Half Yearly Report

Alternative Networks plc

Steady progress against a challenging market

Alternative Networks plc, ('the Company' or 'the Group'), a leading independent business-to-business communications provider, reports its Interim Results for the six months ended 31 March 2013.

HIGHLIGHTS

·; Solid performance - underlying performance in line with prior year

·; Fundamental strengths of the business maintained with resilient margins and strong cash conversion

·; Mobile subscriber base up 10% and revenues up 5% year on year

·; Advanced solutions making good progress selling to larger enterprises

o Ground breaking new managed services contract won. Minimum £4.5m over 3 years.

o Record order backlog - £1.6m higher than prior year

·; Strong balance sheet position: £15.3m net cash as at 31 March 2013

·; Board further strengthened with new Non Executives Directors and the appointment of a new Chief Financial Officer

·; Ongoing progressive dividend policy maintained:

o Interim dividend of 4.4p payable on 15 July 2013, an increase of 10%

o Special dividend of 4.0p announced returning further cash to investors

o Guidance reiterated for a minimum proposed full year dividend of at least 12.65p full year dividend and a minimum 10% growth for 2014

KEY FINANCIAL INFORMATION

Edward Spurrier, Chief Executive of Alternative Networks, commented:

"Alternative Networks has delivered a resilient performance in the first half of the year, despite the tough market, demonstrating that our strategy continues to work. The major components of our growth strategy all played their part: we gained mobile market share; we maintained high levels of cross-selling across our customer base; we continue to see market leading levels of low churn; and we invested in areas where we know we already have a competitive advantage.

"The Enterprise sales group has proven to be successful at the larger end of the SME market with our Business Markets team focusing on servicing and cross selling our product portfolio into small and medium entities. We are well placed with our unique product portfolio to meet our customer requirements across the entire spectrum of business communications and data services.

"We will continue to grow the business, by further cross-selling of our existing base of products and services to larger customers; and by making acquisitions which bring additional commercial opportunities, add value and make us even stronger. Current trading is improved compared to earlier in the year and we enter the second half with greater momentum, a healthy pipeline and a record order book. Although the market will remain challenging, we are confident of achieving a result for the year in line with our expectations"

Enquiries:

Chairman's Statement

Results

Alternative Networks has delivered a steady performance in the first half of the financial year in an economic environment that continues to be challenging, with revenue of £55.3m down 4% (H1 2012: £57.4m) and a 4% reduction in adjusted operating profits from £7.4m in H1 2011 to £7.1m. The Board is confident that the comparative revenue dip is not a genuine trend but that underlying this, is a return to growth. More than half of the revenue decline was due to the EU regulation changes in mobile roaming data charges which commenced in July 2012. A further £0.8m was due to the increase in the Advanced Solutions order book, year on year, which will convert into revenue in the second half of the year. Cash generation from operations remains strong at £6.5m (H1 2012: £6.8m), with a continuing strong cash conversion ratio of 88% (H1 2012: 90%) of adjusted EBITDA.

Cash and dividends

As at 31 March 2013, the Group's net cash position was £15.3m. As a result of the strong levels of cash generation, the Group was able to return more than £10m to shareholders, of which £6.5m was by way of share buy backs. The Board has declared an interim dividend of 4.4p per share increased by 10% over 2012, and will also pay an additional special dividend of 4p. The Board has indicated that the full year dividend is expected to be no less than 12.65 pence, with a minimum of 10% increase per annum in the year to 30 September 2014 consistent with a progressive dividend policy. The Board intends to give further guidance on dividend outlook at the end of the financial year.

Trading Performance

We have continued to grow market share in the mobile market, whilst maintaining its position in fixed line and continuing to build in the Advanced Solutions arena. The mobile business achieved a good level of revenue growth, despite the EU regulatory impact from July 2012, on the back of a 10% increase in the subscriber base. This was offset by the historical decline in the fixed line market, where we nevertheless continued to deliver margin growth, and the more "lumpy" nature of part of the Advanced Solutions business.

In Advanced Solutions, revenues were down to £17.1m compared to £18.4m in the previous year. As mentioned above, there was good growth in the order book which ended the period at record levels. Two larger deals were signed in the first quarter, but will not convert into recognised revenues until the second half of the year. We enter the second half of the financial year with a stronger pipeline. The customer base of recurring revenues was up 2% to £9.6m from £9.4m in 2012 reflecting the growing customer base.

We continue to make progress in cross selling services and attracting larger customers and average larger customer average spend is now £5,388 per month, up 2% from £5,285 a year ago. Gross margin has improved on the back of improved commercial arrangements but with the fall in revenue, gross profits have fallen. Overhead reduction had a positive impact on operating margins, but was offset by the £0.2m one-off costs associated with the restructuring of our Board in 2013. After stripping this out, adjusted profits and operating margins were in line with 2012.

Overall, with the continuing low levels of churn, the Board believes that the trading performance in a challenging environment was satisfactory and is also encouraged by the prospects for the second half and is expects to make further progress.

Board Changes

During the period, Edward Spurrier stepped up to the role of Chief Executive Officer, Gavin Griggs joined the Group as Chief Financial Officer and two experienced Non-Executive Directors, Bernard Cragg and Mark Quartermaine, also came on to the Board. I became Executive Chairman, as planned, allowing me to focus on the strategic development of the Group. I am delighted to report the board changes were implemented seamlessly, and with a clear demarcation of responsibilities in place, we have a stronger Board to drive the business forward.

Growth Strategy

Looking ahead, we will focus on achieving higher levels of organic growth. This will be achieved in three key ways:-

·; we will step up our efforts to target larger customers in the Enterprise space (more than 500 employees), with an emphasis on selling managed data services into larger Enterprise customers and we have recently won our first significant multi-year service contract worth a minimum of £4.5m over three years. We will also focus on cross selling IP and data services into our legacy Enterprise customer base taking predominantly mobile and fixed voice.

·; we will use our Synapse portal product, a vital service differentiator, to make further inroads into the Business markets segment of our customer base (80 - 500 employees).

·; we will make more use of our wholesale and partner channels, leveraging our billing products and channel clients.

The Group's strong balance sheet and cash position also provides scope for the Group to continue to seek acquisitions that complement our organic growth strategy and bolster the existing range of products and services, but we will remain committed to our stringent financial and operational criteria. As usual, several opportunities are under active consideration. However we will only complete deals at sensible prices, that deliver the right business fit and that can be effectively integrated into the Alternative Networks Group.

Outlook

Although the economic and market conditions remain uncertain, the Group has entered the second half of the year with greater momentum than six months earlier and underpinned by a number of larger contract wins. The outlook for the year and beyond is therefore positive and we expect to make further progress in the rest of the year and we expect to continue to trade in line with management's expectations.

James Murray

Executive Chairman

Business Review

Our performance has been resilient in a tough market and economic climate. During the period gross margin percentage has improved, profits excluding the costs for board restructuring have been stable and cash generation remained strong enabling us to distribute over £10m to shareholders.

The Enterprise group which was formed in 2012 to target all enterprises with over 500 employees, has proven to be a successful route to market. The ability to better understand and service our 500 largest clients has led to opportunities to cross sell from our product portfolio with some notable successes. The Business Market business, comprising the Small and Medium Businesses with 80 to 500 employees has also benefitted from a focused resource that can meet our customer's business communications and data services requirements. Overall the approach has enabled the Group to optimise its resource utilisation.

The Mobile business has again gained market share with a 10% increase in connections resulting in growth in revenues of 5% to £20.7m; the mobile business represented 37% of the Group revenue in the first half. The Advanced Solutions revenue at £17.1m was down 7% as a result of customer requirements in converting two large contracts won in Q1 into revenue which will now convert in Q3 and Q4. Advanced solutions now represented 31% of the Group revenue with the remaining 32%, £17.5m, being the Fixed Line business which was 9% below the prior year. The balanced nature of the Group combined with the customer focused route to market has enabled the Group to deliver a solid performance whilst building a record order backlog, and £1.6m ahead of the level seen at the equivalent point in 2012, that will convert to revenue in the second half and a strong sales pipeline.

There has been further progress in the both the development of and customer usage of our Synapse portal, following the launch of live chat functionality to our customer base, the introduction of paperless billing and improved reporting and statistics tracking with drill down capability all launched in the period. This has helped add value to keep the Group's service and product offering ahead of its competitors, and bolster margins in the individual product sets.

At the Group level, profits were down £0.2m. Gross margin percentage improved but the costs (£0.2m) associated with the recruitment of the new directors have meant a small one-off reduction in operating profits and margins. Cash conversion was 88% (2012: 90%) of adjusted EBITDA; stripping out two one-off working capital movements cash conversion would have been 106%.

Results Overview

Total revenue decreased 4% to £55.3m (2012: £57.2m). However, underlying revenues are in line with the prior year. Of the £2.1m reported decline, £1.2m is as a result of the regulatory changes mandated by the EU commission which lowered EU mobile roaming voice and data rates from July 2012 with the balance due to deferred data and voice Advanced Solutions revenues into the second half of the financial year. Mobile revenue grew 5% and stripping out the regulatory impact underlying revenue growth was 11%. At the Group level this growth was offset by revenue declines in the Advanced Solutions and Fixed line businesses of 7% and 9% respectively.

Group gross profits and adjusted operating profits decreased 3% and 4% respectively in the first six months. Gross Margins have increased by 20 basis points from 38.6% to 38.8% due to stronger margins in mobile and fixed line which helped offset the reduction in mobile. Further analysis is detailed below by product set.

Gross profit was £0.6m lower at £21.5m (March 2012: £22.1m). This reduction was mitigated somewhat by lower selling and general administration costs ("SG&A") which resulted in Adjusted operating profit being £0.3m lower at £7.1m (March 2012: £7.4m). In the period there was £0.2m costs relating to the Board restructuring taken in the income statement. Without these adjusted operating profits were broadly in line with the prior period. The Board believes there is still scope to further increase operating margins.

The adjusted operating profit is stated before non-cash intangible asset amortisation of £0.9m (H1 2012: £1.0m), the IFRS2 share option costs of £0.6m (H1 2012: £0.5m) and an exceptional charge relating to the tender offer of £0.2m.

Statutory operating profits before tax have decreased 2% from £5.6m to £5.5m.

Net funds and facilities 

Period end net cash balances were £15.3m, down from £20.6m at 30 September 2012 but increased on the £13.1m at 31 March 2012. The reduction was as a result of more than £10m being distributed to shareholders including £6.5m used to fund a share repurchases (£5m through via a tender offer) in the period.

Adjusted EBITDA (note 5 below) cash conversion remained healthy at 88% (H1 2011: 90%). In this six month period there were 2 unusual adverse working capital movements which were flagged at the preliminary results in December 2012. The first was a £1.1m reduction in trade creditors due to a supplier failing to take a direct debit for services due at the end of September 2012 which was taken in this period. The second related to accrued contingent consideration of £0.35m for the Scalable acquisition which was paid in the period. Normal underlying cash conversion of adjusted EBITDA would have been 108% in this period.

In the six months to 31 March 2013, the Group generated £6.5m of cash from operations (H1 2012: £6.8m).

Capital expenditure

Capital expenditure in the period was £0.6m compared to £0.4m in the six months to 31 March 2012. Of this, £0.3m was further expenditure in respect of developing the Synapse Portal (2012: £0.2m) and the balance was investment in hardware in a managed data centre. The continuing capital investment requirements of the business remain low and the full year level is expected to be £1.3m.

Bank facilities

There have been no changes to the Group's banking facilities during the period. The Group has a £6m three year drawdown loan facility (as renewed in 2011) available on demand, but has not needed to use this facility to date.

Share Buy Backs

On 31 October 2012, the Group repurchased 1,992,012 ordinary shares for cancellation. These were cancelled on 31 October 2012. The purchase was by tender offer whose terms were announced on 11 October 2012. The price per share was 251 pence and the total consideration was £4,999,950.

Earnings per share

Basic earnings per share were 9.8p up from 9.5p in 2012. Adjusted earnings were down 5% and adjusted earnings per share was down 1% to 10.5p on a diluted basis. The adjustments to earnings relate to amortisation of intangibles (acquired), share based payments which have been deducted in full from profits for these earnings calculations and the charges relating to the share buy back in the period.

The earnings benefitted from a lower effective tax rate of 23.1% as compared to 25.6% in the prior year. This was due to the further reduction in the standard rate of corporation tax and schedule 23 tax deductions in respect of share options being exercised in 2013.

The weighted average shares in issue decreased by 1.1m shares to 43.3m over the comparative period as a result of the share buyback of 2m shares in October 2012, 1.6m on a weighted average basis, which was offset by a 0.2m increase as a result of share options exercised by staff in the period.

Dividend

The Board proposes to pay an interim dividend of 4.4 pence per share which represents a 10% increase on the interim dividend of 4 pence per share paid in July 2012.

The Board also proposes a special dividend of 4 pence per share. This dividend in conjunction with the recent share repurchases reflects our stated intention to improve shareholder returns and our progressive dividend policy.

These will be paid on 15 July 2013 to shareholders on the register on 28 June 2013. The ex-dividend date is 26 June 2013.

The full year dividend is expected to be no less than 12.65 pence, a 10% increase on 2012, with a minimum of 10% increase per annum in the year to 30 September 2014.

As in prior years, the Board will continue to monitor cash levels and will look to return cash where it is considered in the best interests of the shareholders to do so.

Outlook

The Group has had a steady start to the year in an uncertain market. There has been improved performance in terms of revenue in both April and May 2013 and the ongoing momentum in parts of the business combined with the record order backlog and full pipeline leaves the Group in a good position. The Group expects to return to growth in the second half and meet our full year expectations.

The Group continues to deliver good cash generation which combined with a strong balance sheet leaves the Group is in a very sound financial position and well positioned to make further acquisitions and the Board continues to review a number of opportunities.

Review of business and KPIs by product sets

Telephony services- Mobile

·; Mobile revenues grew 5% in the period; the performance was dampened by the impact of the regulatory changes introduced by the EU in July 2012 which reduced revenue by £1.2m. Stripping this impact out, underlying revenue grew 11%.

·; The mobile subscriber base has grown 10% organically to 77,612, since 31 March 2012 and is 0.6% ahead of the base level at 30 September 2012.

o The managed subscriber base has increased by 21% to 14,391 since March 2012 and by 6% since September 2012.

o The core business subscriber base increased by 4,436 (8%) to 63,105 as compared to March 2012. This was driven by the growth in the second half of 2012 as the base has marginally declined (0.5%) since September 2012.

o The gross new connections in the period were 8,967 (2012: 10,738) made up of 7,061 (2012: 9,308) on the Alternative contracted base, and 1,906 on the managed base (2011: 1,428). This reaffirms the Group's on-going success in direct sales and marketing winning market share in a flat overall market.

·; Monthly ARPU was £41 (March 2012: £46, September 2012: £44). The biggest driver of the year on year reduction was the regulatory changes on the roaming charges which accounted for half of the reduced ARPU. The other drivers are falling rental costs on new business and contract renewals although this was partially offset by increased data ARPU.

·; Data connections grew by more than 4,000 over the year to 46,025, and now represent nearly 73% of all devices. With the increase in smartphones the data usage has also grown with ADPU (Average Data per User) at 61Mb per month up 67% from the half year ended March 2012. The demand is expected to continue to grow with more data hungry devices combined with increased speed of provision. The Group is monitoring its customers' spend profiles carefully and opportunities for increased revenues clearly lie in monetising higher data usage across its client base.

·; Mobile churn levels remain low and are some way better than industry averages, reflecting the service focus across the Group and the benefits resulting from the Synapse Portal. There are three lead indicators:-

o The level of customer attrition by value stands at an industry leading 15% which is in line with position for the first half of 2012 but up slightly from the full year to 30 September 2012 when it was 14% which reflects the increased competitive nature seen in the mobile market place. This is at the bottom of the Group's target range of 16% to 20%.

o Network churn levels are stable and stand at 17%.

o Client re-sign levels have are up significantly reflecting value seen in the Groups service offering and the number of subscribers in contract has increased to 78% (year ended 30 September 2012: 74%).

·; Mobile gross margins have decreased to 38% from 39% (40% for the full year to 30 September 2012). The key driver of this is the high level of re-signs and the associated hardware costs which have only been partially offset by supplier bonuses resulting in a reduction in gross profit of £0.5m.

Telephony services - Fixed Line Network Services

·; The gross margin on this product set has grown year on year but with the revenue decline gross profit has reduced. The revenue decline of 9% to £17.5m is as a result of the reduction in call spends to mobiles, due to regulatory price reductions, the continuing move to email and mobile and SIP based telephony continues to eat into traditional office based telephony revenues. The migration to SIP lines benefits the Advanced Solutions data product where the base is now 3,160 channels.

·; Outbound KPIs

·; In Outbound, revenues have decreased by 12% to £13.4m from £15.3m in 2011. These revenues are split as follows:

o Outbound call revenues were down 7% from £7.5m to £7.0m, due principally to the mobile termination rate reductions being passed onto customers and the ongoing migration to SIP which benefits the data services revenue in Advanced Solutions. The revenue was also impacted (£0.4m) by two of our largest clients going into administration although there was no adverse profit impact as a result of effective contract management.

o The average revenue per customer per month ('ARPU') has increased again by 2% to £1,381 over the year, as more customers take both line rentals and calls, and with the addition of larger customers in the period. Contract periods are typically now 24 months and this is illustrated as the average contract period increased to 24 months from 23 months a year ago.

o Gross margins for outbound revenues increased from 36% to 40% in line with expectations. In spite of a higher proportion of revenues coming from lower margin rental revenues, the margins were increased due to higher margins on minutes following the mobile termination rate reductions in April 2012 and in wholesale ISDN rates.

·; Inbound KPIs.

·; Revenues increased by 3% from £4.0m in 2012 to £4.1m in this period which is in line with the revenue seen in the second half of the year ended 30 September 2012. The growth is principally due to an increasing ARPU of customers and improvements in supplier revenue share payments.

·; Inbound gross margin was 42% down from 46%. This decline was due to prior period customer credits. Underlying, margin was at 46% which is within the expected range of 45% to 47% range varying according to customer spends and, obviously, subject to any regulatory pricing changes.

Advanced Solutions

Advanced solutions revenues decreased by 7% to £17.1m as a result of reduction in IP switch hardware revenue and the associated professional services revenue recognised in the period. That being said, the Advanced Solutions data business has been successful in winning new orders from existing and new clients particularly in the latter part of the second quarter and the business has ended the first half of the year with a record order book up £1.6m on the prior year to over £3.5m which will predominantly be delivered in the second half of the year.

·; Reported Data hardware revenues decreased 23% to £3.0m (2012: £3.9m). One of the aforementioned contracts won in Q1 was in this area, the typical revenue conversion timing is 3 months but in this case the revenue will be recognised in Q3.

·; Revenue from the sale of Voice kit was in line with the equivalent period in 2012 at £3.3m. The other key contract won in Q1 was in the voice arena. The conversion to revenue will occur over Q3 and Q4.

·; Professional services revenue, which is heavily orientated towards the timing of the installation of data hardware, was down £0.6m to £1.2m but given the expected order revenue conversion in the second half of the year revenue is expected to recover as the orders are fulfilled.

·; Data services revenue increased 14% to £2.5m as a result of the continuing migration to SIP lines and the focus on driving WAN sales. The WAN order to revenue conversion time is typically 6 months reflecting the complexity of these sales.

·; Encouragingly, recurring maintenance and data services revenues were ahead of the prior year with revenue up £0.2m to a combined level of £7.8m. This reflects an underlying increase in the customer base.

·; AKJ billing services revenues were in line with the prior year at £1.8m (2012: £1.8m). This was as expected, given the focus of AKJ on internal group projects, particularly the development of the Portal. During the period, AKJ won a notable £0.4m two year contract for the billing of cloud and datacentre services.

Gross margins in advanced solutions have performed in line with expectations and the prior period.

Organic Growth

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

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. The successful reorganisation of our market sales orientation has enabled us to tailor our sales and service approach to each customer.

The number of customers with recurring revenues of more than £1,000 per month has reduced slightly to 1,186 (31 March 2012: 1,285) but this is predominantly due to billing erosion with lower impact from client churn. There was a net increase of clients who bill over £1,000 and are new to the Group, being greater than the number who left the Group in the period. Billing erosion is caused by regulatory price cuts, competitive price drops, lower usage due to lower economic activity and lower product penetration.

The number of customers taking 3 or more products with the Group stands at 30% in line with levels seen at March 2012 (March 2012: 30%) demonstrating the client loyalty that the Group has. Significantly the average spend of these larger customers has increased as larger customers have been won and more products cross sold into existing larger clients. The average spend has increased 2% from £5,285 in March 2012 to £5,388 in March 2013. 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 of products across all customers

A key part of our organic growth strategy remains to sell more products to new and existing customers. The number of customers taking more than one product stands at 46% (March 2012: 47%). In the larger customer base (i.e. those spending > £1,000) product penetration remains strong with the number of large customers buying more than one product at 73% (March 2012: 73%)

Churn continues at low levels

The Group has continued to experience low churn levels across all products. Mobile has traditionally had the highest attrition rates of the product sets and is covered separately above. The levels of customer attrition in the other product sets remain in line with targets as the customer Portal continues to add value at no additional cost to the customer.

Product Development

Product development represents a key growth opportunity to expand cross selling

Portal Development

Synapse

In the six months to 31 March 2013, we have further expanded the capabilities of the Synapse portal. This has included:

·; Live chat launched to the managed base

·; Paperless billing, reducing printing and postage costs, accelerating cash collection and reducing our environmental impact.

·; Improved reporting giving full visibility of all services and charges, and the ability to drill down into the detail.

·; Network Call Performance statistics integrated into Synapse allowing clients to view their answer performance by site, quantify missed calls, quality of service, and plan for their migration to SIP

This has seen the Portal contribute further to efficiency gains as well as being instrumental in some major client wins and maintaining our high level of customer retention.

Key Metrics include:

·; Clients perform 2,500 mobile management transactions on Synapse a month, keeping users working where ever they are in the world, or replacing devices in a minute

·; 42,000 automated reports are sent out by Synapse per month

·; Over 35% of mobile devices are ordered online

·; 19,000 automated alerts are issued per month, helping to prevent bill shock and leading to Bills that are up to 10% lower than they would otherwise have been

Synapse was a finalist at the Mobile News Awards 2013 for Innovative Service

Next 6 months 

The next six months will see action on two fronts:

Further Development, the roadmap includes:

·; Updated user interface to increase usability and performance

·; Expanded ordering functionality to include Analogue and Broadband services integrated to our partners

Also, we will drive usage and uptake of the new features through the Portal to maximise the return on the investment. Intelligent marketing initiatives are possible in the Portal and include up sell and cross sell of products, and flagging Portal opportunities to customers.

Growth by Acquisition

The acquisitions of Echo, AKJ and Scalable have driven the transformation of the Group's business and the Board continues to target earnings enhancing acquisitions. Currently, the Group is in preliminary discussions with a number of companies which meet our strict criteria of businesses which are growing, profitable, cash generative, and expected to be earnings enhancing in the first year post acquisition. The focus remains on strategic acquisitions, which complement the existing businesses and can be seamlessly integrated although the Group has also considered bolt on acquisitions that complement the existing Group businesses. The Group is well placed to take advantage of those opportunities as they arise.

Edward Spurrier

Gavin Griggs

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 March 2013

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

CONSOLIDATED statement OF Cash flowS

NOTES TO THE FINANCIAL INFORMATION

1. Basis of preparation

The financial information contained in this interim statement does not constitute financial statements as defined by section 434 of the Companies Act 2006. The interim report has been neither audited nor reviewed by the Group's auditors. The financial information for the year ended 30 September 2012 is derived from the statutory accounts for that period that have been delivered to the Registrar of Companies and included an audit report, which was unqualified and did not contain any statement under section 498 of the Companies Act 2006.

Alternative Networks plc's consolidated financial statements and this interim financial information have been prepared in accordance with IFRS and International Accounting Standards (IAS) as adopted by the European Union (EU). The accounting policies applied are consistent with those described in the Annual Report and Financial Statements 2012 except as described below. The Interim Report has been prepared in accordance with IAS 34 'Interim Financial Reporting' and should be read in conjunction with the 2012 Annual Report and Financial Statements.

The Group has adopted the following new standards and interpretations for the accounting period commencing 1 October 2012. The adoption of these standards has had no material impact on the Group.

Amendments to IFRS 7, 'Financial Instruments: Disclosures' on transfers of assets

Amendment to IFRS1, 'First time adoption', on fixed dates and hyperinflation

Amendment to IAS 12, 'Income taxes' on deferred tax

The interim results were approved by the Board on 4 June 2013.

 2. Accounting policies

The accounting policies applied are consistent with those of the annual financial statements for the year ended 30 September 2012, as described in those annual financial statements except as noted above. Taxes on income in the interim periods are accrued using the tax rate that would be applicable to expected total annual earnings.

3. Dividends

The reported dividend in these statements represents the 2012 proposed final dividend of 7.50 pence per £0.00125p ordinary share, which was paid on 31 January 2013 (2012: represents the 2011 proposed and paid final dividend of 7.00 pence per £0.00125p ordinary share). The amount of dividend paid was £3,328,000 (2011: £3,237,000).

The directors propose a dividend for the 2013 interims of 4.4 pence per £0.00125p ordinary share (2012: 4.0 pence), with a total payment value of £1,940,000 (2012: £1,932,000). In addition, the directors propose a special dividend of 4.0 pence per £0.00125p ordinary share (2012: nil), with a total payment value of £1,764,000 (2012: nil). These were approved on 4 June 2013, and have not been accrued in the financial statements. These will be paid on 15 July 2013 to shareholders on the register on 28 June 2013. The ex-dividend date is 26 June 2013.

 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 dilutive shares: those share options granted to employees where the exercise price is less than the average price of the Company's ordinary share during the year.

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

The adjusted EPS is based on the adjusted profit after tax as set out in note 5, and the weighted average number of shares as described above.

The calculation of the weighted average number of shares in issue excludes 3,672,490 shares held by the Alternative Networks Employee Benefit Trust (EBT) (2012: 3,915,200).

There were 46,524,115 shares in issue at 31 March 2013 (2012: 48,295,239 shares). The weighted average number of shares during the 6 months to March 2013 was 43,325,498 (2012: 44,358,556).

5. 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.

6. Taxation on profit on ordinary activities

Income tax expense is recognised based on management's best estimate of the weighted average annual income tax rate expected for the full year. The estimated average annual tax rate used for the year to 30 September 2013 is 23.1% (the estimated tax rate for the first half to 31 March 2012 was 25.3%). The current year is lower due to the further reduction in the standard rate of corporation tax.

The standard rate of tax in the comparative period was 25%.

7. Intangible assets

8. Cash generated from operations

9. Analysis of movement in net funds

10. Segmental information

Per IFRS 8, operating segments require identification on the basis of internal reporting about components of the Group that are regularly reviewed by the chief operating decision maker to allocate resources to the segments and to assess their 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 operating segments are Telephony Services, Advanced Solutions Voice and Data and Advanced Solutions Billing Services which are reported in a manner consistent with the internal reporting to the Board. The Board assesses the performance of the operating segments based on revenue, gross profit, net profit and EBITDA.

Telephony Services consists of two revenue streams, fixed line and mobile. The maintenance and sale of telephone systems and the integration of computer networks is Advanced Solutions Voice and Data. Advanced Solutions Billing Services relates to the provision of billing facilities.