VTech Report Strong 1H FY2016 Results

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VTech Holdings Limited has announced its results for the six months ended 30 September 2015, reporting further growth in revenue.

Group revenue for the six months ended 30 September 2015 rose by 3% over the same period of the previous financial year to $928.1 million. This was primarily due to higher revenue in North America, Europe and Other Regions, offsetting lower revenue in Asia Pacific. Despite the increase, the strong US dollar depressed the Group's reported revenue during the period.

Profit attributable to shareholders of the company decreased by 2.5% to $100.1 million. The fall in profit was mainly attributable to the decline in gross margin, which resulted from unfavourable currency movements and a change in product mix.

"In the first six months of the financial year 2016, VTech continued to make progress in its core businesses, despite strong foreign exchange headwinds. In electronic learning products, the business in North America returned to growth while sales in the Asia Pacific region rose sharply. Telecommunication products continued to achieve expansion in commercial phones and other telecommunication products. Contract manufacturing services turned in a good performance, with growth that continues to outpace the global electronic manufacturing services industry," said Allan Wong, Chairman and Group CEO of VTech Holdings Limited.

Although material prices decreased slightly over the same period last year, cost of materials rose owing to a change in product mix. Manufacturing overhead also increased, as wages in mainland China continued to rise and the Group added manufacturing capacity. Despite the strong headwinds from foreign exchange movements and wage inflation, VTech was able to reduce the workforce through automation and process improvement, resulting in a stable direct labour cost. Gross margin declined over the same period last year. This was mainly due to the depreciation of currencies against the US dollar, the change in product mix and the higher manufacturing overhead.

Segment Results

North America

Group revenue in North America in the first six months of the financial year 2016 grew by 2.4% to $461.6 million, supported by higher sales of electronic learning products (ELPs) and contract manufacturing services (CMS). North America is the Group's largest market, accounting for 49.7% of Group revenue.

CMS revenue in North America rose by 19.8% to $112.7 million. The growth was driven by higher sales of professional audio equipment and industrial products, which offset lower sales of solid-state lighting. Professional audio equipment posted good growth as a major client increased orders after resolving excess inventory issues, while several other customers saw higher demand for their products. Growth in this category also benefited from the addition of new customers. Industrial products recorded higher sales as VTech gained more business following a customer's decision to consolidate suppliers. Sales of solid-state lighting, however, trended lower as the demand for the customers' products decreased.

Europe

Group revenue in Europe in the first six months of the financial year 2016 was up 3.8% to $373.7 million, mainly due to higher CMS sales. Europe is the second largest market of the Group, representing 40.3% of Group revenue.

CMS revenue in Europe was up 20.8% to $170.1 million. Sales of hearables, professional audio equipment and home appliances grew, while those of power supplies were stable. Hearables recorded higher sales as VTech increased its revenue share with a major customer, alongside strong market demand for the customer's products. In professional audio, the Group secured more projects from existing customers and there was a sales contribution from new customers. In home appliances, sales to existing customers also recorded an increase.

Asia Pacific

Group revenue in Asia Pacific decreased by 3.1% to $59.7 million in the first six months of the financial year 2016. Lower sales of TEL products and CMS offset growth in ELPs. The region accounted for 6.4% of Group revenue.

CMS revenue in Asia Pacific declined by 15.4% to $22.5 million. Sales of testing and measurement equipment fell, as the weaker Japanese Yen led the customer to move production back to Japan. The keen competition from mainland Chinese brands faced by customers resulted in lower orders for solid-state lighting, while sales of medical and health equipment trended lower on weakening demand for the customer's products. Sales of home appliances and hearables, however, saw an increase during the period.

Other Regions

Group revenue from Other Regions in the first half of the financial year 2016 grew by 15.3% to $33.1 million, as higher sales of TEL products and CMS offset lower sales of ELPs. Other Regions, which include Latin America, the Middle East and Africa, represented 3.6% of Group revenue.

CMS revenue in Other Regions was US$0.6 million, as compared to US$0.3 million in the same period last year.

Outlook

Given the Group's year-to-date financial results and the continued strong headwinds from currency movements, management expects stable revenue and lower gross margin year-on-year.

The good momentum in CMS is anticipated to continue. Sales of professional audio equipment, hearables and home appliances will increase as business with existing customers expands, while new customers add to demand. The switching mode power supplies business is expected to remain stable. Sales of solid-state lighting are expected to decline, as the customers face strong competition. To cater for further expansion, a new manufacturing building for CMS commenced operations in July, adding 25% to production capacity.

About VTech

VTech is the global leader in electronic learning products from infancy to preschool and the world's largest manufacturer of cordless phones. It also provides highly sought-after contract manufacturing services. Founded in 1976, VTech's mission is to design, manufacture and supply innovative and high quality products in a manner that minimizes any impact on the environment, while creating sustainable value for its stakeholders and the community.