LeapFrog Reports Third Quarter Fiscal Year 2015 Financial Results

EMERYVILLE, Calif., Feb. 5, 2015 /PRNewswire/ -- LeapFrog Enterprises, Inc. (NYSE: LF) today announced financial results for the third fiscal quarter ended December 31, 2014. The company's fiscal year covers the twelve-month period ending March 31, 2015.

"We are very disappointed that our performance in the third quarter declined significantly year-over-year and was below our previously-provided guidance," said John Barbour, Chief Executive Officer.

"As we previously stated, the sales shortfall was mainly due to the following factors:

• In our major territories, holiday sales of children's tablets across the toy and electronics segments declined more than expected. This fall in consumer demand resulted in lower than planned LeapPad shipments in the quarter.
• Due to development issues, we shipped and promoted our new LeapTV educational video game system later than planned. This delay along with associated LeapTV advertising and promotion being late in the holiday season and inconsistent execution at retail resulted in us significantly missing our sales expectations on this innovative new platform.
• The lower consumer sales of LeapPad and LeapTV hardware resulted in less demand for cartridges, accessories and digital content.
• Our LeapReader learn-to-read system sales were also lower than expected over the quarter, partly due to the significant drop in the retail prices of children's tablets.
• In addition to the primary drivers above, retail in-stocks of our new tablets were hampered by tighter inventory management and open-to-buy challenges across a number of our retailer partners and the West Coast port slowdown in the US.

"Despite these sales declines, the children's tablet business remains a sizeable business around the world, and we believe based on market data that LeapPad tablets continued to be the #1 selling kids' tablets in the US based on units. In addition, our LeapPad tablets were also the overall #1 selling toy in the UK for the year according to NPD.¹ LeapTV has also won a wide variety of independent awards and has been getting good online consumer reviews."

Summary of financial results for the quarter ended December 31, 2014 compared to the quarter ended December 31, 2013:

• Consolidated net sales were $144.6 million, down 23%. U.S. segment net sales were down 20%, and international segment net sales were down 28%.
• Net loss per basic and diluted share was ($1.77) and included $0.23 per share of goodwill impairment, net of the associated tax benefit, and $1.29 per share of an additional deferred tax asset valuation allowance. In the prior year period, net income per diluted share was $0.90 and included $0.88 per share benefit from the reduction of deferred tax asset valuation allowance.
• Adjusted net loss per basic and diluted share,² which excludes goodwill impairment, the tax benefit associated with goodwill impairment and the deferred tax asset valuation allowance adjustment, was ($0.25), compared to adjusted net income per diluted share² of $0.02 a year ago.
• Cash and cash equivalents were $94.0 million as of December 31, 2014, down 44% compared to $168.1 million as of December 31, 2013.

"In light of the sales decline and losses, we are reviewing our product strategies, operations and cost structure. In this regard, we internally announced yesterday an approximate 16% reduction in our worldwide organization," continued Mr. Barbour. "LeapFrog is a strong brand that parents trust with a rich, 20-year history of innovation and education. We are confident we can leverage our core assets to return the company to growth and continue to help children achieve their potential." 

Financial Overview for the Third Fiscal Quarter Ended December 31, 2014 Compared to the Quarter Ended December 31, 2013

Third fiscal quarter net sales were $144.6 million, down 23% compared to $186.7 million last year, and included a 1% negative impact from changes in currency exchange rates. In the U.S. segment, net sales were $99.2 million, down 20% compared to $123.7 million last year. In the International segment, net sales were $45.4 million, down 28% compared to $63.0 million last year, and included a 3% negative impact from changes in currency exchange rates.

Loss from operations for the third fiscal quarter was ($36.5) million, compared to income from operations of $0.7 million last year.

Net loss for the third fiscal quarter was ($124.2) million and included non-cash charges of $19.5 million for goodwill impairment, net of the associated non-cash tax benefit of $3.8 million, and $90.8 million for additional non-cash deferred tax asset valuation allowance. In the prior year period, net income was $63.9 million and included a non-cash benefit of $62.8 million from the reduction of deferred tax asset valuation allowance.

Net loss per basic and diluted share was ($1.77) and included $0.23 per share of goodwill impairment, net of the associated tax benefit, and $1.29 per share of an additional deferred tax asset valuation allowance. In the prior year period, net income per diluted share was $0.90 and included $0.88 per share benefit from the reduction of deferred tax asset valuation allowance.

Adjusted net loss per basic and diluted share,³ which excludes goodwill impairment, the tax benefit associated with goodwill impairment and the deferred tax asset valuation allowance adjustment, was ($0.25), compared to adjusted net income per diluted share³ of $0.02 a year ago.

Adjusted EBITDA⁴ for the third fiscal quarter was a loss of ($7.3) million, compared to a gain of $9.2 million last year. Adjusted EBITDA⁴ excludes stock-based compensation and goodwill impairment.

Guidance

"We expect our net sales to decline in the fourth quarter compared to the same period of the prior year given our recent sales trends," said Ray Arthur, Chief Financial Officer.

Conference Call and Webcast

LeapFrog will hold a conference call to discuss third quarter fiscal year 2015 financial results on February 5, 2015, at 2:00 p.m. Pacific Time (5:00 p.m. Eastern 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 72266181. A replay of the call will be available for one month. To access the replay, please dial (404) 537-3406 and use conference ID 72266181.

About LeapFrog

LeapFrog Enterprises, Inc. is the leader in educational entertainment for children. For 20 years, LeapFrog has created award-winning learning solutions that combine educational expertise, innovative technology and a child's love for fun. With experiences that are personalized to each child's level, LeapFrog helps children achieve their potential through LeapFrog's proprietary learning tablets, learn to read and write systems, interactive learning toys and more, all designed or approved by LeapFrog's full-time in-house team of learning experts. LeapFrog's Learning Path, the ultimate guide for parents on early childhood, is designed specifically to help support and guide their child's learning with personalized ideas and feedback, fun activities and expert advice. 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. Learn more at www.leapfrog.com.  

TM & © 2015 LeapFrog Enterprises, Inc. All rights reserved.

Use of Non-GAAP Financial Information

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

Adjusted net income (loss) is calculated as net income (loss) adjusted to exclude goodwill impairment, tax benefit associated with goodwill impairment and deferred tax valuation allowance adjustment. Adjusted net income (loss) per basic and diluted share is calculated as adjusted net income (loss) divided by weighted-average basic and diluted shares outstanding, as applicable. As required by SEC rules, we have provided a schedule with a reconciliation of adjusted net income (loss) and adjusted 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 adjusted net income (loss) and adjusted net income (loss) per basic and 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 basic and diluted share as a result of deferred tax valuation allowance adjustment and goodwill impairment, 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, goodwill impairment, 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. Additionally, these non-GAAP measures may not be comparable to similarly-titled measures used by other companies. 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 the size of the children's tablet business, the market share of our LeapPad learning tablets in the U.S., the strength of LeapFrog's brand, the trust that parents place in the LeapFrog brand, our ability to leverage our core assets to return the company to growth and help children achieve their potential and 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, our ability to correctly predict highly changeable consumer preferences and product trends, our ability to continue to develop new products and services, our ability to compete effectively with competitors, deterioration of global economic conditions, our reliance on a small group of retailers for the majority of our gross sales, the effectiveness of our marketing and advertising efforts, the seasonality of our business, 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, our ability to protect or enforce our intellectual property rights, defects in our products, the risks associated with international operations, costs or changes associated with compliance with laws and regulations, negative political developments, changes in trade relations, armed hostilities, terrorism, labor strikes, natural disasters or public health issues, our dependence on our officers and other employees, the sufficiency of our liquidity, impacts from acquisitions, mergers or dispositions, continued ownership by a few stockholders of a significant percentage of the voting power in the company, the volatility of our stock price, the impact of potential impairment charges or valuation allowances and failure to successfully implement new strategic operating initiatives. These risks and others are discussed under "Risk Factors" in our filings with the U.S. Securities and Exchange Commission, including our most recent Form 10-K and Form 10-Q. All information provided in this release is as of the date hereof, and we undertake no obligation to update this information.

¹ Source: Based on the NPD Group/Retail Tracking service; UK; GBP; Annual 2014.
² Adjusted net income (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.
³ Adjusted 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.
⁴ Adjusted EBITDA 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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SOURCE LeapFrog Enterprises, Inc.