- Group revenue was up by 2.1% to US$876.1 million
- Profit attributable to shareholders of the Company increased by 3.1% to US$91.2 million
- Strong balance sheet, with deposits and cash of US$108.9 million
- Interim dividend of US16.0 cents per ordinary share, same as the dividend paid in the corresponding period last year
Hong Kong – VTech Holdings Ltd (HKSE: 303) today announced its results for the six months ended 30 September 2012, reporting higher revenue and profit amid weak economic conditions.
Group revenue for the six months ended 30 September 2012 increased by 2.1% over the same period of the previous financial year to US$876.1 million. This was primarily due to higher revenue in North America and Europe, where electronic learning products (ELPs) and contract manufacturing services (CMS) recorded growth. Higher revenue from telecommunication (TEL) products and ELPs in Asia Pacific also contributed to the increase in Group revenue.
Profit attributable to shareholders of the Company increased by 3.1% to US$91.2 million. The increase in profit was mainly attributable to higher revenue and a modest improvement in operating profit margin. Basic earnings per share consequently increased by 2.5% to US36.5 cents, compared to US35.6 cents in the corresponding period last year.
The Board of Directors has declared an interim dividend of US16.0 cents per ordinary share, which is the same as the dividend paid in the corresponding period last year.
“I am pleased to report that the Group managed to grow its top line in the first half of the financial year 2013, despite weak economic conditions in our major markets. Profit was modestly higher as margin stabilised,” said Mr. Allan Wong, Chairman and Group CEO of VTech Holdings Limited.
Operations
In the last financial year, rising input costs posed a challenge to the Group. During the first half of the current financial year, raw material prices declined somewhat, as global economies weakened. The impact of Renminbi appreciation has also eased off. However, labour cost and manufacturing overhead in China have continued to rise, as recruitment and retention of workers have become more challenging. In response, the Group has raised workers’ compensation, as well as stepped up investment in factory improvements to address these issues. Driven by these cost increases, gross margin for the period stayed flat from the same period of the last financial year.
Segment Results
North America
Group revenue in North America increased by 1.8% to US$439.0 million in the first half of the financial year 2013. The increase was mainly due to higher revenue from ELPs and CMS, which offset lower revenue from TEL products. North America remains the largest market for the Group, accounting for 50.1% of Group revenue.
During the period, revenue from TEL products declined by 10.4% to US$197.4 million. This was due to lower sales of residential cordless telephones, as the market is mature, compounded by uncertain economic growth and weaker than expected demand.
Nonetheless, VTech maintained its number one position in the US. The new Connect to Cell™ system has sold well, proving that connectivity with mobile phones is a feature valued by consumers. The Group’s strength in product development and design was also demonstrated by the Retro Phone, which featured in People magazine as one of the most innovative new consumer electronics products.
Sales of VTech’s commercial phones, including the small to medium sized business (SMB) phones and hotel phones, increased. The growth was primarily driven by a full six-month contribution from the hotel phones and increased sales of SynJ® and Synapse® business phone systems. SynJ features optional repeaters that can extend the range of cordless handsets, making it a unique solution for operations such as warehouses, restaurants and retail shops. Synapse can accommodate up to 100 extensions, and is an easy to use and affordable system for SMBs.
In September this year, the Group shipped its new four-line Small Business System to office super stores in the US. It is a user-friendly, easy-to-install 16-station system that does not require professional maintenance, saving companies time and money. This highly competitive product has been well-received by all retail customers.
ELP revenue in North America during the first six months rose by 26.0% to US$145.4 million, with growth attributable to both platform and standalone products. The revenue growth was driven primarily by InnoTab® and InnoTab® 2, VTech’s first and second generation educational tablets. This contrasts with the last financial year, when the majority of InnoTab revenue was not recognised in the first half.
InnoTab 2 hit the US market in August 2012. Offering increased storage capacity, a new rotatable camera and a built-in microphone, it has been well-received and has garnered a number of accolades, including being named one of Walmart’s “Top 20 Toys for Christmas”. MobiGo®, the educational handheld game console, was also updated to MobiGo® 2. Sales of MobiGo 2 also made a good contribution to growth.
Standalone products also performed well in North America. Switch & Go Dinos®, a new line of toys that transform between dinosaurs and vehicles, made the strongest contribution to growth in the first half. This new line was launched in May 2012, gaining the Group additional shelf space beyond the learning aisle. Other notable successes in new standalone products in the region included the Alphabet Activity Cube™ and the Stencil and Learn Studio™.
Revenue from CMS in North America increased by 0.6% to US$96.2 million. Although good growth was seen in industrial products and commercial solid state lighting, this was offset by a decline in sales to a professional audio customer, which entered the period with high inventory. Business with other professional audio customers, however, remained stable. Sales of internet phones for office use were lower, as the customer changed its inventory management strategy.
Europe
Group revenue in Europe rose by 4.6% to US$352.0 million in the first half of the financial year 2013. As in North America, the increase was mainly due to higher revenue from ELPs and CMS, which offset lower revenue from TEL products. Europe is the second largest market for the Group, accounting for 40.2% of Group revenue.
Revenue from TEL products decreased by 8.1% to US$106.0 million. The decline in revenue was primarily due to lower sales of cordless telephones, as the region’s weak economies have caused customers to reduce lead times and inventory. However, integrated access devices and baby monitors posted good growth during the period. VTech maintained its position as the leading manufacturer of cordless telephones in Western Europe.
Revenue from ELPs in Europe was up by 3.0% over the first half of the last financial year to US$128.3 million. Growth in the region was somewhat hampered by a weaker Euro-US Dollar exchange rate as compared with the same period last year. Educational tablets and the Switch & Go Dinos range were again the main growth drivers. Toot-Toot Drivers™, a line of infant smart vehicles and accessories, also made a strong contribution. During the period, InnoTab was updated with InnoTab 2 in the UK, while Storio® 2 was shipped to major markets in continental Europe. Among the many awards won by VTech’s educational tablets in Europe, InnoTab 2 has been included in the “Top Toys for Christmas” list by the Toy Retailers Association in the UK. Geographically, the UK and France turned in the best results. Sales were lower in Germany, Spain and the Benelux countries.
CMS revenue in Europe rose by 22.0% during the first half of the financial year 2013 to US$117.7 million. It was driven by strong growth in medical and health products, as the Group increased sales to existing and new customers. Wireless headsets saw robust growth, as VTech benefited from new product launches by the customer and its consolidation of suppliers. Switching mode power supplies also contributed to higher revenue, buoyed by solar power inverters. Sales of professional audio equipment, however, saw a slight decline during the period.
Asia Pacific
Group revenue in Asia Pacific increased by 6.9% to US$51.0 million in the first half of the financial year 2013. The region accounted for 5.8% of Group revenue.
Revenue from TEL products was up by 31.7% to US$18.7 million, as the Group’s Japanese customer increased orders after recovering from the earthquake in March 2011. VTech also expanded further in Taiwan, and entered into new markets such as Indonesia. In Australia, sales declined moderately as new products have been scheduled for introduction in the second half of the financial year.
Revenue from ELPs in Asia Pacific was US$11.2 million, a 6.7% increase over the same period last year. Sales were higher in China, Korea and Japan, as the Group made further inroads into those markets. Shipment to Australia, ELPs’ biggest market in Asia Pacific, held steady.
CMS revenue in Asia Pacific declined by 8.3% as compared with the first half of the previous financial year to US$21.1 million. In Japan, revenue was lower as sales in marine radio were unable to offset lower sales of consumer LED light bulbs and medical and health products. The handheld radiation detector business returned to normal, as the effect of the earthquake last year receded. However, CMS did achieve strong growth in China and Korea. In China, the enhanced manufacturing facility of CMS, which started operation in November 2011, has helped customers to distribute products in the domestic market more efficiently. In Korea, the Group managed to grow its business with an existing customer.
Other Regions
Other regions include Latin America, the Middle East and Africa. Revenue in the first half of the financial year 2013 was US$34.1 million, down 20.1% as compared with the same period last year. These regions accounted for 3.9% of Group revenue.
Africa and the Middle East recorded growth during the period, but this was more than offset by a decline in Latin America. All product lines saw sales decline in other regions overall. Revenue from TEL products fell by 27.8% to US$19.5 million while revenues from ELPs and CMS decreased by 6.5% and 25.0% to US$14.3 million and US$0.3 million respectively.
Outlook
The global economic environment remains challenging. In the US, growth is uncertain, with a lingering high level of unemployment. In Europe, austerity measures are depressing consumer demand. Nevertheless, VTech remains cautiously optimistic of achieving overall top line growth in the financial year 2013. Labour cost and manufacturing overhead will increase further from the first half of the current financial year. Additionally, the Group will continue to invest in Corporate Social Responsibility (CSR) to achieve sustainable development with its people, the community and the environment. As a result, the Group does not expect gross margin to improve, while bottom line growth will be modest.
The operating environment for residential cordless telephones will continue to be difficult in the second half of the financial year. Consumer demand is expected to remain soft, while customers have been delaying replenishment until the last minute. Despite these challenges, VTech will continue to build on its success in SMB and hotel phones, while bringing further innovation to the residential phone market.
In North America, the Group expects sales of commercial phones to increase. With the introduction of the new four-line Small Business System, there is a strong line-up of well-priced, easy-to-install SMB phones. This will enable VTech to extend its market penetration into broader market segments. The Group also expects to ship more hotel phones as its reputation as a reliable supplier increases in this sector.
In the residential phone area, VTech expects to outperform the market. It will launch a new category of phone called CareLine™. Designed to meet the needs of an aging population, these new products offer innovation such as Voice Announce® Caller ID, Voice Command Recognition and a portable safety pendant with no monthly fee. Customer response has been very positive and the line has been started rolling out to the US market since October 2012.
Sales of TEL products via online retailers will also be higher, as the Group continues to increase its effort in expanding these channels.
Although sales of TEL products in Europe have been weak due to the sluggish economy, the Group has started to see some improvement in the order situation. It expects that sales in the second half will improve over the first half of the financial year.
In Asia Pacific, sales of TEL products will pick up in Australia as the Group rolls out new products. The positive momentum achieved in Japan is expected to continue.
VTech expects the positive momentum for ELPs to continue despite the challenging global economic environment. Platform and standalone products are expected to maintain their solid contributions to growth for the full financial year.
In North America, platform products will lead the way in the second half of the financial year, as the Group benefits from the full impact of MobiGo 2 and InnoTab 2. They have been joined since late October by InnoTab® 2S, a further evolution of the line of educational tablets, featuring a secure Wi-Fi connection.
In addition to hardware, VTech is also expanding its cartridge and download offering. The download library, accessible via the Learning Lodge®, already contains over 200 e-book, game, video and music titles. By Christmas this year, over 300 titles will be available for download.
The Switch & Go Dinos line will continue as the growth driver for standalone products for the full financial year, augmented by the core infant and pre-school ranges.
In Europe, VTech expects a continuation of the good performance in the UK and France, led by InnoTab 2 and Storio 2 respectively. This will be reinforced by the Switch & Go Dinos and Toot-Toot Drivers lines, as well as core standalone products. Germany and the Benelux countries are expected to return to growth for the full financial year. Sales in Spain are expected to remain slow due to its weak economy.
Globally, ELP sales via online retailers will continue to grow, as the Group maintains its increased focus on this fast expanding channel.
The global electronic manufacturing services market is forecast to remain subdued in the calendar year 2012 but VTech’s CMS will continue to outperform the industry. Business from existing customers is expected to be stable and hence growth will be driven by new customers.
Professional audio equipment will see solid growth in the second half. Sales in North America will return to normal, as the Group’s customer has now worked through inventory. In Europe, sales will rise as several new customers have been added in Germany in the first half and their orders will ramp up in the second half. VTech also expects to add more customers in Europe in the coming six months. As a result, sales of professional audio equipment will see growth for the full year.
Sales of switching mode power supplies, including solar power inverters, will be stable in the second half, following the good growth in the first half of the financial year. For the full year, solid growth is expected in this category.
Other categories will achieve higher revenue also. Growth in commercial solid state lighting will more than compensate for a further sales decline in consumer LED light bulbs, while sales of wireless products will continue to increase, led by wireless headsets and marine radio.
The enhanced manufacturing facility of CMS, which started operations in November 2011, will help drive growth. It will support continued expansion in CMS’ China business, as it is helping its customer to distribute products more efficiently in the domestic market. It will also enable CMS to grow its medical and health products, as it is now able to manufacture sophisticated products with stringent safety and quality requirements, including those requiring FDA (the US Food and Drug Administration) approval.
“Our ability to deliver growth in the face of difficult market conditions testifies to the strength of the Group. Although labour cost and manufacturing overhead in China have continued to rise, the Group’s gross margin has stabilised as raw material price pressure has eased off. In addition, CSR measures we put in place will foster a stable workforce, which in turn will lead to an improvement in our efficiency in the longer term. VTech is a company with strong R&D, market leadership position, a strong balance sheet and a highly efficient operation. We will continue to focus on product innovation and geographical expansion to drive growth, while managing costs and risks to enhance profitability,” said Mr. Wong.
About VTech
VTech is the world’s largest manufacturer of 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.
