West Midlands software firm Misys saw its shares plunge yesterday after it warned of a big drop in first-half earnings.
Evesham-based Misys - which employs more than 6,000 people worldwide - said it was not certain the shortfall would be made up in the second half.
It blamed its banking division for the performance, saying the business was likely to be hit by delays in recognising revenues and by increased investment on product development and on expanding its professional services business.
Misys, which also has a healthcare division, said that as contracts became larger and more complex, the timing of their signing became less predictable and revenue recognition occurred over a longer period.
Executive chairman Kevin Lomax said Misys had to incur costs for hiring people, research and development and building skills but did not have the income at the start of the contracts to cover it.
"Conditions in each of the markets Misys serves have been broadly unchanged since July, when we issued our preliminary results," he said.
"From our experience in the first quarter, however, it is now clear that the first half performance in the banking division will be adversely affected by two factors: a delay in revenue recognition and the increased investment in the business which is principally on product development and on expanding our professional services capabilities.
"As previously indicated, as contracts become larger and more complex, the timing of contract signing becomes less predictable and revenue recognition typically occurs over a longer period.
"In line with this trend, revenue recognition on a number of larger banking projects will now occur later than anticipated."
Analysts cut their profit forecasts, with many faulting the company for not having a proper grip on the phasing of revenues from its contracts.
"A big profits warning from Misys," said Bridgewell Securities analyst Kevin Ashton as the brokerage cut its earnings per share forecast for the year to May 2006 by some 15 per cent to around 14 pence.
Following the update, shares in the company fell more than 18 per cent, giving Misys a market value of about £1 billion. Before the statement, shares had risen some 14 per cent so far this year, outperforming UK software sector peers by some three per cent during the same period.
Analysts said the surprise profit warning had dented management credibility and hurt the stock.
"It is effectively dead money from here. People are going to invest in stocks which they can see offering a more secure growth profile. At the moment you can do better in this sector," said one analyst, who asked not to be named.
The company, which was last week forced to abandon plans to award retention bonuses to two key executives, said conditions in each of its markets had been broadly unchanged since July, when it issued its annual results, with pretax profits down from £94 million to £91 million.
Even at the banking division, Misys said its order pipeline and order book were strong. The firm has previously spoken about a modest recovery in the banking market after three years of declining IT budgets.
Misys, which in July reported earnings towards the top end of forecasts, said trading conditions in its other businesses remained on track.
