Vtech Holdings Limited (303) Earnings Call Transcript & Summary

Hello, everyone. Welcome to Vtech's online meeting starting on the acquisition of the assets of Gigaset Communication. In today's meeting, we have Mr. Hillson Cheung, President of our Telecom Product business. Ms. Shereen Tong, the Chief Financial Officer; then Mr. Allan Wong, Chairman and Group CEO, who will be taking part in the Q&A session. To start our proceedings, Hillson will present an overview of Gigaset and explain how Gigaset and Vtech's telecom product business will complement each product. Shereen will then review the transaction and the financial details. After that, we will open the floor for questions. Let me now pass the time to Hillson. Hillson, please?

Thanks, Grace. As you have seen from our press release and the announcement made in January and April, we are excited about the acquisition of the asset of Gigaset Communications GmbH, a global leader in communication technology. We are now taking this opportunity to share with you today the synergies that the acquisition will bring to Vtech as a group. With a history of more than 30 years, Gigaset is a strong and trusted brand, which stands for innovation and demand for the highest, made-in-Germany quality. It is active in over 40 countries with sales network covering all European markets. Looking at product line. It's currently the market leader in DECT phones in Europe. In addition to DECT phones, Gigaset develops, manufactures and it provides business telephony solution for enterprise customers, which has caused professional [indiscernible], and also designs and manufacturers Android-based smartphones. The company has a cloud-based smart home business, which was terminated prior to the closing of the acquisition. Our acquisition of Gigaset asset is strategically compelling because its business are highly complementary with our telecom product business. It will strengthen Vtech's leadership position in the global residential phone market, broaden our product portfolio and new market channels, expand our manufacturing footprint and create many synergy and operational efficiency. Let me explain further. Gigaset is the #1 player in DECT phone in Europe with a market share of 44% in revenue, according to the data from GfK. Vtech, meanwhile, is the #1 manufacturer of residential phone in U.S. By acquiring Gigaset, we have become the world's #1 player in residential phones. This is a significant increase in our global market reach, and clearly brings further economic of scale to our telecom product business. A few years ago, we started to enter European market with the Vtech branded both in Amazon to serve the value segment. Gigaset is the market leader of DECT phone in Europe and holding dominating position in mid-high segments. With the acquisition, we were able to enhance our product portfolios, give a new product and provide a full range of products at all price front to well serve the market needs. In business phone, our existing German subsidiary, Snom Technology, is the pioneer in IP phone. Gigaset is the leading DECT IP system manufacturer. Their multi-cell solution is the perfect companion for mobile corporate communications. There are obvious synergy and potential here for both brands. Smartphone, meanwhile, represent a complete new product category for Vtech. Gigaset's offering is very customized, are well addressing the needs of vertical markets, such as large organization and institution, which has high requirement in terms of quality and security. As well as opening up new product areas, Gigaset is adding new market channel to the group, which will help us for the sales effort worldwide, especially in Europe. Vtech presence in DECT phone in Europe is relatively modest while Gigaset is the market aid. It has extensive sales network covering all European markets with 36,000 point of sales across Europe. In business phone, Snom is focusing on service -- serving value-added resellers and SMB. This will now be complemented by Gigaset's focus on verticals such as large corporation and major institutions. In smartphone, apart from e-commerce, Gigaset also achieved solid B2B exposure as well. The addition of Gigaset factory in Bocholt, with Made in Germany reputation, also brings benefits for various aspects. As such, the acquisition is another step forward in the rationalization of our manufacturing footprint. By operating facility in Asia, Latin America and Europe, we are able to be more close to our customers, and we will aim to provide more value to them. Our R&D will also be benefited. Through the acquisition, Vtech is adding to its already strong global R&D setup with additional 2 R&D centers in Bocholt, Germany as well as in Poland. This will strengthen our future product development capabilities. On the manufacturing side, Gigaset's awarding factory -- award-winning factory in Bocholt is a modern, highly automated production facility, which gives Gigaset high level of efficiency that make it cost competitive globally. The 52,000 square meter factories has about 200 operators. It is capable for producing over 1,200 different type of products. In addition to manufacturing synergies, we also expect savings in sales and marketing, supply chain and operation as Gigaset becoming part of our telecom product business. The foreseen operational efficiency will have a positive impact on the bottom line. We are excited to have Gigaset joining Vtech family. We aim to preserve the assets of what Gigaset represents for end consumer and enterprise customers. With leveraging Vtech's expertise in supply chain management, our global network and capability for innovation, which was able to generate a sustainable and profitable growth. I will turn you to Shereen Tong, our Group CFO, to review the transaction from a financial perspective.

Thank you, Hillson. As Hillson said, we are very excited about this acquisition, and we are confident that the combination of Vtech and Gigaset will create long-term value for all the shareholders. The closing took place on the April 5, 2024, with a preliminary purchase price of about EUR 27.5 million. On closing, EUR 21 million was paid assuring to the asset purchase agreement, which was funded by internal resources. The final consideration is subject to adjustments based on the amount of the assets and liabilities to be determined at closing. The balance of the final consideration will be paid after 12 months from closing and upon meeting certain conditions as disclosed in the announcement. The acquired assets based on the unaudited net book value as of June 30, 2023, was EUR 126.6 million. In the financial year 2022, Gigaset generated over EUR 158 million in sales from DECT phones and about EUR 81 million in sales from business phones and smartphones. We have a proven track record of making acquisitions of this kind and successfully integrated them into our global operations, thereby generating profitable growth. These include the acquisitions of LeapFrog and Snom in 2016, as well as more recently, the manufacturing facilities in Malaysia and in Mexico in 2018 and 2021, respectively. After integrating Gigaset's operations into our telecommunication products business, we expect a positive top line and bottom line contribution to the group in the financial year 2025. In conclusion, the acquisition of assets from Gigaset Communications GmbH represent a significant milestone for Vtech. The strength that Gigaset brings to the Vtech world strongly align with our longstanding and successful strategy based on product innovation, market share gains, geographic expansion and operational excellence. This is the end of our presentation. We'll now open the floor for questions.

[Operator Instructions] The first question comes from [indiscernible].

Could you please give me the asset mix of the assets you acquired?

Well, as I said, the total asset value is EUR 27.5 million. Around half -- 1/3 of it related to the intangible assets, mainly the brand name, patent and trademark. And the other -- the second tier is related to the fixed assets, including the land and building and plant and machinery is about 1/3 of the value. And then the other 1/3 is related to the inventory of the assets that we acquired from the Gigaset Communications GmbH. And the total asset value also have a deduction of the liabilities. The liabilities actually is related to the employment-related liabilities for the employees transferred to the Vtech Group, and the value is talking about less than EUR 2 million. And in total, the net amount for the preliminary purchase price is EUR 27.5 million. Is it clear?

Yes. The land and building, okay, 1/3.

Yes. Land and building, including -- 1/3 including land and building as well as the plant and machinery in total fixed assets.

And the inventory, can you just pin it down in finished goods and raw materials?

Yes. In global materials and finished goods, and then the majorities are the raw materials.

Majority. Okay. And how many staff have you now taken over from Gigaset?

Before the acquisitions, the total employees for the whole Gigaset group, including Germany and the overseas subsidiaries, is talking about 800 employees. So after acquisitions, we reduced the headcount by around 1/3. So right now, the total headcount that we acquired from the Gigaset business, including Germany and the overseas office is talking about 500 employees.

Now after the Gigaset acquisition, Vtech will have 3 representations in Germany in Bocholt, in Berlin and in Stuttgart. How will this develop going forward? Can you streamline the operation?

So Gigaset, actually they will have operation in Bocholt with sales office in Munich. So as Shereen just indicated, we already arranged a certain kind of headcount reduction in operations side as well as the sales force in Munich. And for Snom, they operate in Berlin. So in the meantime the structure will remain unchanged.

Because, I mean, looking at products and operations, I wonder why you need operation in Berlin?

Berlin is our office -- Snom office. So Snom, as we just mentioned in the presentation, it's also in the professional phone business. So they have their own brand, they have their own product portfolio and loyal customers. So basically, for the moment, we see the acquisition for Snom and Gigaset, they will have a certain kind of synergy in product development areas, but a salesforce or sales resources, they will remain separate for the moment.

[Operator Instructions] Second question comes from Eric of Citi.

May I have just 2 questions. The first one is, say, can we get an idea what was the sales for Gigaset over the past few years? Because -- or even before the pandemic because the point is residential phone actually in the market, as you know, has been shrinking. So I'm not sure how fast will the sales declining? That's number one. Number two, in terms of the integrated solution for the enterprise telephony, because you mentioned they have the smartphone, bla-bla-bla. Actually, I'm not sure who other comes in the marketplace right now. And then how does it compare with our competitive advantage versus eLink, the Chinese one, or the Snom, because they do have the integrated solution for the enterprise telephony to cater for work-from-home. So how -- but I'm not quite sure about the competitive advantage.

For the Gigaset sales, you are asking about the previous 3 years. So in the financial year 2020, their total revenue is about EUR 214 million. And then 2021 is also around EUR 217 million. And then in 2022, it's around EUR 241 million. That means in the previous 3 years, their revenue is pretty steady. And then 2022 is even higher than the previous year. But in 2023, which is just last year, they have announced their first half result, but they haven't announced their full year result. The first half is also talking about, say, EUR 100 billion. So that's why the revenue is pretty steady. But I can't tell you their full year result in 2023 because they haven't announced yet, but they had a bit decline compared with the 2022, but they keep it around, say, EUR 200 million year-over-year in the last 3 years.

For Gigaset, with their mobility solutions, it's a pretty sophisticated system that they are able to cover a huge number of base stations and over 20,000 of handset. This edge in terms of application in the market for -- especially for verticals, there is a proven advantage against a competitor as well as other players. And currently, Gigaset don't have desktop solution. So with Vtech engineered resources, we will help them to establish new products in these segments. So in the long run, Gigaset will be able to sell traditional desktop IP phone as well as their sophisticated multi-services, which -- actually imply the future of corporate communication in terms of mobilities.

Maybe I can add a few words on the colors for this telephone. If you see in the presentation, Eric, Gigaset's market share in Europe is about 40-something percent. They are mainly in the high to mid high-range market. Now with Vtech's help, we can provide them with cost-effective solution that they can actually go into the lower price point market. So we can help Gigaset to gain additional market share, both in the existing market and also open up new markets for them. You can bear in mind that in the U.S., our market share of our residential phone is over 60%. So there's still a lot of room, we believe, for Gigaset to gain market share in Europe over the coming years.

Can I have a follow-up question. So a, is how to finance the deal so that the shareholder will sacrifice the upcoming dividend payout? And the second is the -- any risk of the intangible asset impairment? Because may I just double confirm this total net book value is around EUR 126.6 million, right? And then you mentioned 1/3 is related to intangible assets, right? So i.e., roughly around EUR 40 million is related to the intangible asset, right? So any risk for upcoming impairment?

Maybe I will let Shereen answer all the financing and then I will answer the dividend. Shereen?

To make it clear, the 1/3, 1/3, 1/3, I just talked about, I'm talking about the purchase price, the EUR 27.5 million. All the intangible assets, right now, if we're talking 1/3, is just talking about EUR 10 million. And then you are not talking about their balance sheet. As said, June 30, 2023, their intangible assets is talking about EUR 64 million. But when we assess the fair value in our purchase price, it's just accounting for around, say, EUR 10 million only for the purchase price that we buy that intangible asset. So after we buy the intangible asset, mainly the patent, trademark, brand value, we don't have any, say, expectations regarding whether we need to [ give payer ] those, say, brand value, patent and trademark because the amount is pretty low already.

Maybe I'll make a comment on how to finance the deal. As we have said in our announcement, the financing is from internal resource. We will impair the dividend payout, I think it's too early to tell. But I can tell you that the amount is relatively small. And our net cash balance, although I cannot give you a figure, is much better than last year. So we will decide whether we will adjust the dividend payout or not. So -- but at this point in time, we have no decision.

And then for the next question, I will ask the management on behalf of [indiscernible] because headphone microphone is not working. Yes. The first question from [indiscernible] is, what is expected restructuring costs from the acquisition? And will this will be included in the FY 2025 P&L? This is question 1. Question 2 is, what is expected profitability of the business over medium term? And the third question, I think, Mr. Wong has already answered. Will Vtech need to adjust dividend payout in the financial year 2024 downward because of the acquisition? Okay. I will hand the management to answer the questions.

Shereen can answer.

Since the acquisition, the closing day is fall from April 2024, that means the acquisitions will be reflected in our upcoming financial year 2025. And as for the profitabilities of the acquisition, as we mentioned, we expect there will be a top line and bottom line contribution to the group after acquisition. We can't tell you the exact figure, but we have [indiscernible] and when we have already planned for a lot of restructurings by market we have mentioned including the downside of the people as well as the synergy that we will enjoy, including procurement, the R&D we expect after the acquisitions, we will have solid top line and bottom line contributions to the group after this acquisition of the business.

And then our next question comes from Lins, again.

Shereen, back to the asset mix. You said, say roughly 1/3 was for inventories. So this is 1/3 of assets acquired. So we're talking about roughly EUR 40 million in book value of assets is inventory, correct?

So as I said, the 1/3, 1/3 and 1/3, I'm talking about the purchase price, that means for the inventory. It's talking about EUR 8 million to EUR 10 million only for the purchase price. Of course, their book value, as at June 30, 2023, was talking about EUR 40 million. But when we acquired the inventory, we'll not just buy based on the net book value. We have assessed their fair value before we acquire those kind of inventory as of the closing date.

I see. So [ details say ] book value of inventory was basically [ 140-something ] million, correct?

Yes, in total. But this is as of June 30, 2023. Up to the closing day, the inventory was a bit lower than the value as of June 30, 2023. It's over EUR 110 million in terms of net book value, but we don't acquire those assets at net book value. This is a very important message that we need to pass to all of you. That's why the purchase price is -- the net purchase price is talking about EUR 27.5 million based on the [ dealing their assets ].

Yes, let's say, inventories, let's say, I imagine, this is, for example, ICs. And I mean -- so you bought ICs at basically 1/4 of their market value.

Yes.

Good. Congratulations.

Net book value, not market value. Net book value.

So they have net book value but we are talking about -- but we are talking about fair value. Fair value means the market value, the latest purchase price, I would say.

Yes. I mean, but let's say, what they pay is their book value. I mean they don't write up the ICs they bought.

Yes. In their book, they haven't fully provided all their -- provisions for all their excess inventory. But when we acquire those inventories, we assess the fair value and the market value. So that's why our purchase price for the inventory is much lower than their net book value of the inventory.

Yes. But let's say, in raw materials, there should not be a discussion.

So raw material, we do the same thing. We also -- based on the latest purchase price of those raw materials as well as their sales forecast to see whether those materials that they can be used after the acquisition. So that's why the purchase price is lower than the net book value.

Okay. And would I say now, in all parts you're going to double the volume of your phone sales, i.e., you're going to double the volume of group purchases in raw materials or phones. So that should lead to a quite substantial discounts from your suppliers, should it?

That's the hope.

Okay. And if you put now a number to that hope?

Yes, too early to tell. There's definitely some savings.

Okay. And in terms of streamlining the product line?