VTECH Announces FY2005 Annual Results

Revenue and Profit Increase, Buoyed by V.Smile Success

-- Group revenue increased by 11.7% to US$1,022.0 million

-- Profit attributable to shareholders* increased by 22.9% to US$56.9


-- Final dividend of US12.0 cents per ordinary share, total dividend for

the year up 30.0%

-- Strong rebound in electronic learning products business

-- Outperformance by contract manufacturing services business

-- Unsatisfactory results of telecommunication products business in the

United States

-- Rationalisation of the telecommunication products business contributing

to more efficient operations

*including US$6.7 million non-recurring income arising from settlement

of an indemnification claim

Jun 22, 2005, 01:00 ET from VTech Holdings Ltd

    HONG KONG, June 22 /Xinhua-PRNewswire-FirstCall/ -- VTech Holdings Ltd
 (SEHK: 303; London SE: VTH; ADR: VTKHY) today announced its annual results for
 the year ended 31 March 2005. Group revenue increased by 11.7% over the
 financial year 2004 to US$1,022.0 million.  Profit attributable to
 shareholders, including US$6.7 million non-recurring income arising from
 settlement of an indemnification claim, increased by 22.9% to US$56.9 million.
 This has allowed the Board of Directors to propose a higher final dividend of
 US12.0 cents, giving a total dividend for the year of US13.0 cents per
 ordinary share, compared to US10.0 cents for the financial year 2004,
 representing a 30.0% increase.
     "I am pleased to report that the full year results for the financial year
 2005 were better than we expected when we announced our half year results in
 November 2004.  The Group's electronic learning products and contract
 manufacturing services businesses achieved better than expected growth for the
 full year, helping to offset an unsatisfactory performance from our
 telecommunication products business in the United States," said Mr. Allan Wong,
 Chairman and Group CEO of VTech Holdings Ltd.  "Through management efforts,
 the difficult situation of the telecommunication products business in the
 United States was brought under control and, after a series of rationalisation
 measures, its US operations are becoming more effective and efficient."
     Rationalisation of Telecommunication Products Business
     The financial year 2005 was challenging for the telecommunication products
 business.  Revenue fell by 10.9% to US$612.5 million due to the unsatisfactory
 performance in the US market, which outstanding results in the European market
 were unable to offset.  Profitability of the business was substantially
 affected by the underperformance in the United States.  In the financial year
 2005, the business accounted for 59.9% of Group revenue, compared to 75.1% in
 the financial year 2004.
     In North America, revenue of the business declined by 23.6% to US$475.3
 million, accounting for 77.6% of the total telecommunication products revenue,
 compared to 90.5% in the financial year 2004.  The decrease in revenue was
 mainly the result of lower sales in the United States, as our phones failed to
 compete on both product design and price.  Over-optimistic sales projections
 also led to higher overheads and operating costs, resulting in operational
 inefficiency which further impacted profitability.
     A change in management, streamlining and rationlisation succeeded in
 bringing the situation under control in the second half.  As a result, VTech
 is now developing an entirely new range of more cost-effective products that
 will be introduced in early 2006.  During the financial year, the Group has
 also taken an industry lead in responding to technological developments in the
 US cordless phone market by launching its first VoIP 5.8GHz cordless phone
 with Vonage, and its first VoIP 2.4GHz cordless phone with Skype.
     Despite the challenges in the United States, VTech continued to make
 progress in developing the European markets, where revenue rose strongly by
 102.2% to US$112.8 million, as the business is benefiting from the increasing
 opening of the market.  In the financial year 2005, Europe accounted for 18.4%
 of the total telecommunication products revenue, compared to 8.1% in the
 financial year 2004.
     Tremendous Success of V.Smile
     In contrast with the telecommunication products business, the Electronic
 Learning Products (ELP) business has proven its successful turnaround with a
 strong rebound in both revenue and profitability in the financial year 2005.
 Revenue of the business rose significantly by approximately 1.2 times or
 115.1% to US$281.1 million following the well-executed roll out of the award-
 winning V.Smile TV Learning System.  Supported by effective and efficient
 operations, profitability rebounded sharply.  During the financial year, the
 ELP business accounted for 27.5% of Group revenue, compared to 14.3% in the
 financial year 2004.
     The successful launch of V.Smile has allowed the business to rebuild sales
 and regain lost shelf space gradually in the US market, while further
 strengthening its leadership position in Europe.  In the financial year 2005,
 revenue from the North American market rebounded sharply by more than 3 times
 or 328.1% to US$108.3 million, accounting for 38.5% of total ELP revenue,
 compared to 19.4% of total ELP revenue in the financial year 2004.  Revenue
 from the European market also showed a robust increase of 60.3% to US$160.0
 million, accounting for 56.9% of the total ELP revenue.
     The attraction of V.Smile, which in February 2005 was joined by the
 handheld model V.Smile Pocket, is greatly enhanced by highly interactive
 software using licensed children's characters, which now comprise a library of
 27 titles.
     Despite the importance of V.Smile, the traditional product lines also
 performed well and recorded respectable growth during the financial year.
 VTech is committed to maintaining a broad ELP range, focusing on the growing
 infant and pre-school segments.
     Outperformance by CMS Business
     The Contract Manufacturing Services (CMS) business delivered encouraging
 results in the financial year 2005, achieving record revenue and higher profit.
 Revenue increased by 32.0% over the financial year 2004 to US$128.4 million,
 accounting for 12.6% of Group revenue.
     The percentage increase in revenue was markedly higher than the growth of
 the global Electronic Manufacturing Services (EMS) industry.  This performance
 reflects VTech's success in delivering exceptional services to its core focus
 of small and medium sized customers.
     The growth in CMS revenue was primarily driven by strong demand from
 existing customers and a new customer in the industrial printing sector.  The
 investment in R&D has paid off, with R&D related services increasingly driving
 sales.  The business also moved towards compliance with RoHS, a European Union
 environmental directive that takes effect in July 2006.
     Europe continued to be the largest market of the CMS business, accounting
 for 49.2% of the total CMS revenue, followed by the United States at 27.7% and
 Japan at 17.2%.
     By product category, switching mode power supplies and professional audio
 equipment accounted for 35.6% and 27.8% of the total CMS revenue respectively,
 followed by home appliances at 14.6% and wireless products at 10.9%.
     New Manufacturing Facilities
     During the financial year 2005, VTech took the decision to establish its
 third manufacturing plant in Qingyuan city in the northern part of Guangdong
 province.  The new 49,000 square metre facility will initially be used for
 supplying the plastics needs of the telecommunication products business.  The
 plant is expected to start operations in the fourth quarter of the calendar
 year 2005 and it offers the Group's ability to relocate some processes to an
 area of lower cost if required.
     VTech's mission is to be the most cost effective designer and manufacturer
 of innovative, high quality consumer electronics products and to distribute
 them in the most efficient manner.  The Group remains optimistic about the
 outlook of the financial year 2006, but this is tempered with caution in view
 of a number of factors.
     The US economy appears to be on a reasonably firm footing, but rising
 short term interest rates and stubbornly high oil prices may at some point
 dampen consumer spending.  The Group also faces potential challenges from
 rising resin prices and from RoHS compliance, which will increase the cost of
 manufacturing for products shipping to Europe and Japan.  In addition, a
 potential upward revaluation of the RMB would increase operating costs, while
 a weakening of the Euro and Sterling may also affect the Group's results,
 although forward foreign exchange contracts are used to hedge certain
     Nonetheless, the Group's three core businesses are well placed for the
 future, albeit with fundamentally different challenges and opportunities.  The
 telecommunication products business is now on much more stable footing, with a
 lower cost structure and a pipeline of more competitive products under
 development.  The Group will continue to leverage its dual brand strategy,
 using both the AT&T and VTech brands to develop products for different market
     Following the re-engineering measures, management expects the
 profitability of the telecommunication products business to improve in the
 financial year 2006.  Revenue, however, is expected to suffer in the short
 term and will not return to a growth path until the financial year 2007, when
 the revamped products hit the shelves in the US market.  This is despite
 further expansion in Europe, which will support sales.
     Management expects the strong momentum for the ELP business to continue in
 the financial year 2006.  The Group will develop and expand the V.Smile
 product range, which provides a good platform for future growth.  Although
 competing products are beginning to appear, management believes VTech has a
 head start in product awareness and that V.Smile offers the superior
 interactivity and software choice which will allow it to remain the market
 leader.  The Group will invest further in R&D to increase the number and
 variety of Smartridges, and continue to negotiate license agreements to expand
 our portfolio of children's characters.  The Group will also continue to
 invest in our traditional product lines and to support all the products with
 the promotional dollars required to make them compelling from a marketing
     The global EMS industry is still in an uptrend and is expected to deliver
 further growth in the financial year 2006.  VTech's CMS business is well
 positioned to take advantage of this favourable situation to deliver top and
 bottom line growth, given its stable customer base and efficient operations.
 The programme to meet RoHS requirements will continue to be a major focus for
 the CMS business and new market segments will be developed.  Input costs are
 forecast to remain stable, although manufacturing costs will rise as a result
 of RoHS.  The CMS business will work to maintain margins through strict cost
 control and working closely with material suppliers.
     "Looking ahead, I believe VTech has an improved cost structure, enhanced
 product ranges and the right management to allow the Group to capitalise on
 its core competencies to achieve continued progress, and bring solid long-term
 returns to shareholders," said Mr. Wong.
     About Vtech
     VTech is the one of the world's largest suppliers of corded and cordless
 telephones in North America and a leading supplier of electronic learning
 products.  It also provides highly sought-after contract manufacturing
 services.  VTech is a pioneer in the establishment of China-based
 manufacturing facilities and sells its products via a strong brand platform
 supported by a well-established distribution network in North America, Europe
 and Asia.
     Note: Starting from 21:30, 22 June 2005 (HK time), the video archive of
 the annual results announcement can be accessed through VTech's homepage
 www.vtech.com in the "Webcasting and Presentation" section under "Investor
     This release is issued by VTech Holdings Ltd through GolinHarris.  For
 further information, please contact:
     VTech representative in HK
      Grace Pang                     Nick Bradbury
      VTech Holdings Ltd             GolinHarris
      Office: +852-2680-1703         Office: +852-2522-6475
      Fax:    +852-2662-7434         Fax:    +852-2810-4780
      Email:  grace_pang@vtech.com   Email:  nick.bradbury@golinharris.com
     VTech representative in the US
      Marlene Wechselblatt
      GolinHarris International
      Office: +1-212-373-6037
      Fax:    +1-212-373-6001
      Email: mwechselblatt@golinharris.com

SOURCE VTech Holdings Ltd