UK cancels project with SIS, Siemens cuts profit forecast

Yesterday Siemens Group's CEO Peter Löscher announced that the company has revised its profit guidance due to project write-offs in the region of €€900 million during the current quarter (Q2) of the 2008 financial year. The primary source of concern was from the Fossil Power Generation and the Mobility divisions. However, the cancellation this month of a contract with the UK Department for Work and Pensions, originally worth €€85 million, has also contributed to this downward revision.

Siemens won the contract in early 2006 and was due to develop the system as well as provide ongoing system management and maintenance through to 2010. According to a written parliamentary answer (on March 5th), the DWP project, to provide a Central Payments System, was due to be completed by October 2006 but is now unlikely to be finished until December 2010. In addition, the project is 70% over its €114.2 million/£90 million initial budget, with an estimated final cost of €194 million/£153 million.

Comment: CEO Peter Löscher is not only aiming to clear up the company-wide bribing scandal, which has revealed wrong-doings in many more divisions than initially suspected, but he also wants to ensure that the company's profitability targets for 2010 will be met.

As part of this, the company has begun the current quarter with a thorough revision of major projects, particularly in the Fossil Power Generation and Mobility sectors, and in Siemens IT Solutions and Services. Though only 39 projects out of a total of 62 have been reviewed so far, they represent about 80% of the sales volume and CFO Joe Kaeser couldn't rule out that the continued investigations, which are expected to be completed by the end of March, will not add to the write-offs. However, he is adamant that they will not be substantially more than the quoted sum of €€900 million.

SIS specifically is affected by charges of €100m. But unlike the other troubled divisions, SIS' loss is down to a single project cancellation and is not a sign of widespread contractual delivery problems. The key issue is that Siemens was hoping to use its experience at DWP to offer similar solutions to client recipients of DWP such as Jobcentre Plus and other 'funds flow' government departments such as Her Majesty's Revenue and Customs (HMRC) and Defra, hence this cancellation has broader implications. It will inevitably impact Siemens' reputation at a time when it will be hoping that its involvement with major organisations such as DWP would have helped it win a share of the forthcoming multi-million pound National Identity Scheme.

Georgina O'Toole, Senior Analyst and Cornelia Wels-Maug

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