Promising New Products At LeapFrog

LeapFrog (NASDAQ:LF) continued to struggle with the recessionary pressures. The recently announced Q1 performance resulted in a loss while revenues nearly halved over the year. The worldwide edutainment market is still growing rapidly — according to InStat, it was $2.1 billion in 2006 and is expected to be $7.3 billion in 2011 — but as for so many markets, people are cutting spending on toys and other products for children. Perhaps My Pal Scout, the company’s new customizable talking plush puppy, will help boost revenues

Q1 revenues fell 49% to $29.9 million, marginally higher than the Street’s expectations of $29.2 million. Loss for the quarter came in at $0.43 per share, the same as the previous year, but missed the market’s expectations of loss of $0.41 per share.

By region, international sales fell 40% to $7.6 million from $12.7 million a year ago. Excluding the impact of foreign exchange, international sales would have fallen 27% over the year. US sales were much more affected, falling 51% to $22.3 million over the year.

By segment, hardware sales were 15% of US net sales, compared to 36% a year ago; software sales were 43% compared to 30% a year ago; standalone learning toys were 34% compared to 22% a year ago; and the school business was 8% compared to 12% a year ago.

The recession resulted in high retail inventory balances at the end of 2008which impacted net sales for the quarter. During the quarter LeapFrog had relied on significant promotional and marketing campaigns to help retailers reduce their inventory levels, which had some results, but invetories are still too high. Days of inventory on hand was 103 compared to 110 a year ago.

Despite the poor performance, the company saw some positives with regards to its cash flow performance and point of sale trends. There was encouraging consumer support for their Leapster and Tag products and in view of these findings, they are re-establishing their reading range with Tag.

In the coming quarter, LeapFrog plans to launch a new Scout line, which includes educational toys like My Pal Scout, Text-And-Learn, Scribble-And-Write. They have gained nearly 5% share in the learning category in the first quarter and saw Tag, a reading system, establish itself as a solid new industry franchise alongside Leapster. Tag won Educational Toy of the Year at an industry trade fair in February. Scout, which at $20 costs less than many other talking plush toys, has gotten some good reviews for its variety of activities and reasonable price.

LeapFrog is now focusing on working with retailers to get inventories down by adjusting their promotional strategies and marketing plans. They also have a number of initiatives underway to boost sales. For instance, they are introducing new lower-priced products that will reduce their average price points and are launching toys such as the Text-and-Learn, which is similar to a PDA.

Second, they are working to leverage their installed base throughout the year by introducing new content for their reading and gaming lines. The company launched four new platforms last year and expects demand for new content to be higher this year as customers who bought these platforms are expected to buy additional software and content.

Third, they are continuing to enhance existing products, especially Tag and Leapster 2, to be rolled out later this year. Finally, they are building out a more robust learning path which will continue to be a more important feature for their connected productsa strategy that LeapFrog came to late but one that has since helped turn the company around, and may enable them further differentiate from the competition.

The stock is trading at $2.03 with a market capitalization of $129.6 million.