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SMALL BUSINESS
LeapFrog Announces Third Quarter 2009 Financial Results
EMERYVILLE, Calif., Nov. 2 /PRNewswire-FirstCall/ -- LeapFrog Enterprises, Inc. (NYSE: LF) today announced financial results for the third quarter ended September 30, 2009.
(Logo: http://www.newscom.com/cgi-bin/prnh/20090219/LFLOGO)
Net sales for the quarter were $111.9 million, down 42.5% compared to $194.6 million in the same quarter a year ago. Net sales were impacted by high retail inventory levels remaining from 2008 which have now reached levels substantially lower than a year ago.
Despite the decline in net sales, cash and cash equivalents were $29.5 million at September 30, 2009, an improvement of $5.9 million compared to $23.6 million a year ago. Gross margin for the quarter was 42.7%, compared to a gross margin of 43.8% a year ago. Operating expenses for the quarter were $38.7 million, down 30.8% compared to $55.9 million a year ago. Net income per share for the quarter was $0.11 per share, compared to net income per share of $0.38 a year ago.
Retail point-of-sale, or POS, dollars continue to be higher year over year and were up 2% for the 39-weeks ended October 3, 2009 compared to the 39-weeks ended October 4, 2008. (Please see Description of Retail Point-of-Sale Dollars below for an explanation of this operating metric.)
"Over the past nine months, our net sales declined substantially as we worked with our retail partners to bring down unusually high inventory levels from last year. We are pleased that current retail inventory levels are now over 30% lower than a year ago," said Jeffrey Katz, Chairman and Chief Executive Officer. "But in this tough environment, we have also grown retail point-of-sales dollars year over year, we have increased our market share, we have our lowest operating expenses since we went public in 2002, and we expect to see sales growth in the fourth quarter."
"We are also pleased to be starting to see early benefits from our Learning Path strategy which builds direct 'one-to-one' relationships with consumers. For example, POS and tie ratios of software for Tag, our first connected product, are well beyond what we experienced with the highly successful LeapPad at the same point in its lifecycle. We have over one million connected consumers today, and we have the capability to market to them directly in a personalized manner based on consumer information we have through the Learning Path. At the end of the holiday season, we expect to have substantially more connected consumers and to see earnings benefits grow further as a result," continued Mr. Katz.
Third Quarter 2009 Financial Results
Net Sales
Net sales for the quarter were $111.9 million, down 42.5% compared to $194.6 million for the same quarter a year ago. Excluding the impact of currency fluctuations, the decline in net sales would have been 41.5%. Net sales were down year over year primarily as a result of fewer new platform launches, lower product shipments to retailers due to high retailer inventory levels at the end of 2008, and more conservative sales expectations for the holidays compared to the prior year.
Segment Results
Net sales from the United States segment for the quarter were $89.9 million, down 42.5% compared to $156.4 million a year ago. Net sales from the international segment were $22.0 million, down 42.3% compared to $38.2 million a year ago. Excluding the impact of currency fluctuations, the decline in international sales would have been 38.0%.
Gross Profit and Gross Margin
Gross profit for the quarter was $47.8 million, down 44.0% compared to $85.3 million a year ago as a result of lower sales in the quarter. Gross margin for the third quarter 2009 was 42.7% compared to 43.8% in the third quarter 2008. Gross margin declined year over year as a result of increased sales promotions and lower sales relative to a fixed cost base partially offset by lower warehousing and logistics costs and a higher margin product mix primarily due to a higher mix of reading product sales.
Operating Expenses
Operating expenses for the quarter were $38.7 million, down 30.8% compared to $55.9 million a year ago, an improvement of $17.2 million. Selling, general and administrative expenses were $21.7 million, down 20.1% from $27.2 million a year ago reflecting the impact of lower headcount. Research and development expenses were $7.4 million, down 36.8% from $11.7 million a year ago as a result of lower headcount and development costs. Advertising expenses were $7.1 million, down 51.3% from $14.6 million a year ago primarily due to less television advertising as LeapFrog shifted its strategy this year towards more retail trade promotions. Advertising expenses were 6.4% of net sales in the third quarter of 2009, compared to 7.5% in the third quarter of 2008.
Income from Operations
Income from operations for the quarter was $9.1 million, compared to $29.4 million a year ago.
Net Income
Net income for the quarter was $7.2 million, or $0.11 per share, compared to $24.1 million, or $0.38 per share, a year ago.
Financial Position
Cash and equivalents were $29.5 million at September 30, 2009, an increase of $5.9 million compared with $23.6 million at September 30, 2008. Inventories were $71.6 million at September 30, 2009, compared with $95.7 million at September 30, 2008. The company has no debt outstanding on its asset-backed line of credit.
"Financial results for the quarter were as we expected. Sales and earnings were down substantially year over year due to high beginning-of-year retail inventory levels, the weaker retail environment, and the timing of product launches compared to last year. Despite the significant sales decline and the promotional environment, our gross margin held fairly steady due to strong sales of software content and reading products and cost reductions. Operating expenses were down 31% as a result of us taking significant long-term costs out of the business and, as a result, we reported an operating profit of $9.1 million in the quarter. Most important, our cash balance increased $5.9 million compared to last year," said Bill Chiasson, Chief Financial Officer.
Guidance
For the fourth quarter of 2009, we expect:
- Net sales to be between $155 million and $170 million, compared to $138 million in the fourth quarter of 2008
- Gross margin to be between 40% and 45%
- Operating expenses to be down approximately 40% compared to the fourth quarter of 2008
"Looking to the fourth quarter of 2009, we expect sales and earnings growth, as well as gross margin expansion and a significant reduction in operating expenses, relative to the fourth quarter of 2008. We will continue our efforts to reduce costs and improve margins. We are looking to be breakeven on cash flow as of year-end or in January depending on the timing of collection of the receivables. When we enter next year, we believe that lean retail inventory levels together with our lower cost structure, leading brand, strong product portfolio and Learning Path strategy will position LeapFrog for profitable growth," said Bill Chiasson, Chief Financial Officer.
Conference Call and Webcast
LeapFrog will hold a conference call to discuss third quarter 2009 financial results today, November 2, 2009, at 5:00 p.m. Eastern Time (2:00 p.m. Pacific 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 36222756. A replay of the call will be available for one month. To access the replay, please dial (706) 645-9291 and use conference ID 36222756.
Description of Retail Point-of-Sale Dollars
Retail point-of-sale 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. 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.
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 LEAPPAD 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, consumer sales, inventory levels, gross margin, operating expenses, accounts receivable, collections and operating results; the timing of changes in economic conditions; consumer buying patterns and reactions to our marketing and products and services, including the number of connected customers we expect to have at the end of the holiday season; and the effects of our current strategies, products and services. These forward-looking statements involve risks and uncertainties, including risks related to the recession and its effect on retail business, overall 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 2008 annual report on Form 10-K filed on March 11, 2009, and our Form 10-Q filed on August 4, 2009, 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.
Contact Information
Investors: Media:
Karen Sansot Mischa Dunton
Investor Relations Corporate Communications
(510) 420-4803 (510) 596-5441
LeapFrog Enterprises, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
2009 2008 2009 2008
-------- -------- -------- --------
Net sales $111,906 $194,626 $191,197 $321,240
Cost of sales 64,119 109,300 116,583 187,896
------ ------- ------- -------
Gross profit 47,787 85,326 74,614 133,344
Operating expenses:
Selling, general and
administrative 21,738 27,172 62,135 83,945
Research and
development 7,387 11,688 26,900 36,674
Advertising 7,107 14,590 13,608 26,915
Depreciation and
amortization 2,485 2,484 8,023 7,201
----- ----- ----- -----
Total operating
expenses 38,717 55,934 110,666 154,735
------ ------ ------- -------
Income (Loss) from
operations 9,070 29,392 (36,052) (21,391)
Other income
(expense):
Interest income 108 246 456 2,047
Interest expense (4) (106) (30) (140)
Other, net (864) (1,589) (1,632) (4,049)
----- ------- ------- -------
Total other expense (760) (1,449) (1,206) (2,142)
----- ------- ------- -------
Income (Loss) before
income taxes 8,310 27,943 (37,258) (23,533)
Provision for
(Benefit from)
income taxes 1,092 3,892 (5,138) 421
----- ----- ------- ---
Net income (loss) $7,218 $24,051 $(32,120) $(23,954)
====== ======= ======== ========
Net income (loss) per
share:
Class A and B - basic
and diluted $0.11 $0.38 $(0.50) $(0.38)
Weighted average
shares outstanding:
Class A and B - basic 64,106 63,683 63,873 63,589
Class A and B -
diluted 64,262 63,923 63,873 63,589
LeapFrog Enterprises, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------- ---------------
2009 2008 2009 2008
---- ---- ---- ----
Operating activities:
Net income (loss) $7,218 $24,051 $(32,120) $(23,954)
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities:
Depreciation and
amortization 4,652 6,358 14,820 15,614
Unrealized foreign
exchange (gain) loss (100) 1,003 (1,668) 1,826
Deferred income taxes (6,362) 406 (6,236) 330
Stock-based compensation
expense 2,982 2,903 8,554 8,015
Impairment of
investment in auction
rate securities 403 1,091 426 2,822
Loss on disposal of
long-term assets 1,130 -- 1,130 41
Allowance for doubtful
accounts 93 373 (1,356) 942
Other changes in
operating assets and
liabilities:
Accounts receivable,
net (58,902) (111,583) 35 (36,096)
Inventories (8,254) (11,356) (13,812) (45,918)
Prepaid expenses and
other current assets 767 11,788 1,005 7,079
Other assets (1,640) 192 (1,434) 502
Accounts payable 27,682 21,164 2,975 31,358
Accrued liabilities 5,007 13,834 (13,225) (13,123)
Long-term liabilities 5,365 1,870 (964) 531
Income taxes payable 764 69 400 94
Other (53) (1,764) 1,648 (1,826)
--- ------ ----- ------
Net cash used in
operating activities (19,248) (39,601) (39,822) (51,763)
Investing activities:
Purchases of property
and equipment (1,373) (3,438) (4,095) (7,483)
Capitalization of
product costs (2,116) (1,231) (5,628) (9,777)
Other long-term assets (235) -- (235) --
---- ---- ---- ----
Net cash used in
investing activities (3,724) (4,669) (9,958) (17,260)
Financing activities:
Proceeds from stock
option exercises and
employee stock purchase
plans 36 204 77 623
Net cash paid for
payroll taxes on
restricted
stock unit releases (184) (337) (263) (731)
---- ---- ---- ----
Net cash (used in)
provided by financing
activities (148) (133) (186) (108)
Effect of exchange rate
changes on cash (176) (261) 402 (685)
---- ---- --- ----
Net change in cash and
cash equivalents (23,296) (44,664) (49,564) (69,816)
Cash and cash
equivalents, beginning
of period 52,833 68,308 79,101 93,460
------ ------ ------ ------
Cash and cash
equivalents, end of
period $29,537 $23,644 $29,537 $23,644
======= ======= ======= =======
LeapFrog Enterprises, Inc.
Consolidated Balance Sheets
(In thousands)
(Unaudited)
September 30, December 31,
----------------------- ------------
2009 2008 2008
---- ---- ----
(Audited)
Assets
Current assets:
Cash and cash
equivalents $29,537 $23,644 $79,101
Accounts
receivable, net
of allowances for
doubtful accounts
of $1,389, $588
and $3,872 92,323 160,192 89,918
Inventories 71,570 95,732 56,937
Prepaid expenses
and other current
assets 9,948 13,121 10,822
Deferred income
taxes 3,182 3,072 3,189
----- ----- -----
Total current
assets 206,560 295,761 239,967
Long-term
investments 5,000 8,701 4,962
Deferred income
taxes 511 216 497
Property and
equipment, net 14,396 19,202 19,611
Capitalized
product costs,
net 15,083 17,133 16,227
Goodwill 19,549 19,549 19,549
Other assets 6,478 7,901 5,260
----- ----- -----
Total assets $267,577 $368,463 $306,073
======== ======== ========
Liabilities and
Stockholders'
Equity
Current
liabilities:
Accounts payable $58,678 $76,001 $55,098
Accrued
liabilities 31,128 43,839 44,596
Income taxes
payable 629 187 229
--- --- ---
Total current
liabilities 90,435 120,027 99,923
Long-term deferred
income taxes 14,442 20,868 22,404
Other long-term
liabilities 2,562 2,156 3,820
Stockholders'
equity:
Class A Common
Stock - par value
$0.0001
Authorized:
139,500 shares;
Issued and
Outstanding:
36,881, 36,141
and 36,627 4 4 4
Class B Common
Stock - par value
$0.0001
Authorized: 40,500
shares
Issued and
Outstanding:
27,141, 27,614
and 27,141 3 3 3
Treasury stock (185) (185) (185)
Additional paid-in
capital 375,205 361,763 364,657
Accumulated other
comprehensive
income (loss) (271) 2,023 (2,055)
Accumulated
deficit (214,618) (138,196) (182,498)
-------- -------- --------
Total
stockholders'
equity 160,138 225,412 179,926
------- ------- -------
Total liabilities
and stockholders'
equity $267,577 $368,463 $306,073
======== ======== ========
LeapFrog Enterprises, Inc.
Supplemental Financial Information
(In thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2009 2008 2009 2008
---- ---- ---- ----
Net sales $111,906 $194,626 $191,197 $321,240
Cost of sales (1) 64,119 109,300 116,583 187,896
------ ------- ------- -------
Gross profit 47,787 85,326 74,614 133,344
Operating expenses: (2)(3)
Selling, general and
administrative 21,738 27,172 62,135 83,945
Research and development 7,387 11,688 26,900 36,674
Advertising 7,107 14,590 13,608 26,915
Depreciation and
amortization 2,485 2,484 8,023 7,201
----- ----- ----- -----
Total operating expenses 38,717 55,934 110,666 154,735
------ ------ ------- -------
Income (Loss) from
operations 9,070 29,392 (36,052) (21,391)
Other income (expense):
Interest income 108 246 456 2,047
Interest expense (4) (106) (30) (140)
Other, net (4) (864) (1,589) (1,632) (4,049)
---- ------ ------ ------
Total other expense (760) (1,449) (1,206) (2,142)
---- ------ ------ ------
Income (Loss) before
income taxes 8,310 27,943 (37,258) (23,533)
Provision for (Benefit
from) income taxes 1,092 3,892 (5,138) 421
----- ----- ------ ---
Net income (loss) $7,218 $24,051 $(32,120) $(23,954)
====== ======= ======== ========
(1) Includes depreciation
and amortization 2,167 3,874 6,797 8,413
(2) Includes stock-based
compensation as
follows:
Selling, general and
administrative 2,601 2,367 7,455 6,887
Research and development 381 536 1,100 1,128
(3) Includes severance
costs as follows:
Selling, general and
administrative (50) 564 779 1,010
Research and development 22 116 539 130
(4) Includes impairment
of auction rate
securities 403 1,091 426 2,823
SOURCE LeapFrog Enterprises, Inc.