Record revenue and higher profit despite a challenging environment
Hong Kong, 15 May 2013 - VTech Holdings Ltd (HKSE: 303) today announced its results for the year ended 31 March 2013, reporting record revenue and profit growth despite a challenging economic environment.
Group revenue for the year ended 31 March 2013 increased by 4.1% to US$1,858.0 million. The growth was driven by higher revenue in North America, Europe and Asia Pacific, which offset lower revenue in Other Regions.
Profit attributable to shareholders of the Company rose by 5.4% to US$202.3 million, with the Group's net profit margin largely consistent with that of the last financial year. Basic earnings per share increased by 5.1% to US80.9 cents, compared to US77.0 cents in the last financial year.
The Board has proposed a final dividend of US64.0 cents per ordinary share. Together with the interim dividend of US16.0 cents per ordinary share, this will result in a full-year dividend of US80.0 cents per ordinary share, against US76.0 cents per ordinary share in the last financial year, an increase of 5.3%.
"I am pleased to announce that VTech delivered solid results in the financial year 2013, reporting record revenue and profit growth despite a challenging economic environment," said Mr. Allan Wong, Chairman and Group CEO of VTech Holdings Limited. "This performance demonstrates the fundamental strength of the Group, which has the ability to grow sales and increase its market leadership despite a difficult market environment."
Costs and Operations
In the financial year 2013, the Group benefited from lower cost of materials due to sluggish global demand. However, this was offset by higher labour costs and manufacturing overheads in China, as recruitment and retention of workers became more challenging. During the financial year, the Group not only raised workers' compensation and benefits, but also increased its investment in improving their working and living environment.
Group revenue in North America increased by 3.3% to US$933.4 million in the financial year 2013, as higher revenue from electronic learning products (ELPs) and contract manufacturing services (CMS) offset lower revenue from telecommunication (TEL) products. North America remained VTech's largest market, accounting for 50.2% of Group revenue.
Revenue from TEL products was down by 6.2% to US$389.4 million. The decline was mainly due to lower sales of residential phones. The US residential cordless phone market is mature, while demand in the first half of the financial year was affected by weak US economic growth. In the second half, consumer demand steadily improved due to the continuing recovery of the US housing market, resulting in a more modest year-on-year sales decline as compared with the first half of the financial year. During the year under review, VTech maintained its number one position in the US residential phone market .
Sales of non-residential-phone products, including small to medium sized business (SMB) phones, baby monitors, hotel phones and cordless headsets, continued to rise. The growth was driven by baby monitors, a full-year sales contribution from hotel phones and higher sales of SynJ? and Synapse? SMB phone systems. The new four-line Small Business System, which was shipped in September 2012, was well-received by the market. CareLine?, a home safety telephone system for seniors, has also received an encouraging response since its launch in October 2012.
ELPs revenue in North America rose by 17.3% to US$361.9 million in the financial year 2013. Higher sales were achieved for both platform and standalone products. Among platform products, sales of InnoTab?, the educational tablet designed specifically for children, grew strongly. This robust performance was driven by a full-year sales contribution of the product line and the launch of three second generation consoles, InnoTab? 2, InnoTab? 2S and InnoTab? Baby. An expanded software library, with cartridges and download content comprising over 400 titles in English and French, also contributed to growth. Sales of MobiGo? 2 and V.Reader?, however, declined due to the popularity of tablets.
For standalone products, infant products and the new range Switch & Go Dinos? were the key growth drivers. Switch & Go Dinos are interactive preschool toys that transform between dinosaurs and vehicles. They hit US retailer shelves in May 2012 and sold strongly through the holiday seasons. With less than a full year's sales, two Switch & Go Dinos items ranked among the five top selling products in NPD's Preschool Vehicles category in the US for calendar year 2012 . Among new infant products, the vehicle line Go! Go! Smart Wheels? and Alphabet Activity Cube? were the leading contributors.
CMS revenue in North America increased by 1.3% to US$182.1 million. Sales of professional audio equipment, the largest product category in the region, grew slightly as the customer worked through inventory and orders picked up in the second half of the financial year. Sales of industrial products, commercial solid-state lighting and home appliances were also higher, driven by more orders from existing customers. Sales of internet phones for office use, however, were down due to a change in the customer's inventory management policy.
Group revenue in Europe increased by 7.0% to US$769.9 million. As in North America, the growth was attributable to higher revenue of ELPs and CMS in the region, offsetting lower revenue of TEL products. Europe was VTech's second largest market, accounting for 41.4% of Group revenue.
Revenue from TEL products declined by 5.5% to US$203.6 million. The decrease in revenue was primarily due to lower sales of residential phones, as customers reduced orders and inventory in view of the weak economies. This was especially true in the first half of the financial year, while improvement was seen in the second half due to restocking by some customers. In the calendar year 2012, VTech maintained its leadership position as the largest manufacturer of cordless phones in Western Europe .
Despite lower sales of residential phones, sales of non-residential-phone products continued to rise. These included baby monitors, integrated access devices, connected home? devices and hotel phones.
ELPs revenue in Europe was US$331.3 million, up 6.8%, despite being negatively impacted by a lower average Euro-US Dollar exchange rate compared to the last financial year. As in North America, the children's educational tablet Storio? 2, Switch & Go Dinos and infant products, including the new Toot-Toot Drivers? range, were the growth drivers. During the financial year 2013, Storio 2 was sold in all VTech's major markets in Europe. It was the number one selling item by retail revenue in the top five European toy markets in the calendar year 2012 . In the same calendar year, the Kidizoom? digital camera also topped the best selling toy list in Germany .
ELPs sales were higher in the UK, France and Germany while sales in Spain were lower. In the Benelux countries, sales grew in Euro terms but declined in US dollar terms owing to adverse changes in the exchange rate.
CMS revenue in Europe rose by 21.4% to US$235.0 million, driven by sales growth in almost all product categories. Medical and health products posted the strongest growth in the region, buoyed by increased sales to existing and new customers. Wireless headsets also delivered robust results, as VTech benefited from the customer's new product launches and consolidation of suppliers. Switching mode power supplies and professional audio equipment demonstrated solid growth, driven by more orders for solar power inverters and increased orders from new German customers respectively. Sales of industrial products, however, recorded a decline during the financial year 2013.
Group revenue in Asia Pacific increased by 6.1% to US$99.8 million. The sales growth was attributable to higher sales of TEL products and ELPs, offsetting a sales decrease in CMS. The region accounted for 5.4% of Group revenue.
Revenue from TEL products was up by 27.7% to US$37.8 million. The increase in revenue was mainly due to the rise in orders from Japanese customers as they recovered from the earthquake in March 2011. Sales in Australia were also higher, as a new product line was launched in the second half of the financial year, resulting in a pick-up in sales.
ELPs revenue in Asia Pacific increased by 11.4% to US$19.5 million. The growth was mainly driven by higher sales of standalone products in China, Japan and Korea, as VTech continued to make progress in those countries. Shipment to Australia, the Group's largest market for ELPs in Asia Pacific, was slightly down during the financial year 2013.
CMS revenue in Asia Pacific decreased by 9.6% to US$42.5 million. Higher sales in China were more than offset by lower revenue in Japan and Korea. In China, the dedicated manufacturing facility enabled CMS to grow sales rapidly as it helps customers to distribute their commercial solid-state lighting in the domestic market more efficiently. In Japan, however, higher sales of marine radio were unable to compensate for lower revenue from LED light bulbs, medical and health products and handheld radiation detectors. In Korea, orders for Bluetooth speaker phones slowed down in the second half due to market competition, which resulted in a sales decline for the full financial year.
Other regions include Latin America, the Middle East and Africa. Group revenue in other regions fell by 18.8% to US$54.9 million. The decline was due to lower sales in all regions and product lines. Other regions represented 3.0% of Group revenue.
Revenue from TEL products decreased by 22.6% to US$35.6 million, as sales growth in the Middle East was more than offset by sales declines in Latin America and Africa.
ELPs revenue in other regions was down by 10.6% to US$18.6 million. All regions recorded sales declines during the financial year 2013.
CMS revenue in other regions was US$0.7 million, down 12.5% as compared to the last financial year.
VTech will build on its strong fundamentals, with a strategy centring on its four growth drivers of product innovation, gains in market share, geographic expansion and operational excellence, to drive sustainable growth.
Innovative products will remain the key to expanding the Group sales in all regions and across product lines.
In TEL products, the Group launched the world's first home entrance monitoring system, combining a versatile cordless phone with a digital video door bell, in the US in April 2013. This innovation shows that VTech is once again pioneering market breakthroughs with its proprietary Video on DECT? technology. In addition, the Group will expand the well-received CareLine, its home safety telephone system for seniors. It is also developing its first wireless conferencing system featuring proprietary acoustic technology, which will be available by the end of the current financial year. In Europe, SIP (Session Initiation Protocol) phones for commercial use will be launched by September 2013. Other new products in the pipeline include a range of new applications based on the DECT ULE (ultra low energy) platform. Internationally, the Group is planning to launch enhanced versions of its video baby monitors and new hotel phones.
VTech's strategy for ELPs is to apply the latest proven technology to innovative educational toys that help kids learn and develop through fun and smart play. Its lineup of children's educational tablets will be upgraded to a new generation in 2013, offering advanced functionalities and rich learning experience to children between 1 and 9 years old. By the end of the calendar year 2013, its worldwide software library will comprise close to 70 cartridges and over 1,000 apps in five languages, offering a wide variety of age-appropriate content, from e-books and learning games to music, videos and creative activities. VTech will continue to introduce innovative products to its core infant and preschool lines. A new generation of Kidizoom, the market leading line of children's digital cameras, will be launched. Beyond the learning aisle, the successful Switch & Go Dinos and Go! Go! Smart Wheels lines will be expanded with more dinos, vehicles and play sets.
Products mean services at VTech CMS and innovation in service is how the Group keeps its customer base growing. With a stringent quality management system and experienced staff, the Group's CMS has the expertise to produce, optimise and successfully launch products for different markets. In addition to its recognised strength in DFM (Design for Manufacturing) and flexibility in services, VTech CMS has the unique manufacturing know-how in certain product categories that has made it a market leader. Its dedicated manufacturing facility was an important investment that has helped customers to reduce logistics and customs clearance costs when distributing their products in China. The many customer service and product quality awards the Group received demonstrate how successful VTech CMS is in meeting customers' expectations.
Gains in Market Share
Despite a challenging economic environment, VTech will continue to gain market share across product lines.
VTech is the world's number one manufacturer of cordless telephones, with leadership in both the US and Western Europe . In the US, TEL products are benefiting from a new round of consolidation in the cordless phone market. This is resulting in more shelf space that will support further market share gains in the financial year 2014. In Europe, gains will be driven by collaboration with ODM partners as the Group brings them feature-rich products of superior design at competitive prices.
VTech is the largest supplier of ELPs from infancy to preschool in the US and Western Europe , a position the Group has achieved through its commitment to product innovation. Last year, VTech became the largest infant toy manufacturer in its main European markets . The new products the Group plans to launch in the financial year 2014 will allow VTech to strengthen its market leadership in the core learning area and beyond.
VTech CMS will continue to increase its market share globally. Its quality products, service excellence and strong reputation are enabling the Group to increase sales to existing customers and add new customers. According to Manufacturing Market Insider, VTech CMS ranked 27th among the world's top 50 EMS providers in the calendar year 2012, up from 29th in calendar year 2010 and 37th in calendar year 2009.
Gains in Market Share
VTech's strategy of growing outside its core North American and European markets, where the Group already enjoys leadership positions, is making inroads gradually. It offers tremendous growth potential, as Asia Pacific and Other Regions accounted for less than 10% of total Group revenue in the financial year 2013. In Asia Pacific, China will continue to be the focus. The Group is also increasing its presence in Australia, its largest market in the region, and Japan. The Group's efforts in Other Regions will centre on key markets in Latin America and the Middle East.
The ability to offer innovative, feature-rich products at affordable prices underpins VTech's success. Rising labour costs, together with higher manufacturing overheads, will pose continual challenges to the Group in the financial year 2014. VTech will continue to mitigate cost pressure through further automation, product optimisation and process improvement. As always, the Group will manage its operating cost diligently and maintain a lean company structure.
The macro-economic environment will remain challenging in the financial year 2014. The US economic recovery is expected to continue, but it is likely to remain slow. In Europe, the picture is mixed and uncertain.
Despite these challenges, the Group is optimistic of achieving revenue growth across all product lines in the financial year 2014. Material costs are forecast to be steady, while labour costs and manufacturing overheads are expected to increase further. With efficiency gains through higher automation, product optimisation and process improvement, gross profit margin is expected to remain stable.
The growth in TEL products is expected to be driven by market consolidation in the US, and higher sales in Asia Pacific and Other Regions. The prospect for Europe, however, remains uncertain. Revenue growth in ELPs will be supported by a strong base of continued products, as well as new platform and standalone products to be launched worldwide. A special focus for this financial year is to drive a strong increase in sales of software cartridges and download apps. The increase in CMS revenue will be driven by new customers, while business with existing customers will remain stable. CMS will continue to expand in Japan and Germany, while adding the new business area of testing and measurement equipment.
"VTech has an enviable track record in product development, a strong balance sheet, market leadership position and efficient operations. The solid, executable plans we have in place should enable us to seize growth opportunities and generate higher returns for shareholders," said Mr. Wong.