Half Yearly Report

Alternative Networks plc

Alternative Networks plc, ('the Company' or 'the Group'), a leading provider of IT managed services and independent business-to-business communications, reports its Interim Results for the six months ended 31 March 2014.

HIGHLIGHTS

· Encouraging financial performance, with year on year organic growth in revenues and gross margins,

· Robust cash performance, with underlying cash conversion of 100%,

· Recent acquisitions of Control Circle and Intercept IT performing well, with benefits to the enlarged group already evident,

· Strong performance in Mobile with significant increase in revenue and connections,

· Board further strengthened with appointments of new Group Sales Director and Chief Operating Officer,

· Dividend policy reiterated:

o Interim dividend of 4.9p payable on 18th July 2014, up 11% year on year,

o Full year dividend to grow by no less than 10% year on year,

o Annual dividend growth in 2015 to show further progress towards 15% year on year growth,

· On track to meet our full year expectations with positive outlook for second half and significant momentum within the business

KEY FINANCIAL INFORMATION

* Results before intangible assets amortisation excluding software, write off/back of contingent consideration through comprehensive income statement, non-recurring acquisition related costs and share based payments.

** Earnings before interest, taxation, depreciation and amortisation.

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

Edward Spurrier, Chief Executive of Alternative Networks, commented:

"Alternative Networks has delivered an encouraging performance in the first half of the year. The strategy we have developed for improving our service offering and being able to cross-sell a greater range of products continues to be successful.

The highlight of the period was the acquisitions of Intercept IT and Control Circle. They add to our offering in the areas of managed IT and cloud based services and have highly complementary customer bases.

Our growth prospects remain extremely positive. We enter the second half with a record order book and a full pipeline of opportunities. We are therefore confident of delivering a performance for the year in line with expectations and of further growth in the longer term. We also expect to generate significant cash in the current year and so end the financial year with net debt at less than £30m, enabling us to continue our progressive dividend policy."

Enquiries:Alternative Networks 0870 190 7444Edward Spurrier, Chief Executive OfficerGavin Griggs, Chief Financial Officer

Investec Bank PLC - Nominated Adviser and Joint Broker  020 7597 5970

Patrick Robb / Carlton Nelson / Andrew Pinder

finnCap Limited - Joint Broker 020 7220 0565

Stuart Andrews/Charlotte Stranner

Pelham Bell Pottinger 07802 442486

Archie Berens

CHAIRMANS STATEMENT

Results

Alternative Networks performed well in the six months ended 31 March 2014, and was bolstered by contributions from the two businesses acquired in January 2014, Intercept IT Limited and Control Circle Limited. Group revenues increased overall by 14% to £63.0m (2013: £55.3m). This included revenues of £6.5m from Intercept IT and Control Circle. Excluding the acquisitions, organic revenues increased by 2%, driven especially by the Mobile business, which gained market share and grew its revenues by 9%. Adjusted operating profits were £7.5m, up 5% compared with the first six months of the previous year (£7.1m).

Cash generation was strong at £5.7m for the first half of the financial year, compared with £6.5m in the first half of 2013. There were several one-off cash items, amounting to £2.6m in total, relating to the acquisitions of Intercept IT and Control Circle, as well as a cash payment for a share based incentive arising following the acquisition of AKJ. If these were excluded, cash generation for the first half of the financial year would have been £8.3m. For the same reasons, cash conversion was lower at 82% of adjusted EBITDA, compared with 88% in H1 2013, but with those one-off items stripped out, it was 100%

Cash and dividends

The Group's net debt position as at 31 March 2014 was £34.7m (31 March 2013 net cash of £15.3m), which has already decreased from the net debt figure of £40.8m immediately following the completion of the acquisitions. The total amount expended on the acquisitions was £54.0 million (including costs) and £4.2m was also spent on the payment of the final dividend for the prior financial year. The board is targeting to reduce the net debt below £30.0m by the end of the financial year.

The Board is proposing to pay an interim dividend of 4.9 pence per share, 11% higher than last year's interim dividend of 4.4 pence per share. The Board has previously provided guidance that the full year dividend will be no less than 14.3p, representing a minimum increase of 10% on the prior year. Looking ahead, it is intended that annual dividend growth should progress towards 15% in 2015.

Acquisitions

In January 2014, the Group completed two acquisitions, both of them highly strategic in nature, for a total price of £52.3m in cash. In order to fund the acquisitions, the Group secured banking facilities of £43.0m. The first acquisition was of Intercept IT Limited, for £13.0m. Intercept IT is an established provider of hosted desktop solutions to the SME market, as well as desktop and server virtualisation services to Enterprise business customers running on-premises IT infrastructure. Intercept IT broadens the Group's range of IT services and provides a well-established platform to deliver additional cloud services, presenting good cross-sell opportunities with complementary customer bases.

Less than two weeks later, we completed the acquisition of Control Circle Limited, for £39.3m in cash. Control Circle is a well-established provider of complex managed hosting and cloud based services to UK enterprises, the delivery of which is an increasing requirement for the Group's existing and targeted UK enterprise customers. Alternative Networks and ControlCircle have both adopted asset light and customer rich strategies, dedicated to offering flexible data and communications services. The combined group now has a comprehensive and compelling data and IT services portfolio including managed and cloud based services, managed hosting, datacentre virtualisation and application management. The enlarged group offering will also allow customers to choose public or private hosted cloud services.

The integration of both Intercept IT and ControlCircle is progressing very well and both businesses have significantly increased our ability to cross sell a broader range of products and services. Both acquisitions are expected to be earnings enhancing in the current financial year and, as noted above, made a combined contribution of £6.5 million of revenues in the first half, of which £4.4m came from Control Circle and £2.1m came from Intercept IT.

Trading Performance

The Group has again increased its share of the mobile market, with an 10% increase in the base and 8% growth in revenue, from £20.7m in H1 2013 to £22.4m. Mobile churn was at record low levels and well below the industry average, reflecting the high quality of service across the Group, as well as the benefits of the Synapse Portal. Gross margins increased as a result of the value add that we can deliver, aided by improved commercial terms with suppliers.

The downward trend in Fixed Line has continued as expected, with an 8% decline in revenues to £16.1m (H1 2013 £17.5m). Call spending to mobile phones has decreased on the back of regulatory price reductions, increasing use of email and mobile and SIP based telephony. The group minimised the impact with only a £0.1m decline in gross profits.

The migration to SIP lines benefited the Advanced Solutions business, which saw revenues grow overall by 43% to £24.5m (H1 2013: £17.1m). Most of this increase in revenue was due to the maiden £6.5m contribution from Intercept IT and Control Circle. Even so, on an organic basis, Advanced Solutions revenues were 5% ahead. A number of new contracts were signed across the Group's target verticals, with particular success in Higher Education, where four new Universities were won as new customers in the period. A three year agreement has also been signed with Menzies Distribution for LAN, WAN, mobile and voice and unified communications services.

Cross selling of Group products continues to be a key component of our business model. In the first half of the financial year, the proportion of our customers taking more than product was 46%, similar to H1 2013. The number of customers taking 3 or more products with the Group was up 1% to 31% (H1 2013: 30%) demonstrating continuing customer loyalty. The average spend continues to increase as larger customers have been won and more products cross sold into existing larger customers, growing by 2% from £5,349 in H1 2013 to £5,445 during the first half of the current financial year. The acquisitions of Intercept IT and Control Circle have also significantly enhanced the Group's ability to cross-sell. Since those acquisitions, 10 new cross-sell contracts have already been signed, including one that involves all three parts of the Group.

Board Changes

Tim Holland-Bosworth retired from the Board at the start of the financial year, having served as a Non-Executive Director for 14 years, and helping to steer the Group through its IPO to become the business it is today. We are enormously grateful to Tim for all the good advice he provided.

In January 2014 Chris Huggett joined the Executive Board as Group Sales Director and Mark Quartermaine also stepped down as a Non-Executive Director, due to other executive commitments. However, these proved short lived, so we were delighted to welcome Mark back to the Board, this time in an executive capacity, as Chief Operating Officer in April 2014. Both Mark and Chris have extensive experience in IT managed services as well as leadership roles in telecom businesses.

On 30 April 2014, Jim Sewell retired from the Board, having served as Chief Strategy Officer and previously as Group Sales Director. Jim has been with Alternative since shortly after the business started 1994; we are very grateful for his immense contribution to the business, and we will miss his infectious enthusiasm.

Growth Strategy

Having acquired two businesses which add considerably to the Group's all round offering, our focus is now to maximise the additional opportunities that arise as a result of their integration into the Group. The early indications are that they are already having a considerable impact, with over 150 cross-selling opportunities currently being worked on.

One of our top priorities to fuel organic growth is to achieve greater customer loyalty, by improving their experience. With that in mind, we have introduced a new service proposition that achieves greater product integration and is more focused on business outcomes for customers, rather than being product led. Customer experience is also being enhanced through continuing development of the Synapse portal, one of our key differentiators. During the period, we expanded the Synapse's capabilities in a number of ways, including a new user interface, enabling the service to be used on any mobile device, performance upgrades and more transparent and detailed reporting functionality. These have seen Synapse contributing efficiency gains and being instrumental in some major customer wins, as well as maintaining customer retention.

In terms of inorganic growth, Alternative Networks has an excellent track record of acquiring strong, high quality, value adding and complementary businesses, and successfully integrating them within the Group. Intercept IT and Control Circle are maintaining that record and we expect them to play a major role in driving future growth. We also remain well placed to take advantage of other acquisition opportunities and will continue to assess them on their merits, applying our usual strict criteria of value and strategic fit.

Outlook

The Group has enjoyed a successful six months, with healthy organic growth given an additional boost by the new businesses acquired. This trend is continuing into the second half of the financial year, and we have a record order backlog and a full pipeline of new business opportunities. With our service offering broader and more attractive than previously, we can expect a greater proportion of those opportunities to be successfully converted, albeit that with larger customers, multi service contracts can be more complex, occasionally resulting in a longer sales cycle.

We remain confident of continued growth in the second half of the financial year, and of delivering an outcome in line with expectations.

The Group continues to deliver good cash generation and the focus is on maintaining a progressive dividend policy whilst simultaneously reducing the debt levels, which the Board has targeted to be below £30m by the end of the financial year.

James Murray

Executive Chairman

Business Review

The Group's performance has been encouraging during the first six months of the financial year. The existing business has performed well and the two acquired businesses, Intercept IT and ControlCircle are contributing well with strong evidence that they are building momentum within, and delivering benefits to, the new enlarged Group. During the period, organic revenue has increased and gross margin percentage has improved, with the acquired businesses adding a further £6.5m of additional revenue and £2.8m of additional gross margin. Organic operating profits have been stable as the investments in sales, marketing and technical resources in the second half of FY13 offset the improved gross profit. There was a further contribution from the acquisitions that resulted in reported growth. The underlying cash generation has been strong which has enabled the Group to reduce net debt level by more than £5m from its peak in January and distribute over £4m to shareholders.

Excellent progress has been made on integrating the acquired businesses and the back office integration of both businesses has been completed. They naturally fit into the existing Enterprise and Business market businesses. The Enterprise group, formed in 2012 to target all enterprises with over 500 employees, is working closely with both Intercept IT and ControlCircle, leading to opportunities to cross sell with some notable successes. The Business Market's business, comprising the Small and Medium Businesses with 80 to 500 employees has also benefitted from a close relationship with Intercept IT and we are seeing benefits with both existing and acquired customers. The Group is planning to consolidate its 5 London offices to one central location, this will result in the exit of 4 leases and the sale of one building. This is planned to happen in the fourth quarter of the calendar year and based on offers received to date the sale of the property should generate net proceeds of circa £3m.

The Mobile business has delivered a very strong performance across all of the key metrics. It has gained market share again with an 11% increase in connections resulting in growth in revenues of 8% to £22.4m; the mobile business represented 40% of the organic Group revenue in the first half and 31% on a proforma basis.

The Fixed Line business was 8% below the prior year, in line with historic trends. The key focus is to migrate the fixed line to SIP channels effectively reducing customer's costs as rental is circa 50% of ISDN and the business requires circa 50% of the number of lines; this migration increases the revenue decline by circa 2%. The Fixed Line business represents 28% of the existing business and 23% on a proforma basis.

In Advanced Solutions, orders signed in the first 6 months are 25% higher than last year on a like for like basis, thereby continuing the progress seen in the second half of 2013. New orders have been generated across the portfolio but there has been particular success in Higher Education with new contracts signed with four Universities, new to the Group, and a further three in the public and private health sector. The Advanced Solutions organic revenue at £18.0m was up 5% with continuing momentum from the second half of 2013 and orders signed 25% above the level in the equivalent prior year period. This has resulted in a record order backlog as at 31 March 2014, of more than £4.5m and 33% ahead of the level seen at the equivalent point in 2013. The existing Advanced Solutions business represents 32% of the organic base. The margin in Advanced Solutions was lower than historical levels at 36% (2013: 39%) as a result of revenue mix; growth in WAN and higher level of data hardware as compared to voice hardware which was partially offset by improvements in Billing Services margin.

The ControlCircle and Intercept IT businesses will be reported in the Advanced Solutions segment, further expanding the products to include managed services, managed hosting and virtualised desktops. Since the acquisitions, the Group has recognised £4.4m of revenue in just over 2 months from ControlCircle and £2.1m from Intercept IT. On a proforma basis, Advanced Solutions is now the largest segment representing 36% of the enlarged Group by revenue and is 46% on a proforma basis.

The Group, through ControlCircle has been awarded the UK Government's G-Cloud 5 supplier status for "Platform as a Service" and "Specialist Cloud Services", this builds on ControlCircle's previous G-Cloud 4 status and Intercept IT's "Specialist Cloud Services" status. This will give the Group further growth opportunities within the public sector.

There has been further progress in the development of our Synapse portal, with improvements in the performance and the user interface making it easier to navigate, its appearance can now be tailored by the customer and its appearance also adapts automatically to the device it is viewed from, i.e., laptop, tablet. The acquisitions have brought additional online applications that will further enhance the Group's customer interface; the focus in the second half of the year will be on consolidating all of the enlarged Group's portals to optimise the customer experience.

Results Overview

Total revenue increased 14% to £63.0m (2013: £55.3m). Of the £7.7m reported increase, £6.5m was as a result of the acquisitions and £1.2m growth from the existing business. Mobile revenue grew 8% (£1.7m) and the underlying Advanced Solutions business was up 5% (£0.9m). This was partially offset by a decline in the Fixed Line business, which was down 8% (£1.4m). Of the acquired revenue ControlCircle represented £4.4m which was 3% ahead of the equivalent 2 months in the prior year and Intercept IT represented £2.1m, which was 19% ahead of the equivalent prior year period. On a proforma six month basis the Group would have been 2% up on the equivalent period in the prior year.

Reported gross profit increased from £21.5m to £25.1m with £2.6m of the increased profit being derived from the acquired companies with a further £1.0m from the legacy business. On an organic basis gross profit was 5% up on the prior year with adjusted operating profits 1% ahead. Gross Margin increased by 110 basis points from 38.8% to 39.9% due to improved margins in Mobile and Fixed Line which helped offset the reduction in hardware within Advanced Solutions. Further analysis is detailed below by product set.

Adjusted EBITDA at £8.3m was up £0.7m on a reported basis and £0.1m ahead on an organic basis and adjusted operating profit increased 5% from £7.1m in 2013 to £7.5m; on an organic basis adjusted operating profit was in line with the prior year. The annualisation of investments made in the second half of the last financial year has limited growth in adjusted EBITDA and operating profit. There is further scope to improve operating margins across the Group.

The adjusted operating profit is stated before non-cash intangible asset amortisation of £1.2m (H1 2013: £0.9m), the IFRS2 share option costs of £0.1m (H1 2013: £0.6m) and non-recurring charges relating to the acquisitions of £1.3m.

Statutory operating profits before tax have decreased 11% from £5.5m to £4.9m as a result of the non-recurring charges relating to the acquisitions offsetting the growth.

The Group's reported cash conversion was 82% (2013: 88%) of adjusted EBITDA. Stripping out the a one-off working capital injection into one of the acquired businesses, LTIP cash payments linked to the AKJ acquisition and the non-recurring acquisition charges cash conversion would have been 100%. Net debt was £34.7m at the period end, which was down from a peak level of £40.8m at the time of the acquisitions in January.

The Board has confirmed its intention to pay a dividend at a minimum of 14.3 pence this year, at least 10% ahead of the prior year with 4.9 pence to be paid as an interim dividend. The interim dividend will be paid on 18 July 2014 to shareholders on the register at 27 June 2014.

Net funds and facilities 

The period end net debt balances was £34.7m as compared to a net cash balance of £15.3m at 31 March 2013. This is after £52.3m gross expenses on the two acquisitions and paying the final dividend of £4.2m for the prior financial year. The net debt level is still down from a peak of £40.8m at the time of the acquisitions.

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.

Adjusted EBITDA (note 5 below) cash conversion was 82% (H1 2013: 88%). The cash conversion was impacted by 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 £1.3m related to the acquisitions. Stripping out these items underlying cash conversion was 100%. In the six months to 31 March 2014, the Group generated £5.7m of cash from operations (H1 2013: £6.5m); this was after the aforementioned one-off items.

Capital expenditure

Capital expenditure in the period was £0.7m compared to £0.6m in the six months to 31 March 2013. Of this, £0.2m was further expenditure in respect of developing the Synapse Portal (2013: £0.3m), with a further £0.2m on development costs of internal IT systems. The continuing capital investment requirements of the business remain low and the full year level is expected to be £1.5m.

Earnings per share

Adjusted basic earnings per share was up 3% from 11.8 pence to 12.2 pence and up 14% on a fully diluted basis. The adjustments to earnings relate to non-recurring costs associated with the acquisitions in the period, amortisation of intangibles (acquired) and share based payments which have been deducted in full from profits for these earnings calculations.

Basic earnings per share were at 7.5p down from up from 9.8p in 2013 as a result of the non-recurring acquisition costs.

The estimated full year effective tax rate is 22.0% as compared to 23.1% in the prior year. The reduction is as a result of the reduction in the standard rate of corporation tax.

The weighted average shares in issue increased by 4.4m shares to 47.7m over the comparative period. This is mainly due to increases from shares issued for the VCP in May 2013 (3,938,126) and fewer excluded shares held by the EBT of 3,034,090 (2013: 3,672,490).

Going Concern

The Board have made enquiries concerning the potential of the business to continue as a going concern. Enquiries included a review of performance in 2013 and 2014, the 2014 annual plans, a review of working capital including the liquidity position and a review of current indebtedness levels. The Board confirm that they have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Given this expectation they have continued to adopt the going concern basis in preparing the accounts.

Dividend

The Board proposes to pay an interim dividend of 4.9 pence per share on 18 July 2014 which is an 11% increase on the underlying interim dividend of 4.4 pence per share paid in 2013. There was a special dividend of 4.0 pence paid in 2013.

The Board has indicated that the full year dividend is expected to be no less than 14.3 pence; this is in line with the previously stated intention to increase by a minimum of 10% increase per annum in the year to 30 September 2014. Going forward, the Group intends to progress the dividend growth towards 15% in 2015.

Review of business and KPIs by product sets

· Mobile revenues grew 8% in the period as a result of the growth of the subscriber base which has grown 11% organically to 85,701 since 31 March 2013 and is 5.3% ahead of the base level at 30 September 2013.

· The directly contracted base is 9% larger than March 2013 and has increased 2% since September 2013. There has also been growth in the managed subscriber base which has increased by 13% to 16,208 since March 2013 and by 16% since September 2013. The channel route to market that we launched in 2013 is gaining traction with a contracted base of 724 up 601 connections since September 2013.

· The gross new connections in the period were 12,253 (2013: 8,967) made up of 8,319 (2013: 7,061) on the Alternative contracted base, and 3,218 on the managed base (2013: 1,906) and a further 716 (2013: 11) to the new partner channel which is building momentum. This is at record levels for the Group and reaffirms the on-going success in winning market share in a flat overall market.

· ARPU on the entire contracted base was £39 (March 2013: £41, September 2013: £41). The drivers of the year on year reduction are the impact of the EU roaming regulations in July 2013 combined with the trend toward bundled data revenues replacing traditional voice services and lower rental costs on new business and contract renewals.

· The growth in data continues, ADPU is up 38% to 84MB per month. With the predominance of smart phones and the expansion of 4G networks we expect this will continue to grow rapidly.

· Mobile churn was at record low levels and is well ahead of industry averages, reflecting the service focus across the Group and the benefits resulting from the Synapse portal.

· The level of customer attrition by value stands at an industry leading 10% and a record low for Alternative in the 12 years that it has been operating as a Service Provider. This is ahead of the position for the first half of 2013 and the full year to 30 September 2013 when it was 13% which reflects the increased competitive nature seen in the mobile market place. Network churn levels are also down and stand at 13%.

· Customer re-sign levels have held up reflecting value seen in the Groups service offering and the number of subscribers in contract has is 75% (year ended 30 September 2013: 77%).

· Mobile gross margins have increased to 41% from 38% (38% for the full year to 30 September 2013) with the underlying level at 40%. The key drivers of the underlying improvement were the benefits of the commercial arrangements from 2013 and connection bonuses.

· The Group has renewed its agreements with the key suppliers in the period, extending the contract lengths to March 2018. Both are now on a more simplified basis that provides Alternative with greater flexibility to build its own tariffs and propositions. The impact of the new commercial arrangements will supress the reported mobile revenue growth although the Group still expects to see underlying revenue growth; the gross margin is expected to be above 40%.

Fixed Voice Services

· Revenue has declined 8% to £16.1m; the reduction is as a result of a reduced level of call spends to mobiles, regulatory price reductions and the continuing move to email and mobile. Alternative is also proactively migrating the Fixed Line base to SIP based telephony. The migration to SIP lines has increased the number of SIP Channels by 65% year on year to over 5,200.

· The gross margin on this product set has grown again year on year but with the revenue decline, total gross profit has reduced 2%. The growth in gross margin is as a result of improved commercial arrangements from key suppliers.

· Outbound revenues have decreased by 7% to £12.4m from £13.4m in 2013. Outbound call revenues were down 8% from £7.0m to £6.4m, due principally to the mobile termination rates reductions being passed onto customers and the ongoing migration to SIP with the equivalent lower rental charges to customers. Inbound revenues decreased by 10% from £4.0m in 2013 to £3.7m in this period as a result of the loss of one of the larger Inbound customers (£0.2m).

· The average revenue per customer per month ('ARPU') has increased again by 4% to £1,443 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 or greater and this is illustrated as the average contract period increased to 25 months from 24 months a year ago.

· Gross margins for outbound revenues increased from 40% to 44% as a result of improved commercials and margin optimisation. Inbound gross margin was 39% down from 42%. This decline was due to new customers and renewals at lower margins.

Advanced Solutions

Advanced Solutions revenues increased by 43% to £24.5m as a result of inclusion of ControlCircle and Intercept IT and organic growth which contributed £4.4m, £2.1m and £0.9m respectively. On an organic basis the existing Alternative business delivered £18.0m, 5% ahead of the prior year. Orders signed in the first 6 months were 25% higher than the prior year on a like for like basis, thereby continuing the momentum seen in the second half of 2013. New orders have been generated across a number of market verticals but there has been particular success in Higher Education with new contracts signed with four new University customers and a further three in the public and private health sector.

As the Group is being successful with larger, more complex projects with larger customers there has a noticeable lengthening of the sales cycle and the projects complexity inevitably creates a longer delivery lead time. The Group has signed 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 and some of these services will only be delivered from FY15.

A number of larger new contracts were signed in the second quarter and are expected to convert to revenues commencing in the second half; and a number of installations are necessarily planned for the summer (e.g. to accommodate University holidays), resulting in a growth in systems backlog which has increased by more than £1.0m from September 2013. This phasing will mean a higher weighting of revenue and profits to the second half than previously experienced.

· Reported Voice and Data hardware revenues increased 5% to £6.6m from £6.3m.

· Professional services revenue, which is heavily orientated towards the installation of data hardware, was marginally down £0.1m to £1.1m but given the expected order revenue conversion in the second half of the year revenue is expected to record growth as the orders are fulfilled.

· Data services revenue increased 16% to £2.9m continuing the recent momentum. The performance is 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.

· Recurring maintenance revenues were ahead of the prior year with revenue up £0.1m to £5.4m. The growth was suppressed following the loss of a major customer where we rejected to pricing to a level that would damage service levels.

· AKJ billing services revenues were up £0.2m on the prior year at £2.0m driven by growth in recurring revenues as new customers have been brought on board.

Gross margins in Advanced Solutions on an organic basis were 36% margin down from 39% achieved in the half year to 31 March 2013 and from the 38% for the full year to 30 September 2013.

· Systems margins have decreased to 34% from 38% in the prior year. This reduction was as a result of a number of factors; with the continued growth of lower margin data services and data hardware there is a downward product mix impact. This has historically been offset by the growth in professional services. There has also been a customer mix impact driven by the loss of the aforementioned maintenance customer.

· The Billing Services gross margins were up to 51%, as the additional recurring revenue has enabled further leverage of the billing platform.

· Going forward gross margin in the existing Advanced Solutions is expected to be at least the 36% level.

ControlCircle and Intercept IT

Alternative acquired Intercept IT on the 9 January 2014 for £12.95m. In the financial year ended 31 May 2013 Intercept IT recorded £9.8m of revenue in year ended 31 May 2013, a pre-tax loss of £0.3m and an EBITDA loss of £0.1m. Intercept's cost base significantly reduced since May 2013 and adjusting for the costs of this exercise and the efficiency gains, the underlying EBITDA was £0.8m in the year ended 31 May 2013. Since restructuring, Intercept has also reduced its one off sales of low margin hardware and software.

Alternative acquired ControlCircle on 23 January 2014 for £39.3m in cash. In the audited results for the year ended 30 September 2013, Control Circle reported revenue of £21.1m (78% recurring revenue), a pre-tax profit of £0.9m and an EBITDA of £1.9m. Notwithstanding an investment in senior management capability in 2012, Control Circle has focussed on improving profitability in 2013, and in the six months ended 31 December 2013 the company delivered underlying EBITDA of £1.1m. In 2013, total revenue grew 1% on the previous financial year, as growth was constrained by an exceptional reduction in revenues from one customer that underwent a significant financial restructuring. In the previous three years, the compound annual growth rate of revenue was 32%.

The businesses acquired have been performing strongly and there are clear benefits of the combined group. In total £6.5m of revenue was recognised in the period relating to the acquisitions.

ControlCircle revenue from 23 January 2014 to 31 March 2014 was £4.4m; this was 3% ahead of the level recognised in the equivalent prior year period. This reflects the limited new business signed in the previous 6 months. Since acquisition they have signed a number of new customers including a global insurance company, there has also been completion of a number of ongoing projects for existing customers which will increase the level of recurring revenue going forward.

Intercept IT revenue from 1 January 2014 to 31 March was £2.1m; this was 19% ahead of the level recognised in the equivalent prior year period. This reflects the momentum in the business as it is winning notable new contract including most recently a major contract with a "Magic Circle" law firm.

With the new acquisitions there is considerable cross sell opportunities in all directions, i.e. Existing Alternative to ControlCircle and Intercept IT and in the other direction but also between the two acquired companies. Since acquisition we have signed 10 cross sell contracts and there are more than 150 qualified opportunities that are being actively worked on. This is expected to be a key area of growth for all parts of the business.

The integration of both businesses is progressing well; the back offices for both businesses have been successfully integrated and there has been further progress in other areas. As part of the integration planning, the Group has undertaken a strategic review of its property portfolio and plans to consolidate the five London offices into one new site. This will result in the sale of the Chatfield Court property and exit of the remaining sites in the most cost efficient way possible. It is anticipated that this process will occur across the second half of 2014.

Organic Growth

The Group's organic growth strategy remains unchanged on the existing Alternative business and this continues to show progress. The following key factors are the drivers of continued growth, note all KPIs are for the existing Alternative business only.

Focus on larger customers in SME space

The existing Alternative business continues to target the mid enterprise market, particularly those customers with multi-sites and employees ranging from 80 to 1000. The number of existing Alternative customers with recurring revenues of more than £1,000 per month has reduced slightly to 1,142 (30 September 2013: 1,157) but this is predominantly due to billing erosion rather with lower impact from customer churn. There was a net increase of customers 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 and lower usage sometimes as a result of the benefits of Synapse to our customers.

The number of existing Alternative customers taking 3 or more products with the Group is up 1% to 31% (September 2013: 30%) demonstrating the customer loyalty that the Group has. Significantly the average spend of these larger customers continues to increase as larger customers have been won and more products cross sold into existing larger customers. The average spend has increased 2% from £5,349 in March 2013 to £5,445 in March 2014. The success of cross selling products into our existing smaller customers so that smaller customers become larger ones can also be measured as below.

With the focus on larger customers and more complex projects the conversion from order to revenue can sometimes increase.

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 legacy Alternative customers taking more than one product stands at 46% (March 2013: 46%). 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%.

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 through the development of Synapse and focus on the customers this is now at a record low level of 10% which is half the level seen in 2009 and significantly below the market norms. 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 and Service propositions

Continuing to improve the customer experience is a high priority for the Group and we have introduced a new Service Proposition structure that provides greater integration between products and brings together the "Go to Market" and "Service Development" functions into one team. This new structure will increase the go to market speed of new products and propositions and is focused on business outcomes for our customers rather than product led.

Portal Development

Synapse 

In the last 2 years the investment in Synapse has developed a feature rich application that delivers tangible value to our customers:

· Synapse usage continues to boost cross sell, high users are 3 times more likely to take an additional product and improved margin retention

· Key in reducing mobile churn down to record levels of 10%

In the six months to 31 March 2014, we have further expanded the capabilities of the Synapse portal. This has included:

· Improvements user interface making it easier to navigate and now will automatically tailor the presentation to each customer and hardware, i.e., laptop, tablet.

· Performance upgrades to deliver a best in class user experience

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

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

Key Metrics include:

· Customers perform 3,000 transactions on Synapse a month, keeping users working where ever they are in the world, or replacing devices in a minute

· More than 43,000 automated reports are sent out by Synapse per month

· Over 50% of Mobile Devices are ordered online

· More than 21,000 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

Through the acquisition of ControlCircle, a further customer portal was added to Synapse. Max3000 provides a complete, real-time view of a customer's infrastructure. It operates, as Synapse does, through a web-based, interface providing complete visibility of the status of all elements of the IT platform. It covers hosting, co-location, cloud, storage, security and devices creating a single, comprehensive view. This is an area of focus for the Group and recent developments include:

· Further expansion of monitoring and configuration to give greater visibility and reporting on devices and threshold settings and alerting parameters.

· Development of an upgrade that will allow the monitoring of Amazon Web Services and for devices outside of the ControlCircle datacentres.

Intercept IT also offers customers a portal interface to the virtualised desktop. The portal known as the Control Panel automate the components of infrastructure and applications that are required to provide a user with a desktop. The portal allows customers to provision new users whilst driving efficiencies within Intercept IT. The portal is under continual development to improve the user functionality and overall efficiency.

Next 6 months 

The next six months will see action on the following fronts:

· Planning the combination of the groups online applications, from Alternative, Intercept IT and ControlCircle into one cohesive brand and Portal

· Bringing SIP ordering and management into Synapse to reflect the rapid growth of this product, so that the queries and orders it generates can be dealt with as efficiently as possible

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

· Driving usage and uptake of the new features through the Portal to maximise the return on the investment.

Growth by Acquisition

The acquisitions of ControlCircle and Intercept IT have driven the transformation of the Group's business and the Board continues to target earnings enhancing acquisitions. The two recent acquisitions met the Group's strict criteria of businesses which are growing, profitable, cash generative, and expected to be earnings enhancing in the first year of 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. Whilst the Group is predominantly currently focused on integrating the businesses, maximising the cross sell opportunities and reducing the debt levels the Group remains well placed to take advantage of any appropriate opportunities as they arise.

Edward Spurrier

Gavin Griggs

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the six months ended 31 March 2014

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 2013 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 2013 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 2013 Annual Report and Financial Statements.

The Group has adopted the following new standards and interpretations for the accounting period commencing 1 October 2013. The adoption of these standards has had no material impact on the Group.

Amendment to IAS 12,'Income taxes' on deferred tax (effective 1 January 2012) (endorsed 1 January 2013)

Amendment to IAS 1,'Presentation of financial statements' on OCI (effective 1 July 2012)

IFRS 13, 'Fair value measurement' (effective 1 January 2013)

IAS 19 (revised 2011) 'Employee benefits' (effective 1 January 2013)

Amendment to IFRS 1 on hyperinflation and fixed dates (effective 1 July 2011) (endorsed 1 January 2013)

Amendment to IFRS 1,'First time adoption' on government grants (effective 1 January 2013)

Amendments to IFRS 7 on Financial instruments asset and liability offsetting (effective 1 January 2013)

Annual improvements 2011 (effective 1 January 2013)

The interim results were approved by the Board on 3 June 2014.

In preparing the interim financial statements the Directors have considered the Group's financial projections, borrowing facilities and other relevant financial matters, and the Board is satisfied that 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.

2. Accounting policies

The accounting policies applied are consistent with those of the annual financial statements for the year ended 30 September 2013, 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 2013 proposed final dividend of 8.60 pence per £0.00125p ordinary share, which was paid on 30 January 2014 (2013: represents the 2012 proposed and paid final dividend of 7.50 pence per £0.00125p ordinary share). The amount of dividend paid was £4,194,000 (2013: £3,328,000).

The directors propose a dividend for the 2014 interims of 4.90 pence per £0.00125p ordinary share (2013: 4.4 pence), with a total payment value of £2,435,000 (2013: £2,134,000). The directors do not propose a special dividend this year (2013: 4.00 pence per share, with a total payment value of £1,940,000). The proposed 2014 interim dividend was approved on 3 June 2014, and has not been accrued in the financial statements. It will be paid on 18 July 2014 to shareholders on the register on 27 June 2014. The ex-dividend date is 25 June 2014.

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 3,034,090 shares held by the Alternative Networks Employee Benefit Trust (EBT) (2013: 3,672,490).

There were 49,685,544 shares in issue at 31 March 2014 (2013: 46,524,115 shares). The weighted average number of shares during the 6 months to March 2014 was 47,657,368 (2013: 43,325,498).

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 2014 is 22% (the estimated tax rate for the first half to 31 March 2013 was 23.1%). 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 23.5%.

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 and Advanced Solutions 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. Advanced Solutions includes the maintenance and sale of telephone systems, the integration of computer networks 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 and do not require disclosure for either 2013 or 2014.

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.

11. Acquisition of Intercept IT Limited

On 9 January 2014 the Group acquired 100% of the ordinary shares of Intercept IT Limited (Intercept) and obtained control of the Company. Based in London, Intercept is one of the UK's leading cloud computing and virtualisation service providers, employing 48 people of whom 22 are qualified technicians on the date of acquisition. As a result of the acquisition, the Group expects to broaden its range of IT services offered, have greater cross-selling opportunities and to reduce costs through increased Group purchasing power.

The revenue included in the consolidated statement of comprehensive income since 9 January 2014 contributed by Intercept was £2,139,000. Intercept also contributed profit after tax of £149,000 over the same period.

The following unaudited pro forma summary presents consolidated information of the Group as if the business combination had occurred on 1 October 2013.

These amounts have been calculated after applying the Group's accounting policies from 1 October 2013, together with the consequential tax effects.

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

There is no contingent consideration to be paid as part of the acquisition.

The fair value of trade and other receivables was £1,534,000 and included trade receivables with a fair value of £1,313,000. The gross contractual amount for trade receivables due was £1,320,000, of which £7,000 was impaired at the acquisition date.

The residual goodwill of £8,864,000 arising from the acquisition consists largely of the workforce of the acquired business and the significant synergies and economies of scale expected from combining the operations of the Group and Intercept.

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

The Group incurred £222,000 of third-party costs related to this acquisition. These expenses are included in operating costs in the Company's consolidated statement of comprehensive income for the period ended 31st March 2014.

12. Acquisition of Control Circle Limited

On 23 January 2014 the Group acquired 100% of the ordinary shares of Control Circle Limited (Control Circle) and obtained control of the Company. Control Circle is a UK-based provider of complex managed hosting and cloud based services to enterprises and online businesses. As a result of the acquisition, the Group will now have a comprehensive and compelling data and IT services portfolio including managed and cloud based services, such as managed hosting, datacentre visualisation and application management. Furthermore the enlarged Group offering will allow clients to choose private or public hosted cloud services.

The revenue included in the consolidated statement of comprehensive income since 23 January 2014 contributed by Intercept was £4,375,000. Intercept also contributed profit after tax of £203,000 over the same period.

The following unaudited pro forma summary presents consolidated information of the Group as if the business combination had occurred on 1 October 2013.

These amounts have been calculated after applying the Group's accounting policies from 1 October 2013, together with the consequential tax effects.

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