Cogo Group, Inc. ( COGO)

Q2 2011 Earnings Call

August 4, 2011 4:30 PM ET

Executives

Wanyee Ho – Director, IR

Jeffrey Kang – Chairman and CEO

Will Davis – SVP, Business Development and Chief Marketing Officer

Frank Zheng – CFO

Analysts

Mike Walkley – Canaccord Genuity

Scott Searle – Merriman Capital

Quinn Bolton – Needham & Company

Mark Tobin – Roth Capital Partners

Brad Erickson – Pacific Crest Securities

Alan Senter – Valentine Capital Management

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Cogo Group Inc. Second Quarter 2011 Earnings Conference Call. During today’s presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) Today’s conference is being recorded, August 5th, 2011.

I would now like to turn the conference over to Wanyee Ho, the company’s Investor Relations Director. Please go ahead.

Wanyee Ho

Thank you Felicia, and good afternoon to everyone. I’m Wanyee Ho, Cogo’s Investor Relations Director and I would like to thank you all for joining us today to participate in Cogo’s 2011 second quarter earnings conference call.

After the market closed today, Cogo issued a press release concerning unaudited financial results for the quarter ended June 30th, 2011. This release can be accessed in the Investor Relations section of Cogo’s website at www.cogo.com.cn and on most other financial websites.

The discussion today will be hosted by Jeffrey Kang, Chairman and CEO, who will discuss the company’s business operations; Will Davis, our Senior Vice President of Business Development and Chief Marketing Officer who will discuss guidance; and Frank Zheng, our CFO, who will report the company’s financials.

Before we begin, I would like to remind everyone that the call today may contain forward-looking statements regarding future events and the financial performance of the company. We wish to caution you that such statements are at present just predictions and actual results may differ materially as a result of the risks and uncertainties inherent in the company’s business.

We refer you to documents that the company files periodically with the SEC, specifically the most recently filed Form 10-K, as well as the Safe Harbor statements made in today’s press release. These documents contain important risk factors that could cause actual results to differ materially from those contained in the company’s current projections. Cogo assumes no obligation to revise the forward-looking information contained in today’s call.

At this time, I’d like to turn the call over to Jeffrey. Jeffrey, the floor is yours.

Jeffrey Kang

Thank you, Wanyee, and thanks to everyone for joining this call. I will focus on a three key points and leave plenty of time for Q&A. First, I will review our second quarter results and outlook for the third quarter. Second, I will provide an update on our buyback program and our shareholder proxy vote to change our domicile to the Cayman Islands. Third, I will provide an update of the development of our new unique e-commerce platform COGO 3.0, located on cogozon.com which is the one-stop for our SME customer base, providing them with the system of value-added solutions ranging from applications to logistics to products.

Currently, the focus of the COGO 3.0 is on leveraging on our existing customer base while allow their firms to focus to us generating customer updation. In this business, scale is the number one current priority. Cogo’s second quarter revenue was $134.6 million was up 48% year-over-year. We saw strong booking with a specific strength in telecom, healthcare, smart grid, smart meter, 3G smartphones and HDTV. I would classify our overall end-market demand as next with a clearly tightening causing some recent uncertainty among our SME customer base. We view this deterioration as temporary and expect our SME customers to be part for continuous share gains.

Once the credit tightening is in and the current uncertainty lifts, perhaps within two or three quarters. We also saw our blue-chip customers gaining some share across present end-market particularly in the handset and telecom. Our non-GAAP EPS diluted earnings in the quarter was $0.22 in line with our primary guidance. Cogo posted a growth margin of 12.3% in the quarter at much better than expected figure in telecom and also our blended growth margin .We also saw some growth margin deterioration in both digital media and the telecom segment, and these trends are expected to continue for the rest of the 2012 – and in 2011 and into 2012 as the industry continue to mature.

I expect that our growth margin will be in the 10% to 11% range for the rest of few quarters as pricing strength in this segment remains under pressure. But we see stability in this range. We haven’t seen any deterioration in our industrial gross margins and we believe that the depreciated dynamics within this end-market should leave those gross margins at current levels.

In the quarter, Cogo posted operating margins of 7.2%, down sequentially from 8.4% in the first quarter, due to lower gross margin and a calculated utilization to begin ramping investment in several comps and in new offices throughout China in order to aggressively pursue scale. We expect this new service of investment flat through 2012 as we pursue the highly recommended $100 million addressable market.

During the massive slowdown in May 2008, we were too conservative in pursuing new business opportunities. While the end of market in a period of uncertainties, I would like expect as a dark retrench. At some point in 2012, we will expect these uncertainties to have lifted and we expect to begin at even stronger position. To be clear, I am investing aggressively in the business, because I see tremendous opportunities in the market base and I have to take a longer firm approach.

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