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LeapFrog Will Leap Up Higher

Posted on Monday, Mar 24th 2008

I did an interview earlier with LeapFrog’s CEO Jeff Katz where he talked about his strategy on trying to turn around LeapFrog, a leading educational gaming products manufacturer. Recently LeapFrog (NYSE: LF) announced their Q4 results. Their numbers still haven’t turned profitable, but they seem to be on track with the turnaround.

Their Q4 revenue of $181 million was marginally lower than both the previous year’s revenue of $183 million and market expectations of $184 million. Net loss of $0.51 per share, was, however better than the previous year’s loss of $0.73 per share and marginally slipped market expectations of loss of $0.50 per share.

For the year 2007 they recorded revenues of $442 million, 12% lower than previous year revenues of $502 million and short of market expectations of $445 million. The company reasons the decline on account of phasing out of some of the product lines (specifically – Little Leaps, Little Touch, Leapster TV, Leapster L-MAX, LeapPad, and My First LeapPad product lines). The net loss for the year was $1.60 per share compared to the previous year’s loss of $2.31 per share. Cleaning up of the product line was necessary.

Segment wise, their U.S. consumer segment revenues for the year decreased by 11% to $313 million compared to the previous year. International sales recorded a 10% decline to $103.4 million and the School segment’s net sales declined by 30% to $26 million.

For the quarter, U.S. consumer segment generated $128 million, an increase of 2.1% over Q4 2006. International recorded revenues of $47 million, a decline of 11% and school revenues fell to $6 million, recording a reduction of 32% over Q4 2006.

For the year 2008, the company is projecting annual revenue growth rate in the mid to high teens at a nominal loss.

Despite the loss for the year, the stock has reacted positively to the management’s strategic guidance, and the price has been rising since the announcement of its results. From the lows of $5.60 on the day of the announcement, the stock has gained steadily to cross $7.40 recently.

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LeapFrog had reached Barbie like sales status with the LeapPad product. However, with LeapPad having lost its novelty, the company too lost its shine. Several mis-steps followed. For the year 2008, however, they are looking at a wide range of new product lines. They are developing web connected products and launching four new platforms.

To cater to their target market of learn-to-read, and to counter the loss of LeapPad’s sales, they have finally found a new reading platform Tag.

Tag is the first handheld learn-to-read product that interacts directly with books and the Web. To ensure Tag’s success, LeapFrog has tied up with leading publishing partners for content and has created an application called LeapFrog Connect which connects into their learning path software.

The learning path software will soon become a unifying element amongst their products as all their leading products will be built around it. The software not only gives parents a progress report on the child’s performance, but also recommends the next range of products as the child grows, thus becoming an active sales vehicle for the company.

In the gaming and entertainment arena, they have expanded their line with Leapster 2 and Didj handhelds which are also Web connected to the learning path software.

The new range of products will come with their additional development costs. However with the management’s commitment to ensuring that all new products will have good margins, the company might just leap into a profitable 2009.

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