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Cogo Group, Inc. (COGO)

1Q10 Earnings Call

May 6, 2010, 4:30 PM ET

Executives

Jeffrey Kang - CEO & Chairman

Frank Zheng - CFO

Will Davis - CMO

Wanyee Ho - Investor Relations Director

Presentation

Wanyee Ho

Thank you Craig and good afternoon to everyone. I'm Wanyee Ho, Cogo’s Investor Relations Director, and I'd like to thank you all for joining us today to participate in Cogo's 2010 First Quarter Earnings Conference Call.

After the market closed today, Cogo issued a press release reporting final financial results for the quarter ended March 31, 2010. 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'd like to remind everyone that the call today may contain certain 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 am very pleased with our results in the first quarter of 2010, and I would like to extend congratulations to the whole Cogo team for such a great performance. In the quarter, Cogo posted revenue of $81 million dollars US, up 28% year-over-year and down only 8% sequentially. This is versus our guidance of $70-72 million, as our order booked improved continually through the quarter in all business segments.

Our Non-GAAP EPS diluted in the first quarter was 17 cents, up about 40% year-over-year and versus our guidance of 14-15 cents. Clearly we succeeded in flowing the better than expected revenue down to the bottom line. Cogo posted a gross margin of 14.1%, down slightly quarter-over-quarter due to better than expected telecom and handset revenue. Note that our gross margins are almost entirely dependent on revenue mix, and the specific gross margin for each business segment was flat sequentially. We are maintaining our target for 15% gross margins, but as we have indicated many times previously, most of our margin expansion has and will come from the operating side.

In the first quarter, Cogo posted operating margins of 8.3%. While we do see incremental opportunities for opex investments based on our improved visibility, we expect our operating margins to improve sequentially for the rest of the fiscal year. We continue to target an operating margin of 10%.

Cogo’s revenue breakdown in the first quarter is as follows:

* Industrial business represented nearly 17% of total business. This segment grew 96% year-over-year. Our Industrial business continues to excel, and we expect it to contribute nearly 20% of sales by the end of 2010.

* Digital media made up about [58%] of total revenue, representing a sales increase of 19% year-over-year.

* Telecom represented 24% of total revenue, showing a sales increase of 21% year–over-year.

* Service revenue represented about 1.1% of total revenue, with revenue increasing about 24% year-over-year.

In the first quarter of 2010, Cogo’s Blue-chip customer base stayed flat at 80, a 16% increase on a year-on-year basis. The total number of Small & Medium Enterprise customers increased by 10 to a total of 1,350, a year-on-year increase of 14.5%. More than 90% of these customers are long-term, repeating customers. Average Revenue per User (“ARPU”) from Blue-chip customers in the first quarter was $691 thousand, down 8% sequentially and up 5% from the prior year period. ARPU from SME customers in the first quarter was $19 thousand, down 10% sequentially and up 24.4% year-over-year.

We are seeing continued opportunities to increase our SME customer base, particularly in our Industrials and Digital Media segments, and we expect to show continued progress throughout 2010 and 2011.

Overall, we are very pleased with Cogo’s business results in the first quarter. We are well on our way to return to the company’s high-growth mode. We see great opportunities across a variety of business segments, including Auto Electronics, 3G handsets, HDTV, Smart Grid and Smart Meter. Our confidence in China’s economy continues to grow as the fundamentals improve in both the consumer and industrial verticals. Large government projects in the Industrials space are typically multi-year plans.

Now let me discuss a few highlights from our business sectors, starting with the Industrials segment.

The results for our Industrials business speak for themselves. This segment was up 96% year-over-year and is now almost 17% of total sales. This should be our fastest growing segment for the foreseeable future, given the positive trends in the Auto Electronics, Smart Meter, Smart Grid and Railway sectors. In 2010, we expect our Industrials revenue to be split into three areas with approximately 60-70% of revenue coming from Smart Meter and Smart Grid; 15-20% to railways and 15% toward Auto Electronics.

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