CDC Corporation Reports Sixth Consecutive Record Revenue Quarter in Second Quarter of 2007
Company reports (U.S.)$103.9 million in revenues and adjusted net income of $10.1 million software business delivers 53.5% annual growth with license revenue maintaining strong organic momentum
BEIJING, ATLANTA (September 06, 2007) –
CDC Corporation (NASDAQ: CHINA) a leading Global Enterprise Software and New Media Company today announced its financial results for the second quarter for the period ending June 30, 2007.
Second Quarter 2007 Results:
* Total revenue for Q2 2007 was (U.S.)$103.9 million, an increase of 35.0% from (U.S.)$77.0 million in Q2 2006. This is the first time in the company’s history that quarterly revenues have exceeded $100 million and the sixth consecutive record revenue quarter.
* Total revenue from CDC Software for Q2 2007 was (U.S.)$88.6 million, an increase of 53.5% from (U.S.)$57.7 million in Q2 2006. CDC Software license revenues were up 86.6%, with 33.8% growth organically, compared to Q2 2006.
* Total revenue from CDC Games was $9.0 million, an increase of 17.3% from Q2 2006.
* The China.com business, which includes the portal and MVAS business, reported revenues of (U.S.)$6.3 million for Q2 2007, a decrease of 45.4% from Q2 2006. The mobile segment, as well as the overall industry sector, continue to be impacted by regulatory changes in the China market.
* Net loss in Q2 2007 was (U.S.)$ (3.2) million, compared to net income of (U.S.)$8.0 million in Q2 2006.
* Adjusted net income* was (U.S.)$10.1 million for Q2 2007, a decrease of 4.6% from (U.S.)$10.6 million in Q2 2006.
* Adjusted diluted earnings per share* was (U.S.)$0.08 for Q2 2007 compared to (U.S.)$0.09 in Q2 2006.
“This quarter was a milestone quarter in many regards,” said Peter Yip, CEO, CDC Corporation. “Not only were we able to break the $100 million quarterly revenue milestone at CDC Corporation, we took significant steps in creating value for our shareholders. We are making progress in carving out CDC Software and CDC Games. In addition, we have been buying back stock and have increased our buy back amount in the second quarter. In addition, we are exploring creative ways to further enhance shareholder value, including, but not limited to, considering a new dividend policy for CDC Corporation and its publicly traded companies. CDC Corporation has evolved to a value creation company that will prove its model, we believe, once the carve outs are complete.”
“We believe our software business has never been stronger. We are now ranked among the 12 largest enterprise and supply chain management application vendors in the world by revenues, according to a recent publication. In the quarter, our software revenues grew 54%. More importantly, license revenues were up 87%, with organic license revenue growth of over 34%. The momentum in license revenue growth over the last 12 months has surpassed our expectations, and has actually shown an accelerating trend. In addition, we continue to make selective and strategic acquisitions such as Saratoga and the recently announced Catalyst deal. We will continue to make these types of strategic acquisitions that give us new solutions, expand our geographic presence and expand our vertical reach.”
“We are very excited about our online games business as we believe we have one of the most attractive pipelines in the industry,” Yip continued. “We have recently launched Special Force which we believe has the potential to become a top 10 game in the China market. We recently acquired Optics which gives us three additional revenue generating games as well as several other games in the pipeline. With Optics, we are in the final stages of an aggressive launch schedule in 2007 and into 2008, which will introduce games such as Lord of the Rings Online(TM) to the China market. These new game launches will give us improved diversity across our online games portfolio. Also, we have recently announced our intention to invest in Xnet, who was chosen to develop games for the 2008 Olympics in China and which we believe has one of the best 3-D engines in the industry. Finally, we recently launched CDC Games International and CDC Games USA leveraging the CDC Games infrastructure, to take this business segment global and target gaining a leadership position in the online games industry.. With these investments, our intent is to make CDC Games one of the top global online games companies in the world.”
Revenue and Operating Metrics Summary
CDC Corporation
On a consolidated basis, for the second quarter the geographic breakdown of revenues for CDC Corporation is as follows: Asia Pacific contributing 26 percent or (U.S.)$27.1 million, the Americas contributing 50 percent or (U.S.)$52.1 million and Europe Middle East and Africa contributing 24 percent or (U.S.)$24.7 million.
In the second quarter, the company had lower operating and net margins. This was primarily due to the impact of lower revenues at China.com’s mobile division as well as the launch of Special Force and expenses relating to other marketing initiatives at CDC Games. The launch of a new game requires a substantial marketing investment to grow the base of registered users and subsequent, ongoing revenue streams. In addition, CDC incurred several one-time costs associated with the restatement of financial results for 2004 and 2005. Moreover, the company incurred additional costs associated with the process of carving out CDC Software and CDC Games. These are regarded by management as investments in a growing company, necessary to execute our strategy and re-align the organization to create additional shareholder value.
During the second quarter, the company bought back 1.4 million shares at an average price of $8.91 per share. This brings the total amount purchased to date to 7.5 million shares for a total price of $40.4 million.
CDC Software
Total software revenues in Q2 2007 were (U.S.)$88.6 million, an increase of 53.5 percent from (U.S.)$57.7 million in Q2 2006. Software license revenues were (U.S.)$18.6 million, maintenance revenues were (U.S.)$21.2 million, software consulting and services revenues were (U.S.)$24.6 million, and business services revenues were (U.S.)$24.2 million. The company achieved record license revenues in Q2, which were up 86.6 percent year over year, and 33.8 percent on an organic basis. Gross margin for CDC Software, excluding business services and non-cash amortization of purchased technology, during Q2 2007 was 60.6 percent compared to 57.0 percent in Q2 2006. Gross margin for the business services group was 24.0 percent, compared to 32.4 percent in Q2 2006.
CDC Games
Total online game revenues during Q2 2007 were (U.S.)$9.0 million, an increase of 17.3 percent from Q2 2006, when the company generated revenues of (U.S.)$7.7 million. Gross margin of online games in the second quarter of 2007 was 48.2 percent, excluding non-cash amortization of purchase technology, compared to 67.8 percent for Q2 2006. The lower gross margin is due to the launch of a new game in the second quarter as well as slightly lower revenue.
CDC Mobile
Total MVAS revenues during Q2 2007 were (U.S.)$3.4 million, a decline of 65.3 percent from (U.S.)$9.7 million in Q2 2006, as this segment was hurt by continuing regulatory changes in China. Gross margin in Q2 2007 was 38.8 percent, compared to 57.3 percent in the same quarter last year.
China.com Portal
Total revenues for the China.com portal and Media Services during Q2 2007 were (U.S.)$3.0 million, a 57.2 percent increase from (U.S.)$1.9 million in Q2 2006. Gross margin for the China.com portal during Q2 2007 was 60.7 percent, up from 48.2 percent for the same quarter last year.
Operating Unit Summaries
CDC Software Operating Summary
Software, consulting and services revenues were geographically spread, with the Americas contributing 60 percent of the total, and the rest of the world at 40%.
During the quarter, CDC Software signed a total of 82 new customers for enterprise software applications and 256 new customers for add-on and departmental software solutions. Also during the quarter, the company signed upgrade and expansion agreements with 344 enterprise software customers.
New customers, the barometer of health of a software company, accounted for 54 percent of total software license revenue for the quarter. The company continues to deliver a high percentage of sales attributable to new customers, and believes that this metric ranks among the highest in the enterprise software industry. In addition, the company believes that this success is a reflection of CDC Software’s strategic positioning as a specialist in targeted vertical industries. New customers of note included ADI Alternative Investments, Calyon Financial, CompuCredit, Frankfort Candy, Helzberg Diamonds, HP Hood, Nijnekamsk Shina, Rocky Mountain Chocolate, Royal & Sun Alliance, Shearer’s Foods, Sokol Foods and Vredestein.
Repeat business with existing customers accounted for 46 percent of total software license revenue for the quarter and grew by 68 percent compared to Q2 2006. As the company’s base of customers continues to grow through new sales and through acquisitions, repeat business is also expected to grow as a percentage of total revenue over time. Customers with expanded and repeat business during the quarter included Ahlsell AB, AXA Insurance, Barclays Bank, Cheesecake Factory, Greencore Group plc, HealthPartners, Julius Baer, K12, Kluber Lubrication, North Shore Credit Union, Nucor, Pacific Life, The Principal Financial Group, SunTrust and WebEx.
In April 2007, the company announced the acquisition of Saratoga Systems, a leading vendor of vertical CRM solutions with approximately $25 million in annual sales. The target industry verticals of Saratoga are highly complementary to those of CDC Software’s Pivotal solution. The Saratoga CRM applications are also highly complementary to the Ross Enterprise solutions for chemicals manufacturers, and the recently acquired Respond applications for complaint and feedback management.
Organic growth of CDC Software has been accelerated by the company’s acquire-focus-grow strategy and acquisitions that expand the depth of vertical industry solutions. Organic license revenue growth was 34 percent in the second quarter of 2007. After three consecutive strong quarters, the company delivered another record license revenue quarter in Q2 2007.
Overall maintenance retention rates exceeded 90%, indicating a high degree of customer satisfaction which resulted in continued growth in maintenance revenues. The company’s maintenance retention rates are better than the industry average for maintenance retention which is believed to be approximately 85%.
During Q2 2007, CDC Software launched CDC Factory, the first packaged manufacturing operations management solution that integrates finite factory scheduling, manufacturing execution systems (MES), real-time performance management, quality, maintenance and analytics processes to all users. The company believes CDC Factory represents a significant new class of systems in manufacturing operations management. The company is planning to target additional vertical acquisitions and to continue investing in research and development to pioneer additional vertical solutions.
In April, the company announced that it hired Roy B. Goodman as chief financial officer (CFO) and Alan MacLamroc as chief technology officer (CTO) of CDC Software. Goodman comes to CDC Software from RealNetworks, a global provider of network-delivered digital media products and services, as well as software products and services. Goodman served as RealNetworks’ CFO, where he oversaw accounting, finance, investor relations, facilities and operations. Goodman brings more than 25 years of financial management experience, with nearly 10 years experience as a CFO, including at two publicly traded companies. As CTO of CDC Software, Alan MacLamroc will be responsible for product management and product engineering and will be leading a development staff located around the globe including in North America, India and China. MacLamroc has more than 20 years of technology management experience, including seven years serving as CTO at CompuCredit, an information and technology-driven provider and direct marketer of branded credit cards and related fee-based products and services. Prior to CompuCredit, MacLamroc served as CTO for MAPICS, Inc., an enterprise business software provider.
In the third quarter of 2007, CDC Software announced that it has entered into a definitive agreement to acquire Milwaukee-based Catalyst International, a leading provider of supply chain execution solutions and services. With approximate annual revenues of (U.S.) $35 million, the acquisition of Catalyst is expected to be immediately accretive to CDC Software upon completion of the acquisition, which is expected to happen shortly.
China New Media Operating Summary
With a differentiated combination of online games, portals and mobile applications, CDC’s China New Media Business Unit, which includes China.com, is positioned to take advantage of the burgeoning demand for online services and entertainment in the China market. China New Media is focusing on entertainment for both young adults and professionals by leveraging its extensive distribution network to achieve its growth objectives.
CDC Games
During the quarter, CDC Games’ online game segment generated sales of $9.0 million and surpassed 100 million registered users. Yulgang, China’s first major “free-to-play, pay-for-merchandise” online game continues to post strong operating metrics since its commercial launch in July 2005, despite the fact that it is now over 2 years old. Registered users of the game have grown from 48.3 million in Q1 2007 to 53.8 million as of the end of June. Revenue from the game was US$9.0 million in Q2 2007 which was down 6% from $9.6 million in Q1 2007, but up 17% from Q2 2006.
Beginning in the third quarter of 2007, the company did see a drop in revenues in Yulgang primarily due to unauthorized servers offering Yulgang as well as the need to update the current version of Yulgang. CDC Games has since taken steps to crack down on unauthorized servers and has also updated Yulgang to version 180. The company is optimistic that the new products and features offered in version 180, such as enhanced clan features which promote play and formation of user groups, may result in increased revenues per user.
In addition, CDC Games launched Special Force on June 20th. Special Force is a free to play game, and it is the first first-person-shooter online game in China. It was the top ranked online game in Korean Internet cafes for 52 consecutive weeks. Since its launch, CDC Games has generated approximately 4.5 million registered users. As of September 1, 2007, Special Force achieved average concurrent users of approximately 13,500, peak current users of 22,000 and unique visitors of 180,000. Each of these metrics represent record high results the game has achieved since launch.
During the third quarter, CDC Games acquired Optics, which was a subsidiary of CITIC Pacific. Optics operates 3 games in the China market which together have more than 40 million registered users. In addition, Optics has more than 5 new games in the pipeline scheduled for launch in the near future.
Additional new games scheduled for release throughout 2007 and in early 2008 are anticipated to further grow both registered and concurrent users. The planned games to be released over the next 6 months include, Chaosgem, Deco Online, Xeros, and The Lord of the Rings Online(TM). In addition to these new games, the company has also invested in games developers Gorilla Banana, Auran and MGame which further enhance CDC Games’ pipeline and provides an avenue through which it can expand to become a distributor of games.
CDC Games announced on August 28, 2007, the launch of CDC Games International to publish online games on a global scale. CDC Games USA, a subsidiary of CDC Games International, will focus on launching new games, both directly and through publisher partners. The new business unit has entered into a memorandum of understanding with K2 Network, Inc., a leading publisher of online, free-to-play games in the western hemisphere, to evaluate opportunities for publishing selected game titles in North America.
CDC Games has also entered into a letter of intent with Xiakexing Network Technologies Co, Ltd. (“XNet”), a leading China-based developer of online games and innovative games technologies, to invest in the company through the CDC Games Studio program. According to the letter of intent, CDC Games will have exclusive global distribution rights for all games developed by XNet.
CDC Mobile
As noted in prior announcements, the company was alerted in June 2006 to policy changes for all subscription services on China Mobile’s (“CMCC”) Monternet platform which affected the company’s MVAS subscription services. The changes, which were implemented under the policy directives of China’s Ministry of Information Industry, aim to address industry-wide objectives, including reducing customer complaints, increasing customer satisfaction and promoting the healthy development of the MVAS industry and CMCC’s Monternet. These industry wide reforms continued to negatively impact this segment’s results. As a result, MVAS revenue declined 65.3 percent to (U.S.)$3.4 million in Q2 2007, from (U.S.)$9.7 million in Q2 2006.
Looking forward, the company believes the MVAS industry will consolidate towards a smaller group of more stable service providers which will ultimately benefit CDC Mobile’s business in the long run.
China.com Portal
CDC’s China.com portal continues to strengthen its role as China’s Portal for Professionals and a strategic foundation for CDC’s China New Media Businesses. In the second quarter, the portal generated sales of (U.S.)$3.0 million, an increase of 57.2 percent year over year, compared to (U.S.)$1.9 million in the second quarter of 2006.
Guidance
2007 Guidance
We are withdrawing 2007 guidance and you should no longer rely upon the guidance previously issued. In addition, at this point in time the company is unable to provide new guidance because adjusted net income is highly variable and difficult to predict for a number of reasons, including the effects of carve-outs; the new dividend policy the company intends to implement; mergers and acquisitions activity; predictability of the CDC Games results given the upfront costs associated with launching a new game; regulations in the mobile value added services sector; and others.
Looking forward, as CDC Corporation continues its transition from an operating company into a value creation company, management believes that it will be more appropriate to provide separate operating guidance for each individual operating company, such as for CDC Software and CDC Games. In the interim, CDC Corporation is providing additional operating metrics for CDC Software to aid in understanding software business trends. Next quarter we will expand CDC Games disclosure in a similar manner, and also publish additional metrics such as revenue per account, number of paying accounts, revenue outside of China, and growth in Optics since acquisition.
Once the carve outs are completed, the company plans to initiate guidance for the individual operating companies.
Conference Call
The company’s senior management will host a conference call for financial analysts and investors, today, Thursday, September 6, 2007 at 8:30 am EDT.
USA-based Toll Free Number: +1-888-603-6873
U.S. Toll Number: +1 973 582 2706
Passcode: 9132747
Call Leader: Monish Bahl
This call is being webcast by CCBN and can be accessed at CDC Corporation’s corporate web site at www.cdccorporation.net.
The webcast is also being distributed over CCBN’s Investor Distribution Network to both institutional and individual investors. Individual investors can listen to the call through CCBN’s individual investor center at www.fulldisclosure.com or by visiting any of the investor sites in CCBN’s Individual Investor Network. Institutional investors can access the call via CCBN’s password-protected event management site, StreetEvents (www.streetevents.com).
Instant Replay
For those unable to call in, a digital instant replay will be available after the call until September 18, 2007. U.S. based Toll Free Number: +1 877 519 4471 U.S.-based Toll Number: +1 973 341 3080 Passcode or PIN #: 9132747
CDC Corporation
Consolidated Statement of Operations
(Amounts in thousands of U.S. dollars except share and per share data)
Three months ended.
June 30,2006
(Unaudited)
Three months ended.
June 30,2007
(Unaudited)
Revenues
Software
42,803
64,401
Business services
14,937
24,221
Mobile services and applications
9,676
3,359
Internet and media
1,876
2,950
Online Games
7,671
9,001
76,963
103,933
Cost of revenues
Software
(18,402)
(25,391)
Business services
(10,100)
(18,418)
Mobile services and applications
(4,134)
(2,057)
Internet and medis
(971)
(1,158)
Online Games
(2,469)
(4,666)
Amortization of purchased technology
(2,068)
(1,490)
(38,144)
(53,181)
Gross profit
38,819
50,752
Gross margin %
50%
49%
Selling, general and administrative expenses
(27,473)
(40,289)
Research and development expenses
(4,016)
(6,514)
Depreciation and amortization expenses
(2,739)
(4,184)
Restructuring expenses
(228)
(657)
(34,456)
(51,643)
Operating income/(loss)
4,363
(891)
Interest Income
1,576
4,735
Interest expense
(98)
(3,517)
Gain on disposal of available-for-sale securities
205
135
Impairment of available-for-sale securities
