VTech Announces FY2019 Annual Results

Higher revenue on good performances of ELPs and CMS

HONG KONG, May 20, 2019 /PRNewswire/ --

• Group revenue increased by 1.5% to US$2,161.9 million
• Profit attributable to shareholders of the Company decreased by 17.0% to US$171.3 million
• Final dividend of US50.0 cents per ordinary share, resulting in a full-year dividend of US67.0 cents per ordinary share, a decrease of 16.3% year-on-year
• Gross margin declined from 33.0% to 29.4%
• Restructuring to turn around TEL products business

VTech Holdings Limited (HKSE: 303) today announced its results for the year ended 31 March 2019, reporting higher revenue on good performances of electronic learning products and contract manufacturing services.

"The financial year 2019 saw both achievements and challenges for VTech. Electronic learning products delivered a slight sales increase despite the absence of Toys"R"Us in many of the Group's major markets. Contract manufacturing services posted strong growth and the Group successfully integrated its recently acquired manufacturing facilities in Malaysia. The performance of telecommunication products was below expectations, however, which resulted in weaker-than-anticipated Group revenue and profit," said Mr. Allan Wong, Chairman and Group CEO of VTech Holdings Limited.

Results and Dividend

Group revenue for the year ended 31 March 2019 increased by 1.5% to US$2,161.9 million, led by higher sales in Europe and Asia Pacific.

Profit attributable to shareholders of the Company decreased by 17.0% to US$171.3 million. The decline was mainly due to the lower revenue of telecommunication (TEL) products, product mix and higher costs.

Basic earnings per share decreased by 16.9% to US68.2 cents, compared to US82.1 cents in the previous financial year.

The Board of Directors has proposed a final dividend of US50.0 cents per ordinary share, providing a full-year dividend of US67.0 cents per ordinary share, a 16.3% decrease from the US80.0 cents declared in the previous financial year. This represents a dividend payout ratio of 98.4%.

Costs

The gross profit margin of the Group declined from 33.0% in the financial year 2018 to 29.4% in the financial year 2019. The decrease was due to higher materials prices, in part arising from tight supply of certain components, product mix, as well as a rise in direct labour costs and manufacturing overheads.

US China Trade Tension

During the financial year 2019, the US Government began to impose additional tariffs on Chinese imports. In total, around US$250 billion of goods from China to the US have been subjected to additional tariffs ranging from 10% to 25%. Negotiations have been underway regarding the trade arrangements between the two countries. On 10 May 2019, the tariffs on US$200 billion of Chinese imports were raised from 10% to 25%. In addition, about US$300 billion of Chinese goods could be made subject to 25% tariffs in the event an agreement was not reached.

As of today, none of VTech's electronic learning products (ELPs) or TEL products is subject to such tariffs. However, a number of the Group's contract manufacturing services (CMS) customers in the US are affected. Some of them are making plans to move part of their production from the Group's manufacturing facilities in Dongguan, mainland China to its recently acquired production facilities in Malaysia. Despite this, there was little impact on the Group revenue in the financial year 2019.

Segment Results

North America

Group revenue in North America decreased by 4.5% to US$994.5 million in the financial year 2019, as higher ELPs revenue was offset by lower revenues of TEL products and CMS. North America was VTech's largest market, accounting for 46.0% of Group revenue.

ELPs revenue in North America rose by 4.0% to US$476.6 million, with particularly strong growth in Canada. This performance was achieved despite the closure of Toys"R"Us in the US, as some of the Group's existing customers expanded their shelf space and assortment of toys to capture the business previously conducted by the retailer. The Group also increased sales to some second-tier retailers. Additional momentum came from the launch of new VTech and LeapFrog branded products, which were well-received by the market and enabled the Group to gain further market share. As a result, VTech strengthened its position as the number one manufacturer of electronic learning toys from infancy through toddler and preschool in the US[1].

Standalone products posted growth, driven by higher sales for both the LeapFrog and VTech brands. LeapFrog standalone products saw strong growth, as the Group pursued a strategy to expand the standalone toy business by launching more new products. Among the new items launched, Learning Friends 100 Words Book^™, Storytime Buddy^™ and Go-with-Me ABC Backpack^™ sold especially well. Growth of VTech standalone products was led by higher sales of preschool products such as the PJ Masks Learning Watch^™ range, Kidizoom^® Camera and the Kidi line. These successes offset the decline in the Go! Go! Smart family of products.

Sales of platform products decreased. VTech platform products registered a sales increase, driven by strong sell-through of Kidizoom Smartwatch DX2 and KidiBuzz^®. LeapFrog reading systems also saw higher sales, led by the good performance of the newly launched LeapStart^® 3D. These gains, however, were insufficient to offset lower sales of children's educational tablets. Subscriptions to the LeapFrog Academy^™ continued to grow steadily.

During the financial year 2019, VTech was given two prestigious awards by its major customers. Target named VTech "Vendor of the Year 2018", while Walmart, the Group's largest customer, honoured VTech with its "Toy Supplier of the Year" award. Both accolades are given in recognition of successful partnerships between the retailers and their toy suppliers. Among individual products, Kidizoom Smartwatch DX assortment was the top selling toy of 2018 in the youth electronics category according to the NPD Group, Retail Tracking Service (NPD). In addition, LeapStart 3D and the Learning Friends 100 Words Book were selected as finalists for the Toy Association's 2019 "Toy of the Year (TOTY) Awards" in the tech and infant/toddler categories respectively.

TEL products revenue in North America decreased by 19.4% to US$263.4 million, with lower sales of residential phones, commercial phones and other telecommunication products. Residential phones were again affected by the continuing contraction of the fixed-line telephone market. The Group also faced keen competition and a trend among retailers to consolidate their suppliers, leading to a loss of shelf space in club and consumer electronics channels. Despite this, VTech maintained its leadership position in the US residential phones market[2].

Commercial phones and other telecommunication products posted sales declines, as higher sales of headsets and hotel phones were insufficient to offset lower sales of VoIP (Voice over Internet Protocol) phones, baby monitors and wireless monitoring systems. Headsets benefited from the launch and strong sell-through of the world's first 100% voice-controlled headsets by a customer, while hotel phones maintained their growth as the Group won more new projects. Sales of VoIP phones decreased mainly due to a product delay, while baby monitors experienced an overall sales decline as a customer reduced orders. Nonetheless, in the calendar year 2018, the VTech branded baby monitors continued to grow and the Group is the number one baby monitor brand by dollar sales in the US[3]. Wireless monitoring systems were affected by lower sales of Wi-Fi IP cameras.

CMS revenue in North America declined by 0.5% to US$254.5 million. Higher sales of industrial products and medical and health products were offset by lower sales of solid-state lighting and communication products. Meanwhile, sales of professional audio equipment remained stable. Industrial products benefited from increased orders for printed circuit board assembly for note-counting devices and industrial printers. Sales of medical and health products rose on more orders for hearing aids. Solid-state lighting was affected by keen competition faced by the Group's customers, while communication products declined as the customer's product line reached the end of its life cycle.

Europe

Group revenue in Europe increased by 4.0% to US$882.9 million in the financial year 2019. Higher sales of CMS offset lower revenues of ELPs and TEL products. Europe remained VTech's second largest market, accounting for 40.8% of Group revenue.

ELPs revenue in Europe showed a 5.4% decrease to US$343.5 million. All the Group's major European markets reported lower sales. This was mainly attributable to tough market conditions in most of VTech's key European markets. In the UK, Toys"R"Us closed all its stores, while in other European markets some retailers faced financial problems. Logistics issues in continental Europe in the first half of the financial year 2019 resulted in lower shipment of products, which also contributed to the lower sales. However, the Group successfully resolved the logistics issues in the second half of the financial year, recouping most of the sales lost. In the calendar year 2018, VTech maintained its position as the number one infant and toddler toy manufacturer in France, the UK and Germany[4]. 

In standalone products, sales of VTech branded products were down across the board owing to the tough market conditions and the logistics issues. Sales of LeapFrog branded products remained stable, however. During the financial year 2019, LeapBuilders^®/BlaBla Blocks^®[5], a brand new range of interactive building sets, was launched in the Group's major European markets. The launch marked VTech's expansion into the building set category.

In platform products, sales were lower for both brands. VTech saw higher sales of Kidizoom Smartwatches, augmented by the launch of the updated version of Touch and Learn Activity Desk^™. Continued growth in LeapFrog reading systems was supported by the launch of LeapStart 3D in the UK market. These gains, however, were insufficient to compensate for lower sales of KidiCom Max^™ and children's educational tablets. 

The Group's ELPs gained many key industry awards in the UK and continental Europe during the financial year 2019. The Kidi line of products was named "Top Selling Youth Electronics Property in Europe (EU7) in 2018" by NPD. In the UK, Myla the Magical Make-Up Unicorn^™ was among the "Top Toys for Christmas" at Argos. In France, VTech ELPs won three "2018 Grand Prix du Jouet" awards from La Revue du Jouet magazine, while BlaBla Blocks Alphabet House was named "Toy of the Year Award 2018" in the category of 0 - 3 years by the Dutch Toy Association.

Revenue from TEL products in Europe decreased by 9.8% to US$119.7 million as sales of residential phones, commercial phones and other telecommunication products decreased.

Residential phones saw sales decline as the fixed line telephone market contracted further. Commercial phones and other telecommunication products had mixed results. VoIP phones continued to expand, supported by a positive reception from customers for the new series of products under the Snom brand. Meanwhile, sales of hotel phones were stable. Other telecommunication products, namely baby monitors, CAT-iq (Cordless Advanced Technology -- internet and quality) handsets and integrated access devices (IADs) saw sales declines. A major customer reducing orders led to a sales decrease in baby monitors. Lower sales of existing customers resulted in declining sales for CAT-iq handsets. Sales of IADs decreased due to a reduction in orders by a customer.

CMS revenue in Europe increased by 18.8% to US$419.7 million. Growth was seen across the board, driven by higher sales of hearables, professional audio equipment, industrial products, home appliances and communication products. The growth in hearables was strong, driven by market share gains as the Group took over orders from competitors. It was also supported by new product launches and good sell-through of products by existing customers. Professional audio equipment was boosted by increased orders, as existing customers launched new products which were well-received by the market. The shift towards smart homes continued to benefit the industrial products category. There were more orders for internet-connected smart thermostats and air-conditioning controls. The growth in the UK was buoyed by the introduction of a new generation of smart meters. In home appliances, growth was driven by increased demand for electric ovens in Italy and market share gains by a major customer in Russia. Higher sales of communication products were driven by more orders for network routers from an existing customer.

Asia Pacific

Group revenue in Asia Pacific increased by 26.1% to US$248.6 million in the financial year 2019. Higher sales of ELPs and CMS offset lower sales of TEL products. Asia Pacific represented 11.5% of Group revenue.

Revenue from ELPs in Asia Pacific rose by 12.9% to US$81.2 million, as growth continued in mainland China and Australia. Higher sales of LeapFrog branded products in other Asia Pacific markets also supported the overall growth. In mainland China, the increase in revenues resulted from continued sales increases for infant and toddler products, new product launches and channel expansion. Among the new items introduced, the new KidiSchool line, which was introduced to target the early education segment, was especially well received. Higher penetration among maternity-infant-child specialty retailers and e-commerce retailers also contributed to growth. In addition, the Group benefited from the continued expansion of Toys"R"Us in the country. In the financial year 2019, VTech was given a "2018 Vendor of the Year" award by Toys"R"Us in recognition of the successful collaboration between VTech and the retailer in mainland China. In Australia, sales continued to grow despite the closure of Toys"R"Us in the country. Higher sales were seen in both VTech and LeapFrog products, buoyed by broader listings and a focus on improving channel management. The VTech branded First Steps^™ Baby Walker was named "Infant/Preschool Toy of the Year 2018" by the Australian Toy Association.

TEL products revenue in Asia Pacific decreased by 19.9% to US$35.4 million. Lower sales in Japan, Australia and Hong Kong offset growth in Malaysia. In Japan, sales declined owing to reduced shipment of cordless phones to a customer who faced financial problems. In Australia, the continued contraction of the fixed-line telephone market led to lower sales of cordless phones, offsetting growth in baby monitors. Hong Kong saw sales decrease on declines in demand for cordless phones and lower orders for IADs. In contrast to these markets, Malaysia experienced growth as VTech became a key supplier for cordless phones to a major local telephone company.

CMS revenue in Asia Pacific grew by 63.0% to US$132.0 million, led by higher sales of professional audio equipment, medical and health products and home appliances. This offset lower sales of communication products and hearables. Professional audio equipment was boosted by the addition of sales from the DJ equipment business, following completion of the acquisition of the manufacturing facilities in Malaysia from Pioneer Corporation in August 2018. This resulted in a full six-month sales contribution being consolidated in the second half of the financial year 2019. The growth in home appliances was a result of additional revenue generated by one new customer. Medical and health products continued to benefit from higher orders for diagnostic ultrasound systems. In contrast to this growth, sales of communication products declined on reduced orders for marine radios, while hearables were affected by keen competition in the wireless headsets market.

Other Regions

Group revenue in Other Regions, namely Latin America, the Middle East and Africa, fell by 16.3% to US$35.9 million in the financial year 2019. Lower sales of TEL products and ELPs offset higher sales of CMS. Other Regions accounted for 1.7% of Group revenue.

ELPs revenue in Other Regions decreased by 7.1% to US$13.0 million, with higher sales in Latin America unable to compensate for lower sales in the Middle East and Africa.

TEL products revenue in Other Regions declined by 21.9% to US$21.7 million, with lower sales in Latin America, the Middle East and Africa.

CMS revenue in Other Regions was US$1.2 million in the financial year 2019, as compared to US$1.1 million in the previous financial year.

Outlook

Group revenue is difficult to gauge for the financial year 2020, as new tariffs may potentially be applied to practically all Chinese imports. VTech is now assessing the impact and taking steps to mitigate it, which includes expanding our newly acquired production facilities in Malaysia.

Meanwhile, the pressure on materials prices is forecast to abate and labour costs to be stable in this financial year, which are positive to the gross margin.

In ELPs, the Group aims to strengthen its market leadership in North America and Europe through new product launches. For standalone products, this will be led by the expansion of core learning products under both the VTech and LeapFrog brands. In North America, VTech will begin to sell its first robotics toy, Myla the Magical Unicorn^™, which was introduced in the Group's key European markets last year. In the LeapFrog brand, LeapBuilders will be introduced in the US, following its positive reception already in Europe. Platform products will see several key items launched in the financial year 2020. The LeapFrog brand will introduce RockIt Twist^™, a brand new handheld gaming product targeting children aged between four and eight. The LeapStart range will be strengthened by the addition of LeapStart Go. A newly designed version of KidiBuzz/KidiCom Max, adding augmented reality games and live face-tracking photo filters, will be introduced in the US and UK to boost sales of the VTech range. Continued growth in Australia and mainland China will support higher sales in Asia Pacific.

For TEL products, the core strategy is to stabilise revenue through more new product introductions. Sales of commercial phones and other telecommunication products are forecast to increase. The roll-out of the new product line under the Snom brand in the financial year 2019 has laid the groundwork for higher sales of VoIP phones. These models will soon be joined by a new cordless conference phone with wireless microphones. The momentum in headsets will continue as more products are launched, while further growth in hotel phones will be supported by the addition of customers in Macau and New Zealand. Sales of baby monitors, CAT-iq handsets and IADs will benefit from new product launches. In residential phones, the decline in sales is expected to slow as VTech recoups some lost market share in the US and becomes the sole supplier to some key retail customers.

CMS is on track for an eighteenth consecutive year of growth, subject to further trade developments between US and China. Professional audio equipment will be boosted by rising sales at existing customers and the contribution of the new DJ equipment business. The strong momentum in hearables will continue, as a major customer will launch a new generation of headsets and transfer the production to VTech. Industrial products will also grow. Orders for internet-connected smart thermostats and smart air-conditioning controls are expected to rise, as the existing customer's complete product line enters full production. The medical and health products business will benefit from the decision by a customer to let VTech manufacture the finished products of its hearing aids.

A number of new initiatives will help CMS to expand revenue and lower costs. An NPI (New Product Introduction) Centre is being set up within the Group's existing research and development (R&D) facilities in Shenzhen, with the aim of capturing business opportunities from start-up companies. The Group is also taking steps to enhance supplier management. This will secure the best level of services from suppliers during critical supply situations.

"VTech has the dedicated teams globally, solid R&D capabilities and strong balance sheet to cope with the current uncertainties and deliver increasing 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 largest manufacturer of residential phones in the US. 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, 20 May 2019 (HKT), the video archive of the FY2019 annual results announcement can be accessed through VTech website via this link: https://www.vtech.com/en/investors/financial-briefings/.

This release is issued by VTech Holdings Limited through Golin. For further information, please contact:

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