Vtech 2005 Annual Report Download - page 13

Review of Operations
The financial year 2005 was a challenging year 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.
11
Unsatisfactory Results in the
United States
In North America, revenue 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 low er
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.
Comprehensive Measures to
Rectify the Problems
Management moved sw iftly to identify
and address the problems, so that the
situation was successfully brought under
control in the second half of the financial
year 2005. In Novem ber 2004, Mr. Allan
Wong, Chairman and Group CEO assum ed
the role of CEO of the telecommunication
products business, following the departure
of the former CEO, Mr. James C. Kralik.
A comprehensive and broad-based
improvement programme was put in place
to re-engineer all processes worldwide,
with the aim of managing the brands
better, strengthening channel marketing,
forecasting demand more accurately,
rationalising product design and
development and raising productivity.
The business also moved to streamline
operations and tighten cost control
globally.
More specifically, overheads were reduced
to bring them in line with the level of sales.
Product m anagem ent, marketing
communications and channel marketing
functions in the US sales offices began a
process of integration to strengthen
communication, thereby improving
product offerings and marketing. Product
design and development began to be
consolidated to Hong Kong to shorten the
product development cycle. Greater
emphasis has been put on understanding
retailer expectations to ensure product
design and features correspond to
consum er preferences. A revamped
product line is being developed and w ill
be introduced in early 2006.
Strong Performance in Europe
Despite the challenges in the United
States, VTech continued to make progress
in developing the European markets,
where revenue rose strongly by 102.2%
over the financial year 2004 to US$112.8
million. Europe, in the financial year 2005,
accounted for 18.4% of the total
telecommunication products revenue,
compared to 8.1% in the financial
year 2004.
VTech is supplying products to the leading
fixed-line telephone operators on an
Original Design Manufacturing (ODM)
basis. The European business is benefiting
from the increasing opening of the
markets. VTech will adopt the same
strategy to pursue opportunities in
markets outside Europe and
North Am erica.
VoIP Products - Tapping Longer
Term Potential
In addition to geographical diversification,
the business has been developing a range
of products for the VoIP market, which is
beginning to grow rapidly. In January
2005, VTech announced the launch of the
first VoIP 5.8GHz cordless phone with
Vonage, North America's leading
broadband phone service provider and the
first VoIP 2.4GHz cordless phone with
Skype, the leading free Internet telephony
service provider worldw ide. We expect
these products to start
delivering a m eaningful
contribution to the
business in the
financial
year 2007.
VTech Holdings Ltd Annual Report 2005
Telecommunication Products
Revenue by Region