Does the NPfIT contract really justify >75% share price fall. I think not. Especially as other areas of business are excelling. Upside for those willing to wait for clouds to clear.
NHS supplier iSoft reports profits down - but non-NPfIT UK sales up By Tony Collins on February 16, 2010 9:11 AM | No Comments | No TrackBacks | More
Australia-based iSoft, a major supplier to the NHS IT scheme, has reported mixed results for the half-year to 31 December 2009 including net profits down 53%.
Turnover was $239m compared with $275m in the same period in 2008. Net profit after tax was $4.8m compared with $10.3m for the half year to 31 December 2008.
In December 2009 iSoft announced a new debt facility for the next three-and-a-half years, which consists of a term loan of 60 million and a revolving credit facility of 60 million. It replaces iSoft's existing debt facility of 107.5 million.
Some aspects of the half-year results:
Renegotiation of NPfIT contracts
On the NHS negotiations with CSC and iSoft to reshape the deliverables under the programme [which alters parts of the contract between CSC and the NPfIT], there is "currently no agreement in place", says iSoft, although "we expect that this will be concluded in the coming weeks".
iSoft adds: "However, we feel relatively confident that despite some of the rumours to the contrary, much of the clinical functionality of Lorenzo for hospitals will still be required."
There are "uncertainties" and "potential opportunities" regarding the NPfIT, says iSoft.
There was a drop in expected revenues from the NPfIT, via CSC, in 2010 compared with 2009.
"The National Programme revenue represented 37.5% of UK Revenue and has become less significant to group revenues than during the pcp [previous corresponding period]."
Turnover of $237m and EBITDA [earnings before interest, taxes, depreciation and amortization] of $40.8m were impacted, in part, by currency translation, and $11m Revenue and EBITDA effect from phasing of recognition of NPfIT milestones.
There was some "margin erosion" from the phasing of National Programme milestone revenues in the first half compared with the full year 2009.
The NPfIT and iSoft arrangements with CSC
"We also have sought to bring greater visibility to our revenue under the National Programme contract.
"In December we signed a new agreement with CSC. And although we will see some drop in revenue from the National Programme contract, with CSC compared to the previous corresponding period we are confident of offsetting this with more profitable opportunities to sell product to CSC as well as direct to the NHS Trusts.
Non-NPfIT turnover up
"Turning to our operations, the UKI [UK and Ireland] segment (excluding National Programme) saw significant revenue growth (11% year on year) with a number of new major sales to Hospital Trusts - including Sheffield, Wandsworth and East Cheshire NHS Hospital Trust. iSOFT Business Solutions saw the number of new contracts nearly double.
"In the National Programme, we had a number of new go-lives for LRC release 1 - where 7 NHS Trusts have now implemented this solution for a part in part of their hospitals. Bury NHS Trust was the first to implement LRC Release 1.9 (an integrated administration and clinical solution) - and this was in a primary care Trust. We are on track with Morecombe Bay to implement LRC 1.9 in a Hospital setting by end of Q1.
UKI and National Programme
iSoft continues: "As there are a number of uncertainties and potential opportunities regarding the National Programme, and we have decided to provide you with some information that will help you more fully understand the issues.
"UKI-NPfIT Revenue Split
"First, the UKI segment today represents about 55% of our total revenue. Excluding the National Programme the UK revenue was $82m up from $74m on the pcp (constant currency). The National Programme revenue represented 37.5% of UK Revenue and has become less significant to group revenues than during the pcp [previous corresponding period].
"UKI-NPfIT Contracts
"The National Programme is a 12 billion programme to modernise the NHS through a major IT programme. iSOFT with its Lorenzo solution was awarded three of the five regions. This contract, all now with CSC, was executed in 2004 and covers the period to 2016. iSOFT was responsible for developing and maintaining its solutions whilst CSC was responsible for installing and servicing the NHS trusts and managing the delivery over a data centre.
"In June 2007, prior to the acquisition of iSOFT plc, CSC and iSOFT agreed on a new risk sharing model. CSC agreed to be responsible for the development of the solutions and iSOFT agreed to make 750 personnel available to CSC for a period up until April 2010. CSC would accept the risk under its contract with the NHS and iSOFT was to be paid a fixed fee together with milestone payments tied to software releases.
"In March 2008 a further agreement was entered into with CSC whereby CSC agreed to second additional personnel from iSOFT on a cost-plus basis. Today an additional 600 personnel are working for CSC on this basis.
"In December 2009 a new agreement was entered into to extend the agreements until 2012 and to simplify the rates and the basis of the cost sharing under the June 07 and the March 08 agreements. The milestone arrangements remained untouched.
"UKI-NPfIT Table
"As you can see from the table we are forecasting that total revenue from the National Programme Contract with CSC, as it currently stands will deliver $90m of revenue for FY10 compared to $106m for the pcp [previous corresponding period].
"NPfIT Market Update
"Now let's turn to look at the current changes that are being mooted in the UK. First, the NHS has commenced negotiations with CSC and iSOFT to reshape the deliverables under the programme.
"Whilst there is currently a lot of speculation about the extent of that reshaping - there is currently no agreement in place. Although we expect that this will be concluded in the coming weeks. However, we feel relatively confident that despite some of the rumours to the contrary, much of the clinical functionality of Lorenzo for hospitals will still be required.
"In the Southern Region, which was originally allocated to Fujitsu with a Cerner solution, this region has now been opened up to competition as the Trusts will be funded directly by the National Programme. The NHS has advised that solutions that are to be procured must comply with all the standards that the NHS has previously set out for operating across the Spine.
"iSoft has over 50% of NHS Hospital Trusts with its solutions in the South. In the London and Southern Regions seven major hospital Trusts (iSOFT 7) have elected to opt out of the Cerner solution and to remain with iSOFT and seek an upgrade path from iSOFT.
"What are the risks and opportunities?
"The table sets out our view here. Simply put as we own the IP to Lorenzo we can use the solution in the UK I outside the contracted solution to CSC to sell directly to NHS Trusts (or via a partner).
"Further, if the programme gets re-scoped additional modules can be supplied by us for additional revenue. Moreover the opportunities outside the UK are becoming very significant and we have now the ability to use much of the developed product today to sell into these markets."
ISF Price at posting:
17.5¢ Sentiment: Buy Disclosure: Held
