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Cogo Group, Inc. (COGO)

Q3 2009 Earnings Call Transcript

November 4, 2009 4:30 pm ET

Executives

Jeffrey Kang- CEO

Frank Zheng- CFO

Will Davis-CMO

Analysts

Quinn Bolton – Needham and Company

Adele Mao – OLP Global

Richard Safranek – Wafra Investment Advisory Group

Brian White – Ticonderoga Securities

Amir Rozwadowski – Barclays Capital

Nathan Johnson - Pacific Crest

Rahul Khanwalkar – Jefferies and Company

Presentation

Operator

Introduction

Will Davis

Good afternoon to everyone. My name is Will Davis, I am the Chief Marketing Officer of Cogo and I'd like to thank you all for joining us today to participate in Cogo's 2009 Third Quarter Earnings Conference Call.

After the market closed today, Cogo issued a press release reporting final unaudited financial results for the quarter ended September 30, 2009. This release can be accessed in the investor relations section of the Cogo website at 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; Frank Zheng, our CFO, who will report the Company’s financials; and Will Davis, our Senior Vice President of Business Development and Chief Marketing Officer will discuss guidance.

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 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 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, Will, and thanks to everyone for joining our earnings call. During the third quarter of 2009, Cogo posted revenue of $82 million in US dollars, up 9.7% year-over-year and up 11.5% sequentially. Our Non-GAAP EPS Diluted was 18 cents, which is up nearly 30% from the prior year period, which I believe is a tremendous achievement given the current global economic environment and relative to other technology companies. Cogo posted a gross margin of 14.4% and Non-GAAP operating margin of 8.7%, up from 7.7% in the second quarter. We continue to target gross margin of 15% and Non-GAAP operating margin of 10%.

Cogo’s revenue breakdown in the third quarter is as follows (please note that digital media now combines both the original digital media and mobile handset segments):

Industrial business represented 14% of our total business. This segment grew about 260% year over year and increased about 29% quarter over quarter.

Digital media made up about 60% of total revenue, representing a sales increase of 2% year-over-year and an increase of 9% quarter-over-quarter.

Telecom infrastructure represented 25% of total revenue, showing a sales decrease of 9% year–over-year and an increase of 9% quarter-over-quarter.

Service business represented about 1.6% of total revenue, with revenue increased about 86% year-over-year and 18% quarter-over-quarter.

In the third quarter of 2009, Cogo added 3 Blue-chip and 108 SME customers. As at September 30, 2009, Cogo has 77 Blue-chip customers and 1,318 SME customers, up 4% and 9% from the prior quarter and up 22% and 17% from the prior year respectively. More than 90[%] of them are long term, repeating customers. Average Revenue per User (“ARPU”) from Blue-chip customers in the third quarter was $726 thousand, up 7% sequentially and down 8% from the prior year period. ARPU from SME customers in Q3 was $18 thousand, up 2% sequentially and down 12% year over year.

Overall, we are very pleased with Cogo’s business results in the third quarter, and as we noted in our last conference call, we believe that the worst of the economic situation in China is behind us. We expect to return to a higher growth mode in 2010 and we are excited about a variety of growing revenue streams, particularly in our Industrial segment and through our Small and Medium Enterprise strategy. Our $82 million in revenue in the quarter exceeded our original guidance of $79-80 million and we made sequential progress in both gross margin and operating margin. In the third quarter of 2009, we posted Non-GAAP operating margin of 8.7%, up from 7% in the first quarter and 7.7% reported last quarter. We maintain our target of a 10% operating margin. We reported 14.4% of gross margin and maintain our target of 15%, noting that our gross margin level is largely dependent on revenue mix. We reiterate that we expect to see more leverage on the operating margin line than on the gross margin line.

I’d like to spend a moment to highlight our Small and Medium Enterprise Strategy. We are increasingly confident that our platform service business model drives a very sticky relationship for our products and services with around 1,300 Small and Medium Enterprise customers. Roughly 30% of our revenue is from SME customers and we believe that over time this will be more in the range of a 50/50 split with our Blue-chip customers. Our SME customers thrived in the first half of 2009 during the global economic difficulties and in response to this, we sharpened our existing SME strategy. It now includes about 10,000 existing targets. According to government statistics, there are 160,000 “innovation-based” SMEs in China out of a top SME base of 54 million.

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