- Group revenue increased by 0.9% to US$900.8 million
- Profit attributable to shareholders of the Company rose by 7.5% to US$102.7 million
- Gross margin improved from 31.7% to 32.2%
- Interim dividend of US17.0 cents per ordinary share, 6.3% increase over the same period last year
- Strong pipeline of innovative new products
Hong Kong – VTech Holdings Limited (HKSE: 303) today announced its results for the six months ended 30 September 2014, reporting further profit growth on an improved gross margin.
Group revenue for the six months ended 30 September 2014 rose by 0.9% over the same period of the previous financial year to US$900.8 million. This was primarily due to higher revenue in Europe and Asia Pacific, offsetting lower revenue in North America and Other Regions.
Profit attributable to shareholders of the Company increased by 7.5% to US$102.7 million. The rise in profit was mainly attributable to an improved gross margin. Basic earnings per share increased by 7.3% to US40.9 cents, compared to US38.1 cents in the corresponding period last year.
The Board of Directors has declared an interim dividend of US17.0 cents per ordinary share, representing an increase of 6.3% over the same period last year.
“VTech delivered solid profit growth in the first half of the financial year 2015. Profit attributable to shareholders of the Company grew by 7.5%, despite revenue being broadly stable. The profit increase was due to an enhanced gross margin, as the Group benefited from lower cost of materials and an increase in the proportion of higher margin products in all three product lines,” said Mr. Allan Wong, Chairman and Group CEO of VTech Holdings Limited.
Costs and Operations
Cost pressures eased slightly in the first half of the financial year 2015. Cost of materials was lower due to falling component prices. Labour costs and manufacturing overheads remained largely stable, as automation, process improvements and product optimisation continued to generate efficiency gains. This was despite the fact that wages in China continued to rise, although the Renminbi weakened slightly against the US dollar.
Segment Results
North America
Group revenue in North America in the first six months of the financial year was US$450.6 million, down 1.1% over the same period last year. This was mainly due to lower revenue from electronic learning products (ELPs) and contract manufacturing services (CMS). Despite the sales decline, North America remains the largest market for the Group, accounting for 50.0% of Group revenue.
ELPs revenue in North America was US$141.2 million, a 10.5% decrease. The decline was attributable to lower sales of platform products, which was only partially offset by higher sales of standalone products. Despite a challenging market, VTech became the number one manufacturer in the category of Infant and Preschool Electronic Learning in the US[1].
The children’s tablet market in the US was difficult. VTech’s fourth generation of children’s educational tablets, InnoTab® 3 PLUS and 3S PLUS, hit the shelves in August 2014. High channel inventory and increasing competition led to heavy discounting by retailers, resulting in price pressure and reduced shipments of tablets in the education aisle. In other platform categories, the handheld gaming console MobiGo® is reaching the end of its product life cycle.
Continuing its history of product innovation, VTech has successfully harnessed the latest technology trend in smartwatches for adults and brought it to children with the launch of Kidizoom Smartwatch. This is the world’s first smartwatch for children with a built-in camera. It hit retailers’ shelves in the US in July 2014 and sales have been strong. It is recommended in numerous top toy lists, including Walmart’s “Chosen by Kids Top 20 Toy” list, Kmart’s “Fab 15” list of hot holiday toys and Toy Insider’s “Top Tech 12” list.
Standalone products continued to perform well during the period, led by core infant products and Go! Go! Smart Wheels®, the line of smart infant vehicles and playsets. The newly introduced Go! Go! Smart Wheels Ultimate Amazement Park playset was named one of the hottest holiday toys by US retailers, securing listings that include Walmart’s “Chosen by Kids Top 20 Toy” and Target’s “Top Toy”. Go! Go! Smart Animals™, a brand new extension of the successful Go! Go! Smart Wheels line, reached US retailers’ shelves in August 2014. It also contributed to the growth of standalone products.
Revenue from telecommunication (TEL) products in North America increased by 6.8% to US$215.3 million. The growth was driven by higher sales of residential phones, commercial phones and other telecommunication products.
For residential phones, the Group continued to gain market share in North America on the back of a declining market. In other telecommunication products, sales of baby monitors grew strongly as the Group expanded distribution channels and launched new models. Among commercial phones, sales of small-to-medium sized business (SMB) phones and hotel phones increased. The new VTech branded SMB phones include ErisStation™, a conference phone with four wireless microphones; ErisTerminal™, SIP (Session Initiation Protocol) based business phones; and ErisBusinessSystem™, a four-line business phone system. These products have been shipped to customers since April 2014 and have received positive feedback, while adding incremental revenue.
CMS revenue in North America was US$94.1 million, down 2.5%. The decline was primarily due to lower sales of professional audio equipment, communication products and home appliances, offsetting higher sales of solid-state lighting.
Sales of professional audio equipment were lower, as a customer completed the transfer of the manufacture of one product family to its own facility that had excess capacity. Sales of communication products and home appliances decreased, as demand for customers’ products reduced. The sales decline was partially offset by higher sales of solid-state lighting, driven by more business from an existing customer and the ramping up of orders by a new customer. During the period, the Group added a new customer in the medical and health area, generating incremental business.
Europe
Group revenue in Europe in the first six months of the financial year was up 2.0% to US$359.9 million, mainly due to higher sales of CMS. Europe is the second largest market of the Group, representing 40.0% of Group revenue.
ELPs revenue in Europe was US$141.5 million, the same as the corresponding period last year. Higher sales of standalone products offset lower sales of platform products. Among VTech’s key Western European markets, sales in France, Germany, Belgium and Spain were higher, while sales in the UK declined. During the first nine months of the calendar year 2014, VTech further strengthened its position as the number one infant toy manufacturer in France, the UK and Germany[2].
Among standalone products, infant products saw higher sales. Toot-Toot Drivers®, VTech’s line of smart infant vehicles and playsets, achieved robust growth as customers continued to respond well to its expanding range of vehicles, playsets and tracks. In the UK, the new Toot-Toot Animals Safari Park was one of the two VTech products selected as the “Top 12 Dream Toys 2014” by The Toy Retailers Association. In France, VTech won five “2014 Grand Prix du Jouet” awards presented by La Revue du Jouet magazine, the highest among all toy manufacturers. The awards for Little Love: My Baby Learns to Talk and My Stroller 3-in-1 Interactive were especially significant as they mark the Group’s success in expanding into the dolls aisle.
VTech also introduced its pioneering Kidizoom Smartwatch in Europe. The product has been on the shelves in the Group’s major European markets since June 2014 and it has been well received by customers. In the UK, Argos and Hamleys named it one of the top toys for Christmas 2014. It was also selected as one of the “Top 12 Dream Toys 2014” by The Toy Retailers Association.
In contrast to the success of standalone products, sales of platform products decreased. This was mainly due to lower sales of educational tablets and MobiGo. The children’s tablet market is getting more competitive in Europe owing to the weak economies and new entrants, resulting in high channel inventory. This led to heavy discounting and reduced shipments. In addition, MobiGo is approaching the end of its product life cycle in the European markets.
TEL products revenue in Europe declined by 2.0% to US$77.6 million. Sales of residential phones were lower due to the weak economies and a declining market. This was partially offset by higher sales of commercial phones and other telecommunication products. Since January 2014, the Group has been shipping its conference phones with wireless microphones and SIP phones to customers in the region, who have responded positively to these new products. Sales of baby monitors were also higher, as the Group expanded the product line. Signs of improvement were seen in residential phones, as the sales decline in the UK, France and Germany narrowed.
CMS revenue in Europe was up 6.7% to US$140.8 million. Growth was achieved in most product categories. Sales of switching mode power supplies were higher, as an existing customer increased orders in a new business area for data centres, and in response to the upgrade from 3G to 4G technology. Wireless headsets also saw growth, owing to strong demand for a customer’s products and gains in market share. In contrast, sales of professional audio equipment were lower as a customer transferred products requiring custom configuration to manufacturing in-house. This was partially offset by higher sales to other professional audio equipment customers.
Asia Pacific
Group revenue in Asia Pacific increased by 16.9% to US$61.6 million, with growth in all three product lines. The region accounted for 6.8% of Group revenue.
ELPs revenue in Asia Pacific was up 6.7% to US$12.7 million, driven by sales increases in China. In mainland China, the full distribution of Switch and Go Dinos® and the launch of Go! Go! Smart Wheels contributed to higher sales. In the Hong Kong Special Administrative Region, core infant products and Go! Go! Smart Wheels were the main growth drivers.
TEL product revenue in Asia Pacific rose 16.1% to US$22.3 million as sales trended higher in Australia, Japan and China. In Australia, the Group gained market share in residential phones, while further gains were made following the launch of VTech branded baby monitors. In Japan, sales of residential phones increased as the Group added a new customer, while further inroads were made into the China market.
CMS revenue in Asia Pacific grew 23.1% to US$26.6 million, buoyed by higher sales of solid-state lighting, marine radio and medical and health products. The robust growth in solid-state lighting was driven by additional orders arising from the Youth Olympic Games in Nanjing, China. Higher sales of marine radios were due to good sell-through of a customer’s products. Increased sales of medical and health products were supported by a customer’s new product launch.
Other Regions
Other Regions include Latin America, the Middle East and Africa. Group revenue from Other Regions was down 8.0% to US$28.7 million, representing 3.2% of Group revenue.
ELPs revenue in Other Regions declined by 5.7% to US$10.0 million, as growth in Africa was offset by lower sales in the Middle East and Latin America.
TEL products revenue in Other Regions fell by 8.9% to US$18.4 million. Higher sales in the Middle East were offset by lower sales in Latin America and Africa.
CMS revenue in Other Regions was US$0.3 million, as compared to US$0.4 million in the same period last year.
Outlook
Economic recovery in the US is expected to continue, while the economies of Western Europe will remain weak. In this environment, the Group is targeting a modest revenue growth for the full financial year 2015, with a stable gross margin.
We are expecting a slight decline in ELPs sales in the full financial year. Sales of platform products will continue to be challenging in light of the keen competition in the children’s tablet market. InnoTab MAX, the Group’s new Android-based flagship educational tablet that is now on the shelves in the US, Canada, the UK and France, aims to recapture some of the market share lost to the commoditised consumer electronics tablets. A strong performance from Kidizoom Smartwatch is expected for the remainder of the financial year.
Standalone products will continue to perform well, with the momentum behind infant products, the Go! Go! Smart Wheels and Go! Go! Smart Animals lines carrying into the second half of the financial year. In addition, a strong line-up of new standalone products will start to reach the markets in Spring 2015. This includes Go! Go! Smart Friends™, a range of colourful playsets and characters that infuse traditional role-play with MagicPoint™ technology.
The positive momentum in TEL products is expected to carry into the second half of the financial year, driven by higher shipment of commercial phones and other telecommunication products. The Group’s baby monitors have achieved strong growth since VTech entered the field and new models will be introduced during the second half of the financial year. New connected home™ devices based on the DECT ULE (Ultra Low Energy) standard will join the Group’s growing range of other telecommunication products, alongside new CAT-iq handsets. In the fourth quarter of the financial year, a high-end integrated access device will be shipped to a new customer. This product supports VDSL vectoring and dual band 802.11ac. Sales of residential phones are forecast to hold steady despite a declining market, as VTech continues to gain market share and expand geographically.
CMS is also expected to achieve growth for the full financial year 2015. In the category of professional audio equipment, the reduction in orders from one customer will be partially offset by higher orders from others in this category. Sales to existing customers in switching mode power supplies, wireless headsets and solid-state lighting will increase, while new customers will add stimulus to growth. The new CMS factory building, which will raise manufacturing capacity by 25%, is making good progress and will commence operation as planned in the middle of the calendar year 2015.
“It has been a solid start to the financial year. Looking ahead, the Group will continue to focus on the development of innovative products, gains in market share, expanding our presence geographically and achieving operational excellence to generate sustainable returns for shareholders,” said Mr. Wong.
[1] Source: NPD Group, Retail Tracking Service. Ranking based on total retail sales in the combined toy categories of infant electronic learning, other infant toys and preschool electronic learning between 29 December 2013 and 21 September 2014
[2] Source: NPD Group, Retail Tracking Service
About VTech
VTech is the global leader in electronic learning products from infancy to preschool and the world’s largest manufacturer of cordless phones. It also provides highly sought-after contract manufacturing services. Founded in 1976, VTech’s mission is to design, manufacture and supply innovative and high quality products in a manner that minimises any impact on the environment, while creating sustainable value for its stakeholders and the community.
