Final Results

Alternative Networks plc

Results for the year ended 30 September 2014

Alternative Networks plc, ('the Company' or 'the Group'), a leading provider of IT managed services and business-to-business communications, reports its Preliminary Results for the twelve months ended 30 September 2014.

HIGHLIGHTS

Successful year with growth in revenues, profits and underlying cash generation

· Reported revenue up 20% to £137.8m (2013: £114.3m)

o Organic revenue up 1%, excluding the effect of Mobile bonus reduction^

o Organic gross profits up 5%

· Gross margin strengthened to 41.2% (2013: 39.2%)

o Reflecting greater proportion of higher margin services and improved mobile terms

· Reported adjusted EBITDA increased 23% to £19.6m (2013: 15.9m)

o Organic adjusted EBITDA +5%

· Continued strong cash generation

o Underlying cash generation of 99% (2013: 106%)

o Net debt of £29.3m, in line with prior target and significantly below peak level of £40.8m at time of acquisitions

· Proposed full year dividend increased 12% to 14.5p

o Reiterated intention to progress towards 15% annual growth, with no less than 10% growth per annum

· Strong revenue performance in Advanced Solutions and Mobile

o Organic revenue growth in Advanced Solutions of 3%, with H2 2014 organic revenue +17% on H1 2014

o 4% revenue growth in Mobile, driven by 12% growth in the subscriber base

· Strong performance in acquired businesses

o ControlCircle revenue in period since acquisition +10% on equivalent period last year

o Intercept IT revenue in period since acquisition +18% on the equivalent period last year

o Integration of the acquired businesses progressing, with the increased breadth of products and services facilitating numerous cross sell opportunities across the Group

· Record order book at period-end and strong pipeline for year ahead

KEY FINANCIAL INFORMATION

* Operating profit before intangible assets amortisation excluding software, write off/back of contingent consideration through comprehensive income statement, exceptional items and share based payments.

** Earnings before interest, taxation, depreciation and amortisation.*** Adjusted earnings per share are based on profits as set out in note 5

^ Revenue earned directly from network providers based on sales volumes that has been terminated during the year following the redrafting of relevant commercials to provide higher margin opportunities

Edward Spurrier, Chief Executive of Alternative Networks, commented:

"I am very pleased to report a strong performance by the Group throughout the year. We have achieved organic growth in a competitive market and can credibly call ourselves a market leader. We are delivering innovative and relevant solutions to our existing customers, increasing our ability to retain them and cross-sell them more products, and are now penetrating a broader range of new prospects.

"This has been accompanied by an equally impressive financial performance. Strong cash generation has enabled a significant reduction in debt in less than nine months and we have been able to invest in the business organically whilst increasing dividends more than 10% year on year.

"2014 has been one of the most important and significant years in Alternative's history, which saw two acquisitions enable the transition of the group into an IT Managed Services company covering the full spectrum between Device and Datacentre. The group is now better placed than ever to capitalise on the growth opportunities which lie in the key areas of managed data services, cloud solutions and hosting. With a record pipeline and order book, we remain confident of our prospects for further growth."

Enquiries:

CHAIRMAN'S STATEMENT

Introduction

Alternative Networks has had another successful year. We have delivered a strong financial performance, invested in both acquisitions and the organic business to support long term growth, and increased value for shareholders.

Results

Reported revenue for the year ended 30 September 2014 was up 20% on 2013 and up 1% on an organic basis when the effect of the Mobile bonus reduction is excluded. Reported adjusted EBITDA is 23% up on 2013, with an equivalent organic rise of 5%.

Organic revenues rose 2% in H2 as compared with H1, demonstrating the potential of the Group's new expanded product portfolio and ability to cross sell newly acquired products.

Also pleasing is the rise in gross margins across the Group to 41.2%, up from 39.2% in 2013, reflecting improved terms on mobile and the increasing contribution from higher gross margin services including from the acquired businesses.

Alternative Networks' balance sheet remains strong. Net debt of £29.3m is down from the peak of £40.8m, in line with the Board's target, despite incurring additional capital expenditure inherited from acquisitions, paying 12% higher dividends and servicing the loan financing for the majority of the year.

Dividend Policy

The Group continued to pursue its progressive dividend policy, with a proposed final dividend of 9.6 pence per share, resulting in a total ordinary dividend for the year of 14.5 pence per share (2013: 13.0 pence per share), an increase of 12% (not including the 2013 special dividend payment). The Board intention remains to progress towards 15% annual growth over the longer term with at least 10% growth per annum.

Review of Operations

We completed two corporate transactions during the year which both met our strict acquisition criteria. Intercept IT and ControlCircle are highly complementary businesses, both in terms of customer profile and service offering. They have significantly increased cross-selling opportunities across the combined group's existing customer bases; and they also enhance the Group's ability to offer a full service to a broader range of new customers, covering all areas of data management, online communication and telephony from an individual device to a customer's data centre. Given such a good fit, the integration of both acquisitions is unsurprisingly progressing well and they have also both been earnings enhancing in their first year, another key criterion.

Excluding the contribution of the two acquisitions, the Group's core business was able to achieve modest organic growth in its own right. In a highly competitive market, this is a very creditable performance and demonstrates the significant edge the group's offering has over its rivals. Mobile subscribers continued to grow and, aided by careful cost control and better commercial arrangements with the main mobile operators, gross margins also increased, especially in the second half of the financial year, when they reached record levels. The Advanced Solutions business also achieved organic growth during the year. Several new products and services were introduced with the overall purpose of improving customer experience and enabling them to make the right commercial decisions for their business.

The Synapse portal remains fundamental to our offering and our ability to retain and attract customers. We continued to invest in improving the portal and marketing its benefits more widely; our overall billing capabilities will also be enhanced by the addition of three complementary portals which had been separately developed by Intercept IT and ControlCircle.

I am delighted to welcome Het Marsh and Mark Quartermaine to the Board this year and record thanks to Jim Sewell; and am confident we have the strength in depth to take the business forward.

 Growth Strategy

In spite of having made two highly strategic and significant acquisitions which have transformed the business, we continue to monitor the market for additional opportunities to improve our offering even further. Our particular focus is on managed and hosted services, the market for which offers the best prospects for growth. Our financial strength and track record of successful integration underpins our ability to make any such acquisitions, always in the knowledge that we will apply the same strict criteria as we have always done.

Cross-selling remains at the heart of our organic growth strategy and has been enhanced by the two acquisitions we made during the year. All of the key metrics for customer cross selling are moving in the right direction, a trend we expect to continue. We will also target larger customers, which should enable us to increase average billings per customer, and these efforts will be supported by the development of new products and services. More detail of these initiatives is provided in our Chief Executive's Report.

James Murray

Executive Chairman

9 December 2014

Chief Executive's Report

Overview

This has been a transformational year for the Group following the acquisitions of ControlCircle and Intercept IT, completing the transition of the business to an IT Managed Services company spanning the full spectrum from Device to Datacentre. Cash generation remains strong enabling us to reduce significantly net debt from the peak at the time of the acquisitions. We have increased dividends during the year, with the full year dividend up 12%.

The major operational highlights have been as follows:

o Continued gains in market share in key growth areas:

§ Mobile subscribers increased 12% to 91,391 (2013: 81,396)

§ Advanced Solutions organic revenues were up 3% to £39.1m

o Good progress on the integration of the two acquired companies with the cross sell benefits already being evident with over 25 contracts signed to date with contracted gross profit in excess of £0.6m

o Significant development of our customer portals as we look to integrate Synapse with the acquired portals

Financial Results

Group reported revenues at £137.8m were 20% ahead of 2013, with organic revenues of £114.2m in line with the prior year (2013: £114.3m), and up 1% after the reduction in Mobile bonus revenue is excluded.

ControlCircle and Intercept IT contributed £23.6m revenue and £10.0m gross profit to the group results. Group reported gross profit increased 27% to £56.8m (2013: £44.8m) with a corresponding increase in gross margin from 39.2% to 41.2%. The key underlying drivers of this were in mobile telephony, where margins have benefited from the new commercial arrangements signed in 2014. Margins per product set are reviewed in more detail below. Gross margins across the Group in the second half of the year rose to 42.5%, an all-time high for the business.

Group reported adjusted operating profits were up 17% to £17.6m (2013: £15.0m), with organic adjusted operating profits up 5%. This reflects the improvement in gross margins above and further investment made in sales and marketing.

On a statutory basis, pre-tax profits decreased £2.1m (17%) to £10.4m, primarily as a result of exceptional acquisition costs incurred in the year. The adjustments are shown in the income statement, and also detailed in Note 12.

Cash generation continues to be excellent. Net cash generated from operations was £16.2m (2013: £14.4m) representing 82% of adjusted EBITDA in the period (2013: 91%). Underlying cash generation was £19.5m giving an underlying cash conversion of 99%. Free cash flow was £11.7m (2013: £10.3m) after servicing the loan payments and increased capital investment, enabling the Group to reduce net debt from a high of £40.8m to £29.3m.

Adjusted earnings per share increased 9% to 26.9 pence and, on a fully diluted basis, increased 15% to 26.4 pence. The statutory or unadjusted fully diluted earnings per share decreased 16% from 19.7p to 16.6p. A detailed reconciliation is set out in the financial review.

The Group's strong financial performance and cash generation has enabled the Board to maintain its progressive dividend policy, with a final dividend of 9.6 pence being proposed. The result is a total ordinary dividend for the year of 14.5 pence per share (2013: 13.0 pence per share), representing an increase of 12% (not including the 2013 special dividend payment). Looking ahead, the Board has reaffirmed its intention to progress to an annual dividend growth of 15% with no less than 10% growth per annum.

ControlCircle and Intercept IT

Alternative acquired Intercept IT on 9 January 2014 for £12.5m and ControlCircle on 23 January 2014 for £39.3m in cash. Both businesses have performed strongly since acquisition, proving the anticipated benefits to the combined group. In total £23.6m of revenue and £10.0m of gross profit and EBITDA of £2.8m was recognised in 2014 relating to the acquisitions.

ControlCircle revenue from 23 January 2014 to 30 September 2014 was £16.6m; 10% ahead of the level recognised in the equivalent prior year period, reflecting the ongoing momentum in the business and adjusted EBITDA margins were up from 8% in the first half to 13% in H2 as we have started to integrate the business. ControlCircle has signed a number of new customers including a global insurance company plus completion of a number of ongoing projects for existing customers which has bolstered the level of recurring revenue going forward.

Intercept IT revenue from 1 January 2014 to 30 September 2014 was £7.0m; 18% ahead of the level recognised in the equivalent prior year period. This reflects the momentum in the business as it is wins notable new contracts including most recently a major contract for a global roll out with a "Magic Circle" law firm. Profitability has also improved with adjusted EBITDA margins approaching 12% up from 1% in the prior year.

Considerable cross sell opportunities exist across the Group resulting from the acquisitions, in all product areas and industry verticals. We have now won 25 contracts with £0.63m first year contracted margin. This includes the sizeable deal with Lark insurance to provide services from Intercept IT hosted by ControlCircle in addition to the fixed line, mobile and WAN products that Alternative already supplied. The pipeline has grown with now 223 deals up from just over 150 at the interim stage, and these are worth £2.3m first year contracted margin. 

We have reasonable progress on integration with the back office functions of finance, marketing, HR and IT all quickly integrated. The professional services teams and some operations teams have been combined, and the client management teams have been integrated. As a result of the integration to date we have 5% fewer staff, in spite of increasing the sales teams by 4 heads.

Overall we are pleased with progress and remain confident in meeting expectations.

Outlook

2014 was a transformational year for Alternative. Our underlying commercial success was complemented by two acquisitions which have delivered significant value, both financially, and more importantly strategically, because they have immediately positioned us a market leading IT Service business, able to deliver end-to-end solutions to a larger and more receptive customer base.

We have seen encouraging and improving levels of cross selling with the new businesses, as well as in the rest of the group, and we have finished FY 2014 with a record quarter in terms of business signed. This means we have started the new financial year with a good following wind. We go into financial year 2015 with confidence, as unlike many previous years, we have all the people and skills and customers in place from which to deliver further growth. The improved profitable performance in the second half of 2014 together with the high recurring revenue levels in the group mean that the Board approaches 2015 confident that the business can generate increased levels of growth in this financial year. The first weeks of 2015 show signs that the momentum carried through the previous quarter is continuing and provide sound encouragement.

Edward Spurrier

Chief Executive Officer

9 December 2014

Trading review

The Group has traded well, with continued growth in the Advanced Solutions and Mobile telephony products and services, which together now account for nearly 80% of Group revenues on a proforma basis. The revenue mix across the group has improved as a result of acquired and organic growth, previously, Advanced Solutions and Mobile telephony accounted for 70% of group revenues. This means a reduction in the percentage of revenue relating to legacy Fixed line voice services, which is in managed decline.

Gross profit for the organic business grew 5% to £46.8m (2013: £44.7m). The gross profit had been in line for the 3 years 2011 to 2013.

Advanced Solutions*

* In order to facilitate understanding of business performance, the Group splits out its operating KPIs, both financial and non-financial into three distinct revenue groupings. These are Mobile, Fixed Line and Advanced Solutions. These enable users to benchmark the Group's performance against competitors and enable the Board to control more clearly the underlying drivers to the Group's business. The acquisitions of ControlCircle and Intercept IT are reported in Advanced Solutions and have no impact on the Mobile or Fixed Line. For avoidance of doubt, the business does not operate separate trading divisions but sells a converged product offering, with teams of sales and service organised according to customer size as previously explained

Advanced Solutions revenues increased by 65% to £62.7m as a result of inclusion of ControlCircle and Intercept IT combined with organic growth which contributed increases of £16.6m, £7.0m and £1.2m respectively over the previous year.

On an organic basis the existing Alternative business revenue was £39.1m, 3% ahead of the prior year, as a result of growth in the first and second half of the year at 5% and 1% respectively. Whilst the rate of growth was lower in the second half of the year, this lower growth reflects a particularly strong second half in 2013. Organic revenue in the second half of 2014 was 17% up on the first half of 2014.

There is good momentum as the level of client orders signed in the second half was 6% ahead of the equivalent prior year's period and 13% ahead of those achieved in the first half. This has resulted in a record backlog at 30 September 2014 (£3.8m in hardware). The revenue growth resulted from all areas, and new orders have been generated across the portfolio but there have been some notable areas of success, particularly in Higher Education, where the Group has signed contracts with fifteen universities and twenty one colleges during the year.

As the Group is being successful with larger, more complex projects with larger customers, this often results in a lengthening of the sales cycle from order to income recognition, and the projects' complexity inevitably creates a longer delivery lead time. Notable contract wins with larger customers included a three year agreement with Menzies Distribution for LAN, WAN, mobile and voice and unified communication services, of which the LAN and WAN and mobile are new services being provided by Alternative. The Group has also signed a 7 year contract with Newsquest to provide managed hosted voices services.

The product data and analysis presented includes the results of the acquisitions made during the year as these businesses and products are now integrated.

Hardware & Software

Hardware and Software revenues comprise all individual non-recurring direct sales across the Group, and increased 36% to £21.1m (2013: £15.6m) due to the inclusion of ControlCircle and Intercept IT sales of £5.8m. Gross margins of the ControlCircle and Intercept IT hardware and software are at similar levels to the remainder of the group but two larger deals contributed to a reduction in the year.

Existing Alternative revenues were flat on the prior year, but 32% up on the first half reflecting strong sales of hardware in the second half, including a number of installations that occurred over the summer. This was a good result and came from targeted investment in marketing and client facing technical and selling skills.

Professional Services

Professional services revenue, which is heavily orientated towards the installation of data hardware, increased from £2.5m to £5.9m, including the addition of £3.1m of sales from ControlCircle and Intercept IT. Existing Alternative sales grew by 8% as a result of the high level of hardware orders and more complex projects with higher levels of associated installation requirements.

The existing Alternative business continues to generate a margin of 78%, reflecting the high quality of service offered by the Group's technical experts. The margin on professional services of ControlCircle and Intercept IT was lower due to the use of third party consultants to complete major contracts.

Maintenance

Maintenance revenues were broadly in line year on year as the Group continues to offer this service as an ongoing component of longer term contracts. There has been margin pressure due to the competitive environment, however the Group resists extreme pricing pressure and has during the year experienced the loss of one large customer that was churned due to pricing at a level that would have damaged service levels.

Data

Data services revenues increased 19% to £6.3m in 2014. This growth is across broadband sales to existing customers, single site Ethernet sales and from SIP solutions for both existing and new customers. Sales were boosted by a number of Enterprise customers for whom we provide WAN solutions and expanding this is a priority in 2015. Margins have remained stable.

Colocation

Colocation revenue arises purely from ControlCircle and consists of recurring provision of datacentre hosting services to customers wishing to outsource and create a more flexible cost base. This revenue stream is a customer entry point to our data centre services and the focus is on then migrating that revenue to more added value managed hosting services. ControlCircle has a relatively low level of dedicated colocation hosting services compared to its competitors.

Managed Hosting

Managed hosting encompasses the Group's managed services offerings in all hosting, cloud and utility services. All revenues arise from the ControlCircle and Intercept IT acquisitions. Growth in this area is a key focus with both existing and new customers and the service offerings and levels provided by ControlCircle and Intercept IT are differentiators in the market. The ControlCircle contract signed in the year to provide these services to the EMEA division of a global insurer will be a larger driver in growth in this in 2015. High margins in this area represent the added value nature of the services provided.

Billing

AKJ Billing Services revenues were up 3% to £4.0m (2013: £3.9m). 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 a market value of £0.6m was in line with the level in 2013. This includes work on the billing system and the support of Synapse. Gross margins at 53% 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 revenues

Headline mobile revenues have increased by 4% to £43.8m (2013: £42.0m), as the group continues to take significant market share. Underlying revenue growth in the year was 8%, the difference being due to the change in the commercial agreements with the networks, Vodafone and O2, in the year, with the reduction of "bonus" revenues as both are now on a revenue share basis. The Group will cease to receive connection bonuses in exchange for a greater share of the ongoing revenue which has impacted the revenue in the second half of the financial year and will have a similar impact in the first half of the coming financial year. The impact on margin is outlined below. These new commercial agreements run until March 2018 when they are expected to be renewed.

There was high growth in the contract base with a 12% increase in subscribers to 91,391 since 30 September 2013. This is mostly on the back of new connections being over 30% higher than the previous year at 25,089 (2013: 19,145), another record level for the Group, reaffirming the on-going success in winning market share in a flat overall market. The success was also underlined by lower churn rates explained below.

Mobile Margins

Mobile gross margins have increased significantly to 43.3% from 38.3% mostly as a result of the benefits of the new commercial arrangements in 2014, but also positive factors such as the value added from the Synapse service platform and a stabilising of ARPU in the year. The new contracts have improved the mobile margin and going forward we expect a similar growth trajectory with gross margin between 42 and 44%.

Mobile Operating KPIs

The performance in the key metrics of Monthly "ARPU" and "ADPU" and churn are set out below and represent a strong performance in a very competitive market.

· "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 circa £2 (4%) to £39. The key factors underpinning this trend are the reduction in rental charges associated with more bundled packages and the price deflation seen in this area which is being offset by increased data usage with the ongoing shift from voice to data usage. Declines in voice ARPU total approximately £2 ARPU across rental charges. Although roaming data ARPU is still dampened by the regulatory changes to roaming prices introduced in 2013 the trend has returned to growth with roaming outside of the EU driving the ARPU up. It is worth noting that the ARPU in H2 was £39; the same level as H1. The continuing high growth in data usage is beginning to have an impact as set out below:

· "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 45% to 99Mb demonstrating the rapid growth in data usage. The growth in data usage can be attributed to a number of factors including:

o Increase in the number of "Smartphones" within the base with the migration away from standard feature phones and Blackberry devices to higher usage devices. In the mobile base the average per user usage of an Apple handset is circa 250mb of data per month compared to 150Mb on a Blackberry and circa 30Mb on a standard feature phone. As at September 2014, Smartphones represented 69% of the subscriber base up from 61% in September 2013.

o The move from 3G to 4G networks. Although the penetration remains lower we are seeing early adopters ADPU at more than 6 times the average usage and 2.5 times that seen on a 3G Apple device.

· Churn:

o Churn by value, which illustrates the retention value of all contracted customers to the Group, has again improved year on year, at 11% (2013: 13%) setting a market leading benchmark, where the broader industry sees churn levels of 20% to 25% and demonstrates the value the Group provides to customers.

o Network churn was 14% which is down 1% on 2013 (2013: 15%) and down on the 17% at March 2014. This latter trend is due to reducing level of network switching (which does not impact Alternative's revenues or margins). This year we have also seen a much higher churn on data cards. This has happened unsurprisingly as the new smartphones can act as a tethered hot-spot or to replace the "dongle" using Bluetooth functionality. The impact in value terms on the other churn metric is not significant as the ARPU on these data-only devices is low. Year on year this is an excellent performance in a very competitive marketplace where it is easy to switch between networks. The generally high retention is as a result of the overall client experience covering the service offering and the benefits of Synapse.

Telephony Services

Fixed Voice Services

The market is two-tier on legacy fixed voice services. The networks are still focussing on other carriers' traffic as well as the corporate end user and these are typically in decline by mid single digit rates, year on year (4-6%). The resellers and service providers are largely migrating their customers away from digital and analogue voice to IP services at a faster rate and the market trends are for annual revenue reductions in the order of low double digit (10-14%). We consider our performance this year to be more than satisfactory given the market context.

The Group manages its Fixed Voice Services in the context of the declining market place whilst improving market share and profitability, and proactively migrates customers to SIP based telephony. In the year the number of SIP lines has increased by 82% from 4,076 to 7,424.

Overall Fixed revenues are down 9% year on year to £31.3m, as a result of the move to SIP combined with the on-going market performance. Outbound and Inbound revenues were down 10% and 8% respectively on the prior year as a result of a reduced level of call spends to mobiles, regulatory price reductions and the continuing move to email and mobile. However, gross margin performance was strong, with an increase of 200 basis points to 44%.

Outbound services

· Outbound revenues decreased 10% to £24.0m (2013: £26.5m). 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, mobile and IP based telephony, continues to cannibalise traditional office based telephony revenues. Usage revenues per customer were in line year on year, as the Group churn has been generally at the lower level of ARPU customers which has offset usage decline.

· Outbound ARPU has remained flat at £1,421. Average contract periods are now 2 months longer than the prior year increasing the viability of future revenues.

· Wholesale Line Rental revenues ('WLR') declined 10% to £11.7m from £14.0m. The number of lines in the estate declined by 8% to 70,392; some of these were non or low billing analogue lines that we have helped customers identify using Synapse. The ongoing to transition to SIP has progressed well with an 82% rise in SIP lines.

Inbound services

· Inbound services revenue at £7.3m was 8% below the prior year. This fall results primarily from a 4% reduction in the customer base during the year, including the loss of one large, low margin, customer, and a 2% fall in average ARPU. The revenue decline stabilised in the second half of the year, with revenues at the same level as the first half, as increases in NGN products compensated for the reduction in customer traffic revenues. As a consequence, whilst gross profit was down 9% to £3.0m year on year, it grew 15% in the second half of the year. Gross margins for inbound services are broadly level year on year but include the changing balance towards NGN in the second half of the year.

Strategic Review

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

Strategy - Organic growth

The Group continues to build successfully on the following four key areas of focus to deliver for continued organic growth:

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

· Using service and Synapse combined with acquired portals to drive improved customer retention across the wider product set

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

· 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. With a broadened product base, there are multiple entry points to these customers.

The Group has two distinct sales and technical support teams which target:

· Enterprise customers for those customers 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 focused on winning smaller customer's business through selected partners.

We continue to focus on winning larger customers (a larger customer being classified as having a monthly spend in excess of £1,000). Going forward, the data will include the acquired customer bases, but for the purposes of immediate comparison, the data below is for the underlying base.

At the period end the Group had 1,136 larger Enterprise customers (30 September 2013: 1,157). 82 new larger customers were added during the year and 76 existing customers increased their monthly spend above the £1,000 threshold. 53 larger customers churned during the period and 126 decreased spend below the threshold. The proportion of large customers to the total base has increased from 35% to 37%.

The average monthly spend of these customers increased 5% to £5,663 (2013: £5,408). Given that 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 customers.

As at September 2014 ControlCircle had 58 customers, of which 54 are large (billing more than £1,000 per month), and Intercept IT had a total of 83 customers, of which 46 are considered to be large.

Using service and Synapse combined with acquired portals to drive improved customer retention across the wider product set

The acquisition of ControlCircle and Intercept IT brought customer portals to the group that complement Synapse and give complete coverage from Device to Datacentre. We have started the process of bringing these together, with all customer facing portals now available from the Synapse homepage. These additional portals have delivered a significant expansion of our Visibility and Control suite which is a key platform for Alternative's customer engagement strategy.

Development of Synapse

The primary focus for Synapse during the year has been improving the customer end user experience. The main improvements were around performance and reporting; dealing with many specific requests. Synapse continues to contribute positively to our above market mobile growth (8% revenue growth versus Ofcom decline of 1%), and to complement this we have directly integrated Synapse into Wandera's Mobile Data Optimisation tool.

Delivering customer led improvement and a targeted communications plan has delivered strong usage metrics in 2014:

· Monthly usage has grown 25% to more than 15,000 logins per month

· More than 1,000 customers with 2,000 users per month with increased usage with both Enterprise and Business customers

· 50% of SIM free orders and 22% of overall tickets now fully automated through Synapse

· 4,000 Mobile SIM transactions performed direct by customers each month

· Live Chat usage has increased 100% since last year

Further improvements to Synapse in 2014/15

Mobility is the key theme for Synapse development in the next year, both in terms of the management of a mobile fleet, and the provision of access to core features on the go. This will deliver increased cost savings and improved productivity for our customers.

The key aspects will be to deliver the user interface on the go, focussing on key features such as Mobile SIM management (barring), mobile bolt-ons, alerts and current spend. We are also looking to extend the live chat experience to mobile too, so that customers can interact directly with their support team, regardless of location. The second key development will be the management of mobile boltons.

Wider development of acquired portals

The acquisition of ControlCircle brought the Max 3000 portal into the Alternative group and Intercept IT gave us the client portal ControlPanel. Further development of these is portals part of the ongoing strategy and since acquisition there have been the following developments:

· Launch of MaxCloud to allow the monitoring as a service for Amazon Web Services

· Developments to Hybrix will allow seamless orchestration with AWS and private environments alongside existing, which will allow a client to spin up a virtual machine, wherever they want

Alternative Business Cloud The acquisitions have laid the foundations the business to combine the tooling already in group into a new platform. ABC will be our next generation of Portal, aimed at both staff and customers alike, it will cover the entire portfolio, and be a vehicle to all of our products/services in the cloud and deliver our next generation of services. A single service management platform will further drive operational efficiencies across the business and reduce the time from order to cash.

Cross selling and up selling of products across our customer base

A key part of our organic growth strategy remains to exploit cross selling opportunities within the group to improve product penetration and sell more, higher value products to new and existing customers, and again we have seen a sustained resilience in high product penetration. The acquisitions of ControlCircle and Intercept IT have also significantly enhanced the Group's ability to cross-sell in 2014, as proven by the base customer statistics.

Within the underlying Alternative base the number of customers taking more than one product year on year has been retained at 46% and the proportion taking 5 or more products has increased from 5% to 7%.

Of the customers that churned in the year more than 50% were billing less than £100 per month (average of £430 per month), whereas of the customers won during the year only 24% were billing less than £100 per month. The average billing for new customers to the Group was circa £2,000 per month, more than four times the average churned client level.

Product development and innovation to increase value to our customer base - Consolidating our Device to Datacentre capability through Product and Service innovation

The integration of the product and service teams of the Group with the acquired teams is complete and we have been working to unify the group portfolio under a common set of service description documentation and terms and conditions. The main developments in the year have been:

Strategy - Acquisitions

The Group successfully completed two acquisitions in January 2014, in line with the above strategy. The first business acquired was Intercept IT which has two core propositions; it is an established provider of hosted desktop solutions to the UK SME market SMEs; and it consults, designs, builds and runs 'on premise' managed solutions for Enterprise customers requiring datacentre virtualisation and cloud based desktop services. The second business acquired was ControlCircle a provider of complex hosting, cloud and datacentre services to Enterprise customers. Both acquisitions met the Group's long standing and consistently strict criteria for acquisitions which 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 cash generative nature has facilitated the significant reduction in net debt since the acquisitions; this, combined with the strong balance sheet leaves us well placed to capitalise on further opportunities and the Group continues to monitor the market proactively for further "right-fit" acquisitions. Acquisitions are being targeted to complement the existing products and to further expand our capabilities and product set in the Advanced Solutions area, with a focus on managed and hosted services. While we remain on the lookout for exceptional opportunities, we expect our activity in this area to increase in the second half of 2015.

Financial review

Bank facilities

As part of the funding of the acquisitions, the Group renegotiated its financing facilities extending from £6m to £43m. The structure of the facility is split equally between two lenders and is made up of a £23m term facility repayable in instalments by July 2017 and a revolving credit facility of £20m expiring in January 2018. The margin over LIBOR is based on a leverage grid from 2.25% to 3.25%. It is expected that the average margin payable in the 2015 financial year will be below 2.5% based on current forecasts. In the 2015 financial year there are 2 payments against the term loan of £2.5m each to be made in January 2015 and July 2015.

The year-end net debt balance was £29.3m as compared to a net cash balance of £17.2m at 30 September 2013. This is after £52.3m gross costs on the two acquisitions and paying dividends of £6.6m. The net debt level is down from a peak of £40.8m at the time of the acquisitions and in line with the target of £30.0m as set by the Board.

After considering the Group's financial projections, available borrowing facilities, covenants on borrowing facilities and other relevant financial matters, the Board is satisfied that on the date of approving the financial statements, there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason the Directors continue to adopt the going concern basis in preparing the financial statements.

Non-recurring charges

As a result of the acquisitions the Group incurred non-recurring charges of £2.0m. This comprised of £1.4m relating directly to acquisition related charges including stamp duty and due-diligence fees, and a further £0.6m related to the subsequent restructuring and redundancy charges.

Finance costs

Finance costs were £1.2m (2013: £0.1m) driven by the Group's new debt facilities in place for the majority of the year. At September 2014 the margin applied to this facility had fallen to 2.75% over LIBOR based on the leverage position of the balance sheet, and so we expect the run rate finance cost to decrease in 2015.

Tax

The effective tax rate for the year was 22.0% (2013: 22.6%). This is in line with the main rate of corporation tax of 22.0% expected for the year (2013: 23.5%). This results from the benefit of a claim for allowable research and development expenditure being offset by high disallowable expenditure incurred in the year.

Earnings per share

Basic adjusted earnings per share has increased by 9% from 24.7p to 26.9p. Fully diluted adjusted earnings per share ('EPS') has increased by 15% to 26.4p (2013: 22.9p). The statutory or unadjusted fully diluted earnings per share has decreased 16% from 19.7p to 16.6p.

The weighted average number of shares in the year used for calculating the basic earnings per share has increased by 2,214,296. This is outlined in Note 5. In the prior financial year there were 3,100,000 shares relating to the VCP scheme that were potentially dilutive for 250 (on average) days of the year which added 2,100,000 shares to the dilutive share number. There were also 1,200,000 of potentially dilutive shares from the EBT (1 x 638,400 for the full year, 1 for 99 days and one for 341 days). This effectively increases the number of shares in the diluted calculation relating to the VCP/EBT by 3,300,000. In the current financial year there are no shares relating to the VCP scheme and 578k shares relating to the EBT. The fully diluted number of shares has decreased by 395,160 due to the conversion of options to shares under the EBT and VCP schemes.

Cash flow

The focus on cash performance remains a high priority and this has extended to the acquired entities. The Organic business cash performance continues to be strong with the underlying cash generated from operations at 98% of adjusted EBITDA (2013: 106%). For the acquired businesses, after an anticipated working capital injection at the time of the acquisition, the underlying performance is above 100% as we look to improve the working capital position. Overall, the Group underlying cash generated from operations conversion to adjusted EBITDA is 99%.

Cash inflow from operations was £16.2m (2013: £14.4m), compared to adjusted EBITDA of £19.6m (2013: £15.9m). This represents a cash conversion of adjusted EBITDA of 83% (2013: 91%). Within this there were a number of one-off movements: a working capital injection into one of the acquired business of £0.9m, the cash payment of a previously accrued LTIP relating to the AKJ acquisition of £0.4m and a non-recurring of £2.0m related to the acquisitions. Removing these non-recurring, non-standard items from working capital cash flows results in cash generated of £19.5m (2013: £16.8m) and an underlying cash conversion of adjusted EBITDA of 99% (2013: 106%).

Management continues to place significant emphasis on managing working capital and cash performance, resulting in a five-year cumulative cash conversion of 105%.

Capital expenditure

The Group invested £2.1m (2013: £1.3m) in tangible fixed assets and intangible software assets during the year, of which £0.6m was spend associated with the acquired businesses, leaving £1.5m underlying spend. Of the total spend £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 2015 we estimate investing £2.0m across the Group on routine capital expenditure, in line with the level in 2014, the key focus areas being further investment in a consolidated customer portal service, expanding on the existing Synapse functionality (£0.6m) and investments in the existing CRM platform to improve our service to customers and reduce operating costs.

In addition for 2015 there will be one-off costs associated with the fit out of new office space and extensions to data centre capabilities. The latter includes the delayed relocation of Intercept IT infrastructure into a third party datacentre managed by ControlCircle, which was deferred prior to acquisition. These are expected to incur a maximum cost of £2.2m and £0.5m respectively, and be funded by the disposal of leasehold property, which will give rise to an excess cash inflow of approximately £3.0m.

Dividend per Share

The Board has proposed a final dividend of 9.6 pence per share (2013: 8.6 pence per share) making a total ordinary dividend of 14.5 pence per share for the full year (2013: 13.0 pence per share).

The dividend will be paid on 30 January 2015 to shareholders on the register as of 30 December 2014, with an "ex-dividend" date of 29 December 2014.

Gavin Griggs

Chief Financial Officer

9 December 2014

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 30 September 2014

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 30 September 2014

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.

CONSOLIDATED statement OF Cash flowS

For the year ended 30 September 2014

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 2014 and 2013.

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 2013 (which received an unqualified audit report) have been filed with the Registrar of Companies. Financial statements for the year ended 30 September 2014 were approved by the Board of Directors on 9 December 2014 and will be presented to the Members at the forthcoming Annual General Meeting.

2. Segmental information

IFRS 8, "Operating Segments" requires identification of the Group's segments on the basis of the internal reporting about components of the Group that is regularly reviewed by the chief operating decision maker to allocate resources and to assess performance.

The chief operating decision maker has been identified as the Board. The Board review the Group's internal reporting in order to assess performance and allocate resources. The Board assesses the performance of the operating segments based on revenue, gross profit, net profit and EBITDA. The reportable segments of the Group are Telephony Services and Advanced Solutions.

Telephony Services consists of two revenue streams, fixed line and mobile. Advanced Solutions includes the installation and maintenance of telephone systems, the integration of computer networks, the provision of managed hosting solutions and the provision of billing facilities.

Assets and liabilities are not disclosed by segment as they are not reported to the chief operating decision maker.

Transactions with the largest customer of the Company are less than 10% of Group revenue.

All sales have taken place within the United Kingdom and those between segments are all carried out on arm's length basis.

All non-current assets are located within the United Kingdom.

3. Taxation

The current tax assessed for the year of 22.1% (2013: 22.6%) is higher (2013: lower) than the average rate of corporation tax in the UK of 22% (2013: 23.5%) 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 23% to 21% with effect from 1 April 2014. Accordingly, the Group's profits for this accounting period are taxed at an effective rate of 22%. 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 21% to 20% from 1 April 2015. The reduction in tax rate to 20% was substantively enacted on 2 July 2013 and, therefore, has been included in these financial statements to measure the deferred tax assets and liabilities.

4. Dividends

The 2013 proposed final dividend of 8.60 pence per 0.125p ordinary share (2012: 7.50 pence) was paid on 30 January 2014. The amount of dividend paid was £4,194,000 (2013: £3,328,000).

The Company paid a 2014 interim dividend of 4.90 pence per 0.125p ordinary share (2013: 4.40 pence), with a total payment value of £2,370,000 (2013: £2,134,000). This was paid on 18 July 2014 to shareholders on the register on 27 June 2014.

The Company did not pay a special second interim dividend in 2014 (2013: 4.00 pence per 0.125p ordinary share, with a total payment value of £1,940,000).

In addition, the Directors are proposing a final dividend in respect of the financial year ended 30 September 2014 of 9.60 pence per 0.125p ordinary share (2013: 8.60 pence) which will require an estimated £4,600,000 of shareholders' funds (2013: £4,271,000). Assuming it is approved by the shareholders at the Annual General Meeting on 28 January 2015, it will be paid on 30 January 2015 to shareholders who are on the register of members at 30 December 2014 with an "ex-dividend" date of 29 December 2014.

5. 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 adjusted profit after tax, 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 2014 by 1.1p (2013: 1.3p).

The calculation of the weighted average number of shares in issue excludes 638,400 shares (2013: 2,201,746) 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 49,688,544 shares in issue at 30 September 2014 (2013: 49,662,667). The weighted average number of shares during the year was 47,709,701 (2013: 45,495,405).

6. Intangible assets

Amortisation has been charged through the income statement within operating costs.

The carrying amounts of goodwill by reportable segment are as follows;

Each group business, comprising individual acquired companies, is deemed to be a Cash Generating Unit (CGU), being the lowest level for which cash flows are separately identifiable. Goodwill is attributed to each CGU and reviewed for the purposes of the annual impairment review as this is the level that management monitors goodwill.

During the year the goodwill in respect of each cash generating unit was tested for impairment in accordance with IAS 36. All CGUs were assessed to have a value in use in excess of their respective carrying values, and hence no impairments to goodwill were considered necessary.

The key assumptions in the value in use calculations were:

The forecasts were based on pre-tax cash flows derived from approved budgets for the 2015-2018 financial years. Management believes the forecasts are reasonably achievable based on market performance and its expectations of market developments. The directors consider that the key assumptions in the forecasts are earnings before interest and tax and revenue. Subsequent cash flows were extrapolated using a 1.0% (2013: 1.0%) growth rate reflecting an approximate forecasted long term growth rate for the UK economy, the Group's principal market.

The pre-tax discount rate used to assess the carrying value of goodwill is 10.0% (2013: 11.6%) which approximates the Group's weighted average cost of capital. This discount rate has been calculated on a consistent basis.

The review performed at the year-end did not result in the impairment of goodwill for any cash generating unit as the estimated recoverable amount exceeded the carrying amount in all cases. The Group undertakes sensitivity analysis based on reasonably possible changes in assumptions by increasing the weighted average cost of capital and reducing future growth expectations in the model. The results of this analysis show no indication of impairment.

7. Trade and other receivables

8. Cash and cash equivalents

9. Called up share capital

During the year 25,877 shares were issued under share option schemes as follows;

9,905 issued at 102.5p resulting in a share premium of £10,140

15,972 issued at 150.5p resulting in a share premium of £24,018

10. Trade and other payables

11. Cash generated from operations

12. Reconciliation to adjusted performance