CDC Reports Strong Q1, Contemplates Software Spin-off
by Jeff Moad, MA Editorial Staff
Posted on Thursday, May 25, 2006 5:06:00 PM EDT
managingautomation.com
"Riding strong growth in its enterprise software business and ongoing consolidation and cost-containment efforts, CDC Corp. today reported a dramatic rise in first-quarter earnings and solid revenue gains for the period ended March 31.
Hong Kong-based CDC Corp. also disclosed that it is actively exploring the spin-off of CDC Software, which is based in Atlanta, into a separate company.
Revenues for CDC Software, which includes Ross Systems and other enterprise software companies acquired by CDC over the last few years, grew 13.7% to $53 million compared with the first quarter of 2005. Software license revenue for the quarter was $8.8 million, up 7.3% compared to the like period last year.
Software consulting and services revenue, meanwhile, grew 21.5% to $28.8 million for the quarter. Software maintenance revenues were $15.4 million, up 5.5% compared to the year-earlier period. The company does not break out earnings for CDC Software.
"I am very pleased with this quarter's performance," said Peter Yip, CDC Corp. executive vice chairman and CEO, during a conference call with analysts . "We have delivered solid year-over-year growth and improvement in all financial metrics."
CDC Corp. also released financial guidance indicating that the company expects revenues in the second quarter of 2006 to rise by about 10% to between $70.6 million and $71.6 million. Yip said second-quarter earnings will grow by 13% to between $5.8 million and $6.3 million.
The strong performance of enterprise software -- which represents the bulk of CDC Corp's business -- helped boost overall results. CDC Corp. reported $64.6 million in total first-quarter revenue, up 14.9% compared to the $56.2 million in revenue the company reported in the first quarter of 2005. CDC Corp. earnings for the quarter rose 392% to $5.9 million.
Contributing to the company's bottom-line improvement were lower sales, general and administrative (SG&A) costs. During the quarter, SG&A expenses were 32.5% of revenue, down from 41.5% of revenue in the year-earlier period. CDC also reduced research and development expenses by moving more software development activity to low-cost regions such as China, officials said.
On the conference call, Yip said CDC will continue to reduce operating expenses as the company continues to consolidate its worldwide operations.
In recent years, CDC Software has pursued a roll-up strategy, acquiring and integrating several enterprise software vendors since 2002. In addition to Ross Systems, which was purchased in August, 2004, CDC has acquired Pivotal (February, 2004), IMI (2003), and Platinum China Ltd. (April, 2002). Most recently, CDC acquired CRM software vendor c360 in April.
Yip said CDC will continue to push its acquisition strategy, which currently includes an outstanding $82.7 million offer to purchase CRM software vendor Onyx Software Corp. (Bellevue, WA). Onyx has said only that it will evaluate the offer, made March 22. Today, CDC Corp. Executive Vice President for Strategy Eric Musser indicated the company is losing patience and may consider removing its offer from the table.
"We believe we have a fair offer on the table ... and we are standing behind that offer," Musser said. "We encourage investors of Onyx to make a decision soon ... At some point we will need to make a go/no go decision on Onyx, but we are not there yet."
Musser also reiterated earlier comments that CDC has other potential acquisitions "in the pipeline," without providing details.
The initiative to spin CDC Software out as a separate company, Yip said, is intended to increase CDC shareholder value. Yip said a recently formed CDC Software board of directors has been working with financial advisors on deciding what form that spin-off will take. He said a spin-off could be accounted for as a dividend to existing shareholders.
Officials said CDC would complete its planning on the spin-out this summer and announce details sometime during the next two quarters.
The company also revealed that it is planning later this year to launch on-demand CRM, human resources, and payroll services in China. The CRM software-as-a-service offering will be a joint effort with Microsoft as part of an alliance announced earlier this week.
Beginning in July, Microsoft and CDC will jointly market on-premise versions of Microsoft's Dynamics CRM and CDC's Software c360 products in China. At that time, CDC will also launch an on-demand version of its HR and payroll applications in China.
By the end of this year, the company said, CDC will offer an on-demand version of the Microsoft Dynamics CRM application in China. The on-demand offerings will be hosted at China.com, CDC Corp.'s Internet service, which currently hosts applications for 1,700 enterprises in China and also offers games to consumers. Through China.com, the Microsoft and CDC software-as-a-service offerings will be made available nationwide in 30 provinces and four municipalities, CDC said.
CDC officials made no mention of including the Pivotal CRM offering among the company's on-demand services.
The on-demand offerings will target the rapidly growing number of small businesses in China, the number of which is currently estimated at 48 million, according to Richard Thomas, senior vice president for CDC's Asia/Pacific region. Yip said CDC estimates that only 3.2% of the small businesses in China have automated any business processes to date.
Separately, CDC also announced a Franchise Partner Program under which the company said it will invest $20 million into its software reseller channel partners. CDC said it will make direct equity investments in and provide lines of credit to partners that are able to help the company grow in key geographies including Eastern Europe, the Middle East, Latin America, India, and China." |
