LeapFrog Enterprises (NYSE:LF.DL) posted surprisingly weak fiscal fourth-quarter results today, as it endured a massive drop in demand for its educational products. After suffering a 23% slip during the holiday quarter, the company booked an even heftier sales drop this quarter: Revenue plunged lower by 40%.

Source: LeapFrog.

The stock, which is down 56% this year, fell 16% immediately following the announcement. 

Here's a big-picture look at how LeapFrog's headline results stacked up against Wall Street's expectations.

Metric Expected Actual
Revenue $48 million $34 million
Profit $-0.21 per share $-0.56 per share

"Expected" is the average target of the eight analysts that cover the stock. Source: Yahoo! Finance and LeapFrog financial filing.

The numbers
The fourth-quarter results, which were delayed due to an accounting review, showed that sales shrunk by 37% in LeapFrog's U.S. market, and by 33% overseas. The company's learning tablets and instructional video-game devices failed to sell through at retailers during the holidays, and that demand slump accelerated this quarter. That left LeapFrog pinched with the twin problems of lower sales and higher inventory. While revenue fell by 40%, inventories rose by 39%.

Meanwhile, operating expenses doubled, thanks to a $37 million impairment charge tied to the accounting review that held up the reporting of the fourth-quarter results. In that review, LeapFrog accountants determined that the company paid more for certain corporate assets, including its website and new enterprise system, than the products are objectively worth today. That finding led to a writedown that pushed the company into a $76-million loss for the quarter, compared to a $12-million loss in the prior-year period.

The outlook
LeapFrog executives plan to respond to the shifting demand by moving into new and more varied product categories that target what they believe is a large untapped educational market of millennial parents. "We are uniquely positioned to take advantage of this opportunity through the extension and evolution of the LeapFrog brand, products, and services," CEO John Barbour said in a press release.

Still, management warned that the new products won't hit stores until fiscal 2017, so the year ahead will be at least as bad as the one that just closed. LeapFrog projects another significant annual sales drop along with losses of as much as $100 million.

"This will be a year of rebuilding," Chief Financial Officer Ray Arthur said. "We will continue to prudently manage expenses and cash as we stabilize the business and position LeapFrog for long-term growth," he added.

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