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Executives

Jeffrey Kang - Chairman and Chief Executive Officer

Yi Yuan- President

Frank Zheng – Chief Financial Officer

Wanyee Ho - Investor Relations Director

Analysts

Charles John - Piper Jaffray

Amir Rozwadowski - Lehman Brothers

Ramesh Misra - Collins Stewart

Adele Mao - Susquehanna Financial Group

Quinn Bolton - Needham and Company

James Faucette - Pacific Crest

Comtech Group Inc. (COGO) Q1 2008 Earnings Call May 7, 2008 4:30 PM ET

Operator

Welcome to the Comtech Group first quarter 2008 results conference call. (Operator Instructions) This conference is being recorded today, Wednesday, May 7, 2008. I would now like to turn the conference over to Wanyee Ho, Investor Relations Director.

Wanyee Ho

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

After the bell today, Comtech issued a press release reporting final unaudited financial results for the quarter ending March 31, 2008. This release can be accessed in the investor relations section of Comtech’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 introduce to you our new President, Mr. Yi Yuan who joined the company recently to strengthen our management team.

Before we begin, I’d like to remind everyone that the call today may contain forward-looking statements regarding future results and 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 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. Comtech assumes no obligations to revise the forward-looking information contained in today’s call.

At this time I’d like to turn the call over to Jeffrey Kang, Chairman and CEO of Comtech.

Jeffrey Kang

Thank you, Wendy and thanks to everyone for joining us on this call. I’m delighted to report that we have achieved the best first quarter in the company’s history. We have done this while continuing to improve the gross and operating margins of our business and drive profit growth faster than the top line growth.

During the first quarter of 2008, our revenue grew over 35% year-over-year to reach $60.2 million U.S. dollars and non-GAAP EPS diluted at $0.19, representing a growth of around 27% from the same period last year. The results are in line with our projections and reflect better than normal seasonality.

The revenue breakdown in first quarter is as follows. Mobile Handsets comprised 41% of total sales, delivering an increase of 37% year-over-year and a decrease of 26% quarter-over-quarter.

Digital Media made up 29% of total sales. It grew 57% year-over-year and was down 4% quarter-over-quarter. Technical Infrastructure represented 27% of total sales, showing an increase of the 13% year-over-year and down 26% quarter-over-quarter.

Service business represented 33% of total sales, increasing 36% year-over-year and was down 39% quarter-over-quarter. The new Industrial business segment, which is mainly comprised of auto electronics, started to contribute to the company’s revenue representing, almost 1% of total business.

Now, let me provide some highlights from the first quarter and give you an update on our business outlook for the rest of 2008. We continue to experience robust revenue growth well above expectation performances across all our key business areas during the first quarter.

We are very confident that we will achieve an approximately 30% growth target this year. Based on existing visibility and the new business in the pipeline, management is providing an updated 2008 two year guidance of $290 million in revenue and a non-GAAP EPS of $0.92.

We will be able to achieve this aggressive goal despite a downturn in the U.S. economy because our business mainly targets the Chinese domestic and newly emerging markets, which we expect to continue on their robust upward trajectory.

First quarter results demonstrated our growth is intact and we suffered no negative impact from the U.S. We believe that the handset market outlook for 2008 will remain strong with around 25% growth in the Chinese domestic market and 30% in exports. Although, we recognize the Chinese handset market can prove volatile from time to time.

Contrary to the investment community’s concerns over inventory problems and weak demand, the industry’s performance and COGO’s business performance has exceeded expectations in the first quarter 2008.

We believe the strong growth momentum will carry on throughout the year with overall economic optimism and a robust consumer spending in China.

COGO’s strength lies in its more than 100 handset customers, which represents virtually all Tier 1, Tier 2 and Tier 3 players in this market. COGO addresses the market volatility and the rapid shifts in market shares among key handset players with its customer-centric focus on providing timely, value added solutions and addressing customers’ demand for quick time to market delivery.

We are confident we will continue to improve our market share in this dynamic market and to target trending to 30% of growth with a stable margin in 2008.

Let’s turn to our Digital Media business, the fastest growing end market for COGO. The digital media business is comprised of almost 30% of our total business in the first quarter of 2008.

We believe that existing business on Home Gateways, set-top boxes and GPS will continue to grow and the new solutions such as the mobile TV and the digital photo frames, which we introduced in the first quarter, are expected to generate a strong business in the second half of 2008.

We feel confident about projected growth in the Digital Media business and forecast an increase of 40% in the sector for the whole year 2008.

Next, let’s review the Telecom Equipment business, which comprised 27% of our total business. Here we estimate our major customers, Huawei and ZTE, will demonstrate a more than 40% annual growth in 2008.

We project a stable 15% growth from this segment in 2008. We plan to focus especially on growing business with meaningful margins such as intercom, broadband and wireless.

A month ago we announced a $10 million telecommunications margin solution contract with ZTE. This deal is important because it secures sustainable revenue growth in this sector and it fuels the management confidence in the company’s growth outlook, despite the prospects of a U.S. recession. We expect to continue our strong growth pattern in 2008.

We expect the capital expenditure in China’s telecom infrastructure to continue with the steady growth going forward. In particular, 2008 promises a strong result in part fueled by upcoming Olympic Games and calls for the widespread mobile Internet access and multimedia streaming.

The eventual launch of the 3G is also expected to kick off billions of dollars in middle of the year purchases and accelerated growth in this industry. To be conservative, we have excluded most of the 3G business in China from our guidance. Although we believe 3G business will certainly come this year and it will add a significant boost to the company’s growth.

While COGO strives to deliver strong performance in this existing key market, this year we also expect to generate revenue from the new industrial businesses, such as auto electronics and green energy, which we categorize as industrial applications.

We estimated that the new business will contribute over 5% of total revenue in 2008. And it will become another long term growth driver for COGO. In the first quarter we generated a nearly 1% of our total revenue from this new venture.

Next, let me look at the Service segment, which experienced an increase over 36% in year-over-year for the first quarter 2008. We continue to be confidant that this will be a high growth, high margin proportion for COGO and will deliver over 33% of growth in 2008.

Finally, I’ve been asked to elaborate our M&A development. We have entered an MOU to acquire Mega Smart, a leading digital media solution design service company in China.

We are currently in the final stage of the due diligence and a business integration process, and expect to close this deal in the second quarter of the year. The company has run a profitable business since its inception and a focus on providing solutions, targeted at digital media and also electronics market.

The acquisition is expected to capture a new customer base in China. In COGO’s business model, Mega Smart is expected to create a strong platform, an increased product solution offering and a market share in this new high-growth market.

This will certainly be another accretive acquisition with the potential to boost our growth in the coming years. We expect more deals similar to the Mega Smart in the near future.

The principle behind our acquisition is to place integration ahead of closing a deal. Consequently, we usually spend a significant amount of time ensuring a smooth transaction prior to concluding an agreement.

Although this deal process may take longer than expected, the quantity and the status of the acquisition has provided a solid foundation for COGO’s long-term sustainable growth.

KA, the company we acquired last summer is a good example of our acquisition strategy at work. An extended transition ensured the seamless integration and I’m proud to report that KA comprises 10% of our total revenue − that’s a success.

Recently the Board is planning on changing the U.S. holding company’s name from the Comtech Group, Inc., to COGO Group, Inc., by the end of May. We will continue to use the Comtech brand in China for existing business and then retain our product company’s name with their own inherent brand values.

We believe the new COGO brand elaborates the company’s extensive customer base and expertise in value-added solutions, while providing a powerful umbrella under which all brands in the group will thrive. Management expects more acquisitions down the road to push growth out in the near future.

Next, since there are very few insider trading days until Q1 earnings release is issued, we have not yet executed the stock buyback program the Board authorized back in February. Management will use the best judgment to determine the right timing and schemes based on the evaluation of the market conditions and in the best interest of our stockholder to protect the shareholder value.

With that, I would like to turn the call over to Mr. Frank Zheng, our Chief Financial Officer, to report Q1 audited results.

Frank Zheng

Thank you, Jeff. Good afternoon, everyone. For clarity, all figures I’m discussing here, unless otherwise noted, are in U.S. dollar.

Now let me review the line items for the first quarter. Revenue was $60.2 million U.S. dollars, an increase of 35.1% year-over-year. Gross margin was 19.5% compared to 19.1% recorded during the same period last year. This was due to a more favorable product mix, especially the growth in high margin product offerings, such as the digital media.

Operations expenses was 11.7% of total revenue, which includes R&D expenses of 2.3% and SG&A expense of 9.4% of total revenue. Operation margins for the first quarter was 7.8% versus 9% for the same period in 2007.

However, excluding the effects of stock-based compensation and acquisition-related costs, including amortization of purchased intangible assets, non-GAAP operation margin would have been 12%.

Net income for the first quarter was $5.3 million, representing GAAP EPS diluted of $0.13. Non-GAAP EPS diluted was $0.19. The weighted average number of shares used in the calculation of EPS dilute was 40 million. Capital expenditure was $4 million and depreciation was $0.3 million reported in the first quarter.

We have maintained a healthy balance sheet. COGO complete a quarter with $123 million in cash with no bank borrowing. It continues to be in a strong financial position with a current ratio of 4.9 to 1.

Shareholders equity as of March 31, 2008 was $210.4 million U.S. Inventory turnover days has shortened to 27 days. Average number of days receivable outstanding was 99 days.

Operation cash flow was positive of $1.3 million. We are confident we will continue to deliver strong performance with robust organic growth and accretive acquisitions.

This concludes my comments. Thank you everyone for joining the call to discuss our 2008 first quarter audit results. Before opening up the floor for the questions, I would like to take this opportunity to welcome our new President, Mr. Yi Yuan, who joined our management team last month.

Yi Yuan

Thank you, Frank and hello everyone. COGO holds a unique position in China’s technology industry with its broad client base, its customer relationships and the customer-oriented culture.

This asset provides a unique, ideal platform on which we will be able to capitalize; striking more relationships, partnerships with the leading global technology vendors; extending solution offerings in digital media and other new growth segments.

I look forward to working with the management team to continue to deliver strong organic growth and reinforce COGO’s leadership in China’s technology industry. Thank you.

Frank Zheng

Thank you Yi, so we are pleased to have you be with us at COGO. At this time, let’s turn the call to the operator to open up the floor for questions. We are look to end this call around 5:30 pm.

Question-and-Answer Session

Operator

Our first question comes from Charles John - Piper Jaffray.

Charles John - Piper Jaffray

Congratulations on the good quarter. I had a couple of questions, so I’ll just start off with the Mega Smart acquisition. I realize you can’t talk much about the details of the deal at this time, but if you could just talk about how much this will contribute to your digital media segment revenue for the year and how we should think of the ramp within the segments of the remainder of the year?

Jeffrey Kang

For this project, we started this project almost a couple of months ago and right now we are thinking we are in the final stage or so we expect to close this deal around the end of this quarter.

This is a profitable business focused on the digital media segment. So their solution can be used in the two categories: one is in the digital media segment, such as high end digital photo frame segments and now they can be used also in the auto electronics segments, which is like a car monitoring system.

So, this company, they are profitable and after if we finally close on this deal, so we are able to take this solution and products to sell in front of our digital media customer base, and as well as the new auto electronics manufacturing customer base as well. So, it has certainly increased our shareholder base and also we have some leverage from our existing customers from the digital media segment.

It’s an immediately accretive deal, because currently we haven’t finalized all the deals. So, we cannot tell you that what’s the final size of the deal, but it’s similar to our KA deal, which we believe we started to have a certain revenue contribution in the second half, mostly in the fourth quarter, and I think that the major accretive contribution will start in 2009. So that’s the situation for that part of this deal.

Charles John - Piper Jaffray

Okay great, thanks. And longer term, right now we have the digital media segment of around 30% of total sales. Do you see this becoming a much more significant piece of COGO of 2009 or do expect those percentages to stay pretty much the same?

Jeffrey Kang

Certainly we will have a relatively bigger portion of our business coming from the digital media segment, because in this segment our projected growth rate this year is around 40%, is higher than our average company growth rate. So that’s why we actually estimated the digital media segment in the end of this 2008 will probably be closer to about 30% of our total revenue.

Charles John - Piper Jaffray

Okay, great. Switching to the TD-SCDMA, do you think just based on all the rumors out there for the Olympics and how prepared the 3G network is right now, are the expectations for the TD based handsets come down slightly for 2008 and more relative to 2009 or do you think they’ll stay the same? And if you could just talk about the impact to your handset business?

Jeffrey Kang

As we estimated in our earnings call, we’re quite optimistic about the 3G rollout this year before Olympics and after Olympics. But to be conservative, we haven’t put that number in this 2008 guidance yet. In other words, our 2008 existing guidance excluding the 3G business in China.

So we believe it certainly will come, it’s just a matter of time. So frankly, the reason why we haven’t put that number in our guidance, it’s just because we’re not sure when it will have a material impact to us. We are being optimistic so this impact could be coming around the fourth quarter, but it is also possible that this type of impact will be postponed to the next year.

So at this moment, what we can say is that in a normal round, it’s certainly an optimistic segment but we haven’t included that into our 2008 number yet. It will become another catalyst for us to boost our results in this or next year.

Charles John - Piper Jaffray

Okay. Great. And real quick if you could just give some commentary on the recent press about Huawei pulling out of the handset business. They’re a pretty big customer for COGO. How do you see this playing out the next several quarters?

Jeffrey Kang

You mean for Huawei Mobile?

Charles John - Piper Jaffray

Yes.

Jeffrey Kang

Huawei Mobile run a very profitable and a strong and a high-growth business, not only in China because their mobile handset customer is not from the Chinese domestic market. But they’re more likely 80%-90% exporting to the new international emerging markets.

So we are seeing a very strong demand from our customer. We saw Huawei grow that business very dramatically in the last two years. Certainly we benefit from this trend. For example, the reason why in the fourth quarter last year and even in the first quarter of this year, COGO is still running a very strong mobile handset business, even though sometimes there is a rumor about the weak Chinese demand.

I think that a strong order from a company like Huawei or ZTE, they’re mostly in the new international market, actually help us to lift our overall business outlook. So that’s why I think they are very positive driver to us, to drive COGO’s mobile handset business growth in the next couple of years.

Charles John - Piper Jaffray

Okay. Great. And now one last question, Frank, for you. I missed the CapEx number. Could you just repeat that for me please?

Frank Zheng

The CapEx number’s at $4 million U.S.

Charles John - Piper Jaffray

And could you spell Mega Smart, the name of the company, if you don’t mind?

Frank Zheng

M-E-G-A-S-M-A-R-T.

Charles John - Piper Jaffray

Okay, perfect. Thank you.

Operator

Our next question comes from Amir Rozwadowski - Lehman Brothers.

Amir Rozwadowski - Lehman Brothers

Good afternoon, folks. Thank you very much for taking the question. Jeffrey, I just wanted to touch upon some of the topics you’d mentioned about end demand in the Chinese handset market.

Certainly we’ve seen some volatility out of some of the domestic Chinese handset suppliers, and some concerning news out of the MII in terms of tempering growth from the handset market there. Can you give us a little bit of color around your visibility into the market and what gives you confidence that the market is growing at the rates you had highlighted?

Jeffrey Kang

As we mentioned in our earnings script, so the mobile handset market in the first quarter, if you remember back to the January, investors felt quite worried about it, the Q1 performance, because everybody’s talking about inventory problems, weak demand.

But if you look at it overall Q1, the industry performance is actually much better than investors’ estimation. Because we are seeing quite a strong rebound since March, that it really helped deliver quite a strong Q1 number.

And coming to the fourth quarter, because for the Chinese market for the handset is quite volatile from time to time, but overall it’s like a 20% or 30% growing industry. A single customer can continue to keep up sustainable growth in this segment, because this is a time-to-market and it’s really a mass-market business.

So the way COGO addressed this business is that we covering almost everybody in the same industry, and that’s why our business cannot reflect an overall industry growth rather than speak with one or two key customers.

From the demand perspective, so we still see quite a strong demand in April. So that’s why in general we estimate our cell-phone business at the quarter-over-quarter increasing in the Q2.

One last thing, the quarter-over-quarter increase is definitely like 10% to 15% quarter-over-quarter increase because I know from that end, we still see a very strong industry demand down the road and we are confident that we are able to deliver quite a strong performance in this quarter and the next couple of quarters.

Amir Rozwadowski - Lehman Brothers

Great, that’s very helpful. And on the industrial side, your industrial revenues, certainly you are expecting a fairly healthy ramp leading to 5% of total sales in 2008. Any chance if I can get a little bit more visibility in how you see that progression on a quarterly basis?

Jeffrey Kang

Because we just started this new business, so in the first quarter, most of the revenue is coming from our organic business, which is auto electronics related business and as you know, the reason why we are so confident that we are able to have a little over 5% of our business in which coming from the post-organic and acquisition as well. Still most of it from organic.

As you know, we struck a deal with Freescale just a couple months ago, so most of this solution we are targeting for the Chinese auto-electronics business. We have won a lot of design-in in the last few months, so that’s why we are so confident in the second half expecting that Q3 and Q4 will actually be very strong business ramp up from this auto-electronics business from our organic operation.

Also, we have one or two deals in our pipeline which is also in the green energy, industrial application-related, which also already in our pipeline for a while. So, I think it’s just a matter of time to close those deals so that will definitely increase our business visibility in the second half.

That’s why I personally feel the 5% is a very reasonable expectation in terms of our existing overall business.

Amir Rozwadowski - Lehman Brothers

Great. That’s helpful. Lastly, just a housekeeping question. Do you have the breakout of share-based compensation by line item?

Jeffrey Kang

You mean the stock compensation…?

Amir Rozwadowski - Lehman Brothers

Yes.

Jeffrey Kang

I think R&D is more like 30% and sales and marketing and SG&A at like 70%.

Amir Rozwadowski - Lehman Brothers

Great. Thank you, very much.

Operator

Our next question comes from Ramesh Misra - Collins Stewart.

Ramesh Misra - Collins Stewart

My first question is in regard to Mega Smart, Jeffrey. Can you provide a sense of the rough range of revenues that Mega Smart recorded in 2007 and also how large is this acquisition, very roughly again just to help us put our arms around this?

Jeffrey Kang

Right now we cannot give you a very detailed number because for this deal, we’re still in the final auditing process. But what I can tell you is that every deal like this, so usually within the first two quarters after closing a deal is a slightly accretive deal to us, but it’s usually after two quarters of our closing a deal. So it’s usually going to contribute like 5% to 10% of our total business. So it’s kind of like a KA deal.

For example, in KA we closed the deal in last August, but in this first quarter KA contributed maybe 10% of the whole group’s business. So I think that’s a typical a case for our M&A target. So I think every deal we expect to make a 5% to 10% contribution from our book of business.

Ramesh Misra - Collins Stewart

Okay, that helps, Jeffrey. In regards to the new industrial business, is the gross margin profile here pretty similar with the rest of Comtech or is there any meaningful difference?

Jeffrey Kang

Actually, it’s in line with our digital media segment. It’s kind of in the 20% to 30% gross margin range. So it’s slightly higher than our combined data, the group average gross margin.

Ramesh Misra - Collins Stewart

Got it. In regards to the Service business, it’s still under 5%. What kind of growth profile are you anticipating in services going forward? Do you see it basically as a 5% kind of a business or do you think a point will come when it can break say the 10% level?

Jeffrey Kang

I think the Service business is mostly related to the product selling; after product selling, we get it more in maintenance business these days. That’s why we don’t think it will become another 10% business. I think the growth rate for the Service business is still like around 30% in this year. So that’s why at the end of this year, so I think in our Service business could be around like 5% of our total revenue.

Ramesh Misra - Collins Stewart

Okay. And you said that the Industrial business is expected to be 5% exiting the year? Or is it for the full year 2008?

Jeffrey Kang

Full year of 2008.

Ramesh Misra - Collins Stewart

I see. So in Q4 it could actually be running at a run rate of in excess of that 5% number?

Jeffrey Kang

Yes. Correct.

Ramesh Misra - Collins Stewart

Thanks, Jeffery.

Operator

Next question comes from Adele Mao - Susquehanna International Group.

Adele Mao - Susquehanna International Group

Thank you. A couple of questions. First of all, it’s related to your gross margin. Jeffrey, with more higher margin digital media contribution, do you expect your overall gross margin expanding from here above the 20% level for the year?

Jeffrey Kang

It’s possible. Even though we don’t officially give the gross margin guidance, but the management team realize the gross margin is a very important financial metric to our investors. So our internal strategy is we want to expand our gross margin slightly quarter-over-quarter and year-over-year, that’s what we did in the past.

So there’s no magic. We don’t expect to make a significant gross margin expansion. So we think our gross margin is around 19.5% to 20% in this year. So we’ll be increasing gradually quarter-over-quarter because we have a strong operating leverage, so we are going to see operating margin improvement is much higher than our gross margin improvement this year.

Adele Mao - Susquehanna International Group

That’s great. Did you see just during the last quarter, are there any margin pressure from the mobile handset or the telecom equipment areas? These are typically lower margin than the digital media business.

Jeffrey Kang

I think the price pressure has been always there since day one, not just in fourth quarter or this first quarter. So we have to deal with the price pressure from our customers, from our suppliers and from the market as well.

So if you go to COGO’s business model as the design-win driven business, so typically when we get a win at design-in, so in the product life cycle we’ve kind of been protected in terms of our gross margin because we already set the price to sell for our customer. And also sometimes fixed price we are purchasing from our supplier. So that’s why.

So we are facing the price pressure from each of our customer, but we know as we did before, we’re still able to manage this business well, given the new solution and new design-win to make sure we always have the high margins, and the business from the new products to offset the side of our certain other business that has margin down, to make sure the overall margin structure still looks healthy quarter-over-quarter.

Adele Mao - Susquehanna International Group

Okay. That’s very helpful. The other question I have is related to Mega Smart. Did you say that the size or revenue is similar to the KA deal? I missed that.

Jeffrey Kang

Because KA is very successful deal, it’s high end of range of the size of the our position so, usually with that said, with every deal we expect 5% to 10% of our total business. (Inaudible) our guidance is $290 million so I think the 10% is like that, closer to $30 million. So I think that the acquisition in terms of the contributions anywhere from $15 to $30 million.

Adele Mao - Susquehanna International Group

Okay. Where is Mega Smart based?

Jeffrey Kang

Mega Smart is a Chinese company and they have a couple of locations in China and mostly in Shenzhen, but they also have operations in Shanghai and in Beijing as well. So, as we did in similar deals we usually acquire their parent company which basically is a BVI registered company.

Adele Mao - Susquehanna International Group

Got it. Okay, thank you.

Operator

Our next question comes from Quinn Bolton - Needham & Company.

Quinn Bolton - Needham & Company

Good morning Jeffrey, Yi and Frank I missed the first part of the call, so I was just wondering if you could go through just the split of revenues again and then any comments you made on linearity of orders you’ve seen in the handset market.

I think there’s been some commentary from some other participants in the food chain that March was a pretty good month for handsets in China, but April may have slowed down again. I’m just wondering if you hade any comments about just month to month order patterns that you’ve had seen for the domestic business as well as the export business? And then I’ve got a couple of quick follow-ups. Thanks.

Jeffrey Kang

In terms of the revenue, our revenues are around a $60.2 million U.S, and the non-GAAP EPS is $0.19. So, for this first quarter, I think the mobile handsets is around 41% of our total revenue in the first quarter, and we have like year-over-year growth like 37% and quarter-over-quarter like 13% comparing with last Q1 and Q4.

So we think this result is quite in line with our estimation. It’s a matter that the Q2 is a fairly good number or certainly is not a bad number given we deliver like 37% growth rate over the year.

So yes you’re right, and the March demand is quite strong. But that’s one of the reasons for the overall industry outlook in the first quarter. Coming to April,I see the market’s come back to the weak demand. April’s demand is quite reasonable because there is a Golden Week, it’s a holiday, it’s a little bit shorter than it used to be, and we’re also actually in the second quarter, the sales industry still can grow, quarter-over-quarter like 10% to 15%.

So that’s why we still view this industry quite healthy, given a strong demand and already our biggest design in the works, so we still think about quarter-over-quarter that 10% to 15% industry at the growth rate reflects quite a healthy demand to a company like ours.

Quinn Bolton - Needham & Company

Okay so April is okay ahead of Golden Week and then you’ll see typical seasonality in China with May and June sales being a little bit typically slower after the Golden Week holiday but still net-net up 10%-15% quarter-over-quarter?

Jeffrey Kang

Yes correct.

Quinn Bolton - Needham & Company

Okay and then I know that you’re not very much exposed into the U.S. economy and you cited that as one of the reasons why you continue to grow. Have you seen any increased concerns from your customers about the sell off in the China securities markets, either the slowdown in housing prices or the increasing cost of commodity items such as rice or oil?

Are you seeing any impact on that in terms of consumer spending in some of the emerging markets you’re participating in?

Jeffrey Kang

I think because we are in this part of the world so I think everybody can have something to impact others. So certainly we see the U.S. the impact, but it’s just in our industry, like the technical infrastructure, mobile handset and digital media segments, happen to be the growth driver for the customer we are serving, is driven by Chinese domestic and other new emerging markets rather than the U.S. consumer demanding.

So that is why we haven’t seen this negative impact onto our business but some low-end manufacturing in China, which are producing the electronics to the sales in the U.S. market, that business is facing a lot of challenge in this year.

But this could have some material impact to us as in China’s consumer spending. So you’re right. China’s consumer spending is certainly will be impacted by a couple of factors, for example like the CPI, like Chinese domestic stock exchange, stock performance as well as the real estate price.

So I think right now the Chinese consumer spending is still quite healthy. In general the growth rate is not as high as it was in the fourth quarter, but this whole market is just starting.

So from our perspective, the Chinese consumer spending is still quite healthy, but because government placed quite a strict tightening on spending policy, so that’s something that has little bit of negative impact to some consumer spending.

We’ve already factored that [in], we still can say this year the Chinese GDP can grow 10%. Consumer spending is far beyond 10% this kind of a growth rate. But that’s was why we are confident to our business will not have a big impact by the overall economies.

Quinn Bolton - Needham & Company

Okay, great. And then just last point, on the Mega Smart. It sounds like since you haven’t closed that transaction yet, that Mega Smart is not included in the guidance raise that you discussed in the press release going to $290 million of revenue and $0.92 rate. That excludes the impact for Mega Smart?

Jeffrey Kang

Yes. You can think about it that way because usually when we only put into our guidance number after we finalize the whole deal. So that’s why I said this increasing most of it is coming from our organic growth.

Quinn Bolton - Needham & Company

Okay. But as you said, Mega Smart in first couple of quarters after you closed it, it will have more limited impact. It’ll have a larger impact in 2009?

Jeffrey Kang

Yes.

Quinn Bolton - Needham & Company

Okay, great. Thank you, Jeffrey.

Operator

Our next question comes from James Faucette - Pacific Crest.

James Faucette - Pacific Crest

Thank you very much. Just a couple of follow-up questions. First on the other acquisitions that you have in the pipeline after Mega Smart. Should we think about those also having similar time lines to really having an impact on your numbers? That is, that we should expect those to be accretive to earnings say 9 to 12 months after the acquisitions are completed?

Jeffrey Kang

Yes. So I think the typical acquisition COGO is targeting is not to acquire a company which already is very profitable. If that’s the case, the evaluation is going to be very high. So we typically acquire a company which have new products and a solution which we are able to utilize our existing platform and customer base to generate incremental value.

So that’s our acquisition focus. So typically after the acquisition, first 1 or 2 quarters, it’s accretive, certainly there’s no negative impact on us. But we also don’t expect too much of the contribution in the next 3 to 6 months, but after that we are going to see more like an explosive in the revenue growth. The design-in cycle typically has like 3 to 6 months.

James Faucette - Pacific Crest

Okay. That’s very useful. And then just an accounting and business question. It looks like your days of inventory are about at one of the lowest levels they’ve been in the last few years. But at the same time, your date of sales outstanding on accounts receivable are actually at one of their highest levels maybe ever.

Can you talk a little bit about what’s going on there? Is that just because of the linearity of the quarter? Or are there other things at play there?

Jeffrey Kang

We think the inventory and AR level are actually at the normal range. Our typical AR level run 90 days to 100 days, that’s a normal AR level. And the inventory level usually is below the 30 days. So that’s our normal business pattern. Because we actually give the credit mostly to the blue chip customers.

So we have the very good AR quality but the reason why sometimes the AR is higher or lower is mostly because of the revenue mix from the different customers. So if we generated more revenue from the Tier one customer, our AR days is longer.

But if we generated more revenue from the second tier, third tier customer base, the AR base is lower because we usually don’t grant credit lines to the second tier or third tier customers.

That’s been typical in the past, and fortunately in this quarter, because a couple of the key customers, like ZTE has a credit strong in the revenue contribution, because that’s why our AR rates are relatively high in the range of our mobile business.

James Faucette - Pacific Crest

Great and then as far as the inventory, especially the sequential take down, you feel like that that’s within the normal range and you say you’re not suffering from component shortages or anything like that that would have driven down inventories?

Jeffrey Kang

Inventory is slightly lower, you are right, because in the first quarter, especially in the telecom segment, we are seeing quite a strong demand for the Broadcom related business so that’s why we are seeing that the inventory level is slightly lower than what our normal range is.

But in general we do not see too much of unreasonable changing, in terms of supply and demand balance in the first quarter, except a few items, such as the broadband-related business.

James Faucette

That’s very useful. Thank you very much.

Operator

(Operator Instructions) At this time, I understand no further questions in the queue. I’d like to turn the call back over to management for any concluding remarks they may have.

Jeffrey Kang

Thank you. Thank you everyone for joining. Our focus on the past 5 years has been on creating a path of sustainable and strong growth for the company. We believe we providing the long term robust growth has been much more valuable than having one or two year high performing years and we are optimistic about maintaining our consistent growth pattern. I would like to take opportunity to thank all COGO believers, employees, customers, partners and long-term shareholders.

We have provided COGO with opportunities to deliver robust, sustainable growth in the past and going-forward as we will move into that second half of 2008. We believe we are in the right industries and the right market to be able to capture and capitalize on the tremendous opportunities in China.

Management is committed to committed to driving sustainable high growth in the next 5 years and providing significant return to our shareholders. Thank you again for joining this call. I look forward to talking with you soon. Thank you.

Operator

Ladies and gentlemen, this does conclude the Comtech Group first quarter 2008 results conference call. You may now disconnect and have a pleasant day.

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Source: Comtech Group Inc. Q1 2008 Earnings Call Transcript
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