More on EMIS Profit Warning

A few days ago I commented on the announcement by EMIS Group that warned about a failure to meet customer service levels and a possible hit to profits as a result of up to £10 million. As I said at the time, I wrote to the Chairman and asked several questions. Today I received a response by letter from Peter Southby, CFO. He has been there since 2012 it is worth noting.

The letter was the typical “brush-off” that individual investors tend to receive – for example it commenced: “I am afraid we are not able to respond to questions from individual shareholders on this matter for standard reasons around customer confidentiality and commercial sensitivities”. So I phoned him up and reassured him I was not seeking inside or price sensitive information. He then proved more amenable. This is what I learned:

The failure was to meet service level agreements with NHS Digital for the GP software (EMIS Web). The current contract was signed in 2014 but there was a previous similar contract.

EMIS discovered the problem themselves, following a review of customer services, rather than the client reporting it. The issue is a “low level” service issue, and not a critical item to the customers who have not been impacted significantly. The problem was not known to senior management until it was recently reported (certainly the CFO was not aware of it). It is not currently known how long the failure to meet contract terms had been running. They are working to get back within the contract terms as soon as possible. As regards the past failure and associated financial liability, it is possible the customer will accept an alternative rather than a cheque – for example, provision of software enhancements. But that is subject to negotiation.

EMIS have an active “user group” and the problem has apparently been discussed with them already.

In my original note I suggested auditors KPMG might have been at fault for not picking up this problem in their last audit, but it does sound as though that might not have been possible. However I suggest that is a question to be revisited later and it still leaves the issue of major risks not being noted in the Annual Report.

In conclusion, the problem may be less serious than first apparent, although there is still a risk in this kind of situation that more issues may be discovered the more investigations are performed. Will have to wait and see for the moment.

One thing I am certain about though, which is why I like the company. The GP end-users would hate to switch to another software product. Admittedly EMIS will have to negotiate their way out of this difficulty with NHS bureaucrats rather than end-users but when an on-going relationship of some years standing is in place, then some horse trading is the usual outcome. I’ll have to ask my GP what he knows about this problem next time I see him.

Just one final point: If you get the kind of response I got, then it’s always worth a phone call. Personal contact can make the difference.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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