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LeapFrog slims losses on strong fourth quarter

By Staff -- Gifts and Dec, 2/11/2010 9:22:00 AM

EMERYVILLE, Calif.—Leap Frog pared its net losses in 2009 on the strength of a stellar fourth quarter that saw sales jump nearly 37 percent.

For the year, the electronic learning toys maker slashed its losses by more than $65 million to end the 12-month period with a net loss of just $2.7 million, or 4 cents per share. Results were helped by a 31 percent cut in operating expenses and a 2.1 percent gain in gross margin, but hampered by a 17 percent drop in annual sales to $379.8 million. Adjusted EBITDA earnings were worth $21.4 million, a $53.4 million gain.

In the fourth quarter the company recorded net income of $29.4 million, or 46 cents per share, a $73.6 million, $1.15 per share gain. Gross margin grew 9 percent, while operating expenses were cut nearly 36 percent. Net sales for the quarter were $188.6 million, up 37 percent compared to $137.8 million for the same quarter a year ago, and included a favorable impact from changes in currency exchange rates of 1.5 percentage points. Net sales increased year over year primarily as a result of higher sales of interactive reading systems, software-based book and game content, and learning toy products—among them Tag and Tag Junior reading systems and the company’s new for 2009 line of Scout plush toys, according to CEO Jeffrey Katz.

Quarterly sales in the U.S. grew nearly 48 percent to $155.6 million. International sales were essentially flat, helped into the black by currency exchange rates.

"Our goal for the year was to manage the business towards break-even earnings, and we essentially did that on the back of strong POS growth, extraordinary expense discipline, and personalized marketing programs to our Learning Path customer base. Sales were up 37 percent and net income per share was up $1.15 in the fourth quarter. We are entering 2010 with momentum and lean retail inventories," Katz said of the performance.

Learning Path is LeapFrog’s proprietary content management application that allows parents to track online how well their child is performing tasks using various LeapFrog learning products.

Looking forward, Katz said: "We expect significant sales and earnings growth to continue in 2010 and beyond. Our products are being very well received by consumers, our cost of doing business is dramatically lower, and our Learning Path and product portfolio strategy are producing sales results with substantially lower marketing outlays. We have 3 million connected customers today and expect to have 6 to 7 million after the 2010 holiday season. Through the Learning Path we are able to communicate with and engage LeapFrog product users with customized play experiences and market to them in a personalized manner. We're already seeing results of sales from product 'graduation' initiatives launched from the Learning Path, more software-based content sales due to our Learning Path recommendation engine, and higher tie ratios of software to hardware sales."

The company’s forecast sees net sales grow 10 percent to 20 percent compared to 2009; gross margin to be roughly flat compared to the gross margin of 42 percent that was achieved in 2009; growth in operating expenses at “a rate significantly less than the rate of net sales growth”; and positive operating income and net income at year’s end.

Thanks to leaner inventory, for the first quarter of 2010 the company expects net sales to be “significantly above” the full year growth rate of 2010.

LeapFrog also announced that with positive 2009 results and an upbeat outlook for 2010, effective March 1 Jeffrey Katz, currently Chairman and CEO, will take on the role of Executive Chairman, and that Bill Chiasson, currently Chief Financial Officer, will become CEO.

"As CFO, over the last five years Bill has worked with me to fundamentally restructure the Company,” said Katz of Chiasson’s pending appointment. “With over 20 years of experience in retail businesses including leadership roles at Kraft and Levi Strauss, as well as LeapFrog, the Board and I feel confident he is the right person to build upon the significant momentum that has been created through our turnaround."

As a result of the move, other LeapFrog said the following promotions would take place:

William Campbell, currently Executive Vice President of Global Sales, will become President of Sales and Marketing responsible for all customer-facing matters.

Michael Dodd, currently Executive Vice President of Supply Chain and Operations, will become Chief Operating Officer.

Mark Etnyre, currently Vice President, Controller and Chief Accounting Officer, will become Chief Financial Officer.

Michael Chai, currently Executive Vice President of R&D, will become Executive Vice President for Product Development and Engineering.

Jeffrey Grant, currently Senior Vice President of Marketing and Web Products, will become Senior Vice President and Chief Marketing Officer.

Craig Hendrickson, Senior Vice President of Product Marketing, will become Senior Vice President and Chief Product Officer.

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