(Source: Business Wire)
CDC Corporation (NASDAQ: CHINA), a leading global enterprise software and new media company, today announced financial results for the fourth quarter and full year ended December 31,2008. For the fourth quarter of 2008, revenues and Adjusted EBITDA (a) from continuing operations (b), were (U.S.)$96.2 million and (U.S.)$8.0 million, respectively. This compares to revenue and Adjusted EBITDA of (U.S.)$106.9 million and a loss of (U.S.)$4.5 million, respectively, for the fourth quarter of 2007. Adjusted EBITDA for the second half of 2008 of (U.S.)$20.3 million, exceeded the company's guidance of (U.S.)$17.0 million to (U.S.)$19.0 million, which was re-affirmed on February 4, 2009.
In addition, according to Thomson Financial First Call, Wall Street consensus estimates for CDC Corporation's Adjusted EBITDA for the fourth quarter of 2008 were expected to be $4.3 million. With Adjusted EBITDA of (U.S.)$8.0 million in the fourth quarter of 2008, this marks the fifth consecutive quarter where CDC Corporation has reported quarterly Adjusted EBITDA that has exceeded Wall Street consensus estimates.
For the year ended December 31, 2008, total revenue and Adjusted EBITDA were (U.S.)$409.1 million and (U.S.)$28.7 million, respectively, compared to (U.S.)$394.0 million and (U.S.)$20.3 million for 2007.
CDC Corporation also generated positive operating cash flows in the fourth quarter of 2008, marking four consecutive quarters of cash generated from operations during the year. Operating cash flow was (U.S.)$8.3 million in the fourth quarter of 2008 and was (U.S.)$27.1 million for the full year ended December 31, 2008. The company's balance sheet remained strong at year end with Non-GAAP Cash and Cash Equivalents of (U.S.)$215.2 million as of December 31, 2008, which was an increase from the previous quarter as a result of cash flow generated from operations. This amount subsequently has been reduced by the company's previously announced purchases of a portion of its convertible notes as discussed herein and which, as previously announced, the company was able to accomplish by utilizing a combination its own internal cash, cash generated from operations and refinancing.
"Despite the extremely difficult global economic environment, we are proud of what CDC Corporation accomplished in 2008," said Peter Yip, CEO of CDC Corporation. "We believe we are ahead of the curve in on our cost reduction efforts and have made several significant operational improvements in our business units throughout 2008, which helped us to achieve strong Adjusted EBITDA growth of 41 percent for the year ended December 31, 2008. Our margin expansion was accomplished primarily through improved staff utilization, the streamlining and tighter integration of acquired entities, improving cost management and leveraging an expanded offshore model in India and China for research and development. We have also seen maintenance renewal rates above-industry average and our maintenance win back program, started at the end of the third quarter of 2008, has demonstrated significant momentum generating more than (U.S.)$619,000 by the end of 2008. We believe that our proactive strategies allowed us to exceed Wall Street consensus estimates for the last five quarters. In addition, we have made excellent progress with our convertible debt."
Yip said, "We have continued to generate strong operating cash flow, as during the fourth quarter of 2008 we generated over (U.S.)$8 million in cash flow from operations and throughout 2008 we generated an aggregate of over (U.S.)$27 million. Furthermore, we expect to continue generating positive cash from operations. We intend to continue to focus on cash generation throughout 2009, as well as work with the remaining holders of our outstanding Notes."
In the fourth quarter of 2008, CDC Corporation recorded a goodwill and intangible asset impairment charge of $49.0 million and an impairment charge associated with its investments in available for sale securities of $8.5 million. With these charges, CDC Corporation reported a net loss from continuing operations of $84.3 million and $108.4 million for the fourth quarter and full year of 2008, respectively.
Strategic Growth Alternatives
CDC Corporation has three core businesses, CDC Software, a leading global provider of a broad suite of scalable enterprise software applications to customers in targeted vertical industries; CDC Global Services, an IT services and consulting business; and CDC Games, which offers online games in China. These businesses, on an aggregate basis, achieved a 35 percent increase in Adjusted EBITDA of $48.8 million in 2008 compared to $36.2 million in 2007. In the past, CDC Software included CDC Global Services. The company has now separated these businesses for reporting purposes, as it now believes that CDC Global Services should be viewed as a discrete and autonomous business unit with its own operating geographies and metrics.
The following table illustrates the results generated by these three businesses on a combined basis for the years ended December 31, 2007 and 2008:
2007 2008 Variance Revenue: $382.6 million $395.4 million 3% Adjusted EBITDA: $36.2 million $48.8 million 35% Adjusted EBITDA Margin: 9% 12% 33% -------------------------------------------------------------------------------
The parent company, CDC Corporation, has invested considerable time and effort to develop these various core businesses and each of them is at a different stage of maturity. During 2008, CDC Corporation has improved several of the key operating metrics in these businesses and is now in the process of exploring strategic and growth alternatives with respect to all of them. The company believes that the exploration of such alternatives for these businesses could ultimately unlock shareholder value in the company.
According to Yip, "While our businesses are not for sale, as a public company we must explore all strategic and other growth alternatives for our various businesses in order to act in the best interests of our shareholders and our company. We believe CDC has now established itself as a platform for growth and we expect that this global and scalable infrastructure will continue to contribute to our future growth by facilitating organic expansion, strategic acquisitions and other business opportunities to unlock shareholder value."
Convertible Debentures Update
As of April 20, 2009, an affiliate of CDC Corporation has negotiated the purchase of an aggregate of more than 52 percent of the original $168 million face value of the Company's 3.75 Percent Senior Exchangeable Convertible Notes Due 2011 (Notes), from 9 of 11 separate Note holders. The total of all such purchases currently closed and under contract represents an aggregate of $88 million of the face value of the outstanding Notes, which were, on average, purchased at prices below par value. In addition, the company was able to accomplish these purchases by utilizing a combination its own internal cash, cash generated from operations and refinancing, with no dilution of shareholder equity resulting from these transactions. The company has saved over (U.S.)$26.5 million in potential future interest expense and principal as a result of these previously announced purchase transactions under contract and closed with the holders of company Notes.
Internal Control Remediation
The company has made significant improvements with respect to the material weakness remediation efforts and believes it is currently on track to be able to fully remediate the material weaknesses that existed at December 31, 2007, however, final determination will be made upon the completion of the financial audit for the 2008 fiscal year and filing of the corresponding Form 20-F which the Company is expecting to file before June 30, 2009.
"After a significant realignment of operations which we began more than a year ago, we believe that CDC Software is well positioned despite the current challenging economic backdrop. CDC Software delivered an increase in maintenance revenue of almost 20 percent to $103.6 million for 2008 compared to 2007. CDC Software also delivered solid Adjusted EBITDA of $32.4 million for the full year. We believe that CDC Software is also on track to cure its previously disclosed material weaknesses. In addition, CDC Software has now established itself as a platform for growth and we expect that this global and scalable infrastructure will continue to contribute to our future growth by facilitating organic expansion, strategic acquisitions, and leveraging cross-selling and other business opportunities with our customers.
"In addition, we are pleased that CDC Games achieved 34 percent annual growth in revenue for 2008 compared to 2007. Although this segment had delivered five consecutive quarters of double digit sequential growth through 2008, we do not expect this to continue into the first quarter of 2009 due to several factors including the typical seasonality effects associated with the first quarter. In addition, we believe that several gamers were awaiting the launch of Yulgang 3.0, which occurred in late March 2009. This resulted in lower Yulgang revenue for January and February of 2009. However, we are now starting to see an improvement in revenue performance as a result of the recent launch of Yulgang 3.0," Yip stated.
"Overall, despite the difficult economy, we remain cautiously optimistic with regard to our long-term prospects. Leveraging our strong balance sheet and cash flow, we also plan to resume pursuing strategic acquisitions to expand our software platform, such as our previously-announced pending Categoric transaction. In addition, we also look to increase our marketshare in China for our MMO online games business by pursuing additional investments. We remain confident of our global business which is reinforced by our strong market presence in China."
Full Year 2008 Highlights:
Total revenue for CDC Corporation for 2008 was (U.S.)$409.1 million, an increase of 4 percent from (U.S.)$394.0 million in 2007.
Adjusted EBITDA from continuing operations was (U.S.)$28.7 million for 2008, compared to (U.S.)$20.3 million in 2007.
Total revenue from CDC Software for 2008 was (U.S.)$240.8 million, a 0.4% increase from (U.S.)$239.9 million in 2007.
Total revenue from CDC Global Services for 2008 was (U.S.)$109.7 million, an increase of 0.5% from (U.S.)$109.1 in 2007.
Revenue from CDC Games for 2008 was (U.S.)$44.9 million, an increase of 34 percent from (U.S.)$33.6 million in 2007.
The company's China.com segment generated revenue of (U.S.)$13.7 million in 2008, an increase 20 percent from (U.S.)$11.4 million in 2007.
Subsidiary Revenue and Operating Metrics Summary
CDC Software (excluding Global Services)
On a standalone basis, CDC Software, the largest of the three core businesses, had the following historical annual results:
2007 2008 Variance Revenue: $239.9 million $240.8 million - Adjusted EBITDA: $26.1 million $32.4 million 24% Adjusted EBITDA Margin: 11% 13% 18% -------------------------------------------------------------------------------
Despite essentially flat revenues in Q4 2008, CDC Software experienced a significant improvement in Adjusted EBITDA margins primarily due to the effects of several cost saving initiatives that were implemented over the past several quarters.
CDC Software intends to continue to focus significant effort on improving its operating margins through several initiatives including leveraging an offshore model, improving sales force performance and continuing to work on maintenance win-backs.
CDC Software also introduced new products and version upgrades for its core applications in ERP, Manufacturing Operations Management, Customer Relationship Management, Human Resource Management and Supply Chain during the fourth quarter of 2008, and has also continued to expand into new vertical markets for its Front Office Solutions, which have been gaining traction in emerging markets through the company's Franchise Partner Program. The company also integrated its separate partner and reseller programs into one central program called CDC Software's "Global Partner Program" which is expected to streamline efficiencies and savings as the company expands its geographic footprint.
In Q4 2008, revenue for CDC Software was geographically distributed, with the Americas contributing about 55 percent of the total, and the rest of world contributing about 45 percent.
Further, during Q4 2008, CDC Software added a total of 149 new customers and signed upgrade and expansion agreements with 472 enterprise software customers. New customers accounted for 34 percent of total software license revenue during the quarter and included: AAA of Western and Central New York, Eesti Tartbijateühistute Keskühistu (ETK), John Bean Technologies SPA, Legacy Packaging LLC, Mair Research, Martinez Nieto (MARNYS), Owens & Minor, Inc., Precision Biologic, Inc., Sabormex and Web Line.
Repeat business with existing customers accounted for 66 percent of total software license revenue for the quarter. Customers with expanded and repeat business during the quarter included: Accor Services, AFII, ANCV, Bankpime, Baumer Electric, Fresca Group, Plc, Johnson Controls, KBS, Litehouse Foods, Mapfre, Max New York Life, Midcoast Aviation, Pierre & Vacances Conseil Immobilier, Sandvik Terreal and Virbac.
Recent highlights include: Ross ERP was selected as the ERP solution to be used in the Food Safety Information Management Platform being offered to the Henan Province in China; CDC Factory closed the company's second largest MOM deal ever in North America to a leading, global pasta maker; CDC Software's Franchise Partner in Latin America sold several deals including their first sales for CDC Factory and CDC Respond in Mexico and Latin America; a major version of CDC HRM was launched in China that includes new human capital management functionality along with employee self-service capabilities. Also, CDC HRM was sold to CCTV, China's largest national TV network along with several other industry-leading companies.
Additionally, in February 2009, CDC Software announced that it entered into a binding term sheet to acquire WKD Solutions Ltd., a leading provider of supply chain event management and business activity monitoring (BAM) solutions marketed under the Categoric brand name. These solutions help enterprises improve their supply chain visibility and support their governance, risk and compliance requirements.
CDC Global Services
On a standalone basis, CDC Global Services had the following historical annual results:
2007 2008 Variance Revenue: $109.1 million $109.7 million 1% Adjusted EBITDA: $4.7 million $5.3 million 13% Adjusted EBITDA Margin: 4% 5% 25% -------------------------------------------------------------------------------
Total revenue for CDC Global Services for Q4 2008 was (U.S.)$24.5 million. Gross margin for CDC Global Services was 21 percent during Q4 2008 compared to 22 percent in Q4 2007. Staff utilization for the quarter was 85.2 percent, continuing a strong trend.
CDC Global Services' offerings include platform-specific services for Microsoft and SAP, as well as project management, staff augmentation, managed help desk solutions, and a full range of outsourced service offerings. The company also provides hardware for data collection and RFID through partnerships. Two key attributes of this business unit include the onshore / offshore delivery model for project work, which helps to keep costs low for customers while protecting margins for the company, and long term contracts for managed services, which ensures predictability of our revenue stream. For the full year 2008, roughly 38% of the revenue was billed under long term contracts.
Recently, this business unit had some key wins, which include the implementation of SAP eWMS at a major global pharmaceutical company, a global leading medical equipment company, a large utility, and a major financial services company. We have also successfully delivered Global Service capabilities to CDC Software customers, proving that the CDC Software customer base is an excellent growth target for Global Services.
In addition, recent highlights include: CDC's Australian services unit was named Microsoft Dyanamics Fastest Growing Partner of the Year. Several of our services units with US and Indian operations, launched Business Process Outsourcing offerings utilizing the Mumbai base. A pipeline has been established and multiple wins for both voice based services and process based services.
CDC Games
On a standalone basis, CDC Games had the following historical annual results:
2007 2008 Variance Revenue: $33.6 million $44.9 million 34% Adjusted EBITDA: $5.4 million $11.0 million 103% Adjusted EBITDA Margin: 16% 25% 56% -------------------------------------------------------------------------------
Total revenue from continuing operations (b) for CDC Games during 2008 was (U.S.)$44.9 million, which represents an increase of approximately 34 percent over 2007. The increase was primarily driven by a substantial year over year improvement in the performance of Yulgang following the settlement in March 2008 of our dispute with Yulgang's developer, Mgame. Gross margin from continuing operations (b) for CDC Games during Q4 2008 was 43 percent.
In the first quarter of 2009, CDC Games launched Lunia, its first massively multiplayer online role-playing action game (MMORPG), in China. Lunia is based on the popular manga style comic art form. In addition, improved cross-promotion and data mining activities have helped CDC Games lower its cost of acquiring new players for its games.
CDC Games believes that the benefits of its diversification strategy are becoming clear as CDC Games' revenue is now derived from its portfolio of six online games. As such diversification continues into the future, the company believes that it will be able to develop a relatively stable, recurring and repeatable revenue base. In addition, the company believes it has developed a more cost-effective process for effectively launching games, which includes cross promotion and leveraging a combined base of existing players.
CDC Games is working on launching domestic games in the China market. The company expects this strategy will help it align itself with market trends, where industry data has indicated that the market share of domestic online games in China increased from 65 percent in 2007 to more than 80 percent in 2008.
China.com
Total revenue from continuing operations (b), for the China.com portal and media services businesses during Q4 2008 was (U.S.)$4.7 million, an increase of 16 percent from (U.S.)$4.0 million in Q4 2007. Gross margin from continuing operations for the China.com portal business during Q4 2008 was 56 percent.
During Q4 2008, China.com saw an increase in portal advertisement in its key vertical channels, automobile and webgame channels. The company believes that China.com benefits from strong brand recognition in China, the growth of online advertising and strategic partnerships with Internet industry leaders. China.com is particularly focused on its industry-leading automobile and defense content channels and has increased its advertising focus in these areas.
Summary
Yip concluded, "We continue to believe that our stock is undervalued and will continue to work to enhance shareholder value in these difficult economic times. As of year end 2008, we have improved our cash balance despite several convertible redemptions. In addition, we are planning to explore strategic alternatives for our core businesses, which we believe will unlock shareholder value."
Conference Call
The company's senior management will host a conference call for financial analysts and investors, today, April 20, 2009 at 5:00 pm EDT.
