aspect huntely update via etrade

Although NHS deadline was missed, the forecast still looks good as of 16.4.10

Huntley's Recommendation: iSOFT Group Limited
Recommendation: Buy
iSOFT Group provides healthcare information systems and e-health services to public and private hospitals as well as community and primary care organisations. Installations are in over 500 hospital and clinics in the UK, Europe, Australia, New Zealand, Asia and the Middle East. Customers include tertiary research and teaching facilities and multi-enterprise care delivery organisations. ISF has significant growth opportunities given committed spending by governments on healthcare IT infrastructure. Scalability of ISF�s software means users are added at minimal cost. Its main product is in the early cycle of the rollout stage meaning business risk though with growth potential is high. ISF is a growth stock suitable for risk-tolerant investors.

Event
16-Apr-2010
Rollout of Lorenzo, ISFs flagship healthcare IT solution, missed a deadline set by the UK National Health System (NHS).

Business Impact: Head of Department of Health was quoted in the media blaming both the product and implementation processes. Management denied product was the issue. A direct approach was adopted for Trusts in the southern region in which hospitals are allowed to choose solutions besides those offered by ISF and Cerner. ISF holds around 50% market share in the region and is well positioned to renew and win contracts. The stronger A$ prompted an EBITDA downgrade of $5m or around 4% from February guidance.

Forecast Impact: --

Recommendation Impact: The stronger A$ prompted an EBITDA downgrade of $5m or around 4% from February guidance. We revise our EBITDA and profit forecasts inline with guidance to $109m and $31.2m. Revenue guidance of 6-10% growth in local currency terms is maintained. We maintain our long term view on the stock. As a software developer holding intellectual property rights to its software, ISF is in control despite the hiccup at Morecambe. Buy.

Event Analysis
Rollout of Lorenzo, ISFs flagship healthcare IT solution, missed a deadline set by the UK National Health System (NHS). Lorenzo was scheduled to be running live by the end of March at the Morecambe Bay Trust (hospitals in a geographic region) under the National Program for IT (NPfIT). The program is aimed to improve IT systems in UK hospitals. This is another minor hiccup. Lorenzo is installed successfully in hospitals in Germany and Netherlands. The same version tested for Morecambe was rolled out in another NHS Trust last year while an older version is also operational in seven other NHS Trusts. The revised schedule is prospective of a full rollout in May. Currently, the NHS program is structured in a two tier system. A software developer such as ISF, partners with a company in installing their software at hospitals. ISF is partnering with Computer Science Corporation (CSC) while competitor Cerner is working with BT in delivering its Millenium software. Revenue earned is based on internal targets and milestones. Both groups are experiencing issues given the size and complexity of the projects. Head of Department of Health was quoted in the media blaming both the product and implementation processes. Management denied product was the issue. System tests were successful in all modules except for one during the integration process and as a result, the live version was not switched on. NPfIT has received greater attention in the media as the UK election nears. The project is labelled by the opposition party as a failure given extensive delays and an overblown budget. With the national budget running at a deficit, the government has since scaled back the project by around �500m. Given the time and funds invested, the program is unlikely to be abandoned. Reshaping the NHS IT program could benefit ISF. The two tier system could be replaced by a direct approach in which the software developer works directly with hospitals. This leads to higher revenue on product installation. Smaller scaled projects are manageable but a partner is needed to deploy larger projects as ISF focuses on software development. A direct approach was adopted for Trusts in the southern region in which hospitals are allowed to choose solutions besides those offered by ISF and Cerner. ISF holds around 50% market share in the region and is well positioned to renew and win contracts. This mitigates some risk as the Department of Health followed through with its warning of not renewing contracts with CSC as the Morecambe deadline was missed. ISF can bypass CSC and work directly with hospitals. Possible delays for other trusts means further revenue is generated from existing solutions. Renegotiation of contract terms between ISF and CSC is also underway. ISF is in a better position to extract more favourable terms given the progress made on Lorenzo. Geographic diversity reduces any negative impact of the NHS program. The company generates 42% of revenue outside the UK and Ireland. ISF entered the US market through an acquisition last year. The US makes up a significant part of the global health IT market at 48%. While $19bn of the 2009 stimulus directed towards healthcare IT looks lucrative, ISF will not take existing competition head on. It is a reverse situation in the US with most hospitals using other products. Initially, ISF will offer solutions for particular departments within hospitals. But this strategy could be hard to achieve as most users opt for solutions from a single provider. The stronger A$ prompted an EBITDA downgrade of $5m or around 4% from February guidance. We revise our EBITDA and profit forecasts inline with guidance to $109m and $31.2m. Revenue guidance of 6-10% growth in local currency terms is maintained. We maintain our long term view on the stock. As a software developer holding intellectual property rights to its software, ISF is in control despite the hiccup at Morecambe. Buy.