Ignoring the Noise: A Focused Look at LeapFrog Enterprises, Inc. (LF) Earnings

Page 1 of 2

It can be difficult for investors to focus on qualitative criteria during earnings season, and it’s no different with LeapFrog Enterprises, Inc. (NYSE:LF). With so much emphasis on “beating the street,” investors all too often look only at earnings per share, revenue, and guidance. In an attempt to change the status quo, all I will say is that LeapFrog easily exceeded analyst expectations for fiscal year 2012, posted solid financial results, and still offers compelling value. These results were due to its product offerings, and those product offerings should be the primary focus of investors. So, in the tradition of thinking like a business owner and long-term investor, let’s take a look at how LeapFrog products are selling, and where they’re headed.

LeapFrog Enterprises, Inc. (NYSE:LF)A year in review
Looking back at 2012, it was the year of multimedia sales, which includes items like the LeapPad, and associated content for the device. LeapFrog saw sales of its multimedia segment grow 60% compared to 2011, with downloadable content sales quadrupling. Keep in mind that 2012 was the first full year of LeapPad sales, so comparability in sales is somewhat skewed to the high side.

Toys in this segment were the number one best-selling toy in the United States, and were in the top 10 best-selling toys in the United Kingdom. During the question and answer portion of the conference call, management noted that they had problems meeting demand with their retail partners, with some partners saying they left sales on the table. I would say that running out of product is generally a good problem to have when you’re running a business and, hopefully, with the release of the all new LeapPad in 2013, they’ll have the same problem.

All in all, the multimedia segment is definitely the company’s bread and butter, and appears to have a long way left to run with plenty of opportunity. You shouldn’t always focus on what’s working, however, and while multimedia was a shining star, the company’s other products left a lot to be desired.

These other products in question are interactive reading and learning toys, with sales down 11% and 12%, respectively, for 2012. Management highlighted that the decline was due to the popularity of the LeapPad cannibalizing sales, and also having some disappointing toy lines. They hope to reinvigorate this line-up in 2013 with some exciting new toys that they’ll showcase on February 12. The company doesn’t release segment revenue numbers, but it’s safe to assume that the multimedia segment generates a vast majority of the company’s profits. So that leaves us with management and new markets.

Page 1 of 2