CDC Corporation Q4 and Full Year 2005 Earnings Conference Call Transcript (CHINA)

CDC Corp. (CHINA)
Q4 and Full Year 2005 Earnings Results Conference Call
April 12, 2006, 9:00am EST

Executives

Peter Yip, Executive Vice Chairman and CEO
Scott McLeod, Senior Vice President, Global Marketing and Corporate Communications, CDC Software
Bruce Cameron, Senior Vice President, North American Sales, Pivotal Corporation
Eric Musser, Executive Vice President, Strategy, M&A, and Chief Technology Officer, CDC Software
Gary Nowacki, Senior Vice President, North America, Ross Systems

Operator:

Good morning ladies and gentlemen. My name is Ian and I’ll be your conference facilitator today. At this time I would like to welcome everyone to the CDC Corporation full year 2005 and quarter 4 2005 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer period. If you would like to ask a question during this time, please press * then the number 1 on your telephone keypad. If you would like to withdraw your question, please press the pound key. It is now my pleasure to turn the floor over to your host, Mr. Scott McLeod. Sir you may begin your conference.

Scott McLeod, Senior Vice President, Global Marketing and Corporate Communications, CDC Software

Good morning everyone and thank you for joining us today for the conference call on our results for the fourth quarter 2005 and guidance for 2006. With us today is Mr. Peter Yip, CEO 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 at CDC’s 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 web cast may constitute forward looking statements which are based on managements 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 b e beyond the control of the company. This includes but is not limited to economic factors effecting business spending, referred to in the company’s filing with the Securities and Exchange Commission. And now it’s my pleasure to introduce Mr. Peter Yip for a review of our results and outlook. And then, we’ll be pleased to take your questions. Peter?

Peter Yip, Executive Vice Chairman and CEO.

Thank you Scott and good morning everyone. This morning I would like to focus on our results for the full year 2005 and the 4th quarter of 2005. I would also like to bring you up to date on the progress we have made with our strategic review to realign our organization and become a leaner, market-focused company. The significant steps we have been taking are very important to our success going forward. Additionally, I will provide guidance for the first quarter of 2006 as well as guidance for the full year.

For the full year 2005, our operating highlights include the following:

Total revenue for the full year 2005 was $245 million, up 34.1% from $182.7 million in 2004. Revenue for the fourth quarter was $62.3 million, up 13% from $55 million in the fourth quarter a year ago.

Total revenue from CDC Software for the full year 2005 was $201 million, up 33.8% from $150.8 million a year ago.

For the fourth quarter, CDC Software revenue was $50.6 million, up 2.1% from $49.6 million in the fourth quarter of 2004.

Total revenue from China.com for the full year 2005 was $43.2 million, up 35.6% from $31.9 million a year ago. For the fourth quarter, China.com, Inc. was $11.7 million, up 112% from $5.5 million in the fourth quarter of 2004.

The adjusted EBITDA for the full year for CDC was $13 million, and for the fourth quarter was $5.4 million. When you look at the GAAP net loss for the full year, it was $3.9 million and for the fourth quarter the net income was $1 million.

The non-GAAP net cash and cash equivalent increased by $5.2 million from 2005 to $218 million as of December 31, 2005.

Overall I am very pleased indeed with the results achieved in 2005 and specifically in Q4. We are now on a clear path to consistent profitability as evidenced by our results posted in the last quarter. Our strategic review and corporate restructuring is now complete and we are operating the business on a greater improved cost structure and I will share more of those details with you in a few minutes.

But first, let me focus on two core operating units.

Let’s take a closer look at China.com. The business unit has been making excellent progress in 2005. We’re making an investment in online games in MVAS and portals to position ourselves for future growth and to capture upcoming opportunities. Our main investment in online games was in marketing and promotions for the very exciting game Yulgang, which turned out to be the number one game in all of China in 2005. In MVAS businesses, we invested to diversity our revenue base, and today we have shied away from SMS predominant and drive much of our MVAS revenue from advanced services. So, making our MVAS revenue much more balanced.

In the portal space, we continue to invest in our brand and we continue making progress in building more and more exciting content.

The online game subscribers increased to about 15 million at the peak, concurrent users surpassed 260,000 at the end of Q4 2005.

We fully expect that this continued trend in organic growth in our China business to continue in 2006. We believe in 2006 China.com is well-positioned to continue to take advantages of the opportunities emerging in the Chinese market.

Now let me turn it our attention to CDC Software.

The business of CDC Software continued to turn in excellent performance on both an annualized basis as well as on a quarter over quarter basis. Topline growth was driven by substantial increase in the sales of software licenses and business services.

In Q4 we report record software license revenue, driven by growing demand from new customers around the world as well as delivery of new products for our existing customers. During the quarter, we signed 75 new customers for a total of 300 for the year and there is more than one new customer signed for every business day of the year.

We continue to achieve one of the highest ratios of new to existing business in the industry. In 2005, 40% of our software license revenue came from new customers. This is a clear indication that our industry specific solutions for ELP, for supply chain and for CRM are having strong demand and very clear selling advantages in competitive situations around the world.

We recognize that much of our success is based on our industry-focused approach to software design, to software development and sales. Simply put our specialized focus results in a high win rate in competitive opportunities. For example, in 2005 our win rate for CRM applications in the financial services market exceeded 60% and we are seeing similar results in many of our other target markets globally. This result is more than twice the typical win rate for generalized (inaudible) priced software applications.

Of equal importance, our customer community is growing; which provides an expanding maintenance base and a larger base of (inaudible) new products.

The growing customer community also creates more opportunity for selling value added services from our business service division.

Another very important factor contributing to our success has been our ability to delivery comprehensive targeted solutions on a global scale in 2005. Our business well-balanced globally with less than half of our revenue coming from the Americas, almost 1/3 from continental Europe and the UK, the Middle East and Africa and approximately 20% coming in from the Asian-pacific countries. Looking ahead to the remainder of 2006, we will continue to invest to expand our distribution channels and we are expecting a steady rate of sales growth in Eastern Europe, Latin America, and Asia Pacific overall and in China particularly.

We continue to grow CDC Software through internal product development and organic growth as well as through target acquisition. Our acquisition strategy is driven by a keen focus on our core strengths and areas of greatest competitive advantage. Our three primary areas of focus are: 1) providing expanded ELP and SBM solution for process manufacturing. This is a primary solution from Ross and IMI and we have recently expanded this offering with our acquisition of JRG which adds on-demand supply chain planning solutions delivered as software added service.

We continue to look for additional products that will expand our offerings and increase our competitive advantages in process manufacturing.

Number 2, vertical CRM solutions. This is primarily based on (inaudible) and how this will fit very well into our ’04 CRM strategy.

Number 3, outsourced business services. These services are highly complimentary to our solution offerings for process manufacturing and vertical target CRM systems. In addition to the traditional implementation and consulting services offered by other enterprise software vendors, we also plan to offer expanded value-added services including application monitoring and managed application outsourcing.

In support of all these three key areas of focus for CDC Software, our acquisitions will be targeted to expand market share, will be targeted to fill critical functional gaps in our products and industry solutions, and provide additional value-added services that create new revenue opportunities and further differentiate us from our competitors.

As a result of our accomplishments so far, we are now one of the top 25 global providers of enterprise software systems. We are very proud of this achievement and intend to continue to move up, to continue to strengthen our positioning, continue to build momentum through both organic growth and target acquisitions. By the end of this year, we expect to be in the top 15 and by the end of 2007, we expect to be in the top 10.

With our prior acquisitions, we have proven that size is important and the market momentum we create can only help us to significantly improve the performance of new sales activity for acquired companies. As we continue to grow through acquisition, we will apply this proven formula to acquired companies with the expectation of quickly driving positive results to the bottom line.

I am very proud of our accomplishments in 2005 and the value we are creating for our customers and for our shareholders. We have already undergone a transformation that will position us for even better performance going forward. As a result of our strategic review, which was initiated in the 3rd quarter of 2005 and just recently completed, CDC is now organized into 2 primary business units; China.com and CDC Software. I am now fully re-engaged as the CEO of CDC Corporation and expect to be Chairman of the Board for CDC Software. I am very active in driving the company’s strategy and overseeing operations going forward. Several weeks ago, we announced a new senior management team that is now in place and has the experience, has the drive that we will need to realize our full potential.

High on our list of priorities will be focusing on unlocking potential shareholder value by separating CDC Software as a stand-alone company. The newly-formed CDC Software Board is carefully evaluating the many options in front of us in order to achieve the goal of enhancing and unlocking shareholder value for CDC shareholders. Among the possibilities we may seek to do a reverse merger, we might do an IPO, as there are many bankers who have been approaching us. They think the market is ready, particularly for a company that has the divisions we have and has the track record and has the management team that can deliver. We might even consider a dividend to our CDC Shareholders. We will do whatever it takes to unlock the potential shareholder value. We believe very strongly that this course of action will happen and we hope it will happen in the next 12-18 months, if not earlier.

The key initiatives for 2006 include continuing to focus on consistent profitability. We have reduced our overall expenses by more than $6 million on an annualized basis and we continue looking for opportunities for further improvement. In addition to focusing on consistent profitability going forward, we will also be focused on growing and improving our profit margins to achieve double digit results.

In supporting our growth objectives, as I said before, we will continue to seek out targeted acquisitions that will support our growth strategy for our industry-specific solutions and complimentary value-added business services.

Now, before I take any questions from you, I’d like to provide guidance for the company going forward.

For the first quarter of 2006, we are expecting to report the following results for CDC Software:

Total revenue for CDC Software will be in the range of $52.3 million to $52.6 million, representing an approximately 12% increase over the first quarter of a year ago. The adjusted EBITDA will range between $4.1 million and $4.2 million, which would be an increase of approximately 272% over the same period a year ago.

Taking a broader look at our expectations for the full year 2006, we are expecting to achieve the following:

For CDC Corporation, total revenue in 2006 will range between $283 million and $290 million, which will be an increase of approximately 16% over 2005. Non-GAAP net income will range between $30.9 million and $32.1 million; that represents over 96% increase compared to a year ago.

The adjusted EBITDA will range between $29.9 and $31.2 million, representing 130% increase over a year ago.

For the non-GAAP net income on a full diluted basis, using our share calculating, we’re estimating $.28, which translates to .02824, representing an increase of approximately 100% over a year ago.

For CDC Software we are expecting total revenue in 2006 to range between $225 million and $230 million. The non-GAAP net income will range between $27.1 million and $28.3 million and that represents 86% over a year ago. On the adjusted EBITDA basis, $24.72 and $26.1. That is more than double our adjusted EBITDA a year ago.

The first quarter historically is very slow for enterprise software vendors. We are very pleased to report growing revenue for every segment of revenue for CDC Software for the first quarter of 2006. And, this healthy revenue growth in the first quarter will provide a tremendous, solid start for CDC Software in 2006.

So, in summary, we believe the company’s structure is much improved and the operating units are well-positioned for success in their target markets in 2006. We continue to execute and grow, both organically and through target acquisitions. Additionally, we are prepared to do whatever it takes to unlock shareholder value. And, as we do so we are expecting 2006 to be a very good year for all of us.

At this point, we are ready to take questions. Scott, I will turn it back to you.

Scott McLeod.

Thank you Peter. Ladies and gentlemen, we are ready to take your questions. I’d like to request that we take only one question at a time from each participant to allow as many of you as possible to participate during the time that we have remaining. Ian, can you go ahead and provide instructions so that everyone can get their questions into the cue?

Operator:

Certainly. At this time I would like to remind everyone, if you would like to ask a question, please press “*