrease in deferred lease inducements(18)(37) (54)(110) Changes in non-cash working capital:       Increase in accounts receivable(193)            405 (1,941)(458)  Decrease (increase) in prepaid expenses           894(81) (763)(657)  Increase in accounts payable and accrued liabilities             669            490            287         1,147  Increase (decrease) in income taxes payable         1,216              54 (465)(2,122)  Decrease (increase) in deferred revenue            476(314)            491(200)Cash flows from operating activities         7,590          5,225        12,167       12,164Investing Activities:       Acquisition of subsidiary, net of cash acquired                -(534)                -(534)  Investment in other assets              45(135) (625)(362)  Acquisition of property and equipment(10,973)(9,390) (31,228)(22,992)  Acquisition of intangible assets(507)(389) (1,064)(1,325)  Proceeds on disposition of equipment               18              29               46              71Cash flows used in investing activities(11,417)(10,419) (32,871)(25,142)Financing Activities:       Proceeds from notes payable       25,035        2,000        74,172        2,000  Repayments of notes payable(1,000)(750) (32,726)(1,500)  Payment of capital lease obligations(94)(66) (291)(178)  Payment of derivative liabilities(283)  (283)   Issuance of capital stock           352               9            415           471  Purchase of shares for cancellation pursuant to normal course issuer bid               -                - (255)               -Cash flows from (used in) financing activities      24,010         1,193        41,032            793Foreign exchange gain (loss) on cash and cash equivalents           804              75            854            137Increase (decrease) in cash and cash equivalents      20,987(3,926)        21,182(12,048)Cash and cash equivalents, beginning        2,516         7,622          2,321      15,744Cash and cash equivalents, ending$      23,503$        3,696 $      23,503$       3,696Supplemental Disclosure of Cash Flow 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 Hosting +1 (604) 909-6428 mpeake@peer1.com