Health service IT contractor in crisis

· iSoft now worth less than when it floated in 2000
· Founders have made £90m in six years

The Gardian - June 9, 2006
Richard Wray

Original text from

One of the software firms at the heart of the NHS's £6.2bn IT upgrade yesterday said it had to change the way it accounts for its revenues, knocking a huge hole in its profits. The move has forced iSoft to cut 15% of staff, sell non-core assets, renegotiate its overdraft, and consider wiping £500m off the value of a business now valued at only £117.3m by the City, less than when it floated six years ago.

Manchester-based iSoft has been plagued by delays to the NHS programme and there are concerns in the Square Mile that the company is suffering a cash squeeze. It has warned on profits twice this year and yesterday admitted that it has to change the entire way it recognised revenues from the sale of its software.

The company's own joint broker, Morgan Stanley, appeared to admit defeat yesterday, suspending its recommendation on the stock. It added: "We don't feel that we have enough visibility to offer a recommendation." Fellow broker Bridgewell Securities added that putting the new figures into its financial model "would imply an extreme price drop".

In fact, its shares plunged 32p to 51p yesterday - a drop of 38% - having been more than 450p in August last year. The company floated in July 2000 at 110p a share and at the time was worth £123m. Yesterday it was valued at just £117.3m.

Since the flotation the three men that bought the business in 1998 from within the accounting group KPMG have been selling shares. Patrick Cryne, who led the buyout but has since left the board, plus former director Roger Dickens and current commercial director Steve Graham, have made themselves more than £90m through a series of share sales.

The company said yesterday it has decided to stop recognising software licence revenues at the time of delivery and recognise them, instead, over the full length of the contract. This will slash iSoft's annual profits to between £3m and £7m compared with expectations, set less than six weeks ago, of £17m to £22m. Following an emergency board meeting on Wednesday, at which the change in revenue recognition was agreed, the company said yesterday that it now expected revenues for the year to end April 2006 to be £195m to £200m compared with its original forecast of up to £215m. Its auditors have yet to sign off these accounts.

In addition, iSoft yesterday sliced the revenues it reported for the previous year - to April 2005 - to £190m compared with the £262m reported at the time. It must cut revenues from the year before that by £55m and the year before that by £40m, despite the fact that the group's performance over this three-year period paid out handsome bonuses to senior management.

A spokesman for the company defended the bonuses, saying: "It's easy with the benefit of hindsight to draw attention to these but on the other hand the accounting policy applied at the time was appropriate. It's easy to look back."

The change in revenue accounting has forced the company to renegotiate its banking facilities. It is also cutting 150 staff - or 15% of its UK workforce - and looking to sell off "non-core assets" including buildings.

The company is also reviewing its balance sheet and may have to write down up to £500m - or more than three times the value of the business - of goodwill related to previous acquisitions.