- Group revenue increased by 6.0% to US$778.5 million
- Profit attributable to shareholders declined by 20.5% to US$68.8 million
- Interim dividend of US12.0 cents per ordinary share
- Net cash position of US$143.7 million
Hong Kong – VTech Holdings Ltd (HKSE: 303; ADR: VTKHY) today announced its interim results for the six months ended 30th September 2008, reporting higher revenue and a decline in profit mainly due to exchange factors.
Group revenue increased by 6.0% over the same period of the financial year 2008 to US$778.5 million. Despite maintaining a stable gross profit margin, profit attributable to shareholders declined by 20.5% to US$68.8 million, reflecting an exchange loss of US$11.2 million arising from the Group’s global operations in the ordinary course of business, as the Euro and Sterling weakened abruptly against the US dollar. This contrasts with an exchange gain of US$8.0 million for the same period last year. Excluding the impact of exchange differences, profit attributable to shareholders increased US$1.5 million or 1.9% over the same period last year. Earnings per share decreased by 21.7% to US28.2 cents and an interim dividend of US12.0 cents per ordinary share was declared, which is the same as the corresponding period last year.
“VTech posted higher revenue during the first half of the financial year 2009 while profit declined mainly due to exchange factors. Although we anticipated a slowdown of the global economy, the full extent is difficult to forecast. We are well prepared to manage through the downturn, as we have a solid net cash position, ample available liquidity, effective cost control and strong supplier and customer networks,” said Mr. Allan Wong, Chairman and Group CEO of VTech Holdings Limited.
Response to the Global Financial Crisis
The global economic downturn originating in the problems of the US sub-prime mortgage market is one of the greatest difficulties all businesses face currently.
VTech maintains a strong liquidity position. As of 30th September 2008, the Group is substantially debt-free, with net cash plus currency-linked deposits with principal protected amounting to US$163.0 million. In accordance with Group policy, its cash is largely placed on fixed deposit with very strong banking institutions.
In the shorter term the Group will focus on preserving cash and maintaining a high degree of liquidity. However, it may acquire businesses or assets that become available at attractive prices, and which have the potential to give the Group entry into new technology or product areas that complement its core businesses.
VTech’s diverse base of customers and suppliers is composed mainly of major retailers and international companies. Compared with the same period of the previous financial year, the Group has experienced no significant change in its debtors and creditors position. Management has nonetheless strengthened monitoring of customers and suppliers, and has increased insurance protection in cases where it is felt to be prudent.
While the precise outcome of the financial crisis is impossible to predict, it is already resulting in a fall in consumer confidence and demand, which is affecting product orders. The Group is responding to the slowdown in demand by tightening cost controls, rationalising operations and raising productivity.
In the longer term, the reduction in demand will accelerate market consolidation. This will benefit stronger players such as VTech, who will be able to gain market share at the expense of weaker competitors. In addition, costs are now levelling off as the global economy weakens. The oil price has fallen, along with prices of other commodities, and inflation has moderated. Wage pressures are relenting and the rise of the Renminbi has slowed markedly. These are having a positive impact on the Group’s operations.
Continued Growth in European Sales at the TEL Business
Revenue at the telecommunication products (TEL) business declined 2.8% to US$346.2 million, accounting for 44.5% of Group revenue.
In North America, where the Group mainly operates a branded business, revenue decreased by 13.3% to US$219.9 million as gains in market share were more than offset by a faster than expected contraction of the US cordless phone market as the US economy deteriorated. Outside North America, the ODM business continued to perform well. Revenue in Europe grew by 17.3% to US$101.7 million, and in Asia Pacific and other regions by 111.4% and 39.8% respectively. Growth was mainly driven by new customers and increasing sales to existing customers, as the Group offered products with better industrial design and pricing. VTech also benefited from the weakening of competitors.
In September 2008, the Group strengthened its position in the European market by signing an agreement with Deutsche Telekom AG (Deutsche Telekom), giving it exclusive rights to supply corded and cordless telephones for Deutsche Telekom’s well-known THome brand, Sinus and Concept product names. The three-year agreement, renewable for one year, will see the first “T-Home/VTech” co-branded products shipped early in the calendar year 2009.
Further Revenue Increases at the ELP Business
Revenue at the electronic learning products (ELP) business rose 10.7% to US$290.1 million, accounting for 37.3% of Group revenue.
Standalone products led the way, with particularly strong increases in the infant category, benefiting from an enhanced product offering and more shelf space. There were also good contributions from Kidizoom Camera™ and V-Motion™. During the period, standalone products accounted for 68.0% of total ELP revenue whereas platform products accounted for the remaining 32.0%.
VTech’s exciting range of products once again garnered a number of important awards. The motion activated educational video gaming platform V-Motion™ was included in the Toys “R” Us “Hot Toy” List and named as one of Walmart’s “12 Toys of Christmas”. The product also received the Creative Child Seal of Excellence Award and The National Parenting Center Seal of Approval. The creativity-enhancing KidiArt Studio™, meanwhile, earned a Creative Child 2008 Toy of the Year Award and was named one of The Toy Book/Redbook’s Toy Insider “Hot 20 Toys for the Holidays”.
Geographically, all markets recorded sales growth during the period. In North America, revenue rose by 14.9% to US$138.4 million, representing 47.7% of total ELP revenue. In Europe, revenue grew by 5.0% to US$129.1 million, accounting for 44.5% of total ELP revenue. Revenue from Asia Pacific and other regions increased by 33.8% and 14.9% to US$8.7 million and US$13.9 million respectively, representing 3.0% and 4.8% of total ELP revenue.
CMS Business Continues to Outperform
The contract manufacturing services (CMS) business saw revenue increase by 22.7% to US$142.2 million, representing 18.2% of Group revenue, achieving a rate of growth that outpaced the industry.
In power supply, VTech increased its share of orders from existing customers while in solid state lighting, orders from existing customers grew on the back of rising market demand. The Group also continued to expand its customer base in the professional audio arena, as its reputation continued to grow. The professional audio sector enjoys relatively stable growth, is less competitive and more resilient to economic downturns.
Switching mode power supplies regained its position as the largest product category of the CMS business in the first half, accounting for 29.5% of total CMS revenue, followed by professional audio equipment at 26.5%, home appliances at 16.4% and wireless products at 10.4%. Geographically, both North America and Europe recorded sales growth during the period, with revenue increasing by 29.1% and 26.9% to US$59.5 million and US$67.5 million respectively. In the Asia Pacific region, revenue declined by 8.4% to US$15.2 million.
Outlook
“In light of the weakening market, we cautioned investors during our annual results announcement in July 2008 not to expect growth for the financial year 2009. It is by now clear that the United States and the European markets are entering into recession and that increasing unemployment and weak consumer confidence are leading to a decrease in consumer spending. Although we have managed to maintain sales growth in the first half, it is unrealistic to expect growth for the full year. We expect this Christmas to be the slowest selling season in recent years and the poor economic environment to continue throughout 2009 at least.
However, the bright spots in the picture are that wage pressures are decreasing, the cost of raw materials is declining and the rise of the Renminbi has slowed. The pace of industry consolidation, meanwhile, has increased and this favours strong players such as VTech,” said Mr. Wong.
Looking ahead, in the TEL business, VTech expects continued weakness at the branded business since sales of cordless phones will be affected by the slowing US economy. A major competitor has recently exited the market, however, which should enable the Group to gain further market share. In addition, the Group’s cordless phones are being joined by cordless headsets, which have been on the shelves since October and have already started to contribute to sales in the second half of the financial year 2009.
The ODM business is expected to maintain momentum and post continued sales increases during the second half. The Group expects to add new customers and increase orders from existing customers as competitors weaken and the Group delivers better products that are competitively priced. The sole supplier agreement with Deutsche Telekom will start to contribute to sales early in the calendar year 2009.
Sales at the ELP business are expected to decline in the second half. Recent point-ofsales data in North America have shown softening consumer demand and customers are reducing inventory and slowing replenishment orders. With the European economies entering into recession, a slower Christmas season is expected in these markets.
VTech will step up promotional efforts to ensure good sell-through of ELPs during the holiday season. Standalone products, especially those in the infant category, should maintain their strong momentum and the Group anticipates gaining shelf space in this category. VTech has also developed a new infant line for launch next year that will enable the Group to expand into the infant aisle, a new avenue of growth.
Second half sales at the CMS business are also expected to slow, again as customers reduce orders and inventory in anticipation of declining consumer demand. Nonetheless, the Group will continue to streamline work processes and increase automation to raise productivity, reduce dependence on labour and improve product quality. In the longer term, however, pressure on margins should lead to more outsourcing, which would benefit the CMS business. In addition, the product areas of the CMS business are less subject to competition than the overall Electronic Manufacturing Services market, and steady growth is forecast in areas such as solid state lighting, which continues to expand worldwide.
“In summary, we believe the poor economic environment will continue throughout 2009 at least. However, VTech is prepared for the downturn and is responding through tightened cost control, a rationalisation of operations and measures to enhance productivity. The Group is already benefiting from lower input costs and market consolidation. Our sound strategy based on product innovation, gains in market share, geographic expansion and operational excellence will enable us to weather the downturn and emerge an even stronger company,” concluded Mr. Wong.
About VTech
VTech is one of the world’s largest suppliers of corded and cordless telephones and electronic learning products. It also provides highly sought-after contract manufacturing services. Founded in 1976, the Group’s mission is to be the most cost effective designer and manufacturer of innovative, high quality consumer electronics products and to distribute them to markets worldwide in the most efficient manner.
