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CDC Corp. (NASDAQ:CHINA)

Q1 2006 Earnings Conference Call

May 25 2006, 9:00 am EST

Executives

Scot McLeod - SVP Global Marketing

Peter Yip - EVP, CEO

Xiaowei Chen - General Manager of China.com

Verome Johnston - CFO

Eric Musser – EVP, Strategy

Richard Thomas - SVP, Asia-Pacific

Analysts

Jack [Geing] - [Kwazara] Capital Management

Bert Hochfeld – HIRG

Michael Mankowski - Tier 1 Research

Ming Lu – Riedel Research

Presentation

Operator

Good morning, ladies and gentlemen. My name is Nelson and I'll be your conference facilitator today. At this time I would like to welcome everyone to the CDC Corporation first quarter earnings conference call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Scot McLeod. Sir, you may begin your conference.

Scot McLeod

Good morning, everyone, and thank you for joining us for the conference call today to discuss our results for the first quarter of 2006 and provide guidance for the second quarter.

With us today is Mr. Peter Yip, Chief Executive Officer of CDC Corporation and Executive Chairman of CDC Software.

Please note that this conference call will be recorded and available for playback via the Internet by visiting our corporate website which is www.CDCcorporation.net.

As customary before we begin, please allow me to take a moment to remind you that certain statements made during this conference call and webcast may constitute forward-looking statements which are based on management's current expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to differ materially, including risks that may be beyond the Company’s control.

This includes but is not limited to economic factors affecting business spending and the risks referred to in the Company's filing with the Securities and Exchange Commission.

Now it's my pleasure to introduce Mr. Peter Yip who will take you through our results for Q1 and our outlook for Q2 and then we'll be pleased to take your questions. Peter, please go ahead.

Peter Yip

Thank you, Scot and good morning, everyone. This morning I would like to focus on our results for the first quarter of 2006. Additionally, we will provide guidance for the second quarter.

Today, I am also joined by Dr. [Chen], General Manager of China.com. In a few minutes, Dr. Chen will provide an overview of the operating highlights for the first quarter for China.com.

As you have seen in the press release earlier this morning, our first quarter results reflect very strong earnings growth. Overall our revenues are up to $64.6 million, approximately a 15% increase compared to the first quarter of 2005. Revenue for CDC Software was up almost 14% to $53 million as compared to a year ago. Revenue for China.com was up almost 20% to $11.5 million as compared to the same period a year ago.

I am indeed very pleased with this quarter’s performance in both our global enterprise software business and the China-based mobile application and online gaming businesses. We have delivered solid year-over-year growth and improvement in all important financial metrics.

Looking ahead, we are optimistic on the Company’s outlook for the remainder of 2006 and beyond. In the first quarter, we have completed our strategic review of CDC Corporation and as a result, our cost structure has never been better. A new strategic partnership with Microsoft as well as our recently launched CDC Franchise Partner Program are expected to provide additional traction in our distribution channels in broadening our reach in our target growth markets around the world.

Additionally, the momentum in our core businesses and our financial flexibility from our strong balance sheet is giving us confidence in our ability to achieve our operating plan and our growth objectives for 2006.

Because our confidence in the performance of the Company going forward, our Board of Directors recently approved the extension of our 2005 stock repurchase program. The program authorized the repurchase of up to $20 million of the Company’s common share for an additional 12 months until May 2007.

So far, the Company has purchased over 1 million shares. Additionally, the senior management team, including myself, have bought over 440,000 shares during the last three months. This demonstrates and reflects the Company’s confidence in the Company, as well as myself and all of my management team. Later on in the presentation I will outline some of the key steps we are taking to improve our shareholder value. I am now turning over the presentation to Dr. Chen for a review of our China.com operating unit.

Xiaowei Chen

Thank you, Peter. Let’s bring our attention first to our mobile value-added services. As we can see, traditionally Q1 is a slow quarter due to the holiday season in China. However, in this last Q1 of 2006 we grew revenue by 21% year-over-year. Our biggest contribution actually came from WAP, which represents mobile Internet, which grew 36% quarter-over-quarter or 79% over the same quarter last year.

Two points I would like to call your attention to in our mobile value-added services are: first, we more evenly distributed our revenue sources. Instead of being SMS heavy as in Quarter One 2005, we have now shifted more towards WAP and MMS which ride on newer technologies.

The second point I would like to call your attention to is that we also focused on developing our own content. In music, we licensed exclusive rights for ringtones from a number of popular singers which contributed to our WAP growth. In video content, we hired a production team from former CCTV editors, producers and other talent from top institutions in China. This production team is now creating a show similar to Jon Stewart’s Daily Show in the U.S. It just came online in October and has received popular user attention and enthusiastic responses. We are now positioning this show as tailor-made mobile video content for 3G’s imminent arrival in the China market.

Let’s now turn to our games business. Since the launch of Yulgang last July, we have suddenly become the industry innovator and leader in the new business model of free-to-play games. Our major competitors have followed suit. As you can see from the game side, every vital sign is showing a continued growth trend. Our peak concurrent users have surpassed 330,000 up 27% compared to last quarter. We cannot compared to Q1 2005 because at that time, the game had not been launched yet.

Our registered user number has totalled 22 million in this quarter, up 47% from last quarter. Our number of merchandise sold totalled 7.4 million, up 196% compared to Q4 of 2005 and our server groups throughout China supporting Yulgang numbered 43, up 19% from Q4 of 2005.

Furthermore, our game revenue has also kept up the growth trend and it grew nearly 60% QonQ. This is not reflected, however, in our Q1 2006 earnings statement as we did not consolidate Yulgang until the end of the first quarter 2006.

At the end of the first quarter, we fully acquired the remaining shares of 17game, and have now become 100% owners of this business. This acquisition demonstrates our commitment to the rapidly growing online gaming market in China, and is just another step in our strategy to be the market leader of online and mobile games in China. This acquisition also allows us to leverage Yulgang’s growing base of 22 million registered users, and its extensive national coverage and support of 43 server groups for organic growth where we can employ the strong cash position to make targeted acquisitions.

Now taking a closer look at our portal business. As you can see, we focused our attention on four strategic points:

  1. Building China.com’s Chinese website as a portal for Chinese professionals.
  2. Build our English channel as a global gateway to China.
  3. Leverage the value of our domain name and build City.China.com, Country.China.com and brands.China.com url services.
  4. We are preparing for the launch of new products and services to existing enterprise clients.

Let me just say that all four strategic points center around one word: differentiation. We differentiate by user groups. Our core user group is highly educated professionals with an average age of 26.5 years, which is quite old by Chinese Internet standards. We also have developed a lifestyle channel and entertainment content that targets this group. We also differentiate with our strengths, which is our valuable URL name that we own. We have developed a domain name strategy, as I just pointed out.

Our Italy.China.com channel, which was launched on March 15, 2006 brings viewers Italian-specific content such as fashion, music, tourism, football, and gourmet and also provides a platform for Italian and European merchandisers to reach the Chinese consumers. Today, less than two months after it was launched, the Italian channel as part of our lifestyle channel averages over 0.5 million page views per day.

Our Korea.China.com Channel is planned for launch at the end of this month. In addition, we also leveraged our sister company, CDC Software’s strength and are preparing to launch the first software as a service to our existing 1,700 enterprise clients.

Now let me turn it back over to Mr. Peter Yip, the CEO of CDC.

Peter Yip

Thank you. Thank you for the update on China.com. Earlier, I mentioned that we are exploring every opportunity for unlocking shareholder value within the Company. One of the options we are investigating involves the potential separation of CDC Games into a stand-alone company. We are working with financial advisers to identify the best course of action. A potential opportunity we are considering is a separate listing for CDC Games on a European stock exchange such as the London Stock Exchange. We anticipate the completion of our planning for these coming months, and we will share with you more details as these develop.

Now, let me turn the attention back to the CDC Software operating unit. During the first quarter, we embarked on a new branding effort for CDC Software as a customer-driven company. This rebranding effort reflects the high rate of customer satisfaction and our deep commitment to our customers.

This also reflects the fact that our applications and our services are indeed helping our customers to succeed as a customer-driven company. As the markets we are serving are becoming increasingly competitive, our industry-specific enterprise software applications are used to gain competitive advantages through a high level of customer service and satisfaction.

As part of our branding effort, we have launched a new website at www.CDCSoftware.com. On that website, you can see many, many stories of the benefit of our customers are gaining every day as they continue improving their competitive positions.

Taking a closer look at some of our key operating metrics. Once again, we see that our top line revenue growth is driven by business from both the new customers and repeat business from our existing, satisfied customers.

We have signed 55 new enterprise customers during the quarter resulting in 43% of our total software license revenue coming from new customers. Compared to many of our peer competitors, who have reported anywhere between 9% to 25% in new customer license revenue, we believe our unique revenue mix is a clear indication of our continued above average organic growth in new business.

Additionally, our average software license for new customers continued to hold steady and we see this as another sign that our industry expertise and our specialized applications are highly valued in a market that is becoming increasingly diluted by generalized applications that only offer a marginal out-of-the-box fit to the industry-specific requirements required by many of our customers.

As our family of customers continues to grow, we continue to expand our maintenance base and continue to build a larger customer base for back selling new products. The growing customer family also creates more opportunities for selling value-added services from our business services division.

In China, we have signed 16 new software customers resulting in a 24% increase in CDC software revenue in China as compared to the same period a year ago.

The rapid economic growth in China represents a significant opportunity for enterprise software and we believe that CDC Software is in the ideal position to capture that opportunity. We are indeed in the right place at the right time.

Our software license and service businesses, with our current base of customers, performed very well during the quarter. On a worldwide basis, over 150 existing customers upgraded or purchased additional software licenses from us. Our industry focus and our continued investment in industry-specific applications is highly valued by our existing customers and this is reflected in our high customer satisfaction rate and continued investment from our customer base.

As we have outlined before, our solution and our acquisition strategies are focused in three key areas which include:

  1. Expanded ERP and supply chain solution for the process manufacturing industry.
  2. The industry-specific CRM solutions.
  3. Our outsourced business services, which are highly complementary to our software offering.

During the first quarter and early Q2, we have completed acquisitions to add new product functionality to our current product mix to add to the new customer base; to add new revenue streams and profits.

Looking ahead, we will continue to build on our current market momentum. We will continue to leverage our strong cash positions to continue adding complementary acquisitions in our key areas of focus. In doing so, we intend to gain further competitive advantages. We intend to continue to gain greater value for our customers and for our shareholders.

Before I move onto the outlook and guidance for Q2, I would like to review some of the specific steps we are taking to be positioning ourselves for continued strong performance going forward.

In early Q2, we have launched a CDC Software Franchise Partner Program globally. To our knowledge, there is nothing like this available in our industry today. Through this very unique program, we will leverage our significant cash reserves to strengthen our distribution channel in strategic growth markets around the world. With the $20 million we're setting aside for this program, we will invest in selected channel partners to help them to expand their marketing programs; to help them to expand the delivery capability dedicated to CDC Software products.

Any current channel partners, including the 450 companies selling the c360 CRM application worldwide, can be and will be considered for this opportunity to grow with us. We are currently in final negotiations with a number of our channel partners today. We're expecting very soon to announce our first franchise partners.

Recently, we announced a unique opportunity we have to leverage the China.com infrastructure to fulfill the growing demand for enterprise applications in China. Our recent research and survey indicated that many Chinese companies prefer to ramp this enterprise application as on-demand services rather than license them in store as traditional on-premises systems.

The key challenge for this model in China is the need for a reliable infrastructure to deliver this enterprise application services on a consistent and on a non-stop basis. In this particular area, we have a significant competitive advantage in the opportunity to leverage the infrastructure already built and proven by China.com.

This nationwide network required over five years to establish throughout the entire China and currently supports over 1,700 enterprises hosting their solution in our nationwide network.

CDC Software will leverage on this very unique infrastructure to launch our first HR application as a host service in July of this year. Also at the end of this year will host, along with Microsoft, the Microsoft CRM platform and our c360 CRM platforms together as a host service in over 40 cities in China on a nationwide network backbone.

Earlier, I indicated we are looking at enlarging shareholder value. As I mentioned, the potential spin-off or carve out of CDC Games. I would like to give you an update on our continuing effort to explore a similar option for separating CDC Software as a standalone company.

The newly formed CDC Software Board is actively working with our financial advisers to carefully evaluate the options to achieving this goal. The possibility include the potential spin-off, a carve-out or even a dividend to our CDC shareholders. We anticipate the completion of this planning during the summer and we are looking forward to share with our shareholders in more detail as they develop over the next couple of quarters.

Before I take on any questions I would like to provide guidance for the Company going forward. For the second quarter of 2006, we expect to continue to report organic growth. Total revenue for CDC Corporation is expected to range between $70.6 million and $71.6 million; a double-digit increase over the same period a year ago, approximately 10%. On the adjusted net income basis, we are expecting to range between $5.8 million and $6.3 million which will be an increase of approximately 13% over the same period a year ago.

In summary, we believe the Company's structures are much improved; the operating units are well-positioned for continued success, for continued profitability in their target markets. We will continue to execute on growth both organically and through target acquisitions.

Additionally, we are prepared to do anything to further improve our shareholder value. As we do so, we expect the remainder of 2006 to be on target with our original guidance, with our original projections that we gave to you some time ago.

So at this time I think we are ready to take questions. Scot, I will turn it back over to you.

Scot McLeod

Thank you, Peter, and thank you Dr. Chen. Ladies and gentlemen we're ready to take your questions now and I would like to request that if you would not mind asking one question at a time so that we can allow each participant to get their questions in during the limited time that we have. So, operator, if you would go ahead and provide the instructions for getting the questions into the queue.

Question-and-Answer Session

Operator

(Operator Instructions)

Scot McLeod

Great. Operator, I see that while we are waiting for that queue to be assembled, we do have a couple of questions that have come in over the Internet. So while you're assembling that queue, why don't we go ahead and get these questions out now?

The first question here is in several parts. Can we provide guidance for the full year, and are we on track to get our 20-F completed before the June 30th deadline? Where do we stand with our bid to acquire Onyx?

Peter Yip

Thank you very much for the questions. What we are going to do as I have on the call tonight several of our senior executives. So from time to time I am going to refer to them so that they can provide direct answers to those questions.

On the question about guidance as well as on the question on the 20-F, I'm going to refer to our CFO, Verome Johnston. A little later on. Before I do that, I'm going to refer the Onyx question to our Executive Vice President in charge of our strategy and in charge of M&A, Eric Musser. Eric, please.

Eric Musser

Peter, thanks a lot. As we have stated before, we believe that we have a very fair offer on the table for Onyx and we are standing behind that offer. We would encourage the investors of Onyx to reach out to Onyx and encourage them to make a decision very shortly.

We continue to execute on our strategy. I think everybody is aware that we acquired c360 last quarter. We have other acquisitions in the pipeline and we will continue to execute upon that strategy. At some point in time we will need to make a no go, no decision about Onyx. We are not there at that point in time, though.

So with that Peter, I will turn things back over to you then.

Peter Yip

Verome, can you give us the answer on the question on 20-F? Are we on track and when are you expecting to file it? As well, do you continue to be comfortable on the previous 2006 full year guidance we gave a quarter ago?

Verome Johnston

Yes, thank you very much, Peter. We're absolutely on track to file the 20-F during the month of June. We are in the final stages of review there with our external certifying accountants and expect to get that done shortly. On our guidance as well, we remain comfortable with the full year guidance that we have given for 2006. I will turn it back to you, Peter.

Peter Yip

Thank you. Scot.

Scot McLeod

It looks like we've got quite a few questions building up rapidly in the phone queue, so we will go ahead and cut over to taking the first question over the phone.

Operator

Your first question comes from Jack [Geing] - [Kwazara] Capital Management.

Jack [Geing] - [Kwazara] Capital Management

Hi Peter, congratulations on the good quarter.

Peter Yip

Hi Jack, how are you doing?

Jack [Geing] - [Kwazara] Capital Management

Good. Very happy to see your result and your guidance. Actually, this will be a question more for Dr. Chen about your game. Can you elaborate a little bit on the two games in the pipeline for later half of the year?

Xiaowei Chen

The two games that we are currently in negotiations with are both also free-to-play models, which we first introduced to China on a massive scale; one of them is actually from Japan. The two games that we're negotiating with, one of them is from Japan and the other is from Korea. We expect to close the deals in the second half of this year.

Jack [Geing] - [Kwazara] Capital Management

What is your view on the free-to-play model, because in the beginning when you first rolled out the game there was some hesitation about this model. But looking at what Shanda has achieved and what Sohu has achieved from the games during the past quarter it looks like this thing certainly has much better proof on the concept.

Xiaowei Chen

I agree with you, Jack. There is a saying that imitation is the best form of flattery. Since we introduced the model to China, many of our major competitors have followed suit. As you pointed out, Sohu, Shana have all announced their own free-to-play models. When we first introduced this game to China, it also became the number 2 most popular game among 15 new game releases.

Jack [Geing] - [Kwazara] Capital Management

I will go back to the queue and then come back later. Thank you.

Scot McLeod

Operator, next question.

Operator

Our next question comes from Bert Hochfeld – HIRG.

Bert Hochfeld – HIRG

This is Bert Hochfeld. Congratulations on a nice quarter. I had a couple of questions about CDC Software. I wonder if you could help us understand the financial opportunity that you see with your new arrangement with Microsoft? Is there any way to quantify some level of expectations?

Ancillary to that question, are there other initiatives that you have to exploit your position as a Chinese domiciled company to sell more enterprise software in China?

My other question would be could, you comment on the opportunity that might have been created by Infor's announced intention to acquire SSA and what programs that you might have in place to capture some uneasy SSA customers? Thank you.

Peter Yip

Thank you very much. Those are very fine questions. What I am going to do is I will take on the third part of your question first, the SSA and the Infor, particular because I know them both very well personally and I have a great deal of respect for both of the companies.

Then I am going to ask Richard Thomas, as he’s been really the person that has been working in China with the Microsoft partnership, an exciting partnership for us, and also have him comment on China's software market opportunity as well.

We're very happy for the shareholders of SSA. I am sure they have done very well financially and certainly are very happy for Infor, a very well-run company. They have been on a roll, buying a company after another company. I am sure they will do very well. I am sure they will tell you and I am sure you are expecting SSA is a very good-sized company to digest a company of that size, that magnitude on a global basis. It is going to take some time. It is going to take anyone some time. There will be some tough decisions to make in terms of consolidation as we have gone through our own, two years back.

It is never easy, in terms of consolidating a company you acquire. In the process we think there will be opportunities for us that we will be able to compete in that space; more advantages, on a more aggressive basis.

We have some product that we can put in particular in the process manufacturing space. We have a great deal of respect for them but so far we have done very well in competing with them and with anyone, including some very good companies like Oracle, Microsoft, and SAP.

We have done very well because of our deep vertical application, our deep industry expertise and our win rates speak for itself in terms of how well we have done in terms of winning our businesses; making our prospects and eventually our customers happy. So we are happy for that marriage and we wish them the best and I am sure we will see them in the marketplace.

On that, I will turn it over to Richard Thomas, on the Microsoft partnership in China.

Richard Thomas

Thank you very much for the questions. Just by way of introduction, my responsibility for the Company is as the Senior Vice President for the Asia-Pacific region. I have been with the Company for over seven years and have held a number of positions in the management in North America as well as in Asia.

We are very, very excited about the partnership with Microsoft and as we look at our business activities, I will try to answer both of your questions here at the same time. Our business activities in China, we see the partnership with Microsoft allowing us a way of attacking a very large market.

There are over 48 million small and medium enterprises in China in the Microsoft platform combinations, with their dynamic CRM package that we talked about earlier in the release, as well as their software as a service technology infrastructure will allow us to attack this significant market.

As far as our enterprise software applications, we currently sell a suite of solutions in China today. We have an HR and payroll solutions suite. We sell our ERP suite in China today and we are going to be launching other product suites to CDC Software including supply chain management and business analytics as we go throughout the rest of this year.

So this is a tremendous market, tremendous growth opportunity and we're going to be doing additional research against these companies and opportunities to further define the total size of the market for us.

Scot McLeod

Great, thanks Richard. Operator, can we move onto the next question?

Operator

Our next question comes from Michael Mankowski - Tier 1 Research.

Michael Mankowski - Tier 1 Research

Thank you, nice quarter. Did you provide any guidance for CDC Software for 2Q?

Peter Yip

Let me speak a little bit on it and I will turn it over to Verome, our CFO. I think we only provide the CDC Q2 guidance at this moment, and we are standing by the guidance we have previously provided for the full year for CDC Software. We are very comfortable with that guidance that we previously provided. Verome, do you have anything to add to what I just said?

Verome Johnston

No, Peter, you are correct.

Michael Mankowski - Tier 1 Research

If I could, a follow-up on this software as a service in China, it sounds to me like it is a great greenfield opportunity. What is the competitive landscape, if any, for software as a service in the Chinese market?

Peter Yip

I think it is still in the very early stage. I think we are probably the first one, the way we plan on a nationwide basis is not just one city because our infrastructure has been in place, as I explained; that took us over five years. Not just on the network, the buildings, but also on the support center 24/7, on the training we will be providing to our support staff; on the extensive research we are working with the appropriate department in China with a particular focus in the small- and medium-sized businesses.

On our last survey, they are something like 20 million small and medium-sized businesses. There are only 3.2% of them that have anything to do with automation. Of course, many of them are still on Abacus.

So the application we plan to launch in July, the payroll application is very [inaudible], particularly the tax reporting. Every city in China has a different tax reporting system and it is actually quite complicated if you were to do it yourself and you need to provide a filing every month; we have been doing it for the past five, six years now in China.

For bigger enterprises, the enterprises they need to do; but for medium-size enterprises what they still need to do is very expensive for them to try to do it themselves. Not so much expensive, it is very tedious, if you will and they are making mistakes from time to time.

This is the kind of service, I think with our cooperation with our local government, not just on a federal level, but state and city governments that we have experiences with. It is something I think is extremely compelling what we have been offering.

We also have been offering, as I mentioned, close to 2,000 enterprises on some of our services already. So the scale, the level of application, and later on, the year, the partnership with Microsoft; I do not see anyone have the kind of planning we're planning for. To me I think it is so natural for many of the medium, small enterprises in China to go on instead of getting on their own server, their own PC, and trying to figure out what to pay or what not to pay to the government. It is something that we are going to provide as a service and application.

To me I think it very natural, and we are very bullish on it based on our current survey. The feedback we have so far from our current customer base that are using different applications so far, so we are looking forward to it. Do you have anything to add on this?

Scot McLeod

Okay, thanks Peter. Next question, operator?

Operator

Our next question comes from Ming Lu – Riedel Research.

Ming Lu – Riedel Research

Thank you. First, would you please detail why operation expense decreased? Second, China Mobile established a central music platform and wants to be an SP itself. What do you think about the impact on China.com? Thank you.

Peter Yip

On the operating expense, you mean the CDC operating expense, right?

Ming Lu – Riedel Research

Yes, CDC.

Peter Yip

The question is why it went down?

Ming Lu – Riedel Research

Yes.

Peter Yip

I will refer to Verome on it in terms of our SG&A as compared to a year ago as a percentage of revenue. This is part of our continued effort of controlling our expenses, something that we initiated during the strategic review. I think we have done that very effectively over the past several quarters and I'm sure Verome will give you some or color on that.

Then on the question on the China Mobile, I'm going to refer that to Dr. Chen and maybe Dr. Chen, you can answer the question on China Mobile and the ambition to become an SP. Then I refer you to Mr. Johnston on the operating spend.

Xiaowei Chen

Thank you, Peter and thank you, Ming, for your question. Referring to China Mobile's musical platform, China Mobile itself also knows its strength and weaknesses. China Mobile has not traditionally been a content provider and it is not one of their expertise. They actually partner with us SPs to provide content, music included.

We also diversified -- or shall we say, we also plan -- to move up the value chain into content as I talked about in the earlier part of this call. We not only licensed musical rights from popular singers, we also are producing our own video content. This program, I especially encourage you to go on China.com’s front page and you can see the link to that video program.

It is modeled after Jon Stewart's The Daily Show, and since it launched three days ago, it has received wildly popular responses. It is also produced in short segment, six minutes per program and we can break it up into two three-minute segments, which is tailor-made for mobile screens.

So we are positioning ourselves as content providers or at least move towards that direction for the imminent arrival of 3G. Thank you.

Peter Yip

Thank you.

Verome Johnston

It's Verome. I will take the questions on the changes in the cost structure. We continue to evaluate all opportunities we can to reduce, for example, our back office operations. We have gone through extensive worldwide consolidation of any redundant and duplicative type activities that we have got.

Some of those consolidation efforts continue into Q2 and beyond. We continue to consolidate our real estate footprint within North America, we are moving more of our revenue-generating personnel to a work at home model and continue to exit costly real estate leases in jurisdictions where we don't really need them. That is the major backbone of the activity that we've got going on on the cost-saving side. I will turn it back to Scot.

Scot McLeod

Great, thanks Verome. Folks, I mentioned earlier we had a couple of questions that were in the online queue and I would like to come back to one of them. This question here is somewhat similar to a question that we took earlier, but it is a little bit different, so let's go ahead and get it in.

The question is, your Yulgang game continues to grow and outperform many of the market peers. How do you project this growth to continue going forward?

The second part of this is, how will you leverage that success as you launch your second games into the market?

Peter Yip

Dr. Chen, do you want to take on this particular question, please?

Xiaowei Chen

Sure, Peter. To answer the first question, how do we expect the continuing growth trend of Yulgang. As we all know, every game has a life cycle. As Yulgang is the first free-to-play game introduced to China on a large scale, we don't really have another Chinese game to model after, for the length of its life cycle.

However, this business model was first launched in Korea about a year ahead of China. In Korea, a typical life cycle of such a game is about four to five years. We launched Yulgang last July, less than a year from now. So right now, every vital sign from peak concurrent users to registered user number, to number of items sold and revenues shows a strong growth trend. We expect this growth trend if the Korea model is a model to model after, we expect this growth trend to continue for another couple of years.

In terms of how we can leverage the current Yulgang game for our second or third game launch, the Yulgang game and especially the management team has a number of competitive advantages that we can leverage in order to launch a second or third game after that.

First of all, their infrastructure with their 43 servers are distributed around China. They also have proven technical expertise in anti-[bob] technology and anti-hacking technology. They have an extensive distribution network and channels around China. Most importantly, they have a 25 million registered user base as their customer base and they are currently building a game portal on which not only multiple role-play games are launched, but there will be casual games too. So on this game portal, we can cross-sell over the 25 million user base.

Back to you, Scot.

Scot McLeod

Great, thank you Dr. Chen. Well, everyone, I want to thank you for participating with us this morning. We look forward to these calls again in the future. Of course if you have any questions after the call, you can certainly reach out to us at the contact information on the screen. Craig Celek is our VP of Investor Relations and he will be happy to take your questions and pass them on to us.

We look forward to talking with you again in the future. Thank you, and that is the end of our call today.

Operator

Thank you. This does conclude today's CDC Corporation's first quarter earnings conference call. You may now disconnect and have a wonderful day.

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Source: CDC Corp. Q1 2006 Earnings Conference Call Transcript (CHINA)
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