Cogo Reports Strongest Ever Third Quarter Revenue Share Gains and Increased Scale are Top Priorities in an Uncertain Market

-- Q3 Net Revenue: $146.4 million in accordance with Generally Accepted Accounting Principles ("GAAP") (a year-over-year increase of 46.1%) and EPS Diluted attributable to Cogo Group, Inc. of $0.06 GAAP and $0.16 Non-GAAP (a year-to-year decrease of 23.8% Non-GAAP EPS).

SHENZHEN, China, Nov. 10, 2011 /PRNewswire/ -- Cogo Group, Inc. (NASDAQ: COGO) ("Cogo" or the "Company"), one of the leading gateways for global semiconductor companies to access the industrial and technology markets in China, today announced unaudited financial results for its third quarter ended September 30, 2011. The Company reported quarterly revenue of $146.4 million, up 46.1% year-over-year compared to $100.2 million reported in the third quarter of 2010 and Non-GAAP EPS of 16 cents.

Jeffrey Kang, CEO of Cogo commented, "While I am pleased that our results in the third quarter of 2011 exceeded consensus estimates for both revenue and pro-forma earnings, the continued tightening of credit in China, particularly as it relates to the Small and Medium Enterprise Markets ("SME"), has materially reduced our visibility into our various end markets. Consequently, we will suspend providing guidance for the fourth quarter of 2011, although we plan to remain profitable."

"We continue to view the current market conditions as a time to increase market share versus weakened competitors and we plan to continue to invest in personnel and new sales offices. We are in a cyclical business and when macro economic conditions improve, we will be well positioned to benefit. In the third quarter of 2011, we grew our customer count by 14% year over year to 1,729.  In this period of uncertainty, we find that our global semiconductor partners and our customer base increasingly rely on our technical services and solutions."  

Mr. Kang continued, "The revenue shift towards our blue-chip customers and away from our SME customer base, which we cited during our last earnings call in August, continued in the third quarter and we expect this trend to continue well into 2012. As expected, this shift continues to produce lower gross margins and larger working capital requirements. Any strategy change to reduce our exposure to certain businesses that require particularly high working capital requirements would take a few quarters to completely implement. While we have invested heavily in working capital in the last two quarters to grow our footprint, Cogo still has a strong and liquid balance sheet. In the third quarter, we purchased 2 million shares of Cogo common stock. While we continue to view buybacks as a strategic use of cash, we remain focused in the very short-term on utilizing the balance sheet to drive market share and strengthen our relationships with our customers and global semiconductor partners. However, at some point, our revenue growth rates could be affected by future restrictions to our bank lending facilities, particularly if credit conditions continue to tighten in China."

Financial Results

Net income attributable to Cogo Group, Inc. for the third quarter of 2011 was $2.3 million, down 50.6% from $4.6 million reported in the same period last year, with Non-GAAP net income attributable to Cogo Group, Inc. down 26.5% over the same period last year. Earnings per share ("EPS") Diluted attributable to Cogo Group, Inc. on a US GAAP basis was $0.06, and Non-GAAP EPS Diluted attributable to Cogo Group, Inc. was $0.16, down 23.8% from the third quarter of 2010.

Key Financial Indicators

(all numbers in USD thousands, except share data)



Q3 2011(1)

(unaudited)

Q3 2010(1)

(unaudited)

Percentage

Change

Net Revenue

$146,428

$100,200

46.1%

Cost of Sales

$131,269

$86,004

52.6%

Gross Profit

$15,159

$14,196

6.8%

Operating Expenses

$11,813

$8,962

31.8%

Net Income attributable to Cogo Group, Inc.

$2,296

$4,648

-50.6%

EPS Diluted attributable to Cogo Group, Inc.

$0.06

$0.12

-50.0%

Non-GAAP EPS Diluted attributable to Cogo Group, Inc.

$0.16

$0.21

-23.8%




(1) The US dollar ("USD") amounts are calculated based on the conversion rate of $1 to RMB6.3780 as of September 30, 2011 and of $1 to RMB6.6905 as of September 30, 2010.

(2) Included in the Q3 2011 net income attributable to Cogo Group, Inc. was $2.9 million of share-based compensation expense recognized in accordance with Accounting Standards Codification ("ASC") 718, Compensation-Stock Compensation and $0.3 million of acquisition related costs, such as amortization of intangible assets and related deferred taxation. Non-GAAP net income attributable to Cogo Group, Inc. was $5.9 million.

Revenue Review

Revenue for the third quarter was $146.4 million, an increase of 46.1% compared to $100.2 million reported for the same period in 2010. The revenue breakdown includes: $58.5 million, or 40.0% of total sales for digital media (including mobile handsets business), representing a 3.6% increase year-over-year; $57.9 million, or 39.5% of total sales for telecommunications equipment, representing a 133.4% increase year-over-year; and $30.0 million, or 20.5% of total sales relating to industrial business, representing a 70.8% increase year-over-year. The Company did not record any revenue from the service business in the third quarter compared to $1.3 million reported for the same period last year. The Company is currently experiencing significant growth in the telecommunications equipment end-market. In addition, the Company is participating in what management believes to be some of the fastest growing industrial business end-markets in China, including the smart grid, wind power, smart meter, automotive, high-speed railway and medical equipment sectors. Over time, Cogo expects to expand into other verticals in the industrial space, such as security and factory automation.

Customers and Average Revenue Per User ("ARPU")Update

In the third quarter of 2011, Cogo's blue-chip ARPU was approximately $1.1 million. The Company's Small and Medium Enterprises ("SME") ARPU in the quarter was approximately $23 thousand.

Blue-chip customers accounted for approximately 74% of total Cogo revenue in the third quarter of 2011, up from approximately 68% for the same period in 2010. SME customers accounted for the remaining approximately 26% of total revenue in the quarter.

Cost of sales, which includes the aggregate purchase of components from suppliers and the direct cost of service, was $131.3 million compared to $86.0 million in the third quarter of 2010, representing an increase of 52.6% year-over-year. Gross profit for the third quarter was $15.2 million, up 6.8%, compared to $14.2 million during the third quarter of last year. Gross margin for the third quarter was 10.4%, compared to 14.2% reported for the third quarter of 2010.

Operating expenses, including selling, general and administrative, and research and development expenses, totaled $11.8 million, up 31.8%, compared to $9.0 million reported for the third quarter of last year.

Income from operations was $3.3 million, a decrease of 36.1% from $5.2 million reported in the same period of 2010. Operating margin for the third quarter of 2011 was 2.3% compared to 5.2% for the third quarter of 2010. Excluding the effects of share-based compensation expenses and acquisition-related costs, such as amortization of intangible assets and related deferred taxation, operating margin would have been 4.8% for the third quarter of 2011, compared to 8.7% for the same period in 2010. The effective tax rate for the third quarter of 2011 was 14.4%, compared to 11.7% for the same period in 2010. Non-controlling interests' share of income was $0.3 million for the third quarter of 2011 and $0.05 million for the third quarter of 2010.

Net income attributable to Cogo Group, Inc. for the third quarter of 2011 was $2.3 million or EPS Diluted attributable to Cogo Group, Inc. of $0.06 on a U.S. GAAP basis, compared to net income of $4.7 million, or EPS Diluted attributable to Cogo Group, Inc. of $0.12, in the third quarter of 2010. Included in the third quarter of 2011 was $2.9 million attributable to share-based compensation expense and $0.3 million attributable to acquisition related costs, such as amortization of intangible assets and related deferred taxation. Excluding share-based compensation expenses and acquisition related costs, such as amortization of intangible assets and related deferred taxation, the Non-GAAP net income would have been $5.9 million, or $0.16 Non-GAAP EPS Diluted attributable to Cogo Group, Inc. for the third quarter of 2011. The weighted average number of shares used in the calculation of diluted EPS was 36.3 million compared to 37.9 million in the third quarter of 2010.

For the nine-month period ended September 30, 2011, the Company reported revenue of $390.0 million, an increase of 41.8% from the $275.0 million reported during the same period in 2010. Gross profit was $47.2 million, an increase of 21.2% from $38.9 million reported during the nine month period ended September 30, 2010. Gross margin was 12.1% of sales, compared to a gross margin of 14.1% for the same period last year. Net operating expenses were $33.3 million, an increase of 29.4% as compared to $25.8 million for the same period last year. Income from operations was $13.9 million, an increase of 5.3% from the $13.2 million reported during the prior year period. The Company had an effective tax rate of 11.5% compared to 10.6% during the prior year period. Non-controlling interests' share of income was $1.2 million as compared to $0.1 million during the nine month period ended September 30, 2010. Net income attributable to Cogo Group, Inc. for the prior year period was down 12.2% at $10.8 million from the same period last year.

Balance Sheets and Cash Position

The Company continues to be in a strong financial position with a current ratio of 2.3 to 1 and a net cash position, after deducting bank borrowings, of $5.5 million. The Company had operating cash outflow of $47.2 million in the nine month period ended September 30, 2011 and utilized approximately $16.7 million for acquisitions in the nine month period ended September 30, 2011.

Inventories increased from $38.0 million on December 31, 2010 to $65.8 million as of September 30, 2011 as the Company continued to target new revenue growth opportunities. Inventory turnover days was 46 days in the third quarter of 2011 compared to 47 days in the prior quarter. Accounts receivable increased from $103.3 million on December 31, 2010 to $157.7 million as of September 30, 2011 as a result of increased sales volume, while Days Sales Outstanding increased from 82 days in the prior quarter to 99 days in the current quarter, mainly due to increased sales volumes from some blue-chip customers with longer credit terms. Accounts payable increased from $9.6 million at the end of 2010 to $24.4 million as of September 30, 2011 and Days Payable Outstanding decreased from 18 days in the prior quarter to 17 days in the current quarter sequentially. Cogo's cash conversion cycle increased from 111 days in the second quarter of 2011 to 128 days in the third quarter of 2011.

Total cash, including pledged bank deposits, decreased to $138.2 million reported at the end of the third quarter of 2011 from $156.3 million as of December 31, 2010. Bank borrowings increased from $76.7 million as of December 31, 2010 to $132.7 million as of September 30, 2011. The increase is primarily due to additional bank borrowings as a result of increased operating cash outflows in the nine month period ended September 30, 2011.

Cogo Group, Inc. equity was $273.8 million as of September 30, 2011, an increase of 5.8% from $256.4 million as of December 31, 2010. During the trading days of July 1, 2011 to August 9, 2011 in the third quarter of 2011, the Company repurchased 2 million shares of its common stock at an average price of $4.3 and a total cost of $8.6 million pursuant to a stock repurchase plan under Rule 10b5-1 promulgated under the Securities Exchange Act of 1934, as amended to facilitate the repurchase of its common stock. Cogo continues to view share buybacks as a strategic use of cash but it is limited by the Company's cash level.

About Cogo Group, Inc.:

Cogo Group, Inc. (Nasdaq: COGO) is one of the leading gateways for global semiconductor companies to access the rapidly growing Industrial and Technology sectors in China. Through its unique business-to-business services platform, Cogo designs customized embedded solutions using technology from suppliers including Intel, Broadcom, Xilinx, SanDisk, Freescale, Atmel and others for a customer base of over 1,700 Chinese OEMs/ODMs. Cogo's customer list includes approximately 100 blue-chip companies, including ZTE, BYD and NARI, as well as over 1,600 Small and Medium Enterprises (SMEs). The Company serves a broad list of rapidly growing end-markets in China, including 3G Smart phones, Tablets, Automotives, High-Speed Railway, Smart Meter/Smart Grid, Healthcare and High Definition Television ("HDTV").  

Cogo 2011 Q3 Earnings Results Conference Call

Date/ Time:
November 10, 2011 (Thursday) @ 4:30 PM (ET)

Conference Call:
US/ Canada Toll-Free: 1-877-941-2068
International: +1-480-629-9712

Webcast/ Audio Recording:
http://viavid.net/dce.aspx?sid=00008E06

Replay (from 11/10/2011 at 7:30 pm to 11/17/2011 at 11:59 pm ET):
US/ Canada Toll-Free: 1-877-870-5176 (Passcode: 4479944)
International: + 1-858-384-5517 (Passcode: 4479944)

For further information:
Investor Relations
www.cogo.com.cn/investorinfo.html
communications@cogo.com.cn
H.K.:  +852 2730 1518 
U.S.:  +1 (646) 291 8998
Fax:  +86 755 2674 3522

Safe Harbor Statement:

This press release includes certain statements that are not descriptions of historical facts, but are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. These forward-looking statements may include statements about our proposed discussions related to our business or growth strategy such as growth in digital media, telecommunications and industrial applications businesses, as well as our potential acquisitions which are subject to change. Such information is based upon expectations of our management that were reasonable when made, but may prove to be incorrect. All such assumptions are inherently subject to uncertainties and contingencies beyond our control and upon assumptions with respect to future business decisions, which are subject to change. For further descriptions of other risks and uncertainties, see our most recent Annual Report filed with the Securities and Exchange Commission (SEC) on Form 10-K, and our subsequent SEC filings. Copies of filings made with the SEC are available through the SEC's electronic data gathering analysis retrieval system (EDGAR) at www.sec.gov.

About Non-GAAP Financial Measures:

To supplement Cogo's consolidated financial results presented in accordance with GAAP, Cogo uses the following measures defined as Non-GAAP financial measures by the SEC: 1) Non-GAAP net income attributable to Cogo Group, Inc. which is net income attributable to Cogo Group, Inc. excluding share-based compensation expenses and acquisition related costs, such as amortization of intangible assets and related deferred taxation, and 2) Non-GAAP basic and diluted EPS attributable to Cogo, which is basic and diluted EPS excluding share-based compensation expenses and acquisition related costs such as amortization of intangible assets and related deferred taxation. The presentation of these Non-GAAP financial measures is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP. For more information on these Non-GAAP financial measures, please see the table captioned "Unaudited Reconciliation of Non-GAAP measures to the most comparable GAAP measures" set forth at the end of this release.

Cogo believes that these Non-GAAP financial measures provide meaningful supplemental information regarding its performance and liquidity by excluding share-based compensation expenses and acquisition related costs such as amortization of intangible assets that may not be indicative of its operating performance from a cash perspective. Cogo believes that both management and investors benefit from referring to these Non-GAAP financial measures in assessing its performance and when planning and forecasting future periods. These Non-GAAP financial measures also facilitate management's internal comparisons to Cogo's historical performance and liquidity. Cogo computes its Non-GAAP financial measures using the same consistent method from quarter to quarter.

Cogo believes these Non-GAAP financial measures are useful to investors in allowing for greater transparency with respect to supplemental information used by management in its financial and operational decision making. A limitation of using Non-GAAP net income, Non-GAAP basic and diluted earnings per share, Non-GAAP income from operation and Non-GAAP operating margin is that these Non-GAAP measures exclude share-based compensation expenses and acquisition related costs, such as amortization of intangible assets and related deferred taxation that have been and will continue to be for the foreseeable future a recurring expense in our business. Management compensates for these limitations by providing specific information regarding the GAAP amounts excluded from each Non-GAAP measure. The accompanying tables have more details on the reconciliations between GAAP financial measures that are most directly comparable to Non-GAAP financial measures.

Tables Attached

COGO GROUP, INC.


UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS




September 30, 2011

December

31, 2010


USD'000

RMB'000

RMB'000

Assets




Current assets:




Cash 

78,374

499,868

699,650

Pledged bank deposits

59,866

381,823

332,050

Accounts receivable, net

157,711

1,005,881

681,911

Bills receivable

5,097

32,508

31,001

Inventories

65,755

419,383

250,573

Income taxes receivable

168

1,070

2,478

Prepaid expenses and other receivables

7,982

50,913

49,338

Total current assets

374,953

2,391,446

2,047,001

Property and equipment, net

2,958

18,864

14,613

Goodwill and intangible assets, less accumulated amortization, RMB144,235 thousand (USD22,614 thousand) in 2011 and RMB122,637 thousand in 2010

62,305

397,379

258,935

Other assets

3,492

22,271

1,468

Total Assets

443,708

2,829,960

2,322,017

Liabilities and equity




Current liabilities:




Accounts payable

24,433

155,834

63,283

Bank borrowings

132,707

846,404

505,888

Income taxes payable

2,193

13,986

16,153

Accrued expenses and other liabilities

6,439

41,061

15,581

Total current liabilities

165,772

1,057,285

600,905

Deferred tax liabilities

4,150

26,471

13,777

Total liabilities

169,922

1,083,756

614,682

Equity




Common stock:

Par value: USD0.01

Authorized: 200,000,000 Shares

Issued: 41,309,285 shares in 2011, 41,181,529 shares in 2010

Outstanding: 33,110,950 shares in 2011, 35,848,764 shares in 2010

524

3,340

3,332

Additional paid in capital

215,092

1,371,856

1,315,806

Retained earnings

123,156

785,491

716,839

Accumulated other comprehensive loss

(19,337)

(123,332)

(117,479)


319,435

2,037,355

1,918,498

Less cost of common stock in treasury, 8,198,335 shares in 2011 and 5,332,765 shares in 2010

(49,199)

(313,794)

(226,495)

Total Cogo Group, Inc. equity

270,236

1,723,561

1,692,003

Noncontrolling interests

3,550

22,643

15,332

Total equity

273,786

1,746,204

1,707,335

Total liabilities and equity

443,708

2,829,960

2,322,017




COGO GROUP, INC.


UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME







Three Months ended September 30,


2011

2011

2010


USD'000

RMB'000

RMB'000

Net Revenue




Product sales

146,428

933,919

661,392

Service revenue

-

-

8,997


146,428

933,919

670,389

Cost of sales




Cost of goods sold

(131,269)

(837,234)

(568,120)

Cost of service

-

-

(7,287)


(131,269)

(837,234)

(575,407)

Gross profit

15,159

96,685

94,982

Selling, general and administrative expenses

(7,888)

(50,302)

(40,255)

Research and development expenses

(3,929)

(25,059)

(19,893)

Other operating income

4

23

188

Income from operations

3,346

21,347

35,022

Interest expense

(991)

(6,322)

(3,435)

Interest income

638

4,066

3,971

Earnings before income taxes

2,993

19,091

35,558

Income tax expense

(430)

(2,745)

(4,156)

Net income

2,563

16,346

31,402

Less net income attributable to noncontrolling interests

(267)

(1,705)

(306)





Net income attributable to Cogo Group, Inc.

2,296

14,641

31,096


USD

RMB

RMB

Earnings per share attributable to Cogo Group, Inc.




Basic

0.06

0.40

0.83

Diluted

0.06

0.40

0.82





Weighted average number of common shares outstanding




Basic


36,317,706

37,244,589

Diluted


36,317,706

37,853,878


Three Months ended September 30,


2011

2011

2010


USD'000

RMB'000

RMB'000

Comprehensive income:




Net income

2,563

16,346

31,402

Other comprehensive income




Foreign currency translation adjustments

(386)

(2,461)

(3,876)





Comprehensive income




Less: comprehensive income attributable to noncontrolling interests

(261)

(1,663)

(206)

Comprehensive income attributable to Cogo Group, Inc.

1,916

12,222

27,320







COGO GROUP, INC.


UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME







Nine Months ended September 30,


2011

2011

2010


USD'000

RMB'000

RMB'000

Net Revenue




Product sales

390,022

2,487,562

1,816,723

Service revenue

-

-

23,446


390,022

2,487,562

1,840,169

Cost of sales




Cost of goods sold

(342,855)

(2,186,731)

(1,560,886)

Cost of service

-

-

(18,942)


(342,855)

(2,186,731)

(1,579,828)

Gross profit

47,167

300,831

260,341

Selling, general and administrative expenses

(22,157)

(141,315)

(117,611)

Research and development expenses

(11,161)

(71,185)

(54,915)

Other operating income

3

17

224

Income from operations

13,852

88,348

88,039

Interest expense

(2,067)

(13,184)

(6,216)

Interest income

1,691

10,785

10,758

Earnings before income taxes

13,476

85,949

92,581

Income tax expense

(1,546)

(9,858)

(9,855)

Net income

11,930

76,091

82,726

Less net income attributable to noncontrolling interests

(1,166)

(7,439)

(711)





Net income attributable to Cogo Group, Inc.

10,764

68,652

82,015





Earnings per share attributable to Cogo Group, Inc.





USD

RMB

RMB

Basic

0.29

1.83

2.21

Diluted

0.28

1.81

2.16





Weighted average number of common shares outstanding




Basic


37,457,578

37,149,639

Diluted


37,878,587

38,006,683






Nine Months ended September 30,


2011

2011

2010


USD'000

RMB'000

RMB'000

Comprehensive income:




Net income

11,930

76,091

82,726

Other comprehensive income




Foreign currency translation adjustments

(938)

(5,981)

(5,972)

Comprehensive income




Less: comprehensive income attributable to noncontrolling interests

(1,146)

(7,311)

(470)

Comprehensive income attributable to Cogo Group, Inc.

9,846

62,799

76,284







COGO GROUP, INC. and SUBSIDIARIES


UNAUDITED RECONCILIATION OF NON-GAAP MEASURES TO THE MOST COMPARABLE GAAP MEASURES






Three Months ended September 30,




2011


2010




$'000


$'000

Net Income






GAAP net income attributable to Cogo Group, Inc.


2,296


4,648


Share-based compensation expenses


2,943


2,634


Amortization of intangible assets and related deferred taxation


613


680


Non-GAAP net income attributable to Cogo Group, Inc.


5,852


7,962






Income from operation






GAAP income from operations


3,346


5,234


Share-based compensation expenses


2,943


2,634


Amortization of intangible assets


734


815


Non-GAAP income from operation


7,023


8,683







Operating Margin






GAAP operating margin


2.3%


5.2%


Non-GAAP operating margin


4.8%


8.7%







Earnings per share


$


$


GAAP net income attributable to Cogo Group, Inc. per common share- Diluted


0.06


0.12


Non-GAAP net income attributable to Cogo Group, Inc. per common share- Diluted


0.16


0.21













Weighted average number of common shares outstanding






Basic


36,317,706


37,244,589


Diluted


36,317,706


37,853,878










SOURCE Cogo Group, Inc.




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