RJH writes...

Since the iSoft post in February, there have been several notable developments:

* one of its "partners" on the poisoned-chalice National Health Service
(NHS) contract, Accenture, itself warned on profits and blamed, partially, iSoft

* the iSoft share price suffered a day of what looks like manipulation on 6 April

* the iSoft house broker has warned that accounts may be restated

* at least one press article complains of opacity on the part of management citing as evidence the unknown position of the firm's off balance sheet multi-currency revolving £85m credit facility

iSoft have collected £47m of £109m of recognised revenue from the NHS contract thus far. The difference is about equal to what net current assets were at the half. Presumably the restatement - for surely it is coming if the house broker Bridgewell feels obliged to mention it in client notes - will back out some proportion from both receivables and revenue.

Unless the finance team is putting in an Olympian performance in non-NHS credit collection, positive operating cash flow looks wishful thinking in this scenario. The balance sheet will also appear greatly weakened from the last photo and - add in the factor of the likely 100%+ used position of the revolving credit facility - the issue of banking covenant renegotiation presses.

Take one step back from this din and the question becomes this: is iSoft suffering a crisis of solvency or liquidity?

Long-term debt falling due in 2007 is approximately £13m, and that looks a painless repayment. It is guesswork to assess the impact of a (perhaps) fully used revolving credit facility without data. However, barring fraud it is difficult for this scribe to envisage that the nature of such a facility (principally to provide short term liquidity) would contribute fatally to iSoft. The catastrophe that is the NHS deal means iSoft have anaconda-like swallowed a goat; but, assuming flexible bankers, the firm's existing operations can generate sufficient cash to work off the debauch.

Isoft's is therefore a liquidity crisis and, as bad as matters have become, iSoft management should turn the situation into an opportunity by clearing the financial decks with a conservative set of accounts for end-April 2006. More prudent and thoughtful communication starting with the April pre-close statement would not go amiss either. Few have lost jobs by under-promising and over-delivering.

The scribe owns shares in iSoft plc

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