James Murray's growth strategy pays dividends at Alternative Networks

When James Murray brought Alternative Networks AN to the AIM market in February 2005, the telecoms business he co-founded had already delivered ten years of profitable growth. That year the company turned over £46m, produced a pre-tax profit of £3.9m and Murray picked up Ernst amp; Young's Entrepreneur of the Year award to boot. Six years on, sales and profits have more than doubled, Murray and his team have ably guided the business through recession and a long-standing strategy to blend organic growth with acquisitions is still proving fruitful. What sets this business apart from a typically fast-growing, acquisitive telco is its progressive dividend policy – indeed the dividend yield of 4% this year comes with a promise of a 10% rise over the next two years plus acquisition upside. No surprise then that the company's shares have soared by 74p to around 251p since the beginning of March.

Alternative Networks has spent the last 17 years forming partnerships with big telecoms players and then typically working with small and medium sized businesses on cutting costs, improving efficiency and getting their communications systems working properly. It now works with more than 5,000 of those sorts of businesses. Murray, aged 40, insists that the company's careful approach to growth, particularly in its formative years, has been central to its success. Bearing in mind that many of its peers were put to the knife when the telco bubble burst in the late 1990s, it is unsurprising that Murray remains so focused on the importance of product, service and profit – stumbling blocks that killed off very many others in the sector a decade ago.

James, tell me about what your plans were for Alternative Networks when your first set it up?

It was a long time ago now. We set up the business in 1994 and back then businesses in telecoms were either very large or very small. The idea of being able to set up a business in which you were effectively getting a recurring revenue from people's phone calls was quite unique. That was the essence of setting up the business and then basically we grew it from there. Before that I sold telephone systems and before that I did very basic telephone engineering as well.

The telecoms industry has changed a great deal in the 17 years that Alternative Networks has been operating. What have been your guiding principles over that time?

I think the key is really building a business which is fundamentally growing. I guess the old expression was that it was bricks and mortar, we didn't build it off a whim and it wasn't technology which we didn't think was necessarily going to work. We built it off solid foundations. We've grown the business over the last 17 years but we have done it in a very sensible way. The first ten years it was very much organic growth, we funded the business through cash flow and we didn't go out and borrow any money. So in ten years we grew it organically to £40m and since then we have floated, we have done several acquisitions but we have carried on the organic growth. We have probably added £40m of turnover with acquisitions but then we have managed to bolt-in those businesses and get the cross selling opportunities going as well, which, again, creates more organic growth.

Tell me about the market, who are your customers are and what do you offer them?

We talk about our customers being businesses of 80-plus people up to 1,000, 2,000 in some cases, and they are businesses which basically will come to you for a set of products. So they are looking more for a converged solution and that means putting together mobile, fixed line, data and telephone systems and getting it all working.

There are not many businesses which do what we do and have the breadth of what we do. We partner with the likes of Vodafone VOD, O2, Cable amp; Wireless CWC, Verizon VZ, Mitel MITL, Juniper JNPR, all these quite large businesses. The services we provide range from voice, data, mobile, your smart phones, your iPads and iPhones, your Blackberries and we then fully project manage it, give the client technical expertise, give them access to our portal and really understand what the client wants. So it is a fairly complex solution that we are providing, it's not something that you just roll out the box; it takes time to design and put it together.

We are in a position where we are agnostic so to a degree we can work with whoever we want to work with, those we see as the leading players in the market space. I think we have made those calls pretty well, that is what we are good at. But also when we make acquisitions we try to acquire businesses which are a similar size to ourselves and in similar area so we don't try and spread ourselves too thinly across the market.

Are your services based on saving money for your clients or are there other drivers?

Saving money is more of a benefit of reorganising the solution or putting in a new solution. So, yes, there is an element of saving money but it's not as black and white as saying we can save you 30% off your bill, which is probably the tag line of the old days when people were just doing voice. It is more about saying: ‘Okay, we're running this old system, or this old network, we want to look at the solution and look at what we get back from it', and that could be streamlining what data networks you have in place, what telecoms you have in place, even what people you have in place and how you get it all running better and more efficiently. It's more about efficiency that we look to drive with our customers.

You have completed two acquisitions in the last 18 months - Aurora Kendrick James Group and Scalable Communications. What factors drove those deals and what was it that you wanted to achieve with them?

AKJ was interesting because it was a billing organisation. They had got 70 other telecom companies or customers in the market who used the system that they had developed to bill their customers, and we were one of them. What we wanted to do was take AKJ and develop a customer portal. So that's been a big emphasis for us and we're in the process of building this portal which gives customers complete access to all their communications. It will allow customers to report faults, track reports, order equipment, it will also give them certain access to barring calls, turning mobiles on and off, that type of thing. It is comprehensive and it is pretty unique in the market. There are different types of systems but to have a system which works across an array of different products is quite rare. That is quite a large investment, we have had to buy AKJ, we have got to have the right product sets internally but on top of that we have got six developers working on that system five days a week. So we are spending close to £1m over 18 months investing in and developing that system, which will be pretty unique in this space.

Scalable is more of a data play and has been very successful. They tend to focus on small corporates, they have got 200 customers and they have partnerships more on the data side with companies like Juniper, Extreme Networks and F5. They have also got a Network Operating Centre and they are doing phenomenally well. I don't think, to date, we have lost a person in that business, it's going very well and if anything the biggest challenge we have got there is just managing the growth. It is rare to do an acquisition that is so successful.

Does that give you encouragement to look for further acquisitions? Are there areas where you would like to strengthen the group?

We are not in a rush to do another acquisition. I think once you do an acquisition you have got to get on and bolt it in. The challenge is to not break the business, which so often happens when you do acquisitions. So yes, we are looking at other acquisitions, other opportunities but I wouldn't say there is anything that is going to happen in the short term. But at the same time the most important thing is also making sure we run the business well. It is very tempting to go and acquire and get bigger and bigger and bigger but you've just got to work out why you are doing it. The philosophy that we have had is all about capability, the size of customer that we are selling to and the ability to cross sell.

Have there ever been moments in the past when you saw opportunities or even threats and thought perhaps the business should move in a different direction?

I think what we have realised over the years is that the market moves at a certain pace and it is not as quick as you necessarily think it is. We have been talking about the market converging for years but the reality is that it has taken some time to get there although it is getting there now. I think the biggest change we are seeing now is data coming very much into mainstream and mixing it up with voice and mobile. That is quite a nice place to be, it's quite an interesting area, it is quite complex in putting together these solutions and I think it is where a lot of telecoms or data businesses are trying to be.

You bought the company to the Alternative Investment Market in 2005. What was it that prompted that move and how would you rate the experience since then?

It was mainly to put the business on a platform from which we could go and do acquisitions. We haven't had to raise money. We raised a bit of money at float but that wasn't the key driver. The key driver was putting ourselves on this platform which we could then go and do a number of acquisitions and it is a good incentive for the businesses that we are acquiring as well. It has been good. We have obviously had a very serious recession, but we have stayed steady through that. We did take a tumble, we went back down to almost float price and we had to make cuts as every other business did. People were using the phone 20% less so that had a knock on effect for us. But we have come out of it in pretty good shape and I think we have learnt a lot from it as well.

You have always had a progressive dividend policy, why has that been an important part of your approach to being a public company?

For us, I think it is all about shareholder return. We are all shareholders in the business but we generate a lot of cash and we just feel it is the right thing to be doing from that perspective. We have always said that we'll have a progressive dividend policy and that is what we have stuck to. It is not stopping us doing acquisitions and we are in a position where we haven't gone and borrowed a penny, apart from a bit of a mortgage that we have had for the last ten years or so, but that's about it. So if we have got the opportunity to go and do a larger acquisition and we need to go and raise money, do another placement, we have got the ability to be able to do that. The dividend is just part of the course, it is just progressing it and, again, it makes the business more attractive to a shareholder as well if the dividend is of interest.

What would you point to as a major reason why an investor should take a closer look at the company?

I think you have just got to look at the consistency. I think that is why people like us, that we have been consistent, we have delivered what we said we were going to deliver. Apart from the blip in the recession we have been very consistent and I think, especially being on AIM, especially with our key shareholders, they have been very supportive of us because of that consistency.

Finally, we talked about consolidation and your acquisitions. Do you think Alternative Networks could eventually be a takeover target itself?

Yes I think we probably would one day, it is like anything. I don't know if the environment is out there now, it is difficult to tell if there is going to be more consolidation in the market place. If anything, consolidation will come because there are quite a few telecoms companies out there, there is a lot of conversion that is going on and people want to buy capability. But we are not in a rush, I think all these things happen with the right timing and at the moment we feel we have still got quite a lot we can do.

James, thank you for your time.

Thank you.

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