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Cogo Group, Inc. (COGO)

Q4 2009 Earnings Call

February 4, 2010 4:30 pm ET


Jeffrey Kang - Chief Executive Officer

Frank Zheng - Chief Financial Officer

Will Davis - Chief Marketing Officer

Wanyee Ho - Investor Relations


Amir Rozwadowski - Barclays Capital

Mike Walkley - Piper Jaffray

Brian White - Ticonderoga

Quinn Bolton - Needham & Co.

James Faucette - Pacific Crest

Scott Dale - Unidentified Company

David Wiseman - Jefferies & Co.



Good day ladies and gentlemen. Thank you for standing by. Welcome to the Cogo Group Inc. fourth quarter 2009 results conference call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions)

I would now like to turn the conference over to Wanyee Ho, Investor Relations Director; please go ahead ma’am.

Wanyee Ho

Thank you Lisa, and good afternoon to everyone. I’m Wanyee Ho, Cogo’s Investor Relations, Director and I'd want to thank you all for joining us today to participate in Cogo's unaudited preliminary 2009 fourth quarter earnings conference call.

After the market closed today, Cogo issued a press release reporting final unaudited financial results for the quarter ended December 31, 2009. 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; 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 who 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 Wanyee, and thanks to everyone for joining our earnings call. I’d like to start off with a few key points to highlight on this call. Number one, we plan to make sure we generate our revenue growth rate in 2010 versus 2009. We are able to grow 7% in a very challenged 2009 Q4, to extend the high growth this year.

Second, we expect to expand our operating margin nicely in 2010 versus 2009. Third remain very confident in the growth prospects of our industrial business, particularly in the small grade and smaller meter areas. Our railways and auto electronics business are also poised to grow in growth in 2010. Despite concerns about the changes in many parts in China, the industrial programs are part of the three to five years plan that are affected by wage and the partnership.

Four, after the slow start, the 3G handset market in China is starting to show signs of life, and we are to benefit from this growth in 2010. Fifth, we believe that our telecom business will face better than expected in 2010, not only driven by the continuous 3G spending, the new fiber-to-premises building and the rollout of the new PC and networks.

Six, we continue to see strong opportunities in our SME business, and the SME business in China typically don’t restate large amounts of credit, so that any slowdown in mending typically has an effect on SME annually.

Seventh, we expect a progress in establishing new supply partnerships with the leading global semiconductor players in 2010. Finally, we believe that our authorization of another five million share buyback is strong indication of our place in the current business trend.

Now, onto some financial data; during the fourth quarter of 2009, Cogo posted revenue of $88.1 million in U.S., up 7% year-over-year and up 7.4% sequentially. Our non-GAAP EPS diluted was $0.19, which is at its higher end of our guidance, $0.18 to $0.19. Our gross margin, 14.5% was up slightly sequentially, and our non-GAAP operating margin up 8.4% was down slightly sequentially due to the higher operating expenses associated with some year end bonuses and a one-time impairment charge with the fixed asset.

For the year 2009, we expect to post a revenue of approximately $306 million in U.S. Our three year non-GAAP EPS diluted is expected to be around $0.54 and our gross margins is around 14.4%. Cash balance is expected to be approximately USD 115 million, which including $17 million in pledged bank deposits. Our operating margin should be slightly seasonally weaker across the quarter and then begin to move higher as we go through 2010. We should end 2010 very close to our target of 10% operating margin.

In the fourth quarter, our industrial business represented nearly 16% of total business. This segment grew roughly 100% year-over-year and increased about 25% quarter-over-quarter. Digital media made up about 28% of our total revenue, representing a sales increase of 1% year-over-year, and an increase of 4% quarter-over-quarter.

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