LeapFrog's Turnaround Is On Schedule

LeapFrog Enterprises, Inc. (LF), a leading developer of technology-based learning products, today announced financial results for the first quarter ended March 31, 2007. For the first quarter of 2007, the company reported net sales of $60.9 million and a net loss of $30.4 million, or $0.48 per share. Cash and investments totaled $195.5 million at March 31, 2007.

"First quarter sales and gross margin were generally on track with our expectations," said Jeffrey G. Katz, president and chief executive officer of LeapFrog. "Our cash balance at quarter-end remained strong and our new product milestones for 2007 and 2008 remain on plan."

Highlights:

• Net sales for the quarter ended March 31, 2007 were $60.9 million, compared to $66.5 million for the quarter ended March 31, 2006, a decrease of 8.4%. Net sales from the U.S. Consumer segment totaled $43.4 million for the first quarter 2007, compared with $46.8 million for the first quarter 2006.
• Net sales from the International segment totaled $12.5 million for the first quarter 2007, compared with $12.0 million for the first quarter 2006.
• Net sales from the SchoolHouse division totaled $5.0 million for the first quarter 2007, compared with $7.7 million for the first quarter 2006.
• Gross margin for the quarter ended March 31, 2007 was 40.5%, up 3.2 percentage points from gross margin of 37.3% for the first quarter 2006,
• Operating expenses totaled $54.9 million for the first quarter 2007, an increase of 1.7% compared to $54.0 million for the first quarter 2006. Higher research and development expense associated with new product development was partially offset by lower advertising expense in Europe.
• Loss from operations was $30.2 million for the first quarter of 2007 compared to $29.2 million for the first quarter of 2006. The $1.0 million increased loss reflects higher research and development expense, partially offset by lower selling, general and administrative expense and lower advertising expense.
• The company recorded a net loss of $30.4 million, or a net loss of $0.48 per share, for the first quarter of 2007, compared to a net loss of $23.6 million, or a net loss of $0.38 per share for the first quarter 2006.
• Inventories, net of allowances, were $76.2 million at March 31, 2007, compared with $73.0 million at December 31, 2006, and $163.7 million at March 31, 2006.
• Cash and investments totaled $195.5 million at March 31, 2007, compared with $148.1 million at December 31, 2006, and $202.3 million at March 31, 2006.

Key Performance Metrics and Outlook

Bill Chiasson, chief financial officer, stated, "Our first quarter sales decrease primarily reflects continued declines in LeapPad product sales as a part of our planned transition to a new reading platform in 2008 as well as the impact of our SchoolHouse restructuring strategy. As a result of the many operational changes we made last year, gross margins improved modestly and inventories at both LeapFrog and retailers remain at the lowest levels since 2001."

The company reiterated its current expectations for full year 2007 results:

• Expects a modest sales decline from fiscal 2006 sales of $502.3 million, with sales being softer in the first half of 2007 pending shipments of new products in the second half of the year.
• Expects an improvement in gross margin compared with 29.3% for 2006 driven by inventory clean-up efforts in 2006 and an improved product mix in 2007.
• Operating expenses are expected to decline from $271.7 million for 2006 consistent with the expected sales decline.
• Net loss is expected to show a significant improvement over 2006.

From the Call

• Schoolhouse segment lost $600K in Q1 as most sales come in Q2 at end of school year
• Retailer feedback on new items "very encouraging"
• Inventories at historic lows
• "Very encouraged" at progress and outlook for rest of year
• Little competition in "learning segment" of business

Do not get excited about the 8 cent difference in earnings vs. the estimates. With only 65 million shares outstanding, that only amounts to 5 million dollars, and R&D was the reason. Sales are ahead of schedule and new product reception is excellent.

Things are looking very good here as both management and the analysts were all very positive on the results.

LF 1-yr chart: