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Here’s what is dragging the Over the Wire (ASX:OTW) share price lower

The Over the Wire Holdings Ltd (ASX: OTW) share price is edging lower on Tuesday following the release of a business update.

At the time of writing, the telecommunications, cloud and IT solutions provider’s shares are down 2.5% to $4.35.

What was in Over the Wire’s update?

Over the Wire’s update provided investors with guidance for the first half and revealed a major new contract win.

In respect to the contract win, the company revealed that it has recently been awarded a contract with Eagers Automotive Ltd (ASX: APE).

According to the release, the contract will see Over the Wire provide Eagers Automotive with SD-WAN, WAN carriage, ongoing management services, and assistance with Internet Security across its Australia and NZ-wide operation.

Management expects this to contribute meaningfully to its revenue and earnings before interest, tax, depreciation and amortisation (EBITDA) from the second half of FY 2021.

In the meantime, Over the Wire is forecasting EBITDA to be in the range of $10 million and $10.5 million during the first half. This will be a 22% to 28% increase on the EBITDA of $8.2 million it achieved in the prior corresponding period.

However, FY 2021’s EBITDA has been boosted by the acquisitions of Zintel, Fonebox, and Digital Sense.

Management advised that its existing businesses are expected to contribute ~$7.5 million to $8 million EBITDA in the first half, which implies a year on year decline on a like for like basis. This may be why its shares are underperforming today.

The company believes this is a commendable performance considering that non-recurring revenue is expected to be c.$3.5 million below initial expectations. This reflects client caution on some project spend in recent months. Over the Wire is also facing a reduction in recurring data services revenue of ~$1 million as a result of the migration to NBN and clients downsizing services to reduce costs.

Outlook.

The company remains confident about its prospects for the second half and beyond.

It continues to invest heavily to strengthen its competitive position, build on the positive sales results in the first half, and generate growing revenue and EBITDA from its recent acquisitions.

Over the Wire’s Managing Director, Michael Omeros, commented, “In a challenging period for most of the community, I am proud of the significant achievements of the company in this half, which is a credit to the whole team at Over the Wire. As a result of our progress, we enter the new year in even better shape to support our clients as we continue simplifying technology to empower business.”

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James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Over The Wire Holdings Ltd. The Motley Fool Australia has recommended Over The Wire Holdings Ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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