Cogo Group, Inc., Q4 2008 Earnings Call Transcript

Feb.13.09 | About: Viewtran Group, (VIEW)

Cogo Group, Inc. (COGO) Q4 2008 Earnings Call February 12, 2009 4:30 PM ET

Executives

Jeffrey Kang - Chairman and CEO

Will Davis - SVP of Business Development and Chief Marketing Officer

Frank Zheng - CFO

Analysts

Charles John - Piper Jaffray

Bill Choi - Jefferies

Quinn Bolton - Needham & Co

James Faucette - Pacific Crest

Brian White - Collins Stewart

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Cogo Group, Incorporated Fourth Quarter 2008 Results Conference Call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for question (Operator Instructions). This conference is being recorded today, Thursday, February 12, 2009.

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

Wanyee Ho

Thank you, Michelle. Thank you all for joining this conference call. My name is Wanyee Ho, I am Cogo's Investor Relations Director and I would like to thank you all for joining us today to participate in Cogo's preliminary 2008 fourth quarter earnings conference call.

After markets closed today, Cogo issued a press release reporting final un-audited financial results for the quarter ending December 31, 2008. 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.

Discussions today will be hosted Jeffrey Kang, Chairman and CEO who will discuss the company's business operations. Frank Zheng our CFO, who will report the company's financials. And Will Davis, our Senior Vice President of Business Development and Chief Marketing Officer.

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 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 would like to turn the call over Jeffrey. Jeffrey the floor is yours.

Jeffrey Kang

Thank you, Wanyee. And thanks to everyone for joining our earnings call.

During the fourth quarter of 2008, Cogo posted a revenue of $82.3 million in US dollars up 16% year-over-year and 10% sequentially.

Our non-GAAP EPS was $0.18 with gross margin of the 14.2% and operating margin of 7.7%. We continue to target gross margin of 15% and operating margin of 10%. The results rather flatly ahead of our projections and Cogo continue to experience growth up from all product categories.

Mobile handset comprised the 32% of total sales a decrease of 7% year-over-year and an increase of 0.4% quarter-over-quarter. Digital media made up 30% of our total sales representing an increase of 33% year-over-year and was up 8% quarter-over-quarter.

Telecom infrastructure represented 29% of total sales, showing an increase of 10% year-over-year and an increase of 6% quarter-over-quarter. Service business represented almost 1% of our total sales, a decrease of 74% year-over-year and an increase of about 20% quarter-over-quarter.

The Industrial Application business segment represented 9% of our total business. This segment grew to [126%] quarter-over-quarter.

In fourth quarter of 2008, Cogo had 1251 active customers up 5% from the 1188 in the previous quarter and an average revenue per user (ARPU) of around 66,000 up 3,000 from the third quarter or about 5% of growth. In fourth quarter our repeated customer ratio was over 90%.

Overall we are pleased with Cogo's business results in the fourth quarter and are encouraged by the opportunities ahead of us. We grew revenue 16% from the previous year and we continued to make progress towards our margin target.

Economic situation and the Chinese [stimulus] well we are not immune to the current global economic conditions. We are encouraged by the Chinese Government monitoring and its physical policy to stimulate its demand.

We continue to believe that the Chinese economy growth will exceed the most of other right up to the market. Business discussions additionally we are benefiting from a number of the tailwinds that we believe put us in unique position to grow our revenue in 2009.

This included China 3G, the growth of our export business and other opportunities in our industrial segments.

I will like to expand on several of this handset, on the handset front the fourth quarter was stated above as we expected. With business improving from a weak November is good going into Chinese New Year appears to have (inaudible) handset inventories appear to be fairly normal and we continue to benefit from exports but as domestic handset vendors including ZTE an above rate.

Additionally we believe we gain some shares versus to some weaken competition. Going forward we see several potential drivers including the expected ramp up of the CDMA handset of China Telecom and ultimately higher content driven by our applications like CMMD which is a version of the Mobile TV, clear vendors in the domestic Chinese market.

Additionally, we expect to benefit from our relationships with the VI Telecom and BOID. Ultimately we expected to see strength from PDS CDMA handsets of a China mobile.

Telecom segment while we viewed official announcement of Chinese 3G licenses to be a watershed event for Cogo and the China wireless market will become benefited from those BIOD quarters ago to China Mobile and to China Telecom. The announcement of the licenses also provided some final clarity for China Unicom to build a WCDMA network.

Our relationships with Huawei and ZTE, Alactel-Lucent should continue to benefit Cogo as we are all likely to share gain in the Chinese wireless market. Additionally Cogo benefits from continuous rapid international telecom growth by Huawei and ZTE.

Industrials, while our industrial business is still on the 10% of our total sales. We continue to believe that this segment should be our fastest, growing segment in 2009. Currently Cogo is participating not only in the rapid growth of both domestic railway systems and in the modernization of the Chinese electric grid.

Longer term we see potential in the automobiles, train track, security and medical sectors. While some [technology] and end market customers in our industrial segment are different from our existing core segment.

The business model is the same, Cogo is the getaway for components suppliers wanting to do business in China and ways speeder the time to market for our end market customers.

Lastly Cogo is making solid progress with this raising sign of components relationship including Maxim, Microsoft and Freescale. On that M&A front, we did not quote any deals in fourth quarter, although, we are continued to closely monitor a number of opportunities. Given our cash position and especially lower gross margin of the potential target.

We view M&A as a critical part of Cogo's growth and long term strategy and to diversify into new vertical segment. However, it just as important to ensure that any acquisition would right away for Cogo.

With that I would like to turn a call to Will, to discuss our guidance. Will, the floor is yours.

Will Davis

Thank you Jeffrey. Good afternoon everyone. Please keep in mind that our guidance does not include any potential M&A activity that could occurs later in 2009.

In the first quarter of 2009, we expect that our revenue will be in the range of $60 million to $65 million US dollars with non-GAAP EPS of $0.12 to $0.13. We expect gross margins to remain roughly stable on the first quarter from the fourth quarter in the range of 14%.

We expect to demonstrate good OpEx discipline given current market conditions while staying flexible to pursue new opportunities where appropriate. We are not providing specific annual guidance for Cogo in 2009 while we continue to have good visibility of most of our end market for the next one to two quarters.

We note that the global economic situation makes full year 2009 projections more difficult. However, given our current visibility and our current tailwinds and include 3G rollouts, continue growth of our export businesses and the rapid growth of our industrial segment. We continue to expect revenue growth in all four business units in 2009 versus 2008.

We expect to continue to broaden base and see opportunities to gain share versus some weakened competitors. Additionally, we expect to continue to add new existing component supplier relationships in 2009 while also enhancing our status with key suppliers like Broadcom, Freescale and Maxim.

Non-GAAP operating expenses for R&D and SG&A in the first quarter should be approximately $4.5 million, split approximately 25% for R&D and 75% for SG&A. As indicated earlier we maintained our longer term gross and operating margin targets of 15% and 10% respectively.

Interest income in the first quarter is estimated to be around $500,000 US. The effective tax rate for the first quarter is expected to be 8% unchanged from our prior estimate. We expect this same respective tax rate to apply for the rest of 2009 also.

In the first quarter, stock compensation is expected to be around $1.5 million and acquisition related cost including amortization and impairment of intangible assets will be approximately $1.5 million. Other than those items noted, there are no significant differences between GAAP and our non-GAAP results.

With that, I would like to turn the call over to Frank Zheng. Our Chief Financial Officer, to review our unaudited fourth quarter balance sheet and cash flow.

Frank Zheng

Thank you, Will. Good afternoon everyone. For currently all the figures I'm discussing here, and that's otherwise noted are in US dollar. And now, let me review the line items for the fourth quarter. Since Jeffrey, highlighted the main point of the P&L statements. I would focus on the balance sheet and the cash flow and the buyback.

Cogo continues to have a very healthy balance sheet, and while we do not have a fully have a fully audited financials at this time. We did generate positive cash flow in the fourth quarter and are very comfortable with our cash position.

During the Q4, we have repurchased about 1.4 million shares. At a weighted average of about $4.72 per share. As of December 31 we have bought back total approximately 3.94 million shares with weighted average of [$6] per share.

Under the executive stock repurchase program, the company made buyback up to 5 million shares of any common stock on open market or either negotiated transaction, of which approximately 1.05 million shares still remains under current program.

Jeffrey Kang

At this time, let's the turn the call to the operator to open up the floor for the questions. We will look to ending this call around 5:30. Operator?

Question-and-Answer-Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Brian White with Collins Stewart. Please go ahead.

Brian White - Collins Stewart

Hi, Jeffrey, Will and Frank. I have got a question regarding the subsidy program in China. I think it's had a pretty significant impact on the LCD TV market, especially around the Chinese New Year and I am just curious of the impacts that you have seen on handsets and maybe any other pieces of your business?

Will Davis

Thanks, Brian, yeah on the subsidy front, we view that is definitely nice positive for us particularly given the fact that a lot of the subsidies are focused on rural areas which we believe have higher concentration of ship market share for the domestic handset vendor. So from that vantage point we view it very favorably and to our understanding that there is not a time limit on this subsidy change. So it looks to be indefinite at this point as means of stimulating demand. So from that standpoint some, we are pretty positive about it.

Brian White - Collins Stewart

And in terms of 2009 sounds like you expect all your markets to grow in 2009, I am just curious if you could dig a little deeper into what market do you think will grow faster and what will grow a little slower?

Will Davis

Amongst to our four markets handsets, telecom, digital media and industrial. We are looking at the industrial segment growing significantly faster than the others. In the first quarter of 2008 that revenue was about $400,000 and this obviously ramps pretty aggressively since then and we expected to continue to ramp nicely into 2009. So that's going to be far in a way our fastest grower. The other three segments are going to be much slower growth although we do expect organic growth in handsets, telecom and digital media.

So as a percentage of total sales industrial should continue to ramp as a percentages we go through 2009. And as we have indicated that has positive gross margin benefits because typically the industrial segment vertical has higher than average corporate gross margin.

Brian White - Collins Stewart

Okay just finally if we look into the March quarter here obviously a seasonal time especially for consumer and handsets. If you could give us some type of color on what type of decline we can expect for those markets sequentially in the March quarter just some type of range?

Jeffrey Kang

In general, we did not say anything about economy unusual, in addition to the seasonality change. So we normally the Q1 is like a 20% down versus in the fourth quarter and usually for the whole year the first quarter is roughly only 20% of the whole year's business. And the fourth quarter will be around at 30% of the whole year. So that's a typical seasonality and a quarter-by-quarter in Chinese business.

Brian White - Collins Stewart

And Jeffrey what do you typically see at handsets in the March quarter?

Jeffrey Kang

We are seeing and the business so far is good because the Chinese New Year, we have seen the sales is good but versus and comparing to the fourth quarter of last year it certainly will go down because of the seasonality.

Brian White - Collins Stewart

Right, so what type of clients should we expect?

Jeffrey Kang

Yes I'm not talking about some specific number but in our mind anything between like a 20% to 30% is a reasonable.

Brian White - Collins Stewart

Okay great thank you.

Will Davis

Next question please.

Operator

Thank you our next question comes from the line of Amir Rozwadowski with Barclays Capital. Please go ahead.

Amir Rozwadowski - Barclays Capital

Thank you very much for taking my question gentlemen. Will, you had highlighted through the industrial segment growing significantly faster than the other segments can you give us a little bit of color in terms of what areas are perhaps, what areas that Jeffery had highlighted earlier are really the drivers for that growth?

Will Davis

Sure, currently we are participating in, on the power supply side and the build of Chinese railways a little bit of build in the electrical grid, participating in the security vertical, so there are a number of different things we are working on, and it's still in its influence.

I mean it's assuming 9% of sales in the quarter, so we feel like that we have got a pretty good runway there to continue to grow that. So at this point, we are looking at lot of different opportunities. I think that longer-term you could see some potential on the automotive side. I think you could see some potential on the tech side, solar, medical and I think right now we are piggybacking on the efforts by the Chinese government to stimulate growth through its infrastructure build, and they have.

Jeffrey Kang

And let me add on one thing, we are just talking about our long-term growth in this industrial segment. I think in the near-term, in the 2009, I think our focus is on two things, one is the railway related business.

The second is the electrical grid related to business, so that's the two area directly benefited from the China's government (inaudible) and we are expect a significant of business ramp up in that two areas.

Amir Rozwadowski – Barclays Capital

And Jeffery, is that based on sort of current contracts that you have in place, I mean how is the visibility in that business.

Jeffrey Kang

I will discuss our projections based on our design win and our customers staying at the production and the business plan this year. So that’s why I think our business have a very good visibility. So any of you want talking about, next one or two quarters, we have a quite visible contract our business in '09.

Will Davis

And I would just add to that, I mean if you look at our business four groups. Typically the Telecom and the industrial segments have longer visibility for us than handsets and digital media.

Amir Rozwadowski – Barclays Capital

Great, and then.

Will Davis

Just generically speak so, keep that in mind.

Amir Rozwadowski – Barclays Capital

Okay. Thank you, Will. And then in terms of sort of the domestic handset market, it seems like the commentary suggested that we have seen some pick up around the Chinese New Year.

It also seems like you folks aren't seeing too much of that, we are seeing clean inventory in terms of the channel. In terms of their expectation for growth over 2009 for that business, is that predicated on some level of growth in the domestic Chinese handset markets. Or how should we think about sort of the factors, or at least the market demand in general for that?

Will Davis

I will take that one. We have been planning for flattish growth for the handset market in '09 versus '08 in terms of units. Now if you think about what does that mean in terms of the total cogs for the market, if assume an ASP decline for the overall market. Pick a number 5% or 10%, you were looking at the total cogs of the market being down 5% to 10%, so definitely a pretty sharp slowdown from the last year.

I think within that framework, the ability for us to grow is predicated on export continuing to grow particularly ZRE and Huawei. Growth was through CDMA on the China telecom side. I think we have a pretty tempered outlook on TDS CDMA, I mean you can ask 20 people, and you will get 20 different estimates as to how many units there will be for TD this year, and we are not going to put out an estimate, but overtime I think that will benefit us.

And things around the edges like CMMB, if you get a few million units that has a higher than average ASP for us for that module, so I would say it's a number of different things. But certainly we are cautious about the outlook for the Chinese market relative to the last couple of years there is no doubt.

Amir Rozwadowski – Barclays Capital

Okay. Thank you very much for taking my question gentlemen.

Will Davis

Thanks, Amir.

Jeffrey Kang

Thanks, Amir.

Operator

Thank you. Our next question comes from the line of Charles John with Piper Jaffray. Please go ahead.

Charles John - Piper Jaffray

Hello, Jeffery and Will. Thanks for taking my question.

Will Davis

Charles, thank you.

Charles John - Piper Jaffray

Congratulations on executing in a tough environment. Just had a few questions here, if I switch to the infrastructure business, in the past you have talked about Cogo already participating in the 3G bill. But could you may be just add some color on, are you getting any kind of material acceleration in order as carry as deploy base stations pretty quickly. We are getting some pretty aggressive statements from China Telcom and Unicom. And if you are not seeing any of their acceleration, when do you expect that to start in 2009?

Will Davis

Jeffery, would you like to take that.

Jeffery Kang

Yes. Let me address at this question. We already basically WCDMA, CDMA base station equipment technology technology-wise, there is nothing new. So, we already have a design win into our key customer, in twelve key customers like Huawei and ZTE.

Just previously all those business go, our customers equipment, mostly goes into international market. And this time, when the China Telecom starting to roll out their CDMA network and the China Mobile, and the China is winning (inaudible) pushing the WCDMA networks.

So, there was significant increased, but domestic demand and which will help us to increase our telecom business setting to Huawei and ZTE. So as I told the investors. Since last year, we already are seeing the contract coming from our customers.

And in past quarter, in the fourth quarter, we are certainly are seeing the mobile revenue from the 3G related businesses coming. So, in this year, we're going to continue to say that mobile business in the large spectrum and goes to the benefit from the Chinese 3G rollout.

Charles John - Piper Jaffray

Okay. Thanks for the color Jeffrey. So, with this backup, are there any changed expectations for the engineering services, given the kind of deployments that we are seen out there in network?

Are you all aggressively pursuing any engineering services related to these build outs or should we just keep it at the current time that we see in the last couple of quarters for the engineering services division?

Jeffery Kang

We already engineered Engineering services as we have in last year or two years ago, while it will not e our core business. So, that’s why in our last year we restructuring, we already cut most of our service engineering team. So that’s why in the future there won't be our focus anymore, and all we want, keep our focus on the equipment and providing the design and auto service to the manufacturing and customers in China.

Charles John - Piper Jaffray

Okay, great. And just quickly going back of the question on the industrial division, in terms of growth, you obviously have something in the pipeline good contracts and the stimulus package seems to be working in your favor. Can you just comment on the linearity for 2009, is this happening pretty quickly, or should we put more of a back half for this division?

Jeffrey Kang

I think, because our base, frankly speaking because this sort of base of the industrial business as is relatively small comparing with our other business. So that's why, what I can tell you is, we already have a in decent contract in our pipeline in the next two quarters.

And but just internally we have a much bigger plan to expand this business in the next two years. So that's why we believe and this business have a very good visibility, Just as Will mentioned, because this business is driven by the government infrastructure investment, which usually have a better visibility than the consumer spending driven business regiment. So that's why we have a quite optimistic above our business are ramping up in this sector, since the first quarter of this year.

Charles John - Piper Jaffray

And do you have any targets or percentage of sales for 2009?

Jeffrey Kang

In last call, we have already been talking about like a 15% of the total revenue will come from new industrial segment in 2009. Today was the sort of same view about it.

Charles John - Piper Jaffray

Okay. Perfect thanks color.

Will Davis

Yeah I would just I mean for modeling purposes, it should grow as a percentage of sales as we go through 2009. It's tough to give any more details on the linearity other than that, but that's what we are looking at that should grow each quarter.

Charles John - Piper Jaffray

Okay, great. Thanks a lot guys and congrats again.

Will Davis

Thank you.

Operator

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

Bill Choi - Jefferies

Thanks. Hi, guys.

Will Davis

Hi, Bill. Thanks.

Bill Choi - Jefferies

Obviously government infrastructure build there is a quite important, I am curious if you could provide a little more bigger perspective on this, how many major contracts are going on, how long is kind of the building when you kind of get to the product you sell, what is the components in the ASPs attach to this and here something bigger picture about what are all the contracts out there might look like?

Jeffrey Kang

Bill as you know Cogo's business model. We are not just like one contract and one deal focused business model, we are generating in repeating revenue from each of our account, each of our customers.

So from that angel, we believe from the macro picture perspective. So we are at least believe we are going to benefit from this assuming in next of three years. In 2009 and 2010 and driven by the government spending in build infrastructure in China of that most of that mostly the 3G and the wireless related and specifically to our business model.

So we are in a winning designing more, and more new module submission from and other customer like Huawei, ZTE and many other data com vendors like T&W and 3Com many other telecom customers, because this business, the designer cycle in the telecom business that is longer than the customer business, so that's for everything we design in the designing cycle it takes around six to twelve months.

We've already have a lot of design wins from one all of our three customers. And then when their business ramped up, ultimately we will benefit and get a repetitive revenue stream from each of them. So, that’s the nature of our business and we are very optimistic about, we got to continuously grow this business in the next two quarters.

Bill Choi - Jefferies

In terms of thinking about this when you talk about one specific project the rail line between Beijing, or that I think Shanghai or something like that. If you buy the entire contract, what would a big project like that just to you guys would that bring?

Jeffrey Kang

Well it's hard to say, because we're not directly selling to the real estate our project.

Jeffrey Kang

Right. And I understand that.

Bill Choi - Jefferies

[Qualway] railway station. That's the typical, so technically Qualway is my customer other than Beijing railway station.

Jeffrey Kang

Right, okay, all right. Just in terms of roughly $7 million you guys alluded. I would just add if you are trying to quantify, I would keep in mind when you think about Cogo’s participation within your foreign market customers, who are we don’t account for more than 1% of the cogs with any one of these customers, right? So, I mean certainly, I don't know give you any color in term of.

Bill Choi - Jefferies

No, I understand.

Jeffrey Kang

Yeah, okay.

Bill Choi - Jefferies

Of the $7 million, how would you break that up between railway and electrical grid?

Will Davis

I think most their business in if we are talking about 2009, I think in most of the business and well like a 70% or 60% of the investor business were are coming from electric grid, another in our goes to the in railway and other segment.

Bill Choi - Jefferies

Okay that s helpful. By the way, is there a way to size your export business and also can you percentage that Qualway and 3G represented for you in the quarter?

Jeffrey Kang

I don’t have the specific number at this moment, but I think each of them should be below the 10%.

Bill Choi - Jefferies

And in terms of percentage of total business that ultimately goods exported?

Jeffrey Kang

Yeah. I think that must be around like 30%.

Bill Choi - Jefferies

30? Yeah, and probably moving to 35 overtime?

Jeffrey Kang

yes.

Bill Choi - Jefferies

Okay that's good. In terms of balance sheet items, I am wondering if you could provide a little more details about what the ending cash was, maybe some of the other balance sheet metric like DSO’s, Inventory returns and how you think about overall health of the manufacturing partners as we head into an economic slowdown any defaults or bankruptcies, are that you are noticing? Thanks.

Jeffrey Kang

Because this is a fourth quarter is a little bit special, because right now we are in the final audition process, but that’s why we have an provided the details in the balance sheet number. But certainly as I mentioned and we are generating positive cash flow in the fourth quarter, so that’s why our cash positions certainly should be better than the last two quarter, I certainly believe that it is over US $120 million, or above.

In terms of the inventory and our receivable, I believe all of them are actually in a very healthy range. And there is no difference between our normal range in the third quarter of last year. So that’s our inventory for the quarter is in the waiting of 30 days. And our receivable in around 90 days to 100 days. So I still believe in the fourth quarter, our business to be in that range.

Bill Choi - Jefferies

That’s helpful. Thanks a lot.

Will Davis

Sure thanks, Bill.

Operator

Thank you. Our next question comes from that line of Quinn Bolton with Needham & Company. Please go ahead.

Quinn Bolton – Needham & Co

I just wanted to follow-up on the industrial businesses, and I apologize if I missed this. But could you talk about specifically what types of components in sourced into the electric grid and into the railway or the rail stations?

Jeffrey Kang

Well, in electrical grid it's just like telecom equipment. And we have mostly focusing on the electrical controlling unit, so if you think about our components there. Still like MCU, still like power amplifier, still like relay or many other key components they are sensors.

So we have a lot of product planners in the electrical grid segment for example the free scale, they are MCU, they are [business] have a significant portion Maxim in other AGDA analog chipset that Matsushita and Panasonic they have the relay and other passive components. We have many other this type of components conveners with that to talk this segment.

Quinn Bolton – Needham & Co

Okay. Similar other questions for the rail station?

Jeffrey Kang

It quite a same, is that a still MCU and embedded a software and on and off stuff that and controlling staff connectors and all those kind of high end stuff.

Quinn Bolton – Needham & Co

Okay, great. And then just as sort of coming back to the handset market you mentioned kind of, both CDMA opportunities as well as CMMB. Can you sort of again quantify, how big do you think the CMMB market is this year?

There seem to be range of estimate in terms of the number of CMMB enabled handset that should ship and then sort of similarly on the China Telecom transition to CMA. How is that progressing? Do you still think that 50 million to 55 million units, I think that you have put in press release back last month, is that still a good target?

Jeffrey Kang

Yes, I think that's still our target. So we didn’t say too match of in our downside direction in terms of the overall CMMB in our market rollout in China.

Quinn Bolton – Needham & Co

It means that do you think just a few million handsets in 2009, and bigger opportunity next year?

Jeffrey Kang

It's very hard to say what will happen next year, as we have just mentioned. In this environment is a very hard to longer projection, but we are quite positive on mobile TV related business. I believe in giving at a few quarters, we cannot say, mobile TV function is going to be one of the major features for the cell phone handset in China.

Quinn Bolton – Needham & Co

Okay. and then last just sort of usage of cash. I know you have been active on a share buyback program. It looks like you got about 1 million shares left under that program before it gets maxed out.

Can you sort of talk just about going forward in 2009, do you think that M&A becomes the higher priority, I mean which you intermitted. You probably can buy some pretty good companies at very reasonable valuations and use the balance sheet really expand the operations rather than just buy shares back, but can you talk about the pros and cons of M&A versus reduced share buyback program?

Jeffrey Kang

Well, basically our strategy is a very simple and clear. We are going to do both, M&A and the buyback. Because given the decent cash position today, we're having and we will also continuing to expect and continue to profitable and generate some cash in the next every quarter of this year. So, that’s why we're going to continue to do both, the M&A and the buyback.

So, I think M&A is going to help us mostly, expanding into the new verticals, funding the new business opportunities and the help company grow faster and the buyback also help to achieve our shareholder value, because sometimes our stock can be extremely cheap and we have to protect our shareholder value.

Quinn Bolton – Needham & Co

Okay, then just lastly, can you talk to us about sort of how orders have trended monthly? I think you said that things have picked up post November, but just wanted to see the pattern that you saw say October through January?

Jeffrey Kang

November in quite weak, and the December, January is quite goods. We will see a decent demand in the market and after Chinese New Year, so far we lift up quite comfortable for the first of quarter in addition to the normal seasonality and there is nothing particularly in the '08 at this moment.

Quinn Bolton – Needham & Co

Do you think that December, January strength was sort of. I mean obviously that was build up ahead New Year I would expect, can you talk about how the orders have trended post New Year or what kind of forecast you are seeing now that the holiday has passed?

Jeffrey Kang

Because in '07 and '08, first of quarter is seasonally down versus the fourth quarter last year, and so that has trend in our projection. But in addition to that, we didn't see any see anything particularly awake there.

So we still believe in a so far the Chinese domestic demand is okay. And more importantly, we are seeing many of our customers. They are increasing, they are exporting in sales of business in last few months.

So in the total against that is a global trend, so that quiet positive signal to believe and the cell phone business, I presume it's going to be as bad as what people expected.

Quinn Bolton – Needham & Co

Great. Thank you, Jeffrey.

Will Davis

Thanks, Quinn. Next question please.

Operator

Thank you. Our next question comes from the line of Mark Tobin with Roth Capital Partners. Please go ahead.

Quinn Bolton – Needham & Co

Hi, Jeffrey. Hi, Will. Can you give us an idea for the fourth quarter as well as, I guess, '09 you mentioned it's all organic growth, but for the fourth quarter can you give us an idea of the contribution from the recent acquisition?

Jeffrey Kang

Well, it's very hard for us to breakdown the acquisition revenue and organic revenue. As I mentioned in many time before, so once we acquired a business and we usually acquired their engineer capabilities. And then we are able to using our existing product from sales customer base and all are in network to sell those products.

So we are basically, the very hard if we will ask you to break volume of how much revenue is because of acquisition, but certainly in our recent acquisition which is that non-life and which is most of the CDMA related business, we did a latest deal in summer and, because we predicted the CDMA ramp up in the second half and the most of it this year in '09.

So it approved that we made our realization, and today we have to see our CDMA business increasing dramatically because of our we have products offering to our existing customer who have a ready to sell network solution to help customer, so certainly on denial cycle to meet China Telecom's demand.

So in this year, we are going to continue to stay the benefit from that acquisition, because of the CDMA ramp up could be one of the growth driver for our handset business 2009

Mark Tobin - Roth Capital Partners

Okay. And looking ahead when you think about M&A would you stick with that same strategy so that would be a little of delay with the revenue has recognized as you incorporate the new employees into your infrastructure?

Jeffrey Kang

Yes M&A as I guess I mentioned is still one of the critical part of Cogo in our long-term growth. Just M&A can help us to get the market quicker and so that’s why and our existing acquisition strategy pretty much is focusing on the new segments like industrial, security, auto, some of the new areas rather the business in which we already have a decent customer base and a decent revenue size. So I think we are going to continue to pursue our acquisition strategy, but definitely using more cautious way in this top financial situation.

Mark Tobin - Roth Capital Partners

Okay, thank you very much.

Jeffrey Kang

Thanks Mark.

Will Davis

Thanks, Mark.

Operator

Thank you. Your next question comes from the line of James Faucette with Pacific Crest. Please go ahead.

James Faucette – Pacific Crest

Thanks. I have a couple of questions. First look at the acquisition is, I'm hearing that it looks like you maybe were close, at least based on your previous commentary and then have taken a bit of a step back.

And I just wanted to know if that was because of the overall market conditions or if you were reevaluating what you wanted your targets to be, and how we should think about any acquisitions that you may choose to pursue.

And then my second question was, there obviously have been some subsidy programs that have been ongoing by the government there in China helped something like LCD TVs and some cases mobile handsets, can you just give a little more detail on those and more specifically, how long those subsidy programs are expect to last?

Jeffrey Kang

Why don't I answer your first question, and then Will take your second one. So in terms of the acquisition, the reason why we post upon a few deals they are raising up to one is of course is the valuation issue, so we believe in once the market will become tough, so we should the evaluation should have favor us.

And the second thing is more important thing as when we look at candidates, if one year ago this candidate I'm talking about it can for 30% a year in the next 5 year. But in this tough environment, we are going re-measure or revaluate the possibility.

So if we have acquired this candidate, how much or what kind of growth rate we can get in this though environment so that’s the combination, that’s postponed raising is the combination of the valuation issue, as well as the business projection will have to be revisit their business of visibility in the next few years.

So that’s a why we are currently, we use a cautious way to evaluate the acquisition opportunities. But again, we want to just to tell you last year acquisitions steal one of our very important tool to expand our business to achieve our growth rate. Will, you can take second.

Will Davis

James, you had a question about the subsidies, was that what it was?

James Faucette – Pacific Crest

Yeah, exactly. Just how important they still are I guess and what your expectations as at least in terms of their duration?

Will Davis

It’s all understanding that there isn’t a time limit, there it’s indefinite, and I was reading I think that the subsidies it was four provinces maybe nine months ago, and then it grew to 8 and then 12 and I think now it's all of them currently.

So from our vantage point the fact that it's meant to simulate demand in rural areas also where some of the domestic players have higher share is a good thing. Specifically and just in general to stimulate demand. We think it's a good thing. So we think its indefinite tough to make a prediction but that's kind of our view point at this point and yeah we think it's a good stuff.

Unidentified Analyst

Great and then just on that related to that I guess you mentioned a couple of times that you are seeing increasing demand, you think for export of handsets from your Chinese customers. I guess with that two questions, firstly are the domestic Chinese manufacturers or your customers specifically do you feel like they are taking share internally in China. And then secondly what do you think is driving or has driven the export growth for customers like Huawei and ZTE?

Will Davis

It seems to us that the domestic guys are pretty much maintaining share within China. I do not know that there has been any dramatic move either way with those guys. I mean certainly it fluctuates but in general I think that the share seems to be fairly stable. And in terms of the export business, it's a tough one to quantify. We raise it as a tailwind, when we are talking in terms of showing okay in a flat market in China we can actually grow the business as one of the key drivers. I mean we do not bring it up to say that the handset business is going to grow 30% in 2009.

We do not want to overplay that card but it's certainly a tailwind for us. And longer term we think that some of the domestic Chinese guys can continue to gain some incremental share. But we do not want to overplay that. So, if you kind of see my point. It's a tailwind and should help us drive growth in '09 versus '08 within our handset business, but it's not upon to see.

Unidentified Analyst

That's great. I think that pretty well helps me and measure it that back. Thank you very much.

Will Davis

Anytime, thanks, James.

Operator

(Operator Instructions) We do have a follow-up question from the line of Brian White with Collins Stewart. Please go ahead.

Brian White - Collins Stewart

Jeffery, few times you mentioned gaining market share if you could maybe discuss a little bit what's going on in the competitive environment, and why you think you are gaining market share?

Jeffrey Kang

Well, it's very simple and perfect example in the past before any of our customer. So if they can think about choosing a partner, so you know. As I mentioned Cogo we have our competition is very fragmented but we certainly have competition on a every single project.

Today because of the financial crisis the customer willing to find somebody stable financially in partner to what we have been. We do not want to working with up partner who has financial trouble. So if their project six months, but three months later that this guys disappeared. So that's why we are going to say more and more our customer is waiting to working with Cogo.

To develop a new function, new solutions. So, that is going to significantly help us. On other hand we are seeing one of more in the US, technology companies, today they are because China has been one of the fastest growing region in the world.

So, that’s why more and what would I say, more semiconductor partners willing to working with Cogo in participating into these broader market into China. Because of that, we have got a financial crisis. So, we see more competition. But right now, because we are staying low, we are probably would become more and more perfect or ideal partners for either of our customers or our suppliers at this moment.

Brian White - Collins Stewart

Okay. And on the acquisition front, you talked about new verticals, now industrial auto you are already doing something. So, what kind of new verticals that you are not in right now are you looking at?

Jeffrey Kang

You know, Will, just mentioned, we are right now looking at the Medicare, medical business, which is certainly we believe will become another driver in a long run. We are looking at like automobile, CleanTech. So all those segment, but just in this year we believe most of our industrial revenue were coming from like power supply, electrical grid, and a railway related business.

Will Davis

Okay, so, Brian I would say just to clarify, when we talk about other verticals, we mean within the industrial segment. So, all of those being within the industrial segment, not that there is a new segment outside of industrial. So everything is going to be in that one segment.

Brian White - Collins Stewart

Okay, so, medical would go into the industrial segment, I just be curious what, you had in organic auto business. What type of developments are occurring there, and what type of programs are you ramping in auto?

Jeffrey Kang

We already have the business like in all costs in our entertainment system like GPS, like audio and this type of the system. We already generating revenue in this segment. And moving forward, particularly after we are working with, working with Freescale. So we want to move into much deeper in to the auto controlling business. For example, as you know VOIP is the developing in electrical car and profit made investment in that company.

So, within that business, in next three core controlling business. So, we have they were using our solution in the electrical car segment.

Brian White - Collins Stewart

Okay. Do you think right now or they may use it later this year?

Jeffrey Kang

They may use it later this year.

Brian White - Collins Stewart

Later this year. Okay, thank you.

Will Davis

Thanks, Brian.

Operator

Thank you. And there are no further questions at this time. I would like to turn the call back over to management for any closing remarks.

Jeffrey Kang

Thanks. I believe Cogo our unique business position within the Chinese market. Our brands of our relationship across the wider range of end-markets, and large net of 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 weakened competition by expanding business with both the new and existing suppliers and increased exposure to the new end market. We are also making positive stride towards reaching our profitability target.

I want to take this opportunity to thank all Cogo's believers, employees, customers, partners, and long-term shareholders. You have provided Cogo with this opportunity to deliver robust and sustainable growth in past and we appreciate your support as we move into 2009 management team is committed to driving sustainable higher growth and providing significant returns to our shareholders. Thank you again for joining this call, I look forward to talking with you soon. Thank you.

Operator

Thank you, ladies and gentlemen, this conference is available for replay. You may access the replay system by dialing 303-590-3030 and entering the access code of 3964131. You may also call 1-800-406-7325 again the access number is 3964131. Again the telephone number is 303-590-3030 and 1-800-406-7325 and the access code is 3964131. Thank you so much for your participation today. You may now disconnect.

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