Shares in iomart Group (AIM:IOM) have dropped 27% as the company faces challenges in its core business.
Despite strong order bookings and a promising acquisition, the cloud services provider has seen an acceleration in customer churn and weaker renewal rates in private cloud-managed services.
The purchase of Atech last October was a key step in iomart’s strategy to expand its secure cloud offerings.
Atech has performed well, meeting revenue and profit expectations while strengthening the group’s Microsoft capabilities and managed security services.
However, shifts in revenue have impacted profits more than expected due to the fixed costs of data centres and network infrastructure. While growth in newer cloud services is helping offset legacy declines, the company now anticipates adjusted EBITDA to be about 10% below market forecasts.
Peel Hunt noted that while Atech’s strong performance is 'a positive', the impact of accelerating customer churn in the legacy business should not be underestimated.
The broker highlighted that the shift towards higher-growth cloud services is the right long-term strategy, but the near-term financial impact remains a concern. As a result, Peel Hunt has adjusted its forecasts, reflecting the expected pressure on earnings.
Despite these challenges, the broker believes iomart still has potential upside if it can successfully execute its transition strategy.
It pointed out that the demand for secure cloud services continues to grow, and iomart’s expertise in this area could position it well for future expansion. However, managing the decline in its traditional infrastructure business will be key to restoring investor confidence.
In early trading, the stock was down 16.08p at 43.32p.