LeapFrog Reports Third Quarter 2010 Net Sales Up 23%, Net Income More Than Doubles

EMERYVILLE, Calif., Nov. 1, 2010 /PRNewswire-FirstCall/ -- LeapFrog Enterprises, Inc. (NYSE: LF) today announced financial results for the third quarter ended September 30, 2010.

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

• Net sales were $138 million, up 23%.  
• Net income per share was $0.24, an increase of $0.13 per share.
• Retail point-of-sale, or POS, dollars(1) were up 6% in the U.S. for the 39-weeks ended October 2, 2010 compared to the 39-weeks ended October 3, 2009.

"We have good momentum as we head into the critical holiday season," said Bill Chiasson, Chief Executive Officer.  "Globally, our point-of-sale results are strong, aided by the recent introduction of the highly innovative Leapster Explorer™ Mobile Learning System, as well as the continued growth of the Tag™ Reading System.  Additionally, we continue to grow our Learning Path ecosystem, which now has about 4 million connected customers, to create unique and personalized communications. This is up from approximately 3 million connected consumers as we entered the year.  As a result, we are poised to deliver strong sales growth for the year, as well as improved profitability."

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

Third Quarter 2010 Financial Overview

Net sales for the quarter were $138.0 million, up 23% compared to $111.9 million for the same quarter a year ago.  Strong Leapster Explorer sales, continued strength in the learning toy line aided by the introduction of several new products, including My Own Leaptop™, and broader retail distribution drove the sales growth.

Net sales from the United States segment for the quarter were $110.8 million, up 23% compared to $89.9 million a year ago.  Net sales from the international segment were $27.2 million for the quarter, up 23% compared to $22.1 million a year ago, and were unaffected by changes in foreign currency exchange rates.  

Income from operations for the quarter was $16.2 million, an improvement of $7.2 million, or 79%, compared to $9.1 million a year ago.  

Financial Outlook

"Our third quarter sales growth reflects the breadth of our product portfolio and continued momentum of the Leapster Explorer platform," said Mark Etnyre, Chief Financial Officer.  "The sales growth, combined with our ongoing cost discipline, contributed to the significant earnings per share improvement."  

We are reaffirming our full year 2010 guidance and continue to expect:

• Net sales to increase 15% to 20% compared to 2009;
• Gross margin to be between 41% and 43%;
• Significant operating expense leverage; and
• Net income per share to be between $0.20 and $0.30 compared to a net loss per share of $0.04 in 2009.

Conference Call and Webcast

LeapFrog will hold a conference call to discuss third quarter 2010 financial results on November 1, 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 19390925.  A replay of the call will be available for one month.  To access the replay, please dial (706) 645-9291 and use conference ID 19390925.

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, based on retail prices, is provided to LeapFrog by retailers and also includes sales through online retailers and 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 retail point-of-sale dollars are for the 39-weeks ended October 2, 2010 and the 39-weeks ended October 3, 2009.  

Use of Non-GAAP Financial Information

The financial tables attached to this release include tables that present non-GAAP financial measures, including adjusted EBITDA, non-GAAP net income (loss), and non-GAAP net income (loss) per share.  Such tables include a reconciliation of 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 included adjusted EBITDA in the attached financial tables as well as a reconciliation of adjusted EBITDA to GAAP net income (loss).  Adjusted EBITDA should be considered in addition to, not as a substitute for, or superior to, net income (loss) or other measures of financial performance prepared in accordance with GAAP.

Non-GAAP Net Income (Loss) and Non-GAAP Net Income (Loss) Per Share

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

We have included non-GAAP net income (loss) and non-GAAP net income (loss) per share in the attached financial tables as well as a reconciliation of non-GAAP net income (loss) and non-GAAP net income (loss) per share to the most directly comparable GAAP measures:  net income (loss) and net income (loss) per share.  Non-GAAP net income (loss) and non-GAAP net income (loss) per share should be considered in addition to, not as a substitute for, or superior to, net income (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. 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.  The company was founded in 1995 and is based in Emeryville, California.  NOTE: LEAPFROG, the LeapFrog logo, TAG, LEAPSTER, LEAPSTER EXPLORER and MY OWN LEAPTOP 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, which relate to future events or our future financial performance and can be identified by terminology such as "may," "will," "should," "expect," "intend," "plan," "anticipate," "believe," "estimate," "predict," "potential," "continue," "poised," "optimistic,"  "reaffirm," or the negative of these terms or other comparable terminology.  Such forward-looking statements include statements regarding anticipated financial results (including anticipated sales, sales growth, profitability, earnings, net income, cash flows, gross margins, POS dollars, product awareness, retail distribution, and the efficiency of our operating structure) and regarding sales of new products, software and downloadable content sales, and the effectiveness of our Learning Path strategy. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance, achievements or the timing of events to differ materially from those expressed or implied by such forward-looking statements, including risks related to highly changeable consumer preferences and toy trends, our ability to achieve anticipated sales levels, particularly with respect to newly-launched products, the overall economic environment and its effect on retail business, the seasonality of our business during the holiday season in particular, when most of our sales for the year occur, introductions of products that compete with our platforms by a variety of other companies, our ability to respond quickly and cost effectively to changes in manufacturing costs and in consumer demand for our products, and our ability to provide high-quality experiences to consumers with all of our products and services.  These risks and other factors include those listed under "Risk Factors" in our filings with the U.S. Securities and Exchange Commission, including our 2009 annual report on Form 10-K filed on February 22, 2010 and our quarterly report on Form 10-Q filed on July 28, 2010.  Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, achievements or the timing of any events.  We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

SOURCE LeapFrog Enterprises, Inc.