4th Dec 2007 07:01
Alternative Networks plc04 December 2007 4 December 2007 Alternative Networks plc Preliminary Results for the year ended 30 September 2007 Alternative Networks plc, the UK business communications service provider, todayreports preliminary results for the year ended 30 September 2007 extracted fromthe audited accounts. 2007 2006 Change Restated £000 £000 % Statutory performance Turnover 72,083 65,964 9% Operating profit 7,093 5,694 25% EBITDA** 8,134 6,648 22% Profit before taxation 7,571 5,792 31% Earnings per share - basic 13.0p 9.2p 41% - diluted 12.4p 8.7p 43% Underlying performanceAdjusted* profit before taxation 8,172 6,436 27% Adjusted* earnings per share - basic 12.8p 10.2p 25% - diluted 12.3p 9.7p 27% Dividend per share *** 3.3p 2.6p 27% * Adjusted results are before exceptional restructuring charges, profit on saleof investment, and amortisation of intangible fixed assets. For the earningsper share calculation, the tax rate utilised for 2007 is normalised at 30%.Please refer to Note 10 for more details on items adjusted. ** Earnings before interest, taxation, depreciation and amortisation, and profiton sale of investment. *** Dividend per share is the interim dividend paid and the final dividendproposed, divided by the number of shares in issue at the year end. Highlights • Continuing organic growth across the group • Total sales growth of 9% • Organic sales growth of 7% • Acquisition of The Telecom Centre Limited ("Echo") which contributed sales of £1.3m in September 2007 • Adjusted profits before taxation increased by 27% due to improvements in operating margins from 8.6% to 9.8%, as the Group benefited from the scale of organic growth and continuing synergies from ICB were realised. Profits before taxation increased 31% to £7.6m. • Excellent cash generation • Free cash flow of £6.5m; • Strong cash conversion at 108% EBITDA; • The initial cash consideration of £11.5m for the acquisition of Echo was met from the Group's cash resources • Net cash of £3.4m (2006 :£8.5m) • Strong performance in mobile sales and gross profits : • Sales up 13% to £38.2m (2006: £33.9m) • Gross profits up 16% to £11.7m, with increased margins of 30.7%. • Strong ARPU (monthly Average Revenue Per User) and low churn trends continued. • Increase proposed in final dividend to 2.3p (2006: 1.83p), an increase of 26%. James Murray, Chief Executive Officer, commented: "I'm delighted to report a strong performance for the full year, with increasedsales and bottom line growth as well as continued excellent cash conversion.During the second half we have completed the acquisition of Echo which hasincreased our scale, expanded our product range, strengthened our expertise and,importantly, opened up opportunities for cross-selling which we expect todeliver during 2008. "Our strategy remains the same, to be the convergence partner of choice for ourclients, while accelerating growth via acquisitions and organically. We areintent on maintaining organic growth through focusing on larger customers withinthe SME space, cross-selling, reducing churn and developing products to answerour customers' needs. We believe the Group remains in a strong, healthyposition and with our product range, skill set and partners' relationships, weare well positioned to continue our growth into 2008 and beyond." For more information contact: Alternative Networks plc 0870 190 7444James Murray, Chief Executive OfficerEd Spurrier, Chief Financial Officer Financial Dynamics 020 7831 3113Juliet Clarke / Hannah Sloane About Alternative Networks Alternative Networks (ticker: AN.L) is a UK business communications serviceprovider. The Group offers a full range of fixed line, mobile, voice and dataproducts. Launched in 1994, Alternative Networks has achieved a track record ofconsistently profitable growth and in February 2005 it floated on theAlternative Investment Market of the London Stock Exchange. Alternative Networks is a reseller for providers such as BT, Verizon, Cable &Wireless, Avaya, Mitel, O2 and Vodafone. The Group caters to a broad range oftelecoms needs, including both stand alone products and fully convergedsolutions, for larger SMEs and smaller corporate customers in the UK. It hasover 4,000 business customers include clients such as JC Decaux, Channel 4,Miele and Securitas. The Group has grown rapidly over the past 10 years, now employing over 400people, across five UK sites. For more information please visit: http://www.alternativenetworks.com Chairman's Statement I am very pleased to announce the sixth consecutive set of strong results forAlternative Networks. The business has continued to perform well, displaying organic as well asacquisitive growth, with revenues and profits both increased. In addition, thestrong position of the company and its reliable record of free cash flowgeneration have led the Board to propose an increased dividend payment to ourshareholders. On a divisional basis, our mobile division strengthened across a number ofmetrics. Subscriptions rose with a strong level of new connections which morethan offset the base-reducing effect of converged devices; and ARPU remainedconstant, with increasing data connections, and gross margins improved. Network Services saw steady progress, with ARPU increasing 12% as we saw thecontinued success of up-selling Wholesale Line Rental. While there was areduction in smaller, less economic, customers, this was counteracted by a risein customers spending more than £1,000 per month, one of our strategic goals. The increase in higher spending customers was also seen in Advanced Solutions.Gross profits increased as a result of supplier contracts being re-signed withmore advantageous terms, and this more than offset a negative impact on datasales due to existing customers migrating from leased line circuits to broadbandsolutions The acquisition of Echo in September demonstrated a key part of our growthstrategy, adding 22% to the Group's turnover on a pro-forma basis, without theneed to raise external financing. Echo is an excellent fit and has created amore balanced Group with a much broader offering in Advanced Solutions. TheBoard is confident that the acquisition will ensure the Group is well positionedin the growing market for converged fixed and mobile communications. The progress of the Group is showing the clear benefits of following our statedstrategy of growth through both acquisitive and organic means, and reinforcesthe Board's view that this strategy will continue to drive growth in the future. As such the Group will be focusing on maintaining organic growth through fourkey factors: focusing on larger customers within the SME space, cross-selling,reducing churn and developing products to answer our customers' needs. In summary, the company is making firm steps towards being the leading ConvergedCommunications partner of choice for the UK's medium sized businesses. Alternative Networks has come a long way since its flotation in 2005 and theBoard and I have great confidence in our employees' ability to drive itscontinued future growth. Kenneth McGeorgeNon-executive Chairman4 December 2007 Business Review We are delighted to present a review of another successful year's trading forthe Group. In the two and a half years since admission to the AIM market, theGroup has made tremendous strides. In February 2005, the Group had annualisedsales of just over £40m with 283 employees and we derived nearly half our salesfrom re-selling outbound call minutes. In 2007, the Group has recorded sales ofover £70m and derived less than one quarter of its sales from re-sellingoutbound calls, and has more than trebled its mobile subscriber base to 43,615,such that mobile now accounts for over 50% of the Group revenues. The transitionhas meant not only an improvement in the product base, and technical skill setin the Group; but it has also brought an improvement in the quality of earnings,as the group is less reliant on outbound calls, where the barriers to entry arelow and a decline through transition to IP technology inevitable. The scale of the Group is changing again in 2008, as the recent acquisition ofEcho boosts employee numbers to 430, and brings a strong technical engineeringbase, with an excellent track record for supplying customers with convergedcommunication solutions centred around IP based telephone systems in the office. In summary, the Group has adjusted rapidly to changing markets, in particulardeveloping skills organically and by acquisition in the mobile and IP arenas,which the Board expects to continue to be the major opportunities for organicgrowth over the next 2 years, as they command a larger share of our customers'annual spend. Overview The Group has achieved its objectives for the year, as set out in last year'sannual report, and the key ones have been to: • Grow the business organically, increasing the number of customers spending more than £1,000 per month; • Deliver further synergy and integration gains from its previous acquisition of ICB, expanding underlying operating profits margins to 10.8% (2006: 9.6%) and achieve operating profits growth of 25%. • Make a significant acquisition of Echo Communications announced on 3 September 2007, which has contributed one month to these results. Gross profit margins are buoyant and have performed comfortably in line withexpectations, nudging down from 35.6% to 35.0% across the Group. NetworkServices margins have fallen primarily due to the change in sales mix, andMobile and Advanced Solutions gross margins have both had solid advances. Cash generation continues to be a key highlight and differentiates the Groupfrom many of its peers in the sector. Net cash inflow from operating activitieswas £8.8m (2006: £9.3m) which was 108% EBITDA. Free cash flow was £6.5m (2006 :£7.6m) and the healthy cash flow has meant that the Group was able to purchaseEcho Communications for an initial net cash outlay of £11.5m without recourse toany debt. Results The Group reports sales increases of 9% to £72.1 million (2006: £66.0m) withorganic growth of 7% when excluding acquired operations. Echo contributed £1.3min sales in September 2007. Adjusted operating profits of the Group increased by 23% to £7.8m (2006: £6.3m).Echo contributed £0.15m in September 2007. On a statutory basis, pre-tax profits increased 31% from £5.8m to £7.6m, withoperating profits increasing 25% from £5.7m to £7.1m. Trading review by products In these product analyses, we have produced AN key performance indicators byproduct, which are the results for the Group excluding the Echo business, topermit a like for like understanding. Mobile 2007 2007 2006 Group AN ANTurnover (£m) 38.24 38.08 33.87Gross Profit (£m) 11.72 11.69 10.09Gross Margin % 30.7% 30.7% 29.8% Subscribers at 30 Sept 43,615 40,244Monthly ARPU (£) 63 63Monthly average contract length 20 m 19 mGross new connections in year 15,152 16,616Network churn 17% 16%% Subscribers in-contract 81% 81%Data connections(included in above) 11,933 8,640Data connections as % oftotal subscribers 27.4% 21.5% • Sales increased by £4.4m to £38.2m. Organic growth was 12%. • The business subscriber base has increased from 40,244 to 43,615 subscribers : • Net additions in the year were 3,371. In the first 6 months, the net additions were 833. The performance in the second half of the year was much stronger with 2,538 net gains. • New connections in the year were 15,152, only 9% behind 2006, which indicates a healthy underlying growth in the level of new connections when taking into account many new subscribers are taking a converged device, which formerly would have been 2 connections. • The growth in Data connections, being data-only devices and "Converged devices" (this is measured as a data connection which has passed voice traffic in the last 3 months e.g. BlackBerry/MS mail), continues to underpin growth. Converged devices have grown over 50% in the year to over 7,000 connections, now representing one in six of existing connections. This trend is expected to continue over the year ahead. • ARPU has remained constant at £63 for the Group, bucking the industry trends. The increase in converged device subscriptions, which typically have ARPUs of approximately £100 per month, help offset the price reductions on re-signing voice only customers as well as the lower ARPU of data only devices. • Gross margins were strong, growing nearly 1% on a like for like basis. At the interim stage, we reported margins at 31.2%, but advised that the second half margin performance was likely to be less strong due to an increase in the number of customer renewals prior to the EU Roaming price reductions. In the second half of the year, the net impact of funding customer renewals resulted in almost £0.5m additional costs. Underlying margins for call charges and access are healthy with the increase of data usage with higher margins, helping to offset industry wide price erosion on traditional voice minutes. • Network churn for the Group has remained in line with expectations set by the Board. At 17%, churn is marginally ahead of 2006 levels but comfortably within the 16-20% band. In 2007, there has been a reassuring consistency in keeping over 80 % of the base signed into contracts, and marginally increasing the contract length to 20 months. Network Services 2007 2007 2006 Group AN ANTurnover (£m) £23.20 £22.88 £22.43Gross Profit (£m) £8.27 £8.20 £8.73Gross Margin % 35.6% 35.8% 38.9% Monthly ARPU (£) 1,113 990 WLR as a % of total NetworkServices revenues 27% 20%Number of lines/channels 36,120 29,131 Average new customer contractlength (months = "m") 21 m 14 m • Sales increased 4% from £22.4 m to £23.2m. Excluding Echo, sales increased 2% to £22.9m. New customer wins included Brita UK and Hutchison Ports. • Monthly average revenue per customer "ARPU" increased by £123 or 12%. As in previous years, this reflects the continued success of upselling Wholesale Line Rental ("WLR") into these customers and the managed reduction of smaller less economic customers. During the year there was a net loss of 190 customers, but the number of customers spending more than £1,000 showed a gain of 20 in the year. Contract lengths have increased dramatically, aided by some 5 year contracts being entered into by customers. • Gross margins in AN declined from 38.9% to 35.8%, a 3.1% decline. The increase in sales mix of the WLR from 20% to 27% has diluted margins by nearly 2%, given that WLR margins tend to average closer to 20%, as opposed to margins for call charges over 40%. The remainder is due to acquiring new larger customers on slightly more competitive terms than some of the smaller customers leaving. Advanced Solutions 2007 2007 2006 Group AN ANTurnover (£m) 10.64 9.79 9.66Gross Profit (£m) 5.24 4.87 4.66Gross Margin 49.2% 49.7% 48.3% • Group sales increased 10% to £10.6m. These included £0.8m contribution from Echo for September 2007. • Inbound telephony services ('NTS') remains the largest of these product areas and total sales have returned growth of 6% to £6.2m. The Group has enjoyed some good new contract wins, e.g. British Red Cross, with AN recording a 7% increase in the number of customers spending over £1,000. Headlines sales have otherwise been reduced by price reductions owing to the gradual migration from 0870 numbers to other products with lower revenues per minute, following the OFCOM ruling in January 2007. However, the deadline of February 2008 has now been extended and there will be a delay to implementation until later in 2008. • Data sales continued to be held back by the effect of the migration of existing customers from leased line circuits to cheaper Broadband solutions, reducing 10% from £1.7m to £1.5m. However, gross profits on these sales were actually ahead by more than £0.1m as the ICB and AN contracts were re-signed on better margins, having obtained better terms from new and existing data suppliers. • The systems hardware business accounts for the balance, with the AN business at £2.1m (2006: £2.1m). This year has been positive and lately the headcount in the sales force has increased by 20%. In the short term the business will continue to run side by side with Echo, collaborating and sharing resource, while not yet integrated. • Gross margins have increased like for like by 1.4%, reflecting improved data and hardware margins in particular. The Echo margins are typically lower than 49%, albeit still over 40%, and have accounted for a 0.5% reduction in overall margin gain. Looking ahead, the margins in 2008 are likely to be lower due to the impact of Echo on the results. Strategy The Group is continuing with its twin strategy of organic and acquisitivegrowth. The Group aims to become the leading Converged Communications partner ofchoice for UK's small and medium sized businesses. The focus for next year is to : • Maintain organic growth in the core business, especially by focussingon larger customers, keeping churn low and increasing product penetration into awider customer base. • Integrate the Echo business into the Group and ensure our customersstart to benefit from the products and solutions they provide. • Continue the programme to review acquisition opportunities and play anactive part in the consolidation of the sector. • Continue to reorganise the business so that key staff remain motivatedand that the business has a flatter, more efficient structure, across thecombined Group. • Continue to improve business processes and quality of service. Organic Growth factors The four key organic growth factors supporting our strategy remain : Focus on larger customers in SME space The target customer in the market for the Group remains the business customerwho spends between £1,000 and £10,000 per month. During this period we havecontinued to focus on maximising the numbers of customers who spend more than£1,000 per month on telecoms whether this is one product or multi-product. At 30 September 2007, excluding the Echo base of customers, there were over1,200 customers spending over £1,000 per month, being 30% of our total customerbase by number. The Echo base is similar with over 30% of its customers spendingover £1,000 per month, and brings with it more than 1,600 customers in total. Cross-selling The Group has made solid progress in cross-selling the product set. Of the totalcustomer base at 30 September 2007, over 33% took more than 1 product (2006-restated to include all acquired customer bases: 22%). This percentage increaseis enhanced by the loss of single product smaller customers. Of all customers spending more than £1,000 per month, 66.4% (2006: 66.8%) tookmore than 1 product and, most encouragingly, 43.3% (2006: 39.4%) took 3 productsor more. Mobile services are currently treated as one product whether data,voice or ancillary services. It is widely accepted in the industry that the statistical chances of churning acustomer are lessened considerably as each extra product is sold, and the Boardregularly reviews progress in the product penetration into its customer base. Reduction in churn In addition to tracking the net increase in larger customers and the change intotal customers, the Group also tracks the churn of revenues by product. Inaddition, the Group reports the network churn (see below) for the mobile productset. These latter two measures have produced pleasing results in the year underreview, in spite of the net reduction in overall customer numbers, and show theGroup has a sound platform for growth. Following the very successful reduction in churn from 24% in 2005 to 16% in2006, the Board was pleased that mobile network churn in 2007 was 17%. The levelhad been expected to increase, but nonetheless is within the 16-20% band theBoard expected last year. This was achieved in spite of an increase in churn inthe ICB client base in the first quarter of the period which was due to thesmaller customers, who are outside Alternative's target customer size. Customerattrition in mobile, calculated on a revenue basis, was 21% in the period,compared to 18% reported last year. This increase was partly due to the loss ofsome low margin reseller business, acquired with ICB, which has migrated awayduring the year. The Group has continued to invest in reducing churn and some key initiatives inthe year include : • £0.4m investment in CRM, in particular the replacement of customer databases with a single view central database. The latest phase is currently under way - which is specific to case management, to help the Group improve its handling of customer issues, technological faults, and complaints. • Upgrade of "Clarity" - Our second release of the on-line billing reporting tool, "Clarity" included modules for asset management and fleet reporting, as well as a report building wizard. Customer usage, measured by website " hits", increased by over 80% in the first quarter after implementation. • Continuing improvements and investment in our processes and quality management - ensuring ongoing accreditations from the British Standards Institute ("BSI") for its Information System management system ISO/IEC 27001:2005; and the ISO 9001:2000 Quality Management System. • Optimisation of the customer services and client support teams. Thishas had a positive effect and during 2007, the Group was highly commended in theNational Customer Services Awards 2007. Product development Our organic growth depends on widening our share of our customers'communications spend and we rely on using our strategic partnerships toconsistently deliver new growth opportunities. Since 1 October 2006, the Grouphas: • Successfully launched and supported the latest trio of Blackberry converged mobile and data products (Pearl, 8800 and the "Curve") and been accredited into O2's Data Centre of Excellence; • Extended our mobile service provider licences with both Vodafone and O2 until 2009; • Designed and commissioned a suite of upgrades to our "Clarity" on-line reporting tools; • Significantly expanded our data portfolio of products by introducing a new suite of broadband products and higher end data solutions from Viatel and Griffin, to supplement our portfolio of products supplied by Verizon, Cable and Wireless and BT; and • Entered into a partner agreement to be able to provide our customers with higher end mobile applications on PDAs, e.g. mobilising CRM solutions, as well as Intellisync solutions as an alternative to Blackberry. Major current developments: We are currently negotiating supply terms or monitoring progress of thefollowing developments : • WLR3 - this is the "equivalence of access" set of products around BT's existing digital and analogue lines. We anticipate a launch in the first half of 2008; • Local Loop Unbundled business products -the first local loop unbundled products come on-stream in the next six months for analogue lines; and • Wi-fi mobile and fixed IP PBX systems convergence - there are a number of clear partnerships such as Avaya/Nokia, RIM/Ascendant, where developments have gathered pace in 2007 and it has been the year of the "trial". Acquisitions Acquisition of Echo The acquisition of Echo, announced on 3 September 2007, has provided the Groupwith another significant change in scale, as well as adding technological andengineering skills, which will enable the Group to expand its sales of data andIP based telephone systems, as well as broaden its product portfolio andcustomer base. Strategy The acquisition is an excellent strategic fit, as the Echo group is a purely B2Bconverged solutions provider, operating out of London and Abingdon, using thesame suppliers as AN, and having a similar profile of target customer. Twothirds of the business is the sale and maintenance of IP based phone systems andancillary solutions, and the rest is fixed and mobile networks businesses. Themanaging director and founder, and the sales director and operations directorare remaining with the business. Echo has approximately 120 staff of which 45are engineers, and 30 are in sales positions. Key benefits expected to arise from the acquisition are : • Expand product range of data and pbx products; • Acquire skills for selling into the public sector - e.g. Echocurrently has PASA accreditation for pbx and network services products whichallows them to sell to the NHS sector until October 2008; • Acquire complementary skills sets to be able to accelerate the salesof converged solutions into the mid-sized enterprise market; and • Help reduce churn across the Group customer base - there is evidencein AN's own customer base that pbx maintenance customers have the lowest rate ofchurn, and the more products a customer takes, the lower the churn rate. Deal summary The acquisition was funded mostly by cash, £11.5m, from the Group's cashresources, and with 590,882 new ordinary shares being issued in September 2007.Additional consideration of up to £2.3m is potentially payable dependent onperformance in the year to 31 August 2008. The performance measures are basedaround the maintenance base of customers at the end of the period, and the grossprofits on sales of hardware in the period. For the purposes of deriving a fairvalue for goodwill, it is currently estimated that at least £0.4m will beachieved, giving a total consideration of £12.9m including costs, which producesa valuation of goodwill under GAAP of £10.9m. In the year ended 31 March 2007,Echo had sales of £15.4m and pre-exceptional EBITA of £1.1m. In the 5 monthsprior to acquisition, Echo had revenues of £7.6m and pre-exceptional EBITA of£0.6m. Integration progress The integration of the business is underway. Since September 2007, the financefunction has been fully integrated and the finance systems migrated. The keysupplier contracts for mobile and fixed network services have been renegotiated.In addition, the mobile and networks services client management and installationteams have moved to AN and the switch to AN's billing systems and the new Grouplogo is set for December 2007. Echo will remain a separate brand, albeitrealigned under the new Group logo. In the first quarter of 2008, it is expected the two main Echo offices inEarlsfield, London and Abingdon, Oxfordshire will be closed and the teams willtransfer to Plantation Wharf in London and Theale in Berkshire to join AN'sexisting offices and staff. The focus for the remainder of the year will be onachieving the targets set for the business and maximising cross sellingopportunities within the group. Update In the month following acquisition, Echo had revenue of £1.3m and an operatingprofit of £0.15m. Since acquisition, Echo has secured some excellent new saleswins, including Carmarthenshire NHS Trust, and the Savoy Group, which both offerconsiderable further potential. The Board welcome all the Echo employees and remain excited for the considerableopportunities the combination of our businesses is expected to deliver acrossthe Group. ICB Integration completed At 1 October 2006, the business of ICB was already fully integrated into that ofthe Group at the beginning of the year. During the year, the company decided toterminate the lease on the former ICB Headquarters in Reading and relocate theemployees to a new office in Theale. These costs, including the costs of exitingthe lease, and some redundancies have been highlighted as an exceptional item.Following this, Board resolved to transfer the businesses of ICB and itssubsidiary, Magicall into Alternative Networks and formerly strike off thesecompanies. The former was effected 30 September 2007 and no subsidiary statutoryaccounts will be prepared for these companies to 30 September 2007. Capital investment The Group invested £0.57m (2006: £0.38m) in tangible fixed assets during theyear. The majority of this related to phases two and three of our CRM softwareproject (£0.38m), which was the core telesales and sales contact management, andthen Sales order installation and related workflow. The balance of £0.2m wasnormal recurring expenditure, and normal ongoing capital requirements areestimated to be less than 0.5% annual sales. Cash flow Cash inflow from operations was very strong bringing in £8.8m (2006: £9.3m),representing an excellent cash conversion of 108% EBITDA (2006: 136%). In 2006,the inflow was boosted by a one-off favourable working capital movementtriggered by bringing forward the monthly bill run which meant £1.8m could betaken by direct debit before the month end. This was sustained in the year. The Group continues to operate its policy of writing off customer acquisitioncosts immediately to the profit and loss account. This is often significant inmobile customers' contracts, and in many cases, the costs written off in advancewill not be expenditure actually incurred but instead be the establishment ofcustomer funds to buy mobile phone hardware, which they can draw down on for thelife of the contract up to two years. At 30 September 2007, the accrual forthese funds was £1.2m, increased from £0.7m at 30 September 2006. The increasein these funds, together with the share option costs of £0.2m (2006:£0.3m), isthe main reason for the cash conversion rate exceeding 100%. In previous yearsthe cash conversion of EBITDA has been approximately 85% as growth has requiredworking capital expansion. The acquisition of Echo resulted in a reported cash outflow from operations inSeptember 2007 of £0.2m. This was caused by the payment of pre-acquisitionbonuses to staff of £0.2m which were accrued at acquisition, but paid inSeptember 2007. Ordinarily, Echo's activities are expected to be highly cashgenerative, as maintenance contracts and systems hardware are usually paid bycustomers in advance. The operating cash flow of the Group was applied as follows : 2007 2006 £ million £ million Net operating inflow 8.8 9.3Investment returns 0.4 0.1Taxation (2.1) (1.4)Capital expenditure (0.6) (0.4)Free cash flow 6.5 7.6 Acquisitions/Disposals (10.8) (4.4)Dividends (1.3) (0.8)Equity finance from staff options 0.5 -Financing - (0.1) Net cash (outflow)/inflow (5.1) 2.3Debt acquired with subsidiaries (0.5) -Net funds at 30 September 1.8 7.4 Tax The effective tax rate was 23.3% (2006: 31.3%). Note 8 to the annual report andaccounts sets out the reconciliation back to 30% of profits. The principalreason the tax charge was reduced was due to the exercise of 1,825,600 shareoptions by Alternative Networks staff relating to the 2004 EMI scheme, where theexercise price was 25 pence per share and typically the shares were exercisedwith an average market value of 155 pence per share, giving rise to a £2.4mdeduction from profits. As this year and the prior year financial statementswere prepared under GAAP and not IFRS, no deferred tax asset had been formerlyrecognised and this is an exceptional gain in the current year. In the year to30 September 2008, a further smaller deduction will be recognised byestablishing a deferred tax asset for any outstanding unrealised relief onunexercised share options, as required under the IFRS accounting standard. Share buy-back programme The Group announced on 27 November 2006 that a resolution had been passed byshareholders in general meeting to give the Directors authority to buy back, onmarket, up to 10% of the Group's issued share capital. This authority survivesuntil the AGM on 29 January 2008. To date, the Group has not bought any shares.The directors have been advised that owing to the recent changes in marketregulations, and because of low levels of liquidity in the Group's shares, it isonly possible to buy back a very limited number of shares on a daily basis suchthat only small numbers of shares could be repurchased. Accordingly, there is noproposal to extend this authority by resolution at the AGM. The Board willcontinue to monitor levels of cash and whilst these have historically beenearmarked and utilised for future acquisitions, the possibility of returningexcess levels of cash to shareholders will remain under consideration. EPS and Dividend per Share Diluted adjusted earnings per share has increased by 27% to 12.3p (2006: 9.7p).Basic earnings per share have increased 41% from 9.2p to 13.0p. In January 2007, the Group granted 1,147,907 new EMI share options at the marketvalue exercise price of 150.5 pence per share. Of these, 81,920 have lapsed todate. The options cannot be exercised until 31 December 2009, and areconditional on the Group achieving earnings per share growth of RPI plus 3%. Asat 30 September 2007, options were outstanding over 1,065,987 ordinary shares(2006: nil) under this scheme. The calculated weighted average number of shares during the year were increaseddue to : a) 1,825,600 options exercised by staff; b) Issue of 590,882 shares on 31 August 2007 in respect of the Echoacquisition. The Board has proposed a final dividend of 2.3 pence per share (2006: 1.831pence per share) making a total dividend of 3.3 pence per share for the fullyear (2005: 2.6 pence per share). The dividend will be paid on 31 January 2008to shareholders on the register as of 4 January 2008. The Group has aprogressive dividend policy. Outlook Over the next year, the Board will be focusing on three key aims: selling moreproducts into our customer base and keeping churn low, while at the same timedelivering the benefits of the Echo acquisition. The Group's progress gives theBoard confidence that margins and ARPUs will remain strong. The Board believes that the combination of the Group's product range, skill set,and partner relationships put it in the right position to win a greater share ofthe small and medium sized business customer's spend on communications, and weremain confident in future growth prospects. James MurrayEdward Spurrier 4 December 2007 Consolidated profit and loss accountfor the year ended 30 September 2007 Restated* 30 September 30 September 2007 2006 Note £'000 £'000 Turnover 1 72,083 65,964Continuing operations 70,740 65,964Acquired operations 1,343 -Total continuing operations 72,083 65,964Cost of sales (46,853) (42,475)Gross profit 25,230 23,489Other operating costs (18,137) (17,795)Operating profit 7,093 5,694Continuing operations 6,946 5,694Acquired operations 147 -Total continuing operations 7,093 5,694 Total operating profit - analysedOperating profit before restructuring charges andamortisation of intangible fixed assets 7,814 6,338Restructuring charges 10 (82) (101)Amortisation of intangible fixed assets 10 (639) (543)Total operating profit 7,093 5,694Profit on sale of investment 120 -Interest receivable and similar income 418 162Interest payable and similar charges (60) (64)Profit on ordinary activities before taxation 7,571 5,792Taxation on profit on ordinary activities (1,763) (1,813)Profit on ordinary activities after taxation 5,808 3,979Minority interest (7) -Profit on ordinary activities for the financial year 5 5,801 3,979Earnings per ordinary shareBasic 4 13.0p 9.2pDiluted 4 12.4p 8.7p * The comparative figures have been as described in note 2. There is no difference between the profit on ordinary activities before taxationand the retained profit for the years stated above and their historical costequivalents. Consolidated and Company balance sheetsas at 30 September 2007 Restated* Restated* Group Group Company Company 30 30 30 30 September September September September 2007 2006 2007 2006 Note £'000 £'000 £'000 £'000Fixed assetsIntangible assets 17,276 6,107 1,762 476Tangible assets 3,923 2,353 2,516 2,313Investments - - 15,757 5,253 21,199 8,460 20,035 8,042Current assetsDeferred taxation 548 137 111 71Stock - finished goods 251 73 4 11Debtors 14,199 10,470 10,366 7,555Cash at bank and in hand 3,422 8,488 2,684 6,352 18,420 19,168 13,165 13,989Creditors: amounts falling due withinone year (19,373) (14,501) (18,469) (10,863)Net current (liabilities)/assets (953) 4,667 (5,304) 3,126Total assets less current liabilities 20,246 13,127 14,731 11,168Creditors: amounts falling due in morethan one year (1,993) (1,015) (1,436) (1,015)Net assets 18,253 12,112 13,295 10,153Capital and reservesCalled up share capital 5 60 57 60 57Share premium 5 4,577 4,116 4,577 4,116Merger reserve 5 1,833 934 - -Profit and loss account 5 11,776 7,005 8,658 5,980Total shareholders' funds 5 18,246 12,112 13,295 10,153Minority interest 7 - - -Capital employed 18,253 12,112 13,295 10,153 * The comparative figures have been as described in note 2. Consolidated cash flow statementfor the year ended 30 September 2007 30 September 30 September Notes 2007 2006 £'000 £'000 Net cash inflow from operating activities 6 8,785 9,286Returns on investments and servicing of financeInterest received 418 162Interest paid (60) (64)Net cash inflow from returns on investmentsand servicing of finance. 358 98 TaxationUK corporation tax paid (2,067) (1,420) Capital expenditure and financial investmentPurchase of tangible fixed assets (566) (380)Proceeds from sale of tangible fixed assets 7 2Net cash outflow for capital expenditureand financial investment (559) (378) Free cash inflow before acquisitions and financing 6,517 7,586 Acquisitions and disposalsPurchase of subsidiary undertaking 9 (11,548) (5,251)Cash acquired with subsidiary 732 838Proceeds from sale of business 120 - Net cash outflow from acquisitions and disposals (10,696) (4,413) Dividends paid 3 (1,322) (844) Net cash (outflow)/inflow before financing (5,501) 2,329 FinancingIssue of ordinary share capital 462 -Share issue costs - -Purchase of own shares - -Capital element of loan repayments 8 (27) (52)Net cash inflow/(outflow) from financing 435 (52) (Decrease)/increase in net cash 8 (5,066) 2,277 Notes to the Financial Statement 1. Basis of preparation The financial information is abridged and does not contain the Group's fullfinancial statements for the years ended 30 September 2006 and 30 September2007. Full financial statements for the year ended 30 September 2006 (which receivedan unqualified audit report) have been filed with the Registrar of Companies.Financial statements for the year ended 30 September 2007 will be presented tothe Members at the forthcoming Annual General Meeting; the auditors haveindicated that their report on these Financial Statements will be unqualified. The financial information has been prepared in accordance with the historicalcost convention, and in accordance with UK Generally Accepted AccountingPrinciples and the Companies Act 1985. 2. Changes in accounting policies FRS 20 "Share based payment" applies for accounting periods beginning on orafter 1 January 2006 and has been adopted in these financial statements. The impact of the adoption of this standard on the results for the current yearis a charge to the profit and loss account of £158,000. The adoption of thestandard represents a change in accounting policy and the comparative figureshave been restated accordingly. The result of this has been to reduce theprofit for the year ended 30 September 2006 by £115,000. The tax affect of thisprior year adjustment on both the consolidated and company financial statementswas to increase the deferred tax asset and accordingly decrease the tax chargefor the year by £53,000. Hence the net impact is £62,000. In accordance with FRS 12, 'Provisions, contingent liabilities and contingentassets' a liability has been recognised in respect of a holiday pay accrual.This reflects a change in accounting policy and the financial statements for thecurrent and corresponding period have been restated to reflect the newaccounting policy. The net effect of the change in accounting policy on theprior year consolidated financial statements is a charge to the profit and lossaccount of £60,000. The charge for the current year is an additional £25,000. In the opinion of the directors, the revised policies give a fairer presentationof the results and of the financial position of the group. 3. Dividends 30 September 30 September 2007 2006 £'000 £'000 Final Paid - 1.83p (2005: 1.10p) per £0.00125p ordinary share 852 497Interim Paid - 1.00p (2006: 0.77p) per £0.00125 ordinary share 470 347 1,322 844 The 2006 proposed final dividend of 1.83 pence per £0.00125p ordinary share waspaid on 7 February 2007. The amount of dividend paid was £852,000 (2006:£497,000). The directors also paid a 2007 interim dividend of 1.00 pence per £0.00125pordinary share, with a total payment value of £470,000 (2005: £347,000). Thiswas paid on 7 July 2007 to shareholders on the register on 22 June 2007. In addition, the directors are proposing a final dividend in respect of thefinancial year ending 30 September 2007 of 2.30 pence per £0.00125p ordinaryshare which will absorb an estimated £1,096,000 of shareholders' funds. Assumingit is approved by the shareholders at the Annual General Meeting on 29 January2008, it will be paid on 31 January 2008 to shareholders who are on the registerof members at 4 January 2008. 4. Earnings per share The calculation of basic and fully diluted earnings per ordinary share is basedon the profit after taxation for the period and the weighted average number ofordinary shares in issue during the year. The profit and weighted average number of shares used in the calculations areset out below: Weighted average Profit attributable of £0.00125 Per shareBasic and fully diluted Earnings per share to shareholders ordinary shares amount £'000 Number Pence 2007 Earnings per share - basic 5,801 44,609,537 13.0Potentially dilutive shares - 2,009,920 (0.6)2007 Earnings per share - diluted 5,801 46,619,457 12.4 2006 Earnings per share - basic * 3,979 43,280,049 9.2Potentially dilutive shares * - 2,473,955 (0.5)2006 Earnings per share - diluted * 3,979 45,754,004 8.7 * The comparative figures have been restated as described in note 2. The adjusted EPS is based on the adjusted profit before tax as set out in note10 less tax at 30% (2006: 31.3%), and the weighted average number of shares asdescribed above. Adjusted profit Weighted averageAdjusted Basic and fully diluted Earnings attributable to of £0.00125 Per shareper share shareholders ordinary shares amount £'000 Number Pence 2007 Earnings per share - basic 5,720 44,609,537 12.8Potentially dilutive shares - 2,009,920 (0.5)2007 Earnings per share - diluted 5,720 46,619,457 12.3 2006 Earnings per share - basic * 4,422 43,280,049 10.2Potentially dilutive shares * - 2,473,955 (0.5)2006 Earnings per share - diluted * 4,422 45,754,004 9.7 * The comparative figures have been restated as described in note 2. As in prior periods, the calculation of the weighted average number of shares inissue excludes the shares held by the Alternative Networks Employee BenefitTrust of 1,915,200. These shares are then added to the total of extant optionswhen calculating the fully diluted weighted average number of shares. There were 47,633,220 shares in issue at 30 September 2007. On 30 September 2006there were 45,216,738 shares. The weighted average number of shares during theyear was 44,609,537 (2006: 43,280,049). 5. Reserves Group Share Share Merger Profit capital premium reserve and loss Total £'000 £'000 £'000 £'000 £'000 Balance at 1 October 2006 as previously reported 57 4,116 934 7,012 12,119Prior year adjustment - FRS 20 tax effect - - - 53 53Prior year adjustment - Holiday accrual - - - (60) (60)Balance at 1 October 2006 restated 57 4,116 934 7,005 12,112Shares issued 3 461 971 - 1,435Realisation of merger reserve - - (72) 72 -FRS 20 share based payments - - - 220 220Retained profit for financial year - - - 5,801 5,801Dividends paid - - - (1,322) (1,322)Balance at 30 September 2007 60 4,577 1,833 11,776 18,246 Company Share Share Merger Profit capital premium Reserve and loss Total £'000 £'000 £'000 £'000 £'000 Balance at 1 October 2006 as previouslyreported 57 4,116 - 5,987 10,160Prior year adjustment - FRS 20 tax effect - - - 53 53Prior year adjustment - holiday accrual - - - (60) (60)Balance at 1 October 2006 restated 57 4,116 - 5,980 10,153Shares issued 3 461 - - 464FRS 20 share based payments - - - 220 220Retained profit for the financial year - - - 3,780 3,780Dividends paid - - - (1,322) (1,322)Balance at 30 September 2007 60 4,577 - 8,658 13,295 6. Reconciliation of operating profit to net cash inflow from operatingactivities 30 Restated* September 30 2007 2007 2007 September Continuing Acquisitions Total 2006 £'000 £'000 £'000 £'000 Operating profit 6,946 147 7,093 5,694Depreciation of tangible fixed assets 392 10 402 411Amortisation of intangible fixed assets 619 20 639 543Profit on disposal of tangible fixed assets (7) - (7) -Employee share schemes charges 220 - 220 302Decrease/(increase) in stocks 12 (3) 9 48(Increase)/decrease in trade debtors (400) 169 (231) 1,986Decrease/(increase) in prepayments, accruedincome and other debtors 133 (254) (121) (747)Increase/(decrease) in trade creditors 63 (63) - 1,343Increase/(decrease) in other taxationand social security 244 211 455 (176)Increase/(decrease) in other creditors,accruals and deferred income. 747 (421) 326 (118)Net cash inflow/(outflow) fromoperating activities 8,969 (184) 8,785 9,286 * The comparative figures have been restated as described in note 2. 7. Reconciliation of net cash flow to movement in net funds 2007 2006 £'000 £'000 (Decrease)/increase in cash in the year (5,066) 2,277Decrease in loans 27 52Borrowings acquired with subsidiaries (554) (19)(Decrease)/increase in net funds in the year (5,593) 2,310Net funds at 1 October 7,436 5,126Net funds at 30 September 1,843 7,436 8. Analysis of net funds 1 October 30 September 2006 Acquired Cash flow 2007 £'000 £'000 £'000 £'000Net cash:Cash at bank and in hand 8,488 - (5,066) 3,422Debt:Debt due within one year (37) - 4 (33)Debt due after one year (1,015) (554) 23 (1,546)Total debt (1,052) (554) 27 (1,579) 7,436 (554) 5,039 1,843 9. Acquisitions On 31 August 2007 the Group acquired the Telecom Centre Limited (Echo), atelephone system installation and maintenance provider for cash consideration of£11,493,000 including costs of £102,000, and the issue of shares in the Groupwith a value of £971,000. There is also deferred consideration of £447,000,payable in cash next year subject to certain profit targets being achieved. Netassets of £2,061,000 were acquired. The goodwill on acquisition is beingamortised on a straight-line basis over 15 years which is the anticipated lifeof the asset. In its last financial year to 31 March 2007 Echo made a profit after tax of£530,881. For the period from 1 April 2007 to the date of acquisition (31 August2007), Echo unaudited management accounts show: £'000Turnover 7,609Operating profit before acquisition adjustments 676Stock, debtor and hardware fund provisions (259)Staff costs (186)Operating profit after acquisition adjustments 231Amortisation 103Profit before taxation 134Taxation 705Profit attributable to shareholders 839 The balance sheet of The Telecom Centre Limited on acquisition was as follows: Book Value at Fair value Fair value at 31 August 2007 adjustments acquisition £'000 £'000 £'000 Intangible assets 903 - 903Tangible assets 900 506 1,406Deferred taxation 481 - 481Stock 188 - 188Debtors 3,375 - 3,375Cash 732 - 732Creditors due within 1 year (4,023) - (4,023)Creditors due after 1 year (447) - (447)Bank loans (554) - (554)Net assets acquired 1,555 506 2,061Goodwill 10,850Consideration 12,911Satisfied by;-Cash consideration 11,391Deferred consideration 447Issue of shares 971Acquisition costs 102 12,911 The deferred consideration is payable upon the achievement of certain minimumtargets. This represents the minimum amount that is reasonably expected to bepayable. Further performance related payments up to a maximum of £2,300,000 maybecome payable between the date of acquisition and August 2008. Initial estimates of the deferred consideration will be revised as further andmore certain information becomes available with corresponding adjustments togoodwill. The deferred consideration has not been discounted. An evaluation of the useful economic life of the acquired goodwill was performedby the directors. Based on projected earnings and historic churn levels, 15years was considered to be appropriate. 10. Reconciliation to adjusted performance Restated** 30 September 30 September 2007 2006 £'000 £'000Profit before tax 7,571 5,792Amortisation of intangible fixed assets 639 543Restructuring charges 82 101Less profit on sale of investment (120) -Adjusted profit before tax 8,172 6,436Less net interest receivable (358) (98)Adjusted operating profit 7,814 6,338Add back depreciation 402 411Adjusted EBITDA* 8,216 6,749 *Earnings before interest, taxation, depreciation and amortisation. ** The comparative figures have been restated as described in note 2. This analysis is provided as the Group considers it provides a truer reflectionof the underlying performance of the business. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
AN..L