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Pipex Communications (FFG)

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Tuesday 17 April, 2007

Pipex Communications

Final Results

Pipex Communications PLC
17 April 2007

17 April 2007



                            Pipex Communications plc
                  Results for the year ended 31 December 2006





Pipex Communications plc, (PXC), a major provider of integrated
telecommunications and internet solutions including broadband, voice, domain
name registrations and hosting, today reports its results for the year ended 31
December 2006.





Financial Highlights

  • Turnover, including acquisitions of £294 million, up 121% from £133
    million in 2005
  • Gross margin of 38.2% (2005: 46.0%) due to the revenue mix of the 2006
    acquisitions
  • EBITDA* of £23.2 million, up 55% compared to £15.0 million in 2005
  • Operating loss of £11.5 million (2005: loss of £5.9 million)
  • Profit before tax** of £4.8 million, from £5.1 million in 2005, due to
    higher interest costs from funding the 2006 acquisitions
  • Free cash flow*** of £17.6 million, up from £7.9 million in 2005
  • Year end cash balances of £48.3 million compared to £14.0 million in 2005





Operational Highlights

  • Successful acquisitions:
      • Homecall from Phones 4U Group, in March 2006
      • Toucan from IDT Telecom, in October 2006
      • Bulldog customer base from Cable & Wireless, in September 2006



  • Joint venture with Intel in April 2006 to exploit Pipex Wireless' WiMAX
    spectrum licence
      • Trial deployment of WiMAX network in Milton Keynes announced in
        September 2006
  •  Increased brand awareness through the David Hasselhoff marketing campaign



  • Total customer numbers at the year end of 1,380,000, up 140% from 575,000
    in 2005
      • Broadband customers rose 101% to 570,000, from 283,000
      • Hosting customers increased by 14% to 330,000, from 290,000
      • Domain names rose 35% to 1,750,000 from 1,300,000





Post period-end update

  • Strategic review of business options announced in March 2007
  • Agreement with Nokia Siemens Networks to co-operate on WiMAX
    infrastructure and service development to be announced in April 2007
  • Second WiMAX trial being implemented in Warwick in conjunction with
    National Grid Wireless



*pre share option costs

** pre-amortisation, share option costs and share of loss of joint venture

*** pre-freehold purchases





Peter Dubens, Executive Chairman, commented,



"2006 has been a year of considerable progress for Pipex.  The acquisitions of
Homecall, Bulldog and Toucan have taken the number of customers within our
broadband and voice division to over 1 million and increased opportunities for
the provision of multiple services.  The success of this strategy has protected
our margins whilst reducing churn.   Trading within our hosting and domain names
business has been similarly encouraging, with strong organic growth,
underpinning our position as the second largest hosting provider in the UK.



"Pipex Wireless has made good progress with our WiMAX offering.  Technical
trials in Stratford-upon-Avon performed well and the first WiMAX base station
deployment in Milton Keynes in December has been successful.  Following further
trials being conducted in Warwick, we look forward to the first full-scale
roll-out of these services in Manchester in the fourth quarter.  These strong
results and the number of opportunities available to us going forward make me
confident about future growth."





Pipex Communications plc                                           020 7766 6909
Peter Dubens, Chairman
Mike Read, Chief Executive
Stewart Porter, Finance Director


Financial Dynamics                                                 020 7831 3113
Juliet Clarke / Hannah Sloane







                              CHAIRMAN'S STATEMENT



Overview



I am pleased to report that 2006 was another strong year for Pipex with
transformational acquisitions in our broadband business and continuing strong
organic growth in hosting.  Revenues, including acquisitions, increased by 121%
to £294 million (2005: £133 million) and EBITDA (pre share option costs)
increased by 55% to £23.2 million (2005: £15.0 million).  Free cash flow before
freehold purchases of £9.9 million was also strong at £17.6 million compared to
£7.9 million in 2005 despite significant capital expenditure in the reported
year on our LLU programme.



I have previously reported to you on our focus of providing additional services
to customers in order to support prices and margins and to reduce churn.  In
2006, we made a step-change to our capabilities in this area with the
acquisition, in March, of Homecall.  This added a sizeable voice and line rental
business to our broadband division and gave us a strong platform from which to
launch the sale of additional services into our customer base.  Later in the
year we added further scale to our broadband and voice division with the
purchase of the Bulldog customer base, in September, and with the acquisition of
Toucan in October.  At the end of 2006, Pipex had over 1 million customers in
this division, over 50% of whom take multiple services.



Following such a period of acquisitive growth, Pipex will be progressively
integrating and consolidating its broadband and voice businesses over the
remainder of this year and throughout 2008.  We believe that the efficiency
savings available to us from running this division as a unified business will
contribute significantly to our bottom line in future periods.



We continue to enjoy strong organic growth in our hosting and domain names
division, driven by ever increasing levels of internet based activity.  We are
building a state-of-the-art data centre in Cologne to support the rapid
expansion of our German business, with the first customers commissioned in the
new site in March 2007.



Also in 2006, we embarked on the commercial exploitation of our wireless
spectrum licence, in our joint venture with Intel, successfully trialling WiMAX
based services in Stratford-upon-Avon.



Broadband and voice services



The impact of the acquisitions in this area has lifted customer numbers from
283,000 at the end of 2005 to in excess of 1 million by the end of 2006.  Most
importantly, the penetration of multiple service sales into our customers has
grown from an insignificant number at the end of 2005 to a year later where each
of our customers take, on average, 1.74 services from us.  This has helped us to
lift average revenue per customer to £24.70 per month from £23.00 per month last
year, in the face of market pricing pressures, particularly in broadband.



For the customer experience, our focus is to provide excellent connection
quality backed-up by high quality customer service.  We have straightforward
pricing with consistent, unified prices for all our services nationwide.



We operate a hybrid cost model to help maintain margins.  This allows us to
optimise service delivery costs to customers by choosing from a number of
alternate wholesale providers and, of course, from our own local loop unbundling
programme.  At the end of 2006 we had unbundled 59 exchanges.  A further 41 will
be unbundled by the end of April 2007, and the remaining 75 are in the pipeline,
and due for completion, in the fourth quarter of 2007.  Pipex also benefits from
a sizable base of business customers which ensures our broadband network is
loaded and generating revenues in the daytime when residential traffic is low.



The biggest opportunity in this division is from the integration of the recent
acquisitions of Homecall, Toucan and the customers of Bulldog to form a single
unified business, eliminating the functional replication existing in the current
structure.  This process will be completed by the end of 2008 and will deliver a
significant improvement in EBITDA margin for the division.



Hosting services



Once again, the division enjoyed good organic growth in the year.  In the UK, we
are the second largest hosting provider with 413,000 active sites.  Domain names
have also performed strongly with UK growth of 33% to 1.38 million.  In Germany,
the number of hosting services grew by 23% and domain names by 29% to 370,000.
The division continues to benefit from very attractive margins.



Pipex provides a comprehensive suite of hosting services from shared and virtual
private services right up to complex managed hosting solutions.



On the back of strong organic growth in Germany in 2006, we invested in a new
purpose-built data centre in Cologne.  This will come on-stream in three phases,
as driven by demand, and will provide sufficient capacity to meet predicted
server requirements for the foreseeable future. The first customers went live in
the facility in March 2007.



Network Services



This division provides medium sized and larger businesses with virtual private
networks, dedicated access, voice, security and bundled hosting solutions.
During the year, we enhanced the management within the division to take
advantage of the underlying growth in this sector.  This has met with some early
successes with significant customer wins including the British Library, Honda
and Comic Relief.



Wireless



At the end of March 2006 we announced a joint venture with Intel to form Pipex
Wireless.  The aim of the joint venture is to exploit its wireless spectrum
licence in the 3.6 - 4.2 GHz band by providing WiMAX based services through a UK
city roll-out.  Pipex Wireless owns a perpetual, nationwide licence in the UK.
Technical trials have been conducted in Stratford-upon-Avon from which we
believe we will be able to deliver data speeds of up to 8 Mbs, synchronously.
WiMAX has non-line of sight scalable coverage of up to 5 km, similar to cellular
networks, which compares to around only 50m for WiFi hotspots.  The plan is to
roll-out to 50 UK towns and cities by 2009, starting in Manchester later this
year.



Pipex Wireless continues to seek out valuable partners in the roll-out of its
services, and to this end announced in April 2007 an agreement with Nokia
Siemens Networks to co-operate on WiMAX infrastructure and service development
to expand the availability of commercial WiMAX services in the UK.



Operational performance



Turnover in the year increased by 121% to £294 million, with an increase of 14%
in continuing operations, to £152 million, and £142 million contributed by the
2006 acquisitions of Homecall, Toucan and the customers of Bulldog.  Gross
profit increased by 84% to £112 million.  Total gross margin in the year
decreased from 46.0% to 38.2%, the decline arising principally from the high
volume of line rental revenues in the mix of services in the 2006 acquisitions.
This is demonstrated in the gross margin contributed by the acquired businesses
of 31.6%.  EBITDA (before share option costs) rose in the year by 55% to £23.2
million.  Free cash flow generated, before freehold purchases, was £17.6
million, up from £7.9 million last year despite substantial investments in LLU
of £5.8 million.  In the year we acquired the freeholds of our Manchester
office, housing 850 staff, and the site for the new data centre in Germany.



Funding



We undertook a small placing in January 2006 raising £13.6 million, net of
expenses, at 13p per share to raise funds for future growth opportunities.



In March and April of 2006 we raised £91.5 million (£88.3 million net of
expenses) through the private placement of 3.875% Guaranteed Convertible Bonds
2011.  The bonds had a price of 15.1p and are convertible at 19p into ordinary
shares and are listed on the Professional Securities Market of the London Stock
Exchange.  The proceeds of the Bond were used to repay a £40.0 million bridging
loan, obtained to fund the purchase of Homecall and to repay all of Pipex's
existing bank debt, amounting to £35.2 million.



In October 2006, the Company entered into a new senior debt facility of £35.0
million to fund the purchase consideration for the Bulldog and Toucan
acquisitions.



Outlook



On 12 March 2007, following press speculation, the Company confirmed that it had
appointed UBS to investigate a number of strategic options.  The Board notes
that there has been a large volume of highly speculative press coverage, and
would like to reassure shareholders that the strategic review, which is expected
to be completed during the summer, continues to the Board's satisfaction.  Pipex
and UBS continue to explore the various options available to the Company and a
further announcement will be made in due course.



In the first quarter of 2007, we have continued to see an increase in the
average number of services bought by our broadband and voice customers and this
should continue to protect margins whilst inhibiting churn.  The opportunity to
reduce costs in this division by integrating our acquired operations will, we
believe, ensure improving EBITDA margins and cash flow over this year and next.



We look forward in 2007 to launching the first commercial WiMAX services in the
UK.  These services are currently being trialled in Milton Keynes and Warwick as
the forerunner to our first full-scale city roll-out in Manchester in the fourth
quarter.







Peter Dubens

Chairman





CONSOLIDATED PROFIT AND LOSS ACCOUNT
for the year ended 31 December 2006


                                                              Existing                                  Restated
                                                            Operations    Acquisitions        Total      (Note1)
                                                                  2006            2006         2006         2005
                                                  Note           £'000           £'000        £'000        £'000
Turnover                                           3           151,706         142,653      294,359      132,939
Cost of sales                                                 (84,438)        (97,566)    (182,004)     (71,782)
Gross profit                                                    67,268          45,087      112,355       61,157
Operating expenses before
amortisation, depreciation and
share option costs                                            (55,121)        (34,043)     (89,164)     (46,189)
Amortisation of intangibles                                   (13,050)         (5,889)     (18,939)     (11,236)
Depreciation                                                   (9,709)         (2,404)     (12,113)      (7,055)
Share option costs                                             (1,618)           (588)      (2,206)      (2,536)

Operating expenses                                            (79,498)        (42,924)    (122,422)     (67,016)

Operating profit before
amortisation, depreciation
and share option costs                                          12,147          11,044       23,191       14,968
Amortisation of intangibles                                   (13,050)         (5,889)     (18,939)     (11,236)
Depreciation                                                   (9,709)         (2,404)     (12,113)      (7,055)
Share option costs                                             (1,618)           (588)      (2,206)      (2,536)

Operating (loss)/profit                                       (12,230)           2,163     (10,067)      (5,859)
Share of operating loss
in joint venture                                                     -         (1,421)      (1,421)            -
Operating (loss)/profit
including joint ventures                                      (12,230)             742     (11,488)      (5,859)

Other interest receivable
and similar income                                                                              546          303
Interest payable and
similar charges                                                                             (6,806)      (3,068)
Loss on ordinary activities
before taxation                                                                            (17,748)      (8,624)
Tax on loss on
ordinary activities                                4                                            (8)         (48)
Loss for the financial year                                                                (17,756)      (8,672)
Loss per ordinary share    - basic                 8                                          0.76p        0.39p
                           - diluted               8                                          0.76p        0.39p

The loss on a historic cost basis is the same as the results reported above.

All of the results above relate to continuing operations.





CONSOLIDATED STATEMENT OF GROUP TOTAL RECOGNISED GAINS AND LOSSES
for the year ended 31 December 2006


                                                                                           2006             2005
                                                                    Note                  £'000            £'000
Loss for the financial year                                                            (17,756)          (7,071)
Unrealised loss on joint venture                                                        (9,533)                -
Translation difference in respect of net investment
in overseas subsidiary undertaking                                                         (61)             (28)
Total recognised losses in the year                                                    (27,350)          (7,099)
Prior year adjustment (as explained in note 1)                                          (1,601)                -
Total losses recognised since last annual report                                       (28,951)          (7,099)





CONSOLIDATED BALANCE SHEET
at 31 December 2006


                                                                         2006         2006        2005        2005
                                                        Note            £'000        £'000       £'000       £'000
Fixed assets
Intangible assets
             Goodwill                                                 170,692                   99,231
             Patents                                                        6                        7
             Wireless licence                                               -                    4,417
                                                                                   170,698                 103,655
Tangible assets                                                                     46,989                  25,251
Investments in joint venture
              Share of gross assets                                                  5,457                       -
              Share of gross liabilities                                          (11,077)                       -
                                                                                   (5,620)                       -
                                                                                   212,067                 128,906
Current assets
Stock                                                                      47                       63
Debtors                                                                44,679                   18,953
Cash at bank and in hand                                               48,328                   13,964
                                                                       93,054                   32,980
Creditors: amounts falling due within one year                      (100,308)                 (59,866)
Net current liabilities                                                            (7,254)                (26,886)
Total assets less current liabilities                                              204,813                 102,020
Creditors: amounts falling due after
one year (including convertible debt)                                            (125,013)                (24,871)
Provisions for liabilities                                                         (1,561)                 (2,004)
Net assets                                                                          78,239                  75,145

Capital and reserves
Called up share capital                                   5                         23,931                  22,101
Share premium account                                     5                         98,524                  84,127
Other reserves                                                                      23,228                  13,023
Profit and loss account                                                           (67,444)                (44,106)
Equity shareholders' funds                                                          78,239                  75,145





CONSOLIDATED CASH FLOW STATEMENT
for the year ended 31 December 2006


                                                                                          2006              2005
                                                                     Note                £'000             £'000
Cash inflow from operating activities                                  7                34,012            17,440
Returns on investment and servicing of finance
Interest paid                                                                          (2,553)           (2,346)
Bond interest paid                                                                     (1,776)                 -
Interest received                                                                          546               303
Interest element of finance lease payments                                               (668)             (288)
                                                                                       (4,451)           (2,331)
Taxation received/(paid)                                                                   230             (182)
Capital expenditure and financial investment
Purchase of tangible fixed assets                                                     (22,077)           (7,067)
Free  cash flow                                                                          7,714             7,860
Acquisitions
Purchase of subsidiary undertakings                                    6              (25,563)          (15,100)
Purchase of customer base                                              6              (10,368)                 -
Investment in joint ventures                                                             (797)
(Net overdraft)/cash acquired on acquisitions                          6              (40,589)             2,591
Prior year acquisitions                                                                      -               812
                                                                                      (77,317)          (11,697)
Cash outflow before management of liquid
resources and financing                                                               (69,603)           (3,837)

Management of liquid resources
Movement in restricted deposits                                                            138             2,632

Financing
Issue of ordinary share capital (net of issue expenses)                                 13,634                 -
Exercise of share options                                                                2,161               310
Capital element of finance lease repayments                                            (2,543)           (1,700)
Proceeds from issue of convertible bond
(net of issue expenses)                                                                 88,279                 -
Repayment of bank loans                                                               (74,310)             (129)
Repayment of loan notes                                                                      -           (1,989)
Drawdown of new loans                                                                   76,746            10,000
Net cash inflow from financing                                                         103,967             6,492
Increase in cash in the year                                                            34,502             5,287



Reconciliation of net cash flow to movement in net debt for the year ended 31
December 2006
                                                                                    2006                  2005
                                                                                   £'000                 £'000
Increase in cash in the year                                                      34,502                 5,287
Net movement in liquid resources                                                   (138)               (2,632)
New loan drawdown                                                               (76,746)              (10,000)
Issue of convertible bond                                                       (82,879)                     -
Repayment of loans                                                                74,310                   129
Repayment of loan notes                                                                -                 1,989
Repayments of lease financing                                                      2,543                 1,700
New finance leases                                                               (5,016)               (3,302)
Finance leases acquired with subsidiary                                                -                 (276)
Movement in net debt                                                            (53,424)               (7,105)
Opening net debt                                                                (27,722)              (20,617)
Closing net debt                                                                (81,146)              (27,722)



Analysis of net debt at 31 December 2006
                                        At 1 January                                               At 31 December
                                                2006           Cash flow                 Other               2006
                                               £'000               £'000                 £'000              £'000
Cash                                          13,478              34,502                     -             47,980
Restricted deposits                              486               (138)                     -                348
Cash at bank and in
hand per balance sheet                        13,964              34,364                     -             48,328
Bank loans                                  (36,860)             (2,436)                     -           (39,296)
Finance leases                               (4,826)               2,543               (5,016)            (7,299)
Convertible bond                                   -            (82,879)                     -           (82,879)
Net debt                                    (27,722)            (48,408)               (5,016)           (81,146)

The movement of £5,016,000 in "Other" relates to new finance leases.





NOTES TO THE FINANCIAL STATEMENTS

1 Financial information

The financial information set out above does not constitute the Company's
statutory financial statements for the year ended 31 December 2006, but is
derived from those statements.  Statutory financial statements for 2006 will be
delivered to the Registrar of Companies following the Annual General Meeting.
The auditors have reported on the financial statements to 31 December 2006.
Their report was unqualified and did not contain statements under section 237(2)
of the Companies Act 1985.

Prior year adjustment

The group has adopted FRS 20 : Share Based Payments for the first time in the
year ended 31 December 2006.  Under this standard the fair value of share
options granted is recognised as an employee expense with a corresponding
increase in equity.  Fair value has been determined using an appropriate model,
taking into account the terms and conditions upon which the options were
granted.  The amount recognised as an expense in the year is £2,206,000.  Prior
year comparatives have been adjusted accordingly.  The result of this has been
to increase the loss for the year ended 31 December 2005 by £1,601,000.

2 Annual report

The Annual Report will be posted to shareholders on 10 May 2007.  The Annual
General Meeting will be held at the offices of Financial Dynamics, Holborn Gate,
26 Southampton Buildings, London WC2A 1PB on 12 June 2007 at 11am.

3 Segmental information

The group operates one class of business, that of telecommunication services,
and consequently does not prepare segmental information by class of business.
However, to provide useful additional information, turnover is subdivided into
three main service categories shown below.
                                                                                  2006                2005
                                                                                 £'000               £'000
Turnover
Broadband and voice services                                                   231,759              76,539
Hosting services                                                                35,200              30,100
Network services                                                                27,400              26,300
                                                                               294,359             132,939



Turnover and loss before interest and tax, together with net assets by country
of origin, are set out below.  The comparative numbers have been restated to
more logically group similar businesses.


                                                                                 (Loss)/Profit      Loss before
                             Net           Net                                 before interest         interest
                          assets        assets      Turnover         Turnover          and tax          and tax
                            2006          2005          2006             2005             2006             2005
                           £'000         £'000         £'000            £'000            £'000            £'000
UK                        71,872        68,216       284,787          125,616         (12,240)          (5,415)
Germany                    6,367         6,929         9,572            7,323              752            (444)
                          78,239        75,145       294,359          132,939         (11,488)          (5,859)

Turnover analysed by destination is not materially different to turnover by
origin.



4 Tax on ordinary activities
                                                                                       2006             2005
                                                                                      £'000            £'000
United Kingdom corporation tax at 30% (2005: 30%)                                         -                -
Overseas tax on profit for the year                                                      10               48
Prior period overseas tax adjustment                                                    (2)                -
Total current tax                                                                         8               48



5 Called up share capital

Authorised and allotted share capital
                                                                                        2006             2005
                                                                                       £'000            £'000
Authorised
Equity: 4,000,000,000 ordinary shares of 1p each                                      40,000           40,000

Allotted, called up and fully paid
Equity: ordinary shares of 1p each
At start of year 2,210,059,488 (2005: 2,182,171,488)
ordinary shares of 1p each                                                            22,101           21,822
Issued during the year 183,015,435 (2005: 27,888,000)
ordinary shares of 1p each                                                             1,830              279
At end of year 2,393,074,923 (2005: 2,210,059,488)
ordinary shares of 1p each                                                            23,931           22,101

Share capital issued at nominal value in the year relates to the exercise of
share options (30,822,000 shares for consideration of £2,161,375), a placing of
shares (109,000,000 for consideration of £13,633,525) and shares allotted in
respect of the acquisition of Toucan Residential Limited and IDT Direct Ireland
Limited (43,193,435 shares at a fair value of £4,751,000).

6 Acquisitions

(i) Summary

Below is a summary of the significant acquisitions made by Pipex Communications
plc in the year ended 31 December 2006.
                                                                                                        2006
                                                                                                       £'000
Fair value of assets acquired                                                                       (49,818)
Goodwill                                                                                              90,500
Consideration                                                                                         40,682

Satisfied by:
43,193,435 ordinary shares at a market price of 11.00p per share                                       4,751
Cash                                                                                                  33,386
Costs of acquisition                                                                                   2,545
                                                                                                      40,682
Effects on group cash flow:
Cash consideration                                                                                    38,137
Costs of acquisition                                                                                   2,545
Cash balances on acquisition                                                                          40,589
Net cash outflow                                                                                      81,271



(ii) Pipex Homecall Limited

The Company acquired Caudwell Communications Limited and Homecall Payment
Services Limited, (together trading as "Homecall"), on 23 March 2006, for
consideration in the form of assumed bank debt of £43.0 million.  Costs of
acquisition were £990,000.

Goodwill of £51.9 million arising on acquisition is being amortised over ten
years, the useful life as estimated by the directors.  The acquisition
contributed £116.3 million of turnover in the period to 31 December 2006 and an
operating loss of £2.8 million.  The turnover and operating loss of Homecall for
the year ended 31 December 2005 were £162.0 million and £28.5 million
respectively.  The net liabilities of Homecall at 31 December 2005 were £102.9
million.

Prior to its acquisition by Pipex, Homecall issued new shares to its then
parent, Phones 4U Group, the consideration for which was £48.4 million in cash.
Homecall used this cash to pay down part of its overdraft.

Details of the fair values of the assets and liabilities acquired are
provisional and are set out below:
                                                               Book value       Fair value             Fair
                                                                of assets      adjustments            value
                                                           acquired £'000            £'000            £'000
Fixed assets                                                        4,912              911            5,823
Debtors                                                            15,981            2,055           18,036
Cash                                                             (43,146)                -         (43,146)
Creditors (falling due within one year)                          (31,671)                -         (31,671)
Net (liabilities)/assets                                         (53,924)            2,966         (50,958)
Goodwill                                                                                             51,948
Consideration                                                                                           990

Satisfied by:
Cash                                                                                                      -
Costs of acquisition                                                                                    990
                                                                                                        990
Effects on group cash flow:
Cash consideration and costs                                                                            990
Cash balances on acquisition                                                                         43,146
Net cash outflow                                                                                     44,136





EXPLANATORY NOTES:

Fixed Assets

Fixed assets have been adjusted by £911,000 for capitalisation of own labour
costs in accordance with Pipex group policy.

Debtors

Debtors have been adjusted for £745,000 in respect of a refund due for discounts
on prepaid circuit rentals, £464,000 in respect to adjusting for credit
balances. The remaining adjustment of £846,000 is due to a change in accounting
policy to prepay connection costs for newly acquired customers.

 (iii) Toucan Residential Limited and IDT Direct Ireland Limited

On 12 October 2006 the group acquired Toucan Residential Limited and IDT Direct
Ireland Limited (together trading as "Toucan").

The acquisition was financed by a share placement involving 43,193,435 shares at
a value of £4,751,000 and cash of £20,000,000, while costs of acquisition were
£1,257,000.

Goodwill of £23,924,000 arising on acquisition is being amortised over ten
years; the useful life as estimated by the directors.

Toucan contributed £11.7 million of turnover in the period since acquisition,
and operating loss of £1.0 million.

The turnover and operating loss of Toucan as at 31 July 2005 were £23,238,000
and £13,061,000 respectively.  Net liabilities were £15,658,000.

Details of the fair values of the assets and liabilities acquired are
provisional and are set out below:
                                                                  Book value
                                                                   of assets        Fair value              Fair
                                                                    acquired       adjustments             value
                                                                       £'000             £'000             £'000
Fixed assets                                                             949                 -               949
Debtors                                                                7,127             1,216             8,343
Cash                                                                   2,049                 -             2,049
Creditors (falling due within one year)                              (9,230)              (27)           (9,257)
Net assets                                                               895             1,189             2,084
Goodwill                                                                                                  23,924
Consideration                                                                                             26,008

Satisfied by:
43,193,435 shares at a market price of 11.0p per share                                                     4,751
Cash                                                                                                      20,000
Costs of acquisition                                                                                       1,257
                                                                                                          26,008





6 Acquisitions (continued)

(iii) Toucan Residential Limited and IDT Direct Ireland Limited (continued)
                                                                                                             Fair
                                                                                                            value
                                                                                                            £'000
Effects on group cash flow:
Cash consideration and costs                                                                               26,008
Cash balances on acquisition                                                                              (2,049)
Net cash outflow                                                                                           23,959

EXPLANATORY NOTES:

Debtors

Debtors have been adjusted due to a change in accounting policy in order to
align with group accounting policies.

Creditors

Creditors have been adjusted due to a small overstatement at time of
acquisition.

The accounting reporting date for Toucan has been changed from 31 July to 31
December in order to bring it in line with the reporting date for the group.



iv) Bulldog

On 7th September 2006, Pipex Internet Limited acquired from Cable & Wireless
Access Limited the active part of the Bulldog customer base together with the
Bulldog Brand.  Initial consideration was £12 million, in cash.  In January
2007, the number of active customers acquired was reviewed and the consideration
lowered to £10,313,000.

Acquisition costs were £55,000 giving rise to goodwill of £10,368,000.  Goodwill
is being amortised over three years in line with the estimated useful life of
the customers acquired. The current year amortisation charge is £1,151,000.



7 Reconciliation of operating loss to operating cash flows
                                                                                    2006               2005
                                                                                   £'000              £'000
Operating loss                                                                  (11,488)            (5,859)
Depreciation charge                                                               12,113              7,055
Amortisation charge                                                               18,939             11,236
Loss on sale of fixed assets                                                          15                 43
Share of loss of joint venture                                                     1,421                  -
Share option costs                                                                 2,206              2,379
Movement in UITF 25 share option provision                                          (81)                157
Decrease/(increase) in stock                                                          16               (37)
Decrease/(increase) in debtors                                                       865            (1,773)
Increase in creditors                                                             10,371              4,781
Non cash credit in respect of provisions                                           (365)              (542)
Net cash inflow from operating activities                                         34,012             17,440

8 Loss per share
                                                                           Year ended           Year ended
                                                                     31 December 2006     31 December 2005
Loss for the financial year attributable to shareholders                  £17,756,000           £8,672,000
Weighted average number of equity shares in issue                       2,337,117,056        2,200,084,032
Basic/diluted loss per equity share*                                            0.76p                0.39p

* Since the conversion of potential ordinary shares to ordinary shares would
decrease the net loss per share, they are not dilutive. Accordingly diluted loss
per share is the same as basic loss per share.



9 Post balance sheet events

On 12th January 2007, in accordance with the Shareholder Agreement, Intel
Capital (Cayman) Corporation contributed an additional £10.2 million, and Pipex
Communications plc an additional £2.0 million, to the Pipex Wireless joint
venture.


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