Results for the year ended 30 September 2015

Alternative Networks plc

Results for the year ended 30 September 2015

Alternative Networks plc, ('the Company' or 'the Group'), a leading provider of IT managed services and business-to-business communications, reports its Preliminary Results for the twelve months ended 30 September 2015.

HIGHLIGHTS

Good growth in revenues and profits and strong cash generation alongside significant operational enhancements

· Reported revenue up 9% to £146.8m (2014: £134.4m#)

o Pro forma~ revenue up 4%, excluding the effect of Mobile bonus reduction^

o Pro forma~ revenue growth in Advanced Solutions of 10%

o 5% underlying^ revenue growth in Mobile#, driven by 9% growth in the subscriber base

o Pro forma~ gross profits up 4%

· Reported adjusted EBITDA increased 13% to £22.1m (2014: 19.6m)

o Pro forma~ adjusted EBITDA +10%

· Continued strong cash generation

o Operating cash conversion of 99% of adjusted EBITDA (2014: 83%)

o Net debt of £18.7m (2014: £29.3m), materially ahead of the Board's target of £20.0m

o Net debt leverage under 1.0 times adjusted EBITDA

· Proposed full year dividend increased 13% to 16.4p

o Reiterate intention to progress dividend payments towards 15% annual growth in the medium term, anticipating growth of no less than 10% per annum

· Integration of the 2014 acquisitions now complete with the businesses rebranded Alternative and all teams now located together in new facilities

o Increased breadth of products and services facilitating product penetration opportunities across the Group

o Company-wide systems and processes integrated in most business disciplines

· Strong order book at period-end and healthy pipeline for year ahead 

KEY FINANCIAL INFORMATION

* Operating profit before intangible assets amortisation excluding software, exceptional items and share based payments

** Earnings before interest, taxation, depreciation and amortisation*** Adjusted earnings per share is based on adjusted profit after tax as set out in note 7

^ Excludes revenue earned directly from network providers based on sales volumes, that has been terminated in 2014, following the amendment to commercial agreements with airtime partners

# 2014 revenue has been restated as discussed in note 1

~ Pro forma (like for like) numbers include a full 2014 financial year's performance for the businesses acquired in January 2014

Mark Quartermaine, Chief Executive of Alternative Networks, commented:

"2015 has been a good year overall, delivering robust revenue and profit growth whilst completing several major integration and operational improvements projects. The business is in a strong position going forward. The two acquisitions in 2014 and the transformational projects in 2015 have resulted in Alternative Networks becoming an IT Services business with a unified operational structure, a fully invested sales force and a market leading product portfolio, able to deliver end-to-end solutions to a larger customer base.

"The improved profit performance in the second half of 2015, together with the high recurring revenue levels in the group, means that the Board approaches the coming year confident that the business can continue to generate good levels of growth in the future. The first weeks of the current financial year show signs that the momentum carried through the previous quarter is continuing and provides sound encouragement."

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CHAIRMAN'S STATEMENT

Introduction

The 2015 financial year has seen Alternative Networks make good progress in its stated objective to grow the business further. We have continued to strengthen our offering, armed with an increasing array of market leading products and services that can meet customers' communications and data needs. The investment we have made, both through the acquisition of complementary businesses and the upgrading of our infrastructure, is delivering good results and leaves us well positioned for future growth.

Results

Reported revenue for the year ended 30 September 2015 was £146.8m, up 9% on 2014. On a pro forma basis, i.e. including a full 2014 financial year's performance for the businesses acquired in January 2014, revenues were up 3% year on year and up 4% after the effects of the contract changes in Mobile are excluded. Gross margins remained steady and adjusted EBITDA at £22.1m was up by 13% on a reported basis and by 10% on a pro forma basis.

Cash generation has remained strong across the Group with 99% of adjusted EBITDA converted to cash. Group net debt at 30 September 2015 had reduced to £18.7m (30 September 2014: £29.3m), comfortably outperforming the £20.0m target we outlined in June and down from £41.3m at the time of the 2014 acquisitions.

Dividend

The continued financial strength of the Group has enabled the Board to declare a final dividend of 10.9 pence per share, resulting in a total dividend for the year of 16.4 pence per share, an increase of 13%. This is in line with the Board's intention to grow the dividend by at least 10% each year. The objective remains to progress towards 15% growth in the medium term. The dividend will be paid on 29 January 2016 to shareholders on the register as of 4 January 2016.

Review of operations

The acquisitions made in 2014 have been integrated into the Advanced Solutions division, which now represents more than 50% of group revenue. Advanced Solutions performed well in the financial year, especially in the second half, following a slight lull in orders towards the end of the first half, and we closed the year with a strong £5.2 million order backlog. The division also enjoyed some excellent new client wins, and reinforced its particularly strong presence in the Higher Education sector, signing contracts with 14 universities and 33 schools during the year.

Mobile Network Services traded in line with expectations and continued to grow its market share, with an increased number of subscribers in a competitive market, representing a very creditable achievement. Fixed Voice was as expected slightly down on the previous year and in line with market trends, and the division now represents less than 20% of group revenues. Our market leading Synapse portal has continued to be a key differentiator, and we continue to drive further enhancements to its functionality, stability and reliability.

The move to our new offices in Blackfriars Road, London, has completed successfully. This, combined with an upgrade of our entire IT infrastructure and the full integration of the most recent acquisitions, means our employees are better equipped to deliver our high quality products and services to the market more effectively and under a single brand, and has enabled our customers to derive maximum benefit from them.

We announced on 3 June 2015 that Edward Spurrier would be stepping down as CEO and as a director of the company and that Mark Quartermaine would assume the role of CEO. After a four month handover, Ed's last day with Alternative Networks was 30 September 2015. We are enormously grateful to Ed for the contribution he has made to the growth of Alternative Networks from its very earliest days, through to a listing on AIM ten years ago and on to what it has become today.

Growth strategy

Led by the new executive management team, the Group is well positioned to continue the growth trajectory seen to date. The last year has been one of investment for that purpose, and we are well on our way to becoming one of the UK's leading providers of IT managed services to UK businesses. This investment has been made to enable the Group to take maximum advantage of the expanded portfolio of services it has steadily developed, both in-house and through acquisition.

As we look to take advantage of the strong platform we have built, we will use our breadth of products and services to establish ourselves the long term supplier of choice for a larger customer target base and drive organic growth. We continue to remain open to acquisition opportunities should they be clearly enhancing to shareholder value and fit our product and capability set. In addition, we intend to invest further in product development so as to remain at the cutting edge of the market and maintain our competitive strengths. The growth of our pipeline, the increasing number of larger businesses taking more of our services and the conversion rate of orders suggest that our strategy is working and will continue to deliver value. We therefore remain positive about our future prospects.

James Murray

Executive Chairman

8 December 2015

Chief Executive Officer's Review

Overview

2015 has been a good year, delivering solid growth in all key metrics whilst completing major integration and operational improvement projects, and creating a strong platform to support future growth. Most integration related activities are now complete following the London office move and rationalisation, IT platform enhancements and back office process integration. This, in addition to significant investments, most notably across our office portfolio, but also in our sales force and in product development, has resulted in a Group that it is well placed to increase sales and deliver even greater customer satisfaction.

In January 2014 the Group completed two acquisitions, which contributed for part of the year in 2014 and for the full year in 2015, and as such we refer to pro forma (or like for like) results in this report where we have included a full year of 2014 results for the acquisitions as though we had bought them at the start of 2014 financial year.

The major highlights of the year were as follows:

· Continued gains in market share in key growth areas;

o Mobile subscribers increased 9% to 99,413 (2014: 91,391)

o Advanced Solutions pro forma revenues and orders up 10% and 3% respectively

· Major product development with the release of new propositions as well as enhanced versions of existing products;

· £1.0m investment in increasing ongoing account management resource to drive product penetration across the existing customer base;

· Completion of the integration of 2014 acquisitions with the businesses rebranded Alternative and all teams now located together in new facilities; and

· Shift of all legacy on-premise IT infrastructure and hosted services into modern managed secure datacentres.

The new premises and IT infrastructure provide the Group with a sound platform for future growth. The Group is better positioned to expand both its managed service product portfolio and its selling capability to deliver the portfolio to new and existing customers more effectively.

Trading and performance overview

In 2015 the Group has continued to build on a successful 2014, with momentum seen in 2014 continuing into 2015, and has resulted in increases in reported revenues, gross profit and adjusted EBITDA compared with the prior period and on a pro forma basis. Group reported revenues at £146.8m were 9% ahead of 2014, with pro forma revenues up 3% (2014: £134.4m), and up 4% when the reduction in Mobile bonus revenue impact is excluded.

Cash generation was once again strong, with operating cash conversion of 99% of adjusted EBITDA. As a result, net debt has fallen to £18.7m, beating the Group's £20.0m year-end target and bringing it comfortably below one times adjusted EBITDA. This has allowed the Board to propose a final dividend of 10.9 pence per share which is 14% up on 2014. 

The Advanced Solutions business was 10% ahead of the prior year on a pro forma basis. Total orders signed in the year were 3% higher than the prior year on a pro forma basis, resulting in a total backlog of £5.2m at the end of the year for delivery in the coming financial year. New orders have been generated across the portfolio, with some notable areas of success particularly in Higher Education, where the Group has signed contracts with 14 universities and 33 schools and colleges during the year.

Hosted Managed Services and On Demand Services, formerly parts of ControlCircle and Intercept IT, are reported in Advanced Solutions and are now fully integrated into the Group with all teams located in a new, single London office and the businesses rebranded as Alternative. Trading performance has been solid, with minimal client attrition. As previously reported at our interim results, performance in the year was moderately impacted by two major customers putting new orders on hold pending internal strategic reviews, resulting in lower non-recurring revenues. Of these, one customer has returned to its pre-review order profile. Now that the acquisitions are fully integrated we are encouraged to see improving order trends overall, which we expect to continue into the new financial year.

The Mobile business has once again delivered a strong performance in the period, gaining market share with a 9% increase in the subscriber base year on year, and a further 1,300 signed that will connect by the end of the first quarter of 2016. Underlying revenues (which exclude the effect of revised commercial arrangements with suppliers) grew 5% to £39.7m, representing 28% of the Group's overall revenue.

Fixed Voice revenues were 9% below the prior year, in line with expectations. Gross profit was more resilient at 6% behind the prior year due to the positive impact of new commercial agreements signed in the period. Whilst we continue to manage the product set for profitability, the key focus remains the migration of the fixed line base to SIP channels which have grown almost 50% year on year. Overall the Fixed Voice business now represents 19% of the Group's revenue, down from 23% in 2014.

Strategy

The Group's strategy remains to become the leading IT managed services provider for UK businesses via both organic and acquisitive growth. The Group operates in the UK Telecoms and Information Technology (IT) market as an IT Managed Services company covering the full spectrum of services and products from device to the datacentre.

The financial performance of the Group, including revenues, profits, cash flows and net debt is set out in the Financial Review and a discussion of the KPIs of the Group are included in the Trading Review, both within the Chief Financial Officer's Review.

Platform for growth

2015 has been a significant year of organisational and operational change. Major changes revolve largely around the Group's office space portfolio, product development and IT infrastructure. The latter has focussed on migrating our infrastructure and applications to our datacentre facilities and therefore improving resilience.

These combined investments will not only improve our service offerings to customers, but will also increase productivity and collaboration amongst our people and allow easier integration of future acquisitions.

The Board is committed to building a broader and stronger platform for growth. We have set out our vision to be the leading IT managed services provider of choice to UK businesses. We have invested a total of £0.8m non-recurring capital expenditure on developing the new infrastructure required to provide the services which customers need to bridge private and public cloud services, in addition to routine recurring capital investments. The technical strategy is focussed on three elements:

· On demand services - to be accessed through the portal and consumed per user per month (e.g. Email or Unified Communications ("UC")) or per unit of compute (e.g. storage);

· Infrastructure services - in mobile, WAN, voice and hosting; and

· Significantly enhanced Synapse customer portal to include IT services and extend to public cloud services.

The Group infrastructure and hosting services are critical to the delivery of this strategy and in the second half of 2015 we have launched our own UC cloud platform as well as a significantly enhanced "Desktop as a Service".

Strategically, we are positioning ourselves to continue to support our customers to consume business critical applications via a variety of communication methods, and this will support our growth aspirations going forward.

Organic growth

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

· Winning larger customers in our target markets;

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

· Improved product penetration across our customer base; and

· Product development and innovation to increase value to our customer base.

In 2015 the average spend per client was up 12% on the prior year demonstrating the successful implementation of the strategy. At the period end, average monthly spend of our 'large customers' (i.e., those with a monthly spend in excess of £1,000) increased 10% year on year, reflecting a significant increase in the size of new customers to the Group.

The Group's ability to win large contracts with new customers has been proven once again in 2015 including sizeable deals with Homeserve and the London Internet Exchange to provide multiple services.

Product penetration statistics continue to show a broadening uptake of services from across our customer base, with increases in sales per customer showing that our customer service levels continue to improve.

Product penetration across the customer base remains strong, with 46% of customers taking more than one product (2014: 46%) and the proportion taking 4 or more products increasing to 17% (2014:16%). This is in line with the Group's stated strategy of growing the average size of the customers, via enterprise sales and driving product penetration in our existing base.

Product development

We have always aligned our technical strategy with our customers' needs and have now successfully transitioned the Group into IT managed services. We continually look at new product offerings to further support customers and align their IT with the needs of the end user, and to deliver bespoke IT solutions for our customers from the device to the datacentre. As a result we are well positioned to take increasing amounts of market share with new services, most importantly PaaS (Platform as a Service) and DaaS (Desktop as a Service) in which our products are innovative and market leading and further similar offerings will be launched in 2016.

Portal development

Central to this strategy is the use of Synapse, the Group's dynamic service interface, offering customers significant service and flexibility benefits. During 2015 the Group has continued developing Synapse as well as continuing the process of converging the other, wider Group portal systems into it, providing an enhanced interface, covering the Group's device to datacentre portfolio.

As part of the wider transformation of our office and infrastructure estate, the Group portal systems have been moved into a fully virtualised environment, alongside our other internal IT application suite, in order to ensure optimal performance for end users and greater service resilience.

Significant work has also been performed on key internal systems to provide the basis for this convergence, with unification of sales and CRM systems, and with ticketing to follow, this provides the foundations to significantly expand the Group's portal functionality.

Growth by acquisition

The Group's cash generative nature has facilitated the significant reduction in net debt since the 2014 acquisitions; this, combined with the strong balance sheet leaves us well placed to capitalise on further opportunities and as such the Group continues to monitor the market proactively for further "right-fit" acquisitions. Acquisitions are being targeted to complement the existing products and to further expand our capabilities and product set in the Advanced Solutions area, with a focus on managed and hosted services

The main focus remains on strategic acquisitions that complement the existing product set and can be seamlessly integrated, although the Group also considers bolt on acquisitions that would bring a customer base where the Group can capitalise on its proven cross sell capability. The Group will continue to be opportunistic with regards to acquisitions. We remain well placed to take advantage of any opportunities as they arise, applying strict selection criteria.

The Group's long standing and consistently strict criteria for acquisitions remains unchanged. Targets must:

· be successful, growing, highly cash generative, and profitable;

· have customers that provide cross selling opportunities for the Group; and

· be earnings enhancing in the first full year of ownership.

Outlook

The strategic acquisitions in 2014 and the transformational projects in 2015 have resulted in an IT Services business with a unified operational structure, a fully invested sales force and a market leading product portfolio, able to deliver end-to-end solutions to a larger and more receptive customer base.

In 2016 we plan to continue to expand, upgrade and improve our product set, with a full pipeline of new product development. We are also planning further investment in the technology we use to service customers, resulting in greater efficiency and improved service.

Product penetration statistics continue to show a broadening uptake of services from across our customer base, with increases in average sales per customer showing that our customer service levels continues to exceed expectations.

The improved profit performance in the second half of 2015, together with the high recurring revenue levels in the Group, mean that the Board approaches 2016 confident that the business can continue to generate encouraging levels of growth going forward. The first weeks of 2016 show signs that the momentum carried through from the fourth quarter is continuing and provides sound encouragement.

Mark Quartermaine

Chief Executive Officer

8 December 2015

Chief Financial Officer's Review

Results & trading overview

In 2015 the Group has experienced continued growth in the Advanced Solutions and Mobile Voice products and services, and continued excellent cash performance. The Advanced Solutions and Mobile Voice segments together now account for 81% of Group revenues (2014: 77%), with a reduction in the contribution from Fixed Voice services, which is in managed decline.

Year ended 30 September 2015

In order to facilitate understanding of business performance, the Group splits out its operating KPIs, both financial and non-financial into three distinct revenue groups. These are Advanced Solutions, Mobile and Fixed Voice. These enable the Group's performance to be benchmarked against competitors and allow the Board to control more clearly the underlying drivers to the Group's business. All recent acquisitions are reported in Advanced Solutions and have no impact on Mobile or Fixed Voice. For avoidance of doubt, the business does not operate separate trading divisions but sells a converged product offering, with teams of sales and service organised according to customer size.

Total reported revenue increased 9% to £146.8m (2014: £134.4m), with pro forma revenue growth of 3%. The Advanced Solutions business was significantly up at 24% on a reported basis and 10% on a pro forma basis (£77.9m). Reported revenue in Mobile was flat year on year, but underlying revenue (revenue earned directly from network providers based on sales volumes, which ceased during the prior year following the redrafting of relevant commercials) grew at 5% (£2.0m). Revenue growth was partially offset by the managed decline in the Fixed Voice business, which was down 9% (£2.8m).

Reported gross profit increased by 10% (£5.4m) to £60.7m, and 4% (£2.4m) on a pro forma basis. Gross margins are level year on year, reflecting the effect of good margin growth in Fixed Voice and Mobile Voice netted off by some margin pressure across Advanced Solutions owing to pricing on some larger hardware and maintenance deals. Further analysis is detailed below by product.

Adjusted EBITDA at £22.1m was up £2.5m (13%) on a reported basis and £2.0m (10%) ahead on a pro forma basis. As reported in our interim results, during the period the Group has introduced a group-wide sales commission scheme encouraging higher margin and longer term growth, which has had a one off impact on adjusted EBITDA, increasing commission costs by £0.3m. Nevertheless, the adjusted EBITDA margin has increased to 15.0%, up from 14.5% in 2014, reflecting the continued drive on operational efficiency and the benefits of integrating the Group, and is set to improve further with annualisation of the improvements made in 2015.

Advanced Solutions

Advanced Solutions revenues increased by 24% to £77.9m on a reported basis and 10% on a pro forma basis over the prior year. Growth in the second half of the year was slightly slower than the first half, owing to Q3 sales pressure arising from wider economic events and strategic reviews resulting in new business suspensions from two larger customers, as reported at the interim reporting stage.

Growth has returned to healthy levels in Q4, producing a total sales order backlog of £5.2m, and signed orders 3% higher than the prior year on a pro forma basis, giving high levels of confidence heading into 2016.

New orders have been generated across all industry verticals and notable contract wins with larger customers include a wide scale networking contract for the London Internet Exchange and wide scale WAN and hosted voice migration for Homeserve.

The margin in Advanced Solutions is broadly level with the prior year at 38% (2014: 39%) as a result of growth in higher margin services including professional services, netted against some pricing pressure for larger deals involving legacy hardware and maintenance solutions.

Managed services

Managed services encompass the Group's offerings in all hosting, cloud and utility services, including all outsourcing services. Growth in this area is a key focus with both existing and new customers. High margins in this area represent the added value nature of the services provided. The 4% decline in revenue on a pro forma basis reflects a decrease in the lower margin pure hosting and colocation revenue as the Group encourages clients to move towards higher margin, fully managed services.

Online desktop

Online desktop represents the Group's cloud based Desktop as a Service (DaaS) remote access offering, acquired as part of the 2014 acquisitions. 12% pro forma revenue growth in this product has been generated under the Group's ownership as we seek to take a key position in this growing market.

Maintenance

Maintenance revenues have grown by 8% year on year owing to some large wins at the end of the prior year and start of 2015. Margins are also consistent year on year as the group has been able to renew contracts at historical pricing levels due to the service quality available to clients, and proactively churn any that involve lower pricing.

Connectivity

Connectivity revenues increased 32% to £8.3m in 2015. This growth was generated from data connectivity sales to both existing and new customers. Sales growth has also arisen from a number of key wins, including the UK-wide contract with Menzies Distribution signed in 2014.

Hardware & software

Hardware and Software revenues comprise all individual non-recurring direct sales across the Group, and increased 24% to £26.3m (2014: £21.1m) on a reported basis and 17% on a pro forma basis. Gross margins have reduced across the Group due to a number of large deals where competitive pricing has been offered in order to secure further growth opportunities in higher margin products and services with recurring revenue.

Professional services

Professional services revenue, comprising a mix of IT solution design and installation of data hardware, increased 12% from £5.9m to £6.6m on a reported basis and 8% on a pro forma basis as a result of the high level of hardware orders and also a number of more complex projects with higher levels of associated installation requirements. Margins have stabilised during the year following the integration of the acquisitions and continue to reflect the efficiency with which the Group is able to apply the workforce to new and existing projects.

Billing services

Billing Services revenues were up 4% to £4.2m (2014: £4.0m). This is as a result of further growth in sales to third party customers and revenue from providing a hosted managed billing service. Gross margins were in line with the prior year at 53%, as the Group maintained its high client retention level and delivered more consultancy services to clients.

Telephony Services - Mobile

#2014 revenue and gross profit has been restated following a reclassification of mobile customer credits and other costs, as discussed in note 1.

Headline mobile revenues were flat year on year at £40.4m, whilst underlying revenues grew 5% year on year in the period (excluding the effect of bonus reductions) as the Group continues to take significant market share. Margins have once again risen, from 45% in 2014 to 47% in 2015, primarily as a result of the 2014 signed commercial agreements.

There was continued high growth in the contract base with a 9% increase in subscribers to 99,413 at the end of 2015. Whilst this is the result of significant new connections, demonstrating a continued ability to win in a flat market, slightly higher churn has been seen in the second half of the year as market pressure has led to the loss of certain customers where the Group was not willing to support lower margins.

Mobile gross margins have increased to 47%, from 45%, mostly as a result of annualisation of the benefits of the new commercial arrangements signed in 2014, but also other positive factors such as the value added from the Synapse service platform.

Mobile KPIs

The Group uses three principal KPIs to measure the performance of Mobile Voice, being "ARPU", "ADPU" and churn.

· "ARPU" represents the average spend in line rental, voice and data usage charges per live connection per month in the Group's contracted base of subscribers. ARPU has reduced by circa £2 (6%) to £34 in the year, similar to the 2014 decline (2014: £2). Underpinning this trend is the reduction in line rental charges associated with bundled packages and the general trend in reduction in voice usage, partially offset by increased data usage (see below). Declines in voice ARPU total approximately £2.50 (including rental charges) as a result of regulatory changes. Data usage ARPUs continue to rise, by 21% in 2015, which is lower than the 72% rise in ADPU due to a change in the mix between European and higher priced 'rest of world' roaming. Growth in data ARPU has been dampened somewhat both by general market pressures on pricing, where increased bundle allowances have been seen and also a slight decrease in wider global travel, where we have seen a 100bps drop in 'rest of world' roaming as a proportion of our total customer base.

·  "ADPU" represents the average data usage per live connection per month in the Group's contracted base of subscribers. The average ADPU for the period has increased by 72% to 170Mb demonstrating the rapid growth in data usage. The growth in data usage can be attributed to a number of factors including the rise of the smartphone (71% of the subscriber base; up from 69% in September 2014) and the ongoing move from 3G to 4G networks. The growth seen, combined with the Group's high margin customer base, gives a strong platform to grow further in 2016.

· Churn by value, which illustrates the retention value of all contracted customers to the Group, has risen slightly in 2015 from 11% to 14%, mostly due to the loss of certain customers in the second half where retention would have led to decreased margins that the Group was not prepared to accept. Even at 14% the Group is setting a market leading benchmark, where the broader industry sees churn levels of 20% to 25% and demonstrates the value the Group provides to customers. Network churn was 16% which is again up slightly on 2014 (14%), an excellent performance in a very competitive marketplace where it is easy to switch between networks. The generally high retention is a result of the overall client experience covering the service offering and the benefits of Synapse, and as we respond to general market changes with sophisticated tariffs we expect this to improve in 2016.

Telephony Services - Fixed Voice

#2014 gross profit has been restated following a reclassification of other costs, as discussed in note 1.

The market continues to operate on two-tiers with legacy fixed voice providers seeing network traffic in decline by mid-single digit rates and resellers and service providers migrating their customers to IP services at a faster rate resulting in annual revenue reductions in the order of low double digit (10-14%). On this basis we consider our performance this year to be good given the market context. The Group manages its Fixed Voice Services in the context of the declining market place whilst improving market share and profitability, and continues to retain its customer base via migration to SIP based telephony. In the year the number of SIP lines has increased by 47% from 7,424 to 10,924.

Fixed Voice revenues declined 9% in 2015 to £28.5m due to a combination of customer churn and reduction in call volume to mobiles, regulatory price reductions and the continuing move to email and mobile. However the Group has again succeeded in the proactive management of this base with further commercial gains and active retention, particularly in the Inbound services base where year on year gross profits have risen 21%.

The gross margin on this product set has continued to grow in 2015, from 42% to 43%, but with the revenue decline, total gross profit has reduced 6% year on year. The growth in gross margin is as a result of improved commercial arrangements from key suppliers.

Outbound services

· Outbound revenues decreased by 11% to £21.3m. The underlying performance was in line with industry trends as the reduction in call spends to mobiles, due to regulatory price reductions, and a move to email, mobile and IP based telephony, continues to cannibalise traditional office based telephony revenues.

· Outbound ARPU has reduced by 3% to £1,385 in 2015 as a result of a general reduction in spend resulting from the shift to mobile and data communications, tempered by an increase arising from the signing of new, larger, customers and churn of smaller customers. Average contract periods are now 6 months longer than the prior year increasing the viability of future revenues.

· The number of lines in the estate declined by 5% to 68,388, with some of the churn being non or low billing analogue lines that we have helped customers identify using Synapse. The ongoing transition to SIP has again progressed well with a 47% rise in SIP lines.

Inbound services

· Inbound services revenue, at £7.3m, was in line with 2014, as increases in NGN products compensated for the reduction in customer traffic revenues. As a consequence, gross profit was 21% up on 2014 at £3.7m.

· Gross margins are up significantly year on year, to 51%, due to the new commercial terms agreed and increased sales of the higher margin NGN product.

Financial overview

Adjusted and statutory results

In these results we refer to adjusted and statutory results. Adjusted results are prepared to provide a more comparable indication of the group's underlying business performance. Adjusted results exclude adjusting items as set out below and in note 7.

Non-recurring items

As a result of the various restructuring activities the Group incurred non-recurring charges of £2.4m. This comprised £0.6m of redundancy charges, £0.9m of non-cash rent charges on unoccupied property during the fit-out phase and £0.9m on restructuring and other charges.

As reported at the interim stage, the Group has rationalised its property portfolio in 2015, reducing the number of properties around London from five to two, involving the sale of one property for a gross receipt of £3.8m giving rise to a profit on disposal of £2.4m, and the early exit of a leased property yielding a receipt of £0.9m, both of which have been recorded as adjusting items.

Finance costs

Finance costs were £1.3m (2014: £1.1m) driven by the Group's existing debt facilities in place for the whole year. At September 2015 the margin applied to this facility had fallen to 2.50% over LIBOR based on a leverage position of the balance sheet of less than 1.0. Throughout 2016 the margin over LIBOR is expected to be less than 2.50%.

Taxation

The effective tax rate for the year was 17.0% (2014: 22.0%). The effective tax rate in the current period is lower than the prior period due to a further reduction in the standard rate of corporation tax for the year (from 22.0% to 20.5%) and is lower than the UK statutory rate due to the recognition of prior year R&D credits that have been successfully received in the current year and profit arising on the sale of a property for which indexation allowances have been applied.

Earnings per share

Basic adjusted earnings per share have increased by 6% from 26.9p to 28.4p. Fully diluted adjusted earnings per share have increased by 5% to 27.8p (2014: 26.4p). Statutory (unadjusted) fully diluted earnings per share have increased 40% from 16.6p to 23.3p.

The weighted average number of shares in the year used for calculating the basic earnings per share has increased by 502,918, as outlined in note 4. The dilutive share number has increased by 52,057, due to the issuance of new long term retention share option plans netted off by a reduction in shares relating to the EBT.

Net debt & bank facilities

The Group continues to benefit from access to a £36.0m syndicated bank loan facility split equally between two lenders (a £43m facility reduced by £7.0m of term loan repayments), of which the average interest margin payable throughout the 2015 financial year was below 2.5%.

The year-end net debt balance was £18.7m, down from £29.3m at 30 September 2014. This is after £5.3m of total capital expenditure and paying dividends of £7.2m. The net debt level is down from a peak of £41.3m at the time of the acquisitions, and well ahead of the target of £20.0m as set by the Board.

Net debt performance is primarily driven by the strong operating cash conversion of the business (see below) which has been greatly facilitated by the completion of acquisition integration activities. The Group closed the 2015 financial year with an impressive financial position, a key part of the platform for growth initiative.

Cash flow

Working capital and cash management remains a key priority of the Group and once again cash flow has been very strong. Cash inflow from operations was £21.9m (2014: £16.2m), compared to adjusted EBITDA of £22.1m (2014: £19.6m), representing a cash conversion of 99% (2014: 83%). Alongside this the Group debtor days have remained below 30 days.

Capital expenditure

Capital expenditure in the period was £5.3m compared to £2.1m in 2014, largely due to additional non-recurring investments in the Group's infrastructure totalling £2.7m. This was primarily comprised of office fit-out and IT infrastructure, and was funded entirely by the sale of a property during the year for a total of £3.8m. There was a further £0.5m of spares and tooling equipment acquired as part of the signing of a large hardware and maintenance deal in a new customer vertical.

The remaining £2.1m of spend was in line with expectations and previous periods, and represented further expenditure in respect of IT development, including additional investment in a consolidated customer portal service, expanding on the existing Synapse functionality and investments in the existing CRM platform to improve our service to customers and reduce operating costs.

In 2016 we expect capital expenditure to reduce back to routine underlying levels, with some additional investment required across our product portfolio's, including software development to ensure our unique proposition is consistent across all service lines.

Dividend per share

The Board has proposed a final dividend of 10.9 pence per share (2014: 9.6 pence per share) making a total ordinary dividend of 16.4 pence per share for the full year (2014: 14.5 pence per share).

The dividend will be paid on 29 January 2016 to shareholders on the register as of 4 January 2016.

Principal risks and uncertainties

Managing the financial, operational and reputational risks across our business and operations is critical to our success. Below we highlight the identified key areas of risk that are monitored on an ongoing basis. The Group's Risk Management Framework requires a regular review of the key risks facing the Group.

Contracts with suppliers

The Group resells the products of its suppliers and whilst many of the Group's products are supplier agnostic and there exists a freedom to substitute various suppliers' products, the Group acknowledges that it has reliance in particular on the contracts with the mobile networks, O2 and Vodafone. Both managed service agreements run until March 2018.

The Group mitigates this risk by maintaining strong relationships with its suppliers at various levels of the business, as well as paying close attention to ensuring the expectations of suppliers are met, and where possible exceeded.

Acquisition integration

The Group has set out that its strategy includes the acquisition of businesses where they are earnings enhancing. The Board acknowledges that there is a risk of operational disturbance in the course of integrating acquired businesses with existing operations. The Group mitigates this risk by careful planning, rigorous due diligence and segregation of the target operations where possible. Where there is full integration of acquired businesses, the Group receives a report on the effectiveness of the integration and variances from business plan. All acquisitions to date have been fully integrated, with the exception of Aurora (AKJ Limited) where an independent IT infrastructure is essential to its client offering.

Technological change

The Group operates in a market of rapid and dynamic technology changes, and there is a risk that the Group fails to secure the necessary contracts to supply its customers with a new technology (disruptive) which substitutes existing technology. The Group mitigates this risk by maintaining close relationships with its suppliers, and by employing a Product development team whose duties include research, review and procurement of appropriate new technology products for testing prior to release to our customers.

Ability to continue to attract and retain key sales and customer management executives

Ability to continue to attract and retain key sales and client management executives - the Group is a direct sales and marketing business and whilst the revenues of the Group are largely recurring on a monthly basis, the Group depends on being able to recruit and retain staff of the right calibre in order to win and service key contracts. The Group has sought to mitigate this risk by investing in a succession and training plan for career development, and improving the employee benefits and remuneration over the last 3 years, including commissions, and specifically share options and pension contributions. The Board monitors the results of exit interviews, recruitment statistics and staff attrition by department on a regular basis.

Regulatory risk

The Group acknowledges that the pricing of products and services can be affected by regulatory bodies in the UK and the EU. In recent years, usage pricing from fixed to mobile destinations and EU Roaming mobile voice and data retail prices have been substantially altered. The Board believes that where the pricing regulations are directed at wholesale prices, the Group is more able to mitigate the risk through its own buying and pricing policies. Where the regulator imposes price caps at the retail level, the Group is more exposed to a reduction in margin where the operators do not substantially reduce their wholesale prices. The Group mitigates the risks by careful and detailed research on the future regulations, and has been involved in lobbying where applicable. The Group will assess each risk and build it into its forecasts of income as soon as possible and will amend its pricing policies accordingly.

IT environment and control risk

The Group is increasingly dependent on IT systems for delivering its products and services and for retaining customers, as well as for running the operations of the Group. To date, the Group has used its own internal expertise together with external consultants, where necessary, to build its own IT infrastructure and software products, and is continuing to invest each year in improving its systems and adding more resilience. The Board believes the Group mitigates the IT control risks in a number of ways. Firstly, it employs a broad range of highly skilled IT personnel and ensures that there is a succession and retention plan associated with these highly talented individuals. Secondly, the Board directs its external auditors to focus on the IT environment in its control testing at the annual audit, and also instructs additional internal audit where required. Recommendations from both sets of audits are tracked through by the Board. Thirdly, the Group operates best practise in its adherence with standards issued by the International Organisation for Standardisation and the British Standards Institute. Currently, the Group has accreditation for: - ISO 27001: Information Security Management; ISO9001: Quality Management; ISO 14001: Environmental Management; ISO20000 Service Management and ISO 22301: Business Continuity Management in the majority of its operating divisions. In order to retain these accreditations, the IT control environment is regularly reviewed by the British Standards Institute.

The Board is confident that there is a satisfactory framework for monitoring, assessing and reporting on these risks. There is also a robust regular framework for reporting on predictive KPIs in the business.

Gavin Griggs

Chief Financial Officer

8 December 2015

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 30 September 2015

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 30 September 2015

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

a) the balance classified as share capital includes the proceeds arising on issue of the Company's equity share capital, comprising 0.125p ordinary shares and the cancellation of shares purchased during the year.

b) Share premium represents the difference between the fair value consideration received and nominal value of shares issued.

c) Capital redemption reserve arose from the purchase of own share capital.

d) The merger reserve results from the previous acquisitions of Integrated Communications for Business (UK) Limited, Aurora Kendrick James Limited, Scalable Communications plc and The Telecom Centre Limited. This represents the difference between the value of the shares acquired (nominal value plus related share premium) and the nominal value of the shares issued.

 CONSOLIDATED STATEMENT OF CASH FLOWS

For the year ended 30 September 2015

NOTES TO THE FINANCIAL STATEMENTS

1 Basis of preparation

Alternative Networks plc is a company incorporated and domiciled in the United Kingdom under the Companies Act 2006. The address of the registered office is 5th Floor, 240 Blackfriars Road, London SE1 8NW. The shares of the Company are listed on the Alternative Investment Market.

This financial information is abridged and has been extracted from the Group's full financial statements for the years ended 30 September 2015 and 2014.

The Group's financial statements have been prepared in accordance with IFRS as adopted by the EU and IFRIC interpretations and the Companies Act 2006 applicable to companies reporting under IFRS. The financial statements have been prepared under the historical cost convention.

Full financial statements for the year ended 30 September 2014 (which received an unqualified audit report) have been filed with the Registrar of Companies. Financial statements for the year ended 30 September 2015 were approved by the Board of Directors on 8 December 2015 and will be presented to the Members at the forthcoming Annual General Meeting.

The Group offers discounts to Mobile customers which have previously been treated as adjustments to cost of sales due to the nature of the incentive written into contractual agreements. In light of changes in the contractual agreements these amounts are now treated as adjustments to revenue. This change has resulted in a reduction in revenue and a corresponding reduction in cost of sales in the current year of £4.3m. Separately, in order to bring the basis of reported margins in the Telephony Services segment in line with the Advanced Solutions segment, certain costs have been reclassified from operating costs to cost of sales, resulting in an increase in cost of sales in the current year of £1.4m.In order to aid the comparability of amounts included in these financial statements, adjustments to revenue and cost of sales of £3.4m and £1.5m have been applied to the comparative year for discounts to customers and cost reclassification respectively. Accordingly, operating costs have been reduced by £1.5m. There are no earnings per share or equity impacts arising from these adjustments in any period presented in these financial statements.

2 Segmental information

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

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

Telephony Services consists of the Group's Fixed Voice and Mobile Voice services. Advanced Solutions includes the installation and maintenance of telephone systems, the integration of computer networks, the provision of managed hosting solutions and the provision of billing facilities.

Assets and liabilities, operating profit, finance income, finance costs and taxation are not disclosed by segment as they are not reported to the chief operating decision maker.

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

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

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

3 Dividends

The 2014 proposed final dividend of 9.60 pence per 0.125p ordinary share (2013: 8.60 pence) was paid on 30 January 2015. The amount of dividend paid was £4,643,000 (2014: £4,194,000).

The Company paid a 2015 interim dividend of 5.50 pence per 0.125p ordinary share (2014: 4.90 pence), with a total payment value of £2,662,000 (2014: £2,370,000). This was paid on 15 July 2015 to shareholders on the register on 19 June 2015.

The Directors are proposing a final dividend in respect of the financial year ended 30 September 2015 of 10.9 pence per 0.125p ordinary share (2014: 9.60 pence) which will require an estimated £5,280,000 of shareholders' funds (2014: £4,644,000). Assuming it is approved by the shareholders at the Annual General Meeting on 27 January 2016, it will be paid on 29 January 2016 to shareholders who are on the register of members at 4 January 2016 with an "ex-dividend" date of 31 December 2015.

4 Earnings per share

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

For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares. The Group has one category of potential ordinary shares: those share options granted to employees where the exercise price is less than the average price of the Company's ordinary share during the year.

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

The adjusted EPS is based on the adjusted profit after tax as set out in note 7, and the weighted average number of shares as described above.

Share option costs included within adjusted profit attributable to owners of the company are reducing the earnings per share in 2015 by 2.7p (2014: 1.1p).

There were 49,729,817 shares in issue at 30 September 2015 (2014: 49,688,544). The weighted average number of shares during the year was 48,212,619 (2014: 47,709,701).

5 Intangible assets

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

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

Each operating segment is deemed to be a Cash Generating Unit (CGU), being the lowest level for which cash flows are separately identifiable. Goodwill is attributed to each CGU and reviewed for the purposes of the annual impairment review as this is the level that management monitors goodwill. The Group's operating segments to which goodwill has been allocated are Mobile Voice and Advanced Solutions.

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

The key assumptions in the value in use calculations were:

The forecasts were based on pre-tax cash flows derived from approved budgets for the 2016-2018 financial years. Management believes the forecasts are reasonably achievable based on market performance and its expectations of market developments. The directors consider that the key metric in the forecasts is earnings before interest, tax and amortisation. Subsequent cash flows were extrapolated using a 1.0% (2014: 1.0%) growth rate reflecting an approximate forecasted long term growth rate for the UK economy, the Group's principal market.

The pre-tax discount rate used to assess the carrying value of goodwill is 9.7% (2014: 10.0%) which approximates the Group's weighted average cost of capital. This discount rate has been calculated on a consistent basis.

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

6 Cash generated from operations

7 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.

(c) Restructuring, acquisition and associated costs consist of the following: