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Cogo Group, Inc. (COGO)

Q1 2011 Earnings Conference Call

May 5, 2011 16:30 AM ET

Executives

Wanyee Ho – Investor Relations Director

Jeffrey Kang – Chairman and Chief Executive Officer

Will Davis – Senior Vice President, Business Development and Chief Marketing Officer

Fuya Zheng – Chief Financial Officer

Analysts

Charles John – Canaccord Genuity

Amir Rozwadowski – Barclays Capital

Quinn Bolton – Needham & Company

James Faucette – Pacific Crest Securities

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Cogo Group Incorporated First Quarter of 2011 Earnings Results Conference Call. During today’s presentation, all parties will be placed in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, Thursday, May 5, 2011.

And I would now like to turn the conference over to Wanyee Ho, Investor Relations Director. Please go ahead.

Wanyee Ho – Investor Relations Director

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 2011 first quarter earnings conference call.

After the market closed today, Cogo issued a press release this morning unaudited financial results for the quarter ended March 31, 2011. 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 Fuya Zheng, our CFO, who will report the company’s financials.

Before we begin, I would 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 – 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 – Chairman and Chief Executive Officer

Thank you, Wanyee, and thanks to everyone for joining this call. I will focus on three key points today. First, I will review our outstanding quarterly results. Second, I will review our recently filed Form S-4 which is approved by a shareholder proxy vote would change our domicile to the Cayman Islands. This would offer us the flexibility to dual-list shares of Cogo onto the Hong Kong Stock Exchange. Third, I will detail the launch of an exciting new online strategy called COGO 3.0, which will utilize the internet to aggressively ramp up SME customer penetration with lower acquisition costs.

We will create a unique online marketplace to be a one-stop shop for SME customers by providing them value-added solutions ranging from applications to logistics to products. I will be in the U.S. during the week of the May 5 for (indiscernible) show and I’m excited to have a chance to meet with many of you.

Cogo’s first quarter revenue of the $104.4 million was up 29% and showed a clear return of high growth modes. We saw strong booking with specific strength in the auto, health, smart grid, smart meter, and in the 3G smartphones and HDTV. I’m proud to say that we generated $10 million in operating cash flow in the first quarter. Other than having to build some inventory quickly following the Japan earthquake to make sure that we would meet the demands of our customers, our business was not materially affected by this tragedy. Our non-GAAP EPS diluted was $0.20 versus guidance of $0.19. We are on a clear path to show $1 in annual pro forma earning power.

Cogo posted a gross margin of slightly over 14.2% up sequentially. During the quarter, Cogo posted operating margin of 8.5% and we expect sequentially operating margin improvement every quarter for the rest of the 2011 and further progress in 2012. We are focused on driving leverage in the business model while also allowing for necessary investment needed to drive growth.

Now, onto some segment highlights, full details as in the press release. Our industrial business showed 77% year-over-year growth in the first quarter and now represents 23% of total revenue. For 2011, we expect that industrial revenue will be split 60% smart meter and grid, 15% to 20% for auto, 15% to 20% for high-speed railways and 10% for healthcare. Revenue from our MDC acquisition was nearly 5 million in the quarter. I’m very pleased with this result. MDC puts us in the sweet spot of hundreds of billion of dollars in the total healthcare and smart grid spending.

Our telecom business showed a normal seasonality and we expect that it will continue to grow nicely through 2011 and 2012 as the fiber and 3G rollouts continue in the typical fashion of ordering then installation, then more ordering. There is really no magic here. With digital media, handsets showed a typical seasonal decline in the first quarter and we expect that this business to grow nicely through the 2011 and the 3G smartphones to ramp up.

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