HONG KONG – VTech Holdings reported flat fiscal 2022 revenue of $2.37 billion. Higher sales in North America were insufficient to offset lower sales in Europe, Asia Pacific and other regions.

For the fiscal year ended Mar. 31, profit attributable to shareholders fell 25.2% to $172.7 million. The decline was mainly attributable to lower gross profit as costs rose significantly.

“VTech reported stable revenue and lower profit for the financial year 2022,” said Allan Wong, chairman and Group CEO, VTech. “This was largely the result of Covid-19-related disruptions to production and supply chains, together with cost pressures resulting from global shortages of materials and shipping containers.”

Direct labor costs and manufacturing overhead were higher fiscal 2021, mainly because of the appreciation of the Renminbi and the unstable supply of materials, which impacted productivity. The increases in materials prices, especially of electronic components and plastics, also contributed to the decline in gross profit margin. These pressures were partially offset by a change in the product mix.

Improvement was seen in the second half as the group raised prices for its products. Freight cost also declined slightly after the peak shipping season, but the supply of semiconductors remained tight.

Group revenue in North America increased 7.4% to near $1.1 billion for the year, with higher sales of electronic learning products, telecommunication products and contract manufacturing services. North America was VTech's largest market, accounting for 45.1% of group revenue.

CMS revenue in North America increased 26.8% to $238 million, with growth in most product categories. Business activity resumed as social distancing measures eased. There was also a full-year sales contribution from the plant in Tecate, Mexico, following the completion of the acquisition in April 2021.

Industrial products benefited from the resumption of business activities, boosting orders for PCBA for coin and note-recognition machines.

Group revenue in Europe declined 5.6% to slightly more than $1 billion, as higher sales of ELPs were offset by lower sales of TEL products and CMS. Europe was the group's second largest market, representing 43.2% of revenue.

CMS revenue in Europe fell 11.1% to $556.2 million. Hearables recorded lower sales due to materials shortages and reduced orders for Bluetooth headsets. Sales of professional audio equipment increased, driven by higher orders for audio mixers. IoT products grew as smart meter installations resumed in the UK, following the relaxation of social distancing measures. Sales of internet-connected thermostats and air-conditioning controls increased as demand recovered. Growth in medical and health products was driven by increased orders of hearing aids, while sales of health and beauty products were stable. Home appliance sales increased slightly, while sales of automotive-related products were supported by increasing orders for smart electric vehicle chargers.

In contrast, sales of communication products were down, due to lower orders for Wi-Fi routers. During the financial year 2022, VTech added a new customer in smart energy management systems.

Group revenue in Asia Pacific decreased 5% to $255 million in fiscal 2022, as lower sales of TEL products and CMS offset higher revenue from ELPs. The Asia Pacific region represented 10.8% of group revenue.

CMS revenue in Asia Pacific declined 7.3% to $143.4 million. Lower sales of professional audio equipment offset growth in medical and health products and communication products. The professional audio category was affected by lower sales of DJ equipment, as the group's Malaysian facilities shut down for a total of 45 days during the financial year 2022, following the imposition by the Malaysian government of a Movement Control Order to curb the spread of Covid-19. There were also lower orders for USB streaming microphones for online key opinion leaders, resulting from over-inventory at a customer.

In contrast, sales of medical and health products rose. There were more orders for diagnostic ultrasound systems, as hospitals rebalanced budgets away from Covid-19-related equipment purchases, while demand for hearables increased as business activity recovered. Sales of communication products were higher as orders for marine radios improved following the launch of a new generation of products by the customer.

Group revenue in other regions, comprising Latin America, the Middle East and Africa, fell 2.7% to $21.9 million. The decrease came as lower sales of TEL products and CMS offset growth in ELPs. Other regions accounted for 0.9% of group revenue. CMS revenue was $100,000, compared to $300,000 in the previous financial year.

Many uncertainties lie ahead in fiscal 2023, the firm says. On the demand side, high inflation in both the US and Europe may slow consumer spending. The spread of Covid-19 in Mainland China has recently prompted lockdowns in major cities, which are negatively impacting domestic consumption. On the cost side, materials prices remain elevated. This is especially true of plastic materials, as the war in Ukraine has pushed up oil prices significantly. The supply of semiconductors and critical components remains tight, with the lockdowns in Mainland China also disrupting the global supply chain. Despite some improvement in the supply of containers, freight costs will also be higher than last year.

The direct effects on the group of the war in Ukraine will be minimal, as its sales to Ukraine and Russia represented only about 0.2% of revenue in fiscal 2022.

In spite of the uncertain business environment, the group is cautiously optimistic of achieving overall top-line growth in the financial year 2023. Gross profit margin, meanwhile, is expected to be largely stable year-over-year, owing to the continued headwinds of elevated materials prices and freight costs, as well as shortages of critical components.

Sufficient stockpiles of materials are in place to meet the strong orders on hand, while earlier production and shipment schedules will ensure new products reach customers on time, and channel inventory will greatly improve.

CMS revenue is anticipated to return to growth as the order book is strong. Benefiting from the global economy recovering to its pre-pandemic level, and a very sizable backlog of orders, most product categories are forecast to grow. The exception will be hearables, which are expected to decline further on lower demand for mobile headsets. The contribution from the new smart energy management system is expected to become significant during fiscal 2023, as the complete product line enters full production. Further growth is expected from the new product introduction center in Shenzhen, while the Mexican facility will ramp production and begin to build up its EMS capacity. As ongoing materials shortages may constrain VTech's ability to meet all orders on time, the group is taking steps to work closely with customers and suppliers to secure a high level of mutual support during critical situations.

“VTech is now much better prepared for the headwinds ahead than a year ago. We have strong brands, a diverse product mix, a proven ability to bring innovative products to market and a strong financial position. As such, the group is in a good position to deliver solid results in the current financial year, as we continue to strengthen our market leadership and pursue operational excellence.”

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