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April 10, 2005

NHS losses blight strong Accenture results

IT services giant Accenture reported soaring revenue and net profit for the second quarter of its fiscal quarter of 2005, but its progress was hampered by the revelations of serious problems with at least one of its two major NHS contracts.

By CBR Staff Writer

While revenues increased 14.5% to $4.22bn for the three months to the end of February, compared to the year ago quarter and net income increased to $209.8m from $123.1m, the Hamilton, Bermuda-based company’s operating margin (excluding reorganization benefits and restructuring costs) fell to 11.4% from 12.6%.

Accenture said that the operating margin fall was down to three factors: problems with the NHS contract; cost-overruns regarding developing reusable assets on some contracts; and delivery inefficiencies, including staffing issues.

The most concerning of the three is undoubtedly its NHS contract problems. In December 2003 Accenture signed two major NHS contracts, to design, develop and deploy patient administration systems for the Eastern ($1.75bn) and North East ($2bn) regions of England.

In a conference call the company revealed that its contracts with the NHS would make a loss of between $110m and $150m in the current fiscal year, and that losses would continue in 2006. The deals would turn around in the following year, contributing to profits in 2008.

Accenture’s CFO Michael McGrath said on a conference call that it had experienced temporary delays in our ability to deploy as planned, a number of systems components, and that the costs incurred in building the infrastructure was significantly above estimates. It currently has $349m in client financing and assets relating to the NHS on its balance sheet and by the end of the year it expects this to rise to between $400m and $460m. These costs are for capital expenditure which it will bill the NHS as ithe assets amortize over the length of the contract.

When asked by an analyst whether the contract problems were down to Accenture or its main subcontractor BT, the company refused to comment. One of the curious areas of the NHS contracts is that the vendors are bound by the draconian terms of the UK’s Official Secrets Act not to disclose the terms and conditions of the deals. If the problems escalate, shareholders of the vendors concerned are likely to get very anxious about the lack of transparency, and should one of the subcontractors get into difficulty, legal disputes could arise which would challenge the secrecy of the deals.

While Accenture said that it relationship with NHS was terrific, it revealed that it was currently working with the NHS on alternative deployment plans and financing arrangements.

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Robert Morgan, who heads up London-based outsourcing advisory firm Morgan Chambers, told ComputerWire that at least two other suppliers involved in the NHS deals were takng heavy losses, and that Richard Granger, Director General of NHS IT had been ruthlessly effective on getting suppliers to effectively fund the reinvigoration of the NHS.

Despite its problems, Accenture said that it achieved bet revenue growth across all three of its geographic regions and all five of its operating groups. Its financial services unit performed especially well over the quarter with sales increasing by 33%, and its products group sales were up 19%. EMEA had a particularly strong quarter, up 27% in US dollars and 17% in local currency, with UK up 22% and Spain up 21%. Germany and Italy also achieved double-digit growth.

The company also reported buoyant contract signings, with $4.88bn in new bookings during the quarter, with stellar growth in its consulting business which was up 43% to $2.81bn. Outsourcing contract signings were flat at $2.07bn, perhaps reflecting the trend in the market place away from mega deals. CEO Bill Green said it was signing smaller outsourcing deals, but that volume and velocity of the opportunities continue to be good. Its sales pipeline was at an activity level higher than it has been in years, he said. We are winning in the market as many of our competitors struggle or are distracted.

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