Interim Results

 12 JUNE 2012

Alternative Networks plc

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 2012.

HIGHLIGHTS

·; Solid financial performance, with continued strong cash conversion

·; Year on year improvement in gross margins and operating margins

·; A return to stronger growth in Mobile with 9% increase in subscriber base

·; Targeting larger customers - a specialist Enterprise sales group

·; Progressive dividend policy maintained:

§ Interim dividend of 4p payable on 6 July 2012, a 33% increase on 2011 interim of 3p.

§ Target of at least 11p full year dividend and a minimum 10% dividend growth p.a. proposed for 2013 and 2014, which is a year's extension to previous guidance.

KEY FINANCIAL INFORMATION

 * Results before intangible assets amortisation excluding software, write off of contingent consideration through comprehensive income statement, share based payments, and costs of Scalable acquisition (2011) and restructure (2012).

** Statutory performance reflects IFRS requirement to expense £0.2m (2011: £1.35m) to the comprehensive income statement on the deferred consideration payable to the vendors of Scalable, because the terms of the acquisition require the vendors to remain as employees of the Company when this payment falls due. This has a one-off 0.5 pence negative impact on earnings per share in this period (2011: 3.1 pence).

*** Adjusted earnings per share are based on profits as set out in Note 5

James Murray, Chief Executive of Alternative Networks, commented:

"Alternative Networks delivered a robust performance in the first half of the year, in the face of challenging market conditions. The major components of our growth strategy all played their part. We continued to increase our market share; we maintained high levels of cross-selling across our customer base and saw reduced churn; and we invested in areas where we know we already have a competitive advantage.

"With the establishment of our new Enterprise sales group to target the larger end of the SME market, we are well placed to leverage our competitive strengths and our all-round offering which covers the entire spectrum of business communications and data services.

"We will continue to grow the business, using both our existing base of products and services and by making acquisitions which bring additional commercial opportunities, add value and make us even stronger. Current trading is stronger than earlier in the year and, notwithstanding that the market remains challenging, we are confident of achieving a result for the year in line with expectations."

Enquiries:

Chairman's Statement

Alternative Networks has delivered another robust performance in the first half of the financial year, with turnover of £57.4m (H1 2011: £59.0m) and a solid 5% increase in adjusted operating profits from £7.1m in H1 2011 to £7.4m. Cash generation from operations across the Group remains strong at £6.8m (H1 2011: £7.2m), with a good cash conversion ratio of 90% (H1 2011: 97%) of adjusted EBITDA.

As a result of this strong cash position, the Board intends to maintain its progressive dividend policy, with a minimum target of 11p for the full year, representing an increase of 10% over 2011. Further dividend growth of at least 10% is targeted for 2013 and 2014.

The Group has been successful in growing market share and revenues in many areas of its business in spite of on-going regulation which has hampered revenue growth in both mobile and fixed line telephony service; and has been successful in cross selling services and attracting larger customers such that its average larger customer now spends £5,285 up 6% from £4,997 a year ago. The Group has increased its gross profits and operating margins without cutting operating costs.

Key trading highlights of the period have been a 9% increase in the mobile subscriber base, and advances in both fixed line and mobile gross profits. In advanced solutions, revenues were broadly flat at £18.4m compared to £18.6m in the previous year. This was due to some slowdown in the sales cycle on larger deals, which are still in the pipeline, and in Scalable's case, the comparative of a particularly strong first half in 2011, where Scalable won a large number of one-off deals. Encouragingly the recurring revenue base in Advanced Solutions grew strongly and was up 17% to £9.1m from £7.8m in 2011. Overall, with low levels of churn, the Board was pleased with the trading performance in what was a challenging environment and the prospects for a stronger second half look encouraging.

A significant operational development took place during the period, with the formation of a converged Enterprise sales and support group. This will be the spearhead of the Group's drive to attract more business from larger customers in the SME space and beyond, and is one of the key components of the Group's organic growth strategy. During the period, we also invested further in "Your Alternative Portal". The Portal is a major competitive differentiator, which has been instrumental in enabling all of the Group's divisions to grow their market share.

The Group's strong cash position also provides scope to continue to seek acquisitions that complement the Group's existing range of products and services and meet its stringent financial criteria. Several opportunities are under active consideration. We are encouraged by our track record of only completing deals at sensible prices and which deliver the right business fit, and of fully integrating those businesses which we acquire.

In spite of market conditions remaining uncertain, the outlook for the remainder of the year and beyond is positive and we expect to continue to trade in line with expectations.

Timothy Holland Bosworth

Non-Executive Chairman

Business Review

This has been a robust performance from the Group, in a challenging market and in a period when the UK economy slid back into recession. During the period, profits increased and cash generation remained strong.

The key operational development in this period was the establishment of a single converged Enterprise sales and support group. This includes Scalable and represents the final integration of this business following the end of the Earn-out period in December 2011. The new Enterprise group is targeting all enterprises with over 500 employees. The focus will be on sector verticals where Alternative can leverage existing expertise. The customer set of Enterprise combines the customer base of Scalable, being approximately 200 accounts, with the top 300 customers of Alternative Networks. The remainder of the Group comprises the Small and Medium Business ("SMB") which will have improved focus on the businesses with 80 to 500 employees, and customers will benefit from dedicated resource that will no longer be impacted by the demands of Enterprise customers. SMB retains its existing strong management team, reporting to Ben Marnham, COO. Jim Sewell is appointed Enterprise CEO, and his management team combines some existing Scalable management with other Alternative managers. The rationale for the change was threefold:

·; Consolidate the enterprise level skills of the Group in one centre of excellence and establish a platform to grow in Enterprise, by offering a converged solution and service to major customers. This is key to our organic growth plans.

·; Align the sales and account management skills with our customers' profiles and enable easier integration of future acquisitions.

·; Deliver the final planned synergies from the Scalable acquisition.

Scalable has continued to trade well, through this period of change, and provides an excellent platform for targeting the Enterprise market. Revenues in the first half relating to Advanced Solutions were £9m. These were 6% below the previous year, partly as a result of orders taking longer than expected in a few cases, combined with an exceptionally strong performance in terms of one-off orders delivered in the first half of 2011, with three particularly large deals landing in the first half of that year. The pipeline is strong going forward and even after improved sales performances in both April and May 2012.

Major progress was also made in the continuing development of our Portal, with a new online case management module and a self-service mobile management service both 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 grew year on year driven by both improved gross margins and operating margins. The rise in operating margins was in spite of a slight increase in selling and general administration costs over the year. The Group managed to convert 90% (2011: 97%) of adjusted EBITDA into operating cash flow and with net cash balances at £13.1m at the period end, the Board has confirmed its intention to pay a dividend of at least 11 pence this year, with 4 pence to be paid as an interim dividend on 6 July to shareholders on the register at 22 June 2012.

Results Overview

Group gross profits and adjusted operating profits increased 2% and 5% respectively in the first six months.

Total sales decreased 3% to £57.4m (2010: £59.0m). Of the £1.6m headline decline, £1m is not like for like as it relates to the change in terms from one of our mobile networks providers in January 2011. The remaining decline is due to regulatory changes since March 2011. These encompass both regulatory changes from OFCOM, which lowered mobile termination rates (Fixed Line) from April 2011, and changes mandated by the EU commission (Mobile), which lowered EU roaming voice and data rates from July 2011.

Notwithstanding one-off impacts and regulatory revenue cuts, there was some strong growth in market share, e.g. total mobile subscribers were up 9%, and Advanced solutions revenues, excluding Scalable hardware sales (£6m vs. £7.3m), grew 10% to £12.4m from £11.3m.

Gross Margins have increased from 37% to 39% due to stronger margins in mobile and fixed line. Further analysis is detailed below by product set.

Adjusted operating profit has increased 5% from £7.1m to £7.4m in 2012. These profits were generated by an increase in gross profits of £0.4m offset by a £0.1m increase in selling and general administration costs ("SG&A"). The Board believes there is scope to increase operating margins further.

The adjusted operating profit is stated before non-cash intangible asset amortisation of £1.0m (H1 2011: £1.11m), and an expense of £0.2m (H1 2011: £1.35m) in respect of contingent consideration payable to the two major shareholders in Scalable. This follows IFRS accounting standards, where the payment of the deferred consideration is contingent on them being employed at the point it falls due. Ordinarily, deferred consideration would be an addition to goodwill on the balance sheet. In addition to these, adjusted operating profits are stated before restructuring costs in respect of the Scalable acquisition of £0.15m (H1 2011: £0.07m), and share option costs of £0.47m (H1 2011: £0.34m).

Statutory profits before tax have increased 33% from £4.2m to £5.6m.

Net funds and facilities 

Period end cash balances were £13.9m, up from £11.7m at 30 September 2011 and £8.7m at 31 March 2011. Net funds were £13.1m at 31 March 2012 (2011: £7.9m).

Adjusted EBITDA (note 5 below) cash conversion remained healthy at 90% (H1 2011: 97%). The cash conversion was held back slightly by Scalable being below the average for the rest of the Group, as a couple of large debtor payments (£0.7m) slipped to just after the period end.

In the six months to 31 March 2012, the Group generated £6.8m of cash from operations (H1 2011: £7.2m). There was a net outflow of £0.7m cash in working capital (H1 2011: £1.2m inflow).

Capital expenditure

Capital expenditure in the period was £0.4m compared to £0.6m in the six months to 31 March 2011. Of this, £0.2m was further expenditure in respect of developing the Portal (2011: £0.3m), with the continuing capital investment requirements of the business remaining very light.

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.

Earnings per share

Adjusted fully diluted earnings per share have decreased by 1% from 10.7p to 10.6p. The adjustments relate to amortisation of intangibles (acquired), the modest restructuring costs of Scalable and the IFRS charge for the contingent consideration on acquisition. Share based payments have been deducted in full from profits for these earnings calculations.

Basic earnings per share were 9.5p up from 6.7p in 2011. The impact of the costs of the deferred consideration due to the principal two shareholders in Scalable was a 0.5 pence reduction in basic earnings per share (2011: 3.1 pence). Without this, basic earnings per share would have increased to 10.0p from 9.8p in 2011, being a 2% increase.

The weighted average shares in issue increased by 0.6m shares to 44.4m over the comparative period, due to share options exercised by staff in the year. The number of potential dilutive shares has increased from 4.7m to 5.8m due the increase in the LTIP potential share issue as announced on 9 March 2012, following strong share price performance in 2010 and 2011.

Dividend

The Board proposes to pay an interim dividend of 4 pence per share on 6 July 2012. In 2011, the Group paid an interim dividend of 3 pence per share on 1 July 2011.

The Board has indicated that the full year dividend is expected to be no less than 11 pence, with a minimum of 10% increase per annum in the years to 30 September 2013 and 2014.

The Board does not consider that these actions represent any material shift in dividend policy, which has been progressive. 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.

Share Buy Backs

In the period ended 31 March 2012, the Group did not repurchase any shares in the Company (2011: nil).

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

Treasury Shares

On 9 February 2012 the Group announced the cancellation of 980,326 Ordinary shares that were held in treasury. The Board had determined that the Group had not made material use of 1 million shares acquired in Treasury in 2008, and therefore these should be cancelled and fresh shareholder consent sought for further capital in due course.

Outlook

The Group has had a solid start to the year in a challenging market. Underpinned by healthy cash generation, increasing margins and a strong balance sheet, the Group is in a very sound financial position.

The establishment of a converged Enterprise sales and support team (including Scalable) , coupled with the continued roll out of the Portal, underpin our confidence in continued market share gains, and the Board expect these to strengthen further the platform for accelerated organic growth in the future.

The Group is well positioned to make further acquisitions and the Board continues to review a number of opportunities.

Review of business and KPIs by product sets

Advanced Solutions

Advanced solutions revenues, excluding Scalable's and AKJ's contribution, increased by 6% to £7.6m principally due to strong growth in Data circuit revenues.

·; IP PBX installation revenues decreased 6% to £3.3m (2011: £3.5m) reflecting the of general market conditions, and following on from some double digit growth in 2011 (2010: £2.8m). The sales cycle for SMB customers was unchanged but there was a noticeable lengthening of the sales cycle for larger enterprises and government agencies as the UK dipped into recession in this period. E.g. One large order worth £0.5m from a long-standing customer, which was specifically budgeted in the half year, was pushed back and is now expected to come through in smaller phased deploys.

·; IP PBX support revenues remained healthy and increased to £2.4m (2011: £2.3m) with average annual revenues per customer increasing to £4,506 at 31 March 2012, compared to £4,106 at 31 March 2011.

·; Data circuit revenues increased 46% to £1.9m from £1.3m in 2011. This reflects continued growth in sales from the new sales team established in summer 2010, and increasing adoption of new products, e.g. MPLS, Ethernet First Mile, Data storage and business continuity products within our existing customer base.

·; AKJ billing services revenues decreased 5% to £1.8m (2011: £1.9m). 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 hosted contract for managed billing and provisioning services in a new datacentre, worth £0.5m over three years.

Scalable revenues were 6% down on 2011 at £9m (2011: £9.6m)

·; Scalable had a solid first half, with significant deals with Woking Council and the Medical Research Council. However, these could not match the stellar first half of 2011 which had a higher number of significant deals (Virgin Money, Newsquest, Carillion), and the total new hardware and professional services sales was £1.3m lower than last year at £6m. The second quarter, which was the first quarter after the earn-out period ended, was quiet but the pipeline has been building solidly through this quarter and is strong going into the second half of the year.

·; The opportunities for Scalable with Juniper, Extreme and Mitel product sets in the mid-enterprise market remain strong in spite of the challenging economy. Scalable continues to target cross sell opportunities in both customers and suppliers of the rest of the Group and has recently landed three such contracts for services.

·; Most encouragingly, revenues from support services were increased 30% to £3m. This is as a result of growth in add-on services to existing clients, e.g. IP security services, and it also reflects growth in support of new installations in the previous periods. In addition there was greater focus on selling recurring revenues to new customers as part of the deferred consideration targets.

Gross margins in advanced solutions have performed in line with expectations, matching the 39% margin achieved in the full year to 30 September 2011.

·; IP PBX and data services margins increased slightly to 41% from 40% a year ago. Margins had been expected to decrease slightly due to the expected and achieved increase in lower margin data sales (up 46%). However, at the same time there was an increase in margins in IP PBX Installations in this period which more than offset the expected decline. Guidance for margins going forwards is a range of 38% to 42%, depending on the data revenue sales mix.

·; Scalable's gross margins were slightly down on last year's first half due to lower voice (IP PBX) revenues in 2012 than in 2011. IP PBX contributes higher margins than IP data products. However, they were in line with the full year margins for 2011 at 35% and represent a strong performance in a more competitive market place.

·; AKJ's gross margins were down year on year but are still running just ahead of expectations. The reduction is due to the increase in developer headcount to accommodate the Group's internal Portal development.

Telephony services- Mobile

·; Mobile revenues were in line with expectations, and grew 2% at the underlying level. In January 2011, the commercial arrangements changed such that bonus commissions on new connections were no longer received up front from one principal supplier, in exchange for higher gross margins for the lifetime of the customer. This means that on a like for like basis, £1m of bonus revenues received in the first quarter of 2011 should be reduced from the prior year to measure relative performance. On this basis, revenues would have grown 2% year on year. Underlying that growth, there has been a 9% increase in market share in terms of subscriber growth from March 2011 to March 2012, but a reduction in ARPU in both Alternative's contracted base (2% decline) and its managed base has meant that overall revenue growth has been restricted to 2%.

·; The mobile subscriber base has grown 9% organically to 70,795, since 31 March 2011.

·; The managed subscriber base has increased by 27% to 11,864 since March 2011. A major client win in this period was Persimmon Homes.

·; The core business subscriber base increased by 1,881 (2%) to 58,669 subscribers in the 6 months to March 2012. This is consistent with growth in the second half of 2011 where subscriber numbers rose by 1,840. This organic growth equates to 7% per annum and has been achieved despite difficult market conditions.

·; The gross new connections in the period were 10,738 (2011: 10,371) made up of 9,299 (2011: 6,272) on the Alternative contracted base, and 1,428 on the managed base (2011: 4,099). This reaffirms the Group's on-going success in direct sales and marketing winning market share in a flat overall market.

·; Data connections grew 36% over the year to 42,013, and now represent nearly 60% of all devices. The net increase of 11,064 data connections includes a net gain of 3,653 data only devices, and a gain of 7,411 Smartphones. Data only devices include connections for iPad, generic netbooks and tablets as well as traditional "dongles".

·; ARPU on the Alternative contracted base has held up well at £49 (2011: £50). This is a reflection of an increase in Smartphones almost offsetting declines in voice traffic. Mobile usage noticeably reduced towards the end of the first quarter but has made a gradual recovery since. This seems due to a combination of lower usage abroad but also within the UK as the economy faltered again.

Looking at higher international spend, which represents approximately one third of the variable revenues (i.e. excluding line rental), usage revenues are approximately 5% down on the comparative period last year. This is partly as a result of regulatory change last summer which has reduced prices for voice and data, but also reflects a 3% net lower activity this year on a (higher) subscriber base. This seems to be mainly due to less business travel by customers and lower call costs due to better availability of wi-fi access in this period.

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 are low and stable, and are well ahead of industry averages, reflecting the excellent services of our staff and the Portal. There are three lead indicators:-

·; The level of customer attrition by value has reduced from the second half of 2011 and is 16% (17% for the full year to 30 September 2011) which represents the bottom of the Group's target range of 16% to 20%.

·; Network churn levels have reduced to 16% from 19% last year, as the impact of some larger customers moving networks has unwound.

·; The number of subscribers in contract is stable at 72% (year ended 30 September 2011: 72%). This is a good result given the increased amount of data only devices which have come out of contract in this period and which have not been formally renewed as it is not economic for the Group to do so.

·; Mobile gross margins have increased to 39% from 35% (38% for the full year to 30 September 2011). The main increase is due to the three months extra impact of higher margins on the new network commercials in H1 2012 compared to H1 2011, with the expected new mobile margin range to be 36% to 40%. Margins have further benefited from a 31% increase in the managed subscriber base revenues where margins are typically nearer 70% due to the net commission received, and an increase in the amount of deferred customer funds delayed to the last 12 months of a 24 month contract, and a reduction in the Contracted VSP base which is typically lower margin revenue.

Telephony services - Fixed Line Network Services

·; Gross profits of this product set have grown year on year. However, there is a headline reduction in fixed line network services revenues. These have declined 4% to £19.3m year on year, and have reduced 2% from the second half of 2011. This is very much in line with industry trends as the reduction in call spends to mobiles, due to regulatory price reductions, and a move to email and mobile and IP based telephony continues to eat into traditional office based telephony revenues.

·; Outbound KPIs

·; In Outbound sales, revenues have decreased by 4% to £15.3m from £16.0m in 2011. These revenues are split as follows:

·; Outbound Wholesale Line Rental (WLR) continued to grow with revenue increasing by 3% from £7.5m to £7.7m with an overall increase in ISDN and SIP lines of 1,591 over the 12 month period to 31 March 2011. Overall the number of lines/channels reduced 1,573 (2%) since 31 March 2011 with the net reduction arising due to the reduction of 3,164 analogue lines, as customers rationalise old technology.

·; Outbound call revenues were down 10% from £8.5m to £7.6m, due principally to the mobile termination rates reductions being passed onto customers. However, the average revenue per customer per month ('ARPU') has increased again by 3% to £1,352 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 23 months from 22 months a year ago.

·; Gross margins for outbound revenues increased from 32% to 36% 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 rates cuts in April 2011 and due to the reallocation of a small amount of SIP and broadband rentals to advanced solutions which are lower margin.

·; Inbound KPIs - These do not include any revenues from Scalable, which had no inbound customers in this period.

·; Revenues decreased by 2% falling from £4.1m in 2011 to £4m in this period. However, this is an increase on the second half of the year ended 30 September 2011, which was £3.8m, and the growth is due to one major new customer being added and an improvement in the revenue share of 08xx products received from the networks since October 2011.

·; Margins have declined from 50% to 46%. This is due in part to margins in 2011 being higher due to a rebate of revenue share that has not repeated in 2012, but also due to some new lower margin clients having a larger share of total spend. Margins were expected to be around 48% as per previous guidance. Going forward we expect margins to be in the 45% to 47% range varying according to customer spends and, obviously, subject to any regulatory pricing changes.

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 acquisition of Scalable has allowed the Group to sell some of its services into the larger corporates or the Enterprise market, and has introduced nearly 200 customers in the large customer category, which are not yet included in the analysis below. From next year, customer metrics will be reported separating out Enterprise and SMB statistics.

The number of customers with recurring revenues of more than £1,000 per month has reduced slightly to 1,194 (31 March 2011: 1,240) but this is due to billing erosion rather than client churn. Actually, 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 continues to improve and now stands at 30% (March 2011: 27%, September 2011: 29%).

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 6% from £4,997 in March 2011 to £5,286 in March 2012.

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 remains at 47% (March 2011: 47%). In the larger customer base (i.e. those spending > £1,000) we also have seen product penetration remain strong with the number of large customers buying more than one product remaining at 78%.

Reduction in churn

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

Portal Development

Your Alternative Portal 

In the six months to 31 March 2012, we have delivered and bedded in the new software and hardware environment. This has provided the building blocks to further enhance the Portal with:

·; Fully integrated Case Management (showing all cases regardless of how they are raised) including reporting

·; Asset Management

·; Mobile SIM Management

·; Online Tracking of All Orders

This has seen the Portal contribute further to efficiency gains as well as driving business development and customer retention.

Key Metrics include:

·; Over 1,000 clients log into the Portal each month, with an average of 9 times per month, across 2 users

·; Sent out 32,000 subscriptions and 16,000 of Alerts across a base of 1,900 clients - equivalent to 16 subscriptions, and 8 Alerts per client on average.

·; 4,500 "self-service" mobile transactions have been performed in the first 4 months of the functionality being live

Your Alternative Portal was also a Finalist in the 'Best Application of Technology' category in the UK Customer Satisfaction Awards, 2012.

Next 6 months 

The next six months will see action on two fronts:

Development - the roadmap to include:

·; Launch of new interactive reporting on customer spends and assets

·; Launch of Online Mobile handset ordering

·; Expanding the range of Products and services that can be ordered online

·; Integration of the Scalable products and Portal

·; Further development of Interactive Reporting and streamlining of the existing features

·; Online Support and FAQ across the portal and all products

Driving 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 discussions with a number of companies which operate in the telephone and data networks market, and meet our 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. The Group is well placed to take advantage of those opportunities as they arise.

James Murray

Edward Spurrier

UNAUDITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

UNAUDITED CONSOLIDATED BALANCE SHEETS

UNAUDITED STATEMENT OF CHANGES IN EQUITY

UNAUDITED CONSOLIDATED Cash flow statementS

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 2011 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 these 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 2011 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 Annual Report and Financial Statements 2011.

The Group has adopted the following new standards and interpretations for the accounting period commencing 1 October 2011. The adoption of these standards has had no material impact on the Group.

Annual improvements 2010

IFRIC 14 amendment - Prepayments on a minimum funding requirement

IAS 24 amendment - Related party disclosures

IFRS 1 amendment - 'First time adoption' on hyperinflation and fixed dates

IFRS 7 amendment - Financial instruments: Disclosures on de-recognition

IFRIC 19 - Extinguishing financial liabilities with equity instruments

The interim results were approved by the Board on 11 June 2012.

2. Accounting Policies

The accounting policies applied are consistent with those of the annual financial statements for the year ended 30 September 2011, 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.

Fixed annual charges are apportioned to the interim period on the basis of time elapsed provided that a contractual or constructive obligation exists at the interim balance sheet date. Other expenses are accrued in accordance with the same principles used in the preparation of the annual financial statements, as modified by the introduction of new accounting standards.

3. Dividends

The reported dividend in these statements represents the 2011 proposed final dividend of 7.00 pence per £0.00125p ordinary share, which was paid on 26 January 2012 (2011: represents the 2010 proposed and paid final dividend of 4.10 pence per £0.00125p ordinary share). The amount of dividend paid was £3,237,000 (2010: £1,875,000).

The directors propose a dividend for the 2012 interims of 4.0 pence per £0.00125p ordinary share (2011: 3.0 pence), with a total payment value of £1,932,000 (2011: £1,433,000). This was approved on 31 May 2012, and has not been accrued in the financial statements. This will be paid on 6 July 2012 to shareholders on the register on 22 June 2012. The ex-dividend date is 20 June 2012.

4. Earnings per share

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

For fully 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 two categories 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 year and those that may be issuable as part of the deferred consideration payable relating to the acquisition of Scalable Communications.

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

The adjusted EPS is based on the adjusted profit before tax 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 3,915,200 shares held by Alternative Networks Employee Benefit Trust (EBT) (2011: 3,915,200 shares).

There were 48,295,239 shares in issue at 31 March 2012 and no shares were held in treasury. On 31 March 2011 there were 48,777,070 shares in issue including 980,326 shares held in treasury. The weighted average number of shares during the six months to March 2012 was 44,358,556 (2011: 43,739,875).

5. Reconciliation to adjusted performance

Adjusted earnings per share are calculated on adjusted earnings after deduction of share option costs.

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

6. Taxation

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 2012 is 25.3% (the estimated tax rate for the first half to 31 March 2011 was 30.1%). Last year was significantly higher due to £1.77m contingent consideration payable to existing employees which was not deductible for corporation tax. The current year is also lower due to the further reduction in the standard rate of corporation tax and schedule 23 tax deductions in respect of share options exercised.

The standard rate of tax in the comparative period was 27%.

7. Intangible fixed assets

Other intangibles constitute trade names, technology, customer contracts and relationships that arose on acquisition. These are being amortised on a straight-line basis over 3 to 10 years which is the anticipated life of the assets. Purchased customer contracts are amortised over 3 to 5 years.

8. Cash generated from operations

9. Analysis of movement of net funds

10. Segmental Reporting

Per IFRS 8, adopted by the Group on 1 October 2009, 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, Advanced Solutions 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 voice telephone systems is Advanced Solutions Voice, Advanced Solutions Billing Services relates to the provision of billing facilities and Advanced Solutions Data is the integration of computer networks.

'IFRS improvement' (endorsed 23 March 2010) has been adopted in relation to non-disclosure of segment assets under IFRS 8. Assets and liabilities are not disclosed by segment as they are not reported to the chief operating decision maker.