AVN.L Regulatory News (AVN)

Avanti Communications Group plc

Preliminary Report for the Year ended 30 June 2011

Avanti Communications Group Plc (AIM: AVN), the satellite operator, announces its audited Preliminary Results for the full year ended 30 June 2011.

Key points

·; Successful launch of HYLAS 1, commercial operation commenced in April 2011.

·; High cost PIK debt repaid, no further debt payments due until December 2012

·; HYLAS 2 fully financed and on schedule for launch in first half of 2012

·; Excellent progress during the year with sales and pipeline on both satellites

·; Completion of HYLAS 2 insurance $15m below budget

·; New sales contracts announced today

·; HYLAS 3 conditional pre-sales contracts of $120m

Financial highlights

·; Revenue of £5.46 million (2010: £5.82 Million) falling as legacy businesses activity ceased in preparation for HYLAS 1 launch

·; Loss after tax £9.7 million, (2010: loss after tax £1.93 million)

·; Closing cash £38.83 million (2010: £34.18 million)

Commenting on the results, John Brackenbury, CBE, Chairman said:

"This has been a landmark year for Avanti Communications Group with the successful launch of our first satellite, HYLAS 1, and the receipt of the first revenues generated by it. As a result, it gives me particular pleasure to present our financial results for the year ended 30 June 2011. I am also able to report on continued success in the construction and commercialisation of HYLAS 2, which remains on target for launch in Q2, 2012. Our pipeline of new business gives us confidence in our ability to meet expectations."

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For further information please contact:

Avanti Communications Group Plc Tel: +44 (0)20 7749 1600

David Williams / Sean Watherston

Cenkos Securities plc Tel: +44 (0) 20 7397 8900

Nicholas Wells (Nomad) / Julian Morse (Sales)

Jefferies International Limited Tel: +44 (0) 20 7029 8000

Julian Smith / Thomas Rider

Redleaf Polhill Tel: +44 (0) 20 7566 6700

Emma Kane / Paul Dulieu

About Avanti

¡ Avanti sells satellite data communications services to telecoms companies which use them to supplyresidential, enterprise and institutional users.

¡ Avanti's first satellite called HYLAS 1, launched on November 26th 2010 and is the first superfast broadband satellite launched in Europe.

¡ Avanti's second satellite, called HYLAS 2, on target for launch in Q2 2012. It will extend Avanti's coverage to Africa and the Middle East.

CHAIRMAN'S STATEMENT

This has been a landmark year for Avanti Communications Group with the successful launch of our first satellite, HYLAS 1, and the receipt of the first revenues generated by it. As a result, it gives me particular pleasure to present our financial results for the year ended 30 June 2011. I am also able to report on continued success in the construction and commercialisation of HYLAS 2, which remains on target for launch in Q2, 2012. Given recent financial markets turmoil it is very satisfying that the financing decisions taken in this and the previous financial years mean that Avanti has two satellites fully funded with a very strong balance sheet and products which are selling on target.

Following the launch of HYLAS 1 and its introduction to service, we have seen a significant increase in the number of signed customer contracts and also the pipeline of customer enquiries for HYLAS 1 and HYLAS 2. Having a satellite in service as opposed to design or construction has considerably improved our profile in the market. In addition, we have seen continued strong demand across all the geographies we cover in consumer, enterprise and military sectors. New applications for our capacity, like Digital Cinema, have appeared on HYLAS 1. Avanti has technological advantages in a number of areas and in focussing on these we are holding pricing at good levels. Given that the HYLAS 1 satellite has relatively modest capacity available, we are confident that it will be full within the three years we have forecast. We have already sold enough capacity to fill the satellite to 36.7% usage by the end of that three year period, we are adding new customers every month and existing customers are already returning to add to their capacity commitments.

Although for most companies the general economic backdrop probably seems unhelpful, we see no sign of this in the high growth markets of Africa and the Middle East, so I believe we made good strategic decisions in that, following the launch of HYLAS 2, 75% of our capacity will address growth markets. There is strong demand for HYLAS 2 capacity from commercial customers in Africa and government customers in the Middle East and we expect to convert this demand to further significant backlog before launch. During the year we repaid our high yielding PIK bond following a £70 million equity fund raising which made our low cost Export Credit Agency HYLAS 2 financing easier to operate and generated a significant financial saving. We completed the placing of insurance for HYLAS 2 at a premium which generated a saving of some $15m against budget, which clearly demonstrates that our technology and management are well regarded in the expert space insurance market. In addition, we commenced work on the construction of HYLAS 3.

Avanti's senior management team has faced a difficult period, as some short term speculators attacked the share price. I am concerned that loyal, long term shareholders, especially private investors who are not allowed by law to receive the detailed reports produced by investment banks, have experienced temporarily diminished value, perhaps without a clear understanding of how this has come about. But it has not changed our approach to our business model at all. We have set out a five year business plan to fill our satellites. Our products and geographies are exhibiting very strong demand and I am satisfied that in the first commercial year of this plan we are achieving our objectives.

It is clear that Avanti owns scarce and valuable resources in one of the few lightly competed sub-sectors of the global telecoms industry which should see us create very significant value. I see great opportunity in emerging markets telecoms and our advantages in these markets are significant. I am grateful for the resolute support of our core long term investors. Patience and confidence in the quite exceptional and unique advantages Avanti has will be rewarded. Our pipeline of new business gives us confidence in our ability to meet expectations

John Brackenbury, CBE

Chairman

CHIEF EXECUTIVE'S REPORT

Introduction

I am pleased to report results for the year which include the first revenues from HYLAS 1, following its successful launch and introduction into service during this financial year. The satellite launch in November 2010 was followed by a period of in orbit testing. As we had expected, HYLAS 1 passed its tests successfully and was brought into service in April 2011. We completed the transfer of our legacy customer base from its old fashioned rented Ku band satellite onto HYLAS 1 with its considerably faster Ka band service by May 2011. HYLAS 2 remains on track for a launch in Q2 2012. The market for our products remains strong and is growing and the progress made in sales for HYLAS 1 and pre-sales for HYLAS 2 means we are confident in achieving our objective of selling out HYLAS 1 in three years and HYLAS 2 in five years from service launch. The growth in market demand has encouraged us to begin the early stage work for the construction of our third satellite, HYLAS 3.

Financial Review

Our result for the year produced turnover of £5.46m (2010: £5.82m) including the first two months of HYLAS 1 revenues. In the run up to the launch of HYLAS 1 we stopped selling our interim broadband service on rented satellite capacity which was highly unprofitable as a result of the high prices of legacy Ku band capacity. We also decided that there was no merit in installing systems which would be replaced within a few months. It was however invaluable in developing and testing in a live environment the control and management software which is now being used to deliver a high quality experience for HYLAS 1 customers. The consumers on this system were successfully migrated to HYLAS 1 in the first two months of service.

As anticipated, our costs increased during the year as we recruited more staff to sell and support our products and also to manage three satellite projects instead of one. In addition we incurred our first depreciation on HYLAS 1. Our currency exposures are all hedged so that there is no cash risk, but Accounting Standards oblige us to report the notional changes in value of hedging and again this year it can be seen that our hedging strategies protected us from losses, and this manifests itself in a profit of £0.11 million (2010: profit of £0.97 million). The loss from operations was in line with our expectations at £12.86 million (2010: loss £2.44 million).

During the year we raised £70 million in an equity placing to refinance an expensive PIK bond and fund the early stage design work for HYLAS 3. In addition, with the construction of HYLAS 2 underway, we drew $190.3 million on our Export Credit Agency debt facilities of $328 million. The debt is at attractive fixed interest rates of 5.5% and is drawn down during the period up to HYLAS 2's launch and then repayable over a seven year period from December 2012. In these volatile economic times, shareholders can draw great comfort from the stable long term financial resilience of our balance sheet.

Business Overview

The successful launch and introduction into service of our first satellite has led to a significant increase in interest from potential customers in buying capacity on both HYLAS 1 and 2. Ka band is new to Europe, but expert customers can now experience the product before buying it. As a result we are now recognised as a credible solution for our service providers as they grapple with increasing and accelerating demands for bandwidth from corporate, consumer and government customers. We are benefitting from this through the successful development of products across all our markets.

- CONSUMER BROADBAND

For consumers, the growth in high data rate applications such as video and cloud computing, as well as the requirement to interact on-line with many companies such as utilities providers means that fast broadband is now a requirement rather than a luxury, regardless of geographic location. Avanti provides competitively priced products at speeds of up to 10Mb/s in this market, and the contractual and technical methods by which our service providers interact with us are unique and differentiated. We have signed a number of contracts with service providers who are migrating legacy Ku band customer bases to HYLAS which will amount to approximately 25,000 when the migrations are completed, in addition to the new business our 75 service providers are adding every day. I am pleased that the UK government made specific provision for satellite to be used in its £800m rural broadband programme, and we have already had success in the first tender to be awarded under this programme in Kent. Our history of successful projects in England, Scotland and Ireland should position us perfectly to benefit further from this work, and we are now seeing progress on projects with other European governments. The smaller companies proved to be more nimble and made the earliest commitments to us. However Avanti now has systems installed with the rural broadband projects of three of the largest incumbent telcos in Europe and progress with those projects could be very large once in full scale deployment.

- ENTERPRISE NETWORKS

In the enterprise sector we are seeing strong demand for the provision of both back-up and primary networks. Our internationally patented back-up Business Internet Continuity product is bundled into a telecoms service provider's offering as a cost effective alternative to a second fixed telecoms line. For primary networks we are seeing demand amongst corporates for machine to machine communication such as ATM networks, telemetry for energy producers and also companies with multiple remote locations. We have also begun work with a project to deploy digital cinema services to one major cinema operator, a market that we think is potentially very large.

- CELLULAR BACKHAUL

The cellular backhaul market is well established in emerging markets because wireless providers struggle to get reliable cables to connect their remote towers. We see strong business for HYLAS 2 already in the pipeline. However we are now actively trialling our backhaul products on HYLAS 1 with wireless providers in the UK and expect to proceed to contracted roll-out soon.

- GOVERNMENT

In the military/institutional market, we successfully completed testing of our Ka band spectrum for its suitability for military applications with excellent results. Whilst we expect demand for military applications to be limited for HYLAS 1, given its largely European footprint, we expect to see stronger demand for HYLAS 2 with its beam configuration over the Middle East and Africa. There is currently a round of tendering taking place in several NATO countries for Ka band capacity and as the only NATO domiciled Ka band operator with capacity for sale across the relevant Middle Eastern countries in 2012 it seems reasonable to expect that Avanti's products will be successful in processes which should conclude before the launch of HYLAS 2.

- BACKLOG AND PIPELINE

During the year we extended our customer base on HYLAS 1 so that we have sold capacity to over seventy service providers in Europe. Our customers typically commit only to enough bandwidth to serve the business they can forecast in the short term. Naturally during the first six months of service, those customers have been focussing on filling the capacity they committed to pre-launch. But we have already seen the first of these successfully sell all of the capacity they acquired from us and come back for more. We expect to continue to sign new customers and remain very confident that we will sell out all of the capacity on HYLAS 1 within 3 years of service launch. At present, our backlog of customer contracts for HYLAS 1 is £141m. Thus the backlog increased despite taking some of it to P&L in the six months since service launch. Many of our customers bought modest capacity to begin with and we expect them all to come back to us to buy more bandwidth to cope with growth. In addition, we are negotiating with new customers seeking significant capacity.

Construction of HYLAS 2 is progressing well and the satellite remains on target to launch in Q2, 2012. Pre-launch sales interest has been very strong and we expect to ink significant deals soon in Southern and Eastern Africa, Iraq and Afghanistan. The backlog of customer contracts for HYLAS 2 is £30m. In addition the options over capacity (for military use) increased to £170m. There is strong interest in Avanti's military capacity, but since we are not presently regulated to sell directly to military organisations, we sell to service providers who are, and some of those pay for options to give them an advantage in bidding processes.

The strong customer interest in our capacity is illustrated by the pipeline of new business. These represent potential contracts where a business proposal has been made to the customer and negotiations on that proposal have commenced. Our pipeline of new business for HYLAS 1 and 2 stands at £473m.

We provide an expanded definition for pipeline and backlog, and have re-introduced the peak fill rate metric in response to shareholder enquiries.

·; The HYLAS 1 peak utilisation rate occurring in Year 3 based on current sales is 36.7%. We are targeting a service launch peak fill rate on HYLAS 2 of 25%.

·; Pipeline is defined as the total potential value of contracts which are currently under negotiation in respect of HYLAS 1 and HYLAS 2, and only includes projects where detailed technical information and a committed price has been delivered and the customer is proceeding with work on that basis.

·; Backlog includes the total value of contracts signed for sale of services. We do not include any value for the potential renewal of the contracts we sign with service providers beyond the specified term. We do include in backlog the value certain historic continuing business:

o The small directly contracted base of consumer broadband customers in the UK which was built under government funded projects prior to HYLAS 1 launch is assumed to roll forward, since those customers have continued with service beyond their initial term.

o We also assume that our small European consulting business which uses HYLAS 1 to create advanced new technologies for government customers continues to generate the level of turnover it has averaged in the last five years.

- HYLAS 3

We have announced our intention to construct our third HYLAS satellite and have already completed the first phase of design and long lead time item work. We have received a preferred offer of highly efficient debt financing to complete the construction of HYLAS 3. The financing offer rests upon the successful pre-sale of significant capacity. We have conditionally contracted pre-sales of $120m, and are close to finalising the balance. In the satellite industry, the long term planning cycles and construction schedules can often be frustrating I know, but this is a business which should produce extraordinary cash flows over the long term and it is important that Avanti makes decisions which maximise shareholders' returns rather than jumping into expensive financing or poorly priced sales deals for the purpose of short term momentum. We hope to update the market on HYLAS 3 very soon.

Competitive Environment

There is presently only one Ka band competitor in each of our geographies. This resembles the competitive environment in the UK mobile phone industry in the early 1990s when only BT and Racal were competing. It does not represent intense competition and as a result it is possible to win business with product differentiation, not price. Every satellite has different characteristics which fundamentally affect its suitability for specific customers such as orbital position and elevation, power and beam shapes, radio frequency specifics, and the design and characteristics of ground equipment and software. Avanti's key advantages are in several areas:

·; HYLAS 1 beam coverage give us advantages in certain areas, such as very high power over Western Europe, and the ability for customers to receive satellite TV and broadband in a single dish in Iberia, which is unique.

·; HYLAS 2 has highly sought after military capacity over the Middle East and military spectrum whose commercial use is unusual and we are turning the short term lead to market advantages into enduring and loyal business relationships.

·; Being first into certain African countries is also important because these countries exhibit growth that is not encumbered by sovereign debt crises or recession

·; Avanti sells a Virtual Network to service providers which enable them to benefit from unique advantages such as:

o Moving capacity dynamically between beams

o Modifying all Service parameters directly - they design their products, not us

o Licensed use of the Avanti patented Business Internet Continuity (BIC) products

·; There are also always relationship issues at play and Avanti's new fresh approach helps, but also, of course, competitors in individual markets usually want to secure separate supply chains.

Thus in lightly competed markets whose services are always bespoke, Avanti has sufficient differentiation to focus on selling to its strengths.

Trading Update

Avanti signed four contracts on Friday. The first is a contract for the sale of HYLAS 2 services to Bentley Walker for services on HYLAS 2 in Afghanistan. Avanti also added three new contracts for HYLAS 1 service.

We completed last week the placement of $328m of Launch plus first year insurance on HYLAS 2 at a premium which is $15m under budget, supporting our view that it is a well managed and low risk project. We are grateful for the support of our insurers.

Outlook

Avanti owns scarce and valuable spectrum resources, in a lightly competed sub-sector of a global telecoms market which is experiencing breakneck growth in data demand through the increasing use of high data applications in government, business and consumer sectors and growing penetration of consumer telecoms usage.

Avanti has excellent differentiation in its products and is winning business at good prices. Our five year business plan is well poised to deliver exceptional returns to investors and there is additional upside for us to be found in completing new projects financed with very efficient debt. Our pipeline of new business gives us confidence in our ability to meet expectations

David Williams

Chief Executive

CONSOLIDATED INCOME STATEMENT

Year ended 30 June 2011

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Year ended 30 June 2011

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 30 June 2011

CONSOLIDATED STATEMENT OF CASH FLOWS

For the year ended 30 June 2011

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Year ended 30 June 2011

1. Basis of preparation

The final results for the year to 30 June 2011 have been extracted from the audited consolidated financial statements which have not yet been delivered to the Registrar of Companies but will be published on 3 October 2011.

The financial information set out above does not constitute the company's statutory accounts for the years to 30 June 2011 or 2010 but is derived from those accounts. Statutory accounts for the year to 30 June 2010 were approved by the Board of Directors on 1 December 2010, published on 1 December 2010 and delivered to the Registrar of Companies, and those for the year to 30 June 2011 will be published on 3 October 2011. The auditors have reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 237 (2) or (3) of the Companies Act 1985 in respect of the accounts for the year to 30 June 2010 nor a statement under section 498 (2) or (3) of the Companies Act 2006 in respect of the accounts for the year to 30 June 2011.

2. Principal accounting policies

Full disclosure of the group accounting policies can be found in the 2010 Annual Report and Accounts as presented on the Avanti plc website. These have been consistently applied throughout the 2011 Annual Report and the disclosures made in this statement.

Principal risks and uncertainties (extracted from the Avanti Communications Group plc Annual Report 2011)

·; Fill rates on HYLAS 1 and 2

·; Pricing

·; HYLAS 2 delay and launch

Global economic environment

Poor macro-economic circumstances, particularly in Greece, Portugal, Spain and Ireland might be retarding our sales efforts. However we do not have a long standing trend with which to compare. It does however feel as though companies are only making commitments to buy services that they know they can for certain use or sell on i.e. very few clients are making highly speculative commitments. However, offsetting this effect are two positives. Firstly, telecoms services appear to remain non-cyclical. The long held belief that customers regard telecoms as an essential utility has held quite firm during the recession, with churn rates actually falling in Western Europe during 2010. Secondly, governments in Europe are spending money on broadband subsidy, especially as a result of long planned projects whereby the funding is in locked up EU budget pots.

Thus it is difficult to show that recession is affecting our business. It probably is, but not in a profound or enduring way. We remain the provider of highly desirable services where demand is not met by current or planned supply, with end user consumers whose purchasing decisions are often distressed and thus not highly price sensitive.

Critical accounting estimates and management judgements

The preparation of the consolidated financial statements in conformity with IFRS requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenue and expenses during the reported period. Although these estimates are based on management's best knowledge of the amount, events or actions, the actual results ultimately may differ from those estimates.

The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below.

(a) Revenue recognition

The group uses the percentage-of-completion method in accounting for its consultancy and space projects. Use of the percentage-of completion method requires the group to estimate the services performed to date as a proportion of the total services to be performed.

(b) Impairment of satellites

The carrying amounts of the satellites are dependent on the Group's ability to sell sufficient capacity in the satellites over their useful economic lives. In management's view, at this early stage in the life of the HYLAS 1 satellite, the sale of capacity is progressing well and in line with plans. The Group will assess impairment annually.

(c) European Space Agency Funding and Sale of Capacity

In April 2006 the group entered into a contract with ESA to receive funding for the build of the satellite and also giving ESA the right to use up to 10% of capacity on HYLAS 1 for a period of 3 years if the capacity is available. An assessment of the fair value of the revenues for the sale of capacity has been performed in order to account for this as a multiple element arrangement. The fair value of the capacity sales will be recognised on a straight line basis over a 3 year period commencing in this period given HYLAS 1 is now operational. Management has made their best estimate of the fair value of the revenue element of the transaction based on market prices of the capacity at the inception of the arrangement. The residual fair value represents the value of the capital grant and this will be released to other operating income over a period of 15 years to match the useful economic life of the satellite. If the fair value of the capacity sale was altered by 10% the impact on the revenue figure would be £110,000.

(d) Other financial assets

The Group carries a loan receivable as a long term financial asset to a strategic partner. The loan is long term in nature and accrues interest at 7%. We have assumed that this asset is fully recoverable over the term of the loan. The Group has collateral over the balance which constitutes 75% of the equity interest in the borrower should there be a default.

3. Expenses by function

Operating expenses by function are as follows:

Operating Profit for the year is stated after charging the following:

4. Other operating income

Interest of £427,000 was received from Space Explorations ("Spacex") on settlement of their debt.

Liquidated damages were received from Astrium due to the late delivery of HYLAS in November 2009. These damages compensated Avanti for the additional costs incurred as a result of the late delivery of the satellite and were recognised on a straight-line basis over the additional period that the incremental running costs were being incurred. All liquidated damages have now been recognised in the income statement.

5. Net finance income

6. Income tax (credit)/expense

The tax on the group's loss before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to profits of the consolidated entities as follows:

7. Loss per share

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

8. Cash and cash equivalents

For the purpose of the cash flow statement, cash and cash equivalents include cash in hand and at banks net of outstanding overdrafts. Cash and cash equivalents at the end of the financial year as shown in the cash flow statement can be reconciled to the related items in the balance sheet as follows: