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Executives

Wanyee Ho – Director, IR

Jeffrey Kang – Chairman and CEO

Frank Zheng – CFO

Will Davis – SVP of Business Development and Chief Marketing Officer

Analysts

Charles John – Piper Jaffray

Quinn Bolton – Needham & Co.

Bill Choi – Jefferies & Co.

Amir Rozwadowski – Barclays Capital

Mark Tobin – Roth Capital Partners

Adele Mao – Susquehanna International Group

Cogo Group, Inc. (COGO) Q3 2008 Earnings Call Transcript November 6, 2008 4:30 PM ET

Operator

Good afternoon ladies and gentlemen. Thank you so much for standing by. Welcome to the Cogo Group, Inc. third quarter 2008 results conference call. (Operator instructions) As a further reminder, this conference is being recorded today, Thursday, the 6th of November, 2008.

I’ll now turn the conference over to Ms. Wanyee Ho, Director of Investor Relations. Please go ahead, ma’am.

Wanyee Ho

Thank you, operator and good afternoon to everyone. I am Wanyee Ho, Cogo’s Investor Relations Director and I would like to thank you all for joining us today to participate in Cogo’s 2008 third quarter earnings conference call.

After the bell today, Cogo issued a press release reporting final un-audited financial results for the quarter ending September 30th, 2008. This release can be accessed in the Investor Relations section of Cogo’s website at www.comtech.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 and our CFO, Frank Zheng, who will report the company’s financials.

I would also like to take this opportunity to introduce to you our Senior Vice President of Business Development and Chief Marketing Officer, Will Davis who came on aboard only a few days ago with a wealth of experience from buy-side and sell-side as well as corporate experience at Nokia.

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 forward 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 the documents that the company files periodically with the SEC, specifically the company’s Form S-1 and 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 Jeffrey Kang, Chairman and CEO of Cogo. Jeffrey, the floor is yours.

Jeffrey Kang

Thank you, Wanyee. Thanks to everyone for joining this earnings call.

During the third quarter of 2008, our revenue grew 33% year-over-year to reach US $74.8 million, and the non-GAAP EPS was $0.14. The results are in line with our projections and Cogo continued to experience growth across all product categories, including mobile handset, telecommunication equipment, digital media and industrial applications.

The revenue breakdown in Q3 is as follows. Mobile handset comprised 33% of total sales, delivering an increase of 13% year-over-year and an increase of 12% quarter-over-quarter. Digital media made up 30% of total sales, representing an increase of 65% year-over-year and was up 4% quarter-over-quarter.

Telecom infrastructure represented 30% of total sales, showing an increase of 36% year-over-year and an increase 13% quarter-over-quarter. Service business represented almost 1% of total sales, a decrease of 76% year-over-year and a decrease of 17% quarter-over-quarter.

Industrial application business segment comprised primarily of the auto-electronics, green technology and industrial control system, represented 4% of total business. This segment grew 24% quarter-over-quarter.

In Q2 2008, Cogo had 1,156 active customers and average revenue per user (ARPU) of $59,000 in Q3 2008. Our customer base increased 3% to 1,188 active customers, generating ARPU of $63,000, almost 7% quarter-over-quarter increase. In Q3, our repeat customer ratio was over 90%.

Now let me provide some highlights from third quarter, as well as our business outlook for the fourth quarter and 2009.

Despite the softened global economic situation, we have a number of highlights to report from last quarter. In Q3, we signed an agreement with Microsoft Windows Embedded Business to be an authorized distributor partner in China, providing Cogo with opportunity to expand into the digital media and industrial control business. We also signed a supplier partnership with Maxim to expand business in the digital media and industrial applications.

As of October 31, Cogo has purchased a total of approximately 3.74 million shares with a weighted average of $6.11 per share. Under the existing stock repurchase program, the company may buy back up to 5 million shares of its outstanding common stock on open market or in a negotiated transaction, of which approximately 1.27 million shares remain under the current programming.

On the M&A front, we didn’t close any deals in third quarter, although an agreement with Mega Smart is currently in negotiations.

With the intensifying financial crisis, Cogo has undertaken a more cautious approach to evaluating each deal while, at the same time aggressively pursuing more opposition accelerating the company’s long-term growth.

During the third quarter economic slowdown, we focused on expanding market share and increasing revenue. We continue to outperform expectations, delivering over 30% annual revenue growth in the tough end-market environment. This was a transition quarter and any pricing on adjustments are over. We don’t plan to change the pricing again in the near future, and our business has been on track since the beginning of the first quarter.

As we turn now to the outlook for the fourth quarter, please keep in mind, unless otherwise specified, the forecasts don’t include the efforts of any new acquisition that might be announced after November 6th.

I will use the midpoint of the forecast ranges when making the comparison to specific periods.

Over the next three months, we anticipate a stable market demand from both mobile handset and digital media end market perspective, a reasonably strong growth in the telecom equipment and the new industrial application business. While we have certainly experienced some softness in our end markets, we anticipate continued revenue growth due to our diverse customer base and broad and growing state of the industries we serve.

We are planning for the fourth quarter revenue to be between $80 million to $82 million. The midpoint of this range would be an increase of 8% from third quarter. On a year-over-year basis, the outlook anticipates revenue growth of 14%.

In the fourth quarter, we expect the gross margin of approximately 14%, and we expect our gross margin to improve to the 15% level from the fourth quarter onwards.

Non-GAAP operating expenses, both R&D and SG&A in the fourth quarter should be approximately $5.2 million, split roughly 25% for R&D and 75% for SG&A. The figure is higher than our long-term target of the $4 million to $4.5 million per month per quarter, due to some short-term restructuring items that will not appear in 2009.

We expect our fourth quarter non-GAAP operating margin to be above 7%, and we continue to target an operating margin of 10% over the long term.

Interest income in fourth quarter is estimated to be around $1 million. The effective tax rate for the fourth quarter in this year is expected to be 7% to 8%, unchanged from our prior estimate. We expect this effective tax rate of 7% to 8% to apply for 2009 also.

While we currently view our shares as undervalued, we want to maintain a balance between buying back shares while we’re also preserving cash in a downturn to allow for sufficient working capital and M&A activities. Therefore, it’s difficult to predict the exact weighted average of shares outstanding.

For modeling purposes, please assume our share count to be flat, to slightly down from the currently 39 million shares outstanding. We continue to believe our net cash position provides with significant advantages, particularly in the current economic environment.

We anticipate Q4 non-GAAP EPS to be $0.18 per share. In Q4, stock compensation is estimated to be around US $1.5 million, and acquisition-related costs, including amortization and impairment of the intangible assets, will be approximately US $3.5 million.

Other than those items noted above, there are no significant difference between the GAAP and our non-GAAP results.

Looking at our 2008 whole-year forecast, we remain optimistic regarding the company’s projected revenue growth of approximately 30% an estimate full-year revenue around US $284 million and a non-GAAP EPS of approximately $0.72.

The outlook for 2009 presents another challenging year, but not without great opportunity. The global financial crisis or slowdown in demand will likely impact Cogo’s end markets. However, we remain encouraged by a softened monetary policy in China and the Chinese government’s administrative measure to stimulate the economy.

Cogo plans to continue its growth trajectory by increasing ASP, the average selling price of the existing mobile handsets, even with move to lower ASP handset; add additional media products; and aggressively expanding into the new industries through acquisitions.

In addition to its existing supplier partnerships, the company has recently signed agreement with Microsoft, Maxim and a few others. We will continue to increase the number of supplier partnerships to enrich our solution portfolios. Cogo expects organic growth coupled with the current acquisition to help it achieve its 2009 growth target.

We believe the company’s unique business model supports the sustainable growth, even in challenging economics in 2009, by taking share within existing accounts and broadening our exposure to the newer and high-growth market.

And then, next, I will move to the financial part. So let me just give you some of the details of the third quarter. The revenue was US $74.8 million, an increase of 33.3% year-over-year. Gross margin was 13.8%, compared to the 19.5% reported during the same period last year. Operating expenses were 13.6% of total revenue, which includes R&D expenses of the 2.9% and SG&A expense of the 10.7% of total revenue.

Operating margin for the third quarter was 0.2% versus 8.8% for the same period in 2007. However, excluding the effect of the stock-based compensation and acquisition-related costs, including amortization of purchased intangible assets, non-GAAP operation margin would have been 6.1%.

Net income for the third quarter was US $1.4 million, representing GAAP EPS diluted of $0.04. Non-GAAP EPS diluted was $0.14. The weighted average number of shares used in the calculation of EPS diluted was 39.2 million.

There was a net income tax’s benefit of $0.3 million during the third quarter, compared to an income tax expense of $0.5 million reported in the same period last year. The change in the income tax was mainly attributed to the settlement of the deferred tax liability of $0.4 million for the quarter. Capital expenditure was US $0.9 million and depreciation was $1 million.

With that, I will return the call to our CFO, Frank Zheng, to give you the balance sheet detail.

Frank Zheng

Turning to our balance sheet. We currently have a very healthy balance sheet. Cogo completed the quarter with $117.1 million in cash with no bank borrowings. Cash bank deposits were $8.6 million. We have a current ratio of 4.1 to 1. Shareholder equity as of September 30, 2008 was $210.9 million.

Inventory turnover increased to 30 days from 25 days in Q2. Receivables were collected in an average of 91 days. Cogo generated $11.4 million in operation cash flow in the quarter just ended.

We are confident that we will overcome the current challenge and continue to deliver strong performance with solid organic growth and accretive acquisitions.

This concludes my remarks. Thank you everyone, for joining the call to discuss our 2008 third quarter operating results.

Jeffrey Kang

Okay. Thanks, Frank. At this moment, let’s turn the call to the operator to open up the floor for questions. So in our management team we have myself the CEO; Frank Zheng, our CFO; and our new onboard Chief Financial Officer and the Senior VP of Business Development, Mr. Will Davis joining us to answer all the investor and analyst questions.

Frank Zheng

Chief Marketing Officer.

Jeffrey Kang

Operator, you can open the floor for the Q-&-A.

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions) Our first question is from the line of Charles John with Piper Jaffray. Please go ahead, sir.

Charles John – Piper Jaffray

Good morning, Jeffrey and welcome on board Will. Thanks for taking my question. I’ll start with one on the handsets. Jeffrey, in some of your previous commentary you had indicated exports would be down but domestic demand was still relatively okay. Would love to hear your thoughts if there’s been any changes in the domestic market demand and how you see 2009 shaping up?

Jeffrey Kang

Well, in general the Chinese domestic demand is still quite astonished in the near term. For example, in this fourth quarter, we didn’t see too much of the softness in terms of the demanding, no matter from the domestic or from international – international-wise.

So we just worry about if the global economic continually slowing down, so it might impact directly or indirectly to our end-market, but at this moment, we didn’t see that happen yet, but moving to the next year, even for the cell phone handset demand, so we’re still – we can still estimate the reasonably strong in the near term, and so we believe – even in – especially in a tough economy situation – usually the Chinese vendors were gaining marketing share from the global market by taking advantage of their pricing power and that the flexible – in terms of providing the service.

So that is why we are still optimistic about our handset business growth next year, especially – our growth not only bet on end-market growth. We are still significantly increasing our ASP, increasing our solution and products portfolios to offer to our existing customer.

So let’s do a very conservative estimation. Let’s assume next year – even with the whole end-market without any growth, but at Cogo, we believe we might still able to grow our own revenue because we can increase our ASP and increase our customer base to increase our revenue from our handset business.

Charles John – Piper Jaffray

So Jeffrey, just trying to understand the ASP comments a bit better. With the restructuring in China and hopefully the aggressive CDMA plan in 2009, I’m guessing it’s going to be mostly low-end 2G phones, so just curious where you – which parts of the handset to continue – actually see the ASPs rate increasing and how you expect to get that rise in ASP next quarter, or the next couple of quarters?

Jeffrey Kang

Okay. There are two ASPs. One is the average – the handset ASP. Another is Cogo’s revenue from perform. Basically, what we’re seeing is, even for the CDMA, in the near term, we’re seeing the demand probably is the low end or middle end of CDMA handset.

But if we’re looking forward for another one year or two year, so we will see there are more middle-end or high-end CDMA phones with all kinds of the functionalities which the existing GSM phones will have. So that’s why we’re kind of optimistic about the demand and ASP – the trend in the long term.

So that’s why we were not expecting a significant ASP drop on every cell phone in the next year. So what we are going to see is the ASP relatively stable with just – we’re going to see the same ASP. We’re going to see one or more features will be added into each phone.

And we at Cogo want to take advantage of this trend, so we will try to offer more new solutions to our customer, and we’ve got an increase in our average selling price per phone. So currently, our ASP per phone revenue should be around $1 per cell phone, so we can just – we needed to– increasing our ASP. For example, increasing from $1 to $1.3 per phone, so that would give us a significant growth potential next year.

Charles John – Piper Jaffray

Okay and how about the channel inventory for handsets in general? How is that looking?

Jeffrey Kang

Especially in this tough environment, everybody’s very cautious about inventory, and no matter our customers or the cell phone distributors. So from our existing survey, we believe the cell phone inventory is in a quite healthy situation. The demand is solid, and it’s not driven by demand, but still, the demand is quite solid in the near-term, and we didn’t see any inventory issues at this moment. We will not expect any inventory issues in this market in the near future.

Charles John – Piper Jaffray

Yes and one last one from me. Hearing a lot about the credit issues and the spillover effect into the emerging markets, you obviously have a nicely diversified customer base. Could you give us a sense of just the revenue distribution across to your customers, if you have any 5% or 10% customers and the risk-exposure that you have to your top line if any of these major customers face any sort of credit or liquidity issues?

Jeffrey Kang

We’re quite cautious about any credit issues here, and so that’s even before this crisis coming, since the beginning of Q3, we would have done orders, credit review with each of our key customer, so we are quite confident and first of all, we have a very reasonable AR, and so our receivable is very safe and at the same time, we have intensed our internal control to monitor them AR and the credit issues.

The first thing, we don’t expect any of our major customers like Huawei, ZTE or TCL have any liquidity issues in the foreseeable future. The second thing is we already have the very defensive way and tools to hedge the risk. So that’s why we will not expect any kind of material impact to us because of the liquidity issues in the near future.

Charles John – Piper Jaffray

So could you give us any of the 5% or 10% customers that you had this quarter?

Jeffrey Kang

There’s only one 10% customer in the third quarter, that’s T&W, which is the EMS factory for Huawei and ZTE and Alcatel in China.

Charles John – Piper Jaffray

Okay. Thanks a lot, Jeffrey.

Operator

Thank you. Our next question is from the line of Quinn Bolton with Needham & Co. Please go on with your question.

Quinn Bolton – Needham & Co.

Sure. Jeffrey just wanted to follow-up on a question about rising ASPs in 2009 just so I have it straight. You’re not saying that you’re going to go out and implement a price increase. What you’re saying is that you’re going to try and add dollar content per phone through new modules or new components. Is that right?

Jeffrey Kang

Yes. Correct. Our strategy is that we cannot estimate precisely what the, handset ASP trends, but what we can tell investors is that Cogo, we’re going to move very aggressively to increase our dollar content per phone to increase our own revenue. So that’s exactly the purpose we want to or the meaning I want to express.

Quinn Bolton – Needham & Co.

I understand. Are there specific components or modules that you see as key to that strategy, whether it’s a Bluetooth or certain larger screen displays – anything that is going to be particularly of focus next year?

Jeffrey Kang

No. We don’t have any single product focus at this moment. We covered quite a broader technology area, even in the cell phone sector. For example, next year at least in the first-half of next year, so we are seeing the big screen slide-phone is the mainstream trend in China.

So that will drive the demand of the big screen, that LCD module and then next year, the CMMB mobile TV, digital TV function will become quite popular and also, few other functionalities, like the 3-D in the segment in the game will be adopted, imbedded into the cell phone.

All of this is going to drive the new demand for the new phone with the new fancy features. So we’re going to support everything around that enables us offering more solutions to our existing customer to increase our ASP.

Quinn Bolton – Needham & Co.

Second question. Looks like the telecom infrastructure business has been particularly strong in Q3 and again, I think it was one of the growth segments in Q4.

Can you talk a little bit more about what specific parts of telecom are strong? Is it across the board? Is it wireless infrastructure? Is it wire-line infrastructure? Is it domestic China? Is it other Southeast Asian countries that are driving the demand?

Jeffrey Kang

I think, in general after the Olympics, so we are seeing the CapEx from the Chinese carrier is starting increasing and I think it’s not just any single segment. I think almost more like a cross-border and sectors, like the optical business broadband, wireless.

We’ve seen a sign of the increasing demanding in end of Q3, and especially in this coming fourth quarter. So that’s why we believe the telecom infrastructure business will be reasonably strong in the fourth quarter, and so that will give us I know, like a very distinct demand indication in the near future.

Quinn Bolton – Needham & Co.

Okay. Great and then just the last question is really a clarification, Jeffrey. I think you said that you expected steady growth in the handset and digital media segments.

I wasn’t sure if we’re supposed to read that as you see those businesses being flat quarter-over-quarter, or whether they’re just going to grow at a more moderate rate than the industrial and the telecom infrastructure business?

Jeffrey Kang

In the near-term, in this quarter, we believe everything’s going to grow, because overall, we’re going to grow over 7%, 8% quarter-over-quarter. So that’s why every line – we believe we are profiting cell phones, mobile and telecom infrastructure business, digital media – all of them are going to grow this quarter.

But in terms of the growth rate, so the new industrial business will grow much faster than other segments because this is a new business to us, so we have a very aggressive plan to expand this new high-growth margin business portion in the next year, 2009.

At this moment, we just want to say in modeling that our existing sector, like mobile handset, digital media and telecom infrastructure, have the modest growth and we are growth driver, mostly coming from the new industry, the industrial sector. At this moment, we want to give a relatively conservative estimation in terms of the business growth from our existing business.

Quinn Bolton – Needham & Co.

Okay, great. Thanks, Jeffrey, and just want to say welcome to the Cogo team, Will.

Will Davis

Thank you.

Operator

Thank you. Our next question is from the line of Bill Choi with Jefferies & Co.. Please go ahead.

Bill Choi – Jefferies & Co.

Okay. Thanks and welcome aboard as well, Will. Good to see you there.

Will Davis

Hello.

Bill Choi – Jefferies & Co.

Jeffrey, looking at your gross margin here, it was actually pretty good considering the mix of business you had. Mobile handset was given all the ASP reductions, that being up sequentially 11%. Maybe can you address how gross margins in the handset business held up versus expectations in digital media as well?

Jeffrey Kang

As you know, we adjust our strategy since the beginning of the third quarter with strategically lowering our gross margin from the business in the mobile handset segment to try to enlarge our marketing share and our total address market.

So in this two quarter, we believe this new strategy has proven to be monetization and in order enable Cogo able to grow, even in a tough environment. So from the near-term, we don’t expect we’re going to further reducing our price because we think, the gross margin level, we are able to continue to grow our business.

So we didn’t see any the near-term threaten, we have to further cut our price to expanding to expand our business. So we believe just keeping the existing gross margin structure and we are able to have a nice growth in the next couple of years. So and then, I think since the fourth quarter, our gross margin has been back to our long-term stable gross margin level.

With guidance for Q4, the gross margin is around like 14% above. In the next one or two years, our gross margin target is actually at 15%, we want to try to keep this gross margin that enable us to continue to grow our revenue line and at the same time so we can control our operating expenses and that enable us eventually, we’ll have double-digit and operating margin structure. So we want to keep this margin structure to significantly grow our revenue in the next two or three years.

Bill Choi – Jefferies & Co.

Right, but it also looks like, even in the mobile handset segment, gross margins probably stayed at or above 7%, right?

Jeffrey Kang

No. We think about our gross margin in the cell phone handset is around 12% above, I think that could be our worst scenario and in our foreseeable future.

Bill Choi – Jefferies & Co.

So you saw 12% in the quarter for handsets?

Jeffrey Kang

Well, 12% gross margin in the third quarter. Yes, I think that’s the most gross margin sale in a quarter to us.

Bill Choi – Jefferies & Co.

Yeah, I know that’s a great job on that, now moving on to your comments about expanding into new end-markets or acquisitions. There seems to be a renewed focus here, a little more aggressive about you’re talking about acquisition even though you’re probably more concerned about the overall macroeconomic picture here.

I just want to try to understand the logic a little bit more. Are the expectations from entrepreneurs along the valuation line a lot more reasonable now that makes it more interesting for you or what is going on that you might seek to do more acquisitions, any particular new emerging market segment that’s interesting?

Jeffrey Kang

Yes. We are still aggressively pursuing all these new opportunities, even though we are more conservative at this moment because this is the market in which cash is king, and we should fully better utilize that high net cash position at this moment.

As you said, we see that the public market is in kind of the free-fall, but as a matter of fact, in the private sector in China, so the valuation still in our view haven’t gone to the reasonable level yet.

So for example, if the public market’s down 50%, but the private sector and the private deal that the valuation having it down 50% in a year still in looking for when is the best timing for those acquisitions, and to fully utilize our existing strong financial situation.

Of course, what we are saying is the deal is cheaper, but in my view, it is still not cheap enough to enable me to make a decision to aggressively pursue any deals here.

Bill Choi – Jefferies & Co.

And why didn’t Mega Smart deal close in the third quarter?

Jeffrey Kang

Again, because when we started that deal, most of this is because of how we are modeling the next one or two years in their business, because as you know, the financial crisis just happened in just last one or two months.

So in our estimate if you do well in the real market six months later and so that’s why we don’t want to say, we still want to evaluate what’s the direct or indirect impact to the industry the Mega Smart guys’ marketing.

So that’s why we prefer potentially postpone, technically postpone the deal for a while to make us really believe and their business is going to continue to have that strong growth in the next two years.

Bill Choi – Jefferies & Co.

Right and potentially even renegotiate prices and so forth, right?

Jeffrey Kang

Of course.

Bill Choi – Jefferies & Co.

Yes. Okay. Thank you so much.

Operator

Our next question is from the line of Amir Rozwadowski with Barclays Capital. Please go ahead.

Amir Rozwadowski – Barclays Capital

Thank you very much, Jeffrey, Frank and Will. Jeffrey, I was wondering if you could speak a little bit more about this Microsoft Maxim deal partnership and what type of potential growth or revenue opportunities you could see there. That would be very helpful.

Jeffrey Kang

Great. We signed a deal with Microsoft mostly for their Windows Embedded, which mostly using in the digital media segment, for example, like a GPS, like LCD TV, like LCD machine, as well as in the industrial control segment like FA converter, a type of the industrial applications.

So as you know, Cogo in the past, we were mostly offering the hardware solution, but at Microsoft, the imbedded software solution is pretty important in the segment. So it’s a logical strategy for us to combine the software and hardware and offering our customer total solutions. So that’s why we think this is a very strategic deal to us. So we certainly believe it will contribute significant, such revenue for us in this business for Microsoft portion.

Maxim, as you know they have a very strong and a very strong and unique analog technology, particularly in a match of a few of our solutions. For example, in the space CMMB in a cell phone solutions. So when we design a CMMB module, we can use the Maxim Tuner technology embedded into our CMMB module and it eventually goes to the cell phone market and also, Maxim the technology has been widely broadly used in the industrial control segment, which happens to be our new business.

The segment is true as an example to show the investor how we’re going to increase our ASP in the next couple of quarters. Our revenue depends on how many customer we are having, what’s the average revenue per customer. So the way to increase Cogo’s revenue in one way is increasing our customer base, our customer numbers and at the same time, we’ve got to enrich our products and solution portfolios to increase the dollar contents to per customer.

So that’s that. We will continue to increase more supplier partners into our products portfolios and to increase our ASP in the next four quarters.

Amir Rozwadowski – Barclays Capital

Great, Jeffrey. That’s very helpful and then last question I had was your service revenue declined pretty healthily year-over-year. Is this the new mark that we should expect for you folks at this level from a service perspective?

Jeffrey Kang

No. As I mentioned in last earnings call, because company – we made some strategic adjustment, so the service revenue contributed a decent gross margin business, but at a same time, we’re going to spend a decent – and operating expenses to generate a better revenue.

Like slowing down market, so we strategically trim that service sector’s business. At the same time, enable us to cut operating expenses dramatically to control the costs. So that’s why I don’t believe the service revenue will be our focus in the near future. We want to focus the module and hardware business to keep the company, continue to grow.

Amir Rozwadowski – Barclays Capital

Great, thank you very much for taking my question.

Operator

Thank you and our next question is from the line of Mark Tobin with Roth Capital Partners. Please go ahead with your question, sir.

Mark Tobin – Roth Capital Partners

Hi, Jeffrey. Quick question, maybe I missed it during the call, but there was reference to a 2009 growth target, but I didn’t hear, is that the 30% revenue growth number?

Jeffrey Kang

Yes. We give the guidance for the fourth quarter is US $80 million to US $82 million the revenue. So that enable us to achieving the whole year is around US $284 million. So that’s approximately 20-something percent.

Mark Tobin – Roth Capital Partners

I’m actually referring –

Jeffrey Kang

So while we still believe we are able to keep this, our previously planned we had in the beginning of this year.

Mark Tobin – Roth Capital Partners

I’m actually referring, there was reference in the press release to 2009 growth targets, not 2008, and I’m just wondering –

Jeffrey Kang

Right now, we cannot give any guidance of the 2009. I think we can talk about ‘09 guidance in the next earnings call, but our existing visibility and our estimation we can tell the investor we’re going to continue to grow our business in 2009.

Mark Tobin – Roth Capital Partners

Okay and then secondly, along the lines of the service business, I knew from the second quarter you indicated there would be some restructuring during this third quarter. Did you incur some restructuring expense in Q3?

Jeffrey Kang

Yes. So that’s why our – if you look at our operating expenses in Q3 and Q4, the operating expenses is all over US $5 million, which our normal range to be US $4 million to US $4.5 million. I think that this additional portion mostly coming from these restructuring costs. So these restructuring costs will not appear in 2009.

Mark Tobin – Roth Capital Partners

Okay and then final question. On the supply side, what sort of supplier concentration did you have for the quarter?

Jeffrey Kang

I think at this quarter, Broad accounts still are not just the supplier, as always. So I think we don’t have too much of the supplier concentration, but Broad accounts certainly is our largest supplier at this moment.

Mark Tobin – Roth Capital Partners

Is that – are they a greater than 10%-type supplier for the quarter?

Jeffrey Kang

Yes. I think the Broad account certainly is over 10% out of the quarter.

Mark Tobin – Roth Capital Partners

Okay. That’s all I have. Thank you.

Operator

Thank you. (Operator instructions) Our next question is from the line of Adele Mao with Susquehanna International Group. Please go ahead.

Adele Mao – Susquehanna International Group

Hi, guys. I jumped on the call very late. I apologize if you have already covered some of the topics.

First of all, I would like to ask about your thoughts for the near-term opportunities, specifically in TDS CDMA telecom equipment area. This week, we are seeing the bidding results coming out for the second phase billed out [ph]. How should we think about the revenue opportunities for Cogo’s customers related to this?

Jeffrey Kang

First of all, we haven’t included the TD revenue into our – in ‘08 guidance yet, and we don’t think it will be the near-term revenue. Even after this bidding result comes out, so when the equipment vendors started to place order to build the equipment, it takes time.

So that’s why, in our – this fourth guidance, we haven’t embedded any of the TD revenue yet, even though my personal view is in the long-run, TD could be quite bright – have quite a bright future in the long-run, but again, it’s quite hard for us to give the – predict the exact revenue contribution in the near future. So that’s why we prefer and are still putting TDSR in revenue and business off-site.

Adele Mao – Susquehanna International Group

Okay. Because we’re seeing Tiankyu, ZTE, and Huawei coming up as the top three vendors. So if we look out in 2009, what could be sort of the upside, and how should we just think about the opportunities related to Cogo from these customers? I think these three – you work with all of the three, correct?

Jeffrey Kang

Yes. We work with all of them. All of them are our customers, and we have design win in TD from every project of their business. Again, even we have this – this very optimistic views which have been in result, but, I believe comparing with other segments, so that the TD deal not that materially important to us. So we are having to deal too much of the estimation and from TD, even for the 2009 yet.

Adele Mao – Susquehanna International Group

Okay. That’s fair. Could you also discuss what Cogo’s opportunities are in CMMB handsets and if you have invested in this area?

Jeffrey Kang

Yes. We already started offering the CMMB solution – and before the Beijing Olympics. So that’s why today, you can even pickup any CMMB cell phone in China, so there are certain solutions coming from Cogo there.

So we believe the mobile TV function could be a very hot venture. Next year could be something “must-have” in China. So that’s why we believe as I said, this is mobile TV function, which is most technology-wise mostly its CMMB and could it become a mainstream stuff and we have a lot of solutions surrounding this venture. So that’s why we are quite optimistic about its expansion become the mainstream venture China next year.

Adele Mao – Susquehanna International Group

Okay. You mentioned that if I were to take any CMMB handsets in China right now, it will Cogo’s solution in there?

Jeffrey Kang

Yes.

Adele Mao – Susquehanna International Group

Okay. So like, currently, there are about 1.2 million, and I think recent statistics coming out of that – at least a target is to grow to 50 million by 2010. Is that kind of the growth opportunity that you guys expect for Cogo in CMMB handsets?

Jeffrey Kang

Yes. Yes. We expect, I think that’s one of the estimation from most of industry experts, and we are going to continue to see this CMMB related cell phone ramp-up into the markets. We at Cogo will get a significant revenue portion from this segment.

Adele Mao – Susquehanna International Group

Okay, great that’s good to hear. Thank you.

Operator

Thank you, ladies and gentlemen and at this time, we’d like to give participants a final opportunity to ask any additional questions. (Operator instructions) and there are no further questions at this time. Management, please continue with any closing comments.

Management, did you have any closing comments for the call today?

Jeffrey Kang

Okay. Thank you. I believe that Cogo’s a unique business model and our inaudible) of business relationships across a wide range of end-markets, and our large net cash position all support sustainable revenue growth in 2009.

Even in this expected continued economic downturn, we plan to continue to gain market share against the waiting competition by expanding business with both the new and existing suppliers and increased exposure to the new end-market.

Before signing off, I want to take this opportunity to thank all Cogo’s believers, employees, customers, partners, and long-term shareholders. You have provided Cogo with the opportunity to deliver robust and sustainable growth, and we appreciate your support as we’re moving into the last quarter of 2008.

Management is committed to driving the sustainable growth and providing significant returns to our shareholders. Thank you again for joining this call. I look forward to talking with you soon. Thanks.

Operator

Alright. Thank you, sir. Ladies and gentlemen, this does conclude the Cogo Group Inc.’s third quarter 2008 results conference call. This conference will be available for replay after 6:30 Eastern Standard Time today through November 13th at midnight Eastern Standard Time.

You may access the replay system at any time by dialing 1-800-406-7325 and entering the access code 393-2201. International dialers may call at 303-590-3030, again entering the access code 393-2201. We thank you very much for your participation today. You may now disconnect. Have a very pleasant rest of your day.

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