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Executives

Jeffrey Kang - Chairman and CEO

Will Davis - Senior Vice President of Business Development and Chief Marketing Officer

Frank Zheng - CFO

Wanyee Ho - Investor Relations Director

Analysts

Mike Walkley – Canaccord Genuity

Scott Searle – Merriman Capital

Quinn Bolton – Needham & Company

Mark Tobin – Roth Capital Partners

Brad Erickson – Pacific Crest Securities

Alan Senter – Valentine Capital Management

Cogo Group, Inc. (COGO) Q2 2011 Unaudited Results Earnings Call August 4, 2011 4:30 PM ET

Operator

Good afternoon. At this time I would like to welcome everyone to the Cogo Group, Inc. Second Quarter of 2011 earnings conference call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer period. If you would like to pose a question during this time, please press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. It is now my pleasure to turn the floor over to Cogo’s Investor Relations Director, Ms. Wanyee Ho. Wanyee - you may begin your conference.

Wanyee Ho

Thank you Alisha, and good afternoon to everyone. I'm Wanyee Ho, Cogo’s Investor Relations Director, and I'd like to thank you all for joining us today to participate in Cogo's 2011 Second Quarter Earnings Conference Call.

After the market closed today, Cogo issued a press release reporting unaudited financial results for the quarter ended June 30, 2011. This release can be accessed in the investor relations section of Cogo's website at www.cogo.com.cn and on most other financial websites.

The discussion today will be hosted by Jeffrey Kang, Chairman and CEO, who will discuss the Company’s business operations; Will Davis, our Senior Vice President of Business Development and Chief Marketing Officer, who will discuss guidance; and Frank Zheng, our CFO, who will report on the Company’s financials.

Before we begin, I'd like to remind everyone that the call today may contain forward-looking statements regarding future events and the financial performance of the Company. We wish to caution you that such statements are at present just predictions, and actual results may differ materially as a result of the risks and uncertainties inherent in the Company's business. We refer you to documents that the Company files periodically with the SEC, specifically the most recently filed Form 10-K, as well as the Safe Harbor statement made in today’s press release. These documents contain important risk factors that could cause actual results to differ materially from those contained in the Company's current projections. Cogo assumes no obligation to revise the forward-looking information contained in today's call.

At this time, I'd like to turn the call over to Jeffrey. Jeffrey, the floor is yours.

Jeffrey Kang

Thank you, Wanyee, and thanks to everyone for joining the call. I will focus on a few key points and leave plenty of time for Q&A.

First, I will review our second quarter results and outlook for the third quarter;

Second I will provide an update on our buyback program and our successful proxy vote to change our domicile to the Caymans Islands,

Third, I will provide an update of the development of our new, unique e-commerce platform, Cogo 3.0, located at cogozon.com, which is One-Stop Shop for our SME Customer base, providing them with soup to nuts Value Added solutions, ranging from applications to logistics to products. Currently, the focus of Cogo 3.0 is on leveraging our existing customer base, while longer term, the focus will shift to accelerating customer additions. In this business, scale is the number one current priority.

Cogo’s second quarter revenue of $134.6 million was up 48% year over year. We saw strong bookings with specific strength in Telecom, Healthcare, Smart Grid/Meters, 3G Smartphones and HDTV. I would classify our overall end market demand as mixed, with the credit tightening causing some recent uncertainty amongst our SME customer base. We view this situation as temporary and expect our SME customers to be poised for continued share gains once the credit tightening eases and the current uncertainty lifts, perhaps within two or three quarters. We also saw our blue-chip customers gaining some share across certain end markets, particularly in handsets and telecom.

Our Non-GAAP EPS diluted earnings in the quarter was 22 cents, in-line with our prior guidance. Cogo posted a gross margin of 12.3% in the quarter as much better than expected strength in telecom lowered our blended gross margin. We also saw some gross margin deterioration in both digital media and telecom segments, and these trends are expected to continue for the rest of 2011 and into 2012 as these industries continue to mature. I expect that our gross margins will be in the 10-11% range for the next few quarters as pricing trends in these segments remains under pressure, but we see stability in this range. We have not seen any deterioration in our Industrial gross margins and believe that different dynamics within those end markets should leave those gross margins at current levels.

In the quarter, Cogo posted operating margins of 7.2%, down sequentially from 8.5% in the first quarter due to lower gross margins and a calculated decision to begin ramping investments in headcount and new offices throughout China in order to aggressively pursue scale. We expect this new series of investments to last through 2012 as we pursue the highly fragmented $100 billion Addressable Market. During the last slowdown in late 2008, we were too conservative in pursuing new business opportunities. While the end markets are in a period of uncertainty, I would like expand and NOT retrench. At some point in 2012, we would expect this uncertainty to have lifted and we expect to be in an even stronger position. To be clear, I am investing aggressively in the business because I see tremendous opportunities in the marketplace and I have to take a longer term approach. The current market forces give us an unprecedented chance to aggressively consolidate the market to drive scale while others are cautious. We have the platform, the capital structure and the scale to make it happen.

Now onto some segment highlights. Full details are in the press release.

Our Industrials business grew 68% year over year growth in the quarter and now represents 20% of total revenue. For 2011, we continue to expect that our Industrials revenue will be split 60% for Smart Meter/Grid, 15-20% for Autos, 15-20% for High Speed Railways and 10% for Healthcare.

Revenue from our MDC acquisition was $2.4 million in the quarter and we remain on track to surpass our goal of $15-20 million in the first four quarters after closing. We saw increasing order strength in the quarter and expect this to turn to revenue later in 2011 and 2012. We are still in the process of leveraging the MDC assets across our whole customer base and I am pleased with the progress. MDC puts us in the sweet spot of hundreds of billions of dollars in total Health Care and Smart Grid spending.

Our telecom business showed much better than normal seasonality in the quarter and we began to see hockey stick growth in the month of June that has not slowed down yet. We expect the strength to probably continue through the end of the year. Most of the upside in our telecom revenue is coming from one of our key Tier One vendors; and this strength is focused on fiber and PON build-outs and less focused on wireless.

Within digital media, the key strength was found in HDTV and 3G Smartphones. Overall, handset demand was weaker than expected, with some higher ASPs in 3G handsets helping to bridge the difference. We believe that Tier One handset vendors gained share in the quarter versus white box handset vendors. We expect that low-cost 3G baseband solutions more geared for smaller white box vendors will be available within a couple of quarters.

Now, I’d like to turn attention to our buyback. In the second quarter, as previously discussed, we bought back 865,000 shares of Cogo stock. As of yesterday’s close, under our previously announced 10-5-1 buyback program that began on July 1st, we have bought back an additional 1.4 million shares of stock. The current program lasts through August 9th, at which point, we will have bought back, over the last few months, approximately 10% of the public float not held by Cogo insiders. Clearly we are putting our money where our mouth is.

Additionally, once we file our 10-Q, we can begin to buy back stock again. At some point in the near future, we will have reached the 5 million-share limit established under the current buyback program and we would certainly plan to re-authorize a new buyback. Clearly, at current levels, with our stock trading below tangible book value, we believe that buying back Cogo shares is a very attractive use of cash.

This quarter, our shareholders overwhelmingly approved our proposal by the Board of Directors to change our domicile to the Cayman Islands and today this re-domesticiation was completed. This opens the door for us to dual-list our shares on the Hong Kong Exchange while also maintaining current levels of regulatory scrutiny and financial transparency. We believe that this dual-listing of shares will broaden our shareholder base and consequently, a positive catalyst for the stock.

Finally, I would like to address the progress we have made in the launch of our unique e-commerce platform, cogozon.com. We are currently in beta testing phase with a number of our customers and in the quarter we executed approximately 2 million dollars in online orders from 38 customers. We expect the final version to be completed by the end of this year with increased functionality. Over time, we will leverage our customer base of over 1,600 on this transaction based Internet revenue platform, through both our Application Store and Product Store. This is not an overnight game changer, but we have a clear first mover advantage and the feedback from our customers is clear: this makes ordering, checking of orders, and buying 3rd party apps simpler and faster and they want to utilize what we are offering. Over time, we will shift the focus towards the acceleration of customer acquisitions. Simply put, Cogo 3.0 will help us to accelerate our ability to scale our business towards one billion in revenue and beyond.

With that, I would like to turn the call over to Will to discuss our guidance. Will, over to you.

Will Davis

Thank you Jeffrey. Good afternoon everyone, and thank you for joining our call. In the third quarter of 2011, we expect our revenue to be in the range of $130-140 million US dollars, and Non-GAAP EPS Diluted to be 15-16 cents.

Cogo ended the second quarter of 2011, with 95 blue-chip customers, up three customers sequentially and up 13% from the prior year period. The Company grew its SME customer base sequentially by 45, reaching 1,585 at the end of the second quarter, up 14% year over year and 3% sequentially. Cogo’s total customer base is now 1,680, up 14% year over year and 3% quarter over quarter. Since the first quarter of 2008, Cogo’s total customer count is up nearly 55%.

Cogo’s blue-chip Average Revenue Per User (“ARPU”) was $1 million in the second quarter of 2011, up 35% sequentially and up 36% year over year. Clearly, a lot of the telecom strength is evidenced in that statistic. The Company’s SME ARPU in the quarter was nearly $25,000, up 6% sequentially and up 18% year over year. Total Cogo ARPU was up 29% year over year.

Here are some specifics to help you with your modeling in the Third Quarter of 2011:

From the prior year period, we expect our SME and blue-chip customer counts to each increase by over 10% and we expect our SME ARPU to grow around 15% and our blue-chip ARPU to grow around 36%, as we expect conditions we saw in the second quarter to continue into the current quarter

We expect that our telecom and Industrial segments will each grow over 10% sequentially and our digital media segment to grow less than 5% from the prior quarter.

Non-GAAP Operating expenses for R&D and SG&A in the third quarter are expected to be approximately $8.0 million, with the split remaining consistent at about 35% for R&D and 65% for SG&A.

Our minority interest obligations were in-line with prior expectations at $508,000. In the third quarter, we expect this to be about $300,000 and then we expect them to reach approximately $1. 5 million in the fourth quarter as we plan to open a China office for Comtech Broadband to handle the continued increase in orders. This would trigger and increase in the Minority Interest payment; currently, the payments are only attached to business flowing through our Hong Kong subsidiary. We continue to believe that maintaining and motivating the employees of the Comtech Broadband group as critical because they continue to drive upside to our current internal estimates, and we believe they serve as a great showcase for us to win other component supplier contracts.

Interest income in the third quarter is estimated to be a loss of $50,000 and in fourth quarter, a loss of $100,000.

We continue to estimate our Non-GAAP effective tax rate to be around 8.5-9% in the second quarter and in the range of 8.5-9% through 2011. In 2012, we also expect our tax rate to be in a similar range.

In the second quarter, total stock comp related to SG&A was around $1.2 million and it was $1.65 million for R&D. Acquisition and amortization of intangible costs in the second quarter were $1.4 million. In the third quarter, we estimate that total stock comp for SG&A will be $1.3 million and R&D will each be around $1.7 million.

Acquisition-related costs, including amortization and impairment of intangible assets, will be approximately $1.5 million. Total diluted share count will probably be between 38 and 39 million shares.

Other than the items noted above, there are no significant differences between GAAP and Non-GAAP results. With that, I would like to turn the call over to Mr. Frank Zheng, our Chief Financial Officer.

Frank Zheng

Thank you, Will. Good afternoon everyone. Unless otherwise noted, all items are in US dollars. Cogo continues to have a very solid capital structure that is a true competitive advantage. We ended the quarter with $56.2 million in net cash, or around $1.60 a share. As we indicated on our last earnings call, our quarter to quarter operating cash flow will be volatile based on working capital needs and we had negative operating cash flow in the second quarter after generating $10 million in operating cash flow in the first quarter. We are seeing tremendous growth opportunities and our business model needs working capital to drive our growth. Please remember that our business model requires very little capex.

Our current strategy is to grow our scale and if we need to increase our working capital requirements on a short-term basis in order to achieve this, then that is the approach we plan to take. This strategy is very consistent with what we have said previously. As Jeffrey indicated earlier, we are committed to driving scale in this period of uncertainty. Our cash conversion cycle improved sequentially in the third quarter from 117 days to 111 days.

In the second quarter, we spent $4.9 million for buybacks, $5.5 million towards the MDC Acquisition, and a $3.5 million increase in pledged deposits for a new bank facility.

We continue to be very pleased with our ongoing relationship with our auditors, KPMG in Hong Kong. They have been our auditors consistently since the spring of 2006.

This concludes my remarks. Thank you everyone for joining the call to discuss our 2011 Second quarter unaudited results. At this time, let’s turn the call to the operator to open up the floor for questions. We will look to end this call at around 5:30. Operator?

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. (Operator Instructions) One moment please for our first question. Our first question comes from the line of Mike Walkley with Canaccord Genuity. Please go ahead.

Mike Walkley – Canaccord Genuity

Great, thank you. Can you walk us through the change in the gross margins going forward, clearly a different mix shift, but if you could kind of walk us through the gross margin and if you have any kind of longer term targets now for gross margin and operating margin to help us on a long-term modeling, that would be great. Thank you.

Jeffrey Kang

We just expanded the industrial business which is one of our fastest growing segment of business. We feel the gross margin is still consistent with what we are targeting of talking about 30% of the gross margin. And I think this certainly –industrial business will continue to grow and achieve this high margin status for the bank (inaudible). In terms of telecom and digital media business, I think the major – we are facing certain – there have been problem which is the revenue growth from this segment is much higher than our conservative estimate.

And most of this revenue coming from the tier one customers like as ATE for example. And so normally the revenue from our tier one customer, as the gross margin is lower than the revenue coming from our SME segment. So that’s why I think in the near-term and we cannot say our revenue going to grow dramatically and a much higher than what we have expected, but at a same time the mixed impact is the gross margin will be lower because of the revenue mix will favor – will help our gross margins.

So in our view is a combined strong growth in terms of the revenue, as I just stated in our putting press release that we think the 10% to 11% of the combined gross margins will be pursuable [ph] for the next few quarters. So that’s our view. Again because of the revenue mix that is changed from quarter-to-quarter. So in the second quarter, the revenue growth of the telecom segment is slower than what we had expected and then we’re going to update the margins, so that the gross margins will be expected so you can create. So that’s our – view of our gross margin in the near-term.

Mike Walkley – Canaccord Genuity

Okay, thank you. And Jeffrey, within your digital media’s division you talked about weaker overall unit demand but better from tier one so I imagine that also hurts your gross margins, so is it more looking for more affordable 3G solutions to help the other base so that helps the overall mix again move higher within the medium digital in terms of gross margin?

Jeffrey Kang

Yes, weak estimations because of various tightening policy in China, that is in a good part of the inflation. So that makes the tax so costly, it’s a very expensive in China. And not only the cost but also most of the SME caught on [ph] to access the credit line. And so that’s why so the overall market – so if we look at the end market demand, even though its overall still quite strong, but most of the demand is coming from the still one way, the blue-chip company. Most of the SME companies they are kind of the prices shrinking their size and to stay on a market.

So we adjust this situation to continue for another at least a one or two quarters. And so but after this situation, overall sentiment is changed and suddenly the SME is going to gain some – getting more shares. So additionally in the 3G segment, I think up from because today the Qualcomm’s deal dominated the base line business in 3G business in China. But I think after like NPK or Broadcom, Baseband [ph] comes to the market with total solutions available and mono FME [ph] cell phone customers will adopt those solutions and we’re going to stay there enough taking the share back. It may be in the middle of the next year. So that our view about overall market. When that happens it will help our gross margins.

Mike Walkley – Canaccord Genuity

Okay, great. Thank you. And then one last question I’ll pass it on. Can you just update us on the likelihood and planning for your dual-listing, what are the next steps and is that something you guys still plan to go forward with?

Jeffrey Kang

I believe totally in investors. So we are the first gets our – we have to redomicile change from the U.S. to the Cayman Islands to get the finish there in specifically since today. And then also then that’s open the door for us through on Hong Kong dual-listing. So we view the Hong Kong dual-listing is kind of a catalyst to maximize our shareholder value. So we’re could have timely release and that’s the timing to do that. So again we are also that we domiciled on. So normally, it only takes a few months after we kind of start making those developments to the Hong Kong Exchange then we will be able to do a listing on Hong Kong Exchange.

And I think the next question is when, and we are in a (inaudible) to do that. So we don’t want to waste another catalyst because we view the Hong Kong dual-listing as the catalyst to maximize our shareholder value.

Mike Walkley – Canaccord Genuity

Thank you very much.

Will Davis

Thanks Mike.

Operator

Thank you. Our next question is from the line of Scott Searle with Merriman Capital. Please go ahead.

Scott Searle – Merriman Capital

Good afternoon. Jeffrey, just to follow-up on the gross margin question. Beyond the pressure in telecom, it seems like it goes a little bit beyond mix, so outside of industrial, where we see any recovery in the gross margins as we go into 2012. It sounds like near-term it’s going to be in that 10% to 11% range, but what will bring it back to a higher level? And on the OpEx front, I thought the number you mentioned was $8 million. Can you provide a little bit more color that’s a fairly significant step up in terms of how that’s going to be deployed? Thanks.

Jeffrey Kang

Well as we discussed in our press release, I think that overall the market –we’re heading to the uncertainty, may not necessary slowing down in China but one thing is for sure is that the market is still quite uncertain in the next one or two quarters. So that’s the trend we have started to see since in the middle of the second quarter. So our view is in this environment, our focus is not just to move the – so I’ll say our intent is not to move the gross margin 1% or 2% that is that is not our priority. We don’t want to repeat a mistake we made in financial crisis in 2008. So we’re too conservative. So I think at this moment, we have a very clear strategy. This is the opportunity we are waiting for in two or three years.

So we have to significantly expand our revenue and customer base in the next couple of quarters. Driving the scale up is our – the only priority for us to do that. So moving how to capitalize that the product to move the gross margin, is probably another financial metrics is not our near-term priority. So one thing is for sure, once we’ve reached the certain scale and then invest are going to say almost every other financial metrics will stay step back to hard level. But again I think in the near future, I want to state that very realistic in the target class are driving the scale and driving the customer number increase and finding the new customer moving to the new segment, take him up this year, expand [ph] the revenue growth that’s the only priority for us in the foreseeable future in the new few quarters.

And after we achieve into that level and then we’re going to move to help improving the other financial papers such as the gross margin and operating margin.

Scott Searle – Merriman Capital

And Jeffrey maybe just to follow-up in terms of the sequential outlook, as we get into the fourth quarter, typically telecom sales down, should we expect that to be slowing down as well. Will we actually see up revenues in December or some mix issues can impact that?

Jeffrey Kang

Well we are continued to stay from the revenue and our demand perspective, well we are going to continue to stay in the slunk role in the second half of this year for the September and December quarter. And that’s our – based on our existing book of the vanity [ph]. So that’s why is in the near-term and the telecom revenue and digital media revenue, both the revenue of our company has to grow. And so the only thing is we are industrial also, we didn’t see anything changed well, will grow as what we have expected. And so I think our – the overall mix will of this year in terms of the revenue will we’re going to stay market higher mix from the revenue, from the telecom and digital media around what do we expected in the early of this year.

Scott Searle – Merriman Capital

Great, thank you.

Operator

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

Quinn Bolton – Needham & Company

Thanks. Jeffrey, just for I guess a little concerned about the sort of change in business strategy, it seems like you guys were now focusing on scale over the next few quarters, but just focusing on scale in a business where margins appear to be declining and that just seems like for typically lower and lower levels of absolute profit, they’re already overtime to me. How do you change that cycle? Do you think once you get critical mass that you can start to turn those margins back around or is this, I mean if you look back over three years or remember when the gross margin was 18% to 19% you guys guided to 14% to 15%. You held that for about two plus years pretty consistently now, looks like we’re seeing about another four points going up margins and we’re going to be talking about 10% to 11% for that sometime. How does it not continue to go down I guess driving still sort of worries me at the margins continue to come in?

Jeffrey Kang

Thanks, basically I think that’s – in generally that’s – we’re not running a perfect model. There is a non-perfect model wherever there. So I think the management team have to choose the right strategy based on end-market situation. So we’re all facing the same end-market, there is a lot of uncertainties there, people are cautious. So that’s why and also we’re pulling investor in a Cogo and we are in the transition period in this year. We’re moving to the e-commerce business model which is I think once we are moving to the e-commerce business model, so the scale the most important think to us in order to be stay cleared again either in the Chinese markets, particularly in the transaction based into the market. So that’s how our positioning. So we don’t want that – there is only one focus in uncertain times. So I think in the next two – so let’s assume in the next couple of quarters our focus is driving the scale.

So basically and there are certainly where some does not provide something, you won’t if you wanted to get more new more customers. So most of the new customer we might have some lower revenue, lower margin business in that we’ll be getting but look at – think about a Cogo’s business model, no matter we are in the low margin or high margin business, we are – whatever business, is a profitable business. So the whole thing is once we move one or more to the SME based and we reached the business scale and the margin level comes back.

So that’s why – I cannot tell the exact range, if we’ll reach $1 billion or $800 million of revenue, that’s the figure will comes back, but the trend is if we continue to expand our scale to reach a $1 billion revenue target and the second point (inaudible) in my view says that overall this marketing trend that when we come back, recover back and then the investor were certainly buying Cogo actually or another higher levels in terms of overall marketing share and market utilization. So that’s why I think particularly in this uncertain end-market environment, Cogo should have grown more broadening for taking market share other than the trends that are not extending. We made the same mistake two or three years ago, I don’t want to same mistake again.

Quinn Bolton – Needham & Company

And just either for Jeffrey or Will, can you walk through the buyback again, it sounded like you had repurchased I think you said either 10% of the float or 10% of the shares outstanding if I heard you right, is this shared out for Q3 to buy 38 million to 39 million range which is roughly flat with where it’s been. So if you bought back that one stock, when do we see it actually get in terms of reduced share count?

Will Davis

Hi Quinn, I’ll update that one. Yes, it’s in the second quarter we bought back 865,000. And in the third quarter from July 1st till now, we’ve bought back about 1.4 million. So that’s 2.3 million. And the 10% that we talked about was the public float that is not held by Cogo insiders, right, so that’s a non-Cogo insider public float that we’re referring to. And in terms of 38 million to 39 million share count, it could end up being lower than that depending on what we end up buying for the rest of the quarter. Now, our 105b-1 plan goes through August 9th which means we don’t really have any knowledge of how that proceeds.

Then we will file our Q, and then typically a couple of days after the Q is filed, we’d been started buying back again under our normal program and then we’d be able to buy for a certain number of weeks until the block-out period. So that’s something that we would pursue. I think at some point we would have to renew the five million buyback authorization five million shares which we can do at some point probably later this quarter. So the share count I gave could end up being conservative based on what we end up doing, but certainly down here, Quinn, we don’t really see a better use of cash.

Quinn Bolton – Needham & Company

Can you give – sorry one final question by that, with the 2.2 or 2.3 million that repurchase in Q2 to Q3 to-date, what is that leave available on the current five million?

Will Davis

If my memory serves we would have about a 1.5 million left.

Quinn Bolton – Needham & Company

Okay. Some of that 1.5 could be purchased under the current 10b5-1 plan through August 9th.

Will Davis

Exactly and then we could re-open and continue to go.

Quinn Bolton – Needham & Company

Once 150 [ph] was filed.

Will Davis

Exactly. There are SEC rules around that but we’ll file the Q and I believe it’s the third business day maybe that – I think it’s the third business day we can start.

Quinn Bolton – Needham & Company

Okay, thank you.

Will Davis

Sure, thanks Quinn.

Operator

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

Mark Tobin – Roth Capital Partners

Hi guys, thanks for taking my question.

Will Davis

Hi Mark.

Mark Tobin – Roth Capital Partners

About the rollout is and I know its early stages with the 3.0 but can you give a sense of what segment customers you’re seeing with the initial traction that you’re getting?

Jeffrey Kang

Most of the customer that we’re focusing today is our 3.0 strategy has two part. In the near-term, we’re pretty much focusing on what are our existing customer base and we’re trying to give them the platform, make them easier to purchasing some of the new stuff, additional stuff through our product store. So currently I think the feedback is quite positive, mostly from our customer from both the digital media and industrial segment. And so we are – I think that in the next couple of quarters, we expect to see a significant ramp up from the online orders from this SME, because we really offer them very easy, easiest way to access the technology information as well as the one place to buy most of the stuff.

And our longer term strategy is try to use this platform to get more and more new customer in addition to what we’re having achieve the customer base through our offline. So I think the longer term, the offline and online strategy will significantly help Cogo expand our customer base. So that’s the two strategy we’re using. To answer your questions best (inaudible) with the second line of the customers coming from digital media and the industrial. And most of them are the SME customer base.

Mark Tobin – Roth Capital Partners

Okay, that’s helpful. And shifting gears, looking at your – managing your capital structure, with the current environment mainly you carry a nice half balance and also carry point a little bit gap, can you share with us how you’re looking at that and you kind of balancing your cash balance with your debt as you manage your business?

Jeffrey Kang

The reason we have raised the debt and there is two ways. One is the near term, looking ahead for demand is we totally have the bank credit line over $200 million in the bank credit line. So most of them from the banks in Hong Kong. And so that’s why – that it makes Cogo is a very lacking [ph] company because we access the cash store in this tightening environment and that’s why we decided to using more of risk and weight to do that to expand our business. And answer your questions, there are two reasons for us for managers, we borrowed more money in Hong Kong in US dollars but we are tuning more in a Chinese currency in China.

So that’s why part of the borrowing is that purely we have delighted is like a fixed play of the Chinese appreciation. That’s a one reason why we increased the debt significantly in matter of few quarters. Secondly, that’s our working capital demand. And so for that portion and I think this also based on our investing bank credit line. And so we are – I am pretty much sure, we can – based on this capital structure, we’ll be able to raise a $1 billion revenue without that kind of either to raising additional money for this equity markets. So that’s our view and for our – how to manage our, you know the tax structure to grow our business in next two years.

Mark Tobin – Roth Capital Partners

Okay, that’s helpful. I’ll jump back in the queue, thanks guys.

Will Davis

Thanks Mark.

Operator

Thank you. Our next question comes from the line of Brad Erickson [ph] with Pacific Crest Securities. Please go ahead.

Will Davis

Hi Brad.

Brad Erickson – Pacific Crest Securities

Hi there, how are you?

Will Davis

Great, thank you.

Brad Erickson – Pacific Crest Securities

Just wanted to clarify on the industrial segment, I don’t know if my line went out or what happened but you guys had mentioned this few times being on path I believe its $100 million and I just wanted to confirm that that wasn’t changed?

Jeffrey Kang

No, well we didn’t changed – the our outlook for our industrial business.

Brad Erickson – Pacific Crest Securities

Okay.

Jeffrey Kang

The industrial business, we’re going to continue to grow out in a finance to investor still in a type of statement for the quarter which feel grew like 68% in the year-over-year growth and our growth margins state the statements as when report investor, we believe that high growth trends are going to continue and gross margin are going to stay stable in the next foreseeable future.

Brad Erickson – Pacific Crest Securities

Okay.

Will Davis

Brad, we reached almost exactly the half-way point for that after the first couple of quarters. So that’s something that we can definitely set our sights on.

Brad Erickson – Pacific Crest Securities

Okay, very nice. And then just turning to the e-commerce platform and you were talking about potentially going live by the end of the year, I believe is what you said, and as you look to sort of target away from these tier one customers that are holding the margins back in the near-term, at what point like that you thought, I think you said $2 million with 38 customers. So at what point might that become bit more – I realized it’s not going to become a huge piece may be in ‘012 or even in ‘013 but at what point might we think about that starting to give you guys a little more confidence on the margins coming back a bit next year?

Jeffrey Kang

We are – as you know we are fully investor aware in the transition period from along with offline business and steadfast and moving online e-commerce business model. So I think it’s very encouraging to us and after one quarter we are launching this new platform to get our run $2 million online orders from our customers. And given though our overall platform is still in the beta better version. So we still add a lot of the new functions onto our platform. So to offer more functionalities to our business customers.

I think we don’t want you to give you a tool in over step in a promise to that future but I think that that’s the direction we want to go. We’re clearly one of [ph] either in the B2B transaction base on the e-commerce platform in China. So and then we believe if we still believe that in a second point of next year and I think we should demonstrate how powerful this platform could help us accelerate the customer base in China and accelerate our business revenue. And after we reached, it may take one year or two year and I believe in just giving us in the foreseeable a couple of quarters, we could be able to reach that level. And when we reach to that level and that we’re going to stay Cogo is actually on totally higher level the company in terms of the market share and we have leading position in the market.

So that’s our view about this business and we are very confident and we’re pleased to see the progress we’ve made in the second quarter.

Brad Erickson – Pacific Crest Securities

Okay, it’s helpful. Thank you.

Will Davis

Thanks Brad.

Operator

Thank you. Our next question comes from the line of (inaudible) The Blackstone Capital [ph]. Please go ahead. Mr. McKinnon [ph] your line is open. If you have a question.

Unidentified Analyst

Sorry, I forgot that I was on mute. Thank you guys for taking my call, I appreciate it. The one thing that I wanted to talk about being just real brief with you guys can touch on and then I’ll hop up, is the use of the factoring arrangements. Could you guys talk about what activity you had in Q2 in terms of selling some receivable and also maybe could you kind of more broadly talk about the thought behind the factoring arrangements from why you guys do selling receivables as kind of a necessary process to go through? And then also perhaps if you can round that up with how much of what you have sold that you think might still be uncollected because as I understand it, those sales are re-coursed back to the company. So maybe if you guys could talk, touch on those points about the factoring sales that would probably be helpful.

Jeffrey Kang

Okay, let me answer your questions in order. So this factoring, with the reason why we’re factoring this that is reciprocal [ph] this is reciprocally is coming from our tier one customers, the ATEs. So because we have that special terms to give with ATE [ph] which is under our normal terms and in terms of the AR. So that’s why the revenue from this year increasing our AR amount will increase in financing. But on other hand we have a term with Bank of China in Hong Kong. We can still afford this AR from eventually from Bank of China in Hong Kong with normal interest rates which is roughly 2% to 4.5% a year, the interest rate. So that makes me it’s like saved by the witness. Even we have lot of this factoring arrangement. I have to limit our revenue from this year because it takes too much of our tax loan [ph].

But with this arrangement is more like fits best for me, so whatever the revenue from this year, at the same time we can still depend on China using the normal bank loan rate. And then that’s we will makes all [ph] it’s like we’re into the business for me to take. But that’s a thing – that’s something behind the why we factor this AR. So we factor AR not because we are not able to collect the money from the ATE and it’s because basically in based on our internal model result of ATE portion we’ll certain we cannot run a lot of deposited cash flow every quarter, just because the ATE, they have an ongoing (inaudible) payment terms, but at the same time on, we are – so that are come, we also ATEs is the most of the revenue contributed to Cogo. So that’s all using the factor arrangements is good for our business is also – is I think that makes a lot of business again to take by using this way.

So I think that’s the reason behind this factor and we’re going to continue our strategies again, we’re going to continue to increase our revenue from the tier one comps like the ATE and at the same time we’re going to continue to factor and based on our cash position to sell to the Bank of China to getting that cash to finance our further demand for the working capital.

Unidentified Analyst

Thank you. The other question that I would have is, do you know – do you guys keep tabs on how much of those receivables kind of remain outstanding today?

Jeffrey Kang

I think that’s our resalable – it’s based on the days, I think it’s just whole internally and we have a very strict policy. I think overall our AR resalable days is that we’ve probably in the 90 days of the revenue. And our inventory days is around that normally that we’re 30 to 45 days. And we are trying to – our payable days are running like 30 days, so that’s a normal like a financial model for our business. But the only thing is that if there are a few key accounts like a ATE or the tier one account even their revenue have much bigger portion of our overall revenue. So we have to better sales from there and ours so keep this overall cash in balance. So that’s the strategy we are adopting to manage our working capital demand.

Unidentified Analyst

All right, thank you guys very much for touching on that. I appreciate it.

Will Davis

Thanks (inaudible).

Operator

Thank you. Our next question comes from the line of Alan Senter [ph] with Valentine Capital Management [ph]. Please go ahead.

Alan Senter – Valentine Capital Management

Actually you guys dealt with the same question I have, so I will (inaudible) thanks.

Jeffrey Kang

Okay, thank you.

Will Davis

Thanks, Alan.

Operator

Thank you. I show no further questions in the queue at this time. I’d like to turn the conference back to management for closing remarks.

Jeffrey Kang

While we are facing some market uncertainty due to credit tightening in China and some unforeseen margin pressure on some of our products, we believe that now is the time to aggressively invest in the business. Our goal for one dollar in annual EPS has been pushed out, but we do not want to repeat the same mistakes of 2008 when we were too conservative. My number one goal remains driving scale through an increased customer count. Right now, Scale is King. Reaching one billion in annual revenue is a pivotal point in the future of Cogo and will allow us to drive incremental Value Added Services through our unique e-commerce platform, cogozon.com. Current market conditions, which we view as temporary, are giving us a unique opportunity to utilize our scale, capital structure and market experience to accelerate our share gains in this highly fragmented marketplace.

So that’s my summary. Thanks very much for coming. I’ll be seeing you in next quarter. Thanks.

Operator

Ladies and gentlemen, this concludes the Cogo Group Inc. Second Quarter 2010 Earnings conference call. Thank you for your participation. You may now disconnect.

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