Record profit and higher dividend

21 June 2006

• Group revenue increased by 17.9% to US$1,204.6 million
• Profit attributable to shareholders sets a new record of US$128.8 million
• Final dividend of US26.0 cents per share, total dividend per share for the year up 146.2%
• Strong all-round growth at electronic learning products business
• Outperformance by contract manufacturing services business
• Turnaround in profitability at telecommunication products business with continuous growth in Europe
• Well positioned for further growth

Hong Kong – VTech Holdings Ltd (SEHK: 303; London SE: VTH; ADR: VTKHY) today announced its results for the year ended 31 March 2006, reporting the highest profit in its nearly 30 years of operations.

Revenue for the Group increased by 17.9% over the financial year 2005 to US$1,204.6 million. Profit attributable to shareholders increased by 126.4% to US$128.8 million. Earnings per share increased by 117.9% to US54.9 cents. In light of the continued increase in profitability, together with the Group’s very strong balance sheet, the Board of Directors has proposed a final dividend of US26.0 cents, giving a total dividend for the year of US32.0 cents per ordinary share, as compared to US13.0 cents for the financial year 2005, representing an increase of 146.2%.

“I am pleased to report that the Group has delivered remarkable results in the financial year 2006. Indeed, profit attributable to shareholders was the highest we have achieved in our nearly 30 years of operations. This superb achievement was supported by the record performances of our Electronic Learning Products (ELP) and Contract Manufacturing Services (CMS) businesses. Our success in turning around the profitability at the Telecommunication Products (TEL) business also contributed to the excellent performance,” said Mr. Allan Wong, Chairman and Group CEO of VTech Holdings Limited.

Turnaround in Profitability at TEL

During the financial year 2006, the TEL business continued to execute its plan to rationalise its US operations. As a result of the successful implementation, the business returned to profitability, although revenue declined slightly by 2.9% over the financial year 2005 to US$594.7 million. For the financial year 2006, the business accounted for 49.4% of Group revenue, as compared to 59.9% in the previous financial year.

Revenue in North America fell by 14.3% to US$407.3 million, accounting for 68.5% of the total TEL revenue. The fall in revenue was due to the planned reduction in sales by management as the business streamlined its product line and exited unprofitable businesses.

Profitability of the US business was, however, turned around as the Group continued to re-engineer all its processes to enhance efficiency. While re-engineering the operations, a dedicated effort was made to develop a revamped product line much more in tune with the needs of US customers and consumers. This entirely new product line-up has gradually been appearing on the shelves since April 2006.

In Europe, the business achieved continuous growth. Revenue from the region rose by 49.4% to US$168.5 million, as the Group leveraged its relationships with its ODM customers, who are major fixed line telephone operators and leading brand names. The business also made good progress in entering in new markets such as Scandinavia and Eastern Europe. In the financial year 2006, the European business accounted for 28.3% of the total TEL revenue.

Strong All-Round Growth at ELP

The ELP business achieved a record performance in the financial year 2006. Revenue increased by 60.7% over the financial year 2005 to US$451.7 million, setting a new record. The expanding V.Smile range continued to show strong momentum while the traditional ELP also posted solid growth. During the financial year, the ELP business accounted for 37.5% of Group revenue.

The revenue increase was apparent in all markets. Revenue from North America rose by 101.0% to US$217.7 million, while that from Europe increased by 34.3% to US$214.8 million. The growth was attributable to the continuous strong momentum of the V.Smile range, which was supported by effective and well targeted marketing and sales promotions, ranging from TV commercials to promotional campaigns in partnership with retailers.

In the financial year 2006, the V.Smile range benefited from its first full year of sales and its second year in the market. Higher console sales together with the introduction of V.Smile Pocket, the handheld version of V.Smile in 2005, led to a greater installed base and generated higher software sales during the financial year.

VTech is committed to ensuring the longevity of the V.Smile range. During the financial year 2006, significant developments were undertaken in software, accessories and platforms. 10 new Smartridges were added to the software library, which will grow to 33 titles in all by the end of the calendar year 2006. More accessories such as Art Studio and Jammin’ Gym Class were developed to enhance the value of the current platforms. Furthermore, the launch of V.Smile Baby and V.Flash are widening the target age range of V.Smile platform from nine months to the pre-teens years. These products are part of the Group’s strategy to sustain the growth momentum of V.Smile.

Although V.Smile has undoubtedly been the centre of attention since its launch, the Group is also committed to enhancing its range of traditional ELPs, which still accounted for a significant part of the total ELP revenue. In early 2006, over 30 new products in the traditional range were unveiled. As educational toys remains a growing segment in the US toys market, these traditional products give VTech further opportunities to leverage its strengths in product design and technology adaptation to grow revenue and market share.

Record Revenue at CMS

The CMS business again delivered good results in the financial year 2006, with a second record year of revenue, which rose by 23.2% over the financial year 2005 to US$158.2 million, representing 13.1% of Group revenue, up from 12.6% in the previous financial year.

The solid performance in part reflects the positive state of the overall electronic manufacturing services (EMS) market, which expanded by approximately 10% in the calendar year 2005. The rise in revenue was, however, also driven by increased orders from existing customers in all segments, as well as new accounts, including those for LED lighting systems and handheld wireless audio-visual devices for use on site at sports events.

Europe continued to be the largest market of the CMS business, accounting for 47.1% of the total CMS revenue, followed by the United States at 29.5% and Asia Pacific at 23.4%. By product category, switching mode power supplies and professional audio equipment accounted for 28.9% and 29.9% of the total CMS revenue respectively, followed by home appliances at 16.1% and wireless products at 7.8%.

The business has retained its focus on small and medium sized customers to which it provides a highly flexible and reliable service that runs from product design to full production. During the financial year 2006, the business was successful in improving its cost structure, enabling it to maintain stable margins. A new organisational structure was also introduced with the aim of tightening customer relationships.

Outlook

The remarkable results of VTech in the financial year 2006 reflect the Group’s success in executing its strategies well.

Looking ahead, in its TEL business, having restored profitability, the Group is targeting higher revenue. Growth in Europe is expected to continue as the Group gains market share by leveraging its core competences in manufacturing and technology. In the second half of the calendar year 2006, the Group will start to deliver VoIP cordless phones to its ODM customers in Europe, establishing a position in a market of a longer term potential.

In the United States, the Group is regaining shelf space with the revamped product lines. The new product line-up shows a marked improvement in industrial design and cost, which enables it to meet customers’ expectations and consumers’ needs better. A series of next-generation cordless phones will be launched in spring 2007, enabling the Group to continue to build its presence in the VoIP cordless telephony market.

For the ELP business, growth is expected to continue by building on the Group's leadership position in Europe and the growing presence in North America. The Group will strengthen its leadership position in the educational video game category by investing in R&D to ensure a robust pipeline of product innovations. Products will continue to be supported by well executed advertising, PR, trade promotion and point of sales displays. At the same time, the Group will ensure the expansion is well managed and that costs are kept under control.

The global EMS industry is forecast to remain on an uptrend and the CMS business is expected to grow with the industry. The Group is taking great care to manage growth at this business, devoting considerable effort to maintaining the exceptional levels of quality and service which are fundamental to its success. The R&D service offered to CMS customers is expected to drive further growth for the business.

This overall optimistic outlook is tempered with caution as rising interest rates may affect the global economy and dampen consumer confidence. Furthermore, VTech’s success in the ELP and CMS businesses, together with the growth of the TEL business in Europe, is likely to invite more competition. The Group will therefore need to ensure that strategies are executed well.

All of the Group's businesses did well in countering the pressure of rising production costs in the financial year 2006. High oil prices resulted in high prices for plastics, an important raw material for the Group. Labour costs increased in southern China, the Group’s manufacturing base, following the raising of the minimum wage and the appreciation of the Renminbi against the US dollar.

It is likely that these trends will continue and hence impose further cost pressures on the Group during the financial year 2007, as witnessed by recent rises in component prices. The Group will therefore need to make further progress in cost control in order to achieve sustainable growth.

In this regard, the new plant at Qingyuan, mainland China, is expected to deliver cost savings over time. The facility commenced operations in November 2005 and it will allow the Group to transfer certain operations, particularly the labour and electricity intensive plastics production, to this lower cost environment.

“Our results for the financial year 2006 reflect the Group’s success in executing its strategies well. Going forward, we will continue to focus on our core businesses, identify opportunities in our chosen market segments and execute our strategies carefully. I believe the Group is in very good shape and well poised for further growth in the financial year 2007, with all initiatives on track,” said Mr. Wong.

About VTech
VTech is the 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.