Vtech 2016 Annual Report Download - page 6

Dear Shareholders,
VTech experienced a challenging environment in the financial
year 2016, resulting in a decrease in revenue and profitability.
The strong US dollar depressed the Group’s reported revenue,
while the weak economy in Europe affected sales in that
region. In addition, the data breach due to the cyber-attack
on VTech’s Learning Lodge in November 2015 added to the
decline in sales and profitability. Looking at the Group’s
product lines, strength in standalone electronic learning
products, commercial phones, other telecommunication
products and contract manufacturing services was offset
by weakness in platform products and residential phones.
In April 2016 the Group completed the acquisition of
LeapFrog Enterprises, Inc., a leading developer of educational
entertainment for children, paving the way for future growth in
electronic learning products.
Results and Dividend
Group revenue for the year ended 31 March 2016 decreased
by 1.2% to US$1,856.5 million. The decrease was due to lower
revenue in North America and Europe, which offset higher
revenue in Asia Pacific and Other Regions.
Profit attributable to shareholders of the Company decreased
by 8.4% to US$181.4 million. This fall in profit was partly
attributable to the decline in gross profit margin, which
resulted from unfavourable currency movements and a change
in product mix. Profitability was also impacted by higher
administrative and other operating expenses, which included
a provision and expenses related to the cyber-attack on the
Learning Lodge® app store.
Basic earnings per share fell by 8.5% to US72.2 cents, compared
to US78.9 cents in the previous financial year.
The Board of Directors has proposed a final dividend of
US25.0 cents per ordinary share, providing a full-year dividend
of US42.0 cents per ordinary share, a 46.2% decrease from
the US78.0 cents per ordinary share declared in the previous
financial year. This represents a reduction of the dividend
payout ratio to 58.2%, from 98.9% in the financial year 2015,
in order to fund the acquisition of LeapFrog. It also reflects the
year-on-year decline of basic earnings per share.
Costs
Costs presented a mixed picture in the financial year 2016 and
the gross profit margin declined year-on-year, largely because
of strong headwinds from foreign exchange movements and a
change in product mix. Because of these factors, cost of material
as a percentage of Group revenue was higher, even though
material costs decreased slightly from the previous financial year.
Direct labour costs declined as VTech improved productivity
further, reducing the number of workers by 9.9% year-on-year.
This was achieved through automation, process improvement
and product optimisation. Manufacturing overhead increased,
however, owing to wage inflation in mainland China and the
opening of additional CMS manufacturing facilities in July 2015.
Data Breach due to Cyber-attack
The financial year 2016 results were affected by the data
breach which occurred as a result of a cyber-attack on VTech’s
databases in November 2015. During the cyber-attack, an
unauthorised party accessed databases containing personal
information from users of Learning Lodge, the PlanetVTech
website and Kid Connect service. In total over five million
parent accounts and related child profiles were affected,
though no credit card or other financial information was
involved. VTech immediately took steps to suspend all affected
websites and services, inform customers and report the
incident to the authorities. As a result, Learning Lodge was
offline for several weeks during the key holiday period.
In April 2016 the Group completed the acquisition of LeapFrog
Enterprises, Inc., a leading developer of educational entertainment for
children, paving the way for future growth in electronic learning products.
2 VTech Holdings Limited Annual Report 2016
Letter to Shareholders