Tola Sargeant
iSoft shares plunge on change in accounting policy
Shares in iSoft were down 33% at around 55p yesterday as the markets digested the latest news from the company. In a statement yesterday morning, iSoft announced changes to its revenue recognition policy, explained the impact this will have on past and future trading results, warned of a future impairment charge and said that it is in discussions with its banks to agree new terms on its credit facilities.Under the new accounting policies, the group now expects to report revenues of £195-200m for the year to April 2006, and a profit before tax (PBT) of £3-7m, compared to previous guidance of £210-215m in revenues and PBT of £17-22m. Restated figures for FY 2005 are expected to show revenues of £190m and a break-even operating profit.The change in the accounting policy will involve "reversing" revenues of around £70m, £55m and £40m, which were recognised in FY 2005, FY 2004 and FY 2003 respectively, effectively wiping out its profits in the last few years. iSoft now expects £40-50m of these revenues to be recognised in FY 2007 and FY 2008, and the majority of the balance in the following two years. iSoft also announced that it is reviewing the carrying value of goodwill on its balance sheet and expects to make a material impairment charge.The change in revenue recognition policy has no effect on cashflow and the company still expects to report a net cash position of around £15m as at 30 April 2006. However, the new accounting policy does have a bearing on iSoft's banking facilities, and the group is in negotiations with its banks with the objective of agreeing new terms that will give it more headroom. It expects these negotiations to be concluded early next month. iSoft also confirmed today that it is making around 15% of its UK workforce redundant (150 people) at a cost of roughly £3m. In addition, it is considering the disposal of several non-core assets, including freehold properties, following on from the sale of its Swiss operation to Nexus at the beginning of the month. Comment: This is the latest in a string of negative announcements from iSoft ahead of its FY 2006 results. iSoft's share price is at another all-time low, as is confidence in the management team among investors, and it is difficult to see how all this bad news could not be affecting decisions by iSoft's existing and potential customers. The redundancies in the UK are also worrying. While the company clearly has to cut costs, iSoft, which is already stretched, will need as many good people as possible to help get its NPfIT implementations back on track. However, Tim Whiston maintains that iSoft would never put itself in a position where its ability to deliver was at risk.The Board's decision to change its revenue recognition policy is to be welcomed, but the move will be seen by many as too little, too late. The previous policy was risky under NPfIT and the new policy should lead to greater visibility over earnings in the long term. In the short term, however, the new policy reveals much lower profit margins than previously declared - the latest guidance suggests pre-tax margins of 1.5-3.5% in FY 2006, compared to 8-10% under the previous system. It looks like we'll have to wait for the company's results announcement in July to get clarity on the results of discussions about the rescheduling of its contractual delivery schedule under NPfIT and the results of iSoft's talks with its bankers. Both of these discussions could have make or break consequences for the company. In the meantime, iSoft is looking more and more like a potential acquisition target.
