LeapFrog Improves in 1Q, Revs Soar

LeapFrog Enterprises Inc.(LF - Snapshot Report) reported a first quarter 2012 loss per share of 14 cents, much better than the Zacks Consensus Estimate of a loss of 26 cents. The loss narrowed from the year-ago loss per share of 34 cents.

LeapFrog’s net revenue of $72 million surged 81% year over year and also beat the Zacks Consensus Estimate of $51 million. Foreign exchange had an unfavorable impact of 1%. Revenue was mainly driven by strong content sales, higher demand for LeapPad, low inventory levels at the beginning of the year and share gains in core markets. The calendar shift of Easter also boosted the first quarter sales on a year-over-year basis.

Quarter Highlights

LeapFrog experienced net revenue growth on a worldwide basis. In the U.S. segment, net revenue shot up 98% year over year to $52 million. The segment revenue was driven by strong growth in U.S. Point-of-sale system and low inventory levels at the beginning of the year. Within the international segment, net revenue jumped 49% year over year to $20 million, driven by double-digit growth in Point-of-sale system in core markets and strong sell-in growth.

Businessline-wise, net revenue of multimedia learning platforms and contents line soared 193% year over year. Physical books, ebooks and ultra books, which come under multimedia learning platforms category, experienced double-digit growth. LeapPad's hardware, contents and accessories line also enjoyed strong revenue growth, partially offset by lower revenue from the gaming platform. In contrast, net revenue of the learning toy line plunged 17% year over year, as most of the products under the category are nearing their last phases of life cycle.

In the quarter under review, gross profit skyrocketed 153% year over year to $30 million and gross margin jumped 11.7 percentage points to 41.3% year-over-year. The increase in gross margin was driven by strong sales volume, favorable product mix and low products costs. Operating expenses grew 14% on a year-over-year basis to $38 million. Net loss was $9 million in the reported quarter, which narrowed from the year ago loss of $22.2 million.

Financial Highlights

At quarter end, total assets were $298.2 million compared with $244.1 million at the end of the year-earlier quarter.

As of March 31, 2012, shareholders’ equity was $227 million versus $185.5 million as of March 31, 2011.

Outlook

For second quarter 2012, management expects the loss per share to be in the range of 18-20 cents. Net sales are projected to increase in the range of 17%-22%.

For full year 2012, management expects earnings per share to be in the range of 52-57 cents, up from previous projection of 40-45 cents. Net sales are expected to increase in the range of 10%-13%, up from the previous projection of 6%-8%.

Our Take

The company’s first quarter results were above expectations as total revenue increased on a year-over-year basis. We expect estimates to move up in the coming days. The Zacks Consensus Estimates for 2012 and 2013 are pegged at 62 cents and 70 cents, respectively.

We have an Outperform recommendation on LeapFrog over the long term as it has an industry-leading position, strong balance sheet and strong product momentum. Its focus on top-line growth, product innovation, international expansion and effective cash deployment also augur well.

LeapFrog currently retains a Zacks #1 Rank, which translates into a Strong Buy rating. As a point of reference, one of LeapFrog’s major peers Mattel Inc. (MAT - Analyst Report) missed the Zacks Consensus Estimate in its first quarter 2012 earnings per share and revenue.