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CDC Corp. (CHINA)

Q2 2006 Earnings Conference Call

August 22, 2006 9:00 am ET

Executives

Peter Yip - CEO

Dr. Xiaowei Chen – CFO, China.com

Verome Johnston - CFO

Scot McLeod - SVP

Eric Musser - President

Analysts

Bert Hochfeld - HRG

Michael Mankowski - Tier 1 Research

Patrick Lin - Primarius Capital

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the CDC Corporation second-quarter 2006 earnings conference call. (Operator Instructions). It is now my pleasure to turn the floor over to your host, Mr. Scot McLeod. Sir, you may begin your conference.

Scot McLeod

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

With us today is Mr. Peter Yip, Chief Executive Officer of CDC Corporation; Peter is joined by Dr. Xiaowei Chen, Executive Director and Chief Financial Officer of China.com; and Mr. Eric Musser, President of CDC Software.

Please note that this conference will be recorded and available for playback on the Internet by visiting our corporate website at www.CDCCorporation.net.

As customary before we begin, I would like 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 as well as risks referred to in the Company's filings with the Securities and Exchange Commission.

Now it is my pleasure to introduce Mr. Peter Yip, Chief Executive Officer of CDC Corporation. Peter, please go ahead.

Peter Yip

Thank you, Scott and good morning, everyone. I am very pleased indeed with the results we have posted for Q2 which demonstrate the successes we are seeing across our businesses. Since we completed our strategic review earlier this year, I am especially pleased with the cash we are generating from the businesses with a more efficient organization. In fact, during Q2 we have generated in excess of $18 million of free cash flow from operations.

We now have the global scale, we now have the infrastructure, the management team and the balance sheet needed to sustain and accelerate our growth both through continued organic growth and through target acquisitions. We are also creating and exploring new opportunities for unlocking shareholder value within CDC, of which I will update you later.

Turning to the financial highlights of Q2, I'm very pleased to report earnings for the quarter exceeding our original estimates. At $77 million, our total revenues Q2 are up 19% compared to the second quarter last year and that also set a new quarterly record for the Company. Revenue for CDC Software was $57.7 million which is an increase of 8%; and revenue for China.com was $19.2 million which is an increase of 77% as compared to second quarter of 2005.

Our ability to successfully grow both organically and through acquisitions is reflected in our year-on-year comparison of our quarterly revenues. Building on this successful track record of growth, our objective now is to continue that growth trend through continued organic growth and further expansion in strategic geographic areas, as well as continued addition of new products and new services.

We posted adjusted net income of $10.5 million, which is an increase of 95% from the second quarter of last year, and on a GAAP basis our net income was $7.9 million compared to $36,000 a year ago. As I said earlier, we have generated in excess of $18 million cash flow during the second quarter.

I'm now turning over the presentation to Dr. Chen for an operating update on China.com.

Xiaowei Chen

Thank you, Peter. As the Company has been continuing to evolve since our last report to our investors, I'd like to briefly review the structure and competitive positioning of China.com Inc.

We have three main lines of new media businesses in the China market: games by CDC Games; Internet portal with the URL name China.com; and mobile value-added services through CDC Mobile.

First, I'd like to draw your attention to the recent performance of CDC Games which has been particularly pleasing. As in our neighboring country, Korea, China's online gaming business has been growing exponentially over the past few years and we continue to see significant room for future growth. We're committed to further enhancing our market position and exploring new opportunities in the promising China gaming market.

Secondly, CDC Mobile provides mobile value-added services in China which is another core strategic line of business for China.com Inc. We are well positioned in China, benefiting from solid relationships with mobile network operators at the national and provincial levels. We have established national connectivity with both China Mobile and China Unicom and extensive marketing and sales networks.

Another important strategic line of business, which is our oldest business and where the Company has its roots, are our portals: www.China.com and www.HongKong.com. I'll be delving into a bit more detail about each of these business units in a moment, but first let's look at the financial highlights of China.com as a whole.

At $19.2 million our total unit revenue in Q2 is up 67% compared to the first quarter and also set a new quarterly record for the Company. GAAP net income for the unit was $2.3 million, up 80% from the first quarter of 2006. The strong performance in Q2 is mainly due to two factors:

  1. The increase of our stake in 17 games, 100%, at the end of Q1 and we're now reaping benefits during Q2.
  2. The strong organic growth of our online games business.

To highlight our games business, let me tell you a bit more about the success of our latest online game, Yulgang. Yulgang was of the fastest-growing massive multi-player online role-playing games in China in 2005. Based on a popular comic book published in Korea, Yulgang was commercially launched in July 2005 and pioneered the free-to-play, pay for virtual merchandise business model for MMORP games in China. It was noted by 17173.com as the second-most popular MMORPG among over 50 new online games launched in China during 2005 ,and also named by China's e-Game Industry Association as the most innovative game in 2005.

Since the launch of Yulgang last July, we have established our position as one of the innovators and leaders in the China online gaming market. We note that since the launch of Yulgang, several of our major competitors have followed suit in adopting a free-to-play, pay for virtual items business model.

We continue to enjoy strong growth in multiple key metrics for Yulgang. Our peak concurrent users have surpassed 348,000; our average concurrent users are up 34% over last quarter; our number of registered users has totaled 30 million this quarter, up 35% from last quarter; virtual merchandise sold totaled 21.4 million units, up 187% compared to Q1 2006. The number of server groups throughout China supporting Yulgang now totals 48, up 12% quarter-over-quarter.

In order to build a broader portfolio of games, we have licensed two new games with free-to-play models, Special Force, licensed from Korea and Stone Age 2, licensed from Japan. Special Force is ranked the most popular game in Korea's Internet cafes and we expect to launch it in China during Q4 of this year.

Further, we expect to launch Stone Age 2 in Q1 of 2007. Based on the success of Stone Age 1 from 2001 to 2003 in China, and the high popularity of Special Force in Korea, we're hopeful that these new games will achieve strong success in China as well. We're also negotiating the license of another online game from the United States. This game enjoys high brand recognition worldwide and we hope to close this deal by the end of Q3.

Let's now turn our attention to our mobile value-added services subsidiary, CDC Mobile. CDC Mobile provides a wide range of MVAS products including SMS, MMS, WAP, IDR, and KJAVA. Our products range from picture and ringtone downloads to mobile games, chatting and dating, news and infotainment.

Revenue for this quarter in this segment was up 6% compared to last quarter. Our biggest contribution came from WAP and MMS, each of which grew 27% quarter-on-quarter. Please note that our mobile value-added services are more evenly distributed in terms of revenue mix by product line. We aren't SMS heavy, as many of our peers. Our revenues have now shifted more toward our WAP and MMS products which are newer technologies and somewhat less affected by new regulations recently enacted by China’s mobile operators.

While Q2 had continued improvement, we're cautious about short-term future performance in this segment. Starting early June, like many of our peers, the Company was alerted to policy changes by China Mobile's Monternet platform which will affect all of the Company's MVAS subscription services.

The changes which are being implemented under the policy directives of China's Minister of Information Industry, aim to address another industrywide objective including reducing customer complaints, increasing customer satisfaction and promoting the healthy development of the MVAS industry and CMC technology.

Similar to our peers in the MVAS industry, we expect near-term negative impact on our MVAS revenue and profits. However, in the long run we believe these new regulations will create a healthier sector and we firmly believe in the opportunities arising from a vibrant Chinese market with over 400 million mobile users.

My management team and I are actively adjusting the Company's operating strategy to better serve the new regulatory environment. We're also reviewing our cost structure to become more efficient and scalable to revenue expectations, including considerations of headcount reduction.

Now taking a closer look at our portal businesses, in Q2 2006 the China.com portal continued to build upon its position as one of China's preferred portals for professionals. We focused efforts on building and improving our lifestyle, career, entertainment, technology and health channels. I reported to you during last quarter's call that we hired a production team consisting of former CCTV editors, producers and other talented individuals.

This team is now producing a show similar to Jon Stewart's “The Daily Show” in the U.S. and we call it "The Straight Show". You can view it now from the front page of China.com. Since it was launched in May it has received popular attention and enthusiastic responses.

Further, we have leveraged the value of our URL name and entered into arrangements with cities, countries and brands using city.China.com, country.China.com and brand.China.com URL names. We launched our career.China.com channel this quarter.

Also in Q2, the China.com portal signed strategic partnership agreements with Google combining the strength of these international brands and their technologies with China.com's portals own content. The partnership is not only providing better user experience, but also is turning our page views into additional revenue for the Company.

Let me now turn briefly to our current priorities. First, to better adapt to the regulatory changes in the MVAS industry we will continue to maintain strong relationships was supervising government agencies and major operators at the central level and provincial and municipal levels, strengthening relationships with local operators. We will also actively seek new business models and new customer acquisition methods. We're also committed to providing unique content to our customers.

Secondly, in the ever more competitive online game business, we're increasing marketing and promotional activities and will continue our efforts in licensing quality games and bringing the best products from around the world with a unique and compelling gaming experience to our users.

Furthermore, in order to reduce our reliance on licensors, we're actively looking into developing and/or acquiring game development capabilities.

I would now like to turn over the presentation to Mr. Eric Musser to continue our operational summary with the focus shifting to CDC Software.

Eric Musser

Thank you, Xiaowei and good morning, everyone. I'm delighted to be speaking with you today and look forward to your questions at the end of the call. As we've outlined in recent updates, I'd like to briefly review the structure and the competitive positioning of CDC Software. This is important, because it has been one of the keys to our success and will continue to be critical to our success in the future.

The first of our strategic lines of business is focused on providing extended ERP and supply chain solutions to companies in the process manufacturing industries. These large and dynamic industries such as food and beverage, pharmaceuticals have unique needs that are uniquely unaddressed by generic software vendors. Because of our specialization, track record of success and excellent references we are experiencing exceptional win rates and strong growth in new business.

Most of our success is with the rapidly growing mid-market segment of companies and we're also seeing increasing opportunities in larger organizations. As an example of our success with larger companies, a multi-billion dollar drug manufacturer recently selected our Ross Extended Enterprise Solution to plan, track and analyze their outsource supply chain. They selected Ross due to a dual focus on life sciences and our understanding of the complexities of outsourcing, production and distribution. The Ross solution will help them optimize inventory, increase distribution performance and lower the cost of manufacturing through better decision-making.

Our next strategic line of business is focused on providing vertically specialized CRM solutions. Here we are focused on industries such as financial services; manufacturing and construction where unique customer facing business practices help companies differentiate themselves from their competitors. Once again, because of our industry specialization, track record of success and excellent references, our win rates are significantly better than the industry average, both in the mid-market and with larger Tier 1 companies.

Although the Tier 1 segments are widely believed to be saturated with enterprise software, many of these companies have not employed systems due to the poor fit and high overhead costs. As a result, many of these lines of businesses within Tier 1 companies are still running homegrown systems and they seek industry-specific solutions that are proven to be more cost-effective.

An example of this is a recent win. One of the largest financial institutions in the world has chosen our Pivotal Financial Services CRM application to help them manage rapid growth. The hedge fund group will use the Pivotal CRM applications to improve consistent use of their practices for due diligence and client on-boarding. With Pivotal CRM they will also have a holistic view of their funds and fund managers.

Our third strategic line of business provides outsourced business services that are highly complementary to our vertical software offering. In addition to the traditional implementation and consulting services offered by other enterprise software vendors, we also offer extended services including staff augmentation, application monitoring and managed application outsourcing. Our ability to offer these extended services, along with our software solution, gives us a competitive advantage. We also leverage our low-cost offshore resources in India and China to improve our margin in this business.

Now taking a look at our key operating metrics for Q2, once again we see that our top line revenue growth was driven by new customers and additional business from our current customers. We signed 61 enterprise software deals with new logo customers during the quarter, which is 49% of our software license revenue. At the current rate, we're adding one new logo customer to the CDC software family every business day.

Also of particular note during the quarter we signed 19 software customers in China. In July we launched our first Software as a Service applications in China. We already have new customers signed on and a growing pipeline of opportunities for these SaaS applications.

The initial SaaS product offering includes our human resource applications and we are on track to jointly launch SaaS versions of Microsoft Dynamic CRM applications with Microsoft by the end of the year. The CRM initiatives in China are part of our broader strategy and strategic plans with Microsoft that include launching the SaaS versions of Dynamic CRM in other geographies in 2007.

Our software license and service business with our current customers also performed very well. Worldwide, over 200 customers upgraded or purchased additional software licenses. Our industry focus and continued investment in industry-specific applications is highly valued by our existing customers. This is reflected in our customer satisfaction and maintenance renewal rates and ultimately in continued investments from our customers.

Our business continues to be well-balanced globally with slightly more than half of our revenues coming from the Americas, almost one-third coming from Europe and 20% coming from the Asia Pacific countries. Looking ahead, we will continue to invest in our distribution channel and we anticipate accelerated growth in Eastern Europe, Latin America, Asia Pacific overall, and in China in particular.

As a result of our accomplishments we have moved up in the global enterprise software companies. Last year we were ranked in the top 30 and this year we've moved up into the top 20, specifically into position 18. We're very proud of this achievement and we intend to continue moving up, strengthening our position, building momentum through both organic growth and targeted acquisitions. In 2007, our goal is to break into the top 10.

Through our acquisitions during the past three years, we've proven that size and financial strength is important. The market momentum we create can help significantly improve the performance of acquired companies.

We are now truly a global organization with over 5,000 customers, 1,700 employees, 22 offices and 450 distributors around the globe. This global scale creates competitive advantage for us, especially when working with larger multinational companies in our target industries. These software vendors cannot match our ability to provide global support. Generalized software vendors can't match our focus and depth of industry. Competitively we're in a very strong position.

We're now positioning and branding CDC Software as the customer-driven company and this commitment to our customers is reflected throughout our current priorities.

First, we will continue to focus on delivering value to our customers and ensuring their success. In this turn, we continue to enhance our references and reputation in our target industry. Five years ago I set a goal for us to have uniquely happy customers that will help us sell software. At a recent user group conference with over 300 customers in attendance for three days we had over a dozen prospects. We gave them free access to all venues and all customers. They were very surprised as no other vendors were confident enough to provide this unbridled access to do their customer base. In fact, most competitors struggle to produce three to four matching references. The feedback was 100% positive and one prospect even wanted to accelerate the sales process at the end of the conference. We always like when this happens.

Secondly, we continue to deepen our commitments to providing the most cost-effective solutions for our target industries. Investments in our industry solutions will continue to be driven largely by evolving critical needs of our customers. A recent example of this commitment is the introduction of our solutions that help consumer product companies comply with the mandate for the support of RFID, from Wal-Mart, Target, the Department of Defense and other industry giants.

As another example, many of our customers operate in highly regulated industries such as pharmaceuticals and financial services. We are providing the industry critical functionality needed to ensure compliance with the latest requirements.

In addition to our enterprise solutions, we also provide point solutions for companies and divisions that need to address industry-specific challenges. This approach opens the door to a large segment of opportunities where legacy systems may be in place. Our objective is to gain a toehold, often in the Tier one companies, where we can pursue additional opportunities once we have proven our value. Many of these solutions, such as our One Plan application for optimizing factory schedules, will be delivered via SaaS, removing the obstacle for upfront license fees and enabling customers to get up and running within weeks while keeping their maintenance overhead to a minimum.

It is important for our SaaS solutions to provide quick returns and high value. Most companies are funding these from their operating budgets, not their capital budgets. With One Plan, we are experiencing strong success in growing pipelines with companies that need to supplement the limited functionality of their legacy ERP systems.

We are also seeing growing demand for our c360 products that enhance the Microsoft CRM applications. In fact, in addition to the 61 new enterprise software companies we added this quarter, we also added over 130 new customers for the c360 solutions.

Because many customers, especially in overseas locations, have established relationships with trusted consultants and resellers, we will continue to expand our reach through our franchise partner program. This program includes $20 million in funding for investments in selected franchise partners in our strategic geography.

During the second quarter, we invested in our first franchise partner in Latin America and we expect to announce others shortly in China, Eastern Europe, India and the Middle East. To manage our franchise partner program we recently announced the addition of Fred Dilkes as our new Senior Vice President of Worldwide Channels.

Finally, our customers are in need of broader products and services offerings. We're responding to these needs through innovation, organic growth and acquisitions. To ensure that we successfully manage this evolution, we're bringing in additional proven leaders to fill key roles. Recently we announced the addition of Sam Anidjar who will lead our global acquisitions as we seek complementary products, technology and customers.

Also, we've added Stephanie Kelly to head global HR. As we continue to grow rapidly, Stephanie will help us maintain the culture and the commitment necessary to ensure ongoing customer success and satisfaction. All of the noted new additions to the management team come to us from SSA Global where they contributed to the success of the Company and their IPO during a period of rapid growth.

I'm very pleased to welcome these new members to our management team and I'm confident that we're building the team needed to grow the customer-driven company. Our unique commitment to customers' success will drive our ongoing creation of shareholder value.

Now I'd like to turn the presentation back over to Peter as we focus on our guidance for the remainder of 2006.

Peter Yip

Thank you, Eric. Thank you, Xiaowei. I'd now like to provide a status update on our plan for unlocking shareholder value. In the last few months we have been working very actively with financial advisors to explore various options for unlocking the shareholder value that we believe exists within CDC. This initiative is a top, top priority of mine and the feedback we've received from our financial advisors has been very, very positive.

The option we are investigating now involving separation of two of our businesses into stand-alone companies. Our exploration of a carve-out or a spin-off of CDC Games continues to move forward at full speed. We are evaluating a potential and a possible listing of CDC Games on a foreign stock exchange in Europe and we anticipate the completion of our planning before the end of the year. We will certainly share more detail with all of you as they become available.

We are also continuing to investigate options by separating CDC Software as a stand-alone company. As Eric updated you, we have expanded the scope and experiences of the senior management team at CDC Software in preparing for its possible carve-out. We have mandated an outstanding team of T1 investment bankers to help us in the carve-out process.

We are also anticipating new appointments, new independent directors on the Board of CDC Software, new independent directors on the Board of CDC Games in preparing for the possible spin-off and carve-out. We believe very strongly the potential value that we'll be creating through this strategy of carving out two of our most successful businesses going forward.

In the event we should decide a spin-off, we will certainly do so in a most tax efficient manner, perhaps in the form of a tax-free dividend to our CDC shareholders.

In addition to our strong organic growth, as Eric and Xiaowei have been repeatedly saying that we are going to do so through target acquisitions. Let me give you two examples of what we have been evaluating for potential acquisitions. We are making now very good progress in China and we are now engaging in discussions with a potential company for us to acquire that will provide us with ERP systems and ERP installations for medium and small-sized businesses in China. This potential acquisition certainly will provide us with a better distribution channel in the regions and provide us with additional products in the lower end of the market.

Our strategy in the process manufacturing business will be to leverage our current position in the market, to leverage our large base of customers in life science, in food and beverage and in chemicals. We are in current discussions with multiple software vendors in North America, in Europe. We have targeted potential companies that will expand our solution, bring us much deeper into the manufacturing plan, expanding our customers' ability to collaborate with our customers and with their customers and with their vendors and improve their performance in the supply chain.

Overall, this potential acquisition represents five different potential acquisition opportunities. We expect that we will close at least one of these opportunities by the end of this year.

Let me turn it over now to Verome Johnston who will discuss with us our liquidity options under consideration as well as other key financial initiatives and the outlook for the rest of 2006.

Verome Johnston

Thanks, Peter. As you have heard, we have ambitious plans for CDC Corporation, complementing the functionality of our product lines and expanding into new markets and geographies are some of our top priorities. We also need to continue to invest in research and development programs to integrate any newly-acquired product lines into our product mix as well as upgrading our existing products so that they continue to offer our customers the functionality they require to compete most effectively in today's markets.

Making these investments will benefit not only our customers, but also protect our business by keeping our win rates high and our customer satisfaction and retention rates among the best in industry.

Meeting our ambitious plans as well as satisfying our ongoing working capital requirements of course will require cash. We are fortunate to have a large existing cash balance we can draw upon. However, we're also looking for other ways to create liquidity which may be better for us, particularly if these needs can be met through initiatives at the operating unit level.

Along those lines, we're explore numerous alternatives. For CDC Software we're exploring the possibility of entering into a new line of credit which may be backed by the accounts receivable and cash flows generated by the software business. Such lines of credit are common in the software industry. Based on our current performance, we believe it may be possible for us to obtain a line of credit in the range of approximately US$100 million.

For CDC Software and CDC Games, there is also the possibility of issuing debt which may either be straight or convertible. We are exploring with our financial advisers the merits and risks of issuing debt. An important consideration in this regard is timing and whether this transaction will be better done before or after a carve-out of CDC Software or CDC Games occurs.

Because of our strong performance in Q2 and our confidence in the performance of the Company going forward, we continue to believe that the Company harbors additional value that is not currently reflected in our stock price. Last month, we completed our first $20 million stock repurchase program. The Board of Directors has approved another stock repurchase program. This new program authorizes the repurchase of up to an additional 20 million of the Company's common shares over the next year. To date, the Company has purchased over 4.7 million shares at an average cost of approximately $20.6 million. During the last six months, the senior management team including the CEO has purchased more than 750,000 shares.

I would like to take a moment to clarify some confusion that seems to exist regarding the personal holdings of our CEO and his family. We have received several inquiries from people who believe that Peter has recently made large sales of the Company's stock. This is not the case. In fact, the opposite is true. Peter has actually increased his overall holdings in the Company's stock during the prior 12-month period.

The filings you may have seen have been made by Peter's wife, Nicola Chu, in connection with what are commonly called 10b5-1 trading plans. Under these plans which are regulated by the Securities and Exchange Commission, she is authorized to sell a specified number of shares, but only if certain stock price targets are met. Previously, Peter and his family have had 10b5-1 plans that expired without any share of sales being executed because the stock never reached the necessary price target thresholds.

Under the term of Nicola Chu's plan that was recently filed, almost 75% of the shares designated cannot be sold unless the stock reaches a threshold price of $7.50 per share. It is also important to note that only about 15% of Peter and his family's holdings in CDC are covered by these sales plans, which means that about 85% of his holdings are not covered. In summary, the overwhelming majority of the shares authorized to be sold under these plans have not been sold.

At this time, we are reaffirming the revised earning guidance that was issued on July 17th of this year. We expect total revenue for CDC Corporation to range between $300 million and $305 million. This represents an increase of approximately 22.5% over last year. We expect adjusted net income to range between $31.6 million and $32.8 million, which would be an increase of approximately 100% over the same period a year ago.

Although we are reaffirming the earnings guidance, it is important to keep in mind that we are experiencing a changing regulatory environment in China with respect to our mobile services business. At this time, we believe that any revenue and income which may be lost as a result of these emerging regulatory changes will be offset by continued growth in our game's revenues, strong growth in software license revenues and business services within CDC Software, and completion of pending acquisitions that are currently in the pipeline.

At this time, Peter, I'd like to turn it back over to you for your closing comments.

Peter Yip

Thank you. In summary, we believe the Company structure is much improved. The operating unit is well-positioned for continued success in their target markets in 2006. We are very pleased with the $18 million free cash flow we have generated from the business in Q2. We will continue to execute. We will continue to grow rapidly, and we are prepared to accelerate the process for the carve-out or spin-off of CDC Software and CDC Games in order to unlock shareholder value for all of us. We expect the remainder of 2006 to be on target with our original projections.

Scott, at this point we are ready to take any questions.

Scot McLeod

Great. Thank you, Peter. Ladies and gentlemen, we are ready to take your questions, and I would like to request that we take one question from each of you at a time to allow all the participants to get their questions in during the time that we have remaining. Operator, if you would please provide instructions for everyone to get their questions into the queue.

Question-and-Answer Session

Operator

(Operator Instructions)

Scot McLeod

Operator, while you're assembling the queue there I've got one question that's come in online and the question is short. It reads: it looks like your net cash is down; can you explain why?

Verome Johnston

Our non-GAAP net cash is down slightly. Cash has been used to fund the stock buyback program and we also repaid some debt that existed on the balance sheet at the end of last year. The majority of the stock buyback has been funded out of operating proceeds, however.

Scot McLeod

Thank you. Operator, before you get into the questions it looks like I've got one more that's come in online here and it reads as follows: For the past two quarters you have provided quarterly guidance going forward. It looks like this time you are providing only guidance for the remainder of the year and not quarterly guidance. Can you please explain why?

Verome Johnston

I'll take that, Scot. The uncertainty on our CDC Mobile business created by the industrywide regulatory changes creates some uncertainty for us in the very short-term. While we cannot provide highly accurate guidance for the next couple of months, we do feel comfortable in reaffirming our projections for the second half of the year.

Scot McLeod

Thank you, Verome. And that's what I've got so far online. So operator, I think we're ready to take the first caller question.

Operator

Our next question comes from Martin Shutts, HRG.

Bert Hochfeld - HRG

This is Bert Hochfeld. I wonder if you could possibly drill down a little bit further on the CRM win that you talked about with the large financial institution? Who were the competitors there, who did you displace? Approximately what size was the transaction? What other opportunities do you have with the institution?

Also, as a corollary to that, you've hired a couple of relatively high-level people from SSA and I wonder if you are embarking on a specific, conscious program to pick off targets of opportunity as SSA merges into Infor at this time? Thank you.

Eric Musser

This is Eric Musser here in Atlanta and I'll take both of those questions. On the CRM side, we had many examples to choose from when we were looking at great exceptional wins in the financial services space.

Just to give you a little bit of color on some of the competition out there, we have seen that Siebel is still a player in the market. We've seen some changing price strategies from them recently. But the fact is that we are offering very verticalized solutions that are very well fit.

At the low end we're also seeing salesforce.com, great on the simple side of life, but do not again have the vertical expertise. So if you're looking for the lowest total cost of ownership as well as a solution that's fitted to the industry, we're doing very well there.

The size of the deals I'm not going to comment on specifically, but I will tell you what we're now seeing in our financial services space with CRM is viral-type growth within these organizations. They continue to expand user by user and move from one organization to another.

So a lot of what we're doing today is in the past you might have seen that a Siebel would go in and sell an entire enterprise. We are not selling the entire enterprise; we are selling into a specific division and/or department. We're seeing great growth over a period of time. The upside for us is tremendous as we look at that side of our business.

The second question was related to some of the recent hires. The fact is that we're looking for any opportunity that we can get out there to improve not only our own organization, but also to gain competitive advantage. The consolidations that have occurred in the marketplace have provided us with opportunity, not only on the competitive landscape as we've seen some applications no longer being sold into the new markets, but also from a personnel perspective. So we are looking for the best and brightest out there and we have a lot of people knocking on our doors today. We enjoy this position and we are doing our best to make sure that it continues into the distant future. Thank you.

Scot McLeod

Thank you, Eric. Operator, we'll take the next question on the phone.

Operator

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

Michael Mankowski - Tier 1 Research

Any commentary or additional traction around the partnership with Microsoft? I know You telegraphed that the SaaS offerings for dynamics will be ready later this year, but how is that partnership progressing and what's going on with Software as a Service in China, per se?

Eric Musser

Let me talk first about Microsoft and then I'll jump in a little bit more Software as a Service, because I think it's a broader topic that goes beyond just China. The Microsoft relationship is going very well; c360 is a very key partner for Microsoft at this point in time. We're seeing great traction with the c360 products that really enhance the CRM solutions that are provided by Microsoft.

As you probably are aware, Microsoft has announced and they're launching later this year/next year SaaS solutions into different markets. We are moving forward with those initiatives and we will be launching our c360 products on top of that platform.

That being said, I think that one of the things that we see as a great opportunity is that we have an incredible relationship with those Microsoft channel partners and we believe over a period of time we'll be able to introduce additional services as well as software products in through that channel. This is all being done in coordination with Microsoft and their support in this. They've been an excellent partner. They have been promoting our products throughout their partner base and we're very appreciative of their help that they've been providing.

The second point that you touched on was Software as a Service, or SaaS. Yes, we have launched in China, but one of the things I want to point out is we've been offering SaaS for a number of different products on a worldwide basis for at least the past 24 months. Market First, marketing automation as well as our One Plan applications for planning and scheduling.

Although we see that this is a model that is picking up some adoption rate, we still see that our traditional on-premise business is where many of our customers are requiring product and still demanding that they have on-premise solutions. This becomes even more true in those industries that are regulated: life sciences, pharmaceuticals, financial services. They continue to drive us on those on-premise solutions. Thank you.

Scot McLeod

Thank you, Eric. Operator, we're ready for the next question.

Operator

Our next question comes from Patrick Lin - Primarius Capital.

Patrick Lin - Primarius Capital

Congratulations, guys, on the quarter, especially on the cash flow, it looks like pretty positive there on the $18 million. Peter, you've been on the road since you came back as CEO over the last nine to 12 months with some of your management team. I'm curious given CDC's stock price has been up almost 100%, what would you attribute to this stock performance? What would you say are the main reasons why the stock has worked so far this past year?

Peter Yip

Thank you, Patrick; you have been most kind and thank you for your support and your encouragement. Of course you're right, we've done very well. Thank you for Board support; our management team has been very focused on executions, really turning around the Company with $18 million, as you point out, free cash flow in the quarter. We're building momentum. I think momentum is the best word and is the key word going forward. We're building up and I assure you you're just beginning seeing the beginning of the momentum and we're right into it for the rest of this year into 2007 as well.

And I will turn it over very quickly to Eric and talk about the momentum we're building, particularly in the software space, the new customers we've been seeing as well as particularly more elaborating what we've been doing with Google and their support of us and what additional services we are now negotiating with them to expanding our current relationship with them in a very, very important market that is in China. Let me turn over first to Eric.

Eric Musser

Thank you, Peter. So I think that one of the things that you pointed out there is that we are seeing some momentum. The momentum is not only in our stock, it's in the performance of the Company and more specifically the momentum with our customers. As I said earlier, our customer focus is very important to us and we believe that the value that we provide to our customers is now being portrayed and moved out into the market.

As a result of that we're seeing this growth that is in our business today. We are in the under-penetrated markets. As I said before, many of these businesses do not have enterprise solutions and/or have systems that are homegrown. We have innovative products and we have just an amazing team that is dedicated to our customers in providing them with a high level of value. The momentum that you've seen, I believe is just the very beginning of this momentum and we continue to see accelerated growth around the globe.

We're very happy to talk about some of the things that are going on in China with the CDC Software Group, but probably even more exciting in China than CDC Software at this point in time and some of the things Xiaowei is doing with her group. So Xiaowei, maybe you can give us a little bit more color on what's going on on your side?

Xiaowei Chen

Like Peter said, momentum is the buzzword. At China.com I think we're very fortunate to be riding on the momentum of the entire China market. One particular example is the recent partnership that we entered with Google which itself sees the tremendous momentum in the China market. The partnership we have with Google is on Adsense for content, Adsense for search and search technology itself. And it is by far the most extensive partnership that Google has entered with the major portals in China.

And we believe that this partnership can be further deepened and expanded and already is providing our users with a better user experience; it's turning our page views into revenue and Google itself is very happy with the partnership . We are talking about further expanding the areas of these partnerships. Did I hear someone asking me to clarify on the names?

Adsense for content is a partnership with Google in which that Google ad revenue is shared with us depending on how many page views that we're providing to them. And the momentum has not stopped just short of our Internet portal either; we're seeing great momentum from CDC Games. So overall we believe that China.com is very fortunate to be in the right market at the right place and we have tremendous executing teams that are doing the right thing.

Patrick Lin - Primarius Capital

Great, thank you. And just a quick follow up. Are there investor meetings that you're planning to be at in the U.S. in the next three months or so?

Eric Musser

This is Eric Musser and, yes, we are planning on holding additional investor meetings. We're currently putting a schedule together and you can reach out to our Investor Relations and they'll provide you with the schedule here in short order.

Patrick Lin - Primarius Capital

Great. Thank you and congratulations.

Eric Musser

Thank you very much.

Scot McLeod

Thanks again. Before we move on to the next question I've got another one that's come in online here. And the question is with regard to CDC Software and your R&D spending as a percent of revenue, it looks like it's at about 7%, which seems low compared to the industry average. Can you comment on this?

Eric Musser

Yes, Scot, I'll pick that one up. So a couple of things that are related to that. One is if we look at it on a true basis the revenue that's associated with those software products were much higher than that. In fact, at this point in time we see the opportunity to improve the spend rate that we currently have in the development organization that is associated as a percentage of revenue.

Currently we're running approximately at 19%. Now with that we have opportunity through some of the revenue growth that we're seeing to decrease that number. Secondly, we have a great opportunity with our offshore capabilities in China as well as India that also substantially adds to improvements in these numbers. So I think that we have some upside potential in that.

Scot McLeod

Okay, great. Thanks. Folks, I see we're at the top of the hour here, so we have exhausted all our time. At this point I'd like to wind this down and, Peter, ask if you have any closing comments before we disconnect?

Peter Yip

I'm looking forward to speaking to all of you either on the road show which we plan very soon or on the next investor call. Thank you again. Have a good morning.

Scot McLeod

Thank you, everybody. Take care.

Operator

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.

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Source: CDC Corp. Q2 2006 Earnings Conference Call Transcript (CHINA)
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