VTech Announces FY2020 Annual Results

Improved gross profit margin but impact of COVID-19 uncertain

HONG KONG, May 18, 2020 /PRNewswire/ --

  • Group revenue increased by 0.2% to US$2,165.5 million
  • Profit attributable to shareholders of the Company grew by 11.3% to US$190.7 million
  • Gross profit margin increased from 29.4% to 30.6%
  • Dividend payout ratio reduced to 70.0% to conserve cash, with final dividend of US36.0 cents per ordinary share, resulting in a full-year dividend of US53.0 cents per ordinary share
  • Reinforcing cost control with strict focus on cash and liquidity
  • Malaysian manufacturing base to expand to about 25% of the Group's total production capacity

VTech Holdings Limited (HKSE: 303) today announced its results for the financial year ended 31 March 2020, showing an increase in profit on higher gross profit margin.

"The outbreak of the novel coronavirus -- COVID-19 -- in the final three months of the financial year 2020 caused Group revenue for this quarter to decline. It resulted in a flat revenue for the full financial year, while profit recorded growth due to higher gross profit margin," said Mr. Allan Wong, Chairman and Group CEO of VTech Holdings Limited.

Results and Dividend

Group revenue for the financial year ended 31 March 2020 increased by 0.2% to US$2,165.5 million, as higher sales in Europe and Asia Pacific offset lower sales in North America and Other Regions.

Profit attributable to shareholders of the Company grew by 11.3% to US$190.7 million. This was mainly attributable to higher gross profit, as a result of lower costs.

Basic earnings per share increased by 11.0% to US75.7 cents, compared to US68.2 cents in the previous financial year.

In light of the COVID-19 crisis and the resulting unprecedented negative business outlook, the Board of Directors considers it prudent to reduce the dividend payout ratio as compared with the prior financial year so as to conserve cash. This will ensure the Group has ample financial resources to navigate the exceptional period of turbulence. Accordingly, a final dividend of US36.0 cents per ordinary share has been proposed, providing a full-year dividend of US53.0 cents per ordinary share, a 20.9% decrease from the US67.0 cents declared in the previous financial year. This represents a dividend payout ratio of 70.0%.

Costs

The Group's gross profit margin in the financial year 2020 increased to 30.6%, from 29.4% in the previous financial year. Materials prices were lower, while direct labour costs benefitted from the depreciation of the Renminbi. Manufacturing overheads remained stable.

US-China Trade Tension

On 15 January 2020, a phase one trade deal was signed between China and the US. A 15% tariff that was imposed on VTech's residential cordless phones from 1 September 2019 was reduced to 7.5%, effective 14 February 2020. A number of the Group's contract manufacturing services (CMS) customers have also been affected by the tariffs, ranging from 7.5% to 25%. As of today, all but a few of the Group's electronic learning products (ELPs) are exempt from the US tariffs.

Segment Results

North America

Group revenue in North America decreased by 0.5% to US$989.6 million in the financial year 2020 as higher sales of ELPs were insufficient to offset lower revenues of telecommunication (TEL) products and CMS. North America remained VTech's largest market, accounting for 45.7% of Group revenue.

ELPs revenue in North America rose by 3.6% to US$493.7 million, driven by higher sales of both LeapFrog and VTech standalone products. The Group gained market share overall, in large part due to a strong performance in Canada, where VTech overtook the competition to become the number one supplier in the infant and toddler toys category[1]. As a result, the Group strengthened its leadership as the number one manufacturer of electronic learning toys from infancy through toddler and preschool in the US and Canada[2].

In standalone products, the growth of LeapFrog learning toys was particularly robust. The brand benefitted from higher sales of infant, toddler and preschool products as retailers increased shelf space. Good sell-through of items carrying overt educational value, such as LeapFrog Learning Friends 100 Words Book and 2-in-1 LeapTop Touch, also boosted growth. The newly launched interactive building sets, LeapBuilders®, saw solid sales as retailers gave support to the range.

For the VTech brand, preschool products and the Kidi line achieved higher sales, driven by the success of items such as Myla the Magical Unicorn, PJ Masks Learning Watch and the Kidi Star Karaoke Machine. This growth offset declines in infant and toddler products, KidiZoom® Camera and the Go! Go! Smart family of products.

In platform products, both LeapFrog and VTech brands registered lower sales. LeapFrog saw a further decline in sales of children's educational tablets, offsetting the contribution from the newly launched handheld gaming system RockIt Twist and Magic Adventures Globe. During the financial year 2020, the line-up of LeapFrog reading platforms was expanded through the introduction of LeapStart® Go. This latest version is a sleek, easy-to-hold stylus that triggers videos and audio responses, helping children aged 4 - 8 years to learn. As a result, sales of the LeapFrog reading system were stable, reinforcing the Group's dominance in the reading category. For the VTech brand, lower sales of KidiBuzz offset higher sales of KidiZoom Smartwatches and Touch & Learn Activity Desk.

VTech's partnership with Netflix, the animated series Go! Go! Cory Carson, premiered in January 2020. The response has been good and a range of playsets and vehicles based on the Go! Go! Cory Carson characters reached the shelves in US in March 2020. LeapFrog Academy®, meanwhile, is steadily growing its subscriber base.

Once again, VTech ELPs won numerous prestigious awards from industry and consumer organisations. In the US, five VTech and LeapFrog products were finalists for the "2020 Toy of the Year (TOTY) Awards" from The Toy Association: Myla the Magical Unicorn in the preschool category; Mix & Match-a-Saurus™ and LeapBuilders 123 Fix-It Truck in the infant/toddler category; RockIt Twist for "Innovative Toy of the Year"; and LeapBuilders ABC Smart House in the construction category. Both Myla the Magical Unicorn and Mix & Match-a-Saurus made Walmart's "Top Rated by Kids" list in 2019. In Canada, RockIt Twist and Myla the Magical Unicorn were named to Walmart's list of "Top Toys for 2019".

TEL products revenue in North America declined by 7.4% to US$243.9 million, with lower sales of residential phones, commercial phones and other telecommunication products.

In residential phones, sales continued to decrease as the fixed-line telephone market contracted further. However, the rate of decline moderated as the Group became exclusive supplier to a key US retailer. In the financial year 2020, VTech gained market share and maintained its number one position in the US residential phones market[3].

For commercial phones and other telecommunication products, sales of small-to-medium sized business (SMB) phones, hotel phones, headsets and baby monitors were lower, offsetting growth in VoIP (Voice over Internet Protocol) phones and conference phones. VTech's range of SMB phones has reached the end of its life cycle, leading to a reduction in sales. Hotel phones faced the pressure of a very competitive marketplace. Sales of headset products fell because of an existing customer with excess inventory, although this was partially offset by a new customer's launch of a mobile phone station. Baby monitors experienced an overall sales decline as a number of customers reduced orders. Nonetheless, in the financial year 2020, VTech gained market share and retained its position as the number one baby monitor brand by dollar sales in the US and Canada[4]. The Group's award-winning Snom products contributed to the overall growth in VoIP phones.

CMS revenue in North America was 1.0% lower at US$252.0 million. The decrease resulted mainly from the growth in professional audio equipment and medical and health products being offset by lower sales of industrial and communication products. Professional audio equipment grew as a backlog of orders for a customer cleared following an improvement in the materials supply, while another customer increased orders as it benefitted from a new product launch. Growth in medical and health products was driven by higher sales of hearing aids. This came as a customer transferred part of its in-house production to VTech and contracted for the manufacture of finished products rather than printed circuit board (PCB) assembly. Sales of industrial products fell on lower orders for note counting machines and electronic locks, while sales of communication products declined as the customer's product reached the end of its life cycle. The solid-state lighting business, meanwhile, was largely stable.

Europe

Group revenue in Europe increased by 0.4% to US$886.3 million in the financial year 2020, as higher CMS sales offset lower revenues from ELPs and TEL products. Europe was VTech's second largest market, accounting for 40.9% of Group revenue.

ELPs revenue in Europe declined by 3.0% to US$333.3 million. The European markets were affected by weakness of the European currencies, the lingering effects of the Toys"R"Us bankruptcy and the financial difficulties faced by smaller retailers in the region. Sales of both standalone and platform products were lower. Despite this, VTech remained the number one infant and toddler toys manufacturer in France, the UK, Germany, Spain and Belgium[5].

In standalone products, sales of VTech branded products were down. Lower sales of infant and toddler products, the Toot-Toot family of products and the Kidi line offset growth in preschool products, KidiZoom Camera and Switch & Go Dinos®. A new range of interactive animal playsets called ZoomiZooz® was introduced to the key markets in Europe and was well-received. Sales of LeapFrog standalone products increased, led by rising sales of infant, toddler and preschool products. Bla Bla Blocks® (the name in Europe for LeapBuilders) saw sales decrease.

Platform products recorded sales decreases, as higher sales of LeapFrog products were insufficient to compensate for lower sales of VTech products. In the LeapFrog brand, growth was driven by new product launches, including Magic Adventures Globe, RockIt Twist and LeapStart Go. This offset sales declines in children's educational tablets and the LeapFrog reading system. The sales decline for VTech platform products was led by lower sales of children's educational tablets, KidiZoom Smartwatches and KidiCom Max®. Sales of Touch & Learn Activity Desk remained steady.

VTech ELPs won many key awards in Europe during the financial year 2020. KidiZoom Pixi was named "Best Electronic Toy" in the "Grand Prix du Jouet 2019" award from La Revue du Jouet magazine in France, while the Spanish Association of Toy Manufacturers named KidiZoom Touch 5.0 and Turbo Force® Racers Race Track "Best Toy of the Year 2019" in their respective categories of Electronic Toys and Vehicles, Radio Control and Tracks. In the UK, Learn & Dance Dino and KidiZoom Action Cam HD were winners in the "Rainbow Awards for Toy Excellence".

Revenue from TEL products in Europe decreased by 6.0% to US$112.5 million in the financial year 2020. Sales of residential phones continued to decline, offsetting the growth of commercial phones and other telecommunication products.

Residential phones saw sales decline owing to the continued contraction of the fixed-line telephone market and as a result of reduced orders from a number of existing customers.

The sales growth in commercial phones and other telecommunication products was mainly driven by CAT-iq (Cordless Advanced Technology -- internet and quality) handsets and the CareLine range. Sales of CAT-iq handsets were boosted by addition of a new customer in Germany and the start of shipment to a major telecommunication operator in the UK. The CareLine range saw increased orders from several existing customers. Conference phones also recorded modest growth. The VoIP phones, baby monitors and hotel phones businesses were stable, but sales of IADs (integrated access devices) trended lower, as a customer reduced orders.

CMS revenue in Europe grew by 5.0% to US$440.5 million, with sales increases in the majority of product lines. Hearables benefitted from the good sell-through of existing products and a new project launch at a major customer. The growth of professional audio equipment was supported by a backlog of orders for a major customer being cleared and another customer's new generation of products seeing strong demand. Sales of IoT products, such as internet-connected smart thermostats and air-conditioning controls, grew as a customer shifted all production to VTech. There was also stable demand for smart meters. Medical and health products saw revenues from hearing aids rise following the decision by the customer to allow VTech to manufacture finished products rather than only handle PCB assembly. A new customer in the field of hair removal products added to the growth. Home appliances sales rose as market demand improved from key customers. In communication products, production of network routers for an existing customer was ramped up. Switching mode power supplies, however, registered a sales decline as expected.

Asia Pacific

Group revenue in Asia Pacific increased by 4.3% to US$259.4 million in the financial year 2020, as higher sales of ELPs and CMS offset lower sales of TEL products. The Asia Pacific region accounted for 12.0% of Group revenue.

Revenue from ELPs in Asia Pacific rose by 2.5% to US$83.2 million, led by growth in Australia, Korea and Japan. In Australia, the Group benefitted from broader listings and more shelf space at major retailers, all of which supported strong sell-through for both VTech and LeapFrog branded products. LeapStory was named "Electronic Toy of the Year" at the Melbourne Toy Fair in March 2020, organised by the Australian Toy Association. Growth in Korea was driven by higher sales of LeapFrog products, while in Japan the Group benefitted from the relaunch of the VTech brand in a major toy retailer. In mainland China, sales declined owing to the outbreak of COVID-19 in the final quarter of the financial year 2020, resulting in lower sales in offline channels. The Group's footprint in the Asian markets was strengthened by opening a VTech's flagship toy store on Lazada.com in Malaysia.

TEL products revenue in Asia Pacific declined by 21.2% to US$27.9 million, with decreases in most of the region's markets. Sales rose in Hong Kong, driven by increased orders for IADs from an existing customer. In Australia, sales fell as lower sales of residential phones offset higher sales of baby monitors. Sales in Japan were affected by a customer's financial situation, while excess inventory at one customer led to lower sales in Malaysia.

CMS revenue in Asia Pacific increased by 12.3% to US$148.3 million on higher sales of professional audio equipment, which offset declines in medical and health products, home appliances and communication products. Growth in professional audio equipment came from a full year sales contribution from the DJ equipment business, against an eight-month contribution in the financial year 2019. Medical and health products were affected by a decline in orders for diagnostic ultrasound systems while lower orders due to slow market demand resulted in a sales decline for home appliances. Sales of communication products fell as the Group's marine radios customer began a transition to a new generation of products.

Other Regions

Group revenue in Other Regions, comprising Latin America, the Middle East and Africa, declined by 15.9% to US$30.2 million in financial year 2020. ELPs and TEL products saw sales decreases, while CMS registered growth. Other Regions accounted for 1.4% of Group revenue.

ELPs revenue in Other Regions declined by 6.9% to US$12.1 million. Higher sales in the Middle East were offset by lower sales in Latin America and Africa.

TEL products revenue in Other Regions decreased by 23.5% to US$16.6 million. The decline was attributable to sales decreases in Latin America, the Middle East and Africa.

CMS revenue in Other Regions was US$1.5 million in the financial year 2020, as compared to US$1.2 million in the previous financial year.

Impact of COVID-19

The COVID-19 pandemic has caused disruptions to VTech in both the supply and demand for products.

On the supply side, in mainland China, the long Chinese New Year holiday in January 2020 was extended and factories were required to resume work in phases. Furthermore, many suppliers there extended their shutdowns, causing interruptions to materials supply in February and March. In Malaysia, production at the Group's facilities for CMS customers ceased from mid-March 2020 when the country imposed a "movement control order" to slow the spread of the virus. Production capacity in mainland China and Malaysia began returning to normal in April, with the easing of lockdown measures.

On the demand side, most of the Group's major markets have been in different levels of lockdown since late January 2020, adversely affecting shipments across all VTech's businesses.

In response to COVID-19, the Group has stepped up its efforts to ensure a safe working environment at all its locations worldwide, in line with local government and World Health Organisation recommendations. In mainland China, the Group has been producing face masks for its local workers and staff since mid-March 2020. 

Around the world, VTech and its employees have been increasing their support for local communities. This includes making financial donations, supporting children in need with educational toys, offering free online learning, as well as donating baby monitors and surgical masks to hospitals.

Outlook

COVID-19 is an unprecedented crisis affecting the entire world and makes the outlook for the financial year 2021 highly uncertain. With the Group's key markets still in different stages of lockdown, resulting in lower orders and demand for products, revenues from all businesses for the financial year 2021 are expected to decrease.

To mitigate the impact of lower orders and weaker demand, VTech is reinforcing its cost control and maintaining a strict focus on cash and liquidity. The Group will streamline its operations and slow its new capital expenditure. Inventory management is being tightened and accounts receivable are being closely monitored, especially for those smaller customers more at risk of experiencing financial difficulties. With the acceleration in the shift to purchasing online, the Group is stepping up its efforts to increase sales to e-tailers and other online sales channels. To consolidate its market leadership, VTech will speed up product development and roll out more innovative products to the markets.

Looking at ELPs, the Group will focus on strengthening its market position through new product launches and expansion in the Asia Pacific region. In standalone products, new infant, toddler and preschool products are being rolled out under both the VTech and LeapFrog brands. Myla's Sparkling Friends, an addition to the robotics category offering for girls, will be launched in the US in Autumn 2020. It consists of a range of fantastical creatures that talk, sing and light up in different colours. The successful Kidi line will benefit from the arrival of KidiZoom Creator Cam, a high-definition video camera kit offering basic editing capabilities. LeapBuilders will be strengthened through the addition of popular Blue's Clues & You! characters. In platform products, a new generation of KidiBuzz/KidiCom Max will be introduced. In Asia Pacific, VTech is stepping up digital marketing efforts and increasing sales to online sales channels in mainland China, while increasing penetration in Japan and Malaysia through channel expansion and more product introductions. 

For TEL products, high definition video baby monitors and super-long range residential cordless phones that have been delivered to market in the second half of the financial year 2020 will contribute to revenue. A new line of VoIP phones under the Snom brand will be rolled out, which will drive revenue growth in commercial phones. For hotel phones, a newly designed series based on SIP (Session Initiation Protocol) and PSTN (Public Switched Telephone Network) technology will be introduced to regain market share. Anti-bacterial technology will be applied to both the hotel phones and Snom branded business phones to enhance these products' appeal. A new baby monitor using cutting-edge technology, along with a baby care app, will strengthen VTech's lead in the US and Canada, while new IADs with Wi-Fi 6 standard will expand this product category.

Under the impact of COVID-19, CMS customers have been revising their orders as markets suffer the effects of the lockdowns, resulting in uncertain demand for products. To open up new business avenues, an NPI (New Product Introduction) centre is expected to open in the Group's research and development centre in Shenzhen, mainland China in the second quarter of the financial year 2021. It aims to capture new business from the many start-ups in this technology industry hub.

In line with the strategy of rationalising its production base, in December 2019 VTech signed an agreement to acquire its second manufacturing facility in Malaysia. It comprises over 500,000 square feet of buildings in Penang. The new facility, which is expected to commence operations by the end of the financial year 2021, will be used to manufacture ELPs and TEL products destined for the US market. Meanwhile, the existing CMS facilities in Muar will undergo an expansion. This will be carried out in two phases, adding 50% of capacity upon completion. The Malaysian manufacturing facilities will account for about 25% of the Group's total production capacity.

"VTech has a strong balance sheet and solid fundamentals, including market leadership in many product categories. This will enable us to weather the storm and take advantage of new opportunities when they arise," said Mr. Wong.

[1] Source: NPD Group, Retail Tracking Service

[2] Source: NPD Group, Retail Tracking Service. Ranking based on total retail sales of VTech and LeapFrog products in the combined toy categories of Early Electronic Learning, Toddler Figures/Playsets & Accessories, Preschool Electronic Learning, Electronic Entertainment (excluding Tablets) and Walkers for the 12 months ended December 2019

[3] Source: MarketWise Consumer Insights, LLC, April 2019 – March 2020

[4] Source: The NPD Group Inc., Retail Tracking Service, US & Canada, Baby Monitors, Dollar and unit sales adjusted, April 2019 – March 2020

[5] Source: NPD Group, Retail Tracking Service

About VTech

VTech is the global leader in electronic learning products from infancy through toddler and preschool and the largest manufacturer of residential phones in the US. It also provides highly sought-after contract manufacturing services. Since its establishment in 1976, VTech has been a pioneer in the electronic learning toy category. With advanced educational expertise and cutting-edge innovation, VTech products provide fun and learning to children around the world. Leveraging decades of success in cordless telephony, VTech's diverse collection of telecommunication products elevates both home and business users' experience through the latest in technology and design. As one of the world's leading electronic manufacturing service providers, VTech offers world-class, full turnkey services to customers in a number of product categories. The Group's mission is to design, manufacture and supply innovative and high quality products in a manner that minimises any impact on the environment, while creating sustainable value for its stakeholders and the community.

Note: Starting from 22:00, 18 May 2020 (HKT), the archived webcast of the FY2020 annual results announcement can be accessed through VTech website via this link https://www.vtech.com/en/investors/financial-briefings/.

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