EX-99.1 2 dex991.htm PRESS RELEASE DATED NOVEMBER 3, 2008 Press release dated November 3, 2008

Exhibit 99.1

LEAPFROG ANNOUNCES THIRD QUARTER 2008 FINANCIAL RESULTS

EMERYVILLE, California—November 3, 2008—LeapFrog Enterprises, Inc. (NYSE:LF), a leading designer, developer and marketer of technology-based learning products, today announced financial results for the third quarter and nine months ended September 30, 2008.

For the third quarter 2008, the company reported net sales of $194.6 million and net income of $24.0 million, or $0.38 per share. This compares to net sales of $144.0 million and a net loss of $10.3 million, or $0.16 per share, for the third quarter 2007. In addition to the 35% increase in net sales, the improved financial results included higher gross margin and lower operating expenses year-over-year.

LeapFrog President and Chief Executive Officer Jeffrey G. Katz stated, “We entered 2008 planning for our largest and most important launch year ever, and our third quarter results were on track with our expectations. Third quarter sales were driven by the continued roll-out of our new products, notably our Leapster2 and Didj educational gaming systems, and the Tag reading system in our international markets. These launches went well and our products have already won numerous awards and strong holiday toy accolades in the media, which we think bodes well for when holiday consumers finally come out of their bunkers. And we think they will come out. But, we doubt we can completely compensate for the recent softness in retail trends and so we are going to moderate our expectation for full year sales growth.”

Third Quarter 2008 Financial Results

Segment Results

Net sales from the U.S. Consumer segment increased 40% to $153.6 million for the third quarter 2008 compared with $109.5 million for the third quarter 2007. Net sales from the International segment increased 26% to $38.2 million for the third quarter 2008 compared with $30.2 million for the third quarter 2007. Net sales from the School segment decreased 35% to $2.8 million for the third quarter 2008 compared with $4.3 million for the third quarter 2007.

Gross Profit and Gross Margin

Gross profit improved to $85.3 million for the third quarter 2008 compared to $60.7 million for the third quarter 2007. Gross margin for the three months ended September 30, 2008 increased by 1.6 percentage points to 43.8% in the third quarter 2008 compared to 42.2% in the third quarter 2007.

Operating Expenses

Operating expenses totaled $56.0 million for the third quarter 2008 compared to $71.3 million for the third quarter 2007. Selling, general and administrative expense decreased by 35% for the third quarter 2008, reflecting the impact of cost containment actions including headcount reductions, as well as the absence of patent defense and settlement costs. Research and development costs also fell by 18% to $11.7 million, reflecting decreased spending for platform development and the shift to third-party content development. Advertising expense increased 14% year-over-year to $14.6 million for the third quarter 2008 to support new product introductions.

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Provision for Income Taxes

Provision for income taxes was $3.9 million for the third quarter 2008 compared with $0.6 million for the third quarter 2007, reflecting the increased profitability of the company.

Net Income/Loss

The company recorded net income of $24.0 million, or $0.38 per share, for the third quarter 2008, compared to a net loss of $10.3 million, or $0.16 per share, for the third quarter 2007. Higher sales, improved gross margins and lower operating expenses drove the improved performance.

Balance Sheet

Inventories were $96.9 million at September 30, 2008, compared with $52.4 million at December 31, 2007 and $110.3 million at September 30, 2007. The increase in inventories since year-end reflects an expanded product portfolio and preparations for the holiday selling season in the fourth quarter. Cash and investments totaled $32.3 million at September 30, 2008, compared with $104.4 million at December 31, 2007 and $97.5 million at September 30, 2007. The decline in cash is due to seasonal working capital needs combined with a year-to-date operating loss.

Outlook

“We are pleased with this quarter’s results. We have a strong portfolio of products, clean inventories, a healthy balance sheet and plenty of liquidity to weather the economic storm,” said Bill Chiasson, chief financial officer.

LeapFrog’s revised expectations for full year 2008 results are:

 

   

10%-15% revenue increase compared to 2007.

 

   

Higher gross margin compared with 39.2% in 2007.

 

   

15% reduction in overall SG&A and R&D spending compared to 2007.

Conference Call and Webcast

A conference call will be held today, November 3, at 5:30 p.m. Eastern time (2:30 p.m. Pacific time) to provide further discussion of the results for the third quarter of 2008. A live Web cast of the conference call will be offered on LeapFrog’s investor relations website at www.leapfroginvestor.com and on www.earnings.com. To participate in the call, please dial (706) 634-0183 and request Conference ID 69608981. A replay of the Web cast will be available on these Web sites through November 3, 2009. A telephone replay is also available through December 3, 2008 at (706) 634-0183; I.D. No. 69608981.


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Upcoming Investor Luncheon

LeapFrog will host an investor luncheon on Thursday, November 6, in New York City. For more information contact Eileen VanEss, Vice President of Investor Relations and Treasurer, at 510-420-5361 or ir@leapfrog.com.

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 six languages at major retailers in more than 35 countries around the world. LeapFrog School’s multisensory products currently reach students in more than 100,000 classrooms across the United States. LeapFrog School is a business division of LeapFrog Enterprises, Inc.

NOTE: LEAPFROG, the LeapFrog Logo, TAG, LEAPSTER, and DIDJ are trademarks or registered trademarks of LeapFrog Enterprises, Inc.

Forward-Looking Statements

Cautionary Statement under the Private Securities Litigation Reform Act of 1995:

Except for the historical information contained herein, this news release contains forward-looking statements, including statements regarding the timing, scope and success of future product launches, expected benefits of new products and services, anticipated 2008 financial results, including expected net sales, margins, expenses, profitability, cash flow and cash balances for 2008. These forward-looking statements involve risks and uncertainties, including risks related to overall consumer sentiment and its effect on retailer buying behavior, the company’s ability to launch and support new products, services and features on time and at anticipated margin and profit levels; the acceptance by consumers, retailers and schools of the company’s new strategy related to Internet-connected products and related Internet services, including with respect to the LeapFrog Learning Path; the company’s ability to launch and operate its network infrastructure to support the new Internet-related business; and the effect of marketing on the sales of the company’s products and services. These and other risks and uncertainties detailed from time to time in the company’s SEC filings, including its 2007 annual report on Form 10-K filed on March 13, 2008, 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.


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Contact Information:

 

Investors:    Media:
Eileen VanEss    Mischa Dunton
Investor Relations    Corporate Communications
(510) 420-5361    (510) 596-5441


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LEAPFROG ENTERPRISES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

 

     September 30,     December 31,
2007
 
     2008     2007    
     (Unaudited)        

ASSETS

      

Current assets:

      

Cash and cash equivalents

   $ 23,644     $ 71,677     $ 93,460  

Short-term investments

     —         11,800       —    

Accounts receivable, net of allowances

     160,192       118,527       126,936  

Inventories

     96,907       110,261       52,415  

Prepaid expenses and other current assets

     13,121       21,388       20,427  

Deferred income taxes

     3,072       4,578       3,405  
                        

Total current assets

     296,936       338,231       296,643  

Property and equipment, net

     36,335       32,616       34,017  

Deferred income taxes

     216       277       213  

Intangible assets, net

     23,799       24,866       24,512  

Long-term investments

     8,701       14,000       10,925  

Other assets

     3,651       9,070       4,153  
                        

Total assets

   $ 369,638     $ 419,060     $ 370,463  
                        

LIABILITIES AND STOCKHOLDERS’ EQUITY

      

Current liabilities:

      

Accounts payable

   $ 77,176     $ 69,472     $ 46,868  

Accrued liabilities and deferred revenue

     43,839       48,904       57,591  

Income taxes payable

     187       1,955       93  
                        

Total current liabilities

     121,202       120,331       104,552  

Long-term liabilities

     23,024       23,751       22,438  

Commitments and contingencies

      

Stockholders’ equity:

      

Class A common stock, par value $0.0001; 139,500 shares authorized; shares issued and outstanding: 36,141, 35,782 and 35,857 at September 30, 2008 and 2007, and December 31, 2007, respectively

     4       4       4  

Class B common stock, par value $0.0001; 40,500 shares authorized; shares issued and outstanding: 27,614 at September 30, 2008 and 2007, and December 31, 2007, respectively

     3       3       3  

Treasury stock

     (185 )     (185 )     (185 )

Additional paid-in capital

     361,763       351,625       353,857  

Accumulated other comprehensive income

     2,023       5,217       4,036  

Accumulated deficit

     (138,196 )     (81,686 )     (114,242 )
                        

Total stockholders’ equity

     225,412       274,978       243,473  
                        

Total liabilities and stockholders’ equity

   $ 369,638     $ 419,060     $ 370,463  
                        

 


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LEAPFROG ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2008     2007     2008     2007  

Net sales

   $ 194,626     $ 144,045     $ 321,240     $ 260,965  

Cost of sales

     109,300       83,272       187,896       155,205  
                                

Gross profit

     85,326       60,773       133,344       105,760  

Operating expenses:

        

Selling, general and administrative

     27,172       41,896       83,945       104,240  

Research and development

     11,688       14,242       36,674       42,735  

Advertising

     14,590       12,804       26,915       22,610  

Depreciation and amortization

     2,484       2,386       7,201       7,315  
                                

Total operating expenses

     55,934       71,328       154,735       176,900  
                                

Income (loss) from operations

     29,392       (10,555 )     (21,391 )     (71,140 )

Other income (expense):

        

Interest income

     305       1,470       2,202       5,908  

Interest expense

     (106 )     (14 )     (139 )     (88 )

Other, net

     (1,648 )     (569 )     (4,205 )     (151 )
                                

Total other income (expense)

     (1,449 )     887       (2,142 )     5,669  
                                

Income (loss) before income taxes

     27,943       (9,668 )     (23,533 )     (65,471 )

Provision for income taxes

     3,892       637       421       3,290  
                                

Net income (loss)

   $ 24,051     $ (10,305 )   $ (23,954 )   $ (68,761 )
                                

Net income (loss) per common share:

        

Class A and B - basic

   $ 0.38     $ (0.16 )   $ (0.38 )   $ (1.09 )

Class A and B - diluted

   $ 0.38     $ (0.16 )   $ (0.38 )   $ (1.09 )

Weighted average shares used to calculate net income (loss) per common share:

        

Class A and B - basic

     63,683       63,376       63,589       63,319  

Class A and B - diluted

     63,923       63,376       63,589       63,319  


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LEAPFROG ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, except per share data)

(Unaudited)

 

     Nine Months Ended
September 30,
 
     2008     2007  

Net loss

   $ (23,954 )   $ (68,761 )

Adjustments to reconcile net loss to net cash used by operating activities:

    

Depreciation and amortization

     15,614       14,171  

Unrealized foreign exchange (gain) loss

     1,826       (3,092 )

Deferred income taxes

     330       (3,551 )

Stock-based compensation expense

     8,015       7,395  

Impairment of investment in auction rate securities

     2,822       —    

Investment accretion

     —         (792 )

Provision for (recovery on) doubtful accounts

     942       (228 )

Other changes in operating assets and liabilities:

    

Accounts receivable

     (34,198 )     12,045  

Inventories

     (44,492 )     (37,240 )

Prepaid expenses and other current assets

     7,306       1,968  

Other assets

     502       67  

Accounts payable

     30,308       22,752  

Accrued liabilities and deferred revenue

     (13,752 )     10,147  

Long-term liabilities

     586       4,083  

Income taxes payable

     94       1,231  

Other

     41       (608 )
                

Net cash used by operating activities

     (48,010 )     (40,413 )
                

Investing activities:

    

Purchases of property and equipment

     (17,260 )     (17,922 )

Purchases of investments

     —         (460,329 )

Sales of investments

     —         516,088  
                

Net cash (used) provided by investing activities

     (17,260 )     37,837  
                

Financing activities:

    

Proceeds from stock option exercises and employee stock purchase plans

     623       2,389  

Net cash paid for payroll taxes on restricted stock unit releases

     (731 )     (746 )
                

Net cash (used) provided by financing activities

     (108 )     1,643  
                

Effect of exchange rate changes on cash

     (4,438 )     5,296  
                

Net change in cash and cash equivalents for the period

     (69,816 )     4,363  

Cash and cash equivalents at beginning of period

     93,460       67,314  
                

Cash and cash equivalents at end of period

   $ 23,644     $ 71,677