EX-99.1 2 v351540_ex99-1.htm EXHIBIT 99.1

Exhibit 99.1

LEAPFROG REPORTS SECOND QUARTER 2013 NET SALES INCREASED 16%

Operating Results Improved 34%

EMERYVILLE, Calif.—August 1, 2013—LeapFrog Enterprises, Inc. (NYSE:LF) today announced financial results for the second quarter ended June 30, 2013.

Highlights of second quarter 2013 results compared to second quarter 2012 results:

Consolidated net sales were up 16%.

U.S. segment net sales were up 19%, and international segment net sales were up 10%.

Loss from operations improved 34%.

Net loss per basic and diluted share was $0.05.

Normalized net loss per basic and diluted share¹, which includes an effective 37.5% tax rate, was $0.04, an improvement of $0.03.

Adjusted EBITDA¹ was positive in the second quarter for the first time as a public company.

“In a challenging economic environment, we delivered strong net sales growth and improved our bottom line in the quarter while making strategic, long-term investments in the business,” said John Barbour, Chief Executive Officer. “Our learning tablets, learn-to-read systems, and learning toys businesses each experienced double-digit net sales growth. Our performance speaks to the exceptional quality and rich educational content of our learning solutions and parents’ priority to invest in their children’s education.

“We are making great progress towards achieving our 2013 objectives. We recently launched three exciting new learning platforms: The LeapReader Reading and Writing System, LeapPad Ultra, the ultimate kids’ learning tablet, and LeapPad2 Power. These platforms, together with our vast selection of top quality educator-approved content, provide the very best in fun learning solutions for children. We are also continuing to make significant long-term investments in content, new business categories, international expansion, online communities and systems, which we believe will enable us to greatly extend our leadership in children’s educational entertainment and further strengthen our foundation for continued growth.”

Financial Overview for the Second Quarter 2013 Compared to the Second Quarter 2012

Second quarter 2013 net sales were $83.0 million, up 16% compared to $71.5 million last year, and were not materially impacted by changes in currency exchange rates. Net sales growth was largely driven by sales of our LeapPad learning tablet line and LeapReader reading-and-writing line which benefitted from new products being shipped to retailers for summer 2013 launches. We experienced double-digit net sales growth in both of our key business categories, multimedia learning (which includes learning tablets, learning game systems and learn-to-read systems) and learning toys. Within our multimedia learning business, content, platforms, and accessories each delivered solid net sales growth. In the U.S. segment, net sales were $58.4 million, up 19% compared to $49.1 million last year. In the International segment, net sales were $24.6 million, up 10% compared to $22.3 million last year, and included a 1% negative impact from changes in currency exchange rates.

¹ Normalized net loss per basic and diluted share and adjusted EBITDA are non-GAAP financial measures. They are described below and reconciled to their comparable GAAP measures in the accompanying financial tables.

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Loss from operations for the second quarter was $4.9 million, an improvement of 34% compared to $7.5 million a year ago. Loss from operations as a percentage of net sales was 5.9%, an improvement of 460 basis points compared to 10.5% a year ago.

Net loss (GAAP) for the second quarter was $3.3 million, an improvement of 59% compared to $8.1 million a year ago. Net loss per basic and diluted share (GAAP) was $0.05, an improvement of $0.07, or 58%, compared to $0.12 a year ago.

Normalized net loss² (non-GAAP) for the second quarter, which reflects an effective 37.5% tax rate, was $2.8 million, an improvement of 44% compared to $4.9 million a year ago. Normalized net loss per basic and diluted share² (non-GAAP) was $0.04, an improvement of $0.03, or 43%, compared to $0.07 a year ago. We provide normalized net income (loss)² measures, which are non-GAAP measures, to help investors review our performance and performance trends excluding discrete tax items which have historically been significant.

Adjusted EBITDA² for the second quarter was $2.6 million, up $3.3 million compared to a year ago, and was positive in the second quarter for the first time as a public company.

“We are pleased with our first half net sales and operating performance, which are up significantly year-over-year, and are tracking slightly ahead of our plan,” said Ray Arthur, Chief Financial Officer. “While we are encouraged by this performance, the first half of the year is seasonally small relative to our total annual business. As we look to the back half of the year, we feel good about our leading learning solution portfolio and market position, yet we remain cautious on the overall consumer environment.”

Guidance

For the full year 2013, we are reiterating our guidance. We expect:

Net sales to increase at a high single-digit percentage growth rate compared to 2012.

Operating margin to be relatively flat to 2012, as we make long-term investments in content, new business categories, international expansion, online communities and systems.

Net income per diluted share (GAAP) and normalized net income per diluted share² (non-GAAP) to both be in the range of $0.57 to $0.60. This assumes an effective 37.5% tax rate which does not include one-time discrete tax items. We may incur some discrete tax items in 2013, but we are not able to estimate or anticipate those discrete tax items at this time, which primarily relate to any adjustment of our remaining valuation allowance against our deferred tax assets. For the full year 2012, net income per diluted share (GAAP) was $1.24 and normalized net income per diluted share² (non-GAAP) was $0.56.

Capital expenditures to be in the range of $30 million to $35 million, compared to $25 million in 2012, as we make long-term investments in our business. Capital expenditures include purchases of property and equipment and capitalization of product costs.

² Normalized net income (loss), normalized net income (loss) per basic and diluted share, and adjusted EBITDA are non-GAAP financial measures. They are described below and reconciled to their comparable GAAP measures in the accompanying financial tables.

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For the third quarter of 2013, we are initiating guidance and expect:

Net sales to increase at a mid-to-high single-digit percentage growth rate compared to the third quarter of 2012.

Net income per diluted share (GAAP) and normalized net income per diluted share³ (non-GAAP) to both be approximately $0.32, which is flat to normalized net income per diluted share³ in the third quarter of last year. This guidance assumes an effective 37.5% tax rate which does not include one-time discrete tax items. We may incur some discrete tax items in the third quarter of 2013, but we are not able to estimate or anticipate those discrete tax items at this time, which primarily relate to any adjustment of our remaining valuation allowance against our deferred tax assets. For the third quarter of 2012, net income per diluted share (GAAP) was $0.60 and normalized net income per diluted share³ (non-GAAP) was $0.32.

Conference Call and Webcast

LeapFrog will hold a conference call to discuss second quarter 2013 financial results on August 1, 2013, at 2:00 p.m. Pacific Daylight Time (5:00 p.m. Eastern Daylight Time). The conference call will be webcast live and can be accessed at LeapFrog's investor relations web site at www.leapfroginvestor.com. An archive of the webcast will be available on the web site approximately three hours after completion of the call. In addition, more information about LeapFrog, including this press release and other financial and investor information, is also available on the investor relations web site.

To participate in the call, please dial (706) 634-0183 and request conference ID 19914127. A replay of the call will be available for one month. To access the replay, please dial (404) 537-3406 and use conference ID 19914127.

About LeapFrog

LeapFrog Enterprises, Inc. is the leader in educational entertainment for children. LeapFrog’s award-winning product portfolio helps millions of children achieve their potential by delivering best-in-class curriculum through engaging content, fun multimedia learning platforms and toys. The Learning Path, LeapFrog’s proprietary online destination for parents, provides personalized feedback on a child’s learning progress and offers recommendations to enhance each child’s learning experience. Through the power of play, LeapFrog’s products and curriculum help children of all ages prepare for school and life success. LeapFrog’s products are available in more than 45 countries and have been used by teachers in more than 100,000 U.S. classrooms. LeapFrog is based in Emeryville, California, and was founded in 1995 by a father who revolutionized technology-based learning solutions to help his child learn how to read. Come see the learning at www.leapfrog.com.

³ Normalized net loss per basic and diluted share is a non-GAAP financial measure. It is described below and reconciled to its comparable GAAP measure in the accompanying financial tables.

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Use of Non-GAAP Financial Information

This press release includes non-GAAP financial measures, specifically normalized net income (loss), normalized net income (loss) per basic or diluted share, and adjusted EBITDA.

Normalized net income (loss) is calculated as net income (loss) adjusted to reflect an effective 37.5% tax rate. Normalized net income (loss) per basic or diluted share is calculated as normalized net income (loss) divided by weighted-average basic or diluted shares outstanding, as applicable. As required by SEC rules, we have provided a schedule with a reconciliation of normalized net income (loss) and normalized net income (loss) per basic and diluted share to the most directly comparable GAAP measures, net income (loss) and net income (loss) per basic and diluted share.

Management believes that normalized net income and normalized net income per basic or diluted share are some of the appropriate measures for evaluating the operating performance of the Company because of the significant swing in net income (loss) and net income (loss) per share as a result of the deferred tax valuation allowance release and other discrete tax items, and therefore, provides a more comparable measure of year-over-year operating results.

Adjusted EBITDA is defined as earnings (or net income) before interest, income taxes, depreciation and amortization, other expenses (income), and stock-based compensation. As required by SEC rules, we have provided an attached schedule with a reconciliation of adjusted EBITDA to the most directly comparable GAAP measure, net income.

Management believes adjusted EBITDA is one of the appropriate measures for evaluating the operating performance of the Company because it reflects the resources available for strategic opportunities including, among others, to invest in the business, strengthen the balance sheet, and make strategic acquisitions.

However, these non-GAAP measures should be considered in addition to, not as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP as more fully discussed in the Company's financial statements and filings with the SEC. As used herein, "GAAP" refers to accounting principles generally accepted in the United States of America.

Forward-Looking Statements

This news release contains forward-looking statements that involve risks and uncertainties, including statements regarding anticipated financial results. Our actual results may differ materially from those expressed or implied by such forward-looking statements. The risks that could cause our results to differ include, without limitation, deterioration of global economic conditions, our ability to correctly predict highly changeable consumer preferences and product trends, our ability to continue to develop new products and services, our reliance on a small group of retailers for the majority of our gross sales, our ability to compete effectively with competitors, the seasonality of our business, our growing focus on online products and services and privacy concerns about our Internet-connected products, consumer acceptance of downloadable content and data collection, system failures in our online services or web store, our dependence on our suppliers for our components and raw materials, our reliance on a limited number of manufacturers, our ability to maintain sufficient inventory levels, our ability to maintain or acquire licenses, third parties who claim we are infringing on their intellectual property rights, errors or defects in our products, the sufficiency of our liquidity, the risk associated with international operations, costs or changes associated with compliance with laws and regulations, negative political developments, natural disasters, armed hostilities, terrorism, labor strikes or public health issues, the loss of members of our executive management team, continued ownership by a few stockholders of a significant percentage of voting the power in the company, and the volatility of our stock price. These risks and others are discussed under “Risk Factors” in our filings with the U.S. Securities and Exchange Commission, including our 2012 annual report on Form 10-K filed on March 11, 2013. All information provided in this release is as of the date hereof, and we undertake no obligation to update this information.

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Contact Information

Investors:	Media:
Karen Sansot, CFA	Monica Ma
Investor Relations	Media Relations
(510) 420-4803	(510) 596-3437
ksansot@leapfrog.com	mma@leapfrog.com

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LEAPFROG ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012

Net sales	$	82,986		$	71,480		$	165,923		$	143,490
Cost of sales		52,084			42,925			101,709			85,203
Gross profit		30,902			28,555			64,214			58,287

Operating expenses:
Selling, general and administrative		21,814			20,204			43,719			43,901
Research and development		8,694			8,849			17,707			17,738
Advertising		2,692			4,339			6,842			6,753
Depreciation and amortization		2,615			2,633			5,410			5,913
Total operating expenses		35,815			36,025			73,678			74,305
Loss from operations		(4,913	)		(7,470	)		(9,464	)		(16,018	)

Other income (expense):
Interest income		18			96			42			189
Other, net		483			(449	)		(25	)		(1,116	)
Total other income (expense), net		501			(353	)		17			(927	)
Loss before income taxes		(4,412	)		(7,823	)		(9,447	)		(16,945	)
(Benefit from) provision for income taxes		(1,122	)		287			(3,146	)		622
Net loss	$	(3,290	)	$	(8,110	)	$	(6,301	)	$	(17,567	)

Net loss per share:
Class A and B - basic and diluted	$	(0.05	)	$	(0.12	)	$	(0.09	)	$	(0.26	)

Weighted average shares used to calculate net loss
per share:
Class A and B - basic and diluted		68,199			66,928			68,018			66,662

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CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)

	June 30,						December 31,
	2013			2012			2012
ASSETS
Current assets:
Cash and cash equivalents	$	181,418		$	126,926		$	120,000
Accounts receivable, net of allowances for doubtful accounts of $247, $3,891 and $292, respectively		61,919			51,360			180,043
Inventories		66,601			52,650			40,311
Prepaid expenses and other current assets		10,195			9,325			8,353
Deferred income taxes		10,777			978			9,315
Total current assets		330,910			241,239			358,022
Deferred income taxes		15,225			1,281			13,269
Property and equipment, net		30,056			19,437			23,723
Capitalized product costs, net		15,151			11,319			12,109
Goodwill		19,549			19,549			19,549
Other intangible assets, net		350			2,150			950
Other assets		1,178			1,591			1,283
Total assets	$	412,419		$	296,566		$	428,905

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	45,530		$	32,200		$	31,617
Accrued liabilities		24,492			24,737			51,353
Deferred revenue		7,930			6,739			8,516
Income taxes payable		688			379			493
Total current liabilities		78,640			64,055			91,979
Long-term deferred income taxes		3,759			3,713			3,759
Other long-term liabilities		1,944			8,988			3,224
Total liabilities		84,343			76,756			98,962
Stockholders' equity:
Class A Common Stock, par value $0.0001;
Authorized - 139,500 shares; Outstanding: 63,947, 58,230 and 61,970, respectively		7			6			6
Class B Common Stock, par value $0.0001;
Authorized - 40,500 shares; Outstanding: 4,395, 8,953 and 5,715, respectively		-			1			1
Treasury stock		(185	)		(185	)		(185	)
Additional paid-in capital		411,017			400,193			405,078
Accumulated other comprehensive (loss) income		(434	)		(158	)		1,071
Accumulated deficit		(82,329	)		(180,047	)		(76,028	)
Total stockholders’ equity		328,076			219,810			329,943
Total liabilities and stockholders’ equity	$	412,419		$	296,566		$	428,905

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LEAPFROG ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Operating activities:
Net loss	$	(3,290	)	$	(8,110	)	$	(6,301	)	$	(17,567	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization		4,899			5,133			9,889			11,122
Deferred income taxes		(1,850	)		203			(3,462	)		212
Stock-based compensation expense		2,588			1,567			4,543			3,039
Loss on sale of long-term investments, net of tax		-			-			-			91
Loss on disposal of long-term assets		-			-			-			2
Allowance for doubtful accounts		(229	)		(87	)		41			3,252
Other changes in operating assets and liabilities:
Accounts receivable, net		(4,633	)		5,742			117,715			102,842
Inventories		(21,731	)		(14,166	)		(26,868	)		(18,293	)
Prepaid expenses and other current assets		(325	)		(114	)		(2,003	)		(1,234	)
Other assets		52			(514	)		105			(472	)
Accounts payable		26,504			4,248			13,970			(2,435	)
Accrued liabilities and deferred revenue		182			1,380			(27,246	)		(18,922	)
Other long-term liabilities		(559	)		(47	)		(1,280	)		(372	)
Income taxes payable		204			43			206			2
Net cash provided by (used in) operating activities		1,812			(4,722	)		79,309			61,267
Investing activities:
Purchases of property and equipment		(6,131	)		(3,672	)		(11,966	)		(6,392	)
Capitalization of product costs		(3,856	)		(2,030	)		(6,731	)		(3,892	)
Sale of investments		-			2,500			-			2,500
Net cash used in investing activities		(9,987	)		(3,202	)		(18,697	)		(7,784	)
Financing activities:
Proceeds from stock option exercises and employee stock purchase plan		627			1,074			2,263			2,739
Net cash paid for payroll taxes on restricted stock unit releases		(526	)		(510	)		(867	)		(1,212	)
Net cash provided by financing activities		101			564			1,396			1,527
Effect of exchange rate changes on cash		(218	)		(470	)		(590	)		53
Net change in cash and cash equivalents		(8,292	)		(7,830	)		61,418			55,063
Cash and cash equivalents, beginning of period		189,710			134,756			120,000			71,863
Cash and cash equivalents, end of period	$	181,418		$	126,926		$	181,418		$	126,926

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LEAPFROG ENTERPRISES, INC.

SUPPLEMENTAL FINANCIAL INFORMATION

(In thousands)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012

Net sales	$	82,986		$	71,480		$	165,923		$	143,490
Cost of sales (1)		52,084			42,925			101,709			85,203
Gross profit		30,902			28,555			64,214			58,287

Operating expenses: (2)
Selling, general and administrative		21,814			20,204			43,719			43,901
Research and development		8,694			8,849			17,707			17,738
Advertising		2,692			4,339			6,842			6,753
Depreciation and amortization		2,615			2,633			5,410			5,913
Total operating expenses		35,815			36,025			73,678			74,305
Loss from operations		(4,913	)		(7,470	)		(9,464	)		(16,018	)

Other income (expense):
Interest income		18			96			42			189
Other, net		483			(449	)		(25	)		(1,116	)
Total other income (expense), net		501			(353	)		17			(927	)
Loss before income taxes		(4,412	)		(7,823	)		(9,447	)		(16,945	)
(Benefit from) provision for income taxes		(1,122	)		287			(3,146	)		622
Net loss	$	(3,290	)	$	(8,110	)	$	(6,301	)	$	(17,567	)

(1) Includes depreciation and amortization		2,284			2,500			4,479			5,209

(2) Includes stock-based compensation as follows:
Selling, general and administrative		2,290			1,335			4,041			2,644
Research and development		298			232			502			395

Segment data:
Net sales:
U.S. segment		58,358			49,141			116,455			101,359
International segment		24,628			22,339			49,468			42,131

(Loss) income from operations*:
U.S. segment		(10,215	)		(11,021	)		(19,466	)		(22,722	)
International segment		5,302			3,551			10,002			6,704

Certain corporate-level operating expenses associated with sales and marketing, product support, human resources, legal, finance, information technology, corporate development, procurement activities, research and development, legal settlements and other corporate costs are charged entirely to our U.S. segment, rather than being allocated between the U.S. and International segments.

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LEAPFROG ENTERPRISES, INC.

SUPPLEMENTAL DISCLOSURE REGARDING NON-GAAP FINANCIAL INFORMATION

RECONCILIATION OF GAAP NET (LOSS) INCOME TO NORMALIZED NET (LOSS) INCOME,

GAAP NET (LOSS) INCOME PER SHARE TO NORMALIZED NET (LOSS) INCOME PER SHARE,

AND GAAP NET LOSS TO ADJUSTED EBITDA

(In thousands)

(Unaudited)

The following table presents a reconciliation of net (loss) income, a GAAP measure, to normalized net (loss) income, a non-GAAP measure, where available. Normalized net (loss) income is defined as net (loss) income adjusted to reflect an effective 37.5% tax rate. Normalized net (loss) income per share is calculated as normalized net (loss) income divided by weighted-average basic or diluted shares outstanding, as applicable.

	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended September 30,			Twelve Months Ended December 31,
	2013			2012			2013			2012			2012			2012

Net (loss) income - GAAP	$	(3,290	)	$	(8,110	)	$	(6,301	)	$	(17,567	)	$	41,738		$	86,452
(Benefit from) provision for income taxes		(1,122	)		287			(3,146	)		622			(5,785	)		(24,504	)
(Loss) income before income taxes		(4,412	)		(7,823	)		(9,447	)		(16,945	)		35,953			61,948
Effective tax (benefit) expense at 37.5% rate		(1,655	)		(2,934	)		(3,543	)		(6,354	)		13,482			23,231
Normalized net (loss) income - Non-GAAP	$	(2,757	)	$	(4,889	)	$	(5,904	)	$	(10,591	)	$	22,471		$	38,717

Net (loss) income per share - GAAP:
Class A and B - basic	$	(0.05	)	$	(0.12	)	$	(0.09	)	$	(0.26	)	$	0.62		$	1.29
Class A and B - diluted	$	(0.05	)	$	(0.12	)	$	(0.09	)	$	(0.26	)	$	0.60		$	1.24

Normalized net (loss) income per share - Non-GAAP:
Class A and B - basic	$	(0.04	)	$	(0.07	)	$	(0.09	)	$	(0.16	)	$	0.33		$	0.58
Class A and B - diluted	$	(0.04	)	$	(0.07	)	$	(0.09	)	$	(0.16	)	$	0.32		$	0.56

Weighted-average shares used to calculate
net income (loss) per share:
Class A and B - basic		68,199			66,928			68,018			66,662			67,400			67,100
Class A and B - diluted		68,199			66,928			68,018			66,662			69,512			69,720

The following table presents a reconciliation of net loss, a GAAP measure, to adjusted EBITDA, a non-GAAP measure. Adjusted EBITDA is defined as earnings (or net loss) before interest, taxes, depreciation and amortization, other expenses (income), and stock-based compensation.

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012

Net loss - GAAP	$	(3,290	)	$	(8,110	)	$	(6,301	)	$	(17,567	)
(Less) add:
Interest income		(18	)		(96	)		(42	)		(189	)
(Benefit from) provision for income taxes		(1,122	)		287			(3,146	)		622
Depreciation and amortization		4,899			5,133			9,889			11,122
Other, net		(483	)		449			25			1,116
Stock-based compensation		2,588			1,567			4,543			3,039

Adjusted EBITDA - Non-GAAP	$	2,574		$	(770	)	$	4,968		$	(1,857	)