Although growth of its enterprise software business slowed somewhat CDC Corp. today reported a 19% gain in total revenues to $77 million for the quarter ended June 30.
Thanks to ongoing consolidation and cost-reduction efforts, CDC (Hong Kong) achieved net income for the quarter of $7.9 million, up substantially over the $36,000 in earnings reported by the company in the second quarter of 2005.
"We were pleased indeed with the results of our second quarter," said CDC Corp. CEO Peter Yip on a conference call with financial analysts. "We now have the global scale, infrastructure, management team, and balance sheet needed to sustain and accelerate our growth both through continued organic operations and target acquisitions."
CDC -- which since 2002 has pursued an enterprise software acquisition strategy that has involved the purchase of Ross Systems and Pivotal Corp., among other companies -- saw revenues from its software business during the quarter grow to $57.7 million, an increase of 8% over the like period a year earlier. Software license revenue, however, fell slightly from $10.7 million in the year-earlier period to $10 million in the just-concluded quarter.
The slowdown in CDC's software growth rate was more than made up for by rapid growth in the company's China.com online portal business. Revenues from China.com -- which features games and other consumer attractions -- rose 77% to $19.2 million in the quarter.
In response to the second-quarter results, CDC said it is sticking with its 2006 earnings forecast, which was revised upward in July. The company now expects to report between $300 million and $305 million in revenue for the year, up from the previously predicted range of $283 million to $290 million. The company expects to report adjusted net income for the year of between $31.6 million and $32.8 million.
However, CDC declined to provide revenue and earnings forecasts for the third quarter of this year. That, said CFO Verome Johnston on the call to announce the quarter's results, is because new regulations in China may impact CDC Mobile, the company's wireless business.
Lower operating costs helped boost CDC's net income in the quarter. As part of its ongoing consolidation efforts, for example, CDC Software reduced administrative expenses to 32% of revenues, down from 37% in the year-earlier period. CDC Software research and development spending was also down sharply, falling from 10% of revenue a year ago to 7% in the most recent quarter. Efforts to shift software development to lower-cost countries including China and India helped lower R&D expenses, said CDC Software President Eric Musser.
Lower expenses and increased revenues strengthened CDC's balance sheet during the quarter. The company generated $18 million in free cash flow during the quarter, CEO Yip told analysts. At the end of the quarter, the company had $217 million in cash and cash equivalents net of total debt. That compared to $214 million in cash in the year-earlier quarter.
Yip made it clear that CDC plans to use some of that cash to continue its strategy of acquiring enterprise software companies, although he didn't mention the company's failed hostile takeover attempt of CRM software provider Onyx Software Corp. (Onyx was recently acquired by Made2Manage Systems Inc.)
Yip said CDC is reviewing five acquisition opportunities in the U.S. He said the vendor is targeting companies that can bring richer manufacturing and supply chain collaboration capabilities to CDC's product line. CDC expects at least one of those acquisition efforts to close by the end of this year. Yip did not identify the U.S. companies that CDC has targeted.
CDC is also in discussions to acquire an ERP software vendor in China that focuses on small and medium-size customers, Yip said, without naming the company.
Yip said CDC also continues to move closer to its previously discussed plan to spin off parts of its business -- including CDC Software -- as separate companies. CDC is considering spinning off the software and online games businesses in order to increase shareholder value, Yip said. The company has hired investment bankers to help review the plans and, in recent months, has beefed up CDC Software's management ranks in anticipation of its emergence as a separate company.
The company has hired Sam Anidjar as senior vice president in charge of mergers and acquisitions and Fred Dilkes as senior vice president for major accounts and channels. Both were formerly executives at SSA Global, which was recently acquired by Infor.