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LeapFrog Enterprises Inc. Earnings: Sales, Profits, and Cash Balances Turn Lower

By Demitri Kalogeropoulos – Aug 4, 2015 at 4:08PM

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The educational-toy maker's sales slump improved from last quarter, but the results still showed significant stress on its finances and operations.

LeapFrog (NYSE: LF) announced results for its fiscal first quarter on Tuesday afternoon. The educational-toy maker, which suffered from cratering demand for its tablet-focused product line last quarter, posted surprisingly high sales for a change: Revenue shrank by 18%, as opposed to the 36% dive analysts were bracing for. 

However, net loss was higher than expected, and LeapFrog burned through a significant portion of its cash balance.

Here's a big-picture look at how the results compare with Wall Street's targets:

MetricExpected*Actual
Revenue $20 million $39 million
Profit ($0.28) per share ($0.39) per share

*Expected is the average forecast of the eight analysts who cover the stock. Sources:Yahoo! Finance and LeapFrog's financial filing.

A less bad quarter
LeapFrog's 18% revenue drop this quarter consisted of a 9% dip in the U.S. market and 28% lower international sales. While a 20% top-line plunge is never good news, the fact that sales recovered from the carnage of the past two quarters gives weight to management's claim that demand is stabilizing for its educational devices. "A number of our carry-forward product lines are showing signs of positive momentum and many of our new product introductions for fall 2015 have started to ship," said CEO John Barbour.

Image source: LeapFrog.

Gross profit margin held steady at 19% of sales, or $7.2 million. However, LeapFrog will need much higher revenue in order to return to profitability. Its research and development costs alone were $8 million, and the company spent $21 million on salaries and other expenses. All told, operating costs were $34 million this quarter, leading to a net loss of $27 million, or $0.39 per share.

Cash and outlook
Thanks in part to that operating loss, cash on hand sank from $200 million a year ago to $88 million at quarter's end. That drop leaves slightly more than twice the $39 million in cash that LeapFrog burned through this quarter, which raises the likelihood that the company might soon need to add debt to its debt-free balance sheet.

Meanwhile, management reaffirmed its full-year and long-term outlook based on a two-year rebound strategy. The forecast calls for the year ahead to be roughly as bad as the one that closed in June. In other words, sales should drop significantly, and LeapFrog could generate over $100 million in net losses. 

Beyond that, executives believe new product lines currently in development will help LeapFrog get back to double-digit sales growth beginning in late 2017. "While there is significant work ahead of us, we believe we have the right strategies in place to return the company to growth," Barbour said.

Demitrios Kalogeropoulos owns shares of Apple. The Motley Fool recommends Apple and LeapFrog Enterprises. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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