Final Results

Alternative Networks plc

Results for the year to 30 September 2010

STRONG MOMENTUM PRODUCES RECORD PERFORMANCE

* Earnings before interest, taxation, depreciation and amortisation.

** Adjustments to operating profit (and EBITDA) relate to amortisation of acquired intangible assets, share option costs and impairment to freehold property, as set out in Note 10.

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

**** Dividend per share is the interim dividend paid and the final dividend proposed, divided by the number of shares in issue at the year end. In 2010, this included a special dividend paid of 3 pence per share.

Highlights

o Revenues increase of 7% to £96m. Organic growth of 4%, excluding new AKJ revenues for 11 months.

o Gains in market share:

§ Mobile subscribers increased 12% to 62,136 (2009: 55,299).

§ Fixed line customers' lines/channels increased 18% to 79,862 (2009: 67,587). Fixed line revenues grew 12% y-o-y in H2.

o Improving profitability - gross margins up from 35% to 36%, and adjusted operating profit margins up from 10% to 12%

o Strong balance sheet and excellent cash generation:

§ Free cash flow of £10.9m (2009: £7.9m).

§ Strong cash conversion at 112% adjusted EBITDA (2009: 110%)

§ Net cash funds of £11.1m at 30 September (2009: £8.1m)

o Proposed full year normal dividend increase of 20% to 6.1p excluding 3p special paid in April 2010 supported by strong cash flow and higher earnings growth (2009: 5.1p).

o Strategic acquisition of IP Networks integrator, Scalable, achieved October 2010.

o Vodafone and O2 service provider licences each extended to December 2012 and July 2013 respectively.

James Murray, CEO of Alternative Networks, commented:

"We are very pleased with this performance, which has delivered growth in all areas. It demonstrates the strength both of our business model and of our market position. We are rapidly becoming a leading mobile systems and data integrator and the strategy we have put in place, combining organic growth with high quality acquisitions, is supporting this objective. One of the most important aspects of this performance has been our increasing ability to cross sell a greater number of products to a client base whose spend is also growing.

"We have started the current financial year strongly, continuing the momentum that became apparent in the second half of last year. Demand for our products is growing and market conditions are stabilising, giving us confidence that our strategy will deliver long term value."

ENQUIRIES:

 Chairman's Statement

Alternative Networks' performance this year has been impressive, and I thank all our employees for their continued commitment. Sales grew by 7%, but an increase in operating margins saw a 25% rise in EBITDA, from £8.9m to £11.2m. On a like for like basis, revenues were up 4% and Telephony Services being fixed line and mobile, recorded 7% organic growth.

Cash generation has continued to be very strong. Cash inflow from operations was £13.6m, representing 112% of adjusted EBITDA. Free cash flow was £10.9m, compared with £7.9m in 2009, and the Group ended the year with cash of £12m, 34% higher than a year previously. Given that £4.3m of cash was spent on the AKJ acquisition, and £4.1m of cash was also returned to shareholders by way of dividends and share buy backs, this underlines the strength of the Group's performance.

The strong cash position and confidence in the momentum of the business has enabled the Board to increase the proposed final dividend by 17% to 4.1p, making a total for the year of 9.1p, including a special dividend of 3p per share. Excluding the special dividend, the total dividend for the year was 6.1p, an increase of 20% over 2009, in line with our progressive dividend policy.

In addition to the strong financial performance, Alternative Networks also made significant progress in its strategy of transforming itself from a traditional fixed and mobile telephony reseller into a leading mobile systems and data integrator. Two strategic acquisitions were completed in less than a year to support this objective.

The first, Aurora Kendrick James ('AKJ'), allowed the Group to accelerate the development of a customer Portal to support converged services, as well as a market leading integrated billing platform. The Portal is web-based and converges billing, reporting, ordering and support. The service was launched in October 2010, ahead of schedule, and has already delivered tangible efficiency benefits both to ourselves and to our clients. We believe this is unique in the market and it is a key component in delivering the highest levels of customer service and it will underpin our drive to achieve greater levels of cross selling.

The second acquisition, which was completed since the year end, was of Scalable Communications plc ("Scalable"), an IP networks integrator. Scalable will rapidly enable the Group to fulfil its objective of delivering converged voice and data products in a market where telephony is increasingly based on IP.

Cross selling is a fundamental part of the Group's strategy to deliver long term growth. The Group has steadily increased the number of customers taking at least three services. 59% of our larger customers now take three or more services. Two years ago, the proportion of such customers was only 44%. Moreover, our customer profile is evolving as we increasingly target larger companies in the SME space, resulting in higher spend per customer. The Group has pursued a considered and highly effective strategy of organic growth combined with strategic acquisitions. Further acquisition opportunities are being sought, but they have to meet the Group's strict criteria and complement our existing product base.

The outlook for the Group continues to be positive. The strategic initiatives put in place by the management team has created a strong platform, meaning the Group is well placed to capitalise on the fast moving business communications market of today. Market conditions, whilst still challenging, have stabilised and demand for the Group's converged product base, which has been enhanced by the acquisitions that have been made, is growing. We therefore look forward to a continued period of success and to delivering long term growth for our shareholders.

Tony Caplin

Non-Executive Chairman

3 December 2010

Chief Executive's Report 

Overview

This has been an excellent year on a number of fronts.

First, we have delivered record results for the group, with the highest recorded sales, profits, cash levels and dividends in our 16 year history. The return to organic top line growth in a market where our peers generally recorded further declines in revenues was especially pleasing as a validation of our strategy, our success in cross selling, and our employees' commitment through a difficult period.

Secondly, the acquisition of AKJ performed ahead of expectations. The development of the Group's Portal is on target, and this strategic acquisition has opened up new potential revenue streams for the Group, as evidenced by two significant deals recently signed and detailed below.

Finally, we finished the year securing the acquisition of Scalable Communications plc, which is the right fit data acquisition we have looked to deliver, and which gives us a strong platform on which to offer a fully converged mobile, systems and data suite of products to our core market and to allow us to target larger enterprises.

Financial Results

Group sales increased 7% to £96.2m (2009: £89.7m). The differing product sets' results are analysed further below. AKJ has contributed £3.1m of revenue in the 11 months since acquisition. Group sales increased 4% on a like for like basis.

Gross profit margins have increased to 35.8% (2009: 35.0%). AKJ, with their higher margin product portfolio, have contributed to this rise. Underlying margins have held firm, and margins per product set are reviewed in more detail below.

Adjusted operating profits of the Group increased by 28% to £11.5m (2009: £9.0m).

Share option costs increased to £1.0m (2009: £0.6m) due to an amendment to the 2008 LTIP, the introduction of the 2010 LTIP, and provisions made for related taxes.

On a statutory basis, pre-tax profits increased 30% from £7.1m to £9.2m, with operating profits also increasing by 30% from £7.0m to £9.1m.

Cash generation continues to be very strong. Net cash generated from operations was £13.6m (2009: £10.6m) which was 112% of adjusted EBITDA in the period (2009: 110%). Free cash flow was £10.9m (2009: £7.9m) enabling the Group to return a further £0.4m to shareholders during the year through a general share buyback programme, and end the year with £12.0m cash (2009: £9.0m).

Adjusted earnings per share increased 25% and 20% in basic and diluted earnings to 18.0p and 16.7p respectively. Statutory earnings per share rose 31% from 12.0p to 15.7p. A detailed reconciliation is set out below in the financial and business review.

The Board has proposed a final dividend of 4.1p (2009: 3.5p), making a total of 9.1p for the year (2009: 5.1p), in line with our progressive dividend policy. The current year includes a special 3.0p dividend paid out to shareholders. Excluding the special dividend, total dividends increased by 1p to 6.1p.

Strategy

The Group has continued its successful twin strategy of organic and acquisitive growth to become the preferred Converged Communications partner of choice for the UK's SME business market.

Strategy - Acquisitions

Since 30 September 2009, the Group has made two acquisitions less than 12 months apart.

1. Acquisition of Aurora Kendrick James Limited ('AKJ')

On 30 October 2009, we acquired the entire share capital of AKJ, our billing services partner, for a maximum consideration of £5.5m; the initial consideration consisting of £3.75m cash and £0.8m through the issue of 707,076 ordinary shares. The deferred consideration was a maximum of £0.95m and this was agreed in August 2010 to be settled at £0.66m, meaning a final total consideration of £5.21m. The early settlement of the earn-out has permitted accelerated development of the Portal.

The AKJ group is based in Chatham, Kent and were approximately 50 staff on acquisition, of which 25 were IT developers. In the year ended 31 July 2009, AKJ increased sales by 4% to £3.6m, and the group made a pre tax profit of £0.3m, and underlying EBITDA of £0.6m. AKJ's results for the 11 months ended 30 September are set out further below.

The deal was relatively small but nonetheless strategically important for the Group. The rationale for the acquisition was threefold:

·; principally to accelerate development of the Group's Portal, which has since been launched on 18 October 2010,

·; secondly, to secure and build on the exclusive use and development of a market leading billing solution, and finally

·; to expand their business by targeting larger customers and by exploiting AKJ's relationships with its 75 customers to promote additional services into them.

Since the year end, AKJ has delivered two important new contracts to the Group. The first is for the management of approximately 2,000 mobiles for RSM Tenon. The services include enhanced billing reporting services as well as ordinary services. The second is an exciting new billing and provisioning services contract with a major mobile network operator, worth an estimated £0.4m in the first year, and over £1m in total, relating to their fixed line services and the provisioning of WLR3 connections to BT Openreach.

2. Acquisition of Scalable Communications plc ('Scalable')

On 2 October 2010 we announced the acquisition of Scalable for approximately £10m. The consideration was £7.5m cash, with up to £4m deferred based on performance in the two years to 31 December 2011. If Scalable were to achieve its own target, delivering compound annual growth of EBITDA over two years of 40%, the estimated deferred consideration would be £2.5m. The first £1m of the deferred element is to be paid in shares.

Scalable is a IP networks integrator based in Buckinghamshire and London. With just over 50 staff, it is a major partner of Juniper, Extreme, Mitel and F5, and targets the larger SME and enterprise business customers. It consults, builds, installs, and maintains IP configured voice and data networks, also supplying security and a number of other bespoke solutions. Typical clients include Charles Russell, Liverpool Women's NHS Foundation Trust, Fulham Football Club and it has recently won significant accounts with Carillion and Freshfields. It operates directly with clients and also with system integrators, and has recently invested in a modern Network Operating Centre ('NOC') in its head office, so it can constantly monitor and support its customers remotely.

In the year to 31 December 2009, Scalable reported revenues of £12.5m and EBITDA of £0.9m. Gross assets at 31 December 2009 were £5.6m. On acquisition, management were expecting revenues to grow to £15m and EBITDA to increase to £1.4m for the year to 31 December 2010.

The acquisition of Scalable is key to the Group's plans to deliver converged voice and data products in an IP world. Scalable already understand the needs of the Group's larger customers, and are experienced in delivering converged solutions. Critically, as traditional telephony products migrate to Session Initiated Protocol ('SIP'), Scalable is already a leading player in those products.

The acquisition brings enormous opportunities to cross sell as there is limited existing cross over in both Scalable and Alternative's larger client lists and product sets.

The Group continues proactively to monitor the market looking for further acquisitions that have the right fit. Our criteria remain that targets need to be successful, growing, and profitable and have similar sets of customers to the Group. Further bolt-on acquisitions to complement the existing products are being considered, as well as targeting businesses in adjacent product sets.

Strategy- Organic growth

Review of Organic Growth factors - update on Key Performance Indicators

The four key organic growth factors supporting our strategy remain:

Focus on larger customers in SME space

We continue to target the mid enterprise market, particularly those customers with multi-sites and employees ranging from 80 to 1000.

At 30 September 2010, there were 1,249 customers with spends over £1k per month. This is the same as at 30 September 2009. However, the average spends of these customers is increasing as more products are added, and larger customers replace smaller ones in this category. The average spends of these customers increased 5% to £4,765 per month in September 2010, from £4,535 in September 2009.

At 30 September 2010, the number of higher spending business customers who take more than 3 products from the group increased to 734 from 722 at 30 September 2009, representing 59% of the larger client base (2009: 58%). These customers average spend increased 6% to £5,506 per month in September 2010, from £5,180 in September 2009.

Key customers are highlighted in the products results sections.

Channel 4 and BPP are good examples of clients which have been with either Alternative Networks or Echo for some time, which have significantly increased the number of services they take from us in 2010. In Channel 4's case, they have been a longstanding fixed and mobile services client and we have added IP pbx and support, and for BPP they were an Echo maintenance client, and we have added outbound services, more support revenues and delivered new IP hardware solutions.

The success of cross selling products into our existing smaller customers so that smaller customers become larger ones can also be measured as below.

Cross-selling

A key part of our organic growth strategy remains to sell more products to new and existing customers. During the period we have had further success substantially increasing the product penetration in our customer base. The number of customers taking more than one product is 46% (up from 40% in September 2009). This has been helped by the number of multi-product new customers. In the larger customer base (i.e. those spending > £1,000) we have seen a continued increase in product penetration, with the number of large customers buying more than one product up to 78% (75% in September 2009).

Reduction in churn

The group has continued to experience low churn levels across all products (mobile churn is covered separately below). Unsurprisingly, churn remains lower in customers who take more than one product and are users of the Alternative Portal (see below).

Product Development

The group continues to expand its product range to enable it to take a wider share of its customers spend on communications and providing a wider range of products with which to engage new customers. Summarised below are the major developments in each product group in the year:

Mobile The year saw the launch of Android handsets from HTC and Samsung. We also welcomed the BlackBerry Bold 9700, and more recently the touch screen Torch 9800, which is the first of a new range of handsets featuring BlackBerry operating system version 6. These were supported by a BlackBerry Enterprise Server Express product which was a cheaper function-lite product; and also the new BlackBerry Advantage premium support package.

Fixed Line Voice Alternative launched a business-grade SIP Trunking service, providing an IP business grade product alternative to ISDN, for the larger customer. Our service provides quality and security through ensuring that all aspects of customer hardware, connectivity, and numbering are compatible and supplying additional hardware, and bespoke services where required.

We continued to develop our traditional voice products by migrating our analogue line rental customers to the WLR3 product. This was easily facilitated by AKJ who are an BT Openreach Third Party Integrator. Our ISDN migration to WLR3 will be complete in January 2011. These developments provide us with access to a wider range of "equivalent" products from BT Openreach including resilience solutions and temporary lines.

Advanced Solutions The group continued to strengthen its connectivity portfolio by launching corporate MPLS and high speed data connections from Opal (Part of the Talk Talk Group). These utilise unbundled broadband and Ethernet to deliver a competitive advantage over traditional forms of connectivity.

We also gained accreditation to install and support Trapeze wi-fi networks (recently acquired by Juniper). This allows us to deploy secure, voice-quality wireless coverage, asset tracking, and radio frequency firewalls.

Summarised below is the product development expected over the next 6 months :

Mobile: Alternative were one of the first wave of Vodafone Service Providers to have been accredited since our year end to sell the Apple iPhone, further widening our choice of smartphones, associated applications, and opportunities to converge mobile and fixed-line.

We also look forward to launching a range of handsets utilising the new Windows 7 Mobile operating system, and expanding our Android range into a new category with the Samsung Galaxy S tablet.

Advanced Solutions: We plan to launch Power NGN Plus - A cloud-based service from Exponential-e, which gives our clients the ability to analyse and control traffic types on business grade internet connections. The service will also be effective in preventing illegal file-sharing over the corporate network in accordance with the emerging Digital Economies Act.

Also in development is Alternative Backup (backup as a service) which is an online server backup service to SME businesses. This can also be bespoke and offer larger customers a managed backup service, removing many of the capital costs and management overhead of an alternative (eg tape based) backup system.

We continue to develop our deployment of both Avaya and Mitel PBX and associated applications in a virtualized environment. The Group is now in the VMWare partner programme and as such is formalising the skills we already have in this area.

Your Alternative Portal

We successfully launched the Portal in October 2010. This established our unique web-based portal that will converge billing, reporting, ordering and support. The portal is being developed in-house by Group developers, including several drawn from AKJ. The first launch has already delivered efficiency benefits to both clients and the Group. This included the launch of online fault reporting across all product lines; and a new design to rehouse the existing "Clarity" application, as well as provide a new central hub on which future services will be accessible.

The monthly rate of new subscriptions to the Portal has increased by 400%, as we attracted new users from within the existing base, e.g. clients who only had the Advanced Solutions products, and had not previously needed to use the application.

We have assembled a client focus group to help guide and prioritise the Portal development. This is made up of 100 key and strategic clients including Swinton Insurance, MacMillan Cancer Care and Computer 2000. Using feedback from this group we have formulated the next 6 months development plan.

Key deliverables for the Portal for next 9 months are:

·; A new suite of Asset Management functionality which will make it simple for clients to track and manage all of their assets (either with AN or another supplier) - this will encourage further usage of the portal and generate cross sell opportunities

·; Enhancements to the fault reporting service, showing case updates and allowing client interaction

·; Allowing clients to place orders and track their progress online

·; Provide full control of the Mobile fleet, allowing clients to activate new connections, international roaming and add/remove bars

·; New reporting to show trends and usage visually, and bespoke reports to further help clients to control cost.

·; The new infrastructure will improve marketing to specific clients within the Portal based on criteria such as products taken, size, and usage patterns

Outlook

We remain cautiously optimistic for further growth in the year ahead. Scalable has traded positively, ahead of target, since acquisition. AKJ has started the year well, and most importantly, in our core business we are well set with established and experienced sales and operations teams who continue to sell and deliver an expanded converged suite of communications products into new and existing customers. We are investing nearly £2m in developing our sales resources and in building the customer Portal, to further underpin organic growth in the medium term.

Our customers have generally weathered the recession well and whilst customer spend has remained relatively flat we hope to see signs of renewed economic confidence later in 2011. The market is consolidating at a pace, but there remain opportunities for successful bolt-on acquisitions across all our core product sets.

James Murray

Chief Executive Officer

3 December 2010

Financial and Business review 

Trading review by products

The Group operates three separate entities - Alternative Networks, Echo, and AKJ. These are separate trading segments whose services are respectively described as Telephony Services, Advance Solutions, and Billing Services. Telephony Services includes both Mobile and Fixed Line network services. In order to assist investors, the Group splits out its KPIs into 3 distinct revenue groupings, Mobile, Fixed Line, and the balance in Advance Solutions, because these enable users to benchmark performance against competitors and understand more clearly the underlying drivers to the Group's business.

Telephony

·; Group mobile revenues have increased by 4% to £43.3m (2009: £41.6m), with continued market share gains and a stable ARPU.

·; "ARPU" represents the average spends in line rental and usage charges per live connection per month. It has remained stable at £52. In the first six months, ARPU was £51.40, being 50 pence below the previous six months. In the second half of 2010, ARPU has increased to £51.90. The reasons for the stability and modest growth in ARPU in the second half are:

o Continued take up of Smartphones by customers (now 31% up from 25% a year ago) which on average have higher ARPU than traditional voice only handsets;

o Increased stability in international traffic revenues, in spite of some EU imposed reductions in data and SMS revenues;

o Increase in fixed rental products, such as tariff bundles and data tariff bolt-ons, is providing less volatility in ARPU, e.g. the fixed rental element of ARPU has increased from £20 to £22.

The ARPU of the managed base is £41, and is not included in the ARPU calculations above. The managed base was transferred to the Group following a tender pitch to a major network operator who transferred over 50 customers in October 2009. These 6,537 subscribers are not included in the gross new connections in the year to enable a like for like comparison.

·; The business subscriber base for the Group has increased 12% from 55,299 to 62,136 subscribers :

o Net additions in the year were 6,837 (2009: 3,309), reflecting continued gains in market share by the Group. Of these, 6,537 were the managed base. The remaining 300 is the net growth in the subscriber base over the year. As stated in the trading update in 2010, the Group was hindered in the second half of the year by not having access to the Apple business products (e.g. the newly launched iPhone 4) but this has since been remedied, and our sales people are now selling the iPhone and related mobility services.

o Data connections continued to grow rapidly. They now represent 46.4% (2009: 41.9%), of total connections. "Converged devices" or Smartphones continue to gain wider adoption with cheaper Blackberry services being launched this year. The number of converged devices has grown over 25% (2008: 40%) in the year to over 19,000 connections (2009: 15,000), and they now account for over 30% of all connections. This trend is expected to continue over the year ahead. Data-only devices such as "dongles" and more recently, Netbooks, increased to 9,700, up from over 8,000 last year. These continue to dilute ARPU but remain a core part of servicing and retaining business customers.

·; Churn - Network churn was lower than 2009 at 19% (2009: 20%) and remains within our traditional low churn band of 16-20%. As in 2009, the second half of the year had higher churn than the first half. Network churn was 18% at the interim stage (2009 H1: 18%). In the second half, the Group lost three of its largest customers in competitive tenders to other networks on significantly lower pricing. One common feature to these customer losses was that none of these clients took other products from the Group, and they were larger than the typical Group client being won. Otherwise, churn was at low levels for the converged customers. The Group has also managed to renew a considerable number of contracts in a very busy 6 month period.

Unsurprisingly due to the high value clients lost, the churn measurement by value also increased from 15% to 18%. Again it should be noted that the rate has been higher in previous years (21% in 2007) and still remains low by industry standards.

The churn in the new managed base has averaged 30% over the period, but this was less than expected; by the year end over 70% of the base is contracted in for the next 18 months, and so churn rates are expected to fall

·; Mobile gross margins have increased substantially to 32.0% from 29.9% in 2009. The increase is due to the new managed base of customers, where the revenues in the Group's accounts are a net commission less hardware costs for renewing customers, and the margin on these revenues is much higher. Underlying margins in the rest of the business are resilient and have held at the same rate as last year (29.9%), with margins on traffic and rentals having increased 0.2% margin basis points. This gain was then offset by an £0.2m increase in the cost of providing hardware and other subsidies to customers on entering into new or renewed contracts.

Fixed Line network services

Group sales have grown strongly and organically by 9% from £33.8m to £37.0m. Momentum is growing within the business: In the first half revenues grew 6.5%; and in the second half the year on year growth was 12% and the second half was 4% ahead of the first. This is an industry beating performance, as there are very few peers in the sector showing net increases in fixed line revenues. These strong gains are due to continued market share gains with wins of larger customers, attracted by the bespoke billing and reporting offering from our Clarity online platform. Significant new customers include Carpetright, Brake Brothers, and Royal College of Nursing. 

Gross margins overall were down 1.3%. The reasons for the decline were as follows :

o 0.9% was due to a change in outbound sales mix as lower margin fixed rentals increased to 46% of outbound revenues from 41%

o 0.4% was due to 2% lower margins on Inbound products as a result of the 0870 regulatory changes effected in August 2009

Outbound services - Fixed line

·; Outbound revenues increased 9% to £29.4m (2009: £26.9m). Line rental revenues grew 25% to £13.4m, and usage revenues were flat, showing a decline of only 1% (2009: 16% decline) to £15.9m. This good performance reflected the accretion of larger customers with larger telecoms estates, e.g. Carpetright, Menzies Distribution, and Royal College of Nursing, and this is borne out by the monthly average revenue per customer "ARPU" increasing 13% to £1,220

·; Usage revenues have been reviewed in detail. In summary, average call values are declining at a lower rate than previous years, and the volume of calls in the customer base are increasing, entailing a potential return to usage revenue growth

o The number of billed call minutes increased 6% year on year (2009: reduced 16%) due to an increase in higher usage customers

o Total usage revenues remained flat, with price drops of between 6% and 10% depending on call type per minute billed (2009: 15% average decline), more than offsetting the 6% increase in call volumes

o In value terms, the largest impact was from calls to mobiles where average revenues per minute were down 8%. This was due to the reduction in mobile termination rates being reflected in retail pricing in 2010.

·; Wholesale Line Rental revenues ('WLR') grew 25% to £13.4m from £10.7m. The number of lines grew by 12,275, representing 18% growth. The net gains were slightly stronger in the second half with net gains of 6,300 compared to just under 6,000 in the first half. WLR now accounts for 46% outbound revenues (2009: 40%) and at the year end, the annualised run rate was just over £15m of WLR revenues

·; Gross margins, ignoring the effect of the sales mix, remained resilient, entrenched in the same ranges as 2009. Line rental margins are in the 21-23% range, and call margins are 40 - 42%. Looking ahead, changes in the mobile termination rates reductions expected in 2011 are likely to help keep margins up and overall at similar levels, assuming some modest decline in composite margins due to further sales mix changes.

Inbound services -Fixed line

·; Inbound services were stronger than expected in 2010 resulting in overall growth of 10% to £7.6m. Expectations had been muted due to the effective removal of 0870 "Revenue Share" services by Ofcom in August 2009. Accordingly, it was difficult to predict which products would be selected by the major customers to replace these 0870 revenue streams, and the Board was cautious in outlook and therefore happy with the outcome. The key features of the year's performance wer :

o Inbound call revenues on 08xx and 03xx ranges grew by over 20%. This was a function of three factors - new customer wins, a return to higher levels of economic activity in our top 5 customers' businesses, and customers accepting being charged for incoming calls to 0870 numbers, rather than switching to another "Revenue Share" product

o "Revenue Share" revenues remained steady at £4m. Revenue share revenues were expected to be lower than in 2009 but revenues held up due to the addition of two large new customers, as well as an estimated one off beneficial impact of £0.1m provided by the Icelandic "Ash Cloud" boosting calls received by our clients in the travel and holiday services sector

o Gross margins have fallen back as expected due to the change in products and services now offered and due to renewals of large customers' contracts in the period on lower rates. In spite of successful negotiations with suppliers, the margin reductions are expected to remain with us, as we move to IP based products, and guidance for margins going forward is 48-52% range rather than 53-57% enjoyed in previous years

Advanced Solutions (including Billing Services)

In this year, the results include 11 months of the acquired billing services business, AKJ. These revenues have contributed to an overall growth of 11%. At the underlying level, the like for like revenues in connection with installing IP telephone systems ('pbx') and data services were down 10% to £12.8m, as in the first 6 months in particular, sales of new IP pbx were weaker. Overall, gross margins were stronger, increased by 2% points, largely as a result of higher margins in the acquired billing services group, as margins in the IP pbx and data businesses were maintained. During the year, the Group established a new data sales team and a "blue lights" sales team, and a specialist maintenance support sales team costing in aggregate an extra £0.3m.

Gross profits for 2009 have been restated upwards from £5.5m, as £0.6m costs related to customer services have been relocated to administration costs below the line.

Advanced Solutions - IP PBX and Data services

·; IP PBX install revenues were down £1.5m year on year from £7.7m. The recession, together with the credit crunch meant that customers have been disinclined to invest in new equipment even if they had access to the funds, and expectations were set low. On top of this, the combined impact of a harsh winter and a general election meant that the first half was weak, with only £2.8m sales. The second half has been considerably stronger.

o Revenues in the second half have improved to £3.4m, only 6% down on the corresponding period last year (2009 H2: £3.6m)

o The final quarter produced a record £3.2m sales signed, substantially ahead of budget;

o Deferred income, being revenues invoiced but not recognised in the income account until completed, finished the year at £1.4m up from £0.8m at the end of September 2009, meaning an additional £0.6m is carried into 2011

This was a good performance relative to the market. And the outlook is considerably more positive than a year ago. In addition, the new "Blue lights" team traded profitably and landed some key new accounts, e.g. East Midland Ambulance Service

Major client deals included Towers Watson and BPP and four out of the top five highest billing customers were multi product deals

·; Maintenance revenues have remained flat (down 2% to £4.5m). This has been a decent performance especially given the pressure on reducing prices for existing customers, customers closing sites (responsible for 50% of all churn), and the lower level of newly sold hardware. The customer profile has changed as mentioned at the interims. There has been an increase in the average revenue per customer which has risen to £3,800 (6 months to 31 March 2010 : £3,500) as the group has won higher spending new accounts, e.g. Channel 4 and Arqiva, and the Group has lost some smaller accounts. Net gross margin on support services is solid at £2.4m (2009: £2.4m) owing to reduced engineering staff in AN offsetting higher outsourced contract costs

·; Data circuit revenues have increased 5% year on year to £2.1m. A new sales team were brought in during the period and growth targets for 2011 are to increase revenues by over 30%. A number of multi-product deals for new customers brought MPLS revenues to the Group, but as noted before, these have longer connection timelines

Billing Services

·; Sales in the 11 month period were £3.1m, and EBITDA was £0.43m. This was after netting out £0.24m intra group services. On a standalone basis, the annualised EBITDA would equate to £0.72m compared with £0.58 underlying EBITDA in the 12 months to 31 July 2009

·; In the period, AKJ won twelve new customers adding annualised revenues of £0.4m, bolstering its strong market position in the reseller billing services market. Since the period end, AKJ has also won a significant account which will deliver £0.4m in the year to 30 September 2011. AKJ lost just four clients during the period, and has received notice that two further clients will be looking to leave at some stage next year, due to disposals of their businesses. The total annualised revenue losses, including £0.1m known at acquisition, amounts to £0.3m. In addition, in the first 11 months, AKJ renewed existing contracts with annualised revenues of £0.9m

·; The work that AKJ has completed for the Group and the plans for the portal are summarised in the Chief Executive's report

Capital investment

The Group invested £0.21m (2009: £0.34m) in tangible fixed assets and intangible software assets during the year. As in 2009, the expenditure was principally on the Group's IT infrastructure and client facing software.

Capital expenditure in 2011 is expected to be £0.9m, as the Group looks to invest in accelerating the development of our Alternative Portal, which will total at least £0.5m. Since the earn-out of AKJ was settled in August 2010, the Group has assembled a team of developers to deliver the Portal application in 3 phases over 2010 and 2011. Further information will be provided on our web site as the Portal is upgraded.

Freehold property

As mentioned last year, an unsolicited offer to purchase the freehold property of Echo's former headquarters was received for £725,000. The property was in the accounts at this value and the Board sold the property on 17 December 2009, booking net proceeds of £719,000.

Cash flow

Cash inflow from operations was very strong bringing in £13.6m (2009: £10.6m), compared to underlying operating profits of £11.5m (2009: £9.0m). This included a working capital inflow of £1.8m (2009: inflow of £1.0m).

The additional net working capital inflow is mainly due to increased employee bonus accruals of £0.4m, and increased VAT creditor following the rise back to 17.5% of £0.3m.

Customer debtors and accrued income have increased by £1.5m. However, this is not due to extended payment terms. £0.5m of the increase is due to the managed mobile customers' debts which are recognised in the balance sheet for the first time, and £0.7m increase is due to changes in the invoicing timetable for IP phone system completions and maintenance, with corresponding adjustments in deferred income. Essentially, sales invoices are being raised earlier.

The high rates of cash conversion continue to highlight the Group's strong control over working capital The high cash conversion rate of EBITDA is averaging around 106% in the last three years. In 2010, the cash conversion is 111% adjusted EBITDA (2009: 110%). The cash conversion of AKJ in its first 11 months was over 100%.

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

The Group has unutilised bank facilities of £12m which are set to expire in January 2011. Currently, the Board intends to arrange for the £6m overdraft facility to renew, and will continue to monitor when it may be in the Group's best interests to commit to longer term facilities, given their associated costs if unutilised.

Tax

The effective tax rate was 27.4% (2009: 28.5%). 

The main reason for the reduced tax rate was a £0.25m reduction in tax due to the difference between the tax relief actually arising on the exercise of nil cost share options by Alternative Networks' staff, and the release of the related deferred tax asset established in prior periods. This was triggered by the LTIP of the Executive Board vesting in April 2010.

In 2009, the charge was 0.5% higher due to the disallowance of the freehold property impairment charge.

Share Buy Backs

Pursuant to the authority granted at an EGM on 24 July 2008, the Group repurchased 320,000 shares, between 2 and 8 October 2009 for an aggregate sum of £359,100, being 112 pence on average per share, and subsequently cancelled them. This authority lapsed at the AGM on 25 January 2010.

At a general meeting on 29 March 2010, the Group was granted further authority to repurchase up to 4,436,085 shares before 29 March 2013. To date the Group has not repurchased any shares under that authority. The Directors will continue to monitor the level of cash required for the business and determine if further repurchases remain in the shareholders' best interests.

The 1 million shares held in Treasury will continue to be held for potential use in satisfying share option exercises and equity issued as part of an acquisition.

The Board will continue to monitor levels of cash and, whilst these have historically been used for earnings enhancing acquisitions, the possibility of returning excess levels of cash to shareholders via a special dividend or further share buybacks will remain under consideration.

Earnings per share

Fully diluted adjusted earnings per share ('EPS') have increased by 26% to 16.7p (2009: 13.9p). Basic adjusted earnings per share have increased 25% from 18.0p to 14.4p. 

The statutory or unadjusted fully diluted earnings per share have increased 25% from 11.6p to 14.5p, and the basic statutory earnings per share have increased 31% from 12.0p to 15.7p.

The impact of the increase in share based costs (rising from £0.6m in 2009 to £1.0m in 2010) has been to reduce EPS by approximately 1.3 pence in 2010, on a like for like basis. In addition, the 2009 diluted EPS did not account for any impact for the 2008 LTIP. Following the strong share performance in 2010 and the amendment to the scheme in January 2010, this LTIP ultimately resulted in approximately 1m shares being issued in 2010. If these had been included in the 2009 diluted EPS calculation, the diluted EPS would have been 0.3p lower. Accordingly, the total impact of share incentives on diluted EPS is 1.6p adverse on a comparison basis.

Dividend per Share

The Board has proposed a final dividend of 4.1 pence per share (2009: 3.5 pence per share) making a total dividend of 9.1 pence per share for the full year (2009: 5.1 pence per share). Excluding the "special" dividend of 3 pence paid on 1 April 2010, the total dividend per share was 6.1 pence, being an increase of 20% over the previous year. The Board remains committed to a progressive dividend policy, and constantly monitors shareholder return which is considered to include share buy backs, special dividends and ordinary dividend distributions. The dividend will be paid on 27 January 2011 to shareholders on the register as of 7 January 2011, with an "ex-dividend" date of 5 January 2011.

The Trustees of the Alternative Networks plc Employee Benefit Trust ("EBT") have waived their rights to receive dividends on 2 million shares during the vesting period of the Value Creation Plan, which runs until 31 December 2012.

Edward Spurrier,

Chief Financial Officer

3 December 2010

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 30 September 2010

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 30 September 2010

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 and The Telecom Centre Limited and 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) Shares acquired in relation to the employee Share Incentive Plan are held in treasury until such time as the awards vest. At 30 September 2010 the number of shares held in treasury was 1,000,000 (2009: 1,000,000). These had a nominal value of £1,250 (2009: £1,250) and a market value of £1.92 million (2009: £1.04 million)

CONSOLIDATED statement OF Cash flowS

For the year ended 30 September 2010

NOTES TO THE FINANCIAL STATEMENTS

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 2009 and 2010.

The 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 2009 (which received an unqualified audit report) have been filed with the Registrar of Companies. Financial statements for the year ended 30 September 2010 were approved by the Board of Directors on 3 December 2010 and will be presented to the Members at the forthcoming Annual General Meeting.

2 Taxation on profit on ordinary activities

The current tax assessed for the year is lower (2009: higher) than the average rate of corporation tax in the UK of 28% (2009: 28%) applied to the profits before tax for the year. The differences are explained below:

3 Dividends

The 2009 proposed final dividend of 3.50 pence per 0.125p ordinary share (2008: 3.10 pence) was paid on 26 January 2010. The amount of dividend paid was £1,552,000 (2008: £1,383,000).

The directors paid a 2010 interim dividend of 2.00 pence per 0.125p ordinary share (2009: 1.60 pence), with a total payment value of £888,000 (2009: £705,000). This was paid on 1 April 2010 to shareholders on the register on 19 March 2010.

The directors paid a special second 2010 interim dividend of 3.0 pence per 0.125p ordinary share (2009: nil pence), with a total payment value of £1,331,000 (2009: £nil). This was paid on 1 April 2010 to shareholders on the register on 19 March 2010.

In addition, the directors are proposing a final dividend in respect of the financial year ending 30 September 2010 of 4.10 pence per 0.125p ordinary share (2009: 3.50 pence) which will absorb an estimated £1,865,000 of shareholders' funds (2009: £1,552,000). Assuming it is approved by the shareholders at the Annual general Meeting on 25 January 2011, it will be paid on 27 January 2011 to shareholders who are on the register of members at 7 January 2011.

4 Earnings per share

The calculation of basic and fully diluted earnings per ordinary share is based on the profit attributable to equity holders 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 before 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 shareholders are reducing the earnings per share in 2010 by 2.2p (2009: 0.9p).

As in prior periods, the calculation of the weighted average number of shares in issue excludes 1,915,200 shares 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.

During the current year, a further 2,000,000 shares were subscribed to by the EBT which have also been excluded from the weighted average number of shares for both basic and diluted EPS.

There were 48,482,552 shares in issue at 30 September 2010 including 1,000,000 shares held in treasury. On 30 September 2009 there were 44,950,621 shares (inclusive of 1,000,000 shares held in treasury). The weighted average number of shares during the year was 42,720,001 (2009: 42,541,495).

5 Acquisition of Aurora Kendrick James Limited

On 30 October 2009 the Group acquired 100% of the ordinary shares of Aurora Kendrick James Limited (AKJ) and obtained control of the Company. AKJ is a provider of software and consultancy specialising in the telecommunications industry. As a result of the acquisition, the Group expects to be provided with a platform for potential new revenue streams and to reduce costs through increased group purchasing power.

The revenue included in the consolidated statement of comprehensive income since 30 October 2009 contributed by AKJ was £3,123,000. AKJ also contributed profit after tax of £325,000 over the same period. The following unaudited pro forma summary presents consolidated information of the Group as if the business combination had occurred on 1 October 2009.

These amounts have been calculated after applying the group's accounting policies and adjusting the results of AKJ to reflect the additional depreciation that would have been charged assuming the fair value adjustments to tangible fixed assets had been applied from 1 October 2009, together with the consequential tax effects.

The following tables summarise the consideration transferred to acquire AKJ and the amounts of identified assets acquired and liabilities assumed at the acquisition date.

The fair value of the 707,076 ordinary shares issued as part of the consideration paid for AKJ was determined on the basis of the closing market price of Alternative Networks plc's ordinary shares on the acquisition date (30 October 2009).

The contingent consideration arrangement requires the Group to pay the former owners of AKJ dependent on the growth in AKJ's recurring revenue for the twelve month period ending 31 October 2010. A maximum undiscounted amount of £950,000 (£750,000 cash and £200,000 shares) was to be paid if revenue growth has increased by 10% or greater in the twelve months to 31 October 2010 or the date (if any) on which the company and the sellers' representatives agree the amount of the deferred cash consideration. The potential undiscounted amount of all future payments that ANP could be required to make under the contingent consideration arrangement was between £nil and £950,000.

Subsequent to the agreement above, the contingent consideration was agreed by both parties on 31 August 2010. Contingent consideration was agreed at £660,000 (100% cash). This was paid in cash to the former owners of AKJ in September 2010 as a full and final settlement. As this settlement was confirmation of fair value of deferred consideration at acquisition date and was agreed before the fair values were finalised, the goodwill was adjusted for the incremental value in the final settlement.

The fair value of trade and other receivables is £674,000 and includes trade receivables with a fair value of £565,000. The gross contractual amount for trade receivables due is £565,000, of which £nil is expected to be uncollectable.

The residual goodwill of £3,298,000 arising from the acquisition consists largely of the workforce of the acquired business and the significant synergies and economies of scale expected from combining the operations of the Group and AKJ.

None of the goodwill recognised is expected to be deductible for income tax purposes.

The Group incurred £40,000 of third-party costs related to this acquisition. These expenses are included in operating costs in the company's consolidated statement of comprehensive income for the year ended 30th September 2010.

6 Trade and other receivables

7 Called up share capital

During the year 320,000 shares (representing approximately 0.7% of the issued share capital) were purchased by the Company for £359,100 at an average cost per share of £1.12p.

The effect of the buyback programme is to enhance earnings per share in the current and future years.

During the year 1,144,855 shares were allotted under share option schemes as follows;-

56,106 issued at 102.5p resulting in a share premium of £57,439

71,182 issued at 150.5p resulting in a share premium of £107,040

The remainder were issued at nil or nominal value cost resulting in no share premium.

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.