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iSoft makes the deadline to publish its financial accounts. STEPHEN MUSCAT analyses the results
Beleaguered software company iSoft managed to make the deadline and publish its financial results, avoiding a potentially disastrous de-listing from the London Stock Exchange on Friday.
The Chairman and Acting CEO John Weston together with the CFO Gavin James delivered the results just hours before the deadline expired. The company managed to deliver after it worked out a refinancing package with its banks and agreed on the milestones required for certain deliverables with its partners in the NHS UK.
However, the auditors did not sign off the financial results as they could not give an opinion on whether the accounts give a true and fair view for 2005/06 and their comparatives of 2004/05. The decision by the auditors may have also been influenced by the announcement of the Financial Services Authority of the UK that it will investigate iSoft’s past results.
The effort was rewarded by the market that responded favourably with the company seeing its share price increase by 32 per cent to close at 56 pence, which however is still far off from the 400p it closed off in 2005. This increase was not a surprise to analysts who were following the acquisition of iSoft’s shares by the HSBC Bank Group, since this was one of the bankers discussing the refinancing package.
Despite a revenue increase of 8.3 per cent iSoft had to take a massive goodwill impairment charge of GBP351 million for the value of its 2003 acquisition in Torex, which left the company announcing a loss of GBP343.8 million in pre-tax losses as against a profit in the revised financials for 2005.
iSoft has passed through a “turbulent second half” of its financial year, which saw the departure of its CEO, the suspension of the commercial director and a damaging report by the National Audit Office on its deliverables in the GBP6.2 billion National Health Service IT project. Moreover, as a result of its restatement for revenue recognition it had to agree again the general banking facilities given by the banks as it had failed to keep up with the bank covenants.
The discussions with the banks are crucial since they determine the long term financial viability of the Group. A consortium of banks consisting of Lloyds TSB, HSBC, Natwest and Barclays has given iSoft the much-needed breathing space with the new financing package. The revised facilities will remain in place up to November 2007 but they come with certain conditions.
iSoft will have to pay a higher rate of interest and grant the banks warranties that represent 3.7 per cent of its equity. iSoft had, up to last year practically used up its banking facilities and now has to rely on its GBP77 million cash pile and expect to obtain an additional GBP25 million facility subject to an asset disposal programme, which iSoft shall be undertaking.
Moreover, iSoft shall be controlling its costs more aggressively and this includes the reduction of staff in UK, consolidating its operations and reducing its locations and disposing of non-core assets. Even so the company does not expect to register full benefit of these measures before May 2007. It will have to continue to operate with a weakened working capital balance.
Going through the financials one reads that iSoft ended with a positive cash flow figure as a result of a favourable opening balance. It is more difficult to find new clients who are ready to pay upfront to enter into a new contract to buy software. This will hamper the precarious cash flow position of iSoft. The fact that the company did not secure long term financing facilities will not be good news to shareholders who will not be receiving any dividend this year. The board will only return to declare dividend once the financial visibility is clearer. Shareholders will also note that the directors could not give any guidance of how the company will be faring in 2006/07.
What is sure is that there will continue to be more cash outflows as payments for existing contracts are linked to deliverables.
Weston dedicated a good part of his presentation to the Lorenzo software which iSoft is using as a flagship to bid with in international projects and which the NHS is expecting delivery of to replace legacy systems. It only provides five per cent of the group revenue and it is still coming on stream at a slow pace.
The Lorenzo software has three components. The technology component is 70 per cent complete with around 25,000 users in the UK. The services part is only 40 per cent complete whilst the solutions component is still measured by the company itself as being 20 per cent complete.
Beta testing will be carried out later on this year on an IT project which iSoft is implementing in Singapore. The chairman was upbeat in stating that Lorenzo is better than what international competition offers. Only that lately the comments in the UK press that the project is two years behind schedule should raise the alarm for anyone considering procuring the system. At least they are forewarned that it is still a couple of years before Lorenzo becomes a fully-fledged system, even though it is designed to absorb and co-exist with other systems.
iSoft is a large company providing IT healthcare systems to various hospitals worldwide. In fact on the same day of announcing its financials, it announced that it had reached agreement with Computer Sciences Corporation, one of its partners in the National Programme for IT. The agreement specifies that the company shall service hospitals in London and the Southern region. However, there is now a schedule for deliverables which if met have a value of GBP153 million.
iSoft has committed to CSC that if it does not keep to the schedule of delivery, its development team will be managed by CSC. Reading through the press release of this agreement, one reads that iSoft is happy with the continuing confidence of its partners and clients.
However this is questioned when one notices that its other partner in the project Accenture had to take a charge of USD450 million for possible losses relating to the NHS project.
The latest twist to the whole saga comes in the form of reports that iSoft is considering informal bids from private equity and trade organisations that are ready to take over the company or parts of it. This together with the FSA investigation, strict deadlines for deliverables, securing new revenue streams, cutting costs and the vacancy of the CEO post may mean more sleepless nights for Weston and his team.
Further delays in providing what iSoft has been contracted for will hinder the growth of this company and derail it from its recovery plan.
Aspart of a larger consortium of companies, iSoft is one of the short-listed bidders for the IT system at Mater Dei. Doctors will not be concerned with the financial capacity of the software provider of the IT system they will use to access the patients’ records but any potential buyer of the system will carry out its due diligence before placing new orders. Hopefully, payments will be linked to deliverables.
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