OVHcloud H1 EBITDA margin rises; cash flow pressured by capex

Adjusted EBITDA rose 5.9% y/y to €227.2m and adjusted EBITDA margin hit a record 40.9%. Revenue grew 3.6% to €555.3m (5.5% like‑for‑like), but net income fell to €5.9m (from €7.2m) and levered free cash flow widened to a negative €14.2m as capex jumped to €238.5m (42.9% of revenue). Net debt was €1.13bn (leverage 2.6x) and the group targets 5–7% organic revenue growth for FY2026, an adjusted EBITDA margin above FY2025 and positive levered free cash flow; management also launched an AI lab after acquiring Dragon LLM and created a defence unit.

Analysis

OVH’s decision to front‑load hardware purchases is a deliberate insurance policy against supply-chain volatility, but it converts a supply advantage into a working‑capital and inventory risk. If component prices normalize or GPU demand softens in 6–12 months, OVH will carry higher-cost assets and compressed levered free cash flow, creating a narrow window where margin expansion is illusory rather than structural.

The Dragon LLM acquisition and creation of a defence‑focused unit are strategically complementary: verticalized, agentic AI plus sovereign cloud is a credible wedge into regulated European workloads that hyperscalers struggle to monetize without joint‑ventures. Expect initial wins to be high‑visibility, long‑cycle (12–24 months) contracts with high ASPs and sticky renewal profiles, but also to require sustained R&D spend and sales cycles that keep near‑term cash conversion muted.

Balance‑sheet dynamics are the primary hinge for valuation re‑rating: modest leverage means OVH can execute, but negative levered FCF and elevated capex intensity amplify rate and refinancing risk over the next 12 months. Key near‑term catalysts include first defence contract announcements, early commercial pilots of the verticalized LLM, and sequential improvements in levered FCF — absence of those will compress multiples faster than top‑line guidance justifies.

Key Decisions for Investors

• Long OVH.PA equity with downside protection: buy OVH.PA shares now and buy 12‑month 10–15% OTM puts to cap downside. Timeframe 6–12 months; rationale is optionality on AI/defence contract announcements and supply‑secured hardware; risk: put cost (~2–4% of position) limits net loss if levered FCF or refinancing risk materializes. Target +35–45% if material defence/LLM commercial deals are announced within 12 months; downside capped to ~‑15% net of put premium.
• Long NVDA (NVDA) call spread to play enterprise GPU demand: buy a 3–6 month NVDA 20% OTM call and sell a 40% OTM call to fund premium. Timeframe 3–6 months; rationale is incremental demand for inference/LLM serving from customers like OVH driving near‑term GPU ordering; reward capped but >2x potential return vs outright call with limited premium outlay. Risk: a sudden GPU inventory destock or macro sell‑off could compress spot prices and equity multiples.
• Long Thales (HO.PA) catalyst trade: buy 12‑month HO.PA 10% OTM calls or a concentrated long position in shares. Timeframe 12–24 months; rationale is increased likelihood Thales (as a systems integrator for European defence) will partner with sovereign cloud providers for classified workloads, translating to higher‑margin services and cross‑sell. Risk: slower public procurement cycles and competition from incumbents could delay upside — treat as a mid‑term play on European sovereign cloud monetization.