Vtech 2016 Annual Report Download - page 8

The weakness in residential phones was partially offset by
the continued growth of commercial phones and other
telecommunication products. Together, they represented
about 27% of total TEL products revenue in the financial year
2016, against approximately 19% in the last financial year. Baby
monitors performed particularly well, as VTech gained market
share by expanding its distribution channels and extending its
geographic reach. The Group also benefited from the further
roll out of CAT-iq handsets in France, Germany and Switzerland
by the major telecommunication companies, while both
ErisStation®, a conference phone with wireless microphones,
and ErisTerminal®, a SIP (Session Initiation Protocol) based
business phone system, achieved steady growth.
CMS performed well in the financial year 2016, achieving
its 14th consecutive year of growth and once again
outperforming the global EMS market. Professional audio
equipment, hearables, switching mode power supplies and
industrial products were the leading product categories.
These, together with home appliances, registered sales
increases, which offset declines in solid-state lighting,
communication products and medical and health products.
Sales grew in all four geographical regions.
The good performance from CMS was the result of VTech’s
ability to attract new customers while securing more orders
from existing customers. This in turn reflects the Group’s
strong reputation, expertise in certain product categories and
excellent customer service. The new manufacturing building
for CMS that commenced operations in July 2015 has increased
capacity by 25% to accommodate future demand.
Acquisition of LeapFrog
On 4 April 2016 VTech completed the acquisition of
LeapFrog Enterprises, Inc. (LeapFrog), with the result that it
became an indirect wholly-owned subsidiary of VTech. The
acquisition was effected by way of a tender offer that had
been announced in February 2016. The consideration was
approximately US$72 million and the acquisition was financed
through internal resources.
LeapFrog is a strong educational toy brand, and complements
VTech in geographical strength, product mix, skill sets and
operations. VTech is stronger in Europe, while LeapFrog is
more US focused. VTech performs well in standalone products,
while LeapFrog’s platform products are stronger in the US,
Canada, the UK and Australia. VTech excels in technology
and engineering, whereas LeapFrog has an edge in content
development, backed by a strong education team. VTech’s
manufacturing is done predominantly in its own factories,
while LeapFrog out-sourced its entire manufacturing. The
Group will make it a priority to consolidate and streamline
both companies’ back-end operations, including logistics and
manufacturing. This presents opportunities for improving
the overall cost structure of the combined company. The
acquisition will allow VTech to offer the broadest portfolio of
products that enhance the education and development of
children around the world.
Outlook
Despite a strong US dollar and slow economic growth in both
the US and Europe, management expects the Group’s revenue
to be higher in the financial year 2017. Profitability, however,
will be impacted by the integration of LeapFrog, which will
make a negative contribution during the financial year 2017.
ELPs revenue is forecast to grow due to a number of positive
factors. The acquisition of LeapFrog will result in an immediate
sales contribution. Sales of VTech branded standalone products
are expected to increase further. The successful baby line and
Go! Go! Smart Wheels® will be expanded, while the award-
winning Go! Go! Smart Friends® will see the introduction of a
princess-themed line that combines traditional role-play with
cutting-edge technology, providing a multi-sensory learning
experience. The Little Love®/Baby AmazeTM ranges will see more
products added to take advantage of good demand. New core
infant, toddler and preschool products will also be launched.
This will be augmented by the introduction of several new
LeapFrog branded learning toys. Geographically, VTech’s ELPs
sales in China and Australia will grow further, supported by
increased sales and marketing efforts, new product launches
and the continued growth of online sales.
With the addition of LeapFrog branded products, the
combined platform product business will see growth. In the
VTech branded line, Touch & Learn Activity DeskTM Deluxe,
a three-in-one learning desk designed for children aged
between two and five, will be launched globally during
the calendar year 2016. The handy communication device
for children DigiGo®, which was well received following its
launch in Europe in late September 2015, will be rolled out to
the US market this year. Similarly, the Group’s key European
4 VTech Holdings Limited Annual Report 2016
Letter to Shareholders