VTech Announces 2010/2011 Interim Results
- Group revenue increased by 10.3% to US$813.9 million
- Profit attributable to shareholders of the Company rose 2.3% to US$93.6 million
- Strong balance sheet, with net cash of US$181.1 million
- Interim dividend of US16.0 cents per ordinary share, same as the first half of the last financial year
Hong Kong – VTech Holdings Ltd (HKSE: 303; ADR: VTKHY) today announced its results for the six months ended 30 September 2010, reporting growth in revenue and profit despite a challenging environment.
Group revenue for the period increased by 10.3% to US$813.9 million. Growth was driven by Europe, Asia Pacific and other regions. During the period, all product lines achieved sales increases in Europe. VTech was also able to make further inroads with its TEL products and CMS in Asia Pacific and other regions, where the Group is actively expanding.
Profit attributable to shareholders of the Company rose 2.3% to US$93.6 million. Net profit margin fell from 12.4% to 11.5% owing to change in product mix, higher cost of materials, rising labour costs and Renminbi appreciation.
Basic earnings per share increased from US37.2 cents in the first half of the financial year 2010 to US37.8 cents. The Board of Directors has declared an interim dividend of US16.0 cents per ordinary share, which was the same as the dividend paid in the corresponding period last year.
"VTech turned in a solid performance in the first half of the financial year 2011. Despite economic uncertainty and rising costs, both revenue and profit increased," said Mr. Allan Wong, Chairman and Group CEO of VTech Holdings Limited. "Sales were especially strong in Europe, where all product lines saw increases. In North America, our electronic learning products (ELPs) are seeing the benefit of the new platform products we have introduced, while contract manufacturing services (CMS) were boosted by continued gains in professional audio equipment. In Asia Pacific, we doubled sales of our telecommunication (TEL) products."
Rising costs posed a major challenge to the Group in the first half of the financial year 2011. Minimum wage in China has increased by a double digit rate since the middle of the year, while the Renminbi has recently begun to strengthen against the US dollar. Price increases for plastics and other raw materials have led to higher overall cost of materials. Meanwhile, freight costs rose sharply during the period. Furthermore, the launch of new ELPs has necessitated higher spending on advertising and promotion. All these factors have resulted in pressure on margins.
Revenue in North America decreased by 4.6% to US$421.6 million in the first half of the financial year 2011. The decline was mainly due to lower sales of TEL products, which offset the growth in ELPs and CMS. North America remains the largest market for the Group, accounting for 51.8% of Group revenue.
During the period, sales of TEL products declined by 23.4% to US$221.8 million. This partly reflects comparison with a very strong first half in the last financial year, when one of VTech’s major competitors exited the market, and another suffered a delivery problem. Poor consumer sentiment also contributed to lower sales of the Group's cordless telephones. Nevertheless, VTech maintains the number one position in the US corded and cordless phone market.
Since September 2009, the Group has started to introduce small to medium sized business (SMB) telephony systems in the US market. They are being sold through office superstores and value added resellers. The number of SMB partners is steadily increasing, although the sales contribution in this first half has been small.
ELP sales in North America increased by 14.6% to US$118.7 million in the first half, with growth driven by the launch of new platform and standalone products. The two new platform products, V.Reader and MobiGo, have been on retail shelves since June 2010. V.Reader is the world's first interactive e-reading system for children aged between three and seven years. MobiGo is a handheld educational gaming system with touch control for children aged between three and eight years. Retail performance to-date for both products has been good.
Standalone products continued to sell well. As VTech introduced new items to the market and expanded shelf space for infant and pre-school products, there has been healthy growth in these categories. The new line of infant bath toys has been selling especially well.
CMS posted the strongest growth in North America. Sales rose by 66.2% during the first half to US$81.1 million, despite the relatively weak economy. Professional audio equipment was a major growth driver. Customers are giving VTech additional business as a result of its high quality products and excellent services. There has been continued growth in commercial solid-state lighting, an emerging business area.
Revenue in Europe was boosted by gains in all three product lines. Sales increased by 32.4% over the first half of the previous financial year to US$298.6 million. Europe accounted for 36.7% of Group revenue.
Sales of the Group's TEL products in Europe grew by 44.9% to US$111.4 million in the first half, primarily due to restocking by customers and gains in market share. Despite the uncertainty of the European economy, sales growth in the UK, France and Germany was particularly strong, with correspondingly good sell-through. Since February 2010, VTech has been shipping integrated access devices to customers and sales are steadily increasing.
ELP sales in Europe increased by 13.4% to US$108.2 million in the first half. Growth was driven mainly by standalone products. As MobiGo only started to hit retail shelves in late August, while V.Reader (which is called Storio in Europe) is only launched in the UK this financial year, their contributions to sales in this period have been limited.
Despite weakness in the economy, the UK proved to be the strongest performing market. The Kidizoom range remained especially popular. The Kidizoom VideoCam was selected as one of the twelve "Dream Toys" for Christmas by the UK's Toy Retailers Association. In contrast, sales in France and Germany started slow during the period.
For CMS, the sales in Europe were up by 48.2% to US$79.0 million when compared with the first half of the previous financial year. Professional audio equipment was again very strong, with increased orders from existing customers. VTech also benefited from a new product launch with one of the wireless products customers. Furthermore, there was also solid growth in home appliances and switching mode power supplies.
Revenue in Asia Pacific rose 20.2% as compared with the first half of the previous financial year, to US$51.1 million. This market accounted for 6.3% of Group revenue.
Sales of TEL products increased by 100.0% during this period, to US$16.2 million. This was partly driven by sales increases in Australia, where we signed a licensing agreement with Telstra in June 2009. VTech is now the direct supplier of Telstra branded fixed line telephones. The Group also successfully expanded its TEL products into the Japanese market, with the acquisition of the first customer.
Sales of ELPs in Asia Pacific declined by 4.9% to US$9.8 million in the first half. During the period, retailers in some countries sought to work through their inventory, resulting in lower orders. In China, VTech's first ELP designed specifically for the market was launched in September. It is a curriculum based pen-reading system with downloadable textbook content. The product has been well received. As the Group is currently building up the distribution channels, sales to-date have been very limited.
CMS achieved modest growth in Asia Pacific in the first half, where Japan remained the dominant market. Revenue from the region increased by 4.1% to US$25.1 million, driven by medical equipment and LED light bulbs.
Revenue from other regions in the first half of the financial year 2011 increased by 51.6% to US$42.6 million. This accounted for 5.2% of Group revenue. The increase was attributable to strong growth in TEL products, as the Group sold more to the Middle East and Latin America.
The Group faces an environment that is unusually uncertain, which makes forecasting for the second half of the financial year difficult. In most of the Group's major markets, unemployment remains high, governments are cutting budgets and consumer sentiment is subdued. Nonetheless, management is cautiously optimistic of achieving revenue growth in the second half, as we expect good momentum in ELPs and CMS to continue. Profitability, however, will be under pressure as rising costs will further affect margins.
The Group is taking very active measures to counteract cost increases. To reduce the reliance on labour, production processes are being automated at a faster pace. In addition, product design efforts have been intensified to optimise material and manufacturing costs.
To mitigate the impact of Renminbi appreciation and to capture the huge potential of the Chinese market, the Group is stepping up its efforts to increase sales in China, a strategy that provides a natural currency hedge. As mentioned earlier, our first ELP tailored for the China market has been launched during the first half of this financial year.
The Group will continue to exercise tight control over operating costs to rein in further increases in freight and marketing expenses. Overall, VTech's economies of scale will ensure the Group remains cost competitive in this challenging operating environment, positioning VTech well for market share gains.
North America and Europe
The performance of TEL products in North America is expected to improve in the second half, as a new category of products, hotel phones, starts to contribute. The existing line-up of SMB phones will be expanded with new products that offer enhanced features, while more value added resellers will be added to the network to drive sales.
In Europe, TEL products are expected to continue to perform, as the Group has seen good sell-through with customers in the major European markets. The Group aims to widen its market leadership through further product innovation. VTech is among the first companies to introduce products using CAT-iq 2.0 technology, an enhancement to DECT that allows cordless phones to be used for VoIP and other Internet-based services such as streaming audio and video.
For ELPs in North America, the solid momentum of the new platform and standalone products is expected to continue. In the US, both MobiGo and V.Reader have been featured in major retailer holiday catalogues. V.Reader has just been selected as one of the "Top Toys" this holiday season by Walmart. However, the US economy is still highly uncertain, and retailers are maintaining very low inventories. Furthermore, competition among platform products is unusually intense this year. The Group is keeping a watchful eye and working diligently to ensure good sell-through in the upcoming holiday season.
In Europe, the Group's ELP sales in the UK are expected to remain strong, as the market is responding well to the products recently introduced. France is expected to pick up following a sluggish first half, and modest growth is expected from a low base in Spain and the Benelux countries.
CMS should continue to outperform the global EMS market and achieve growth in North America and Europe. Professional audio equipment and commercial solid state lighting will lead the way in North America, as in the first half. In Europe, on top of the already strong power supplies business, further growth will be driven by two new product areas, electric vehicle chargers and solar power inverters.
Asia Pacific and Other Regions
In Asia Pacific and other regions, TEL products should perform well as the Group enjoys good momentum in many of these markets. Expansion in China in the final quarter of this financial year will add to revenue in the next financial year.
For ELPs, as retailers in these regions work through their inventory, growth is expected to resume in the second half. Sales to China should benefit from the expanded distribution channels, as well as the launch of dedicated products.
At CMS, the Group will continue to step up efforts to open up the Japanese market, as the strength of the Japanese yen may induce more medium sized companies to seek outsourcing with a greater sense of urgency. This could offer considerable potential for VTech to acquire new orders and new customers.
"The past six months have not been easy for VTech. Margins contracted owing to rising costs. We faced fierce competition for our ELPs and declining sales of TEL products in the US market. It appears likely that costs will rise further for the remainder of the financial year, making improvement in margins challenging. Furthermore, the present volatility in exchange rates between currencies is expected to continue. Despite this, VTech is in very good shape. Our excellent R&D, strong balance sheet, market leadership position and efficient operations continue to position us strongly to deliver better returns to shareholders going forward," said Mr. Wong.
VTech is the world's largest manufacturer of 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.