Vtech Holdings Ltd
HKEX:303

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Earnings Call Analysis

Summary
Q2-2023

VTech Reports Moderate Growth with Challenging Outlook Ahead

VTech Holdings reported a 4.5% revenue increase to USD 1.16 billion, driven by strong sales in North America and Asia. Gross profit rose 8% to USD 329.4 million, boosting margins to 28.3%. Operating profit also improved by 9%, reaching USD 99 million. However, the outlook darkened with guidance indicating a year-on-year revenue decline for the full year. Challenges include high inflation and cautious retailer orders. While ELP revenue was initially expected to grow, it now anticipates a decline. The company plans to enhance advertising strategies and focus on inventory management to navigate the anticipated downturn.

Earnings Call Transcript

Earnings Call Transcript
2023-Q2

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G
Grace Pang;Head of Corporate Marketing
executive

Good afternoon, ladies and gentlemen. Welcome to our webcast. Today, VTech Holdings Limited is announcing its results for the 6 months ended 30th of September 2022.

Let me introduce our management here. Mr. King Pang, Executive Director and Group President; Mr. Allan Wong, Chairman and Group CEO; Mr. Andy Leung, Executive Director and CEO of Contract Manufacturing Services; and Mr. Shereen Tong, Group Chief Financial Officer. First of all, Ms. Tong will present the group's financial performance. Next, Mr. Leung will talk about the group operations and performance in North America and Europe. Mr. Pang will then continue to share the rest of the segment results and give the management outlook for the coming year. We will finish our presentation with a Q&A session. May I invite Ms. Tong to open today's presentation.

K
Ka Hung Tong
executive

Thank you, Grace. Good afternoon, ladies and gentlemen, and all viewers online. First of all, I would like to share with you the financial highlights of the group. For the 6 months ended 30th of September 2022 compared with the same period of the last year. As we see on the slide, the revenue of the group rose by 4.5% to USD 1,164.8 million. The increase in revenue was mainly due to the higher sales in North America and Asia Pacific, which offset lower sales in Europe and other regions. The gross profit of the group rose by 8% to USD 329.4 million, and our gross profit margin also increased from 27.4% to 28.3%.

The improvement in gross profit and gross profit margin was mainly due to the increase in selling prices and the lower cost of materials, while the direct labor cost and manufacturing overhead benefited from the productivity gains during the period. This offset the negative impact of the depreciation of major foreign currencies against U.S. dollar as well as the increase in inventory provisions arising from the Group's early production and shipment of the Group's products to our overseas warehouses in order to mitigate the higher freight cost and the risks of vessel capacity constraints during the peak season of the financial year 2023. Our operating profit rose by 9% to USD 99 million, and our operating profit margin also increased from 8.1% to 8.5%.

The improvement in operating profit and operating profit margin was mainly due to the increase in gross profit and gross profit margin, which offset the higher total operating expenses arising from the increased spending on advertising and promotion activities, operating profit. For the first half of the current financial year also includes government subsidies of USD 2 million in response to COVID-19 as compared with an amount of USD 0.2 million in the same period of the last year. Our profit attributable to shareholders rose by 6.6% to USD 82 million and our net profit margin also increased from 6.9% to 7%. As a result, our basic earnings per share rose by 6.6% to USD 0.325 and our Board of Directors has declared an interim dividend of USD 0.17, same as the last financial year. Turning to the revenue by region, North America remained the largest market of the group, accounting for 45.5% of the group's revenue. Our sales in North America rose by 6.5% to USD 53.5 million.

The increase in revenue was mainly due to the higher sales of our electronic learning products and contract manufacturing services, which offset the lower sales of our telecom products. Our sales to European market reduced by 3.2% to USD 470.4 million. It was mainly due to the lower sales of our telecom products and contract manufacturing services, which offset the higher sales of our electronic learning products. In Asia Pacific region, the revenue of the group rose by 27.9% to USD 132 million. The increase in revenue was due to the higher sales of all our 3 product lines. Other regions incited Latin America, Middle East and Africa. The gross revenue in other regions reduced by 3.3% to USD 11.7 million. The decrease in sales in other regions was mainly due to the lower sales of our telecom products and Contract Manufacturing Services, which offset the higher sales of our electronic learning products.

Our stock balance as of 30 of September 2022 was USD 517 million, increased by 3% compared with the last financial year date of USD 555.3 million. Our stock turnover days also increased from 121 days to 140 days. The highest stock level was mainly due to the early production and the stock up of the blocks products and our overseas warehouses in view of the risk of verse capacity constraints during the peak season of the financial year 2023. As compared with the same period of the last year, our stock balance, however, reduced from USD 599.4 million to USD 517 million and the stock turnover days, also reduced from 141 days to 140 days. The lower stock level was mainly due to the decrease in raw materials as the supply constraints had eased compared with the same period of the last year.

Our trade debtors balance at the 30th of September 2022 reduced by USD 507.9 million to USD 487.4 million compared with the same period of the last year. Our trade debtors turnover days also reduced from 66 days to 62 days. As of 30th of September 2022, we had a net cash balance of USD 10.1 million, including deposit and cash of USD 103.3 million and bank borrowing of USD 33.2 million, a decrease of USD [ 15.7 ] million compared with a net cash balance of USD 25.8 million as of the same period of the last financial year. The decrease in net cash balance compared to the same period of the last year was mainly due to the lower opening cash balance and unfavorable foreign currency exchange movement on the gross net assets as a result of the decreased result of foreign currencies against U.S. dollar during the period. These offset the lower dividend payment and the increase in net cash generated from operating activities compared with the same period of the last year. Nevertheless, our financial positions remain strong, and we have adequate liquidity to meet the current and future working capital requirements.

That's all of my presentation. I will now invite Mr. Andy Leung to share with you our outlook, operational review. Mr. Leung, please.

H
Hon Kwong Leung
executive

Thank you, Shereen. Good afternoon, everyone. I will take you through the review of our operations. We begin with costs. The group gross profit margin in the first 6 months of the financial year 2023 was 28.3% as compared with 27.4% in the same period last year. The increase in gross profit margin was mainly a result of increase in selling prices and lower cost of material. At the same time, both the direct labor costs and manufacturing overheads were benefited from the productivity gains during the period. This offset the negative impact of the depreciation of the major currencies against the U.S. dollar as well as an increase in inventory provisions. This arose from early production and shipment of the group orders to our overseas warehouses in order to mitigate higher freight costs and risks of capacity constraints during the peak season.

Just a quick highlight about demanding tension between Mainland China and the U.S. On the 7th of October this year, the U.S. Department of Commerce published a number of new technology restrictions on Mainland China, limiting is assessed to certain semiconductors and chip-making equipment. There's low impact on the group businesses from these measures. Either the group products or the equipment used in production is affected. Retail has done less embattled on the strategy, while [indiscernible] its manufacturing base in order to raise our competitiveness and positioned for further growth. The implementation of this strategy began in August 2018, with the acquisition of our first manufacturing facilities in Malaysia at a site in Mura. Since then, the group has expanded its production in Malaysia and to Mexico with the acquisition of 2 more manufacturing facilities in Penang 2020 and Tecate in 2021. The facility in Tecate, which manufacture professional loud speaker and other electronic product for a customer in North America, is now contributing revenue to our CMS business.

As we expand the production base further, our manufacturing footprint will become increasingly global. Looking now at our performance by region, group revenue in North America increased by 6.5% to USD 530.5 million in the first 6 months of the fiscal year 2023, higher sales of ELPs and CMS offset lower sales of telecommunication products. North America remained our largest market, accounting for 45.5% of the group revenue. ELPs revenue in North America grew by 4.5% to USD 266.5 million, with a particularly strong increase in Canada. The growth was driven by higher sales of stand-alone products as we strengthened our core learning product offerings. It also refaced the group's success in delivering product on time and improving channel inventory through adjusting production and shipment schedules to avoid logistics delays.

During the first 9 months of the calendar year 2022, the group maintained its leadership of season as the manufacturer of electronic learning toys from infancy through toddler and preschool in the U.S. In Canada, we have strengthened the position as the #1 manufacturer in the infants, toddler and preschool toys category. Stand-alone products saw sales growth for both VTech and LeapFrog brand products. For VTech, preschool products, KidiZoom cameras products, the Kidi line of products, Switch & Go Dinos and Marble Rush all post higher sales. We had a new series of learning watches featuring favorite children characters, including PAW Patrol, Bluey, Spidey sold especially well. These gains offset declines in infants and toddlers products as well as the Go! Go! Smart family of products. At LeapFrog, growth was driven by higher sales of infants and toddler products, Leapland Adventures, eco-friendly [ pop] toys, which offset a decline for preschool products. The launch of Magic Adventures Microscope and a new licensed version of Leapland Adventures added to growth.

Platform products saw sales decline, mainly due to lower sales of VTech products. For the VTech brand, sales of KidiZoom Smartwatches were higher as materials supply improved. However, this was insufficient to offset lower sales of Touch & Learn Activity Desk. Sales of KidiBuzz held steady. LeapFrog sales increased slightly during the period. The interactive reading systems and Magic Adventures Globe benefited from increased distribution and expanded content. Sales of children's educational tablets, however, posted a decline. This led to a slight fall in subscriptions to LeapFrog Academy.

Telecommunication products revenue in North America fell by 5.6% to USD 123.9. Commercial phones and residential phones reported sales declined, offsetting growth in other telecom products. The decline in commercial phones resulted from lower sales of analog commercial phones has set and SIP phones. The tight supply of semiconductor led to reduce shipments, analog commercial phones, sales of headsets decreased as the major customer reduced its orders. SIP phones experienced sales declines due to a delayed product launch, this declines offset growth in hotel phones. Sales of hotel phones were higher as the group maintained a stable supply of product. A new series with revamped design was launched that enjoy a good market reception.

Sales of residential phones were lower. The US residential phone market has continued to decline and shipments were constrained by the tight supply of semiconductors. Despite this, the group regained distribution in a key retailer and strengthened its leadership position in the US residential phones market during the period.

Other telecommunication products, which comprise baby monitors, CareLine residential phones and IADs posted a sales increase. Baby monitors saw higher sales on increased placements in major US retailers, while the new VTech and LeapFrog ranges were well-received by the market. CareLine residential phones grew due to higher sales of VTech branded products and a customer's products. IADs benefited from increased orders from an existing customer.

During the period, the group strengthened its #1 position in the baby monitors market in the U.S. and Canada. CMS revenue in North America increased by 25.5% to USD 140.1 million. Growth was mainly driven by professional audio equipment and industrial products as business activities continues to recover following the easing of social distancing measure and the improvement in component shortages. Sales of professional audio equipment grew on increased demand for power amplifier and loud speakers. The growth of industrial products was driven by more order for electronic locks and printed circuit board assembly for coin and note recognition machine.

In contrast, sales of solid-state lighting declined as a major customer reduced orders. Sales of medical and health products remained stable. Group revenue in Europe decreased by 3.2% to USD 47.4 million. in the first 6 months of the financial year 2023, higher sales of ELPs were insufficient to offset lower sales of telecommunication products and CMS. Europe remains Retail's second largest market, accounting for 40.4% of the group revenue. ELP revenue in Europe rose by 5.4% to USD 159.3 million. The increased came despite the depreciation of the euro and sterling against the U.S. dollar during the period. Sales of standalone product growth offsetting declines in platform products. Among the group's key markets, France, Germany, Netherlands and Spain post sales increases, compensating for a decline in the U.K. In the first 9 months of the calendar year 2022, VTech remained the #1 infant and toddler toys manufacturer in France, the U.K., Germany and the Benelux countries.

In standalone products, both VTech and LeapFrog branded products reported sales increases. For VTech, preschool products, electronic learning aids, KidiZoom cameras, the Kidi line of products, Marble Rush and eco-friendly toys saw growth, offsetting declines in the Toot-Toot family of products. Sales of infant and toddler products as well as Switch & Go Dinos held steady. For LeapFrog, preschool products and LeapLand Adventures posted sales increases. The launch of Magic Adventures Microscope and the new licensed version of LeapLand Adventures added to growth. This offset sales declines in the brand's infant and toddler products.

Both VTech and LeapFrog platform products saw lower sales. The decline for the VTech brand was mainly attributable to lower sales of children' educational tablets, KidiZoom Smartwatches and Touch & Learn Activity Desk. This offset growth in the KidiCom range of products. At LeapFrog, the higher sales of Magic Adventures Globe were offset by lower sales of interactive reading systems.

Revenue from telecom products in Europe decreased by 2.9% to USD 46.3 million. Commercial phones and other telecommunication products saw sales declines, offsetting growth in residential phones.

Commercial phones and other telecoms products were affected by the economic slowdown which impacted sales of Snom branded SIP phones and hotel phones. Sales of CareLine residential phones were affected by the tight supply of semiconductors. CAT-iq handsets saw a sales decline due to reduced orders from customers. By contrast, our award-winning range of baby monitors saw sales increase on the back of channel expansion and new product launches, including the introduction of LeapFrog branded baby monitors in Germany. The growth in residential phones in Europe was driven by increased order from existing ODM customer and the launch of VTech branded product, with the group increasing its penetration in the U.K. and successful expanding in the German market.

CMS revenue in Europe decreased by 7.7% to USD 264.8 million. The growth from professional audio equipment, IoT products and smart energy storage systems failed to offset lower sales of hearables, medical and health products and communication products.

Sales of hearables declined as the demand for commercial headsets began to slow down as the pandemic receded, while end-market demand for the customer's Bluetooth headsets decreased due to keen competition. In medical and health products, growth from hearing aids failed to offset a decline in hair removal products, which were negatively affected by the tight supply of critical components. Sales of communication products decreased as the upgrading of Wi-Fi routers that had occurred during the pandemic and compounded by the lack of critical components that limited VTech's ability to fulfill orders.

In contrast, sales of professional audio equipment increased, driven by higher orders for audio interface product and a recovery in demand for audio mixers following the pandemic. IoT products saw sales increases from smart meters, internet-connected thermostats and air-conditioning controls as market demand in response to soaring energy prices. Despite growth being constrained by the lack of critical components, sales of smart energy storage systems also trended higher. Sales of home appliances, meanwhile, remained stable during the period.

I will now turn over to King for the remaining regions and outlook.

K
King Fai Pang
executive

Thank you, Andy. Good afternoon, ladies and gentlemen. Group revenue in Asia Pacific increased by 27.9% to USD 152.2 million in the first half of financial year 2023. Growth is reported by all 3 product lines. This region accounted for 13.1% of group's revenue. Revenue from ELPs rose by 6.9% to USD 41.9 million. Higher sales in Australia and Japan offset lower sales in Mainland China. Sales of both VTech and LeapFrog products reported good growth in Australia, where during the first 9 months of calendar year 2022, VTech strengthened its position as the number 1 manufacturer in the infant and toddler toys category.

In Japan, sales growth was driven by the launch and good sell-through of a smartwatch that teaches the popular Sumikkogurashi characters. It was jointly developed with a Japanese partner. Expanded listings with a major toy retailer was also a key growth factor. In Mainland China, despite the successful launch of the Mobile watch line and the strong sell-through of the Magic Adventures Globe, higher online sales were insufficient to compensate for lower sales at offline channels. Revenue from telecommunication products increased by 4.5% to USD 13.9 million. Higher sales in Japan, Hong Kong and India offset lower sales in Australia. In Japan, sales growth was driven by strong shipment of CareLine residential phones with the customer. Sales increases in Hong Kong and India were attributable to IADs and residential phones, respectively.

In Australia, sales of residential phones dropped as the market continued to shrink, while sales of baby monitors declined due to semiconductor shortage. CMS revenue in Asia Pacific increased by 45% to USD 96.4 million. Good sales performance was reported across all major product categories. Professional audio equipment was buoyed by higher sales of DJ equipment, which as pandemic restrictions benefited from improvements on market demand and component supply. This offset lower orders on USB streaming microphones for online KOLs. Medical and health products recorded higher sales. Orders for diagnostic ultrasound systems picked up as hospital re-balanced the budgets away from COVID-19-related equipment. Orders also increased for hearing aids following improvements on material supply. Sales growth for communication products was driven by Marine radio, which benefited from a product redesign to resolved component supply issues.

Other regions, other regions comprise Latin America, the Middle East and Africa. Revenue fell by 3.3% to USD 11.7 million in first half of financial year 2023, accounting for 1% of group revenue. The drop was due to lower sales of telecommunication products and CMS. ELP's revenue in other regions increased by 10.3% to USD 6.4 million. Higher sales in Latin America and Africa offset lower sales in Middle East. Telecommunication products revenue in other regions decreased by 14.5% to USD 5.3 million. Lower sales in Latin America and Africa offset an increase in the Middle East. CMS revenue for this region was immaterial during this period. We next share outlook of the group.

The operating environment for the second half of the financial year 2023 is volatile and complex. Contrary to earlier, I believe that it would be transitory. Inflation has reached multi-decade high and is proving stubbornly persistent. Rapid and drastic interest rate hikes have ensued and raise are yet to show signs of peaking in the near term. Economic outlook around the world have deteriorated sharply, Consumers are reducing discretionary purchases and turning highly price sensitive. On the demand side, retailers are working hard to reduce their high levels of inventory while delaying orders. Outside the U.S., the strong U.S. dollar is exerting additional pressure on retailers and consumers. On the supply side, availability of some critical components remained tight.

Logistics costs, while stabilizing, are still higher overall compared with last year. In light of this drastic operating environment changes, we are revising our full year outlook. Group revenue is now expected to decline year-on-year, and gross profit margin is expected to be stable. The group has intensified its focus on inventory management and cost control. We will, nevertheless, beef up advertising and promotion to drive sell-through. We will also continue to invest in new product development and geographic expansion for future growth.

ELPs revenue, previously forecast for modest year-on-year growth, is now expected to decline for the full year. In North America and Europe, retailers are tightening inventory control and are cautious on order placement. To ensure good sell-through, especially in the upcoming holiday season, we have put in place well planned advertising and promotional campaigns. Good momentum is expected nevertheless, to continue in a number of key markets, notably Canada, Australia, Germany, Spain and the Benelux countries. Sales in Mainland China are expected to improve in the second half, but overall sales for the full year are forecast to decline. Our outlook for telecommunication products has also been lowered versus the previous forecast.

Full year revenue is now projected to decrease year-on-year with improved sales expected in the second half. New baby monitor models with artificial intelligence features and the revamped line of hotel phones with contemporary design will continue our good momentum in these 2 product categories. Sales of commercial phones are expected to recover as new products hit retailer shelves. They include the Snom D9 series of SIP desksets, the multi-cell SIP DECT mobility system and to work from-anywhere. Sales of residential phones are forecast to pick up in the second half.

Improvements in component supply will enable further market share and increase in North America. Market share gains in Europe will be driven by distribution expansion of its own branded products. CMS revenue is now projected to be stable year-on-year. Sales in the second half are expected to slow as the supply of some critical components remained tight. Economic uncertainties also causing customers to pay back inventory. Full year sales of hearables are expected to decline sharply, owing to lower demand for commercial and mobile handsets. These notwithstanding. Full year growth is focused across most major categories. Contributions from smart energy storage systems will continue. It will become significant as the full product line enters production. The facility in Mexico is ramping up to meet strong demand. At the same time, the CMS business is planning further rationalization of this production base to meet customer requirements. Additionally, further process improvements are being implemented to raise productivity.

Thank you. This completes our presentation. We now look forward to answering your questions.

G
Grace Pang;Head of Corporate Marketing
executive

Thank you, King. We will now begin the Q&A session. [Operator Instructions] The first question comes from Eric Lau of Citi.

E
Eric Lau
analyst

Congratulations for a pretty good result despite very tough macro. May I have just a couple of questions. The first one is, can you comment about the implication of your company for over inventory issue in the channel, I mean, U.S., Europe? That's number one. Number 2, just the simple question about the bank loan, why you increase the bank loan around $90 million. And number 3 is, can you remind us what was the FX impact for the first half result, given the stronger U.S. dollar? So like what would be the adjusted revenue growth with a neutral currency basis. And given the weaker euro and weaker renminbi, how was the impact to the first half itself?

C
Chi-Yun Wong
executive

Yes, I'll pass the question to Shereen.

K
Ka Hung Tong
executive

From the inventory, as I mentioned in the presentation, our inventory compared with the same period of last year. Actually, as we did by around USD 29 million, but for our channel inventories, meaning our retailers in U.S. and Europe. They also have some stock up in the inventory sales At the beginning of the year, they foresee there may be some capacity constraints due to shipping carriers. So right now, what we are doing is we have already increased the spending on advertising and promotional activities. So that for the channel inventory in our retailers, especially in U.S. and Europe, we expect that the channel inventory will be resumed to a normal situation, expect half of the holiday season. As per our own inventory, as I mentioned earlier, we have a pretty conservative inventory provision policy, meaning that we based on our aging, and we have increased the inventory provisions by around USD 7 million in the first half compared with the same period of the last year, even though a majority of the inventory on hand in our warehouse are active items.

As for your second question regarding the bank loan. The reason why we have deposit cash of USD 103 million, and then at the same time, we have a bank borrowing of around USD [ 93 ] million because most of the cash that we have on hand as of the interim year-end date is mainly because most of the cash are in euro and pound sterling that we have received. But at the same time, we have [indiscernible] contract to hedge them. But the contract day is around by the end of the year. So if we only exercise those FX contracts, our exchange will be pretty low compared with the contract rate. So that's why we keep the foreign currencies cash deposit at the interim yen, they rather than convert them into U.S. dollar. So that's why we have a huge deposit and cash. At the same time, we also have a U.S. dollar bank borrowing, but the net cash balance is still around USD 10.1 million as at the interim year-end day.

Regarding your third question about the FX impact, as I mentioned earlier, we have already hedged most of our foreign currency, especially euro, pounds against U.S. dollar at the beginning of the financial year. But compared with the same period of the last year, euro and pounds sterling actually has depreciated a lot against U.S. dollar. So it really have had a significant impact on our revenue and net profit, especially for our European sales for our toys business because most of our toy business in Europe, we receive local currency in euro and pound sterling. But since we have already hedged most of our foreign currency exposure at the beginning of this financial year, so that means the impact has been mitigated. But when compared with the same period of the last year, the depreciation actually has hit our top line and bottom line in the first half of this financial year.

E
Eric Lau
analyst

May I have a follow-up question, say your guidance is expectation of revenue to decline year-over-year, so, i.e., second half revenue will drop evidently. So in this case, because of the order visibility deterioration or U.S., Europe market because of the recession issue or because of energy cost surge in Europe? Can we get more color about your guidance change?

C
Chi-Yun Wong
executive

For the question, I think to answer your question, in May, when we announced our final results, we were still a little more optimistic on the outlook of the second half of the year. However, the economy have actually deteriorated quite quickly in the back of a very quick rise in interest rates. So at the same time, as Shereen has mentioned, the channel inventory is high, leading to the other status because of higher channel inventories, leading to reduced order because of that. So all of these added together, so we have changed our outlook to a slightly decline for the full year because of the weak economy, the uncertainty in the interest rate, the weak sell-through that is being anticipated because of higher channel inventory and also the uncertainty in the interest rate that translate to a weaker purchasing power.

G
Grace Pang;Head of Corporate Marketing
executive

Any other question?

U
Unknown Analyst

This is [ Louis ] speaking. Can I have a question?

G
Grace Pang;Head of Corporate Marketing
executive

Yes.

U
Unknown Analyst

With regards to toys, could you give us an idea, ballpark, about the decline in revenue we're expecting?

C
Chi-Yun Wong
executive

Thank you, Louis. Can I pass the question to King to answer this.

K
King Fai Pang
executive

Louis, I'm sure you know that we do not give specific quantities. So apart from saying that as you can see, we are forecasting a switch from growth to decline from the first half to the second half, what can we say?

U
Unknown Analyst

For the full year, let's say, are we talking about low single-digit decline, mid-single digit, double-digit decline?

K
King Fai Pang
executive

It's not double digit.

U
Unknown Analyst

Okay. And one other question, if I may. A long time ago, when VTech acquired Snom, I remember the Chairman saying he saw the writing on the wall for the proliferation of IT-based telephony and the decline of the classic Cisco model. Until now, I don't see the correspondent surge in revenue from the commercial phones. So is the scenario not mature, not developed? Or what is going on in the commercial phone market?

C
Chi-Yun Wong
executive

Yes, Louis, thank you for this question. When we acquired Snom 5 years ago we were obtained the opinion that a closed system for enterprise telephony, like Cisco and some of the other telephone supplier, will eventually move to a cloud-based open architecture. The move is, as we have predicted, happened, although Cisco has also responded to this by purchasing a cloud-based operation pit-based platform. So Cisco is also operating a cloud-based, although the cloud base is a pseudo cloud-based, but it's more like a closed system.

So the market is moving still at this point to the cloud-based system. I think why we are not seeing the growth is because of our product launches, unfortunately, are not catching up fast enough to the market. There are other players in the market. For example, eLink, they are growing rapidly to capture this market. We have since then revamped our product line on Snom, the DH series, as you can see on our presentation is the new series of commercial phone that we are launching this year that should put us in a very competitive landscape to capture this market. At the same time, we are also launching our M500 DECT multi-cell system that we will be able to capture the market. So as of today, our product range are ready. And I think you will see higher growth from this commercial phone sector from VTech. But the overall sector is growing. Unfortunately, our product from Snom, it takes time to revamp the product to become competitive.

G
Grace Pang;Head of Corporate Marketing
executive

Our next question comes from [ Steven ].

U
Unknown Analyst

When you were talking about your downgrade for the second half with reference to contract manufacturing, you're implying sort of part of the reason for the downgrade was shortages of parts. Is this a deteriorating problem? And which parts would you say are particularly short supply at the moment?

C
Chi-Yun Wong
executive

Can I pass it to Andy to answer this question?

H
Hon Kwong Leung
executive

Although the supply situation of the overall component globally have been improved. But however, there is still a lot of our product from our customer that they are affected by shortages of critical component. And customers of CMS have been affected. And for this reason, even though we have a significant number of backlog order from the customer, we may not be able to fulfill the requirement because of the component shortages. And I can say the supply situation has been improved a little bit, especially for the critical component, but the supply situation is still very tight.

U
Unknown Analyst

So can you say which area is particularly difficult?

H
Hon Kwong Leung
executive

Yes, particularly in the area of those critical components for the professional audio and also for those components that relate with the electric vehicle and also the IoT type of products.

G
Grace Pang;Head of Corporate Marketing
executive

Good. Next question come from [ C. Choi ].

U
Unknown Analyst

I got a few questions. Firstly, on the ELP. I think probably a year ago or so, you mentioned, basically, we are losing some other shares in North America, I think probably to Mattel. How is the situations really? And also, in the slide, you talk about the decline in sales in tablets or platform products that resulted the reduction in the sign-up of LeapFrog economy. Is that mostly competition reason? Or is it because the overall market is changing due to reopening and all these things?

C
Chi-Yun Wong
executive

Yes. I'll pass the questions to King.

K
King Fai Pang
executive

Our situation with Mattel this year is similar, maybe a little bit a little bit "worse" than last year, but the change is not significant. And the second question pertains to [ LV ]. Yes, No, we don't think the -- obviously, compared to the beginning of lifetime in the U.S., school children have already been returning. They're all in school already, taking a physical tuition in class. So compared with that, onetime peak, it certainly has come down. But compared to normal times, it does not drop. For us, it's a more local condition. Our best subscriber acquisition is through our LeapFrog tablets. And unfortunately, our tablet, first, was plagued by not being able to get one critical CPU component. So we weren't able to ship when we had lots and lots of orders. The parents and the children they're all looking for tablets for their small kids.

And now, we do not have the component supply issue anymore. But then the market has turned a little bit solid, especially for the high-priced products. And you know that the tablet, it's the selling price, depending on, whether your promotion or not, is anywhere between $105 to $135. So it's a big ticket item. And I think most parents are waiting for Christmas for the purchase. So I would say this is the single most permanent reason for our drop in ELP registration. But the decrease is actually quite insignificant in my opinion, compared to the decrease in our hardware sales.

U
Unknown Analyst

All right. So it's not so much of competition for the hardware, right?

K
King Fai Pang
executive

It's not competition for online preschool learning. The problem that we have encountered for a variety and very different reasons in selling through the tablet.

U
Unknown Analyst

All right. And also on ELP products or the device, it appears that you mentioned a few times just today alone that -- about a couple of products where you're partnered with some, how do I put it, brands or some characters in Japan and in U.S. the PAW Patrol and all this, and it seems to be doing quite well. So the question is while we don't own any major IPs in this front, but then those partnerships seem to be very helpful. But what are the costs to these partnerships, what are the drawbacks? And is there a lot more that you could do on this front?

K
King Fai Pang
executive

No, we are beefing up incorporating IPs in our products. IP sale, especially for preschool and for total products. And the cost, obviously, there is always a risk that we put our stake on a particular IP and that IP goes nowhere. And it's not like there's nothing happened before. Other than that, it's a royalty. It's a royalty on a per unit basis that we pay to the licensor. And also, typically, there is a minimum guarantee for a year or for 2 years, that regardless of the earned royalty that we have to guarantee the license. And these are these are, by and large, order costs.

U
Unknown Analyst

All right. Another question is on your supply chain, logistics side. You talked about overall logistic cost is still higher. But at the same time, we are seeing the container shipping rates basically dropped off by, say, 70%, 60%, at least and probably still going down. Are you going to see in the second half in terms of the reduction in logistic cost.

C
Chi-Yun Wong
executive

Shereen?

K
Ka Hung Tong
executive

For the logistic cost, as you have mentioned, actually, when we compare the first half compared to the same period of last year is higher than the same period of last year. But right now just right after the peak season, we are seeing we are also seeing that logistical is much lower right now and then it's really trending down. It will help us in the second half of the balance of the year because most of the shipping carriers also foresee that they can't charge us too much, especially after the peak season. So it will help our second half regarding logistic cost, but not in the first half.

G
Grace Pang;Head of Corporate Marketing
executive

I will leave the last question for Daniel due to time constraint.

U
Unknown Analyst

Given your expertise in the various segments, I would have thought that something like a VR/AR headset or something like that could be a product that you could make quite well. Is there anything within that space that you're looking at or working on? Or is that an area that you're not focused on?

K
King Fai Pang
executive

First of all, we were talking about ELPs. Obviously, one can find lots of applications for telecommunication products in our CMS division or product line. We'll also be tacking on content manufacturing, ODM or OEM jobs for VR and AR. If we talk about ELP specifically, first of all, we have prototypes of some gadgets that we have tested and are testing in our R&D labs. And we have to be very cautious about it because our ELP is predominantly sold to children of ages below 5 or 6 year old. So the experience has to be appropriate and the content is also quite unique, which means that in addition to developing the hardware itself, which is already a huge undertaking development of content, we would argue is even a bigger undertaking. So keeping our eyes open. We have played with it in our labs, but we do not have any near-term plans to productize VR/AR headset.

U
Unknown Analyst

And just if I could, on a last question, a quick one. I noticed, I think back in June, you made kind of a standard announcement, like other companies do, that you have the ability to buy back up to 10% of your shares. You're obviously very generous with your dividends. So I wonder how you think about buybacks in the context of like vis-a-vis would these replace dividends? Or would they be in addition to dividends? And I've noticed you haven't bought anything back yet despite trading kind of decade low multiples. I just wonder, should we expect buybacks in the near term? Or are you waiting for even lower prices?

C
Chi-Yun Wong
executive

I think this has been a question that was posted to us for the last 10 years since we always generated a lot of cash in our company. In our company philosophy is, we generally believe in returning the cash to the shareholders rather than we buy back shares because I think the shareholders have the freedom to do whatever they want, once they got the dividends. I think that has been the company policy for the last over 10 years. So we go for basically distribute all the earnings back to shareholders and let the shareholders decide what to do with the dividends, they can either buy back company shares, if they feel the price is right or they can do something else. So this has been the general company policy for many years.

G
Grace Pang;Head of Corporate Marketing
executive

Okay. I'm afraid that's all we have the time for. That concludes today's webcast. Thank you for your participation. Thank you very much.

C
Chi-Yun Wong
executive

Thank you.

K
King Fai Pang
executive

Thank you.

H
Hon Kwong Leung
executive

Thank you.

K
Ka Hung Tong
executive

Thank you.

All Transcripts

2023
2022
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