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Cogo Group, Inc. (COGO)

Preliminary Q4 2010 Earnings Call Transcript

February 1, 2011 4:30 PM ET

Executives

Jeffrey Kang – CEO and Chairman

Frank Zheng – CFO

Will Davis – SVP, Business Development and Chief Marketing Officer

Analysts

Amir Rozwadowski – Barclays Capital

Matt Ramsay – Canaccord Genuity

Brian White – Ticonderoga

James Faucette – Pacific Crest

Mark Tobin – Roth Capital Partners

Graham Tanaka – Tanaka Capital

Mike Jolin – Heartland

Presentation

Operator

(Operator instructions)

Wanyee Ho

Thank you very much 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 Fourth Quarter Earnings Conference Call.

After the market closed today, Cogo issued a press release reporting preliminary unaudited financial results for the quarter ended December 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 on the Company’s financials.

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 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. Our excellent execution continued in the fourth quarter of 2010, as we posted unaudited revenues of $113.5 million, up over 13% sequentially and 29% from the prior year period. This represents the highest sequential growth for a Cogo fourth quarter since 2007 and the highest year-over-year growth rate for any quarter in 2010. We easily exceeded our guidance of $107-108 million due to continued solid bookings across all of our business segments with specific end market strength in 3G Smartphones, HDTV, fiber roll-outs, and Industrial areas such as High-Speed Railways, Automotive and Smart Grid/Meters. Our 2010 revenue was up nearly 26% from 2009 and, in our view, it leaves no doubt that we have returned to high-growth mode.

Our Non-GAAP EPS Diluted in the fourth quarter was 24 cents, surpassing our guidance of 22-23 cents and clearly showing we are well on our way to showing one dollar in annual earnings power in the near future. Cogo posted a gross margin of 14.2%, up about 30 basis points sequentially.

Note that our gross margins are determined almost entirely by revenue mix and are not tied to elements such as capacity utilization. Over time, we expect that our gross margins will trend upward, and we maintain our 15% gross margin target - although we would expect it to stay in the range of 14.2-14.4% through 2011. The growth of our Industrials and SME revenue are two of the key positive drivers of our gross margins.

In the fourth quarter, Cogo posted operating margins of 8.7%, which was flat sequentially. As we have indicated previously, while we could post 10% Non-GAAP operating margins in any given quarter by slashing investments in new growth areas, this would starve growth in future years in some very high growth end-markets. Since the first quarter of 2009, our operating margins have grown over 140 basis points. Additionally, we believe that operating margins can improve sequentially in the first quarter 2011 and rise slightly each quarter through 2011 due to continued efficiencies and increased ARPU per customer. We are maintaining our 10% operating margin target and expect to make clear progress towards that goal as we progress through 2011.

In the fourth quarter of 2010, our Industrials revenue grew 46% year-over-year to $20.3 million, representing about 18% of total sales. Our telecom business grew 28% year-over-year to $27.8 million, representing about 25% of sales. Finally, our digital media business grew about 24% year-over-year to $63.8 million, representing about 56% of total sales. Our services revenue grew 37% year-over-year to $1.7 million. I am rather pleased with the results of all of these business units.

I’d like to take a minute to discuss what we view as the fundamental value that Cogo brings to the marketplace. We are the leading gateway for global semiconductor companies like Broadcom, Freescale, Atmel and Intel to access the fast growth Industrials and Technology sectors in China. We offer a unique business-to-business services platform to design specific embedded solutions for our list of over 1,600 customers, of which about 90 are blue-chip and over 1,500 are SMEs. We are very proud of our component partner relationships and strongly believe that we offer clear symbiotic benefits. Essentially, Cogo offers a cost effective way for our component partners to reach these fast growth end-markets in China and we decrease time to market for our customers. In China, time to market is king because life-cycles continue to shrink and industry fragmentation leads to a tremendous amount of competition. The very nature of high levels of industry fragmentation in China is a natural advantage for us and allows us to capture operating leverage by servicing an increasingly large customer base.

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