VTech Revenue Rises on Performance of ELPs and CMS

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

Highlights:

• 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

"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.

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.

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.

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