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31 Jan – 4 Feb 2018
VTech Holdings Limited yesterday announced its results for the six months ended 30 September 2017, reporting higher revenue and profit.
"The first six months of the financial year 2018 saw further progress at VTech. Revenue and profit increased as the Group reaped the benefit of its successful consolidation of the operations of LeapFrog and Snom. The growth of electronic learning products, however, was impacted by Toys"R"Us, which filed for bankruptcy protection in the US and Canada on 18 September this year," said Allan Wong, Chairman and Group CEO of VTech Holdings Limited.
Group revenue for the six months ended 30 September 2017 increased by 5.8% to US$1,039.7 million, supported by higher sales in North America, Europe and Asia Pacific.
Profit attributable to shareholders of the Company increased by 45.1% to US$103.6 million. The rise in profit was due to higher revenue, product mix improvement, the absence of the one-off costs associated with the integration of LeapFrog Enterprises, Inc. (LeapFrog) and the contribution from the Snom Technology GmbH (Snom) business.
Basic earnings per share rose by 45.1% to US41.2 cents, compared to US28.4 cents in the first six months of the previous financial year.
The Board of Directors has declared an interim dividend of US17.0 cents per ordinary share, unchanged from the interim dividend declared in the corresponding period last year.
The Group's gross profit margin in the first six months of the financial year 2018 rose from 31.9% to 32.3%. The improvement was mainly due to a more favourable product mix, a positive currency impact and productivity gains, despite an increase in materials prices. During the period, the Group has successfully brought most of the LeapFrog and Snom products in-house for manufacture.
Group revenue in North America increased by 5.3% to US$499.7 million in the first six months of the financial year 2018. Sales of electronic learning products (ELPs) and contract manufacturing services (CMS) were higher, offsetting lower sales from telecommunication (TEL) products. North America was VTech's largest market, accounting for 48.0% of Group revenue.
ELPs revenue in North America rose by 2.6% to US$192.4 million, driven by higher sales of both standalone and platform products. For the first nine months of the calendar year 2017, the Group maintained its position as the number one manufacturer of electronic learning toys from infancy through toddler and preschool in the US.
Revenue growth was negatively impacted by the filing for bankruptcy protection by Toys"R"Us. VTech's sales to the retailer up to the date of the filing were covered by credit insurance. After the filing, shipments were no longer covered, and hence were temporarily suspended, pending negotiation of new terms. The Group makes every effort to support its long-term business partners and has worked closely with Toys"R"Us to ensure the right products are delivered to consumers in the run-up to the holiday season.
One of the Group's strategies in the financial year 2018 has been to grow the LeapFrog standalone toy business. By launching more learning toys under the LeapFrog brand, this strategy has seen initial success in the first half, with rising sales of the brand's standalone products. A number of the infant and preschool products performed particularly well, including both new and classic items, namely 2-in-1 LeapTop Touch, Mr Pencil's Scribble & Write, Scoop & Learn Ice Cream Cart, as well as My Pal Scout and Violet. Scoop & Learn Ice Cream Cart was featured in The Toy Insider's "Hot 20" list of the hottest toys of the season.
In VTech standalone products, there were higher sales of preschool products and the Kidizoom Camera range, which offset declines in the infant category and the Go! Go! Smart family of products.
Among platform products, the Kidizoom Smartwatch range remains a growth driver. The older models continued to sell well, while the launch of the third generation Kidizoom Smartwatch DX2 featuring dual cameras, and a new Star Wars themed version, added to the momentum. Touch and Learn Activity Desk Deluxe and the LeapStart Interactive Learning System, which were both launched in August last year, continued to perform well. In August 2017, the Group introduced an updated LeapStart system, with an enhanced stylus and additional titles, including licensed books. This product was included in The Toy Insider's 12th annual Holiday Gift Guide. A new children's communication device called KidiBuzz also hit the US shelves. During the period, the Group launched LeapPad™ Ultimate to replace LeapPad Platinum, while LeapFrog Epic was updated with the new Academy Edition. Despite these new launches, sales of children's educational tablets decreased in line with the overall market decline.
Adding a new dimension to the Group's offerings, the LeapFrog Academy was launched in major English-speaking countries in August 2017. This is a subscription-based guided learning system for children aged 3 to 6 years. Designed by educational experts, it currently offers over 1,000 curriculum based activities.
Group revenue in Europe increased by 0.3% to US$413.7 million in the first six months of the financial year 2018, as higher sales of ELPs and TEL products offset a decline at CMS. Europe remained VTech's second largest market, accounting for 39.8% of Group revenue.
ELPs revenue in Europe rose by 7.8% to US$155.7 million, with growth in both standalone and platform products. Geographically, all the Group's key Western European markets, namely France, UK, Germany, the Benelux and Spain recorded sales increases. In the first nine months of the calendar year 2017, VTech strengthened its position as the number one infant and toddler toy manufacturer in France, UK, Germany, Spain and Belgium.
Growth in standalone products was driven by higher sales of both VTech and LeapFrog infant and preschool products, the Kidizoom Camera range, as well as the Kidi and Little Love lines. These offset lower sales of the Toot-Toot family of products.
Platform products sales in Europe increased during the first half of the financial year 2018, driven by Kidizoom Smartwatch, DigiGo and LeapStart. The second generation Kidizoom Smartwatch DX, which was launched in all key Western European markets in the second half of the previous financial year, continued to perform well. Growth was supported by the new Star Wars themed Kidizoom Smartwatches and KidiCom MAX, the new version of DigiGo. Sales of children's educational tablets recorded a decline.
Group revenue in Asia Pacific rose by 43.9% to US$100.6 million in the first six months of the financial year 2018, with higher sales in all three product lines. Asia Pacific represented 9.7% of Group revenue.
Revenue from ELPs in Asia Pacific rose by 43.4% to US$35.0 million, led by growth in mainland China, Australia, Hong Kong and South Korea. In mainland China, the Group benefited from new product launches, channel expansion and increased marketing efforts. In Australia and South Korea, the Group's products achieved broader listings, while more promotions drove sales higher in Hong Kong. Increased sales of LeapFrog branded products in other Asia Pacific markets also contributed to overall growth.
Group revenue in Other Regions, comprising Latin America, the Middle East and Africa, decreased by 1.2% to US$25.7 million in the first six months of the financial year 2018. Lower sales of TEL products in Other Regions offset higher sales of ELPs and CMS. Other Regions accounted for 2.5% of Group revenue.
ELPs revenue in Other Regions rose by 12.8% to US$10.6 million for the period, as higher sales in the Middle East compensated for lower sales in Latin America and Africa.
Group revenue for the financial year 2018 is expected to increase. For ELPs, sales for the full financial year are difficult to gauge, as there is uncertainty regarding the level of shipments in the second half to Toys"R"Us, one of the Group's top five customers. Consequently, the trend in gross margin is also difficult to predict.
Despite the near-term uncertainty, the Group is experiencing good demand for its ELPs. In standalone products, the LeapFrog portfolio is being strengthened by the introduction of more new learning toys, while VTech infant and toddler products, as well as the Kidizoom Camera range, are gaining market share. Platform products will benefit from the strong sell-through of Kidizoom Smartwatch, LeapStart and the newly introduced children's communication devices KidiBuzz and KidiCom MAX.
Subscriptions to the LeapFrog Academy are expected to grow in the second half as more marketing efforts come on stream and more LeapFrog Epic Academy Editions are sold through during the holiday seasons. Geographically, Asia Pacific will continue to outperform. The relaxation of the one child policy in mainland China is increasing the size of the Group's target market for baby and infant products. In Australia and South Korea, broader listings will continue to drive sales growth in these two key regional markets.