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LeapFrog Enterprises, Inc. (NYSE:LF)

Q1 2009 Earnings Call

May 4, 2009 5:00 pm ET

Executives

Karen Sansot - Director, Investor Relations

Jeffrey G. Katz - President, Chief Executive Officer, Director

William B. Chiasson - Chief Financial Officer and Principal Financial Officer

Analysts

Sean McGowan - Needham & Company

Tony Gikas - Piper Jaffray

Ed Woo - Wedbush Morgan

Drew Crum - Stifel Nicolaus

Operator

Good afternoon. My name is Lisa and I will be your conference operator today. At this time, I would like to welcome everyone to the LeapFrog first quarter 2009 conference call. (Operator Instructions) I would now like to turn the call over to Ms. Karen Sansot; you may begin your conference.

Karen Sansot

Thank you. Good afternoon and welcome to LeapFrog Enterprise’s conference call to review the results of our first quarter ended March 31, 2009. I’m Karen Sansot, Director of Investor Relations for LeapFrog. Today on the call we have Jeff Katz, our Chairman and CEO; and Bill Chiasson, our CFO.

Before we begin, we wish to remind you that certain statements made today will include forward-looking statements about management’s expectations, including expectations regarding the timing, scope, and success of product launches, expected benefits of new products and services, and anticipated 2009 financial results.

In addition, we expect the questions posed in the Q&A portion of this call may prompt additional answers that contain additional forward-looking statements not included in our prepared remarks. This cautionary language concerns forward-looking statements in both our prepared remarks and our impromptu answers to questions posed.

A variety of factors, many of which are beyond our control, affect our results, performance, and business strategy and can cause actual results to differ from those projected in such forward-looking statements. Some of these factors are described in our 2008 annual report on Form 10-K filed with the SEC on March 11, 2009, as well as in LeapFrog's other public statements and filings. LeapFrog does not update forward-looking statements and we expressly disclaim any obligation to do so.

On this call today, we will also discuss point-of-sale data. Please refer to the press release we issued today for an explanation of point-of-sale data.

I would now like to turn the call over to Jeff Katz.

Jeffrey G. Katz

Thank you, Karen and good afternoon and evening to everybody. Welcome to the call and thank you very much for joining us. We are going to try to keep our call somewhat brief today. We did provide Q1 guidance a few weeks ago and we put a fair amount of detail into our press release with our actual results, so as we indicated in the release, our results are in line with our expectations, so we are going to keep it brief and of course, we will be happy to answer any questions you have at the end of our remarks.

The first quarter in our business is kind of like the first quarter in basketball. It matters but there is generally not much the sports writers have to say about it. For us, the highlights of this quarter is that while net sales are as we expected down substantially, we are very pleased with our cash flow performance and with our point of sale trends. While our gross margins do reflect that there is a fair amount of promotion in the market, the data shows encouraging consumer support for our products, particularly Leapster and for Tag.

While not the be all, end all, POS data gives us confidence in our product portfolio and its longer term sales outlook. After we worked through our inventory issues, we believe that we are well-positioned for cash flow growth, given our product portfolio and much lower cost structure, and that growth potential will be enhanced if the economy starts to show signs of improvement.

I am going to turn the call over to Bill Chiasson now, our Chief Financial Office. He’ll discuss the quarter in some detail. I will then come back and discuss our initiatives and the actions we will be taking this year.

William B. Chiasson

Thanks, Jeff and good afternoon, everyone. The first quarter results were as we expected and consistent with the guidance that we provided a few weeks ago, so my comments today will be a bit succinct.

As you all know, net sales in the first quarter were significantly impacted by the high retail inventory balances at the end of 2008 that resulted from the economic collapse. During the first quarter 2009, we’ve used promotional and marketing campaigns to help retailers reduce their inventory levels.

Retail inventory balances are down and they are on track with our expectations but we believe they need to come down further. We expect the inventory overhang will impact net sales at least through the second quarter of 2009.

As a result of the high retail inventory balances, net sales in the first quarter were down 49% year over year. As expected, but clearly disappointing. The net loss per share was unchanged year over year despite the $28 million decline in sales. Over the last couple o years, we’ve made great strides in running our business more efficiently, significantly reducing our cost structure. Operating expenses in the first quarter were down 30% year over year.

Cash flow was positive for the quarter. Operating cash flow was $10 million and our net cash balance increased by $6.2 million, compared to year-end 2008. Our balance sheet is healthy with $85 million of cash on hand and no debt outstanding on our $100 million asset-backed credit line.

We believe we are in good financial and operating position to weather this economic storm. We are managing our business with caution and can either dial up or dial down the business depending upon the economic conditions. When our inventory issues are behind us and when the economic recovery begins, we are well-positioned for financial growth.

Now on to a detailed discussion of the first quarter results -- net sales for the quarter were $29.9 million, down 49% from $58.3 million a year ago. We’re down 46% using constant exchange rates.

Sales were down due to the inventory overhang, the restructuring of our school business, and the timing of Easter, which was in April this year as compared to March last.

Net sales in our U.S. segment were $22.3 million, down 51% from $45.6 million a year ago. These results reflect the impact of having too much inventory in the channel; therefore we do not believe the sell-in results provide a good indication of how our products are currently selling through to customers, to consumers.

Point-of-sale data, which reflects sales by retailers to consumers, provides better visibility to the consumer demand for our products and tells an early yet encouraging story.

LeapFrog's point-of-sale data in the U.S. was up 8% through the 16 weeks ended April 25th. While this time period differs from our quarter and includes the impact of the Easter holiday in both 2009 and 2008. Given the current economic conditions and the seasonally lower sales period, 8% point of sales growth is good. It’s slightly ahead of internal expectations and above general industry trends and we view it as encouraging given our generally much higher price points than the industry average.

By business line, point-of-sale growth in reading products was up over 100% through April 25th, as we are re-establishing our reading business with Tag. Point-of-sale in the educational gaming segment was up in teens, driven by sales of Leapster, Leapster 2, and Didj products. Our gaming business is building a large active installed base that we expect will drive future software sales and ultimately higher gross margins.

Point-of-sale in the standalone toys was down about 20% as we transition away from older legacy toys. In the second quarter, we will launch a new scout line, which includes my pal scout, text-and-learn, scribble-and-write, and [alphabetics four]. We have gained nearly 5% share in the learning category in the first quarter and Tag, a reading product, has established itself as a solid new industry franchise alongside Leapster.

Back to our net sales results, by platform, our net sales mix was as follows: hardware sales were 15% of U.S. net sales, compared to 36% a year ago; software sales were 43% compared to 30% a year ago; and standalone learning toys were 34% compared to 22% a year ago, and the school business was 8% compared to 12% a year ago. The mix of hardware sales was down year over year due to the large inventory overhang. Software mix was up due to the new content and higher tie ratios and standalone toy mix was up, since it has less of an inventory overhang issue and the school mix was down due to the restructuring of our school business.

International sales were $7.6 million, down 40% from $12.7 million a year ago. Excluding the impact of foreign exchange, international sales would have been down 27%. We’re seeing the international markets face the same recessionary pressures and inventory overhang issues as in the U.S.

Gross profit for the quarter was $8.1 million, down 62% from $21.1 million a year ago and the gross margin was 27.1%, down 9.2 points from 36.3% a year ago, as a result of lower sales relative to fixed costs and promotions to reduce retailer inventories and improve POS. This was partially offset by a higher margin product mix.

We expect gross margin to increase in the second half of the year as the sales volumes increase.

Operating expenses for the quarter were $35 million, down 30% from $49.8 million a year ago. Over the last couple of years, we have significantly reduced our cost structure by improving operational processes, outsourcing development when appropriate, and focusing on fewer but more strategic projects. Selling, general, and administrative expenses were $19.9 million, down 35% from $30.8 million a year ago. SG&A is down primarily due to lower compensation costs as a result of our reduced team size.

Research and development expenses were $10 million, down 8% from $12.1 million a year ago, also due mostly to our reduced team size, simplified and fewer technology platforms, increasing engagement of our China based engineering team, and the use of third parties for part of the work process.

Advertising expenses were $2.2 million, down 52% from $4.5 million a year ago. This decline was consistent with the revenue decline and advertising expenses as a percent of sales were 7.3% compared to 7.8% a year ago.

The operating loss for the quarter was $26.9 million, a 6% improvement from the loss of $28.6 million a year ago. Our operating results improved due to the substantial costs we have taken out of the business, and the net loss for the quarter was $27.1 million, or $0.43 a share, compared to $27.4 million, or $0.43 a share a year ago.

Operating cash flow was $10.1 million. Capital expenditures were $3.5 million, down 47% compared to $6.6 million a year ago. CapEx is down, as much of our new platform development costs are behind us.

And our net cash flow for the quarter was $6.2 million.

On to the balance sheet, we have a healthy balance sheet. We ended the quarter with $85.3 million in cash and no debt outstanding on our $100 million asset-backed line. Accounts receivable were $5.6 million, down from 39.2% a year ago, and down from $89.9 million at year-end. While this low accounts receivable balance appears unusual, it’s the result of the sales decline in both the fourth quarter last year and the first quarter this year, which resulted in a lower gross AR balances. This, combined with a higher year-over-year sales allowance that we established at the end of 2008 to address the year-end retail inventory overhang, results in a lower net AR at the end of the quarter.

Day sales outstanding were 64, compared to 69 a year ago, based on a trailing 12-month average. Inventories were $59.5 million, up from $55.6 million a year ago, and slightly up from $58.2 million at year-end.

Our inventory on-hand is a bit higher than desired, but it consists of first quality, recently launched products. It also includes some inventory build for our Q2 launch of the Tag Junior and the scout line.

Days inventory on hand was 103 compared to 110 a year ago, and again based on 12-month trailing averages.

Prepaid expenses and other current assets were $11.3 million, down from $22.5 million a year ago and up slightly from $10.8 million at year-end. The year-over-year change was due primarily to an IRS refund for an audit settlement claim on the R&D carry-back, as well as an overall reduction expenditures as we operate the company more effectively.

Long-term investments were $4.9 million, down from $10.7 million a year ago, and roughly flat to year-end. The decrease year over year is due to the write-downs of the carrying value of our investment in auction rate securities. Over the last several quarters, the original balance of $14 million has bee written down to the current $4.9 million.

Accounts payable were $19.7 million, down from $29.9 million a year ago, and down from $56.4 million at year-end. Accounts payable is primarily the result of more prudent purchasing and lower inventory build for the fall launches as compared to the prior year.

As you will note in today’s press release, we’ve also provided guidance for each of the next two quarters. It’s very difficult for us to accurately forecast the full year given the economy and the seasonality of the business. We expect the recession to continue through the year with some potential improvement in the fourth quarter.

For the year, we expect a sales decline compared to 2008 and we are scaling the business based on this assumption. Operating expenses are expected to be down about 30% compared to 2008 and capital expenditures are expected to be less in the prior year as well. We expect cash flow to improve year over year and our internal plans are still targeting break-even net cash for the year.

Our objective for the year is to invest in our products, further reduce our overhead cost structure, improve our cash flow performance, and preserve cash, and we will update you on our full year forecast once we have improved visibility.

And now I would like to turn the call over to Jeff.

Jeffrey G. Katz

Thank you, Bill. Before we wrap up, I would like to spend a few minutes talking about our initiatives for the year. Our top two priorities are clearly to bring down retailer inventory to appropriate levels and to prepare for the launch of new products or products which are being improved in the run-through of inventory, and those products are beginning to ship now, or will be shipping in the coming few months, in anticipation of course of the fourth quarter where consumers, if not richer, are less panic stricken compared to fourth quarter 2008.

We are aggressively working with retailers to get inventories down by adjusting our promotional strategies and marketing plans. Our efforts are working, as demonstrated by our point-of-sale results, which were favorable throughout the quarter and particularly encouraging over Easter.

Along with managing down retailer inventory, we have a number of initiatives underway to boost sales. First we are focused on introducing new lower priced products that will reduce our average price points. This spring we are launching, for example, Tag Junior, affordably priced at $34.99, which will make our award-winning Tag reading system available to a younger age group. Tag Junior will launch with eight titles, each priced at $10.99. We are also launching the new low-priced Scout line, which includes My Pal Scout, a customizable plush toy that will connect parents to the learning path, and Text and Learn, a learning toy that looks just like Mom and Dad’s PDA.

Second, we are working to leverage our installed base throughout the year by introducing new content for our reading and gaming lines. We launched four new platforms last year and we expect demand for new content to be higher this year as customers who bought new platforms last year buy additional software and content. We are seeing software tie ratios on Tag that are higher than any other platform we’ve ever had.

Third, we are continuing to enhance existing products, especially Tag and Leapster 2, and those improvements, as I mentioned, will roll out later this year. Finally, we are substantially building out a more robust learning path. The learning path will continue to be a more and more important feature in our products that will enable parents to more accurately participate in their children’s learning. It will also further differentiate us from the competition and be an important element of our marketing plan, particularly online, but also in traditional channels.

All of these initiatives are designed to strengthen sales in the second half of 2009 and beyond. The impact will be even great if any sort of economic recovery takes place but our ultimate objective is to return to profitability. So in addition to addressing the top line, we need to remain focused on addressing our cost structure and in recent quarters, that’s exactly what we’ve done. Operating expenses, as Bill mentioned, for the first quarter were $35 million, a 30% improvement from the first quarter of last year. As a result of our cost reduction efforts, our net loss for the first quarter of 2009 was flat with 2008, despite a 49% decline in sales.

Finally, on our last call, there was a question about management motivation and retention in these challenging times. As most of you know, it’s not the moment in time where a lot of job-hopping is occurring but that won’t last forever and so our board recently granted new option awards to our senior management team. The intent of these options is to retain talent as well as align incentives to our clear objective to grow value for our shareholders.

And so you will be seeing a few form fours coming out later this month that reflect a part of this program, and we think it will help us motivate performance in the longer run.

To summarize, we anticipate that 2009 will continue to be a challenging year and we are taking what we believe are the right steps to manage through the worst economic conditions in decades. We are focused on getting our sales growth back on track by eliminating the inventory overhang issue as quickly as we can, introducing new products, enhancing current products and building out the learning path experience. Ultimately our inventory position and the economy will improve.

When that happens, we believe that our brand, our product portfolio and lower cost structure will enable us to return to profitability and achieve sustainable profitable growth.

Now I would like to open it up to your questions and I will ask the operator to let us know who might like to begin.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will come from the line of Sean McGowan with Needham & Company.

Sean McGowan - Needham & Company

Thank you. Can you hear me okay? Okay, I’m on a cell phone somewhere. I was wondering if you could, Bill, if you wouldn’t mind getting into a bit more detail on the hardware and software breakout in the quarter?

William B. Chiasson

Sean, I gave the mix of hardware/software for the quarter and -- is that what you are looking for?

Sean McGowan - Needham & Company

I thought I heard you just say up or down. Maybe I missed it.

William B. Chiasson

No, there were a couple of things. First of all, I want to remind you, one of the things I want you to be aware of is that our shipments are certainly impacted by the amount of retail inventory that was on hand at the beginning of the year, so let me give you again our point of sale performance in that first quarter, or actually through April 25th, which I think really is more a reflection of the consumer.

What I said was the reading products were up over 100% on POS, and that’s clearly as a result of the re-establishing the business with Tag. Educational gaming was in the low teens. It was in the teens and it was driven by Leapster, Leapster 2, and Didj. The educational toys were down about 20% for the reasons that we had said before, so those are the POS results.

On the performance of shipments which is impacted by the amount of inventory that was on hand at retail, hardware sales were down about 15%. Software sales were -- excuse me, hardware sales were 15% of U.S. sales compared to about 36% a year ago. Software sales were 43% of sales compared to 30% a year ago, and toys were 34% compared to 22% a year ago.

Our school business is now part of the U.S. segment, so we are including that in our mix calculation, and the school business was 8% of our U.S. sales compared to 12% a year ago.

Sean McGowan - Needham & Company

Okay. That is helpful. Thank you. Can you remind us what the point of sale action was through -- I think the last time you gave us an update was about a month ago. Wasn’t that number like 6%, or do you see -- do you think it’s Easter that caused that acceleration?

Jeffrey G. Katz

I would say Easter and then in general, there’s a few more programs that are happening at the end of the quarter than we might have had underway at the time we did our preliminary, but Easter was going to be the biggest impact through the period Bill mentioned in the POS.

Sean McGowan - Needham & Company

Okay. You know, Jeff, I know you are not -- you don’t have any visibility at this point to do a full forecast for the full year, but are you in any position to sort of bracket what the upside could be if things broke your way? Is there a kind of maximum limit to how big the fourth quarter could be?

Jeffrey G. Katz

I mean, we are certainly looking at a variety of forecasting models. We’d like to wait a few weeks before we sort of anchor those down. Clearly with the kind of encouraging consumer appetite, albeit with a lot of discounting happening at Easter, there’s some upside for fourth quarter that is significant. I would not call it huge yet, and at least the feedback that I’ve gotten from retailers is I don’t think anybody is calling a huge upside opportunity. But Easter was showing that the consumer is a bit more resilient and we would tend to forecast some upside based on that, but we’ll have to see what the next swine flu epidemic does. So we want to give it some more weeks and then at the next quarter, we would envision giving -- obviously giving a read on the fourth quarter to you.

Sean McGowan - Needham & Company

Okay, then two other questions -- Bill, I think -- maybe both of them for Bill -- just an update on what you think the outlook is for the auction rate securities at this point?

William B. Chiasson

We really haven’t seen much action there, Sean. We didn’t see any significant impairment. I think it was a tiny little impairment, maybe $23,000 in the quarter. But we are really not seeing that launch and break open.

Sean McGowan - Needham & Company

Okay, and then regarding the second and third quarters where you do have some guidance, can you talk to where you think the mix might be, U.S. versus international?

William B. Chiasson

I don’t really see that mix changing from our overall mix. Generally international is approximately 20% of our business.

Sean McGowan - Needham & Company

Okay. That’s helpful. Thank you.

Operator

Our next question will come from the line of Tony Gikas with Piper Jaffray.

Tony Gikas - Piper Jaffray

Good afternoon, guys. Thanks for taking my questions. Just a quick kind of follow-up on the last question -- the Q3 guidance, sales guidance assume -- does the Q3 sales guidance assume that there’s more clearing of inventory at retail? It’s coming in I think pretty well below expectations.

William B. Chiasson

There is -- we do expect retail inventories to be a bit high as we exit the second quarter, so there will be some retail inventory that we’ll need to clear out the beginning of the quarter. But one of the other issues impacting the year-over-year performance is of course the strong performance of shipments last year, and as you compare against that base, you are going to see that’s where there is a significant year-over-year comparison issue, is just how strong last year’s shipments were.

Tony Gikas - Piper Jaffray

Okay. And then with the POS up 8% in the quarter, that appears relatively positive to the Q3 guidance. Should we assume that you’ve given us a conservative view of the third quarter? And then Jeff, did I hear you correctly that you are expecting a pretty significantly improved December quarter this year over last year?

Jeffrey G. Katz

Yes, you heard -- on the improvement on the fourth quarter, yes. As Bill mentioned, we had what clearly turned out to be a big over-shift in Q3 and then the brakes being put on dramatically in Q4. But at any case, most of the forecast would indicate some economic recovery, or at least the formal end, if you want, of the great recession in Q4. But Q3 we do think will be a difficult comparison just due to the massive Q3 shift we had in ’08. We will -- at least the sense I have of retailers at the moment is that they are -- I don’t think they are ready to call a great Q3 in terms of the consumer environment, but that’s just my sense of their sentiment not an official forecast. But yeah, substantial up-tick for us in Q4, yes.

Tony Gikas - Piper Jaffray

Okay, and then any improvement with your retail partners in terms of taking product? I mean, I know they have been very, very tight on taking product over the last three to six months. Are they loosening that up at all or not?

Jeffrey G. Katz

I would call it very much performance driven, which is to say they are watching POS, so where they have good velocity and diminishing quantities on hand, I would say we are definitely seeing some loosening of the purse strings. But there is also a motivation that we see to have lower than historic inventory levels. So for example, we hear quite a few discussions where typically they might have let’s say two to four units on a peg and they will try to keep the stock level to a lower per peg number, at least this part of the year. So I think that’s a bit of an offset, but yeah -- but I would call it very performance driven, basically. I think it’s sort of always that way but there’s even more discipline than we saw the prior year, for example.

Tony Gikas - Piper Jaffray

Okay, and then one for Bill -- did I hear you say that your cash flow expectations for the year is to be cash flow neutral?

William B. Chiasson

That’s our internal target, cash flow neutral, that’s right.

Tony Gikas - Piper Jaffray

Okay, and then last question -- shelf space for the year, do you expect to maintain the 2008 levels or do you see any improvement?

Jeffrey G. Katz

It does vary by retailer but I would say neutral to up.

Tony Gikas - Piper Jaffray

Okay. Thank you, guys.

Jeffrey G. Katz

Thank you, Tony.

Operator

Our next question will come from the line of Ed Woo with Wedbush.

Ed Woo - Wedbush Morgan

How much of your R&D is offshore and lower cost locales? And do you have a target in mind?

Jeffrey G. Katz

Let us hunt for the offshore number here -- a substantial amount of what we do internally is offshore. We of course do all of our game development through third parties and more and more of our book development through third parties, so those are frequently onshore developers. That’s an RFP kind of process. Some of it does go offshore, some of it stays, but it’s all external to the company. But the R&D that we spend internally, that may be a number that --

William B. Chiasson

We’ll have to do some research and get back on that.

Ed Woo - Wedbush Morgan

I was just trying to get more color to see what kind of opportunity is available in terms of getting the R&D cost line down.

Jeffrey G. Katz

Yeah. I think we have -- from a pure human resource perspective, the majority I believe is now offshore. Obviously a lower cost basis than the U.S. The opportunity to get R&D down, which we’ve obviously been tracking it down a pretty significant percentage over the last three years in terms of absolute dollars, is largely related to content development right now. So getting our content to be both more efficiently developed and to in effect not do too much of it. Historically LeapFrog has had very rich content, which is good if you have the right volume and that’s probably where our opportunity exists rather than sort of Asia based or offshore based R&D per se.

Ed Woo - Wedbush Morgan

Okay, and then I also noticed that you guys recently released a game for the Apple app store. Would you comment on how -- is that a change in your strategy to release more software for non-LeapFrog platforms? And can you comment how well it’s done so far?

Jeffrey G. Katz

We have long discussed -- in fact, often with investors, the opportunity to put LeapFrog branded content and LeapFrog developed content on to other platforms, the iPhone being a big one. In terms of strategy and sort of profit opportunity, I would say it is near zero in terms of profit opportunity. We are getting -- you know, it’s just hard to make a living off the app store unless you are Apple, but it’s good for the brand. It is definitely getting us into the hand of a higher demographic user than a typical Leapster user, and we hope to learn a lot about the marketing benefits and the brand building or consumer value benefits, but from a pure cash flow perspective, it’s really not a good way to make a living.

Ed Woo - Wedbush Morgan

Okay. Thank you.

Operator

Our next question will come from the line of Drew Crum with Stifel Nicolaus.

Drew Crum - Stifel Nicolaus

Good afternoon, everyone. Jeff, can you give us an update on promotional activity with software, what you are doing there? And absent Tag Junior, what should the average selling price look like for your software, relative to 2008?

Jeffrey G. Katz

Relative to 2008, I think you will see software be -- I would say slightly average price, slightly down, which is to say typically our games and our books are on deals, roughly half of the selling season from a volume perspective. And I think this is going to be more of a promotional year and you will see therefore a slightly lower average price, even if you take out a Tag Junior book from that. And it’s also true that we have a little bit more margin maneuvering room with our content and we are seeing really big lift typically -- not always, but typically really big lift during content promotions. So I would say probably a little bit year-over-year decline in average price, due to the -- just the promotional nature of the first two to I would say three quarters of the year.

Drew Crum - Stifel Nicolaus

Okay, and moving on to Didj, you guys didn’t spend a ton of time with that platform in your commentary. Can you just give us an update on how it’s performing and how you see it playing out for the year and just the life expectancy for this product?

Jeffrey G. Katz

So Didj is actually -- first of all, has been pretty heavily promoted, price promoted, just having done a lot of review of the NPD data, it’s pretty -- it’s now starkly clear how challenging higher price point products were hit in the fourth quarter of ’09, Didj of course being at $79, very hard hit. In fact, I think we launched it at $89, if I remember right. So it’s being pretty heavily promoted and as a consequence, it’s had pretty high sales velocity. We expect software sales velocity then to sort of peak up. It has one of our highest tie ratios, if I remember right, and definitely the highest connect rate of any of our other products.

So back to life expectancy of Didj, we -- this is something we will talk about in June but we certainly expect this kind of product to be a mainstay of the LeapFrog line, which is to say higher resolution, customizable, more -- we need to bring it in at a better price point than, you know, a profitable price point less than sort of $79 and $89, obviously.

Will the Didj -- but we are doing a lot of talk about whether we should morph the brand name of Didj. So the product itself, the chip architecture, the content, all of that we envision being out there for quite a while -- but we’ve got to have a profitable price point lower than even $79, but we want those features to be part of the LeapFrog line.

So if that’s too long-winded and I need to clarify, just tell me.

Drew Crum - Stifel Nicolaus

No, I appreciate the color. On the learning path, I think exiting the fourth quarter, you guys were under one million connections. And I think the guidance for 2009 or by year-end we were expecting or hoping to get to three million. Can you give us an update there, how -- what kind of progress you are seeing there?

Jeffrey G. Katz

We are seeing really good progress on both so-called -- what we call connected consumers, which are those people who have downloaded the application and are sort of exposed to the marketing process, if you will, that comes from that, and then learning path registration also growing nicely. So we still expect certainly in the two to three million. I think my estimate is around three million connected consumers by year-end. Now we tend to measure year-end in this case by end of January 2010, just because so much of the connections happen post-Christmas.

Drew Crum - Stifel Nicolaus

Okay. One last question -- the option awards, can you give us the period over which those vest?

Jeffrey G. Katz

Those will vest over four years.

Drew Crum - Stifel Nicolaus

Okay. Thanks, guys.

Jeffrey G. Katz

Thanks, Drew.

Operator

At this time, there are no further questions. Mr. Jeff Katz, do you have any closing remarks?

Jeffrey G. Katz

Thank you. Again, I want to thank everybody for joining us on the call today. We are planning to host a reception in New York on Monday, June the 8th. We’d like to show investors and our analysts our product portfolio, our fall product launches, and we’ll be getting some information about this event to you very shortly. I hope to see all of you there. I would really look forward to that opportunity. In the meantime, please do feel free to contact Karen Sansot in investor relations. I think you have her number, but it’s here -- 510-420-4803. If you’ve got any follow-up questions, we look forward to answering them. Thanks and have a good evening, all.

Operator

This does conclude our conference call. You may now disconnect.

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Source: LeapFrog Enterprises Q1 2009 Earnings Call Transcript
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