Final Results

Alternative Networks plc

Results for the year ended 30 September 2013

HIGHLIGHTS

· Positive performance with revenues, and profits and underlying cash generation all in-line with previous year, delivered in a flat and challenging market.

· Strong renewed revenue growth achieved in the second half of 2013:

· Overall 3% revenue growth in H2 2013 (H1: - 4 %)

· Mobile and Advanced Solutions, which cover 70% of revenues, both made significant market share gains and grew 8% in H2 over prior year and 12% sequential half on half growth.

· Group winning larger customer contracts delivering returns on specific targeted investment:

· Increased breadth of products and services in portfolio

· Technical abilities of the group expanded

· Transition to new technologies

· Stable performance of the business underpinned by

· High cash generation - underlying 105% conversion of adjusted EBITDA (2012: 104%)

· Growing gross profit margins increased 20bps to 39.2%

· Improved customer retention, due to Synapse investment

· Confidence leading to improved shareholder returns

· In 2013, returned £14m to shareholders in dividends and share buy backs

· Proposed full year dividend increased 13% to 13p, excluding special dividends

· Increased guidance on progressive dividend policy

o Reiterated minimum 10% increase in 2014 off a higher base

o New guidance for 2015, where the aim is to grow at least by 10%, progressing in time towards a longer range target of annual growth of 15%

KEY FINANCIAL INFORMATION

* Earnings before interest, taxation, depreciation and amortisation.

** Results before intangible assets amortisation excluding software, write off/back of contingent consideration through comprehensive income statement, share based payments, and costs of restructuring Scalable post acquisition.

*** Adjusted earnings per share are based on profits as set out in Notes 4 and 10

Edward Spurrier, Chief Executive Officer of Alternative Networks, commented:

"I am pleased with progress through the year. We are growing, winning larger customers with a broader portfolio of products and services, greater technical skills and we have a stronger service proposition as a result of investment in the year.

We delivered what we said we would at the half year, and the increase in dividend and greater guidance for the next two years reflects our confidence in the future.

Acquisitions remain part of our growth plans and with a strong financial position, we are well placed to acquire again, bringing additional skills and customers in growth markets."

Enquiries:

CHAIRMAN'S STATEMENT

Introduction

Alternative Networks has had another successful year, producing a positive financial performance, investing for further long term growth and delivering value for shareholders. The Group has also progressed its strategy to cement its market position, with evidence emerging that those initiatives are paying off.

Results

Revenue for the year ended 30 September 2013 was broadly flat: £114.3 million, compared with £114.8 million in the previous year. While adjusted EBITDA was similarly at last year's levels (£15.9 million in 2012/2013 versus £16.1 million in 2011/2012), this is after significant investment by the Group in improving the quality of its direct sales force and technical support capabilities together with increased spending on marketing. It is also important to note that while the first half of the financial year showed a 4% decrease on the equivalent period in the prior year, the second half was 3% ahead again on the equivalent period in 2012. This was a pleasing turnaround and showed that the growth plans we have put in place are starting to produce encouraging results.

Alternative Networks' balance sheet continues to be strong, with a net cash position of £17.2 million at the year-end. Whilst this was lower than the position 12 months earlier (£20.6 million), this was after the one-off payments totalling £8.7 million relating to a share buy-back and special dividend.

Dividend Policy

The Group continued to pursue its progressive dividend policy, with a final dividend of 8.6 pence being proposed resulting in a total ordinary dividend for the year of 13.0 pence per share (2012: 11.5 pence per share), an increase of 13%. This does not include the payment of a special dividend of 4.0 pence per share. If that is included, the total pay-out for the year was 17.0 pence per share, an increase of 48%. The Board has committed to increasing the basic dividend payment by at least 10% in 2014 and in 2015 to start to progress towards 15% annual growth for the longer term.

Review of Operations

I am pleased to report that the gains in market share achieved last year have continued. We saw an increase in mobile subscribers and in revenues from Advanced Solutions, both of which we regard as key growth areas. We have also succeeded in cross-selling a broader product base to a greater number of customers. This contributed to an increased level of penetration into the higher end of the market, with several larger customers secured. Client retention continued to be market leading, supported by our customer portal, Synapse, whose brand has been well received and which continues to set us apart from our competitors.

We introduced several new products into the market during the year, including the launch of two new vendors in security (Palo Alto) and wireless mobility (Aruba). We also developed our campus and data networking propositions to enable customers to adopt state of the art practice in managing all their data and communications requirements. These developments have played an important part in the securing of larger customers and will continue to do so. In mobile, the launch of 4G has seen us introduce O2's and Vodafone's latest packages to our clients, as well as Blackberry's latest operating system. Our overall objective in 4G has been to give customers the best means of making the right commercial decisions for their business

Growth Strategy

Our strategy continues to be to combine steady organic growth with the securing of value adding acquisitions. While our criteria for acquisitions remain very strict. Several opportunities remain under active consideration and we remain well placed to pursue them.

In terms of organic growth, we will continue to expand our target market upwards, by improving and increasing our sales and technical support capabilities, developing more opportunities to cross sell and by deploying Synapse to retain and attract customers. We believe that this will see us make further inroads into the higher end of our target market, continuing the trend that started to emerge last year.

James Murray

Executive Chairman

6 December 2013

Chief Executive's Report

Overview

This has been another robust performance by the Group. I am pleased to report underlying profits are in line with the prior year, during which time we have also made investments across the Group. Cash generation remains strong, we have increased shareholder returns in the year and anticipate being able to increase dividends going forward as we remain confident in our future growth prospects.

The major highlights are set out on the front page of this report.

Financial Results

Group revenues at £114.3m were broadly in line with the prior year (2012: £114.8m) and adjusted operating profits were down 2% to £15.0m (2012: £15.3m). Gross profit at £44.8m (2012: £44.8m) was in line with the prior year as a very slight increase in gross margin, from 39.0% to 39.2%, has offset the revenue decline. The key underlying drivers of this were in telephony, where fixed line margins improved following changes in supplier terms in October 2012 that offset a reduction in mobile margins which were impacted by the phasing of hardware roll out relating to new customer wins. Margins per product set are reviewed in more detail below.

Group adjusted operating profits decreased by 2% to £15.0m (2012: £15.3m). This was the result of a strategic decision to invest in better quality direct sales and technical support staff, as well as in marketing. On a statutory basis, pre-tax profits decreased 2% from £12.7m to £12.5m as a result of the aforementioned investments. The adjustments are shown on the face of the income statement, and also detailed in Note 10.

Cash generation continues to be good. Net cash generated from operations was £14.4m (2012: £18.1m) which was 91% of adjusted EBITDA in the period (2012: 112%), the underlying cash generation was £16.8m. Free cash flow was £10.3m (2012: £14.6m), enabling the Group to finish the year with £17.2m net cash (2012: £20.6m). This was after the share buybacks of £6.8m (2012: nil) and the special dividend paid in the year of £1.9m.

Adjusted earnings per share decreased 2% to 24.7 pence and, on a fully diluted basis, increased 2% to 22.9 pence. Statutory earnings per share decreased 4% from 22.1 pence to 21.2 pence. A detailed reconciliation is set out in the financial and business review.

Strategy

The Group's strategy is to deliver growth organically and through acquisitions to become the preferred managed services provider of choice for UK businesses.

 Strategy - Acquisitions

The Group continues to monitor the market proactively for further "right-fit" acquisitions. Our strict criteria are as follows:

· targets must be successful, growing, highly cash generative, and profitable;

· they need to have customers that provide cross selling opportunities for the Group; and

· they need to be earnings enhancing in the first full year of ownership.

The Group's strong balance sheet leaves us well placed to capitalise on such opportunities. Acquisitions are being targeted to complement the existing products and expand our capabilities and product set in the Advanced Solutions area, with a focus on managed and hosted services.

Strategy- Organic growth

The Group continues to build successfully on the following four key factors for continued organic growth:

· Winning larger customers in the SME space and targeting Enterprise customers;

· Using service and Synapse to drive customer retention across the wider product set;

· Cross selling and up selling of products across our customer base;

· Product development and innovation to increase value to our customer base

Winning larger customers in the SME space and targeting Enterprise customers

Our target customers are in the mid enterprise market, particularly those customers with multi-sites and with 80 to 1000 employees as historic performance has shown this to be our sweet spot. With the broadening product base there are multiple entry points to these customers. Our go to market strategy segments this market further with two distinct sales and technical support teams which focus on:

· Enterprise customers for those clients with more than 500 employees,

· Business Markets customers with up to 500 employees.

In addition to this we have a Partner Channel sales arm, which is new in 2013 that is focused on winning smaller customer's business through selected partners.

For the purposes of analysing our customers, we have classified a "larger customer" as one with a monthly spend of more than £1,000. At 30 September 2013, the Group had 1,157 larger Enterprise customers (30 September 2012: 1,215). During the year the Group had a net addition of 15 new larger clients and 73 increased their spend above the £1,000 however 126 clients spend level dropped below the level. However, the average monthly spend of these larger customers at 30 September 2013 was £5,408 up 6% on the £5,105 in 2012. Given the general trend for customer spend is deflationary the increase is a testament to the Group's success in cross selling new products and attracting larger clients.

Using service and Synapse to drive customer retention across the wider product set;The focus on service continues to drive improved client retention which is a key KPI. The Group has continued to experience low churn levels across all products (mobile churn is covered separately below). Unsurprisingly, churn remains lower in customers taking more than one product and who are users of the Synapse, the Group's portal.

At the end of 2012 we rebranded the portal as Synapse, to reflect its importance as the Group's main driver of service excellence. 2013 has seen this service excellence develop further with strong messaging, collateral and Social Media.

We have continued to drive development of Synapse, with enhancements delivering over a 50% increase in the speed and performance of the site, and the launch of a brand new user interface, as well as a live chat interface. Synapse usage has continued to grow year on year, with 43% of handset orders now placed online and 55% more Mobile network transactions done by clients directly.

Synapse is delivering tangible value to the Group. An analysis of Synapse users has proved that high synapse usage is indicative of high client satisfaction. They have a higher propensity to re-sign, and at a better margin (up to 7% more on average), and they are 60% more likely to take additional product when compared against light users (in Business Markets). We have used this intelligence to drive activity in the second half of the year, targeting key clients and prospects, with considerable success. We have been able to demonstrate how it can reduce client costs by up to 10% by eliminating non business usage, and also reduce client overheads by removing onerous time currently spent in telecoms reporting through the automation offered by Synapse.

A recent trial showed that from a group of 55 clients and prospects to whom Synapse was introduced and trialled, 10 prospects became clients, 12 took an additional product, and 15 re-signed, securing annual revenue of over £1.3m.

In the coming year we will continue to invest in Synapse development to remain ahead of the competition, by:

· expanding the proposition that Synapse covers so that clients are able to order, track, report, bill and service core products from the Group;

· enhancing the reporting module to increase performance and take account of increased client appetite to manipulate and interrogate large data sets, especially amongst our enterprise base; and

· integrating key 3rd party products to drive Synapse's value for our LAN, WAN and PBX propositions

Cross selling and up selling of products across our customer base

A key part of our organic growth strategy remains to sell more and higher value products to new and existing customers. The number of customers taking more than one product is 46% (down 2% from 48% in September 2012). More than 60% of the clients that churned were billing less than £100 per month and the average billing for new clients to the Group was circa £1,000 per month, more than 100% above the average churned client level. We have seen a sustained resilience in high product penetration, with the number of large customers buying more than one product increasing slightly to 74% (73% in September 2012). The average monthly spend of our higher spending business customers who take three or more products increased 3% to £6,119 in the year ended 30 September 2013 from £5,955 in the previous year. This, combined with the increase in customers taking six products (36 as at 30 September 2013 compared with 25 one year earlier), reflects good continuing focus on enhanced service and cross sell into the larger customers.

Product development and innovation to increase value to our customer base

Advanced Solutions

This year has seen the development of existing products from Juniper Networks alongside the full launch of two new vendors into the portfolio to support specific customer needs in security and wireless mobility from Palo Alto networks and Aruba respectively. In the Juniper Networks product set, we have improved our capability to deliver their class-leading edge routing, data centre switching and management platform solutions, creating a solid foundation for the delivery of Software Defined Networking (SDN) solutions as the market matures.

With Palo Alto we have improved our ability to provide our customers with the threat mitigation they need to protect the confidentiality, integrity and availability of business critical data against new and previously unknown (day-zero) attacks whilst complementing our existing security product base as an additional layer in 'defence in depth' deployments. Aruba Networks provides a leading wireless solution essential in competing for business in specific markets.

We have developed our data centre proposition to ensure our clients have access to a complete solution that fully integrates to dynamic virtualised server environments, participates in future software defined networking (SDN) domains and includes enhanced services such as advanced web application security and Denial of Service (DOS) Mitigation. This has already helped us strengthen our Tier 2 Service Provider credibility, benefitting us with a few large wins and building a strong foundation for future growth.

Mobile

The launch of 4G has been at the forefront of mobile developments this year, with both O2 and Vodafone propositions being launched to our clients. We have also launched BES10, BlackBerry's new operating system and a migration package for existing clients.

Much of the focus this year was to create a clearer understanding of the mobile market for our customers; this has been delivered and we have used it with great effect in helping clients to make the most informed possible commercial decisions for their businesses. A key part of this is the selection of the platform, or multiple platforms that best suit the needs of user groups. The choice of Android, Blackberry and/or Apple depends upon many factors, and we have used our expertise and experience to support the selection process, including the consideration of what applications are required, network preferences, 4G data use optimisation and the levels of security required.

To accommodate the increased focus on security and 'Bring Your Own' initiatives we have developed a range of customer premise options for mobile data optimisation (MDO) and mobile security to sit alongside our more comprehensive mobile device management (MDM) offering. These all work alongside Synapse to deliver complete visibility and control across potentially complex fleets.

Fixed line voice

We have re-branded fixed-line voice services under the name Futurevoice. Futurevoice services fuse together inbound, outbound, ISDN and SIP (Session Initiation Protocol) into one coherent proposition that allows clients to choose the right combination of technology to suit current needs, whilst having a simple and clear migration path to the future organisational needs.

Where clients have a requirement to maintain some of their existing ISDN service our contractual flexibility allows them to do so without restricting their ability to migrate to SIP before the end of the contract term. Furthermore, the migration packages we have made available to existing ISDN clients have supported strong SIP growth, providing clients with access to new features and functionality such as disaster recovery and toll-fraud protection.

Over the next 12 months we expect the following developments:

Advanced Solutions

As WAN connectivity is rapidly developing into a means of connecting to cloud-based services, we will deliver a Virtual Data Centre (VDC) capability with one existing connectivity supplier, and another early in the New Year. This will give clients the option to procure both connectivity and service from Alternative Networks under one contract. A new hosted firewall service is also part of the planned release programme this year.

As unified communications and collaboration increasingly become video based, we will launch the market leading RADVision product to provide clients with access to immersive video conferencing that allows collaboration across the full range of devices and network infrastructures (including 4G) that we provide. Alternative Networks have also adopted this technology to enhance our own collaboration between our often disparate team.

Mobile

We will be working this year to expand our mobile data solution set to include device-level mobile data optimisation. This will provide clients better visibility and control over data use and greater flexibility in how these are deployed on fixed, own device and mixed mobile estates.

To support our technical solutions around Bring Your Own Device (BYOD) we will also be launching an airtime separation initiative that will allow clients to offer SIM only to their staff so they may choose the device they wish to use. This will be supported by a device recycling programme that can help fund a range of mobile initiatives.

This year will also see a full evaluation of additional M2M capabilities to allow the Group to provide additional services for selected target markets.

Fixed line voice

Much of the Futurevoice focus this year will be around the combination of new offerings, such as hosted voice, with existing Alternative Networks services such as SIP and Unified Communications. This will allow us to give clients better choice in providing them with the services that fit their business models better, deliver enhanced agility and reflect the shift in the way many businesses now look to procure services.

Additionally we will be working closely with an existing provider of inbound services to create a feature-rich, powerful, and intuitive software based capability built upon direct feedback from our Inbound client base.

Outlook

While market conditions in London and the South East may have improved a little in the year, conditions overall in the UK have remained flat and challenging, especially with the Public Sector reducing its spend. This environment looks set to continue albeit with a more positive outlook. We expect to continue to benefit from the investments we have made into the business together with our existing portfolio, which will continue to make UK business customers operate more efficiently at lower costs.

We are very encouraged with the progress we have seen through the year. The targeted investments in marketing, increasing our technical ability and improving our client experience have enabled us to return to growth in the second half of the year and also enabled us to further improve our client retention and win larger clients with our broader product set. Our portal, Synapse, is fundamental to improving and maintaining our service offering and is helping the Group to increase its market share in key growth areas. We intend to continue looking for similar ways to enhance our offering.

We have started the new financial year on track and remain positive on our outlook as the investments we have made will deliver benefits and organic growth in the improving market. With our strong net cash position and high cash conversion we are well positioned to consider further acquisitions and this remains a key part of our strategy for growth.

Edward Spurrier

Chief Executive Officer

6 December 2013

Financial and Business review

Trading review

The Group remains in a strong financial position with a robust performance delivered across the key focus areas of Advanced Solutions and Mobile telephony. The cash performance continues to be good and the Group has cash reserves to utilise as required. In order to facilitate understanding of our business performance, the Group splits out its KPIs, both financial and non-financial into three distinct revenue segments. These are Mobile, Fixed Line, and Advanced Solutions. These enable users to benchmark the Group's performance against competitors and enable the Board to understand more clearly the underlying drivers to the Group's business.

Advanced Solutions - growth in full year revenues driven by 13% increase in second half

Advanced Solutions revenues were up 3% year on year as a result of a return to growth in the second half of the year where revenue was 13% up on the prior year and the level of client orders signed in the second half was 25% up on the first half of 2013 financial year. The revenue growth resulted from higher level of voice and data hardware - IP Networks and IP PBX hardware - and data services offset by decline in professional services as a number of new contract wins were hardware only.

Voice and Data Hardware

· Hardware revenues increased 8% to £15.6m (2012: £14.5m). This was the result of significant improvement in the second half where revenue was up 27% on the prior equivalent period, following a decline of 12% in the first half. This was a good result and came from targeted investment in marketing and client facing technical and selling skills. The benefits from these investments have resulted in some significant wins across a number of sectors including higher education and across our broader product portfolio. The Group added several new products into the portfolio during the year, including the launch of two new vendors in security, Palo Alto, and Aruba in wireless mobility which complement the existing product set. These developments have played an important part in the securing of larger customers and will continue to do so.

· Support revenues, covering maintenance and professional services, were down 7% to £13.1m. Maintenance revenue was broadly in line year on year and professional services revenue was below the prior year down as a number of the hardware contracts were provision only with no associated installation professional services. A number of these hardware only contracts were with Service Providers, a new area of focus for the Group, who have their own resources so were contracts on a hardware only basis with limited professional services requirement from our team.

· Data circuit revenues increased 20% to £5.3m in 2013. This growth is across broadband sales to existing clients, single site Ethernet sales and from SIP solutions for both existing and new customers. The overall number of customers has increased through the year which provides momentum into 2014. We also have a number of enterprise customers for whom we provide WAN solutions and expanding this is a priority. Despite the strong growth over recent years, the Group still has relatively low penetration of data products in its customer base, and this remains a focus for growth with a product suite covering MPLS, Ethernet First Mile, SIP, Data storage and business continuity products. We have developed our WAN offering to provide more value around monitoring and launched a virtual data centre proposition which is creating a greater propensity to change supplier.

· Gross margins for Systems held up well at 36%. This is in spite of the margin being impacted by the change in sales mix with more hardware as compared to professional services and the increase in lower margin data revenue driving down the margin level. The equilibrium was maintained by selling higher margin, more complex projects and improvements in the margins.

AKJ Billing Services

· AKJ Billing Services revenues were up 8% to £3.9m (2012:£3.7m). This is as a result of further growth in sales to third party customers and revenue from providing a hosted managed billing service. Intra group work required for Group companies at £0.7m at market value was in line with the level in 2012. This includes work on the billing system and the support of the Portal, rebranded as Synapse. During the year, AKJ won a contract to re-engineer and provide the billing services for a new managed hosting client worth £0.5m over two years.

· Gross margins at 49% were ahead of expectations, as the Group maintained its high client retention level and delivered more consultancy services. The increase on the previous year was driven by leveraging the existing direct cost to support the increased revenue.

Telephony Services

Mobile network services - 5% growth in subscribers resulting in 4% revenue growth driven by increase in customer base and near record low churn

Mobile revenues

Headline mobile revenues have increased by 4% to £42.0m (2012: £40.3m). This is broadly in line with the market share gains but revenue was dampened somewhat by regulatory changes to EU roaming data tariffs in July 2012 and July 2013. The changes fixed a regulatory cap on the amount a mobile supplier could charge for data usage in the EU zone. We have estimated that the impact was around £0.5m lower than the total in 2012 on a like for like basis. On this basis underlying growth would have been around 5%.

Mobile Margins

Mobile gross margins have reduced to 38% from 39% in 2012. The main driver of the reduction was the on-boarding costs associated with a large new client, the higher than normal level of client re-signs and the associated one-off hardware costs that come with both of these. Offsetting this reduction has been a benefit of new commercial arrangements from one of our key suppliers that came in during January 2013. Going forward, margins are expected to be between 37% and 40% with the key variables being the cost of subsidised smartphone equipment and the growth in data revenues.

Mobile Operating KPIs

The performance in the key metrics of subscriber growth, Monthly "ARPU" and "ADPU" and churn are set out below and represent a strong performance in a very competitive market. "ARPU" represents the average revenue from line rental and usage charges per live connection per month and "ADPU" is the average data usage per live connection:

· The mobile subscriber base has grown by over 4,200 subscribers net to 81,396, representing 5% annual growth, and has grown 6% in the 6 months since 31 March 2013. There were a number of larger customers won in the period, including notably De La Rue International and Persimmon.

o The key driver of growth was the increase of 3,860 connections in the Group's business subscriber base (2012: growth in subscriber base was 6,659). This is due to the on-going low levels of churn in the period, the client re-signs and larger customers being acquired, as a direct result of the considerable benefits available to them through Synapse.

o The managed base has increased by 450 subscribers. During the second half of the year we signed a major client which we were in the process of providing new services to at the year-end. At 30 September 2013 there were 1,400 subscribers awaiting connection that had been delayed by client led infrastructure requirements. These are expected to connect in the first quarter of the new financial year.

o There was a small reduction in the subscriber base recorded on a set of customers which are directly contracted with Alternative but via a virtual service provider ('VSP'). This business was acquired with ICB in 2005, and has gradually declined to around 100 connections. In 2013, the Group has re-entered this market place and has now signed up five VSP customers and expects this to be a source of growth for the connection base in 2014.

· "ARPU" represents the average spends in line rental and usage charges per live connection per month in the Group's contracted base of subscribers. ARPU has reduced by £3 from £44 to £41, representing a 7% reduction. The key factors in this trend are:

o The impact of the EU regulatory changes introducing a cap on data roaming charges that were introduced in July 2012. This reduced ARPU in the year by £1.92. The further reductions in the charges introduced in July 2013 have a lower impact reducing the ARPU in the year by £0.18; this will drive an estimated £0.50 further reduction in the coming financial year.

o A reduction in roaming usage - minutes billed were down by 4% against the previous year and on a per connection basis were down 13%. This is due to lower economic activity (business travel), but also confirms the trend to more data usage by customers, including Wi-Fi services. This accounted for a £1.20 reduction in ARPU.

o These are partially offset by the increase in data usage. "ADPU" represents the average data usage per live connection per month in the Group's contracted base of subscribers. The average ADPU for the period has increased by 51% to 68Mb and in September 2013 was 83Mb which demonstrates the rapid growth in data usage.

· Churn:

o Network churn was 15% which is a further reduction year on year on 2012 (2012: 16%). This is an excellent performance in a very competitive marketplace where it is easy to switch between networks and in a period where one competitor's network had the benefit of an early entry into the 4G market. The high retention is as a result of the overall client experience covering the service offering and the benefits of Synapse. The "churn by value" below and the increase in number of contracted subscribers "in contract" from 74% to 77% also demonstrate this.

o Churn by value, which illustrates the retention value of all contracted customers to the Group has again improved setting a new market leading benchmark. In 2013, churn by value was 13% compared with 14% in 2012, this compares very favourably with the broader industry where churn levels of 20% to 25% are commonplace and demonstrates the value the Group provides to clients.

Telephony Services

Fixed Line network services - gross margin up 3 percentage points in declining market 

The Group's approach to Fixed Line is to manage in the context of the declining market place whilst improving market share and profitability, and proactively migrating clients to SIP channels. In the year the number of SIP lines has increased by 2,800 to 4,056 and the Group increased the number of clients taking SIP lines by 52 to 84.

Overall Fixed line revenues are down 9% year on year to £34.4m with as a result of the move to SIP combined with the on-going market performance. Outbound revenue was down 11% and Inbound revenues were 2% below the prior year as both have been impacted by the loss of larger clients which have gone into administration in the period. However, gross margin performance was strong, with an increase of 300 basis points to 42%. The key points were:

· Outbound rental margins were ahead of 2012, as a result of successive years of cost reductions and buying gains. The sales mix change contributed a very small reduction in margins, as line rental margins are substantially lower than those on usage, and had a negligible drag effect.

· Outbound usage margins were up 5% for the full year, with the gain coming as the Group benefited from improved commercial arrangements from key suppliers.

· Inbound margins were lower at 42%, slightly below expectations, due in part to a rate reduction in the year and adverse client and product mix

Outbound services - Fixed line

· Outbound revenues decreased 11% to £26.5m (2012: £29.8m). The reduction in revenue is driven by the regulatory reduction in mobile termination rates. Revenue was also impacted by a large retail client going into administration in the first half of the year although there was no financial exposure to bad debts. The underlying performance was in line with industry trends as the reduction in call spends to mobiles, due to regulatory price reductions, and a move to email and mobile and IP based telephony continues to cannibalise traditional office based telephony revenues. Usage revenues per customer were up 2% year on year, as the Group continued to acquire more higher-spending customers.

· Outbound average revenue per customer per month ('ARPU') has increased 4% over the year to £1,423 as the business has churned lower revenue clients and more take both line rentals and calls. Average contract periods are slightly longer than the prior year.

· Wholesale Line Rental revenues ('WLR') declined 5% to £14.0m from £14.8m. The number of lines in the estate declined by 6% to 72,587; some of these were non or low billing analogue lines (14,450) that we have helped clients identify using Synapse. In addition, the above mentioned large retail client that went into administration caused a reduction of 1,400 lines. The balance was due to the continued proactive transition to SIP.

Inbound services - Fixed line

· Inbound services revenue at £7.9m was 2% below the prior year level. The reduction was a result of the loss of one of our larger clients in the insurance market. Apart from this, the underlying revenue was growing as demand increased particularly in the second half of the year as the overall economy has improved and existing client traffic has increased. Many of these customers are call centres for retail or consumer activity which have trended with the broader economic performance. The market remains a niche with relatively few players and the Group sees opportunities to grow its relatively small market share.

Capital investment

The Group invested £1.3m (2012: £1.0m) in tangible fixed assets and intangible software assets during the year.

In 2013, £0.4m was spent on IT hardware, including £0.3m on equipment installed in a third party data centre to host managed services for customers and support the Group's IT infrastructure.

In 2014, we estimate that a total of £1.3m will be invested across the Group, which is in line with the level in 2013. The key focus areas are further investment (£0.4m) in Synapse as outlined above, further investment (£0.2m) in our infrastructure to enable us to host other services in our third party data centre and investments in the existing CRM platform to improve our service to customers and reduce operating costs.

Cash flow

Cash inflow from operations was £14.4m (2012: £18.1m), compared to adjusted operating profits of £15.0m (2012: £15.3m). This represents a reported cash conversion to adjusted EBITDA of 91% (2012: 112%). Within this there were a number of one-offs movements: £0.9m (2012: £0.3m provision) National Insurance outflow related to share options that vested in the year, a supplier payment taken in October 2012 that related to the prior year and there was £0.4m outflow as part of the consideration for the Scalable acquisition. Stripping out these unusual items out the working capital inflow would have been £1.5m (2012 adjusted: £1.1m) which would result in cash generated £16.8m (2012: £15.9m). Underlying cash conversion of adjusted EBITDA is therefore 105% (2012: 104%).

Management continues to place significant emphasis on the cash performance and managing working capital and this has resulted in a five-year cumulative cash conversion of 104%.

The operating cash flow of the Group was derived and applied as follows:

The Group has renewed its unutilised bank facilities of £6m (2012: £6m) which are now committed until March 2017.

Finance costs

Finance costs were £0.1m (2012: £0.1m) driven by the cash performance during the year and the historically low LIBOR.

Tax

The effective tax rate for the year was 22.6% (2012: 22.8%). This is lower than the main rate of corporation tax of 23.5% expected for the year (2012: 25%).

The effective tax rate was lower mainly due to the benefit of corporation tax deductions for share options exercised. Before this adjustment, the effective tax rate was 23.6% (2012: 25.1%).

Earnings per share

Fully diluted adjusted earnings per share ('EPS') have increased by 2% to 22.9p (2012: 22.4p). Basic adjusted earnings per share have decreased by 2% from 25.3p to 24.7p. The statutory or unadjusted fully diluted earnings per share have increased 1% from 19.5p to 19.7p.

The weighted average number of shares in the year used for calculating the basic earnings per share has increased by 1,156,552. This is outlined in Note 7. The fully diluted number of shares has decreased by 1,143,735 due to the conversion of options to shares under the EBT and VCP schemes.

Basic EPS has reduced 0.9 pence per share as a result of the additional shares in the weighted average shares following the maturing share scheme, 0.6 pence per share, with the balance of 0.3 pence per share as a result of the lower operating profit in the year.

Dividend per Share

The Board has proposed a final dividend of 8.6 pence per share (2012: 7.5 pence per share) making a total ordinary dividend of 13.0 pence per share for the full year (2012: 11.5 pence per share). A special dividend of 4.0 pence per share was paid at the time of the interim dividend. The final dividend is slightly higher than guidance, reflecting the return to revenue growth in the second half of the financial year combined with the significant free cash generated in the year. The total 17.0 pence dividend per share at is 48% above the total paid in 2012 (2012: 11.5 pence). The Board remains committed to a progressive dividend policy, and has announced its commitment to raise the ordinary dividend by at least 10% in 2014 and in 2015 to progress towards a 15% annual growth target.

The dividend will be paid on 31 January 2014 to shareholders on the register as of 20 December 2013, with an "ex-dividend" date of 18 December 2013.

Share Repurchase authority

The Board has not tabled a resolution to extend this authority. This is because the renewal of this authority will also require an ordinary resolution passed by the shareholders in respect of the waiver needed from the Takeover Panel to cover the potential increase in shareholdings of James Murray and his associates, and the Board consider it sensible to convene a separate general meeting to cover both those resolutions in due course or to deal with the resolutions at a subsequent AGM. It is an onerous process, involving advisers, and costs, and the Board is likely to recommend that any extension in authority proposed is for three years in length, to avoid annual iterations.

Gavin Griggs,

Chief Financial Officer

6 December 2013

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 30 September 2013

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 30 September 2013

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

a) the balance classified as share capital includes the proceeds arising on issue of the Company's equity share capital, comprising 0.125p ordinary shares and the cancellation of shares purchased during the year.

b) Share premium represents the difference between the fair value consideration received and nominal value of shares issued.

c) Capital redemption reserve arose from the purchase of own share capital.

d) The merger reserve results from the previous acquisitions of Integrated Communications for Business (UK) Limited, Aurora Kendrick James Limited, Scalable Communications plc and The Telecom Centre Limited. This represents the difference between the value of the shares acquired (nominal value plus related share premium) and the nominal value of the shares issued.

e) All treasury shares were cancelled during the prior year.

CONSOLIDATED statement OF Cash flowS

For the year ended 30 September 2013

1 Basis of preparation

Alternative Networks plc is a company incorporated and domiciled in the United Kingdom under the Companies Act 2006. The address of the registered office is Chatfield Court, 56 Chatfield Road, London SW11 3UL.

This financial information is abridged and does not contain the Group's full financial statements for the years ended 30 September 2013 and 2012.

These financial statements have been prepared in accordance with IFRS as adopted by the EU and IFRIC interpretations and the Companies Act 2006 applicable to companies reporting under IFRS. The financial statements have been prepared under the historical cost convention.

Full financial statements for the year ended 30 September 2012 (which received an unqualified audit report) have been filed with the Registrar of Companies. Financial statements for the year ended 30 September 2013 were approved by the Board of Directors on 6 December 2013 and will be presented to the Members at the forthcoming Annual General Meeting.

2 Taxation

The current tax assessed for the year of 22.6% (2012: 22.8%) is lower (2012: lower) than the average rate of corporation tax in the UK of 23.5% (2012: 25%) applied to the profits before tax for the year. The differences are explained below:

The standard rate of corporation tax in the UK changed from 24% to 23% with effect from 1 April 2013. Accordingly, the Group's profits for this accounting period are taxed at an effective rate of 23.5%. Further changes to the UK Corporation tax system were announced in the March 2013 Budget Statement. The 2013 Finance Act includes legislation to reduce the main rate of corporation tax from 23% to 21% from 1 April 2014 and to further reduce it to 20% from 1 April 2015. The reduction in tax rate to 21% and subsequently to 20% were substantively enacted on 2 July 2013 and, therefore, are included in these financial statements.

3 Dividends

The 2012 proposed final dividend of 7.50 pence per 0.125p ordinary share (2011: 7.00 pence) was paid on 31 January 2013. The amount of dividend paid was £3,328,000 (2011: £3,237,000).

The Company paid a 2013 interim dividend of 4.40 pence per 0.125p ordinary share (2012: 4.00 pence), with a total payment value of £2,134,000 (2012: £1,852,000). This was paid on 15 July 2013 to shareholders on the register on 28 June 2013.

The Company paid a special second 2013 interim dividend of 4.00 pence per 0.125p ordinary share (2012: nil), with a total payment value of £1,940,000. This was paid on 15 July 2013 to shareholders on the register on 28 June 2013.

In addition, the Directors are proposing a final dividend in respect of the financial year ending 30 September 2013 of 8.60 pence per 0.125p ordinary share (2012: 7.50 pence) which will require an estimated £4,271,000 of shareholders' funds (2012: £3,476,000). Assuming it is approved by the shareholders at the Annual General Meeting on 28 January 2014, it will be paid on 30 January 2014 to shareholders who are on the register of members at 18 December 2013.

4 Earnings per share

The calculation of basic and fully diluted earnings per ordinary share is based on the profit attributable to owners of the Company divided by the weighted average number of ordinary shares in issue during the year.

For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares. The Group has one category of potential ordinary shares: those share options granted to employees where the exercise price is less than the average price of the Company's ordinary share during the year.

The profit and weighted average number of shares used in the calculations are set out below:

The adjusted EPS is based on the adjusted profit after tax as set out in note 10, and the weighted average number of shares as described above.

Share option costs included within adjusted profit attributable to owners of the company are reducing the earnings per share in 2013 by 1.3p (2012: 1.6p).

The calculation of the weighted average number of shares in issue excludes 2,201,746 shares (2012: 3,915,200) held by the Alternative Networks Employee Benefit Trust (EBT). These shares are then added to the total of extant options when calculating the fully diluted weighted average number of shares.

There were 49,662,667 shares in issue at 30 September 2013 (2012: 48,321,557). The weighted average number of shares during the year was 45,495,405 (2012: 44,338,853).

5 Trade and other receivables

6 Cash and cash equivalents

7 Called up share capital

During the year 3,317,151 shares were allotted under share option schemes as follows;

12,409 issued at 102.5p resulting in a share premium of £12,704

139,920 issued at 150.5p resulting in a share premium of £210,405

59,040 issued at 135.5p resulting in a share premium of £79,925

3,105,782 issued at nominal par value resulting in a share premium of £nil.

15,971 shares were issued to employees at 221.0p as part of a long-term incentive plan resulting in the creation of £35,276 of share premium.

On 31 October 2012, the Group repurchased 1,992,012 ordinary shares for cancellation. These were cancelled on 31 October 2012. The purchase was by tender offer whose terms were announced on 11 October 2012. The price per share was 251 pence and the total consideration was £4,999,950. This was in accordance with the mandate given to the Board at a general meeting on 29 March 2010, when the Group was granted authority to repurchase up to 4,436,085 shares before 29 March 2013.

8 Trade and other payables

9 Cash generated from operations

10 Reconciliation to adjusted performance

Adjusted EPS is calculated on adjusted earnings after deduction of share option costs.

This analysis is provided as the Group considers it provides a truer reflection of the underlying performance of the business, and is common practice in the investment analyst community.

Acquisition costs and associated items consist of the following;