VTech Announces 2018/2019 Interim Results

Continued growth in Asia Pacific despite lower Group revenue

HONG KONG, Nov. 12, 2018 /PRNewswire/ --

• Group revenue decreased by 3.5% to US$1,003.5 million
• Profit attributable to shareholders of the Company declined by 13.0% to US$90.1 million
• Interim dividend of US17.0 cents per ordinary share, the same as the dividend paid in the corresponding period last year
• Gross margin decreased from 32.3% to 29.5%
• Completed acquisition of Pioneer Corporation's manufacturing facility in Malaysia

VTech Holdings Limited (HKSE: 303) today announced its results for the six months ended 30 September 2018, reporting continued growth in Asia Pacific despite lower Group revenue.

"In the first six months of the financial year 2019 the Group's revenue and profit decreased. The lower-than-expected results were due to the overall weak performance of the Group's telecommunication products and the logistics issues in continental Europe for electronic learning products. There was, however, good progress in Asia Pacific, where VTech continues to expand its presence. The Group also maintained market leadership in its core product areas," said Mr Allan Wong, Chairman and Group CEO of VTech Holdings Limited.

Results and Dividend

Group revenue for the six months ended 30 September 2018 decreased by 3.5% to US$1,003.5 million, owing to lower sales in North America, Europe and Other Regions, which offset growth in Asia Pacific.

Profit attributable to shareholders of the Company declined by 13.0% to US$90.1 million, attributable to lower revenue and higher costs.

Basic earnings per share were 13.1% lower at US35.8 cents, compared to US41.2 cents in the first six months of the previous financial year.

The Board of Directors has declared an interim dividend of US17.0 cents per ordinary share, unchanged from the interim dividend declared in the corresponding period last year.

Costs

The Group's gross profit margin in the first six months of the financial year 2019 decreased to 29.5%, from 32.3% in the corresponding period last year. The decline was mainly due to product mix, higher materials prices, as well as an increase in direct labour costs and manufacturing overheads, which offset the positive impact of further productivity gains.

US-China Trade Tensions

During the first half of the financial year 2019, the US Government imposed three rounds of tariffs on Chinese imports amounting to US$250 billion of goods. Neither VTech's electronic learning products (ELPs) nor its telecommunication (TEL) products are included in the list of items targeted. However, the tariffs affect some of the Group's contract manufacturing services (CMS) customers in cases where they export products manufactured in VTech's facilities in mainland China to the US. As a contingency, the Group is offering such customers the alternative use of its recently acquired production facilities in Malaysia, should they wish to take advantage of the different location.

Segment Results

North America

Group revenue in North America fell by 5.9% to US$470.1 million in the first six months of the financial year 2019. Lower sales of TEL products and CMS offset higher sales of ELPs during the period. North America remained VTech's largest market, accounting for 46.8% of Group revenue.

ELPs revenue in North America rose by 9.6% to US$210.9 million, with growth in both standalone and platform products. The increase resulted from strong sales in Canada and good growth in the US. This was achieved despite the closure of Toys"R"Us in the US, as the Group's existing customers expanded their shelf space and assortment of toys to capture the business previously conducted by the retailer. Furthermore, the positive reception of new VTech and LeapFrog^® branded products allowed the Group to consolidate its market leadership. During the first nine months of the calendar year 2018, the Group maintained its position as the number one manufacturer of electronic learning toys from infancy through toddler and preschool in the US and Canada^[1].

Growth in standalone products was led by sales increases of both VTech and LeapFrog branded products. For the VTech lines, higher sales of infant and preschool products, the Kidi line and Kidizoom^® Camera offset lower sales of the Go! Go! Smart family of products. Among the new standalone products launched, Chase Me Casey^™ and Stroll & Discover Activity Walker^™ sold particularly well. Strong growth of LeapFrog products also reflected higher sales of infant and preschool products. This follows efforts by the Group to support the LeapFrog brand through the launch of new learning toys such as Learning Friends 100 Words Book^™ and Go-with-Me ABC Backpack^™.

Platform products also registered higher sales during the period, with growth across both brands. VTech saw higher sales of Kidizoom Smartwatch DX2 and KidiBuzz^™, while in August 2018, the new Explore and Write Activity Desk^™ hit the market, an update of the popular Touch and Learn Activity Desk^™. Growth in the LeapFrog brand was driven by higher sales of both reading systems, including the newly launched LeapStart^® 3D, and children's educational tablets. There was also a sales contribution from LeapFrog Academy^™, which was introduced to the major English-speaking countries in August 2017.

During the six months, the Group's ELPs received more than 70 awards from toy and parenting industry experts, key retailers and toy advisory boards in the US. Among the major awards, Kidi Star Karaoke Machine^™ was included in Amazon.com's "Top 100 Holiday Toys 2018", while Explore and Write Activity Desk made Walmart's "Top Rated Toys by Kids" list. In another important award, Learning Friends 100 Words Book and LeapStart 3D were both winners of National Parenting Product Awards (NAPPA). They were also named to the "TTPM Most Wanted List" of hot holiday toys.

TEL products revenue in North America decreased by 21.2% to US$131.3 million. Residential phones, commercial phones and other telecommunication products registered lower sales. During the period, VTech continued to maintain its leadership position in the US residential phones market^[2].

Sales of residential phones were lower during the period, as the fixed-line telephone market in the US continued to contract. Loss of shelf space in the club channels also contributed to the sales decline.

Sales of commercial phones and other telecommunication products were lower, as higher sales of hotel phones and wireless monitoring systems were unable to compensate for lower sales of baby monitors and VoIP (Voice over Internet Protocol) phones. Sales of hotel phones rose as VTech continued to win more new hotel projects, while wireless monitoring systems benefited from the launch of new Wi-Fi cameras. Sales of baby monitors decreased due to inventory adjustment by a major customer. Sales of VoIP phones remained low primarily due to delay of the new VoIP phone series, which began shipping in September. The first in the series is a high-end model featuring a large, high-resolution colour display, with a second display to support paperless programmable function keys. Sales of headsets held steady during the period.

CMS revenue in North America declined by 9.1% to US$127.9 million. This was mainly due to lower sales of solid-state lighting, communication products and professional audio equipment. Solid-state lighting was affected by less favourable business conditions at the Group's customers, while communication products registered a further sales decline as a client's product line reached the end of its life cycle. Professional audio equipment saw a reduction in orders from a major customer as it worked through excess inventory. In contrast to the declines, sales of industrial products increased owing to good orders for items including printed circuit board assembly for industrial printers and note counting devices. 

Europe

Group revenue in Europe decreased by 3.2% to US$400.4 million in the first six months of the financial year 2019, as lower sales of ELPs and TEL products offset an increase at CMS. Europe remained VTech's second largest market, accounting for 39.9% of Group revenue.

ELPs revenue in Europe declined by 17.1% to US$129.1 million, with lower sales of both standalone and platform products. Geographically, sales in the UK were stable despite the closure of Toys"R"Us in the country, while France, Germany, the Netherlands and Spain all recorded sales decreases. During the period, the Group engaged a new third-party logistics vendor for continental Europe who relocated to a new warehouse. The transition resulted in reduced shipment of VTech branded products in the region, significantly impacting sales. LeapFrog branded products were unaffected, as these are marketed primarily in the UK. In the first nine months of the calendar year 2018 VTech maintained its position as the number one infant and toddler toy manufacturer in France, the UK and Germany^[3].

Standalone products saw lower sales in Europe in the first six months. Sales of VTech standalone products were lower. However, good growth was achieved in LeapFrog standalone products, as new product introductions drove sales higher in the infant and preschool categories.

Platform product sales in Europe decreased during the period. Among VTech platform products, higher sales of KidiCom MAX^™ were offset by lower sales of Kidizoom Smartwatches and children's educational tablets. Sales of LeapFrog platform products posted growth, however, as continued growth in LeapStart/MagiBook^™[4] and the introduction of LeapStart 3D in the UK offset a decline in children's educational tablets.

During the first six months of the financial year 2019, VTech ELPs won numerous awards in Europe. In the UK, Argos listed Myla the Magical Make-Up Unicorn in its "Top Toys for Christmas 2018". In France, VTech won three "Grand Prix du Jouet" awards from La Revue du Jouet magazine, for Toot-Toot Friends^™ Kingdom Pirate Ship, Myla the Magical Make-Up Unicorn and Little Love^® Léa découvre le pot. In Spain, Toot-Toot Friends Kingdom Pirate Ship was named "Best Toy 2018" from the Spanish Association of Toy Manufacturers.

Revenue from TEL products in Europe decreased by 10.2% to US$62.4 million in the first six months of the financial year 2019. Residential phones and other telecommunication products saw sales declines, while VoIP phones posted a slight growth.

Sales of residential phones were lower as the fixed line telephone market continued to contract.

In commercial phones and other telecommunication products, VoIP phones saw continued growth, supported by a positive reception from customers for the new colour display VoIP phone under the Snom brand. Sales of baby monitors declined, however, as orders from a major customer reduced. Another customer's project delays led to lower sales of CAT-iq (Cordless Advanced Technology – internet and quality) handsets. IADs (Integrated Access Devices) sales also registered declines due to a reduction in orders by a telephone company customer.

CMS revenue in Europe rose by 10.8% to US$208.9 million. The increase was mainly due to higher sales of hearables, professional audio equipment and communication products. This offset lower sales of medical and health products, while sales of industrial products and switching mode power supplies held steady. In hearables, market share gains and new product launches by the Group's existing customers led to growth. Orders for professional audio equipment increased as customers launched new products that were well-received by the market. Communication products benefited from increased orders for Wi-Fi routers and VoIP phones. Medical and health products, however, were negatively impacted by lower orders for hair removal devices and hearing aids. 

Asia Pacific

Group revenue in Asia Pacific increased by 11.4% to US$112.1 million in the first six months of the financial year 2019, as higher sales of ELPs and CMS offset lower sales of TEL products. The Asia Pacific region rose to 11.2% of Group revenue.

Revenue from ELPs in Asia Pacific increased by 16.3% to US$40.7 million, led by growth in mainland China and Australia. In mainland China, growth was driven by new product launches and channel expansion. Infant products and the Switch & Go Dinos^™ range posted higher sales, while increased penetration of specialty maternity and childcare chains, as well as supermarkets and e-commerce channels, also contributed to growth. In Australia, the Group again performed well despite the closure of Toy"R"Us in the country, as broader listings and the Group's focus on channel management drove sales increases in both VTech and LeapFrog products. The VTech branded First Steps^™ Baby Walker was named "Infant/Preschool Toy of the Year 2018" by the Australian Toy Association.

TEL product revenue in Asia Pacific declined by 17.5% to US$17.9 million. The decrease was mainly due to lower sales in Japan, Australia and Hong Kong. In Japan, the decline was the result of an order reduction by a customer. In Australia the continued contraction of the fixed-line telephone market led to sales declines, while Hong Kong was affected by lower sales of cordless phones and IADs. During the period, the Group increased its sales in Malaysia and the Philippines.

CMS revenue in Asia Pacific increased by 21.9% to US$53.5 million. Professional audio equipment and medical and health products posted higher sales, offsetting the sales decline of hearables. The performances of the high precision metal parts business, home appliances and communications products were stable. Orders for professional audio equipment increased as VTech was appointed to design and manufacture professional audio interface products for a new Japanese customer. A new DJ equipment business that was part of the acquisition of the Malaysian manufacturing facilities, also contributed to the growth in this product segment. Medical and health products benefited from more orders for diagnostic ultrasound systems. In contrast to the overall growth, keen competition in the wireless headsets market resulted in lower orders of hearables from existing customers.

On 21 August 2018, VTech announced it had completed the acquisition of a manufacturing facility in Malaysia owned by Pioneer Technology (Malaysia) Sdn. Bhd., a subsidiary of Pioneer Corporation. The acquisition, for a consideration of approximately US$19.9 million, includes a business manufacturing high performance audio equipment for DJs, producers and artists. In addition to strengthening CMS's position as a leading global manufacturer of professional audio equipment, the new facility expands VTech's global footprint, allowing the Group to serve its customers better.

Other Regions

Other Regions, comprising Latin America, the Middle East and Africa, saw revenue decline by 18.7% to US$20.9 million in the first six months of the financial year 2019. ELPs, TEL products and CMS all posted sales declines. Other Regions accounted for 2.1% of Group revenue.

ELPs revenue in Other Regions declined by 13.2% to US$9.2 million for the period, with sales lower in all three regions.

TEL products revenue in Other Regions decreased by 21.4% to US$11.4 million. The decline was attributable to sales decreases in Latin America and the Middle East.

CMS revenue in Other Regions was US$0.3 million in the first six months of the financial year 2019, as compared to US$0.6 million in the corresponding period of the previous financial year.

Outlook

Group revenue for the full financial year 2019 is difficult to gauge. CMS revenue for the full financial year is expected to grow, while revenue of TEL products is anticipated to be lower year-on-year. ELPs performance is hard to predict, as sales in the second half may be affected by the lingering effects of the Toys"R"Us closure and the logistics issues in continental Europe. The continuous trade tension between the US and China adds to the level of uncertainty over the Group's prospects, especially as tariffs may be applied to more Chinese imports.

Given the anticipated lower revenue of TEL products, the logistics issues of ELPs in continental Europe as well as the pressures on labour and materials costs, gross margin is projected to decline year-on-year.

ELPs revenue for the full financial year 2019 is difficult to gauge. The challenges that the Group has experienced recently will carry over into the second half. In North America, sales during the upcoming holiday seasons may be affected by the lingering effect of the Toys"R"Us closure in the US, despite the good growth achieved in the first half. In Europe, sales in the second half will be higher than the first six months, as the logistics issues in continental Europe are being resolved. In Asia Pacific, continued good performances are expected from Australia and mainland China.

Despite these challenges, the longer term prospects for the Group's ELPs remain positive. A brand new range of interactive building sets called LeapBuilders/BlaBla Blocks^[5] has been launched in its major European markets. Designed for children aged 12 months and upwards, it marks VTech's expansion into the building sets category, opening up an entirely new avenue of growth. In addition, the new line-up of VTech and LeapFrog products for the calendar year 2019 has been unveiled to key customers and the reception is good, which positions the business well for a solid performance in the coming financial year.

TEL products sales are expected to pick up in the second half, although full year revenue is projected to be lower than the previous financial year. Full year sales of commercial phones and other telecommunication products are expected to show an increase year-on-year. The VoIP phones business is anticipated to grow in the second half as compared with the first half of the financial year 2019, supported by an aggressive promotional programme and the introduction of additional VoIP phone models. New product launches and increasing orders from a major customer in the second half will lead to a resumption of growth in baby monitors, while sales of CAT-iq handsets will pick up. The headsets business will grow further, as the Group is shipping new models, including the world's first 100% voice-controlled headset. Sales of IADs in the second half will improve.

CMS is expected to achieve growth for the financial year 2019. The increase in revenue will be across the board, driven by higher sales of professional audio equipment, hearables, industrial products, home appliances as well as medical and health products. Existing customers in these segments are expanding their business through new product launches, while new customers are being added. Further growth opportunities will come from IoT (Internet of Things) products, a new category for which the Group is well positioned. VTech CMS is now manufacturing IoT products for existing and new customers, including internet connected smart thermostats and smart air-conditioning controls that help users to save energy costs.

As a result of acquiring the manufacturing facility from Pioneer Corporation in Malaysia, CMS will benefit from the sales contribution from manufacturing high performance DJ equipment. Given the current trade tensions between the US and China, additional business is expected from new customers demanding an alternative manufacturing site outside mainland China.

"It has been a challenging first half of the financial year. With our strong and dedicated team, VTech will continue to maintain its market leadership and deliver sustainable value to shareholders," said Mr Wong.

About VTech

VTech is the global leader in electronic learning products from infancy through toddler and preschool and the world's largest manufacturer of cordless phones. It also provides highly sought-after contract manufacturing services. Since its establishment in 1976, VTech has been a pioneer in the electronic learning toy category. With advanced educational expertise and cutting-edge innovation, VTech products provide fun and learning to children around the world. Leveraging decades of success in cordless telephony, VTech's diverse collection of telecommunication products elevates both home and business users' experience through the latest in technology and design. As one of the world's leading electronic manufacturing service providers, VTech offers world-class, full turnkey services to customers in a number of product categories. The Group'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.

Note: Starting from 22:30, 12 November 2018 (HKT), the video archive of the 2018/2019 interim results announcement can be accessed through VTech website via this link https://www.vtech.com/en/investors/financial-briefings/.

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