The Over The Wire Holdings Ltd (ASX: OTW) share price climbed to $2.60 in afternoon trade after the widely-fancied cloud services and online communications business revealed its results for the six-month period ending December 31 2016. Below is a summary of the result.
- Net profit of $1.56 million, up 10%
- EBITDA (operating income) of $3.05 million, up 25%
- Revenue of $13.96 million, up 29%
- Agreement to acquire Telarus Ltd
- Earnings per share down to 3.6 cents from 4.2 cents
- Interim dividend of 0.75 cents per share
The company said it saw strong revenue growth across all four of its product lines being; data networks, voice, cloud services, and co-location services. Almost half the revenues came from its data network business which continues to enjoy the tailwinds of fast-growing demand.
The group is targeting 20% year-on-year organic growth alongside selected acquisitions in a sign that the consolidation across the telco and cloud services sector at the small end of the market is far from over. In my opinion both Over The Wire and larger rival MNF Group Ltd (ASX: MNF) have acquisitive opportunities ahead of them, while remaining merger or takeover candidates themselves.
Other cloud services and internet connectivity business in Nextdc Ltd (ASX: NXT), Superloop Ltd (ASX: SLC) and Megaport Ltd (ASX: MP1) are also at different stages of development with plenty of potential to attract long-term suitors. Both Superloop and Megaport are founded by Bevan Slattery who has previously sold fibre-optic businesses to fellow entrepreneur David Teoh at TPG Telecom Ltd (ASX: TPM).
Evidently, Over The Wire has some attractive growth potential on a standalone baisis and ticks the boxes as a profitable small-cap able to leverage the digital future. However, the company has taken on a $10 million debt facility with National Australia Bank Ltd (ASX: NAB) to fund its Telarus acquisition, excluding which it has a net cash position of $5.42 million. The balance sheet's moderate strength then means the stock is likely to be volatile depending on how the company can deliver on its plans.
Earnings per share for the period were also down to 3.6 cents from 4.2 cents in the prior corresponding period presumably as a result of share dilution over the period. Despite the potential this looks a business for the watch list to see how well management can execute on its forecasts.
