Hostopia Reports Fourth Quarter and Fiscal 2007 Results

May 8, 2007; 12:40 AM

MISSISSAUGA, ON and FT. LAUDERDALE, FL -- Hostopia.com Inc., a leading provider of web services that enable small and medium-sized businesses to establish and maintain an internet presence, reported preliminary unaudited financial results for the fourth quarter and fiscal year ended March 31, 2007. All figures are in U.S. dollars unless otherwise stated.

Highlights

-   Q4 revenue increased 15.4% year over year, 4.4% sequentially from Q3
-   14th consecutive quarter of positive operating income
-   12-month revenue increased 25.1 % to $22.5 million
-   12-month operating income eased 12.8% on investments for growth (excluding stock-based compensation)
-   Grew end users 23.5% year over year to over 260,000
-   Added 12,000 end users in Q4

"We are very pleased with our fourth quarter and full year results," said Colin Campbell, Hostopia's CEO. "The company showed strong revenue growth, driven by gains in the number of end users and licensed website templates. We continued to grow the company profitably, posting $574,000 of operating income for the fourth quarter, while investing in the future. Momentum remains strong, with 370,000 e-mail accounts recently migrated and 40,000 websites scheduled to be migrated onto our platform during the first six months of fiscal 2008."

Financial Results for the Fourth Quarter of 2007

Revenues increased 15.4% to $5.9 million in the three months ended March 31, 2007, compared to the same period last year. This was the 28th consecutive quarter of higher revenues. Sequential revenue growth of 4.4% in the fourth quarter was primarily due to a 4.6% increase in end users. The licensing of 2,500 website templates in the fourth quarter also contributed to the revenue gain.

Fourth quarter operating income decreased 34.2% over the prior year's quarter to $574,000, primarily due to a combination of: (1) increased personnel to handle new revenue opportunities that have not yet fully developed, (2) higher amortization expenses related to the acquisition of licensed technology, (3) increased R&D expenses related to the development of new web services and enhanced software and service offerings, (4) the adoption of full stock based compensation accounting and (5) increased public company expenses following the company's initial public offering in November 2006.

The company is preparing for the new contracted business that will begin migrating onto the Hostopia platform. These migrations will begin shortly and will continue into the second quarter. Accordingly, in the first quarter operating expenses will continue to reflect outlays related to the anticipated migrations, seasonal participation in trade shows and the integration of Nexthaus Inc. assets and operations, acquired during the first quarter of fiscal 2008.

Basic and diluted net income were both $0.05 per common share, compared to $0.14 and $0.08 respectively for the fourth quarter last year. Net income of $572,000 was $16,000 lower than the same period last year as lower operating income was largely offset by interest income. Net income per share declined primarily because of the significant increase in shares outstanding related to the Company's public offering of 4.83 million shares in the third quarter.

Financial Results for Full Year 2007

In fiscal 2007, revenues increased 25.1% to $22.5 million. This growth was driven primarily by the 24% increase in end users to 260,000. Customers in place at March 31, 2006 contributed 34,000 of this increase while new customers contributed the remaining 16,000.

Operating income decreased by 19% to $2.5 million from the previous year due to the same factors as the fourth quarter, as outlined above.

For fiscal 2007, basic and diluted net income per common share were $0.27 and $0.23 respectively, compared to $0.47 and $0.28 in fiscal 2006. Net income per share declined primarily because of the significant increase in shares outstanding related to the company's public offering of 4.83 million shares in the third quarter. As of year end, the company had 11,097,251 common shares outstanding.

Cash flow from operations for fiscal 2007 totaled $4.6 million. Hostopia invested $2.4 million in capital assets and intellectual property while expensing $3.0 million on the development of new applications for its technology platform during 2007. At March 31, 2007 the company had $27.3 million in cash and cash equivalents available to invest in future business growth.

Subsequent events

The lock-up agreements, signed as part of Hostopia's initial public offering by certain shareholders and employees with stock options, expire on May 8, 2007. In addition, stock options exercisable for 380,000 shares will expire on May 31, 2007. The average exercise price for these options is $2.75. If all of the options are exercised Hostopia will receive approximately $1.1 million. There is no assurance that any of these options will be exercised.

John Nemanic, Hostopia's former Chairman, has informed the Company he is considering reducing his holdings in Hostopia by an unspecified amount sometime in the future in order to diversify his assets.

On May 2, 2007 Hostopia acquired all of the software assets and intellectual property of Nexthaus, Inc., a US-based developer of software applications for mobile devices.

Outlook

"Key client wins and further investments in our platform in fiscal 2007 position us well for another year of strong revenue growth in fiscal 2008, particularly as recently signed contracts come completely onstream," said Mr. Campbell. "Looking forward, we intend to further strengthen our market leadership by adding new products developed internally or through acquisition. These offerings will help us further penetrate our existing customer base as well as support our expansion in the U.S. and into Europe. In fiscal 2008, we also plan to expand into the mobile telephone market by utilizing the Nexthaus mobile synchronization technology we just acquired. Accordingly, excluding any incremental revenue from the Nexthaus acquisition, we are confirming our expectation that revenues will grow by 18 to 22% in fiscal 2008."

About Hostopia.com Inc.

Hostopia (TSX: H) is a leading provider of web services that enable small and medium-sized businesses to establish and maintain an Internet presence. The company's customers are communication services providers, including telecommunication carriers, cable companies, internet service providers, domain registrars, and web hosting service providers. Hostopia's customers purchase its web services on a wholesale basis and resell these services under their own brands to small and medium-sized businesses. The company provides customers with the technology, infrastructure, and support services to enable them to offer web services, while saving them research and development as well as capital and operating costs typically associated with the design, development, and delivery of web services.