PhotoChannel Networks Inc.
TSX VENTURE : PN
OTC Bulletin Board : PNWIF

PhotoChannel Networks Inc.

February 25, 2009 16:00 ET

PhotoChannel Reports Profitable First Quarter

Record Revenues and Record EBITDA for Q1 Fiscal 2009

VANCOUVER, BRITISH COLUMBIA--(Marketwire - Feb. 25, 2009) - PhotoChannel Networks Inc. (TSX VENTURE:PN)(OTCBB:PNWIF), the leading innovator in digital photography and media solutions for retailers, reports its financial results for the first quarter of fiscal 2009 for the period ended December 31, 2008. All amounts are expressed in Canadian dollars. The following discussion is qualified in its entirety by reference to the company's financial statements and accompanying management discussion and analysis, which are accessible on the SEC'S website at www.sec.gov/edgar.shtml and on SEDAR at www.sedar.com.

FIRST QUARTER FISCAL 2009 HIGHLIGHTS

- Net profit of $940,644 versus a loss of $1,082,600 for the comparable period of fiscal 2008

- Record revenues of $7.2 million, up 67% year-over-year

- Transactional revenues of $5.8 million, up 91% year-over-year

- Non-GAAP adjusted EBITDA(1) of $2.8 million, compared to an adjusted EBITDA loss of $117,483 in the first quarter of 2008 (adjusted EBITDA defined as net profit plus amortization and stock-based compensation expense)

- Non-GAAP adjusted EBITDA representing 39% of net-revenues for the quarter

- Earnings per share (EPS) of $0.03 versus a loss per share of $0.03 for the comparable period of fiscal 2008

- Non-GAAP adjusted Earnings per share (EPS)(1) of $0.08 versus $0.00 for the comparable period of fiscal 2008

- At December 31, 2008 the Company had approximately $3.1 million cash on its balance sheet

ORDER METRICS

- Over 4.9 million orders were transacted in the first quarter of fiscal 2009

- Average daily orders of approximately 53,000 versus 15,000 for the same period of fiscal 2008, a 240% increase year-over-year

- Peak day saw over 134,000 orders placed and over 5.2 million images pass through the PNI Platform

"The first quarter of fiscal 2009 has been a record quarter for PhotoChannel in a number of ways," states Kyle Hall, CEO of PhotoChannel. "During the first quarter of 2009, we recorded a net profit for the first time in corporate history, record overall revenues and record transactional revenue. The $2.8 million in adjusted EBITDA is also a record for the Company. This past holiday season confirmed that the PNI Platform is robust and economically scalable. In 2009 we expect to see the PNI Platform deliver many new innovative services that leverage the foundation the Company has built."

The company will host a conference call and webcast to discuss fiscal Q1 2009 results with Kyle Hall, Chief Executive Officer, Aaron Rallo, President and Robert Chisholm, Chief Financial Officer of PhotoChannel, today, February 25, 2009, at 4:30 PM EST.

To access the conference call, investors should dial 1-888-300-0053 in North America or 1-647-427-3420 internationally and quote passcode 85763624. Please call 10 minutes prior to the scheduled start time.

PhotoChannel will also offer a live and archived webcast, available at: www.photochannel.com/webcast

WORKSMEDIA ACQUISITION

The Company today formally entered into a Share Purchase Agreement to acquire 100% of the issued and outstanding share capital of WorksMedia Limited. The deal, the intention of which was announced late last year, is expected to close imminently, subject to acceptance by the TSX Venture Exchange. WorksMedia specializes in kiosk and desktop software that allows consumers to place orders for photos and photo related merchandise. The WorksMedia software is deployed on over 3,000 kiosks around the world and millions of home computers.

"While PhotoChannel believes the photo industry is amid a transition from kiosk based ordering to online ordering, the rich media interface of the WorksMedia software makes it ideal to augment the PNI push to add gifting products to store based kiosks that are connected to the PNI Platform for ordering," says Kyle Hall, CEO of PhotoChannel. "The acquisition of WorksMedia provides PNI with a fully integrated store and home ordering solution that will also serve as the foundation for the development of all future PNI kiosk and desktop applications for consumers to use in an increasingly "connected life" at home, at work and at the retail store."

The acquisition strengthens PNI's vision of the PNI Platform as the "Routing Tier" which moves orders seamlessly between the creation point and thousands of connected stores or fulfillment centres for the production of physical product. With this acquisition, PNI will have over 6000 kiosks deployed worldwide. In addition to the products and business being acquired, PNI also gains valuable development resources located in the cost effective location of Southampton, UK. Upon deal close, PNI will begin to relocate the employees in its Pixology division to Southampton and close the Guildford office in the very near future.

In conjunction with the pending office relocation, PNI recently began restructuring the activities of its UK based division, resulting in an immediate 30% reduction in staff numbers. This reduction should result in annual cost savings of approximately $480,000 which will be offset by one-off severance costs of $75,000, to be taken during fiscal Q2. "WorksMedia has been a profitable company since inception," states Hall. "We expect them to have a significantly positive impact on our kiosk software division's productivity, while also being instrumental in our ability to reduce our overall costs going forward."

Under the terms of the Agreement, PNI will pay the shareholders of WorksMedia Limited $2.1 million in 13 equal monthly installments and issue 750,000 common shares of the Company in three (3) equal installments of 250,000 common shares after 12, 24 and 36 months in exchange for all of the issued and outstanding shares of WorksMedia Limited. Furthermore, if specific pre-determined annual performance targets are met, the shareholders of WorksMedia will receive up to an additional 900,000 common shares over the next three years.

BUSINESS UPDATE AND OUTLOOK

PhotoChannel continues to invest and build on its offerings, working to ensure that customers are always provided with high quality solutions offering full scalability without having to compromise on convenience or pricing.

During the first quarter of fiscal 2009, the Company saw its large retail partners continue an aggressive marketing campaign of their online services. PhotoChannel believes this will continue throughout 2009 as retailers seek to maintain and increase their market share. The marketplace, where PhotoChannel provides one of the dominant online solutions for photofinishers, continues to accelerate rapidly. Unique features of the PNI Digital Media Platform, including seamless up-sell options to higher margin items, provide retailers with opportunities to expand their service capabilities to their consumers.

"During fiscal 2008 a significant investment was made in developing our infrastructure," said Kyle Hall. "We will leverage these past expenditures during fiscal 2009 and are focused on maintaining cost control, while delivering an unprecedented level of service to our retail partners and the best photo options available to consumers."

FIRST QUARTER FISCAL 2009 FINANCIAL RESULTS



Three Months Three Months
Ended Ended
December 31, December 31,
Description 2008 2007 Change % Change
------------------------------------------------------

Transaction fees $ 5,775,841 $ 3,018,482 $ 2,757,359 91%
Installation fees 958,732 973,063 (14,331) (2)%
Membership fees 260,495 170,322 90,173 53%
Professional fees 76,093 136,727 (60,634) (44)%
Archive fees 105,172 - 105,172 -%
------------------------------------------------------
Total $ 7,176,333 $ 4,298,594 $ 2,877,739 67%
------------------------------------------------------
------------------------------------------------------


Consistent with the Company's long-term goal of moving to a transactional fee based model, revenue from transactions represented 80% of total revenue during the first quarter of 2009 compared with 70% in 2007.

The Company's overall increase in revenues was primarily attributable to three factors:

- New customer additions during fiscal 2008.

- Organic growth in usage of the PhotoChannel Network from customers of our photo-finishing retailers, as retailers push the convenience of one hour printing from online through continued marketing efforts.

- Additional organic growth fueled by high growth in the creative products area, including calendars, cards, photobooks and gifts.

Net earnings for the first quarter of fiscal 2009 of $940,644 versus a net loss of $1,082,600 in the comparable period of fiscal 2008. Major contributors to this turn around are as follows:

- A 91% increase in transactional revenues over fiscal 2008 (an increase of $2,757,359)

- Change in foreign exchange gains resulting in a net year-on-year gain of $712,825 primarily incurred as a result of holding an inter company account in UK pounds

About PhotoChannel- Founded in 1995, PhotoChannel operates PNI Digital Media to provide services for major retailers, wireless carriers and content providers. The PNI Digital Media Platform connects consumer ordered digital content with retailers that have on-demand manufacturing capabilities for the production of merchandise. PNI Digital Media generates transactions for retailers and their thousands of locations worldwide.

For more information please visit www.pnidigitalmedia.com.



PhotoChannel Networks Inc.
Consolidated Statement of Earnings (Loss) and Statement of Comprehensive
Earnings (Loss)
Unaudited - Prepared by Management
(expressed in Canadian dollars)

Three Months Ended
----------------------------
December 31, December 31,
2008 2007
------------- -------------

Revenue $ 7,176,333 $ 4,298,594

Expenses
Network delivery 2,371,794 1,823,117
Software development 1,810,956 1,494,036
General and administration 988,226 1,079,892
Sales and marketing 322,864 270,243
Amortization 1,399,028 789,657
----------------------------

6,892,868 5,456,945
----------------------------

Net profit (loss) before the undernoted 283,465 (1,158,351)

Foreign exchange gain 714,286 1,461

Interest income 6,998 74,290

Interest expense - capital lease (44,763) -

Interest expense - other (18,617) -

Loss on disposal of property and equipment (725) -
----------------------------
657,179 73,588
----------------------------
Net earnings (loss) 940,644 (1,082,600)

Other comprehensive loss:

Unrealized foreign exchange loss on
translation of self
sustaining foreign operations (note 7) (457,675) (496,001)
----------------------------
Comprehensive earnings (loss) $ 482,969 $ (1,578,601)
----------------------------
----------------------------

Earnings (loss) per share (note 7)

Basic $ 0.03 $ (0.03)
Fully diluted $ 0.03 $ (0.03)


--------------------------------------------------------------------------
Reconciliation of GAAP earnings (loss) to non-GAAP adjusted Earnings(1)

For the Three Months Ended December 31, December 31,
2008 2007
$ $
--------------------------------------------------------------------------

Net earnings (loss) 940,644 (1,082,600)
Add back:
Amortization 1,399,028 789,657
Stock-based compensation 453,383 175,460
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Non-GAAP Adjusted Earnings 2,793,055 (117,483)
--------------------------------------------------------------------------

Non-GAAP adjusted Earnings per share (Basic) $ 0.08 $ -
--------------------------------------------------------------------------


Non-GAAP Measures

This release includes references to non-GAAP adjusted EBITDA and non-GAAP adjusted Earnings per share data. These non-GAAP measures are not in accordance with, or an alternative for measures prepared in accordance with, generally accepted accounting principles and may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles.

PhotoChannel believes that the presentation of certain non-GAAP measures, including non-GAAP adjusted EBITDA and non-GAAP adjusted Earnings per share, when shown in conjunction with the corresponding GAAP measures, provides useful information to investors and management regarding financial and business trends relating to its financial condition and results of operation.



PhotoChannel Networks Inc.
Consolidated Statement of Earnings (Loss) and Statement of Comprehensive
Earnings (Loss)
Unaudited - Prepared by Management
(expressed in Canadian dollars)

December 31, September 30,
2008 2008
----------------------------
Assets

Current assets
Cash and cash equivalents $ 3,098,265 $ 2,670,988
Accounts receivable (note 6) 5,418,071 4,019,286
Prepaid expenses and other current assets 465,294 430,616
----------------------------
8,981,630 7,120,890

Property and equipment 7,671,412 6,786,650

Deferred expenses 58,168 52,882

Intangible assets 4,315,158 5,164,492

Goodwill 1,469,389 1,498,539
----------------------------
$ 22,495,757 $ 20,623,453
----------------------------
----------------------------

Liabilities

Current liabilities
Accounts payable and accrued liabilities $ 8,722,410 $ 7,480,800
Current portion of deferred revenue 557,482 658,045
Current portion of capital lease obligations 490,072 490,072
Loan payable 924,670 969,886
----------------------------
10,694,634 9,598,803

Deferred revenue 238,772 363,108
Long-term portion of capital lease
obligations 298,120 375,875
Asset retirement obligations (note 5) 21,096 22,009
----------------------------
11,252,622 10,359,795
----------------------------

Shareholders' Equity (note 7)

Share capital $ 65,725,392 $ 65,614,347
Warrants 4,961,826 4,961,826
Contributed surplus 11,996,628 11,611,165
----------------------------
82,683,846 82,187,338
----------------------------
Deficit (69,826,504) (70,767,148)

Accumulated other comprehensive loss (1,614,207) (1,156,532)
----------------------------
(71,440,711) (71,923,680)
----------------------------
11,243,135 10,263,658
----------------------------
$ 22,495,757 $ 20,623,453
----------------------------
----------------------------


Caveat

The statements that are not historical facts contained in this release are forward-looking statements that involve risks and uncertainties. PhotoChannel's actual results could differ materially for those expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, changes in technology, employee retention, inability to deliver on contracts, failure of customers to continue marketing the online solution, competition, general economic conditions, foreign exchange and other risks detailed in the Company's annual report and other filings.

Additional information related to the Company can be found on SEDAR at www.sedar.com and on the SEC'S website at www.sec.gov/edgar.shtml.

WARNING: PhotoChannel relies upon litigation protection for "forward-looking" statements.

The TSX Venture Exchange has neither approved nor disapproved the information contained in this release.

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