CDC Corp. (NASDAQ:CHINA)
Q4 and Full Year 2005 Earnings Results Conference Call
April 12, 2006, 9:00am EST
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
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.
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?
Certainly. At this time I would like to remind everyone, if you would like to ask a question, please press “*” then the number “1” on your telephone keypad. Once again, if you’d like to ask a question at this time, please press “*”, “1” on your telephone keypad.
While we’re waiting, I see that we’ve got several questions that have come in over the internet. So, why don’t I go ahead and read off a few of these while the cue builds up?
The first question that we’ve got here is: Where is Rick Marbarg?
Thank you very much for the question. Rick is no longer with the company. As we completed the corporate restructure, Rick decided to pursue other opportunities outside of CDC. The new management team that we announced a month ago is in place, as I said before, and fully engaged. And, we certainly wish Rick the best of success.
Okay, Peter. It looks like we’ve got a couple of others here, too. I’ll read the next one.
Compared to the growth rate you posted for Q4 2005, your outlook for ’06 seems quite aggressive. Can you offer more insight into the changes driving this?
Very good question. I would answer this question on a general basis. What I’d like to do is to ask one of our senior executives who is focusing on managing our sales operations, Bruce Cameron, in North America; he’s on the call today. He will give you an outlook in terms of this business and the market. You’re right on the question. Our outlook, indeed, for 2006 is very aggressive. And particularly now, as I said before, we’ve just completed our strategic review and our corporate restructuring. Our operating costs have been significantly reduced, as I said before, by more than $6 million. With our new management team in place, we are leaner, we are very focused, and we are very energetic. And, I’m very confident in our ability to achieve these target goals. And with this I’m going to turn it over to Bruce and he will give you a sense of how the market is in North America; at least what he’s been seeing. And Bruce is a very experienced executive who has been with us for some time and has been contributing very successfully to our success so far. Let me turn it over to you, Bruce.
Bruce Cameron, Senior Vice President, North American Sales, Pivotal Corporation.
Thank you, Peter. In North America, we’re considered the industry solution CRM company. So in going up against other companies that are perceived more from a generic solution, Oracle, SAP and Salesforce.com, our prospects and customers are coming to us looking for very unique, quickly-implemented solutions that allow them to return that investment as quickly as possible. And this relates very well to the financial service industries, the home builder industries and certain manufacturing industries. We just closed a deal about 3 months ago at a bank called Calamos, where we were up against Siebel and Onyx and within 3 months of taking that deal, we have them up and live with one of their lines of business. So, to take our vertically rich solutions and make customers very successful very fast is getting around the industry very quickly and our feeling is that it will fuel our growth very fast. We’ve added 4 new account sales people across North America and we fully expect that 40-50% of our business in North America next year is going to be by new customers. And our maintenance renewal rates from our existing customers exceed 92%. So, we look at both of those avenues – both our installed base and new customers – to be very strong in 2006 for CRM software.
Great. Thanks. I see one other question that’s come in here. Let me read it to the phoned-in questions. For CDC Software your focus on growth through acquisitions is impressive and you seem to be executing. But, how are you driving organic growth and how much of a priority is this for you?
Thank you very much Scott. This is again a very good question. Certainly organic growth is a very important part of our strategy going forward. As we have proven over the last several quarters, we continuing growing organically; selling to new customers. More than 40% of new licenses are from new customers as well as (inaudible) from our existing customer base. And I would also turn very quickly to (inaudible) in a while from now to talk about our acquisitions, as you have been referring to. How they will help and compliment our organic growth strategy. Eric, can I turn it over to you? Maybe you can give us some more color?
Eric Musser, Executive Vice President, Strategy, M&A, and Chief Technology Officer, CDC Software.
Yeah, excellent Peter. As you know, I’ve been with the company for over 13 years and I’ve really seen some great things over the period of time that I’ve been with CDC Corp. and I think the most important thing that I see going on right now is that we’re seeing great traction in the markets that we’re selling into. We really see three separate areas of business that are growing for us at this point in time. First, the verticalized CRM market; it continues to grow. The extended ERP, specifically in process manufacturing. And secondly, the business services continue to grow with our outsource businesses for North America, providing value to our customers. All of this being looked at in whole, we see that our organic growth is moving along very nicely; double digit growth. And, we expect this to compliment our acquisitions capabilities as well. Thanks, Peter.
Okay, folks. I’ll bet we’ve got a couple of questions in the call cue now. Ian, can you put somebody through?
Certainly. Our first question comes from Alex Yawenski with Dunallen. Please go ahead.
Great quarter guys. I wanted to find out a little bit more about the CRM opportunities going forward. Are there any thoughts about expanding into discreet from the processes industries?
Alex, a very good question. As I have said before in the past, discreet manufacturing is something we have been looking at. It’s a market that unfortunately has not grown as fast as process manufacturing, so far. There are a lot of players in that space that have been there for a long, long time. And, I think we are at a point whereby we will over the next couple of quarters make a very decisive decision in that space. Something hopefully that we can (inaudible) our existing customer base. More importantly, we want to do something that would make sense, that would give us ongoing organic growth. And, not just doing an acquisition for the sake of adding another software product. This is something we are very meticulous about, compared to some of our peers. I hope we will be able to give you an update over the next couple of quarters in this particular space.
Our next question comes from Michael Wenkowski with Pier 1 Research. Please go ahead.
Thank you. I know in the press release it alluded to JRG being a software service provider, which is great. I guess trying to read between the lines and see what your strategy is moving forward for software service and what areas will you be targeting in 2006?
Thank you very much Michael, this is a very good question, a very timely one. I’m going to pass to my senior executives to respond to you because this is a very important question, very strategic. First I’m going to ask Eric. He’s going to give you an update on how we’re doing with JRG since we acquired them approximately 65 days ago. And the excitement we created within the company; how we’ll position that going forward in our current customer base as well as the prospective customers. Secondly I would go back to Eric again, because he’s been spending a lot of time in terms of understanding our current strategy. And, as I said before, the enormous changes we’re anticipating in the software industry as a whole and how we as a company will take full advantage of such opportunities; how we’ll position ourselves and how we will plan going forward. And let me first turn it over to Gary.
Gary Nowacki, Senior Vice President, North America, Ross Systems
Thank you Peter. You’re correct. We made the JRG acquisition about 60 days ago and we’ve had very good momentum in bringing our sales force up to speed on it, training our services people and so on and so forth. We’ve had a lot of activities with potential partners in this area and there is general, I would say, excitement in the marketplace on software service. I would say where we’re especially excited is that if our sales force is out calling on an account and that account is maybe not looking to license ERP software or maybe not looking to license CRM software, software service in the planning and scheduling area is a great way for us to penetrate that account. We have a very good history of retaining accounts and up-selling and cross-selling them. So it’s one more way, software service, for us to get an easy access point into an account and then to expand later along with that.
So Gary, I’ll add a little bit more to that. I think that one of the things that we’re seeing in the market today is that software to service really provides the consumer a different choice out there. And the choice is really instead of going out with their capital budget and spending, this now goes into an operational budget. And with the solutions that we’re delivering today and the solutions that we’re going to be delivering over the next 12 months, these provide immediate value back to the enterprise; whether this is at a plant level, a department level or company level. We’re seeing great benefits. And, we’re seeing this with our one plan JRG applications, as well. You will see software to service coming across all the major disciplines that I mentioned before and this will become a more important part as we move into the end of 2006 and 2007. That being said, I think we need to understand that we’re going to really have 3 different models moving forward, as we do today. On-premise, which is our traditional revenue line that we have; it will continue to grow and is continuing to grow at double-digit growth for us. Software to service; we’ll see some exponential growth from that but it will still be a minor portion of our overall application sales, and then secondly appliance and selling appliances to our customers. Those are three different mechanisms for delivery. We believe in order to e successful as an enterprise software company, you will need to have all three levels of deployment capabilities in your portfolio of products. Peter? Next question?
Thank you. Scott, next question?
Ian, can you take a moment to pause and remind everybody how to get their questions into the cue?
Certainly. Once again if there are any remaining questions, please press “*” then the number “1” on your telephone keypad.
While we’re doing that, I see that we do have one other that’s come in online. It’s in regard to our ongoing bid to acquire Onyx. The question reads: in your opinion, is Onyx being more responsive to your revised offer than they were with the previous offer?
This is a very good question. It poses a question that is of interest not only to CDC shareholders but also Onyx shareholders. I would turn this question again to Eric, as he has been dealing with the Onyx bankers.
Yeah, that’s correct. We have had communications. The answer to that is, yes. We would like to have much more dialogue though, to move this deal forward. As everybody knows, we believe that size matters. We believe that the quickest way to unlock value is to put these companies together. Onyx and Pivotal today are spending money in similar ways; in infrastructure, sales, marketing, product development. And the quickest way to provide more value to our shareholders is to put these organizations together for more topline revenue as well as bottom line profit. We’ve put an excellent offer on the table and I’d like to have continued dialog with the Onyx organization in order to move this forward.
Okay. Ian, do we have any other questions that have come in?
At this time it appears we have no further questions, gentlemen.
Alright, then I guess that’s a wrap for today. I want to thank everybody for joining us for today’s update. Moving forward we want to make sure that we are able to maintain an open dialog with you. So by all means if you had outstanding questions that you didn’t want to ask on the call, please reach out to us through the contact information either in the presentation or the announcement. And we look forward to staying in touch with you. Again, thank you very much.
Thank you ladies and gentlemen. This does conclude today’s CDC Corporation conference call. You may disconnect your lines and have a great day.
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