CDC Corporation Reports Results For Six Months Ended June 30, 2011

CDC Corporation (NASDAQ: CHINA), a leading China-based value-added operator of, and growth investor in, hybrid (Cloud/On-Premise) enterprise software, IT Services, and New Media assets, today announced financial results for the six months ended June 30, 2011. For the first six months of 2011, Non-GAAP revenue (a) was $159.3 million and Adjusted EBITDA (a) was $3.8 million, compared to Non-GAAP revenue of $159.0 million and Adjusted EBITDA of $17.1 million in the first six months of 2010.

The decrease in Adjusted EBITDA largely reflects planned increases in research and development and sales and marketing, as well as litigation expenses at CDC Software and CDC Corporation. The company expects that earnings will continue to be impacted going forward by expenses related to ongoing litigation as well as costs associated with the investigation being undertaken by the special committee of the board of directors. As of June 30, 2011, CDC Corporation reported Non-GAAP cash and cash equivalents (a) of approximately $91.8 million.

Below is a summary of the financial results of CDC Corporation’s core portfolio of assets.

CDC Software (NASDAQ:CDCS)

On a standalone basis, CDC Software had the following results for the six months ended June 30, 2010 and 2011:
             

 

Six Monthsended June 30, 2010
Six Monthsended June 30, 2011

 

Non-GAAP revenue

$105.7 million

     $109.1 million
 

Adjusted EBITDA

$21.4 million

$10.8 million
 

Adjusted EBITDA Margin(a)

12%

 3%
 

Application sales, which is comprised of license revenue plus Secured Total Contract Value (STCV) for Software-as-a-Service (SaaS) sales secured, was $28.7 million during the first six months of 2011, compared to $21.7 million in the six months ended June 30, 2010. STCV, or bookings, for Software-as-a-Service (SaaS) sales was $13.6 million, compared STCV of $5.0 million in the six months ended June 30, 2010. The results for the first six months of 2011 included record bookings in the second quarter of 2011, since the company started its cloud business in the fourth quarter of 2009.

“We are pleased with our six months results, including the growth in our cloud business, as well as our pipeline,” said Bruce Cameron, president of CDC Software. “Notable sales wins in this period, for example, included a seven digit renewal and add-on SaaS deal of CDC TradeBeam for a leading clothing retailer, key new logo customers for CDC Factory that included a leading cosmetic and beauty company, as well as a chemical manufacturer, both new markets for this business. We also continued to grow our business in emerging markets like India, where we reported our largest license deal in the first quarter.”

For more information regarding the financial performance of CDC Software during the first half 2011 of 2010, please see CDC Software's first and second quarter 2011 earnings press releases located at CDC Software’s website: www.cdcsoftware.com.

CDC Global Services

On a standalone basis, CDC Global Services had the following results for the six months ended June 30, 2010 and 2011:
             
Six Monthsended June 30, 2010 Six Monthsended June 30, 2011
 
GAAP Revenue: $32.2 million $31.1 million
 
Adjusted EBITDA: $(964,000) $1.4 million
 
Adjusted EBITDA Margin: (3)% 4%
 

CDC Global Services’ utilization rate was approximately 90 percent in the second quarter of 2011, and 88 percent in the first quarter of 2011.

Some highlights in the CDC Global Services business during the first half of 2011 included:

  • A leading medical device manufacturer extended its current SAP EWM Consulting Services contract for an additional 12 months. CDC Global Services is currently supporting the rollout of Extended Warehouse Management (EWM) to more than 10 sites globally.
  • A leading provider of automation equipment and peripherals for the North American and Latin American markets has engaged CDC Global Services to provide SAP Console consulting and implementation services for their North American distribution hub located near Chicago.
  • CDC Global Services China was awarded a service contract to design and implement an Enterprise Application Integration framework for the Zhangzhou Development Zone of the China Merchants Group. This framework is expected to improve the interoperability of different application systems already installed, as well as those being planned in the Zhangzhou. CDC Software’s Event Management Framework is a core component of the designed solution.
  • CDC Global Services China was awarded a three-year service contract for the hosting and support of a CRM system used by a leading cosmetic manufacturer in their China retail outlets. CDC Global Services has agreed to provide technical support through call-centers, application system hosting in the cloud computing center and on-site maintenance services in the various cities where this manufacturer has retail outlets.

“We are pleased with the improvement in our Adjusted EBITDA at CDC Global Services as a result of our focus on higher margin business and better traction in our services businesses,” said CK Wong, CEO of CDC Global Services. “We have been progressing well in our China businesses, and have been securing some key engagements with major companies in our SAP consulting business.”

New Media (includes CDC Games and China.com)

On a standalone basis, CDC Games had the following results for the six months ended June 30, 2010 and 2011:
             
Six Monthsended June 30, 2010 Six Monthsended June 30, 2011
 
GAAP Revenue: $15.1 million $11.0 million
 
Adjusted EBITDA: $1.7 million $1.8 million
 
Adjusted EBITDA Margin: 11% 16%
 

GAAP revenue for CDC Games during the first six months of 2011 was $11.0 million, compared to $15.1 million in the first six months of 2010. The decrease in revenue for the first six months of this year was largely attributed to a reduction in the number of games offered and less promotional and marketing spending on existing games, compared to the same period last year. Adjusted EBITDA for the first six months of 2011 improved to $1.8 million, compared to Adjusted EBITDA of $1.7 million in the first six months of 2010. Adjusted EBITDA margin was 16 percent in the first six months of 2011, compared to Adjusted EBITDA margin of 11 percent in the first six months of 2010.

At the end of the first quarter of 2011, CDC Games introduced an expansion pack, “Tyrannis” for EVE Online in China. On June 30, 2011, CDC Games launched Yulgang 6.0, known as “Blood War,” a major new version release of its popular massively multiplayer online role-playing game (MMORPG). Since the launch of Yulgang 6.0, CDC Games has reported an increase in peak concurrent users (PCU) of more than 10 percent.

In September 2006, CDC Games licensed the exclusive rights to distribute, in China, Lord of the Rings Online: Shadows of Angmar (LOTRO), a MMORPG based upon the Lord of the Rings trilogy. For the past several years, CDC Games has experienced significant delays in the continued development and launch of this game. Since initially licensing this game, CDC Games has invested approximately $10.0 million in licensing, development and other costs related to it, including a $4.0 million initial non-refundable license fee.

CDC Games has received notification from the game’s developer that the failure to launch LOTRO constituted an event of default under our agreements with them. The developer has also asserted that our license agreement for LOTRO has been terminated. CDC Games is currently in settlement discussions regarding the license for LOTRO, but does not currently believe that settlement discussions will permit it to retain future licensing rights for LOTRO.

“We are pleased with the improvement in our profitability and the solid metrics of Yulgang 6.0,” said Simon Wong, CEO of CDC Games. “After six years of operating Yulgang, we are very pleased to see this popular game maintaining a strong base of loyal users. While we are disappointed that we do not expect to be launching LOTRO, we believe this is the best financial decision for us in terms of focus on our time and resources.”

On a standalone basis, China.com had the following results for the six months ended June 30, 2010 and 2011:
             

Six Monthsended June 30, 2010
Six Monthsended June 30, 2011
 
GAAP Revenue: $6.0 million $8.0 million
 
Adjusted EBITDA: $(558,000) $(47,000)
 

Adjusted EBITDA Margin:

(9)%

(1)%
 

During the first half of 2011, China.com’s automobile and web games channels continued to expand. Its social network, for example, launched the following new games during the first quarter: “Wind of War,” “City Battle” and “Beautiful City.” In the second quarter, the automobile channel participated in the 2011 Shanghai International Auto Show.

In April 2011, China.com’s webgame channel organized the 2011 National Webgames Summit in the City of Jiaxing, Zhejiang Province, the fourth time hosting this event. This Summit received wide attention in the webgame community in China, with more than 300 webgame developers and operators participating with more than 100 media representatives reporting on the event.

Management News:

As previously announced, the company’s chief executive officer, Peter Yip is on administrative leave and John Clough, chairman of CDC Corporation, is serving as interim CEO for the company.

Concluding Remarks:

“Our operating business units have been performing reasonably well,” said John Clough, interim CEO of CDC Corporation. “CDC Software has continued to report solid results in its business while CDC Games, CDC Global Services and China.com have been making strong progress in improving profitability. We are weighing our options regarding the various litigation matters in which we and our subsidiaries are involved, and are considering financing options, potentially selling non-core assets, as well as other strategic alternatives.”

Share Buyback:

Since January 2009, CDC Corporation has purchased an aggregate of 918,637 of its shares at an average price of $3.85 per share.

Revised 2010 Information:

Results provided herein for 2010 have been revised from those previously reported in CDC Corporation’s press releases due to certain year-end adjustments required to be made in connection with the audit of its financial statements for the year ended December 31, 2010.

The revisions recorded by CDC Corporation included a $133.4 million goodwill impairment charge, $113.1 million of which related to CDC Software’s on-premise business, $10.8 million of which related to CDC Software’s Cloud business and $9.5 million of which is related to CDC Global Services. The company also recorded a $1.3 million impairment charge for identifiable intangible assets in CDC Software’s on-premise business, $7.5 million of tax related purchase accounting adjustments relating to CDC Software’s TradeBeam acquisition, and a $4.0 million write-off in CDC Games for pre-paid license fees relating to The Lord of the Rings Online. Furthermore, in accordance with U.S. GAAP, management has accrued an expected loss contingency of $10.0 million related to the ongoing litigation between the company’s subsidiary, Ross Systems, Inc., and Sunshine Mills, Inc. as of December 31, 2010, which is subject to further revision. Additional adjustments relate to changes in estimates which impacted the reserves for litigation settlements, purchase consideration payables, and valuation of deferred tax assets and deferred tax liabilities.

Footnotes:

All dollar amounts are in U.S. dollars

* CDC Corporation has recently changed the composition of its Adjusted EBITDA measurement, as provided herein, to be consistent with the presentation of Adjusted EBITDA for its subsidiary, CDC Software Corporation. CDC Corporation believes this revised presentation is a useful measure of operating performance.

* In June 2010, CDC Corporation received approval from its shareholders to effect a reverse split of its common shares. CDC Corporation’s board of directors thereafter approved a one-for-three reverse split of the company’s outstanding, issued and authorized shares of common stock, which became effective on August 23, 2010. All numbers set forth herein reflect the effect of such one-for-three reverse stock split.

(a) Adjusted Financial Measures

This press release includes Adjusted EBITDA, Non-GAAP revenue, Adjusted EBITDA margin and Non-GAAP cash and cash equivalents, which are not prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) (collectively, the "Non-GAAP Financial Measures"). We believe that these Non-GAAP Financial Measures are helpful in understanding our past financial performance and our future results. Non-GAAP Financial Measures are not alternatives for measures such as revenue, cash and cash equivalents and other measures prepared under GAAP. These Non-GAAP Financial measures may also be different from Non-GAAP measures used by other companies. Non-GAAP Financial Measures should not be used as a substitute for, or considered superior to, measures of financial performance prepared in accordance with GAAP.

Investors should be aware that these Non-GAAP Financial Measures have inherent limitations, including their variance from certain of the financial measurement principals underlying GAAP, should not be considered as a replacement for GAAP performance measures, and should be read in conjunction with our consolidated financial statements prepared in accordance with GAAP. These supplemental Non-GAAP Financial Measures should not be construed as an inference that the Company's future results will be unaffected by similar adjustments to net earnings determined in accordance with GAAP. Reconciliations of Non-GAAP Financial Measures to GAAP are provided herein immediately following the financial statements included in this press release.

About CDC Corporation

CDC Corporation is a China-based value-added operator of, and growth investor in, hybrid (on premise and SaaS) enterprise software, IT, and new media businesses. The company pursues two value-added investment strategies. The first strategy includes actively managing majority interests in its core portfolio of hybrid enterprise software, IT services and New Media businesses, adding value by driving operational excellence, top-line growth and overall profitability. The second strategy includes identifying and executing on opportunities to co-invest with leading venture capital and private equity funds through minority interests in fast growth companies in emerging markets related to CDC Corporation’s core assets. This second strategy, which complements the first, helps to mitigate risk and enhance deal flow for the company. CDC Corporation expects to deliver superior returns and additional value for its shareholders through these strategies, as well as through its plans to declare and pay regular dividends in the form of registered shares of its publicly listed subsidiaries and other assets. For more information about CDC Corporation (NASDAQ: CHINA), please visit www.cdccorporation.net.

Cautionary Note Regarding Forward-Looking Statements

This press release includes "forward-looking statements" within the meaning of the United States Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements regarding our expectations about the continued and future impact on earnings from ongoing litigation expenses as well as costs associated with the investigation being undertaken by the special committee of the board of directors, our plans and efforts to continue to grow our CDC Software business in emerging markets, our beliefs regarding settlement negotiations with the developer of LOTRO and the potential impact thereof, our plans and expectations regarding litigation matters, financing options, the potential sale of non-core assets and other strategic alternatives, our beliefs regarding our strategic investments and initiatives, and our strategies, and the potential impact and benefit thereof, our beliefs regarding the utility of the Non-GAAP and pro forma financial information provided herein, and other statements that are not historical fact, the achievement of which involve risks, uncertainties and assumptions. These statements are based on management's current expectations and are subject to risks and uncertainties and changes in circumstances. There are important factors that could cause actual results to differ materially from those anticipated in the forward looking statements, including risks relating to: (a) our failure to timely file our Annual Report on Form 20-F for the year ended December 31, 2010; (b) significant liability and losses from any litigation matters or other disputes in which we or any of our subsidiaries may now, or in the future, be involved, including the litigation between Sunshine Mills, Inc. and Ross Systems and the litigation between Evolution Capital Management and CDC Corporation, including the effect and impact of the summary judgment rendered against us in the New York Supreme Court in the Evolution matter; (c) the potential impact of any litigation matters, including the Sunshine Mills or Evolution matters, on our business, operations and financial condition and those of our subsidiaries; (d) the ongoing investigation being conducted by the special committee of our board of directors; (e) our liquidity and our continued ability to access capital; (f) CDC Software’s credit facility with Wells Fargo Capital Finance, and the availability thereof in any future period; (g) the availability of insurance coverage for any litigation matters that we, or any of our subsidiaries, may be involved; (h) our internal controls over financial reporting; (i) our use of judgments, estimates and assumptions, including risks related to significant charges to earnings that we may experience, such as the impairment of goodwill or intangible assets; (j) disruptions in the financial and credit markets, which may adversely affect our business; (k) our limited operating history; (l) acquisitions we have made, including our ability to integrate these businesses and our ability to grow our business organically; (m) the various, and potentially disparate, products and services our subsidiaries may offer; (n) fluctuating expenses and the potential impact thereof on our financial results; (o) regulatory compliance, including export compliance and other matters; (p) our international operations, including compliance with local laws, rules and regulations, currency exchange fluctuations, disruptions in foreign markets and economic downturns; (q) the continuation of our installed base customers continuing to license additional products, renew support agreements, and purchase additional services; (r) any forecasts we may provide; (s) our ability to grow direct and indirect sales channels; (t) research and development and our ability to successfully develop, market and sell new products; (u) competition that any of our subsidiaries may face; (v) CDC Software’s Cloud business; (w) interruptions or delays in service from our third-party data center hosting facilities and the hosting, collection and retention of personal information; (x) our ability to make changes in business strategy, development plans and product offerings to respond to the needs of current, new and potential customers, suppliers and strategic partners; (y) the effects of restructurings and rationalization of operations in our companies; (z) the ability to address technological changes and developments including the development and enhancement of products; (aa) the ability to develop and market successful products and services; (bb) the entry of new competitors and their technological advances; (cc) the need to develop, integrate and deploy enterprise software applications to meet customer's requirements; (dd) the possibility of development or deployment difficulties or delays; (ee) the dependence on customer satisfaction with the company's games, software products and services; (ff) continued commitment to the deployment of the products, including enterprise software solutions; (gg) risks involved in developing software solutions and integrating them with third-party software and services; (hh) the continued ability of the company's products and services to address client-specific requirements; (ii) demand for and market acceptance of new and existing enterprise software and services and the positioning of the company's solutions; (jj) the ability of staff to operate the enterprise software and extract and utilize information from the company's products and services; (kk) our dependence on a limited number of games at our CDC Games business, our dispute with Turbine, Inc. and our ability to maintain our relationships with licensor and other third parties; (ll) operations in China; and (mm) our intellectual property, personnel, technology and networks. If any such risks or uncertainties materialize or if any of the assumptions proves incorrect, our results could differ materially from the results expressed or implied by the forward-looking statements we make. Also, the results and benefits experienced by customers and users set forth in this press release may differ from those of other users and customers. Further information on risks or other factors that could cause results to differ is detailed in filings or submissions with the United States Securities and Exchange Commission made by CDC Corporation in its Annual Report on Form 20-F for the year ended December 31, 2009, filed with the SEC on June 30, 2010. You should also see the filings or submissions with the United States Securities and Exchange Commission made by CDC Software Corporation in its Annual Report on Form 20-F for the year ended December 31, 2009, filed with the SEC on June 1, 2010. We also encourage you to see other public press releases and filings or submissions we, or CDC Software, may make, from time to time. All forward-looking statements included in this press release are based upon information available to management as of the date of the press release, and you are cautioned not to place undue reliance on any forward looking statements which speak only as of the date of this press release. The company assumes no obligation to update or alter the forward looking statements whether as a result of new information, future events or otherwise. Historical results are not indicative of future performance. For these and other reasons, investors are cautioned not to place undue reliance upon any forward-looking statement in this press release.

CDC Corporation
Unaudited Consolidated Balance Sheets
(Amounts in thousands of U.S. dollars except share and per share data)
 
Table 1
  December 31,   June 30,
2010 2011
 
ASSETS
Current assets:
Cash $ 99,360 $ 80,646
Restricted cash 140 25

Accounts receivable (net of allowance of $6,302 at December 31, 2010   and $5,604 at June 30, 2011)
53,432 57,031
Investments 985 394
Deferred tax assets 10,118 10,159
Prepayments and other current assets   12,666     18,515  
Total current assets 176,701 166,770
 
Property and equipment, net 9,808 8,558
Goodwill 56,391 57,209
Intangible assets, net 73,124 66,715
Investments 11,943 11,426
Equity investments 12,134 12,134
Deferred tax assets 47,041 47,432
Other assets   6,967     7,139  
Total assets $ 394,109   $ 377,383  
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 23,405 $ 26,516
Purchase consideration payables 34 673
Income tax payable 3,739 3,510
Accrued liabilities 51,076 53,585
Restructuring accruals 1,610 1,093
Short-term loans 15,078 112
Convertible notes 60,574 64,865
Deferred revenue 59,444 63,778
Deferred tax liabilities   1,416     1,582  
Total current liabilities 216,376 215,714
 
Deferred tax liabilities 19,880 19,961
Long-term debt 238 99
Purchase consideration payables 786 110
Other liabilities   14,993     14,298  
Total liabilities 252,273 250,182
 
Shareholders’ equity:

Preferred shares, $0.003 par value; 1,666,667 shares authorized,   no shares issued
- -

Class A common shares, $0.00075 par value; 266,666,667 shares   authorized; 39,616,132 and 39,655,938 shares issued as of December 31, 2010   and June 30, 2011, respectively; 35,140,879 and 35,180,685 shares outstanding   as of December 31, 2010 and June 30, 2011, respectively
28 28
Additional paid-in capital 747,846 754,015

Common stock held in treasury; 4,463,587 shares   at December 31, 2010 and June 30, 2011
(59,445 ) (59,445 )
Accumulated deficit (579,234 ) (602,584 )
Accumulated other comprehensive income   21,529     26,792  
Total shareholders’ equity 130,724 118,806
 
Noncontrolling interest   11,112     8,395  
Total equity   141,836     127,201  
Total liabilities and shareholders’ equity $ 394,109   $ 377,383  
 
CDC Corporation
Unaudited Consolidated Statement of Operations
(Amounts in thousands of U.S. dollars except share and per share data)
   
Table 2
Three months ended
March 31, June 30,
2011 2011
REVENUE:
CDC Software $ 52,376 $ 56,385
CDC Global Services 14,780 16,347
CDC Games 5,962 5,064
China.com   4,031     4,001  
Total revenue 77,149 81,797
 
COST OF REVENUE:
CDC Software 24,444 26,153
CDC Global Services 11,626 12,498
CDC Games 3,881 3,736
China.com   1,843     1,967  
Total cost of revenue   41,794     44,354  
 
Gross profit 35,355 37,443
Gross margin % 46 % 46 %
 
OPERATING EXPENSES:
Sales and marketing expenses 15,045 16,271
Research and development expenses 7,519 7,959
General and administrative expenses 17,082 19,789
Exchange (gain) loss 112 1,436
Amortization expenses 2,117 2,168
Restructuring and other charges   1,107     (24 )
Total operating expenses   42,982     47,599  
 
Operating loss (7,627 ) (10,156 )
Operating margin % -10 % -12 %
 
Other loss, net   (1,724 )   (2,772 )
 
Loss before income taxes (9,351 ) (12,928 )
Income tax expense   (1,271 )   (358 )
 
Net loss (10,622 ) (13,286 )
Net loss attributable to noncontrolling interest   291     270  
 
Net loss attributable to controlling interest $ (10,331 ) $ (13,016 )
 
Basic earnings (loss) per share attributable to controlling interest $ (0.29 ) $ (0.37 )
 
Diluted earnings (loss) per share attributable to controlling interest (1) $ (0.29 ) $ (0.37 )
 
Weighted average number of common shares outstanding - basic 35,141,880 35,180,073
 
Weighted average number of common shares outstanding - diluted 35,141,880 35,180,073
 
(1) Refer to "Unaudited Basic and Diluted Earnings (Loss) Per Share Computation" schedule for calculation of earnings per share amounts.
 
CDC Corporation
Unaudited Consolidated Statement of Operations
(Amounts in thousands of U.S. dollars except share and per share data)
   
Table 3
Three months ended
June 30,
2010 2011
REVENUE:
CDC Software $ 52,576 $ 56,385
CDC Global Services 15,764 16,347
CDC Games 7,111 5,064
China.com   3,092     4,001  
Total revenue 78,543 81,797
 
COST OF REVENUE:
CDC Software 23,717 26,153
CDC Global Services 12,932 12,498
CDC Games 5,233 3,736
China.com   1,361     1,967  
Total cost of revenue   43,243     44,354  
 
Gross profit 35,300 37,443
Gross margin % 45 % 46 %
 
OPERATING EXPENSES:
Sales and marketing expenses 13,415 16,271
Research and development expenses 7,162 7,959
General and administrative expenses 14,883 19,789
Exchange (gain) loss (1,182 ) 1,436
Amortization expenses 2,121 2,168
Restructuring and other charges   505     (24 )
Total operating expenses   36,904     47,599  
 
Operating loss (1,604 ) (10,156 )
Operating margin % -2 % -12 %
 
Other income (loss), net   (1,872 )   (2,772 )
 
Loss before income taxes (3,476 ) (12,928 )
Income tax benefit (expense)   (3,965 )   (358 )
 
Net loss (7,441 ) (13,286 )
Net (income) loss attributable to noncontrolling interest   (493 )   270  
 
Net loss attributable to controlling interest $ (7,934 ) $ (13,016 )
 
 
Basic earnings (loss) per share attributable to controlling interest $ (0.23 ) $ (0.37 )
 
Diluted earnings (loss) per share attributable to controlling interest (1) $ (0.23 ) $ (0.37 )
 
Weighted average number of common shares outstanding - basic 35,232,253 35,180,073
 
Weighted average number of common shares outstanding - diluted 35,232,253 35,180,073
 
(1) Refer to "Unaudited Basic and Diluted Earnings (Loss) Per Share Computation" schedule for calculation of earnings per share amounts.
 
CDC Corporation
Unaudited Consolidated Statement of Operations
(Amounts in thousands of U.S. dollars except share and per share data)
   
Table 4
Six months ended
June 30,
2010 2011
REVENUE:
CDC Software $ 103,077 $ 108,761
CDC Global Services 32,206 31,127
CDC Games 15,079 11,026

China.com
  5,996     8,033  
Total revenue 156,358 158,947
 
COST OF REVENUE:
CDC Software 47,611 50,597
CDC Global Services 25,928 24,124
CDC Games 10,818 7,617
China.com   3,047     3,810  
Total cost of revenue   87,404     86,148  
 
Gross profit 68,954 72,799
Gross margin % 44 % 46 %
 
OPERATING EXPENSES:
Sales and marketing expenses 26,395 31,316
Research and development expenses 13,946 15,478
General and administrative expenses 29,725 36,872
Exchange gain (588 ) 1,548
Amortization expenses 4,280 4,284
Restructuring and other charges   716     1,083  
Total operating expenses   74,474     90,581  
 
Operating loss (5,520 ) (17,782 )
Operating margin % -4 % -11 %
 
Other income (loss), net   (2,969 )   (4,496 )
 
Income (loss) before income taxes (8,489 ) (22,278 )
Income tax expense   (2,780 )   (1,630 )
 
Net income (loss) (11,269 ) (23,908 )
Net (income) loss attributable to noncontrolling interest   (716 )   561  
 
Net income (loss) attributable to controlling interest $ (11,985 ) $ (23,347 )
 
Basic and diluted earnings (loss) per share from continuing operations attributable to controlling interest (1) $ (0.34 ) $ (0.66 )
 
Basic and diluted earnings (loss) per share attributable to controlling interest (1) $ (0.34 ) $ (0.66 )
 
Weighted average number of common shares outstanding - basic 35,234,849 35,161,082
 
Weighted average number of common shares outstanding - diluted 35,234,849 35,161,082
.
(1) Refer to "Unaudited Basic and Diluted Earnings (Loss) Per Share Computation" schedule for calculation of earnings per share amounts.
 
CDC Corporation
Unaudited Combined Statement of Cash Flow
(Amounts in thousands of U.S. dollars except share and per share data)
   
Table 5
 
Three months ended
March 31, June 30,
2011 2011
OPERATING ACTIVITIES:
Net loss $ (10,622 ) $ (13,286 )
Adjustments to reconcile net loss to net cash provided by operating activities
Loss on disposal of property and equipment - 7

Loss on disposal of available-for-sale securities
9 214
Bad debt expense 263 407
Amortization expense 5,468 5,638
Depreciation expense 1,503 1,445
Stock compensation expenses 1,612 2,956
Deferred income tax provision (273 ) (59 )

Exchange loss (gain)
112 (171 )
Non-cash restructuring and other charges 1,107 (703 )
Amortization of debt issuance costs 87 (256 )
Interest expense 1,805 2,486
Changes in operating assets and liabilities:
Accounts receivable (2,460 ) (1,743 )
Deposits, prepayments and other receivables (4,063 ) (242 )
Other assets 202 771
Accounts payable 5,241 (2,686 )
Accrued liabilities (509 ) 1,673
Deferred revenue 7,410 (4,496 )
Income tax payable 413 (661 )
Other liabilities   (449 )   (267 )
Net cash provided by (used in) operating activities   6,856     (8,973 )
 
INVESTING ACTIVITIES:
Acquisitions, net of cash acquired - -
Payments for prior year acquisitions (500 ) (45 )
Purchase of property, plant & equipment (498 ) (584 )
Purchases of intangible assets (4,000 ) -
Purchase of available-for-sale securities - 554
Proceeds from disposal of available-for-sale securities 41 188
Change in restricted cash   -     115  

Net cash provided by (used in) investing activities
  (4,957 )   228  
 
FINANCING ACTIVITIES:
Short-term borrowings (repayments) (14,996 ) (4 )
Payment for capital lease obligations (71 ) (54 )
Purchase of CDC Software shares   -     (1,553 )
Net cash used in financing activities   (15,067 )   (1,611 )
 
Effect of exchange differences on cash   2,583     2,227  
 
Net decrease in cash (10,585 ) (8,129 )
Cash at beginning of period   99,360     88,775  
 
Cash at end of period $ 88,775   $ 80,646  
 
CDC Corporation
Unaudited Combined Statement of Cash Flow
(Amounts in thousands of U.S. dollars except share and per share data)
       
Table 6
 
Three months ended Six months ended
June 30, June 30,
2010 2011 2010 2011
OPERATING ACTIVITIES:
Net loss $ (7,441 ) $ (13,286 ) $ (11,269 ) $ (23,908 )
Adjustments to reconcile net loss to net cash provided by operating activities
Loss on disposal of property and equipment 17 7 17 7
(Gain) loss on disposal of available-for-sale securities (101 ) 214 (979 ) 223
Bad debt expense 426 407 378 670
Amortization expense 6,679 5,638 13,771 11,106
Depreciation expense 1,820 1,445 3,418 2,948
Stock compensation expenses 1,535 2,956 2,648 4,568
Deferred income tax provision 2,293 (59 ) 2,293 (332 )
Exchange gain (1,182 ) (171 ) (558 ) (59 )
Non-cash restructuring and other charges - (703 ) - 404
Amortization of debt issuance costs (63 ) (256 ) 58 (169 )
Interest expense 1,570 2,486 3,165 4,291
Changes in operating assets and liabilities:
Accounts receivable (1,251 ) (1,743 ) (1,095 ) (4,203 )
Deposits, prepayments and other receivables 2,453 (242 ) (731 ) (4,305 )
Other assets 760 771 286 973
Accounts payable (1,555 ) (2,686 ) (3,377 ) 2,555
Accrued liabilities (1,345 ) 1,673 (3,426 ) 1,164
Deferred revenue (1,929 ) (4,496 ) (2,621 ) 2,914
Income tax payable 1,192 (661 ) (801 ) (248 )
Other liabilities   (99 )   (267 )   211     (716 )
Net cash provided by (used in) operating activities   3,779     (8,973 )   1,388     (2,117 )
 
INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (21,075 ) - (23,321 ) -
Payments for prior year acquisitions (2,100 ) (45 ) (2,100 ) (545 )
Purchase of property, plant & equipment (144 ) (584 ) (431 ) (1,082 )
Purchases of intangible assets (956 ) - (1,213 ) (4,000 )
Disposal (acquisition) of cost method investments (82 ) - 1,394 -
Purchase of available-for-sale securities (391 ) 554 (688 ) 554
Investment in cost method investees (1,920 ) - (1,920 ) -
Proceeds from disposal of available-for-sale securities - 188 1,427 229
Change in restricted cash   606     115     686     115  

Net cash provided by (used in) investing activities
  (26,062 )   228     (26,166 )   (4,729 )
 
FINANCING ACTIVITIES:
Short-term borrowings (repayments) 12,699 (4 ) 9,887 (15,000 )
Debt issuance costs (1,389 ) - (1,389 ) -
Payment for capital lease obligations (289 ) (54 ) (407 ) (125 )
Purchase of CDC Software shares (1,599 ) (1,553 ) (2,913 ) (1,553 )
Purchases of treasury stock   (569 )   -     (698 )   -  

Net cash provided by (used in) financing activities
  8,853     (1,611 )   4,480     (16,678 )
 
Effect of exchange differences on cash   (982 )   2,227     (1,337 )   4,810  
 
Net decrease in cash (14,412 ) (8,129 ) (21,635 ) (18,714 )
Cash at beginning of period   108,067     88,775     115,290     99,360  
 
Cash at end of period $ 93,655   $ 80,646   $ 93,655   $ 80,646  
 
CDC Corporation
Unaudited Reconciliation From GAAP Results to Adjusted EBITDA
(Amounts in thousands of U.S. dollars)
   
Table 7
Three months ended
March 31, June 30,
2011 2011
(a) Reconciliation from GAAP results to Adjusted EBITDA
Operating loss $ (7,627 ) $ (10,156 )
Add back restructuring and other charges 1,107 (24 )
Add back depreciation expense 1,503 1,445
Add back amortization expense 2,117 2,167
Add back amortization expense included in cost of revenue 3,351 3,471
Add back stock compensation expenses 1,612 2,955
Subtract exchange (gain) loss 114 1,436
Add back deferred revenue grind (1)   263     82  
Adjusted EBITDA $ 2,440   $ 1,376  
Adjusted EBITDA margin % 3 % 2 %
 
CDC Software
Unaudited Reconciliation From GAAP Results to Adjusted EBITDA
(Amounts in thousands of U.S. dollars)
Three months ended
March 31, June 30,
2011 2011
(a) Reconciliation from GAAP results to Adjusted EBITDA
Operating loss $ (2,710 ) $ (3,213 )
Add back restructuring and other charges 1,074 148
Add back depreciation expense 766 746
Add back amortization expense 1,606 1,635
Add back amortization expense included in cost of revenue 3,082 2,858
Add back stock compensation expenses 978 1,015
Add back (subtract) exchange gain (loss) 519 1,912
Add back deferred revenue grind (1)   263     82  
Adjusted EBITDA $ 5,578   $ 5,183  
Adjusted EBITDA margin % 11 % 9 %
 
CDC Global Services
Unaudited Reconciliation From GAAP Results to Adjusted EBITDA
(Amounts in thousands of U.S. dollars)
Three months ended
March 31, June 30,
2011 2011
(a) Reconciliation from GAAP results to Adjusted EBITDA

Operating income (loss)
$ (227 ) $ 598
Add back restructuring and other charges 33 (173 )
Add back depreciation expense 77 91
Add back amortization expense 276 297
Add back amortization expense included in cost of revenue 1 6
Add back stock compensation expenses 130 321
Add back (subtract) exchange gain (loss)   (1 )   -  
Adjusted EBITDA $ 289   $ 1,140  
Adjusted EBITDA margin % 2 % 7 %
 
CDC Games Corporation
Unaudited Reconciliation From GAAP Results to Adjusted EBITDA
(Amounts in thousands of U.S. dollars)
Three months ended
March 31, June 30,
2011 2011
(a) Reconciliation from GAAP results to Adjusted EBITDA

Operating income (loss)
$ 387 $ (1,278 )
Add back restructuring and other charges (1 ) -
Add back depreciation expense 613 579
Add back amortization expense included in cost of revenue 268 607
Add back stock compensation expenses   155     483  
Adjusted EBITDA $ 1,422   $ 391  
Adjusted EBITDA margin % 24 % 8 %
 
CDC China.com
Unaudited Reconciliation From GAAP Results to Adjusted EBITDA
(Amounts in thousands of U.S. dollars)
Three months ended
March 31, June 30,
2011 2011
(a) Reconciliation from GAAP results to Adjusted EBITDA

Operating loss
$ (102 ) $ (508 )
Add back depreciation expense 47 29
Add back stock compensation expenses   165     323  
Adjusted EBITDA $ 110   $ (155 )
Adjusted EBITDA margin % 3 % -4 %
 
Corporate
Unaudited Reconciliation From GAAP Results to Adjusted EBITDA
(Amounts in thousands of U.S. dollars)
Three months ended
March 31, June 30,
2011 2011
(a) Reconciliation from GAAP results to Adjusted EBITDA from operations
Operating loss $ (4,975 ) $ (5,755 )
Add back depreciation expense 1 -
Add back amortization expense 236 236
Add back stock compensation expenses 185 813
Subtract exchange loss   (406 )   (477 )
Adjusted EBITDA $ (4,959 ) $ (5,183 )
 
(1) Deferred revenue grind represents the fair value adjustment required to reduce the historical deferred revenue liabilities from acquisitions to the fair value of the Company’s legal performance obligations plus a normal profit margin based on fulfillment effort.
 
CDC Corporation
Unaudited Reconciliation From GAAP Results to Adjusted EBITDA
(Amounts in thousands of U.S. dollars)
       
Table 8
 
Three months ended Six months ended
June 30, June 30,
2010 2011 2010 2011
(a) Reconciliation from GAAP results to Adjusted EBITDA
Operating loss $ (1,604 ) $ (10,156 ) $ (5,520 ) $ (17,782 )
Add back restructuring and other charges 505 (24 ) 716 1,083
Add back depreciation expense 1,820 1,445 3,418 2,948
Add back amortization expense 2,121 2,167 4,280 4,284
Add back amortization expense included in cost of revenue 4,558 3,471 9,491 6,822
Add back stock compensation expenses 1,534 2,955 2,648 4,568
Add back exchange gain (1,182 ) 1,436 (588 ) 1,548
Add back deferred revenue grind (1)   1,444     82     2,647     345  
Adjusted EBITDA (2) $ 9,196   $ 1,376   $ 17,092   $ 3,816  
Adjusted EBITDA margin % 12 % 2 % 15 % 9 %
 
CDC Software
Unaudited Reconciliation From GAAP Results to Adjusted EBITDA
(Amounts in thousands of U.S. dollars)
 
Three months ended Six months ended
June 30, June 30,
2010 2011 2010 2011
(a) Reconciliation from GAAP results to Adjusted EBITDA
Operating income (loss) $ 4,582 $ (3,213 ) $ 5,989 $ (5,925 )
Add back restructuring and other charges 229 148 802 1,223
Add back depreciation expense 952 746 1,651 1,512
Add back amortization expense 1,293 1,635 2,573 3,241
Add back amortization expense included in cost of revenue 3,457 2,858 7,282 5,940
Add back stock compensation expenses 551 1,015 996 1,993
Add back exchange gain (1,156 ) 1,912 (562 ) 2,431
Add back deferred revenue grind (1)   1,444     82     2,647     345  
Adjusted EBITDA (2) $ 11,352   $ 5,183   $ 21,378   $ 10,760  
Adjusted EBITDA margin % 22 % 9 % 12 % 3 %
 
CDC Global Services
Unaudited Reconciliation From GAAP Results to Adjusted EBITDA
(Amounts in thousands of U.S. dollars)
 
Three months ended Six months ended
June 30, June 30,
2010 2011 2010 2011
(a) Reconciliation from GAAP results to Adjusted EBITDA

Operating income (loss)
$ (1,579 ) $ 598 $ (2,834 ) $ 371
Add back restructuring and other charges 135 (173 ) 226 (140 )
Add back depreciation expense 70 91 157 168
Add back amortization expense 641 297 1,284 572
Add back amortization expense included in cost of revenue 1 6 2 7
Add back stock compensation expenses 105 321 200 451
Add back (subtract) exchange gain (loss)   -     -     1     (1 )
Adjusted EBITDA $ (627 ) $ 1,140   $ (964 ) $ 1,428  
Adjusted EBITDA margin % -4 % 7 % -3 % 4 %
 
CDC Games Corporation
Unaudited Reconciliation From GAAP Results to Adjusted EBITDA
(Amounts in thousands of U.S. dollars)
 
Three months ended Six months ended
June 30, June 30,
2010 2011 2010 2011
(a) Reconciliation from GAAP results to Adjusted EBITDA

Operating loss
$ (1,638 ) $ (1,278 ) $ (1,982 ) $ (891 )
Add back restructuring and other charges 141 - (312 ) (1 )
Add back depreciation expense 734 579 1,476 1,192
Add back amortization expense included in cost of revenue 1,100 607 2,207 875
Add back stock compensation expenses   181     483     339     638  
Adjusted EBITDA $ 518   $ 391   $ 1,728   $ 1,813  
Adjusted EBITDA margin % 7 % 8 % 11 % 16 %
 
CDC China.com
Unaudited Reconciliation From GAAP Results to Adjusted EBITDA
(Amounts in thousands of U.S. dollars)
 
Three months ended Six months ended
June 30, June 30,
2010 2011 2010 2011
(a) Reconciliation from GAAP results to Adjusted EBITDA
Operating loss $ (496 ) $ (508 ) $ (911 ) $ (611 )
Add back restructuring and other charges - 1 - 1
Add back depreciation expense 60 29 117 75
Add back stock compensation expenses   146     323     236     488  
Adjusted EBITDA $ (290 ) $ (155 ) $ (558 ) $ (47 )
Adjusted EBITDA margin % -9 % -4 % -9 % -1 %
 
Corporate
Unaudited Reconciliation From GAAP Results to Adjusted EBITDA
(Amounts in thousands of U.S. dollars)
 
Three months ended Six months ended
June 30, June 30,
2010 2011 2010 2011
(a) Reconciliation from GAAP results to Adjusted EBITDA
Operating loss $ (2,473 ) $ (5,755 ) $ (5,782 ) $ (10,726 )
Add back depreciation expense 4 - 17 1
Add back amortization expense 187 236 423 471
Add back stock compensation expenses 551 813 877 998
Subtract exchange loss   (26 )   (477 )   (27 )   (882 )
Adjusted EBITDA $ (1,757 ) $ (5,183 ) $ (4,492 ) $ (10,138 )
 
(1) Deferred revenue grind represents the fair value adjustment required to reduce the historical deferred revenue liabilities from acquisitions to the fair value of the Company’s legal performance obligations plus a normal profit margin based on fulfillment effort.
 
CDC Corporation
Unaudited Reconciliation From GAAP Results to Non-GAAP Net Income (Loss)
(Amounts in thousands of U.S. dollars)
     
Table 9
Three months ended
June 30, March 31, June 30,
2010 2011 2011

(a) Reconciliation from GAAP net (loss) attributable to controlling interestto Non-GAAP net income (loss) and Non-GAAP net income (loss) per share
Net loss attributable to controlling interest $ (7,934 ) $ (10,331 ) $ (13,016 )
Add back restructuring and other charges 505 1,107 (24 )
Add back amortization expense 2,121 2,117 2,121
Add back amortization expense included in cost of revenue 4,558 3,351 4,558
Add back stock based compensation 1,534 1,612 2,955
Add back (subtract) exchange gain (loss) (1,182 ) 114 1,436
Add back deferred revenue grind 1,444 263 82
Add back (subtract) non cash tax expense (benefit) 2,379 763 215
Tax effect on all reconciling items @ 31%   (324 )   548     585  
Non-GAAP net income (loss) $ 3,101   $ (456 ) $ (1,088 )
Non-GAAP net income (loss) as % of revenue 4 % -1 % -1 %
 
Weighted average number of common shares outstanding - basic 35,232,253 35,141,880 35,180,073
Weighted average number of common shares outstanding - diluted 35,232,253 35,141,880 35,180,073
 
Non-GAAP net income (loss) per share - basic $ 0.09 $ (0.01 ) $ (0.03 )
Non-GAAP net income (loss) per share - diluted $ 0.09 $ (0.01 ) $ (0.03 )
 
CDC Corporation
Unaudited Reconciliation From GAAP Cash to Non-GAAP Cash
(Amounts in thousands of U.S. dollars)
 
Table 10
June 30,

(a) Non-GAAP Cash and Cash Equivalents Reconciliation
2011
Cash $ 80,646
Add restricted cash 25
Add available for sale securities - current 394
Investments (1)   11,426
Non-GAAP cash and cash equivalents $ 92,491
 
(1) - Excludes investments of $713 in franchise and strategic cloud investment partners at June 30, 2011.
 
CDC Corporation
Unaudited Basic and Diluted Loss Per Share Computation
(Amounts in thousands of U.S. dollars except share and per share data)
       
Table 11
 
Three months ended Six months ended
June 30, June 30,
2010 2011 2010 2011
Numerator for earnings (loss)attributable to controlling interest per common share:
Net loss $ (7,441 ) $ (13,286 ) $ (11,269 ) $ (23,908 )

Net adjustments for (income) loss attributable to noncontrolling interest and   dilutive effect of subsidiary issued stock (1)
  (493 )   270     (716 )   561  
Adjusted loss (7,934 ) (13,016 ) (11,985 ) (23,347 )
Amount allocated to convertible notes (2)   -     -     -     -  
Net loss attributable to controlling interest $ (7,934 ) $ (13,016 ) $ (11,985 ) $ (23,347 )
 
Numerator for loss attributable to controlling interest per common share:      
Net loss attributable to controlling interest $ (7,934 ) $ (13,016 ) $ (11,985 ) $ (23,347 )
 
Denominator:
Weighted average number of common shares outstanding - basic 35,232,253 35,180,073 35,234,849 35,161,082

Employee compensation related to common shares including stock options
  -     -     -     -  
Weighted average number of common shares outstanding - diluted   35,232,253     35,180,073     35,234,849     35,161,082  
 
Per share amounts:
Loss attributable to controlling interest per common share - basic $ (0.23 ) $ (0.37 ) $ (0.34 ) $ (0.66 )
Loss attributable to controlling interest per common share - dilutive $ (0.23 ) $ (0.37 ) $ (0.34 ) $ (0.66 )
 

(1) Includes the dilutive effects of subsidiary-issued stock-based awards, if any.

(2) Income has been allocated to common stock and convertible notes based on their respective rights to share in dividends. In accordance with FASB Accounting Standards Codification 260, "Earnings Per Share" the Company's convertible notes meet the definition of participating securities and are included in the basic earnings per share using the two-class stock method and in diluted earnings per share using the more dilutive of the if-converted method or two-class stock method.
 
CDC Corporation
Unaudited Reconciliation of GAAP Revenue to Non-GAAP Revenue
(Amounts in thousands of U.S. dollars)
     
Table 12
Three months ended June 30, 2010
GAAP Revenue Non-GAAP Adjustment (1) Non-GAAP Revenue
 
Software $ 52,576 $ 1,443 $ 54,019
Global Services 15,764 - 15,764
CDC Games 7,111 - 7,111
China.com   3,092   -   3,092
Total revenue $ 78,543 $ 1,443 $ 79,986
 
 
Three months ended March 31, 2011
GAAP Revenue Non-GAAP Adjustment (1) Non-GAAP Revenue
 
Software $ 52,376 $ 263 $ 52,639
Global Services 14,780 - 14,780
CDC Games 5,962 - 5,962
China.com   4,031   -   4,031
Total revenue $ 77,149 $ 263 $ 77,412
 
 
Three months ended June 30, 2011
GAAP Revenue Non-GAAP Adjustment (1) Non-GAAP Revenue
 
Software $ 56,385 $ 82 $ 56,467
Global Services 16,347 - 16,347
CDC Games 5,064 - 5,064
China.com   4,001   -   4,001
Total revenue $ 81,797 $ 82 $ 81,879
 
 
Six months ended June 30, 2010
GAAP Revenue Non-GAAP Adjustment (1) Non-GAAP Revenue
 
Software $ 103,077 $ 2,647 $ 105,724
Global Services 32,206 - 32,206
CDC Games 15,079 - 15,079
China.com   5,996   -   5,996
Total revenue $ 156,358 $ 2,647 $ 159,005
 
 
Six months ended June 30, 2011
GAAP Revenue Non-GAAP Adjustment (1) Non-GAAP Revenue
 
Software $ 108,761 $ 345 $ 109,106
Global Services 31,127 - 31,127
CDC Games 11,026 - 11,026
China.com   8,033   -   8,033
Total revenue $ 158,947 $ 345 $ 159,292
 
(1) Non-GAAP adjustment represents deferred revenue grind adjustment required to reduce the historical deferred revenue liabilities from acquisitions to the fair value of the Company’s legal performance obligations plus a normal profit margin based on fulfillment effort.
 

Copyright Business Wire 2010

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