LeapFrog Enterprises Management Discusses Q2 2012 Results - Earnings Call Transcript

LeapFrog Enterprises (LF)

Q2 2012 Earnings Call

August 01, 2012 5:00 pm ET

Executives

Karen Sansot

John Barbour - Chief Executive Officer, Director and Member of Non-Executive Officer Stock Award Committee

Mark A. Etnyre - Executive Officer

Analysts

Gerrick L. Johnson - BMO Capital Markets U.S.

Scott W. Hamann - KeyBanc Capital Markets Inc., Research Division

Lee J. Giordano - Imperial Capital, LLC, Research Division

Elizabeth O. Pierce - Roth Capital Partners, LLC, Research Division

Andrew E. Crum - Stifel, Nicolaus & Co., Inc., Research Division

Edward M. Woo - Ascendiant Capital Markets LLC, Research Division

Presentation

Operator

Good afternoon. My name is David, and I will be your conference operator today. At this time, I would like to welcome everyone to the LeapFrog Q2 2012 Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to Ms. Karen Sansot, Senior Director of Investor Relations. Ma'am, you may begin your conference.

Karen Sansot

Thank you. Good afternoon, and welcome to the LeapFrog Enterprises Conference Call to review our results for the second quarter ended June 30, 2012. I'm Karen Sansot, Senior Director of Investor Relations. Today on the call, we have John Barbour, our Chief Executive Officer; Mark Etnyre, our departing Chief Financial Officer; and Ray Arthur, our new Chief Financial Officer, who joined the LeapFrog team a couple of weeks ago.

Before we begin, we wish to remind you that our statements today will include forward-looking statements about management's expectations, including expectations regarding anticipated 2012 financial results, such as expected sales and earnings per share. In addition, we expect the questions posed in the Q&A portion of this call to prompt answers that contain additional forward-looking statements not included in our prepared remarks.

You should be aware that actual results might differ materially from those projected in any forward-looking statements. Some important factors that could cause actual results to differ materially from those in the forward-looking statements are described in our most recent Form 10-K filed with the SEC. LeapFrog makes these statements as of today and disclaims any duty to update them.

I would now like to turn the call over to John Barbour.

John Barbour

Thank you, Karen. Good afternoon, everyone, and thank you for joining us today. As the CEO and a shareholder of LeapFrog, I'm very pleased with our performance in the first half of the year and the progress that we're making on our 2012 initiatives.

The LeapFrog team's dedication to developing life-changing educational entertainment is helping millions of children achieve their potential, while also creating significant value for our shareholders and our business partners. As a result of high demand for our leading products that both entertain and educate children, we achieved exceptional sales growth in the first half of the year and delivered a terrific financial performance.

Net sales increased 52% in the first half of the year and was strong worldwide, with sales up 55% in the U.S., and up 47% in International markets. This sales strength, along with a higher mix of content, has driven gross margin expansion, with gross margins increasing 790 basis points in the first half of the year. Given our disciplined operating expense management, we're also benefiting from operational leverage. As a result, we reduced our first half -- seasonal first half loss per share by $0.29 or 53%. And our cash balance more than doubled to $127 million compared to $58 million a year ago.

Consumer demand for LeapPad1 and its rich educational content has remained very high even into the summer months. Retail partner sales have exhibited solid double-digit growth in every major market that we're in. This speaks to the incredible educational and entertainment value of the LeapFrog experience, which transcends many different cultures and demographics.

Since its launch, LeapPad1 has been one of the hottest and most in demand children's products. It is the #1 kid's learning tablet and has received lots of prestigious awards and significant praise from parents, educators and the industry. Building upon our success, in August, we will start to ship the next generation of breakthrough educational entertainment platforms, content and toys. We are introducing a significantly enhanced new version of our #1 kid's learning tablet, the LeapPad2, which features a far faster processor, double the memory, higher resolution front and back cameras and video recorders, music player, reduced energy consumption and a battery recharging option.

We have hundreds of learning game cartridges and apps, music, videos and eBooks, with lots more new ones to come through the rest of this year. Pre-sell orders of LeapPad2 have been very strong. Pre-selling as many units in 2 days as the LeapPad1 presale sold an entire week of last year.

We're also launching LeapsterGS, which is our revolutionary learning video game system that offers fast action game play, packed with rich learning. We all know that lots of kids love to play fast action video games, while many parents prefer that their children spend their time doing something more enriching. LeapsterGS is the perfect solution. It's the portable video game system that parents and kids can agree on. LeapsterGS is a massive improvement over the current Leapster Explorer, which was launched in 2010, and is the current #1 selling learning game handheld. LeapsterGS has a new thinner, sleek design, larger screen, built-in motion sensor, camera and video recorder, far faster processor and 4x the memory. LeapsterGS will be compatible with hundreds of digital contents that can also be played on the LeapPad2.

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