PEER 1 Reports Fiscal 2009 First Quarter Results

November 14, 2008; 04:32 AM

VANCOUVER, BC – November 13, 2008 – PEER 1 Network Enterprises, Inc. (TSX: PIX, or “the Company”), a leading provider of online IT infrastructure, today announced the results for the three months ended September 30, 2008.  All amounts are stated in US dollars.

Selected Financial Highlights comparing the quarters ended September 30, 2008 and 2007:

• Revenue increased 12.1 % to $23.5 million from $21.0 million;
• Gross profit increased 16.6 % to $10.5 million from $9.0 million;
• Operating income increased 24.0% to $3.5 million from $2.8 million;
• Normalized EBITDA increased 23.1% to $7.4 million from $6.0 million;
• Normalized EBITDA margin increased to 31.4% compared with 28.6%; and
• Net income increased by 38.5% to $1.73 million, compared with $1.25 million.

Operational highlights:

• On August 8^th the Company took over customer billing, ticketing and provisioning from the third party that was previously responsible for its managed hosting customers.  By eliminating the barrier of a third party provider and consolidating these functions, PEER 1 can enhance the customer experience through better visibility into the trends affecting its customers, increased responsiveness, and reduced time-to-market for new products and services. 
• The Company entered into an agreement that will expand its leased data centre facility in Herndon, Virginia adding 8,614 square feet of additional contiguous space, and increasing the Company's capacity by approximately 2,880 servers.  Occupancy is scheduled for the first quarter of calendar year 2009.

“While a small percentage of our customers have started to feel the effects of the economic slowdown, overall we continue to see good demand for our core services,” said Fabio Banducci, President and CEO of PEER 1.  ”PEER 1’s strategic position, financial strength, and organizational flexibility will allow us to emerge from this period in an even stronger competitive position.”

First Quarter Review

Revenues increased by 12.1% to $23.5 million for the three months ended September 30, 2008, compared with $21.0 million for the same period in 2007.  On a quarter-over-quarter basis, revenues increased by 0.5% compared with $23.4 million for the three months ended June 30^th 2008, and increased by 1.2% when adjusted for the effects of foreign exchange.   

Managed and dedicated hosting revenues increased by 15.1% to $16.8 million for the three months ended September 30, 2008, from $14.6 million in the same period of the previous year.  Compared with $16.4 million for the three months ended June 30^th 2008, managed and dedicated hosting revenues increased over the previous quarter by a combined 2.4% as a result of continued organic growth.

Co-location revenues increased by 8.3% to $3.14 million for the three months ended September 30, 2008, from $2.9 million for the same period in 2007.  Co-location revenues decreased by 3.0% compared with $3.24 million for the three months ended June 30^th, 2008.  This decrease is primarily attributable to the effect of foreign exchange on Canadian co-location revenues.   PEER 1’s growth in this segment will be constrained until new facilities are found in key markets.  However, PEER 1 expects that as data centre space is added, co-location revenues will increase.

Bandwidth revenues increased by 2.0% to $2.4 million for the three months ended September 30, 2008, compared with $2.3 million in the same period of the previous year.  On a quarter-over-quarter basis, bandwidth revenues decreased by 4.4%, primarily as a result of foreign exchange fluctuations. 

PEER 1’s Canadian operations accounted for $4.9 million, or roughly 21% of the Company’s overall revenue.  The effect of the foreign exchange rate on the Company’s revenues is mitigated to a large extent by the natural hedge of revenues and expenses for PEER 1’s Canadian operations being in Canadian dollars.  However, on average, the impact of a one cent change in the exchange rate corresponds to a change in revenue for the quarter of approximately $40,000. 

Cost of sales as a percentage of revenue decreased to 55.5% for the three months ended September 30, 2008, from 57.2% for the three months ended September 30, 2007.   The decrease in cost of sales as a percentage of revenue is attributable to certain costs, including staffing and facilities rent, remaining relatively stable during the three months ended September 30, 2008, in addition to growth in revenue.

For the three months ended September 30, 2008, total operating expenses increased by 13.3% to $7.0 million, from $6.2 million for the corresponding period in 2007.  Operating expenses as a percentage of revenue were 29.6% for the three months ended September 30, 2008, compared with 29.3% for the three months ended September 30, 2007, and 30.9% for the three months ended June 30, 2008. 

Normalized EBITDA for the quarter ended September 30, 2008 grew by 23.3% to $7.4 million, compared with $6.0 million in the quarter ended September 30, 2007.  On a quarter-over-quarter basis, normalized EBITDA decreased by 5.4% compared with $7.8 million for the three months ended June 30, 2008. The decrease in EBITDA from the previous quarter was the direct result of $100,000 of credits to customers that were affected by the Vancouver outage in July, and increased spending on marketing, advertising, and staffing for sales and product development.  Normalized EBITDA margin for the three months ended September 30, 2008 was 31.4%, compared with 28.1% for the corresponding period in 2007, and 33.3% for the three months ended June 30, 2008. 

Net income for the three months ended September 30, 2008 increased to $1.7 million, from $1.2 million for the corresponding period in 2007.  On a quarter-over-quarter basis, net income remained stable at $1.7 million.   Earnings per share was $0.01 for the quarters ended September 30, 2008, September 30, 2007, and June 30, 2008.

As mentioned previously, PEER 1 took over the billing, ticketing, and provisioning for its managed hosting segment from a third party.  During the transition, PEER 1 discovered that a portion of the credit card information that was transferred to it by the previous third party provider was out of date or invalid which required the Company to contact customers for updated information and authorization.  As well, there were some minor delays in billing while data was being transferred from the third party system to our new system.  These transitional issues, combined with a shift to billing a month in advance, contributed to a $2.8 million increase in the Company’s accounts receivables, and a $1.3 million increase in deferred revenue this quarter.  Of the $1.5 million related to the transitional issues described above, approximately $700,000 has been received as of this week, with normal collections activity expected to recoup the remainder of the balance.  On a go forward basis, the remaining $1.3 million increase in PEER 1’s accounts receivables, as well as the corresponding $1.3 million increase in deferred revenue, will be an ongoing part of the Company’s balance sheet due to the effect of the change in billing date.

As at September 30, 2008, PEER 1 had cash and cash equivalents of $8.2 million, compared with $11.0 million at June 30, 2008.  The decrease in cash was the result of $1.8 million in tax payments and $1 million in bonus payments that were accrued in fiscal 2008 and were paid in the first quarter of 2009,

The Company had a working capital deficit of $1.6 million at September 30, 2008, compared with a working capital deficit of $1.3 million at the end of June 30, 2008. The working capital deficit of $1.6 million at September 30, 2008 includes deferred revenue of $5.6 million and current portion of notes payable of $3.3 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 119.3 million common shares outstanding as at September 30, 2008.

Subsequent Events

Subsequent to September 30, 2008, the Company:

• Launched the PEER 1 Partner Network, an integrated Referral and Reseller Program that offers revenue incentives to partners who refer business, which will in turn increase revenue for both PEER 1 and its partners;
• Entered into a partnership agreement with Absolute Performance to enhance its IT systems monitoring solutions across its core business segments; 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%.  Accordingly, for the twelve-month period commencing October 1, 2008, the loan balance under the LSA will accrue interest at the rate equal to (i) the LIBOR Rate of 3.84% plus (ii) an additional amount to be determined based on the Company’s financial performance.  As at today’s date, the interest rate accruing on the loan balance is 6.84%.

EBITDA Reconciliation

Conference Call

PEER 1 will hold a conference call today, Thursday, November 13, 2008 at 5:30 p.m. EST, to discuss the results of the first 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 416-644-3417 or 800-732-0232.  Please connect approximately 15 minutes prior to the beginning of the call. The conference call will be archived for replay until Thursday, November 20, 2008, at midnight. To access the archived conference call, dial 416-640-1917 or 877-289-8525 and enter the reservation number: 21286003 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=2441560

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 infrastructure 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 data centres 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.