LeapFrog Reports First Quarter 2010 Net Sales Up 42%

EMERYVILLE, Calif., May 3 /PRNewswire-FirstCall/ --  LeapFrog Enterprises, Inc. (NYSE: LF) today announced financial results for the first quarter ended March 31, 2010.

(Logo: http://www.newscom.com/cgi-bin/prnh/20090219/LFLOGO )

Highlights of first quarter 2010 results compared to first quarter 2009 results:

• Net sales were $42.4 million, up 42%.  
• Gross margin was 29.3%, up 2.2 percentage points.
• Net loss per share was $0.37, an improvement of $0.06, or 14%.
• Non-GAAP net loss per share(1) was $0.33, an improvement of $0.05, or 13%.
• Operating cash flow was $34.5 million, up $24.4 million.
• Retail point-of-sale, or POS, dollars (2) were up 12% in the U.S. for the 13-weeks ended April 3, 2010 compared to the 13-weeks ended April 4, 2009.

(1) Non-GAAP net loss per share is a non-GAAP financial measure and is calculated by dividing non-GAAP net loss by GAAP shares outstanding.  Non-GAAP net loss is net loss before stock-based compensation.  Please see “Use of Non-GAAP Financial Information” below and the attached reconciliation schedule for more information about these measures.

(2) Please see Retail Point-of-Sale Dollars below for an explanation of this operating metric.

"LeapFrog's Learning Path and product portfolio strategy continued to drive good performance," said Bill Chiasson, Chief Executive Officer and President.  "Strong net sales growth, gross margin expansion, and disciplined spending contributed to an improved bottom line.  Importantly, too, POS increased 12% in the U.S. and was also strong internationally."

"Since our business is seasonal, the first quarter typically represents the lowest sales period of the year and the gross margin is generally lower than the full year gross margin.  That said, we are pleased with the strong sales performance across our entire portfolio and our increasing software tie ratio trends. Looking forward, we are encouraged by the exciting new products launching this year, increased retail distribution, and the impact of direct marketing through our Learning Path system, which now has more than three million connected customers and is continuing to grow.  For these reasons, we feel good about the outlook for the year," continued Mr. Chiasson.

First Quarter 2010 Financial Results

Net Sales

Net sales for the quarter were $42.4 million, up 42% compared to $29.9 million for the same quarter a year ago, and included a three point favorable impact from changes in currency exchange rates.  Net sales were strong across our entire portfolio and benefited from significantly lower retail inventory levels leading into the first quarter of 2010 as compared to 2009.  

Net sales from the United States segment for the quarter were $32.7 million, up 47% compared to $22.2 million a year ago.  Net sales from the international segment were $9.8 million for the quarter, up 28% compared to $7.6 million a year ago, and included a 13 percentage point favorable impact from changes in currency exchange rates.  

Gross Profit

Gross profit for the quarter was $12.4 million, up 54% compared to $8.1 million a year ago as a result of higher sales and gross margin expansion.  Gross margin for the quarter was 29.3% compared to 27.1% in the first quarter of 2009, an improvement of 2.2 points.  Gross margin increased year over year as a result of higher sales relative to fixed costs for the first quarter of 2010 as compared to 2009, partially offset by a higher sales mix of hardware platforms which carry lower margins.  Hardware platforms were 26% of worldwide net sales in the first quarter of 2010, compared to 9% a year ago when retailers started the year with high levels of hardware platform inventory.  

Guidance

"We had a solid first quarter.  Net sales increased 42%, gross margin expanded by two points, operating expenses remained flat, and we generated $35 million of operating cash flow," said Mark Etnyre, Chief Financial Officer.  "We believe we are well-positioned for future growth and profitability given our leading brand, strong product portfolio, Learning Path-connected strategy, and lower cost structure. While it's still early in the year and the first quarter is seasonally less significant than other quarters of the year, the results reinforce our confidence in our ability to achieve our full-year financial goals."

For the full year 2010, we are reaffirming the guidance we previously provided:

• Net sales to increase 10% to 20% compared to 2009;
• Gross margin to be roughly the same as the 41.6% gross margin achieved in 2009;
• Significant operating expense leverage; and
• Positive operating income and net income.

For the second quarter of 2010, we expect:  

• Net sales to increase 20% to 25% compared to the second quarter of 2009;
• Gross margin to be 35% to 38% compared to the 37.9% gross margin achieved in the second quarter of 2009;
• Net loss to increase modestly year over year; note that in the second quarter of 2009, we had a one-time, non-recurring tax benefit of $6 million, or $0.10 per share.

Conference Call and Webcast

LeapFrog will hold a conference call to discuss first quarter 2010 financial results on May 3, 2010, at 2:00 p.m. Pacific Time (5:00 p.m. Eastern Time).  The conference call will be webcast and can be accessed at LeapFrog's investor web site at www.leapfroginvestor.com.  To participate in the call, please dial (706) 634-0183 and request conference ID 71028628.  A replay of the call will be available for one month.  To access the replay, please dial (706) 645-9291 and use conference ID 71028628.

Description of Retail Point-of-Sale Dollars

Retail point-of-sale, or POS, dollars is a non-audited operating metric that represents a measure of U.S. retailers' sales of LeapFrog products to consumers.  Retail point-of-sale dollars differs significantly from LeapFrog's reported net sales, which reflect all products sold by LeapFrog to its retailer customers in all markets and also includes other sources of revenue.  The point-of-sale data is provided to LeapFrog by retailers and also includes sales through our online retail store at LeapFrog.com.  LeapFrog believes this represents approximately 95% of our U.S. retailers' dollar sales of LeapFrog products to consumers, based on historical shipments by us to such retailers.  LeapFrog management uses point-of-sale data to evaluate the retail channel sales environment and develop net sales forecasts.  Results for first quarter retail point-of-sale dollars are for the 13-weeks ended April 3, 2010 and the 13-weeks ended April 4, 2009.  

Use of Non-GAAP Financial Information

This release and the attached financial tables contain non-GAAP financial measures, including adjusted EBITDA (shown in the attached financial tables), non-GAAP net loss and non-GAAP net loss per share.  The tables in the reconciliation schedules attached to the press release reconcile the non-GAAP financial measures to the most directly comparable financial measures prepared in accordance with accounting principles generally accepted in the United States.  Our non-GAAP financial measures do not reflect a comprehensive system of accounting, and they differ from GAAP measures with similar names and from non-GAAP financial measures with the same or similar names that are used by other companies.  We strongly urge investors and potential investors in our securities to review the reconciliations of our non-GAAP financial measures to the comparable GAAP financial measures that are included in this release, and our consolidated financial statements, including the notes thereto, and the other financial information contained in our periodic filings with the SEC and not to rely on any single financial measure to evaluate our business.

We believe that our non-GAAP financial measures provide useful information to investors because they allow investors to view our financial performance using measures that we use internally to assess our business.  We believe that our non-GAAP financial measures provide meaningful supplemental information regarding our operating results because they exclude amounts that we exclude as we monitor our financial results and assess the performance of the business.

Adjusted EBITDA

EBITDA is defined as earnings before interest expense, taxes, depreciation and amortization.  Adjusted EBITDA is defined as EBITDA before stock-based compensation.  Management believes that adjusted EBITDA is an appropriate measure for evaluating our operating performance because it represents a measure of the resources available for strategic opportunities including, among others, to invest in the business, strengthen the balance sheet, and make strategic investments.  

We have provided adjusted EBITDA in the financial tables as well as a reconciliation of adjusted EBITDA to GAAP net loss.  Adjusted EBITDA should be considered in addition to, not as a substitute for, or superior to, net earnings or other measures of financial performance prepared in accordance with GAAP.

Non-GAAP Net Loss and Non-GAAP Net Loss Per Share

Non-GAAP net loss represents net loss plus stock-based compensation expense.  Non-GAAP net loss per share uses the foregoing non-GAAP net loss, divided by the weighted average number of shares used to calculate GAAP net loss per share.  Management believes that non-GAAP net loss and non-GAAP net loss per share are an appropriate measure for evaluating our operating performance.  

We have provided a reconciliation of non-GAAP net loss and non-GAAP net loss per share to the most directly comparable GAAP measures:  net loss and net loss per share.  Non-GAAP net loss and non-GAAP net loss per share should be considered in addition to, not as a substitute for, or superior to, net loss or other measures of financial performance prepared in accordance with GAAP.

About LeapFrog

LeapFrog Enterprises, Inc. is a leading designer, developer, and marketer of innovative, technology-based learning products and related proprietary content, dedicated to making learning effective and engaging for all ages, at home and in schools, around the world. The company was founded in 1995 and is based in Emeryville, California. LeapFrog has developed a family of learning platforms that come to life with an extensive library of software titles covering important subjects such as phonics, reading, writing, math, music, geography, social studies, spelling, vocabulary and science.  In addition, the company has created a broad line of stand-alone educational products for children.  LeapFrog's award-winning products are available in four languages at major retailers in more than 44 countries around the world and in more than 100,000 classrooms across the United States.  NOTE: LEAPFROG, the LeapFrog logo, TAG, and LEAPSTER are trademarks or registered trademarks of LeapFrog Enterprises, Inc.

Forward-Looking Statements

Cautionary Statement under the Private Securities Litigation Reform Act of 1995:

This news release contains forward-looking statements, including statements regarding: anticipated financial results, including net sales, gross margin, operating expenses, operating income and potential profitability; the growth and anticipated success of new and existing products and our overall business; our cost structure; growth in the numbers of Learning Path connected customers; and the effectiveness of our Learning Path strategy. These forward-looking statements involve risks and uncertainties, including risks related to the overall economic environment and its effect on retail business, consumer sentiment and trends relating to children's products and their effect on retailer buying behavior, the rates of acceptance by consumers of our web-based products and services, our ability to respond quickly to changes in demand for our products, and our ability to provide high-quality experiences to consumers with all of our products and services.  These and other risks and uncertainties detailed from time to time in our SEC filings, including our 2009 annual report on Form 10-K filed on February 22, 2010, could cause the company's actual results to differ materially from those discussed in this release.  All forward-looking statements are based on information available to the company on the date hereof, and the company assumes no obligation to update such statements.

SOURCE LeapFrog Enterprises, Inc.