PEER 1 Reports Fiscal 2009 Second Quarter Results

VANCOUVER, BC – February 11, 2009 – PEER 1 Network Enterprises, Inc. (TSX: PIX), a leading provider of online IT hosting, today announced the results for the three and six months ended December 31, 2008.  All amounts are stated in US dollars.

Selected financial highlights comparing the quarters ended December 31, 2008 and 2007:
•    Revenue increased 6.4% to $23.6 million from $22.2 million;
•    Gross profit increased 6.4% to $10.8 million from $10.1 million;
•    Operating income decreased 5.2% to $3.7 million from $3.9 million;
•    EBITDA increased by 11.1% to $7.6 million from $6.9 million;
•    EBITDA margin increased to 32.2% compared with 30.9%; and
•    Net income increased by 6.5% to $2.01 million compared with $1.88 million.

Operational highlights:
•    5,478 square feet of additional data center space at 151 Front Street in Toronto became operational during the quarter representing 120 normalized cabinet equivalents;
•    The PEER 1 Partner Network, an integrated referral and reseller program that offers revenue incentives to web developers, system integrators and IT consultants who refer business, was launched on October 2, 2008.  Since then, more than 50 partners have joined the program;
•    On October 15, 2008 the Company entered into a partnership agreement with Absolute Performance to enhance IT systems monitoring solutions across its core business segments;
•    PEER 1’s backup services, utilizing IBM’s Tivoli Storage Manager software, expanded on October 21, 2008 to include ServerBeach and co-location customers.  PEER 1 now offers enhanced hosting backup services across all of its hosting product lines; and
•    Effective October 1, 2008, the Company fixed for a period of 12 months, the LIBOR Rate (as defined in the Loan and Security Agreement (“LSA”) with Fortress Credit Opportunities 1 LP) at a rate of 3.84%.  As at today’s date, the interest rate accruing on the Company’s loan balance is 6.84%.

“Continued growth in the managed and dedicated hosting segment was offset by the impact of decreased co-location services revenues due to the declining value of the Canadian dollar over the quarter,” said Fabio Banducci, President and CEO of PEER 1.  “While the current economic environment presents challenges for all businesses, the fundamentals of the online IT hosting industry remain relatively stable, and we continue to see healthy demand for all of PEER 1’s core service offerings.”

Review of the Three and Six Months Ended December 31, 2008

Revenue for the three and six months ended December 31, 2008 was $23.6 million and $47.1 million, increasing by 6.4% and 9.2%, respectively, compared with the same periods of the prior year.  However, when adjusted for the effect of foreign exchange rates between the comparative periods, revenue grew 10.8% and 11.4% for the three and six months ended December 31, 2008.  On a sequential basis, revenue for the second quarter of 2009 increased by 0.6% compared with $23.5 million for first quarter, but increased by 3.6% when adjusted for the difference in exchange rates between quarters.  Overall, the increase in revenue for the quarter can be attributed to organic growth partially offset by the declining value of the Canadian dollar.  

Managed and dedicated hosting revenue for the three and six months ended December 31, 2008 was $17.5 million and $34.3 million, increasing by 15.1% and 14.9%, respectively, over the same periods in the prior year.  Compared with revenue of $16.8 million for the first quarter of 2009, managed and dedicated hosting revenues increased by a combined 4.3% in the second quarter.  The increase in managed and dedicated hosting revenues for the quarter can be attributed to organic growth.

Co-location revenue for the three and six months ended December 31, 2008 was $2.95 million and $6.10 million, decreasing by 9.3% and 1.0%, respectively, compared with the same periods of the prior year.  However, when adjusted for the effect of foreign exchange rates between the comparative periods, co-location revenue grew 4.3% and 6.0% for the three and six months ended December 31, 2008.  Co-location revenues in the second quarter of 2009 decreased by 6.0% compared with $3.14 million for the first quarter, but increased by 4.0% when adjusted for the effect of foreign exchange.  Increased sales in the co-location segment for the quarter were more than offset by the decrease in value of the Canadian dollar against the US dollar.

Bandwidth revenue for the three and six months ended December 31, 2008 was $2.05 million and $4.43 million, decreasing by 19.4% and 9.2%, respectively, compared with the same periods of the previous year.  When adjusted for the effect of foreign exchange, bandwidth revenue decreased by 4.4% and 1.8% for the three and six months ended December 31, 2008.  On a sequential basis, bandwidth revenues decreased by 14.0% compared with $2.38 million for the previous quarter, but decreased by 2.7% when adjusted for the effect of foreign exchange. 

PEER 1’s Canadian operations accounted for $4.23 million or 17.9% of the Company’s overall revenue for the three months ended December 31, 2008 compared with $5.16 million or 23.2% for the same period in the previous year.  For the six months ended December 31, 2008, PEER 1’s Canadian operations accounted for $9.16 million or 19.4% of the Company’s overall revenue compared with $9.75 million or 22.6% for the same period in the previous year.

Cost of sales for the three months ended December 31, 2008 increased by 6.3% to $12.9 million compared with $12.1 million for the same period in the previous year.  This increase can be attributed to added server and network equipment depreciation of $0.79 million and added rent expense in connection with the Toronto expansion of $0.11 million.  However, as a percentage of revenue, cost of sales was 54.4% for both three month periods ended December 31, 2008 and 2007.  For the six months ended December 31, 2008, cost of sales increased by 7.6% to $25.9 million from $24.1 million for the same period in the previous year.  Cost of sales as a percentage of revenue decreased to 54.9% for the six months ended December 31, 2008 from 55.8% for the six months ended December 31, 2007.  The decrease in cost of sales as a percentage of revenue for the six month period ended December 31, 2008 can be attributed to certain costs, including staffing and facilities rent, remaining relatively stable while revenue continues to grow.

Operating expenses for the three months ended December 31, 2008 increased by 13.7% to $7.1 million from $6.2 million for the corresponding period in the previous year.  The increase in operating expenses for the three months ended December 31, 2008 was primarily due to a $0.46 million increase in staff and training costs, a $0.24 million increase in advertising and marketing expenses, a $0.16 million increase in stock based compensation, and a $0.1 million increase in bad debt expenses.  Operating expenses as a percentage of revenue were 29.9% for the three months ended December 31, 2008, compared with 28.0% for the same period in 2007.  For the six months ended December 31, 2008 operating expenses grew by 13.5% to $14.0 million compared with $12.4 million for the same period in 2007.  Operating expenses as a percentage of revenue increased to 29.8% for the six months ended December 31, 2008 from 28.6% for the same period in the previous year.

EBITDA for the three months ended December 31, 2008 grew by 11.1% to $7.6 million, compared with $6.9 million for the three months ended December 31, 2007.  On a sequential basis, EBITDA increased by 3.4% compared with $7.4 million for the first quarter of 2009.  EBITDA margin for the three months ended December 31, 2008 was 32.2%, compared with 30.9% for the corresponding period in 2007, and 31.4% for the first quarter of 2009. 

Net income for the three months ended December 31, 2008 increased by 6.5% to $2.01 million, compared with $1.88 million for the corresponding period in 2007.  On a sequential basis, net income increased by 16.2% in the second quarter compared with $1.73 million for the first quarter of 2009.   Earnings per share was $0.02 for the three months ended December 31, 2008 and December 31, 2007 and $0.01 for the three months ended September 30, 2008.

As at December 31, 2008, PEER 1 had cash and cash equivalents of $9.6 million, compared with $8.2 million at September 30, 2008, and $11.0 million at June 30, 2008. 

The Company had a working capital deficit of $1.0 million at December 31, 2008 compared with a working capital deficit of $1.54 million at the end of June 30, 2008. The working capital deficit of $1.0 million at December 31, 2008 includes deferred revenue of $3.61 million and current portion of notes payable of $3.30 million. The Company anticipates current liquidity and cash generated from operations to be sufficient to fund existing operations for the foreseeable future. 

PEER 1 had 119,294,323 common shares outstanding as at December 31, 2008.

Subsequent Events
Subsequent to December 31, 2008, the Company completed the previously announced expansion of its Herndon, Virginia datacenter, that houses 8,500 square feet of contiguous datacentre space and can accommodate 2,880 servers.  The expansion was completed on time and on budget.

EBITDA Reconciliation

Conference Call
PEER 1 will hold a conference call today, Wednesday, February 11, 2009 at 5:30 p.m. Eastern Standard Time (EST), to discuss the results of the second quarter of fiscal 2009. 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 (416) 644-3414 or 1-800-732-9303.  Please connect approximately 15 minutes prior to the beginning of the call. The conference call will be archived for replay until Wednesday, February 18, 2009, at midnight. To access the archived conference call, dial (416) 640-1917 or 1-877-289-8525 and enter the reservation number: 21293319 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=2511080

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

About PEER 1
PEER 1 believes in the limitless opportunity of the Internet, and the business growth potential it provides for its more than 10,000 customers. As a leading online IT hosting provider, PEER 1 offers a reliable high performance Internet network supporting scalable managed hosting, dedicated hosting through the ServerBeach brand, and co-location solutions. Backed by its 100 percent uptime guarantee and 24x7x365 FirstCall Support™, PEER 1 ensures customers' online presence is always fast, always available. Since 1999, PEER 1 has grown to include 15 state-of-the-art data centers in North America and points-of-presence in Europe. The company's headquarters are in Vancouver, Canada and the stock is traded on the TSX under the symbol PIX. For more information visit: www.peer1.com.