Profit boosted by higher revenue and operational improvement

22 November 2006

• Group revenue increased by 27.1% to US$713.8 million
• Profit attributable to shareholders rose by 42.1% to US$65.8 million
• Increased interim dividend of US9.0 cents per ordinary share
• Special 30th anniversary dividend of US30.0 cents per ordinary share
• Rebound in US market for telecommunication products business
• Broad based growth at the electronic learning products business
• Rapid expansion at the contract manufacturing services business

Hong Kong -- VTech Holdings Ltd (HKSE: 303; LSE: VTH; ADR: VTKHY) today announced its interim results for the six months ended 30th September 2006, showing a solid increase in revenue and profit. Group revenue increased by 27.1% over the same period of the financial year 2006 to US$713.8 million. Despite higher raw material prices and labour costs having a negative impact on the Group’s gross margin, profit attributable to shareholders rose by 42.1% to US$65.8 million. Earnings per share increased by 37.3% to US27.6 cents, compared to US20.1 cents in the corresponding period last year.

In view of the continued growth in profitability and the Group’s solid financial position, the Board of Directors has declared an increased interim dividend of US9.0 cents per ordinary share, together with a special dividend of US30.0 cents per ordinary share to commemorate VTech’s 30th anniversary.

“VTech posted a solid increase in both revenue and profit for the first half of the financial year 2007,” said Mr. Allan Wong, Chairman and Group CEO of VTech Holdings Ltd. “The drivers were a strong increase in revenue at the contract manufacturing services (CMS) business, continued across-the-board growth at the electronic learning products (ELP) business, and a rebound in the US market for the telecommunication products (TEL) business, following the successful restructuring of the past two years.”

Rebound in the US for TEL

Revenue at the TEL business rose 21.0% over the same period last year to US$359.3 million. During the period, the business accounted for 50.3% of Group revenue.

Revenue in North America increased by 38.2% to US$289.9 million. The growth was mainly driven by strong sales of 5.8GHz cordless phones. The recovery in the US operations of the business that began in the financial year 2006 has thus continued on track in the first half of the financial year 2007. It follows a comprehensive restructuring programme launched two years ago, designed to improve the competitiveness of the US business through better product design and enhanced supply chain management.

The resulting range of new products, which began appearing on the shelves in the first quarter of the financial year 2007, has been well received by retailers and achieved good sell-through to end users. In consequence, shelf space has increased, sales volumes have risen and the Group has increased its share of the US cordless phone market, where VTech is now in the leadership position.

In Europe, however, the market has been weaker than expected and this has resulted in excess inventory in the market, a situation affecting all suppliers. As a result, although VTech was able to gain new customers and maintain its market share during the period, our TEL sales to the region declined 23.1% over the same period last year to US$60.5 million, following several years of robust growth. As part of our longer term expansion plans for the region, the business started to ship Voice over Internet Protocol (VoIP) phones to European customers in September 2006.

Broad Based Growth at ELP

The ELP business performed well in the past two years on the back of the outstanding performance of the V.Smile range and increasing efforts in marketing and promotion. During the first half of the financial year 2007, revenue at the ELP business increased by 15.1% to US$223.2 million, representing 31.3% of Group revenue.

Growth was driven by increasing sales of all product ranges and the successful launch of the V.Smile™ Baby Infant Development System (V.Smile Baby). The basic V.Smile console is now in its third year and sales were in line with management expectations. Sales of software continued to rise and by the end of the calendar year 2006, 10 new titles will have been added to the library, with additional Spanish language versions. The ratio of cartridges to consoles also increased.

The range has been extended through the introduction of not only V.Smile Baby, aimed at children from nine months to three years old, but also V.Flash, which targets preteenagers. Sales of V.Smile Baby have been particularly encouraging, confirming the Group’s thesis that V.Smile is a product platform that can be developed long into the future. In September, V.Smile Baby was named to the Toys "R" Us 2006 "Hot Toy" list, while in October, V.Flash was named one of the Top 12 Toys of Christmas and Holiday 2006 by Wal-Mart.

The traditional ELPs also sold well and a number of new products were launched, including Nitro Vision and SmartVille, a new line of interactive animal character play sets for toddlers. Pink Nitro Notebook was included in the Toys “R” Us "Fabulous 15 The Best of the Holiday Season" list.

Geographically, revenue from North America rose by 9.9% to US$101.9 million as the business continued to gain shelf space. In Europe, revenue grew by 14.8% to US$101.7 million and VTech maintained its dominant position in the region. Revenue from Asia Pacific and other regions such as Mexico also recorded a continued growth.

Rapid Expansion of CMS

The CMS business achieved an 85.7% increase in revenue to US$131.3 million. As a result, the business accounted for 18.4% of Group revenue and its performance once again far exceeded that of the global Electronic Manufacturing Services industry, which grew by some 14%* during the first half of the calendar year 2006.

* Source: Manufacturing Market Insider – Oct 2006 issue

The growth in revenue came across the board, but was primarily supported by strong demand from existing customers in the areas of switching mode power supplies and professional audio equipment, as they attracted significantly more business.

VTech competed strongly on both price and service. Despite the surge in production volumes and effective cost controls, service levels remained high. In the first half of the financial year 2007, the business was given a “Partner of the Year 2006” award by a professional audio equipment customer, in recognition of VTech’s outstanding service and level of support given to the company’s business development.

Europe remained the leading source of revenue for the CMS business, representing 51.1% of the total CMS revenue, followed by North America at 33.8% and Asia Pacific at 15.0%.

Cautiously Optimistic Outlook

Growth in our businesses appears set to continue in the second half of the financial year 2007. This is, however, dependent on the economic situation in the United States.

The Group also remains mindful of factors that could affect profitability. The Renminbi looks set to rise further, as do wage levels in southern China, our manufacturing base. High raw materials and components prices remain a factor, although they are now stabilising. Hence, throughout its businesses, in addition to seeking higher revenue, the Group will work further to mitigate the cost pressure through improving manufacturing efficiency, better cost control and economies of scale during the second half of the financial year 2007.

The improvement in the TEL business in the United States is expected to continue. VTech is gaining more shelf space and the sell through data thus far suggests continued growth. The new range of products for the calendar year 2007, which includes "next generation" cordless phones, has been unveiled to retail customers and was favourably received. In Europe, however, the market is likely to remain soft and sales growth is not expected in the second half of the financial year 2007.

The ELP business is expected to perform well in the second half. V.Flash came onto the shelves in September and is expected to contribute to incremental sales growth. New print and TV based advertising campaigns have been started in the second half and will support the sales push for all products during the holiday season. The Group plans to introduce a second generation V.Smile console in the second half of calendar year 2007.

The factors that boosted revenue at the CMS business during the first half of the financial year 2007 remain in place and hence continued growth is expected in the second half. At the same time, the business is revitalising its sales office in Japan, a market of much untapped potential for the business.

To cope with the growth in demand for its CMS services, the Group will add a new factory building at its existing plant in Liaobu, Dongguan, increasing the size of the CMS manufacturing facilities by 50%. The facility is scheduled to open in April 2007.

“We are cautiously optimistic that the growth in our businesses will continue, and that each of our businesses is well placed to take advantage of market opportunities,” said Mr.Wong.

About VTech
VTech is one of the world’s largest suppliers of corded and cordless telephones and a leading supplier of electronic learning products. It also provides highly sought-after contract manufacturing services. Founded in 1976, the Group’s mission is to be the most cost effective designer and manufacturer of innovative, high quality consumer electronics products and to distribute them to markets worldwide in the most efficient manner.

For further information, please contact:

Grace Pang
VTech Holdings Ltd
(852) 2680-1000 (office)
(852) 2680-1788 (fax)
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VTech representative in HK
Nick Bradbury, GolinHarris
(852) 2522-6475 (office)
(852) 2810-4780 (fax)
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Kennes Young, GolinHarris
(852) 2522-6475 (office)
(852) 2810-4780 (fax)
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VTech representative in the US
John Columbus, GolinHarris
(212) 373 6037 (office)
(212) 373 6001 (fax)
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