iSoft, an important supplier to the NHS IT scheme, issued a market update today, which appears to have been well received by the market as the company’s share price rose by about 16% to 28.5 cents. The share price over the past week had sunk to a five-year low of 24.5 cents.
The update was generally reassuring, though it referred to cost cutting in the current financial year and also said that, in respect of its contract with local service provider CSC in the Northern Cluster of the NPfIT in England, it expected revenue in 2011 to be significantly less than in this financial year, “which is why we have been working to build the order book of the company outside the CSC relationship”.
iSoft said it doesn’t have issues with CSC under the Northern Cluster contract. CSC has about £3bn worth of contracts under the NPfIT.
“Our relationship with CSC is strong and the joint achievement of the successful ‘go live’ of Lorenzo Regional Care 1.9 at The University Hospitals of Morecambe Bay under the Northern Cluster Contract is a significant achievement as it operates as a validation of the Lorenzo platform in an Acute Care environment.
“The Northern Cluster Contract remains on foot and we continue to work with CSC in the continued roll out of the Early Adopter program for hospital trusts in that region.”
“While we have still not finalised all order intake for FY10, we expectthat the revenue derived from CSC under the Northern Cluster Contract islikely to represent 15% to 20% of our total revenue in this financialyear.
“Our current best estimate is that the balance of ourbusiness (being 80% to 85% of our forecast revenue) will be slightlyahead of the FY09 base when measured on a local currency basis.
“Wehave a core business base with strong recurring revenues across manymarkets – not just the UK. We continue to experience success in severalmarkets. Notwithstanding the economic environment we are seeingsignificant growth in our revenue backlog for FY11 and beyond.
“Therehave been some delays in order placement in the last six months acrossmany of our regions but we believe that this is more symptomatic of thecurrent economic environment than any suggestion that it relates toiSOFT product performance or loss of share to our competitors.
“Profitabilityis adversely affected when there is a significant change in the timingof forecast license revenues, such as occurred this year.
“The cost baseof the company is dominated by employee costs, especially around theproduct development area, which is necessary for the continued deliveryinto existing contracts and to provide next generation product for saleinto future years.
“This year, like last, we will expense around 80% ofour total development costs, even though that effort is designed toproduce revenue growth in future years. We have, however, alreadycommenced adjusting our cost base for FY11 and we would expect thatthere will be significant reduction in run rate costs over the course ofthe coming financial year.”
On the outlook for 2011, iSoft said: “The events ofthe past weeks have not interrupted the ordinary course of business. Weare well advanced in the budgeting process for the coming fiscal yearand are at the same time working toward a close of the current fiscalyear…
“Overall,we do expect revenue growth on a constant currency basis between FY10and FY11; even with the expected decline in contracted revenue that willbe earned under the CSC contract in respect of the Northern ClusterContract.
iSoft said it has kept its banks fully informed, especially on matterssurrounding the NPfIT. “We are not in breach of any banking covenants.
“With the significantnegative effect caused by the translation of regional earnings toAustralian dollars together with the changes to our cash flow, webelieve it is likely that a resetting of some of the covenants will berequired.
“We are working constructively with our banks to ensure thereare no future issues and we expect this process will be concluded overthe next few months.”
On board changes, Gary Cohen has stood down as Executive Chairman inorder to allow him tofully focus on his role as Chief Executive Officer.