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Q9 Networks Reports Third Quarter 2008 Results
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Revenue of $16.9 million, a 16% increase over the same quarter 2007 and a 6% increase over the previous quarter |
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Adjusted EBITDA of $3.9 million, a 4% decrease from the same quarter 2007 and a 15% decrease from the previous quarter |
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Loss before taxes of $0.2 million, compared to income before taxes of $1.0 million for the same quarter 2007 and income before taxes of $0.7 million in the previous quarter |
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Revenue under contract entering the fourth quarter 2008 was $15.1 million, an increase of 7% over the previous quarter |
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On August 24, 2008, Q9 announced it has agreed to be acquired by ABRY Partners at $17.05 per share in cash |
Toronto, ON - September 11, 2008 - Q9 Networks Inc. (TSX:Q) today announced its quarterly results for the three and nine months ended July 31, 2008.
Revenue for the third quarter 2008 was $16.9 million, a 16% increase over third quarter 2007 revenue of $14.6 million and an increase of 6% or $0.9 million from second quarter 2008 revenue of $16.0 million (all figures expressed in Canadian dollars).
Revenue under contract entering the fourth quarter 2008 increased to $15.1 million, up 7% over revenue under contract of $14.1 million at the beginning of the third quarter 2008. Revenue under contract does not include contracts signed but not yet installed.
Co-location revenue for the third quarter 2008 was $8.9 million, managed services revenue was $5.2 million and managed bandwidth revenue was $2.3 million. Set-up and other fees were $0.5 million.
Adjusted EBITDA for the third quarter 2008 was $3.9 million, a 4% decrease from the third quarter of 2007 and a decrease of $0.7 million or 15% compared to the previous quarter. Please see the attached schedule for the Company's Adjusted EBITDA definition and reconciliation.
Net loss for the third quarter 2008 was $0.2 million, compared to net income of $0.5 million in the third quarter 2007 and net income of $0.3 million in the second quarter 2008. Basic and diluted loss per share for the third quarter 2008 was $0.01, compared to basic and diluted earnings per share of $0.02 and $0.01 in the third quarter 2007 and second quarter 2008, respectively.
Cash flow generated from operations for the third quarter 2008 was $7.0 million. Q9 ended the quarter with cash, cash equivalents and short-term investments of $35.7 million, an increase of $4.5 million from the previous quarter. Other than $0.3 million in notes payable to an equipment supplier, Q9 had no debt outstanding.
Q9 did not purchase any shares under its Normal Course Issuer Bid program during the quarter.
Subsequent to quarter-end, Q9 announced it had acquired a building and land in Calgary, Alberta to house its third data centre in the city. Q9 invested $20 million in the building and land and intends to invest up to $30 million more to build out an initial capacity of 1,200 cabinet equivalents. The first phase of capacity in this facility is expected to open in the summer of 2009. The acquisition was partially funded through a $15 million mortgage bearing an interest rate of 8.2 per cent per annum, repayable on August 20, 2016.
On August 24, 2008, the Company entered into a definitive acquisition agreement with CDC Acquisition Corp. ("ABRY"), an affiliate of ABRY Partners, LLC, whereby ABRY will offer to acquire all of the outstanding common shares of the Company at a price of $17.05 cash per common share. The total equity value of the transaction is approximately $361 million on a fully diluted basis. The transaction will be implemented by way of a court-approved plan of arrangement and is subject to certain conditions including receipt of shareholder and court approval. If the Company's shareholders approve the acquisition, the requisite court approval is obtained and other conditions are met, the closing is expected to take place in the fourth calendar quarter of 2008. Following closing of the potential transaction, the Company's common shares will be de-listed and will no longer be publicly traded. If the Company terminates the acquisition agreement with ABRY in order to accept a superior acquisition proposal, it must pay a fee of approximately $6.3 million if such termination occurs during the go-shop period or following the go-shop period where the superior acquisition proposal is from a third party with whom discussions commenced prior to the expiration of the go-shop period (an "Excluded Party") or approximately $10.8 million if such termination occurs following the go-shop period with anyone other than an Excluded Party. A copy of the acquisition agreement is available at www.sedar.com.
There can be no assurance that the conditions to the acquisition agreement will be satisfied in accordance with their terms, and/or the parties to the acquisition agreement will complete the plan of arrangement under the specified terms. In such cases, the proposed transaction could be modified, restructured or terminated, as applicable. Failure to complete the proposed transaction could have a material adverse impact on the Company's share price. The Company may incur significant costs if the proposed transaction is not completed. If the proposed transaction is completed, the Company may also incur fees and costs prior to closing.
"Q9 delivered an excellent third quarter with revenue reaching an all-time high," said Osama Arafat, CEO, Q9 Networks. "I am pleased with the growth across all data centres, particularly Calgary, which continues to see very strong demand. I am further pleased to report that planning for the initial build out of capacity in our recently announced third Calgary data centre is well underway. With contracted revenue of more than $15 million and healthy demand from new and existing customers, we have excellent momentum entering the fourth quarter."
Non-GAAP Measures
The Company reports Adjusted EBITDA because it is a key measure used by management to evaluate the Company's performance. The Company believes that Adjusted EBITDA is useful supplemental information as it provides an indication of the results generated by the Company's main business activities prior to taking into consideration how those activities are financed and taxed and also prior to taking into consideration asset amortization and other non-cash expenses. Adjusted EBITDA is not a recognized measure under Canadian GAAP, and accordingly investors are cautioned that Adjusted EBITDA should not be construed as an alternative to net earnings or loss determined in accordance with Canadian GAAP as an indicator of the financial performance of the Company or as a measure of the Company's liquidity and cash flows. The Company's method of calculating Adjusted EBITDA differs from other issuers and, accordingly, Adjusted EBITDA may not be comparable to similar measures presented by other issuers. Please see the attached schedule for the Company's Adjusted EBITDA definition and reconciliation.
Prior to the second quarter of fiscal 2007, the Company used the term EBITDA for this key measure. For the purposes of reporting the second quarter of fiscal 2007 results, the Company started using the term Adjusted EBITDA and added back total stock-based compensation expense in determining Adjusted EBITDA. Previously, the Company included only stock-based compensation expense related to the nominal exercise options issued at the time of its IPO as described in note 7 to the third quarter 2008 financial statements. Beginning in the first quarter of fiscal 2008, the Company changed the method of calculating Adjusted EBITDA by reclassifying from interest income, net (referred to as investment income, net in fiscal 2007), realized and unrealized gains and losses on short-term investments and included them as reconciling items to Adjusted EBITDA.
Forward Looking Statements
This media release includes certain forward-looking statements that are based upon current expectations, which involve risks and uncertainties associated with our business and the economic environment in which the business operates. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. For example, the words anticipate, believe, plan, estimate, expect, intend, should and similar expressions are intended to identify forward-looking statements. Should one or more of the risks and uncertainties materialize or should the underlying assumptions prove incorrect, actual results or events may differ materially from current expectations. Please refer to the Risks section at the end of Q9's third quarter 2008 MD&A, dated September 11, 2008, which can be found on the Company's website at www.Q9.com or through SEDAR. Q9 does not intend, and disclaims any obligation, except as required by law, to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.
About Q9 Networks
Q9 Networks is a leading Canadian provider of outsourced data centre infrastructure for organizations with mission-critical IT operations. Q9's data centres and network are backed by an industry leading SLA which guarantees 100 per cent network and power availability. Q9 managed services, including: bandwidth, dedicated servers, firewalls, load balancing, virtual private networking (VPN) and back-up/restore, enable the rapid provisioning and scalability of client infrastructure.
Q9 NETWORKS INC.
Balance Sheets
(In thousands)
(Unaudited)
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July 31, October 31,
2008 2007
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Assets
Current assets:
Cash and cash equivalents $ 12,437 $ 5,956
Short-term investments 23,246 36,922
Accounts receivable 4,493 4,552
Unbilled revenue 878 593
Future tax asset 3,416 2,554
Prepaid expenses 1,189 686
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45,659 51,263
Restricted cash - 50
Other assets 1,105 1,101
Future tax asset - 1,795
Property and equipment 91,257 87,226
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$ 138,021 $ 141,435
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Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 7,672 $ 12,003
Deferred revenue 6,685 5,923
Notes payable 274 403
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14,631 18,329
Deferred revenue 1,503 1,032
Deferred gain on sale of property 990 1,049
Leasehold inducements 1,024 1,209
Asset retirement obligations 1,209 1,111
Deferred rent 1,827 1,605
Shareholders' equity:
Capital stock:
Common shares 144,484 145,452
Contributed surplus 2,241 1,072
Deficit (29,888) (29,424)
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116,837 117,100
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$ 138,021 $ 141,435
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Q9 NETWORKS INC.
Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
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Three months ended Nine months ended
July 31, July 31,
2008 2007 2008 2007
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Revenue:
Co-location $ 8,912 $ 7,363 $ 24,518 $ 19,883
Managed services 5,226 5,034 15,657 14,476
Managed bandwidth 2,303 1,939 6,823 5,668
Set-up and other fees 495 307 1,731 850
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16,936 14,643 48,729 40,877
Cost of revenue 12,149 10,230 34,492 28,113
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Gross profit 4,787 4,413 14,237 12,764
Expenses:
Sales and marketing 1,849 1,643 4,928 4,845
General and
administrative 3,092 2,084 8,258 6,908
Amortization of property
and equipment 193 206 579 670
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5,134 3,933 13,765 12,423
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Income (loss) from
operations (347) 480 472 341
Investment income, net 196 486 834 1,592
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Income (loss) before
income taxes (151) 966 1,306 1,933
Income tax expense:
Current - - - 1
Future 14 482 933 1,410
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14 482 933 1,411
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Net income (loss) and
comprehensive income
(loss) (165) 484 373 522
Deficit, beginning of
period (29,723) (26,860) (29,424) (26,122)
Repurchase of shares - (777) (837) (1,553)
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Deficit, end of period $ (29,888) $(27,153) $(29,888) $(27,153)
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Earnings (loss) per share:
Basic $ (0.01) $ 0.02 $ 0.02 $ 0.03
Diluted (0.01) 0.02 0.02 0.02
Weighted average number of
shares outstanding:
Basic 20,845 21,216 20,889 20,669
Diluted 20,845 21,363 20,925 21,263
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Q9 NETWORKS INC.
Statements of Cash Flows
(In thousands)
(Unaudited)
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Three months ended Nine months ended
July 31, July 31,
2008 2007 2008 2007
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Cash provided by (used in):
Operating activities:
Net income (loss) $ (165) $ 484 $ 373 $ 522
Items not involving cash:
Amortization of
property and equipment 3,827 3,231 10,884 8,451
Amortization of other
assets 12 11 32 32
Gain on sale of
property (20) (20) (59) (59)
Accretion expense 33 28 98 82
Unrealized gain
(loss) on short-term
investments 1 17 (18) 26
Loss on disposal of
property and equipment - - 3 -
Net non-cash rent
expense (13) 50 37 245
Stock-based
compensation expense 405 344 1,257 1,491
Future income taxes 14 482 933 1,410
Change in non-cash
operating working
capital 2,907 525 2,966 947
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7,001 5,152 16,506 13,147
Financing activities:
Issuance of notes payable 161 225 536 1,103
Repayment of notes
payable (173) (326) (664) (810)
Repurchase of shares - (176) (2,272) (1,692)
Proceeds upon exercise
of options 1 35 34 3,831
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(11) (242) (2,366) 2,432
Investing activities:
Purchase of property and
equipment (2,433) (6,274) (21,133) (31,072)
Purchase of short-term
investments (23,111) (110,431) (68,492) (255,413)
Sale of short-term
investments 22,918 114,603 81,958 273,345
Increase in other assets (12) (12) (42) (184)
Decrease in restricted
cash - 180 50 180
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(2,638) (1,934) (7,659) (13,144)
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Increase in cash and cash
equivalents 4,352 2,976 6,481 2,435
Cash and cash equivalents,
beginning of period 8,085 5,420 5,956 5,961
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Cash and cash equivalents,
end of period $ 12,437 $ 8,396 $ 12,437 $ 8,396
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Cash and cash equivalents
is comprised of:
Cash on hand and cash in
the bank $ 12,195 $ 8,396 $ 12,195 $ 8,396
Money market mutual funds 242 - 242 -
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$ 12,437 $ 8,396 $ 12,437 $ 8,396
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Supplemental cash flow
information:
Interest received $ 231 $ 752 $ 1,064 $ 2,102
Interest paid 6 12 21 31
Income taxes paid - - - 1
Supplemental disclosure of
non-cash financing and
investing activities:
Effect of acquisition of
property and equipment
in accounts payable and
accrued liabilities 9 1,129 6,215 4,775
Effect of repurchase of
shares in accounts
payable and accrued
liabilities - (1,247) 345 (1,271)
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Q9 NETWORKS INC.
Adjusted EBITDA(1) Reconciliation
(In thousands)
(Unaudited)
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Three months ended Nine months ended
July 31, July 31,
2008 2007 2008 2007
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Net income (loss) for the
period $ (165) $ 484 $ 373 $ 522
Interest income, net(2) (197) (513) (810) (1,653)
Income tax expense 14 482 933 1,411
Amortization 3,819 3,222 10,857 8,424
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EBITDA 3,471 3,675 11,353 8,704
Stock-based compensation
expense 405 344 1,257 1,491
Accretion expense 33 28 98 82
Realized (gain) loss on
short-term
investments(2) - 10 (6) 35
Unrealized (gain) loss on
short-term
investments(2) 1 17 (18) 26
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Adjusted EBITDA $ 3,910 $ 4,074 $ 12,684 $ 10,338
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Note 1: Adjusted EBITDA means earnings before interest income and
expense, income tax expense, amortization, stock-based compensation
expense, accretion expense, and realized and unrealized gains and losses
on short-term investments.
Note 2: Realized and unrealized gains and losses on short-term
investments have been reclassified from interest income, net (referred to
as investment income, net in fiscal 2007 Adjusted EBITDA reconciliation)
and included as reconciling items to Adjusted EBITDA.
For further information, please contact:
Media Relations:
Kevin Spikes
Director of Corporate & Investor Relations
Toronto: 416-848-3311
Toll Free: 1-888-696-2266
media.relations@Q9.com
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