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Ignoring the Noise: A Focused Look at Leap Frog Earnings

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It can be difficult for investors to focus on qualitative criteria during earnings season, and it's no different with LeapFrog Enterprises, Inc. (UNKNOWN: LF.DL  ) . 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.

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.

Management and new markets
A intangible quality that I like to see is the attitude of the management on the call, and is also a reason I like to listen, and not only read a transcript. In Leap Frog's case, the CEO John Barbour was full of emotion on the call, and spoke passionately about the company's future. While this should never be an investor's sole reason for investing, I'd rather have a passionate CEO than one with a Ben Stein persona.

A large opportunity for LeapFrog going forward is developing products for different languages and countries, with sales increasing 38% abroad compared to 24% at home. The company has seen good results in the U.K., and has now entered France and French-speaking Canada. As LeapFrog expands into new markets and languages, it should provide for great growth opportunities. This is an area for investors to watch as the company begins sales abroad.

Final Thoughts
While it was great to see the products selling, and continued market expansion, my main takeaway was the company's new focused vision -- multimedia. The CEO was very clear about how, over the past two years, they've been transitioning from an educational toy company to an educational multimedia company. With a newly-focused company strategy, an established brand, untapped international opportunities, and several new markets, I'd say the odds are stacked in LeapFrog's favor. My only worry isn't the decline of the more traditional toy offerings; it's the possibility of a lingering Hasbro or Mattel buying them before investors and myself get to participate in the ongoing LeapFrog story.

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in our special report. Uncovering these top picks is free today; just click here to read more.

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4/5/2016 4:05 PM
LF.DL $0.00 Down +0.00 +0.00%
LeapFrog Enterpris… CAPS Rating: ***