VTech Announces FY2010 Annual Results

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VTech Announces FY2010 Annual Results

Strong profit growth amid adverse economic conditions
  • Profit attributable to shareholders of the Company grew 44.2% to US$206.5 million
  • Net profit margin expanded by 3.6 percentage points, from 9.9% to 13.5%
  • Group revenue up by 5.8% to US$1,532.3 million
  • Strong balance sheet, with net cash of US$382.6 million
  • Final dividend of US62.0 cents per share, total dividend per share for the year up 47.2%

Hong Kong – VTech Holdings Ltd (HKSE: 303; ADR: VTKHY) today announced its results for the year ended 31 March 2010, reporting strong growth in profit amid adverse economic conditions.

Group revenue for the year ended 31 March 2010 rose by 5.8% over the previous financial year, to US$1,532.3 million. Profit attributable to shareholders of the Company grew strongly, by 44.2%, to US$206.5 million. The proportionally higher profit was mainly attributable to effective spending on advertising and promotions for electronic learning products (ELPs), as well as better foreign exchange risk management. Basic earnings per share increased by 43.1% to US83.7 cents, compared to US58.5 cents in the financial year 2009. The Board of Directors has proposed a final dividend of US62.0 cents per ordinary share. Together with the interim dividend of US16.0 cents per share, this gives a total dividend for the year of US78.0 cents per ordinary share, an increase of 47.2% over the previous financial year.

"We have successfully managed our businesses through the adverse economic conditions, achieving an increase in revenue and a proportionally higher growth in profit," said Mr. Allan Wong, Chairman and Group CEO of VTech Holdings Limited. "Our ability to make further progress across our businesses in the face of very difficult market conditions testifies to the strength of the Group."

Segment Results

North America

North America remains VTech's largest market, representing 57.0% of Group revenue. Despite the most severe downturn in the US economy since World War II, VTech managed to increase revenue by 12.9% to US$872.6 million in the financial year 2010.

Growth was driven by higher sales of telecommunication (TEL) products and contract manufacturing services (CMS). Their revenues rose during the financial year by 34.2% and 7.0% to US$515.2 million and US$122.4 million respectively.

The Group's TEL products continue to lead the market in industrial design, innovative features and competitive pricing. During the financial year, both the VTech and AT&T brands gained further retailer and consumer support against the competition. The core AT&T range, and the opening price point VTech branded DECT 6.0 cordless telephones, sold especially well. Additionally, we have been able to capitalise on the exit of a major competitor towards the end of the calendar year 2008. All these factors contributed to considerable gains in market share for the Group. Our estimated share of the US corded and cordless phone market reached almost 50%.

The Group's first enterprise phone, which sells under the AT&T brand, was launched during the first half of the financial year. VTech offers the only SMB telephony system in the US market to feature optional DECT 6.0 repeaters, which give an unprecedented talk range of up to half a mile. This makes it ideal for use in multi-level buildings, warehouses, restaurants, distribution centres and similar facilities. This product has been well received by our customers and sales have been steadily increasing.

Sales of ELPs, affected by the poor economy in the region, declined by 14.4% to US$235.0 million. Platform products were the main contributor to this revenue decline. As noted at the interim, in view of the unstable economic conditions, the Group had strategically delayed the launch of a major new platform product. The Bugsby Reading System was the only new platform launched. Its retail performance was in line with our expectation.

Standalone products sold well, by contrast, including popular products such as the Tote & Go Laptop™ and Move & Crawl Ball™. The infant category performed especially well. VTech's very strong infant product line up has continued to gain support from retailers, including more shelf space and promotional activities.

A significant new standalone product launch in the financial year 2010 was the Jungle Gym line. This product line combines electronic learning, fun and physical activities. Products in this line are sold outside the traditional learning aisle and have therefore created a new avenue for growth for VTech's ELPs. Within the line, the Bouncing Colour Turtle™ has sold especially well.

CMS saw sales improve sharply in North America in the second half of the financial year, following a decline in the first half. As a result, revenue increased by 7.0% to US$122.4 million. Professional audio equipment, where our reputation continues to grow, saw further sales increases from existing and new customers.


Revenue from Europe declined by 7.3% to US$528.9 million in the financial year 2010, accounting for 34.5% of Group revenue.

VTech sells its TEL products to customers in Europe mainly on an Original Design Manufacturing (ODM) basis. Sales of these TEL products fell by 11.5% to US$171.4 million in the financial year 2010. There was a rebound in the second half as customers began to restock following severe draw downs in inventory, but this was unable to offset the sales decline in the first half. Nevertheless, VTech's market share continued to increase during the financial year.

Co-branded "T-Home/VTech" products based on our exclusive agreement with Deutsche Telekom appeared on the shelves in August 2009 in Germany, with the full product range reaching the shelves in the final quarter of the financial year. The Group's first IAD appeared on the market at the same time. These new products contributed to the rebound in the second half of the financial year 2010.

ELP sales to Europe decreased by 6.5% to US$241.7 million in the financial year 2010. As in North America, declining consumer demand and lower average selling prices depressed sales for the full financial year. Standalone products again fared better than platform products.

In spite of the overall sales decline in this region, ELP sales in the UK and Germany were relatively stable. During the financial year 2010, the Kidizoom and Kidizoom Pro cameras were the top selling toys in Germany and the UK. Furthermore, Kidizoom camera was named Pre-School Toy of the Year 2009 by the Toy Retailers Associations in the UK for the second consecutive year.

Despite a strong pick up in the second half, CMS revenue in Europe declined slightly by 2.0% to US$115.8 million for the full financial year. Demand for switching mode power supplies and wireless products was impacted by the economic contraction in the region. However, we continued to see gains in professional audio equipment as existing customers increased orders.

Asia Pacific and Other Regions

Asia Pacific continued to outperform other markets during the financial year, as the region's economies proved more resilient during the global downturn. Revenue rose by 47.6% to US$81.5 million, accounting for 5.3% of Group revenue.

All product lines achieved sales increases. Sales of TEL products reached US$22.9 million, growing by 59.0% over last year. The rise in revenue was in part due to the agreement signed in June 2009 with a leading Australian telecommunications and information services company Telstra, for which VTech is now its direct supplier of fixed line telephones. For ELPs, sales in the region rose by 23.4%, to US$15.8 million during the financial year.

CMS exhibited similarly strong growth to that of TEL products in Asia Pacific, with sales rising by 52.9% to US$42.8 million. Growth was mainly driven by a customer in the area of solid state lighting. VTech worked with the customer to develop and produce its new range of LED light bulbs for home use and played a significant role in launching the new products on the market on time.

Sales from other regions were flat, with revenue for the financial year decreasing slightly, by 0.8%, to US$49.3 million. This accounted for 3.2% of Group revenue. The decrease was attributable to sales declines in ELPs. Sales of TEL products grew by 13.9% to US$32.8 million during the financial year. Other regions comprise mainly markets in Latin America, the Middle East and Africa, which the Group has been developing in recent years as potential new avenues of growth.


Retail markets in most developed countries started to show signs of recovery towards the end of the calendar year 2009. This, coupled with the rebound in sales we have seen in the first three months of the calendar year 2010, gives some cause for optimism. However, given the financial instability of certain EU countries and the subsequent volatility in global financial markets, we still see considerable uncertainty over the sustainability of this recovery. Additionally, the continued weakness of European currencies will create pressure on our revenue and profitability.

Rising costs will add to the challenges in the financial year 2011. Material and component prices have increased markedly since their lows in 2008 and 2009. Lead times are also longer. Leveraging our economies of scale and strong procurement power, VTech is working closely with suppliers to mitigate these impacts.

Labour costs in mainland China are also affected by the increase in the minimum wage, which came into effect in May 2010. We will continue to re-engineer products for lower costs, and seek productivity gains through increasing automation and improving processes.

Going forward, we are still cautiously optimistic that the Group will deliver growth in the financial year 2011. This will be achieved through pursuing our strategy of product innovation, gains in market share, geographic expansion and operational excellence.

North America and Europe

After a strong performance in the previous financial year, growth will not be easy to achieve for TEL products in North America in the financial year 2011. Nevertheless, we still expect further gains in market share in our core product lines, namely corded and cordless telephones for consumers. Beyond these, the AT&T branded SMB telephony systems will add momentum to sales. Our second model in this category, Synapse™, was launched in January 2010 and sales are gradually building up. We are currently selling these products through value added resellers, and we are also recruiting distributors through our "SMB Partner Program".

In Europe, despite the uncertainty of the economic situation, we expect TEL products to resume growth in the financial year 2011. Most of our existing customers are giving us more orders. VTech is steadily gaining market share in Germany as a result of the Deutsche Telekom agreement. Additionally, while volumes are still small compared to cordless phones, we have been shipping an increasing number of integrated access devices (IADs). This provides further impetus to sales growth.

For ELPs, we expect platform products to return to growth in North America, while momentum for standalone products will continue. The two new platform products launched this financial year, V.Reader and MobiGo, have been well received by the trade. V.Reader is an animated e-book system for children aged three to seven. With a 4.3 inch colour display, stories come to life on V.Reader through narration, music, animation, and interactions. MobiGo is a handheld educational gaming system for children aged three to eight. With its colour touch screen and slide-open keyboard, MobiGo puts the world of educational fun at children's fingertips. Both products have been on retail shelves since June and will benefit from extensive media support. Growth in standalone products will be supported by extensive line-ups of infant and pre-school items. These are being led by additions to the successful Jungle Gym line, a new category of bath toys, as well as strong licensed pre-school products.

In Europe, the introduction of new standalone and platform products is expected to stimulate sales. MobiGo will be introduced in most European markets between late summer and fall, while V.Reader will appear in the UK in the summer. As we receive European currencies for domestic sales in Europe, a decline in their values would affect our revenue and profitability in US Dollar terms. Consequently, growth will be difficult to achieve for the financial year 2011.

The global electronic manufacturing service industry is forecast to remain on an uptrend in the financial year 2011 and our CMS will continue to outperform the market. With an established reputation in the professional audio industry, we expect to gain additional business from both existing and new customers in North America and Europe. Switching mode power supplies will see growth opportunities in the new business areas of solar power inverters and electric vehicle chargers.

Customers are increasingly aware of the efforts we have made in improving the working conditions for our workforce. The operations of CMS are in full compliance to the international standards SA8000 and OHSAS18000. These certifications demonstrate the commitment of CMS in the areas of social accountability and occupational health & safety. This commitment differentiates CMS from the competition and will enhance our growth prospects in the coming years.

Asia Pacific and Other Regions

Asia Pacific is likely to lead the way among other regions and we are planning to introduce TEL products to the Chinese market. We also expect increased contributions from the Telstra arrangement in Australia.

For ELPs, we have set up a new team to develop products specifically for mainland China. These products will hit the shelves by the end of this calendar year. We will continue to step up our efforts in other Asia Pacific markets, notably Australia and Japan.

For CMS, we see good opportunities to build on our success in solid state lighting for the Japanese market. As the performance of the LED light bulbs is superior to that of conventional light bulbs, we are seeing rapid consumer adoption of the new technology. As a result of keen competition in this emerging business segment, tremendous price erosion is expected in the next few years. CMS will work closely with our customer to accelerate cost reductions through new product designs and process automation, so as to improve profit margins through the strong partnership.

"VTech is a company with strong R&D, market leadership position, a strong balance sheet and a highly efficient operation. We will continue to focus on product innovation and geographical expansion to deliver growth, while managing costs and risks to enhance profitability," said Mr. Wong.

About VTech

VTech is one of the world's largest suppliers of corded and cordless telephones and 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.

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