VTech Releases 2018/2019 Interim Results

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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 Wong.

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