Iomart rethinks its cloud strategy

Hybrid clouds, secure connectivity and technology-agnostic solutions don’t sound straightforward. However, Iomart (IOM) intends to make them so. The cloud computing group’s new “welcome to straightforward” strapline is designed to attract the many small and medium-sized businesses for whom these phrases are meaningless. However, the group has encountered some obstacles en route, causing revenue and profits to fall in the first half of its 2022 financial year. 

Iomart’s revenue has dropped by 8 per cent year on year and adjusted profit before tax is down 7 per cent. This is partly due to lower non-recurring equipment and consultancy sales, which management said are "lumpier" than the group’s recurring revenue. More worryingly, Iomart also reported lower customer renewals and its cloud managed services division saw revenue fall by over £1m, to £28m. 

Group chief executive Reece Donovan said this was partly due to clients’ own customer bases: Iomart customers lost their customers, meaning they no longer needed (or could afford) Iomart’s services. However, a "handful" of customers were affected by shortcomings in the service quality, which have since been addressed, according to Donovan.

Iomart’s share price has struggled over the past 18 months and, disappointingly for shareholders, its interim dividend has been cut to 2.42p per share. Its long-term prospects look promising, however. For starters, recurring revenue – which underpins the group’s business model – is strong at 93 per cent, up from 90 per cent in the first half of 2021. Meanwhile, it has consistently high cash conversion, reaching 91 per cent in the latest period, and net debt has shrunk by 10 per cent to £49.3m, 1.2 times adjusted Ebitda.

The group has also rethought its strategy. While Iomart once focused on the private cloud space, it has repositioned its offering around the growing ‘hybrid cloud’ market, which allows clients to store information in a variety of different places and access it easily. Security, the digital workplace and connectivity are also growth areas and Iomart is eyeing up acquisitions to expand its customer base.

In terms of future work, Iomart has secured its first six-figure annual recurring revenue customer for a managed Microsoft Azure service following a sales campaign. Its connectivity services also have a "well-qualified pipeline" with first sales targeted within the current financial year, suggesting better times to come. 

Consensus forecasts point to earnings per share (EPS) falling over the next three years. But Investec has predicted that dividend yield will increase to 5 per cent by 2024. Hold. 

Last IC View: Buy, 286p, 15 June 2021