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Cogo Group, Inc. (COGO)

Q3 2012 Earnings Call

November 15, 2012 4:30 p.m. ET


Jeffrey Kang – Chairman and CEO

Wanyee Ho – IR Director


Brian Alger - Wedbush Equity Management

Chris Zepf - Kingdom Ridge Capital



Ladies and gentlemen, thank you for standing by. And welcome to the Cogo Group Incorporated third quarter 2012 earnings conference call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions)

This conference is being recorded November 15, 2012. And I would now like to turn the conference over to Wanyee Ho, investor relations director. Please go ahead.

Wanyee Ho

Thank you and good afternoon to everyone. I am Wanyee Ho, Cogo’s investor relations director. And I would like to thank all of you for joining us today to participate in Cogo's 2012 third quarter earnings conference call.

After the market closed today, Cogo issued a press release reporting unaudited financial results for the quarter ended September 30, 2012. This release can be accessed in the investor relations section of Cogo's website at 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 and update you on the status of the proposal to purchase certain Cogo subsidiaries.

Before we begin, I'd 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 Forms 20-F and 6-K, as well as the Safe Harbor statement 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 give my prepared comments (inaudible) enough time for Q&A. Most the key balance sheet data is in the press release.

Cogo continues to demonstrate solid top line growth across all business segments and I am pleased with our ability to continually grow our revenue in this uncertain economic times. As we have indicated many times previously, the credit situation for our SME customers in China are still tight. That continues to negatively affect our gross margins. It’s impossible to predict when that situation will materially improve.

Additionally, we are facing some higher operating costs in the back half of 2012 as we pursued the new customers and product launch and this will temporarily hurt our operating margin. However even in the face of the difficult macro headwinds, we continue to drive operating profit adding a significant numbers of the new customers and grow our tangible book value in each and every quarter.

In the third quarter of 2012, we added 200 customers while our operating cash flow was a negative $8.7 million in the quarter, it’s largely related to the changes in the working capital that are made in order to position our sales for continued growth. As I have said many times, cash flow will shift from quarter to quarter based on the business conditions. As you are aware, Cogo generated positive operating cash flows in the previous two quarters.

I am pleased to announce that I have presently completed the transfer of the $278 million required to close my proposed acquisition of certain subsidiaries of Cogo. This fund will help to fund already approved the 10 million shares buyback and as the Audit committee consisting of three independent board members recently approved the terms of the deal, I continue to strongly believe that the closing of this deal will help to legitimize the overall financial assets of Cogo. After the closing of the deal, we believe that our overall gross margin will improve because assets I intend to purchasing has a lower gross margin than Cogo’s overall gross margin. And as stated in the press release Cogo’s financial payment will be updated to show the sales during our next earnings call in February. Please remember that after the close I will still own over 30% of Cogo, I will be far and away its largest shareholder and my number one goal remains enhancing the shareholders that’s for Cogo.

I began to really expand (inaudible) our 10b5 buyback program towards the end of the third quarter (ph). Approximately over 39,000 shares were bought back in the third quarter out of the 300,000 shares that we really bought back in September 24, 2010. We continue to view the share buybacks as a strategic use of cash given where the stock is trading at around 40% of the tangible book value. This concludes my remarks. Thanks for your everyone for joining this call. Let’s turn the call over to operator to open up the floor for the questioners. Operator?

Question-and-Answer Session


(Operator Instructions) Our first question comes from the line of Brian Alger from Wedbush Equity Market.

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