Siemens issues profit warning, highlights IT risks

IT and engineering Siemens has issued a profit warning, after the Department for Work and Pensions cancelled an £65m contract with the company.

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Siemens, the IT and engineering giant has issued a profit warning and cited UK contracts as contributing to its problems.

The German company has warned that earnings for the current quarter will be €900m (£692m) less than expected, following a review of projects at its power generation, mobility division and IT Solutions and Services (SIS) operation.

Last week, the Department for Work and Pensions axed a contract with Siemens. The contract was to develop a new central payment system that would oversee the £110 billion in payments made to 17m people each year.

In a conference call today (17 March), Siemens CEO Peter Loescher, said "unexpected risks" have arisen in existing orders, including some orders in Great Britain.

Loescher said the SIS division accepted an €85m order in March 2006 to put an entire payment system for DWP on a new IT platform by 2010. "At the beginning of March this contract was cancelled after it became clear that on time completion of this project was not realistic for many reasons."

The DWP may not be the only UK project to carry risks for Siemens. Loescher said the SIS unit has assured the management board that no further projects with such risk profiles exist.

"However, while screening other projects in Great Britain, SIS found risks of smaller scales on smaller orders. If you add these risks to DWP, the total burden could be substantial."

Ovum analysts, Cornelia Wels-Maug and Georgina O`Toole, commented on the profit guidance.

"SIS specifically is affected by charges of €100m (£78.52m). But unlike the other troubled divisions, SIS's loss is down to a single isolated project cancellation and is not a sign of widespread contractual delivery issues," said Ovum.

"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' organisations such as HMRC and Defra. This cancellation, therefore, has broader implications."

"The cancellation will also inevitably impact Siemens' reputation at a time when it will be hoping that its involvement with major organisations such as DWP will have had a positive influence on its success at winning a share of the spend in relation to the National Identity Scheme."

The profit warning represents a major setback for Siemens, which is in the midst of a thorough restructuring.

Loescher, who took over as chief executive last year, has been attempting to slim down the company by culling the management board and reorganising the company into three divisions from 10. Last month Siemens announced plans to cut 3,800 jobs at its corporate telecom unit, which the company has been attempting to sell.

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