VTech's annual report is eye-catching for the future of e-learning products

Toy "Anti" Doucheng filed bankruptcy protection in the United States and Canada in September 2017, and then liquidated US and UK operations in early 2018 as one of VTech's (00303-HK) e-learning products. Sales of “anti” Doo City have decreased significantly, with sales growth in North America and Europe being the most affected. VTech Chairman Huang Zixin pointed out in the 2018 financial year performance report that the sales have been guaranteed by credit insurance and that the purchase price of the toy “anti” Doocheng is received. Therefore, the group did not have a major bad debt due to the toy "anti" Doosan liquidation.

However, the revenue of e-learning products in FY 2019 will be affected by the liquidation of the toy “anti” Doosan, although the Group believes that most of the lost sales will eventually be filled by existing customers.

VTech announced its annual results for the end of March 2018. Profit attributable to shareholders increased by 15.3% year-on-year to US$263 million. The final dividend was 63 US cents per share. The annual dividend was 80 US cents, up 14.3% year-on-year; earnings per share was 82.1. Meixian rose 15.1%; gross profit margin fell from 33.2% to 33; revenue increased 2.4% to $2.13 billion.

Earnings growth was higher than revenue growth, mainly due to higher revenues and no need to re-include one-time expenses related to the integration of LeapFrog business. Management and other expenses were significantly reduced by 15.9% to US$78 million. Gross profit margin decreased slightly by 0.2 percentage points to 33%, mainly due to the increase in material costs. During the period, the Group successfully converted most LeapFrog and Snom Technology products into self-production.

LeapFrog children's magnetic letter voice sounding toy

In terms of market performance, the main market in North America, segment profit increased by 30.3% year-on-year to US$119 million; the European market was weaker, down 20.5% to US$309.5 million; the Asia-Pacific region experienced the strongest growth, 97.5% to US$39 million.

Sales of VTech's independent products also increased as sales of infant products, pre-school products and Kidizoom camera series increased. In the telecommunications products business, sales of home phones decreased by 16.8% year-on-year, mainly due to the worse-than-expected performance of the fixed-line telephone market and the tight supply of global materials in the second half of the year. Commercial phones and other telecommunications products continued to grow, with sales accounting for 42% of total telecommunications revenue.

VTech Little Hippo Sleeper

Looking ahead, income expectations for FY 2019 will increase. Telecommunications products are expected to regain their upward momentum, while sales of contracted production services are expected to increase. The income of e-learning products is hard to estimate, as sales in North America and Europe will be negatively affected by the “anti-Fighting” liquidation of toys in the short term.

The uncertainties in the sales of e-learning products and the fluctuations in foreign exchange rates make the gross margin trend difficult to predict. Raw materials and direct labor costs are expected to rise, while global material supplies will continue to be tight.

In addition, trade disputes between the United States and China are currently taking place. To date, the list of products that will be subject to punitive tariffs has been published and does not include VTech's product categories. However, if the trade relations between the two countries deteriorate further, it may affect the performance of the group.

The Group remains optimistic about the long-term prospects of e-learning products. And plans to launch new products in North America and Europe to strengthen its market position. For independent products, the Group will expand the VTech infant and pre-school product line, as well as the LeapFrog brand of learning toys. For platform products, the Group will launch the KidizoomSmartwatch DX2 in most European markets and launch the new LeapStart 3D in the US and UK with interactive 3D holographic projection and touch sounding games. In the Asia Pacific region, the Group expects e-learning products to maintain strong growth.

In terms of telecommunications products, the Group expects revenue to regain its upward trend as sales growth of commercial phones and other telecommunications products is expected to be higher than sales declines in home phones.

In April 2018, VTech acquired a production facility in Malaysia to manufacture fixed assets and businesses for high quality audio equipment. Together with the launch of the new plant building of the Group's existing production base in Dongguan, China, the capacity of contract manufacturing services will increase by nearly 50%.

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