Page 3 - VTech Holdings Limited 2015/2016 Interim Report

In the first six months of the financial year 2016, VTech continued to make progress in its core businesses, despite strong foreign exchange headwinds. In electronic learning products (ELPs), the business in North America returned to growth while sales in the Asia Pacific region rose sharply. Telecommunication (TEL) products continued
to achieve expansion in commercial phones and other telecommunication products. Contract manufacturing services (CMS) turned in a good performance, with growth that continues to outpace the global electronic manufacturing services industry1.
Results and Dividend
Group revenue for the six months ended 30 September 2015 rose by 3.0% over the same period of the previous financial year to US$928.1 million. This was primarily due to higher revenue in North America, Europe and Other Regions, offsetting lower revenue in Asia Pacific. Despite the increase, the strong US dollar depressed the Group’s reported revenue during the period.
Profit attributable to shareholders of the Company decreased by 2.5% to US$100.1 million. The fall in profit was mainly attributable to the decline in gross margin, which resulted from unfavourable currency movements and a change
in product mix. Basic earnings per share decreased by 2.4% to US39.9 cents, compared to US40.9 cents in the corresponding period last year.
The Board has declared an interim dividend of US17.0 cents per ordinary share, which is the same as the dividend paid in the corresponding period last year.
Costs and Operations
Although material prices decreased slightly over the same period last year, cost of materials rose owing to a change in product mix. Manufacturing overhead also increased,
as wages in mainland China continued to rise and the Group added manufacturing capacity. Despite the strong headwinds from foreign exchange movements and wage inflation, VTech was able to reduce the workforce through automation and process improvement, resulting in a stable direct labour cost. Gross margin declined over the same period last year. This was mainly due to the depreciation of currencies against the US dollar, the change in product mix and the higher manufacturing overhead.
1 Source: Manufacturing Market Insider, September 2015
2 Source: NPD Group, Retail Tracking Service. Ranking based on total retail sales
in the combined toy categories of infant electronic learning, other infant toys, bath toys, electronic entertainment (excluding tablets) and preschool electronic learning for the calendar year ending September 2015
Segment Results
North America
Group revenue in North America in the first six months of the financial year 2016 grew by 2.4% to US$461.6 million, supported by higher sales of ELPs and CMS. North America is the Group’s largest market, accounting for 49.7% of Group revenue.
ELPs revenue in North America rose by 5.3% to US$148.7 million, as higher sales of standalone products offset lower sales of platform products. VTech retained its position as the number one manufacturer in the Infant and Preschool Electronic Learning category in the US2.
The growth of standalone products was driven by sales increases in infant products, Go! Go! Smart Wheels® and
Go! Go! Smart Animals®, which offset lower sales of Switch
& Go Dinos® and preschool products. The launch of new products also supported growth, including Kidizoom® Action Cam, Go! Go! Smart Friends®, Baby AmazeTM and FlipsiesTM. Flipsies is a brand new product range of transformable dolls and playsets that feature VTech’s proprietary MagicPointTM and MagicChatTM technologies. It began to sell in the US in August and has allowed the Group to expand into a new category.
Sales of platform products, in contrast, decreased. In August, the second generation of VTech’s smartwatch, Kidizoom Smartwatch DX, hit the shelves in the US and was well received. However, higher sales of the Kidizoom Smartwatch line were unable to compensate for lower sales of InnoTab® educational tablets, which were affected by the continued contraction of the highly competitive children’s tablet market.
VTech ELPs continued to garner prestigious awards in the US during the period. Go! Go! Smart Wheels Ultimate RC Speedway was included in the Toys “R” Us “Hot Toy” list, Walmart’s “Chosen by Kids” list, TTPM’s “Most Wanted” holiday list, as well as The Toy Insider “Hot 20” list of toys. Kidizoom Smartwatch DX made the “Top Tech 12” list of the most forward-thinking and impressive tech-based toys on the market. Kidizoom Action Cam made “Target’s Top Toy List” and “Kmart’s Fab 15”, while Flipsies Sandy’s House & Ocean Cruiser was selected for The Toy Insider’s 10th annual holiday gift guide.
Chairman’s Statement
VTech Holdings Limited 2015/2016 Interim Report 1