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LeapFrog Reports First Quarter 2012 Net Sales Increased 81%

EMERYVILLE, Calif., May 3, 2012 /PRNewswire/ -- LeapFrog Enterprises, Inc. (NYSE: LF) today announced financial results for the first quarter ended March 31, 2012.

(Logo: http://photos.prnewswire.com/prnh/20090219/LFLOGO)

Highlights of first quarter 2012 results compared to first quarter 2011 results:

    --  Consolidated net sales were $72 million, up 81%.
    --  Gross margin was 41.3%, up 11.7 percentage points.
    --  Net loss per share was $0.14, an improvement of $0.20.
    --  Cash and cash equivalents were $135 million as of March 31, 2012, an
        increase of $57 million compared to the balance as of March 31, 2011.

"We delivered a terrific performance in the first quarter with strong sales growth, margin expansion, and a significant improvement to the bottom line," said John Barbour, Chief Executive Officer. "Our exceptional growth was a result of strong business execution, far lower retail inventory levels at the start of the year, and Easter occurring two weeks earlier than last year which drove sales in the first quarter compared to the second quarter last year. In addition, sales of LeapPad, its content, and accessories significantly exceeded our expectations."

Financial Overview for the First Quarter 2012 Compared to the First Quarter 2011

First quarter 2012 net sales were $72 million, up 81% compared to $40 million last year, and included a 1% negative impact from changes in currency exchange rates. Net sales growth was primarily driven by lower retail inventory at the start of the year compared to last year, an earlier Easter, strong content sales, and continued high consumer demand for LeapPad. First quarter 2012 net sales increased 98% in the U.S. segment and increased 49% in the international segment, with international segment net sales including unfavorable changes in currency exchange rates of two percentage points. Gross profit was $30 million for the quarter, up 153% from a year ago. Gross margin was 41.3% for the first quarter 2012, up 11.7 percentage points compared to a year ago. Loss from operations was $9 million for the first quarter 2012, an improvement of $13 million, or 61%, compared to a year ago.

"While it's early in the year, we're out of the gate strong and executing against our stated goal of growing our earnings and delivering strong cash flow through disciplined growth and diligent cost control," said Mark Etnyre, Chief Financial Officer. "As a result, we improved our bottom line by $0.20 per share and generated $63 million of net cash flow in the first quarter. With our leading educational entertainment portfolio, strong team, and commitment to innovation in technology, education, and content, we are well positioned to deliver earnings and cash flow growth in 2012 and beyond."

Guidance

"Given the strength of our first quarter results, we are raising our full year 2012 guidance," continued Mr. Etnyre.

For the full year 2012, we now expect:

    --  Net sales to increase by 10% to 13% compared to 2011.
    --  Net income per diluted share to be in the range of $0.52 to $0.57,
        compared to $0.30 in 2011.

For the second quarter of 2012, we expect:

    --  Net sales to increase by 17% to 22% compared to the second quarter of
        2011.
    --  Net loss per share to be in the range of $0.18 to $0.20, compared to a
        net loss per share of $0.21 in the second quarter of 2011.

Conference Call and Webcast

LeapFrog will hold a conference call to discuss first quarter 2012 financial results on May 3, 2012, at 2:00 p.m. Pacific Daylight Time (5:00 p.m. Eastern Daylight Time). The conference call will be webcast and can be accessed at LeapFrog's investor web site at www.leapfroginvestor.com. To participate in the call, please dial (706) 634-0183 and request conference ID 70750296. A replay of the call will be available for one month. To access the replay, please dial (404) 537-3406 and use conference ID 70750296.

About LeapFrog

LeapFrog Enterprises, Inc. is the leader in educational entertainment for children. LeapFrog's award-winning product portfolio helps millions of children achieve their potential by delivering best-in-class curriculum through engaging content, fun multimedia learning platforms, and toys. The Learning Path, LeapFrog's proprietary online destination for parents and extended family, provides personalized feedback on a child's learning progress and offers product recommendations to enhance each child's learning experience. Through the power of play, LeapFrog's products and curriculum help children of all ages prepare for school and life success. LeapFrog's products are available in more than 45 countries and have been used by teachers in more than 100,000 U.S. classrooms. LeapFrog is based in Emeryville, California and was founded in 1995 by a father who revolutionized technology-based learning solutions to help his child learn how to read. Come see the learning at www.leapfrog.com.

NOTE: LEAPFROG, the LeapFrog logo, and LEAPPAD, are trademarks or registered trademarks of LeapFrog Enterprises, Inc.

Forward-Looking Statements

This news release contains forward-looking statements that involve risks and uncertainties, including statements regarding anticipated financial results. Our actual results may differ materially from those expressed or implied by such forward-looking statements. The risks that could cause our results to differ include, without limitation, deterioration of global economic conditions, our ability to correctly predict highly changeable consumer preferences and product trends, our ability to continue to develop new products and services, our reliance on a small group of retailers for the majority of our gross sales, our dependence on our suppliers for our components and raw materials, the seasonality of our business, our growing focus on online products and services, system failures in our online services or web store, our reliance on a limited number of manufacturers, our ability to maintain sufficient inventory levels, our ability to compete effectively with competitors, our ability to maintain or acquire licenses, third parties who claim we are infringing on their intellectual property rights, errors or defects in our products, privacy concerns about our Internet-connected products, the sufficiency of our liquidity, the risk associated with international operations, continued compliance and associated costs with and/or changes in laws and regulations, negative political developments, natural disasters, armed hostilities, terrorism, labor strikes or public health issues, the loss of members of our executive management team, continued ownership by a few stockholders of a majority of voting power in us, and the volatility of our stock price. These risks and others are discussed under "Risk Factors" in our filings with the U.S. Securities and Exchange Commission, including our 2011 annual report on Form 10-K filed on February 29, 2012. All information provided in this release is as of the date hereof, and we undertake no obligation to update this information.

    Contact Information

    Investors:                      Media:
    Karen Sansot, CFA               Kathryn Green
    Investor Relations              Media Relations
    (510) 420-4803                  (510) 596-3405

                                                 LEAPFROG ENTERPRISES, INC.
                                           CONSOLIDATED STATEMENTS OF OPERATIONS
                                           (In thousands, except per share data)
                                                        (Unaudited)
                                                                                                                        
                                                                Three Months Ended
                                                                     March 31,
                                                               -------------------
                                                                               2012                               2011
                                                                               ----                               ----
                                                                                                                        
    Net sales                                                               $72,010                            $39,678
                     Cost of sales                   42,278                             27,922
                     Gross profit                    29,732                             11,756
                                                                                                                        
    Operating expenses:
                      Selling, general
                      and
                      administrative                 23,697                             20,487
                      Research and
                      development                     8,889                              8,231
                     Advertising                      2,414                              2,335
                      Depreciation and
                      amortization                    3,280                              2,553
                      Total
                      operating
                      expenses                       38,280                             33,606
                          Loss from
                           operations                (8,548)                           (21,850)
                                                                                                                        
    Other income (expense):
                     Interest income                     93                                 33
                     Interest expense                     -                                (36)
                     Other, net                        (667)                              (560)
                      Total other income
                      (expense), net                                           (574)                              (563)
                          Loss before
                           income taxes              (9,122)                           (22,413)
    Provision for (benefit from) income taxes                                   335                               (227)
                     Net loss                       $(9,457)                          $(22,186)
                                                    =======                           ========
                                                                                                
    Net loss per share:
                      Class A and B -
                       basic and
                       diluted                       $(0.14)                            $(0.34)
                                                                                     
    Weighted average shares used to calculate net loss
    per share:
                      Class A and B -
                       basic and
                       diluted                       66,396                             64,822

                                                             LEAPFROG ENTERPRISES, INC.
                                                            CONSOLIDATED BALANCE SHEETS
                                                       (In thousands, except per share data)
                                                                    (Unaudited)
                                                      March 31,                              December 31,
                                                      ---------                              ------------
                                                                       2012                                   2011      2011
                                                                       ----                                   ----      ----
    ASSETS
    Current assets:
             Cash and cash equivalents                             $134,756                                $77,494   $71,863
              Accounts receivable, net of
              allowances for doubtful accounts of
              $4,034, $1,069 and $659,
              respectively                                           57,380                                 37,611   157,418
             Inventories                                             38,868                                 54,667    34,288
              Prepaid expenses and other current
              assets                                                 11,830                                 11,021     8,078
             Deferred income taxes                                    1,071                                  1,741       983
                  Total current assets                              243,905                                182,534   272,630
    Long-term investments                                                 -                                  2,681     2,681
    Deferred income taxes                                             1,357                                  1,059     1,311
    Property and equipment, net                                      18,206                                 17,619    17,881
    Capitalized product costs, net                                   11,378                                 13,276    12,511
    Goodwill                                                         19,549                                 19,549    19,549
    Other intangible assets, net                                      2,750                                  5,219     3,350
    Other assets                                                      1,077                                  2,174     1,119
                  Total assets                                     $298,222                               $244,111  $331,032


    LIABILITIES AND STOCKHOLDERS'
     EQUITY
    Current liabilities:
             Accounts payable                                       $28,009                                $22,136   $34,629
             Accrued liabilities                                     30,246                                 21,334    50,380
             Income taxes payable                                       336                                     45       377
                  Total current liabilities                          58,591                                 43,515    85,386
    Long-term deferred income
     taxes                                                            3,628                                  3,311     3,542
    Other long-term liabilities                                       9,034                                 11,810     9,360
    Stockholders' equity:
              Class A Common Stock, par value
              $0.0001;
              Authorized -139,500 shares; Issued
              and outstanding: 55,611, 46,277 and
              54,923 , respectively                                       6                                      5         6
              Class B Common Stock, par value
              $0.0001;
              Authorized -40,500 shares; Issued
              and outstanding: 11,113, 18,749 and
              11,113, respectively                                        1                                      2         1
             Treasury stock                                            (185)                                  (185)     (185)
             Additional paid-in capital                             398,063                                388,787   395,627
              Accumulated other comprehensive
              income (loss)                                           1,021                                  1,434      (225)
             Accumulated deficit                                   (171,937)                              (204,568) (162,480)

                  Total stockholders' equity                        226,969                                185,475   232,744

                  Total liabilities and stockholders'
                   equity                                          $298,222                               $244,111  $331,032

                                                    LEAPFROG ENTERPRISES, INC.
                                              CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                          (In thousands)
                                                           (Unaudited)
                                                                                                                             
                                                                   Three Months Ended
                                                                        March 31,
                                                                  -------------------
                                                                                    2012                               2011
                                                                                    ----                               ----
    Operating activities:
                     Net loss                                                    $(9,457)                          $(22,186)
    Adjustments to reconcile net loss to net cash provided
     by operating activities:
                      Depreciation
                      and
                      amortization                                                 5,989                              4,526
                      Deferred income
                      taxes                                                            9                                 53
                      Stock-based
                      compensation
                      expense                                                      1,472                              1,228
                      Loss on sale of
                      long-term
                      investments,
                      net of tax                                                      91                                  -
                      Loss on
                      disposal of
                      long-term
                      assets                                                           2                                 53
                      Allowance for
                      doubtful
                      accounts                                                     3,339                                411
    Other changes in operating assets and liabilities:
                      Accounts
                      receivable,
                      net                                                         97,100                            119,888
                     Inventories                                                  (4,127)                            (6,807)
                      Prepaid
                      expenses and
                      other current
                      assets                                                      (1,120)                            (2,571)
                     Other assets                                                     42                               (388)
                      Accounts
                      payable                                                     (6,683)                            (9,307)
                      Accrued
                      liabilities                                                (20,302)                           (20,220)
                      Other long-
                      term
                      liabilities                                                   (325)                                76
                      Income taxes
                      payable                                                        (41)                              (122)
                      Net cash provided by operating
                      activities                                                  65,989                             64,634
                                                                                  ------                             ------
    Investing activities:
                      Purchases of
                      property and
                      equipment                                                   (2,720)                            (4,622)
                      Capitalization
                      of product
                      costs                                                       (1,862)                            (2,169)
                      Disposal of
                      property and
                      equipment                                                        -                                 67
                     Other                                                             -                                (65)
                      Net cash used in investing
                      activities                                                  (4,582)                            (6,789)
                                                                                  ------                             ------
    Financing activities:
                      Proceeds from stock
                      option exercises
                      and employee stock
                      purchase plans                    1,665                                  262
                      Net cash paid
                      for payroll
                      taxes on
                      restricted
                      stock unit
                      releases                                                      (702)                              (536)
                      Net cash provided by (used in)
                      financing activities                                           963                               (274)
                                                                                     ---                               ----
    Effect of exchange rate changes on cash                                          523                                444
    Net change in cash and cash equivalents                                       62,893                             58,015
    Cash and cash equivalents, beginning of period                                71,863                             19,479
    Cash and cash equivalents, end of period                                    $134,756                            $77,494
                                                                                ========                            =======

                                                                                                               
                                           LEAPFROG ENTERPRISES, INC.
                                       SUPPLEMENTAL FINANCIAL INFORMATION
                                                 (In thousands)
                                                  (Unaudited)
                                                                                         
                                                                                          Three Months Ended
                                                                                                March 31,
                                                                                         -------------------
                                                                                              2012                  2011
                                                                                              ----                  ----
                                                                                         
    Net sales                                    $72,010                                   $39,678
                                     Cost of sales (1)                           42,278                27,922
                                     Gross profit                                29,732                11,756
                                                                                         
    Operating expenses: (2) (3)
                                      Selling, general
                                      and
                                      administrative                             23,697                20,487
                                      Research and
                                      development                                 8,889                 8,231
                                     Advertising                                  2,414                 2,335
                                      Depreciation and
                                      amortization                                3,280                 2,553
                                      Total
                                      operating
                                      expenses                                   38,280                33,606
                                                          Loss from operations              (8,548)              (21,850)
                                                                                         
    Other income (expense):
                                     Interest income                                 93                    33
                                     Interest expense                                 -                   (36)
                                     Other, net                                    (667)                 (560)
                                      Total other
                                      income
                                      (expense),
                                      net                                          (574)                 (563)
                                                          Income before income taxes        (9,122)              (22,413)
    Provision for (benefit from) income taxes                                                  335                  (227)
                                     Net loss                                   $(9,457)             $(22,186)
                                                                                =======              ========
                                                                                                    
                                      Includes
                                      depreciation and
                                      amortization                                2,709                 1,973
                                                    (1)
                                                                                                                          
                                (2)   Includes stock-
                                      based
                                      compensation as
                                      follows:
                                      Selling, general
                                      and
                                      administrative                              1,309                 1,104
                                      Research and
                                      development                                   163                   124
                                                                                                                          
                                (3)   Includes severance
                                      costs as follows:
                                      Selling, general
                                      and
                                      administrative                                182                 2,366
                                      Research and
                                      development                                     -                     4
                                                                                         
    Segment data:
    Net sales:
                                     U.S. segment                                52,218                26,352
                                      International
                                      segment                                    19,792                13,326
                                                                                         
    Income (loss) from operations*:
                                     U.S. segment                               (11,701)              (21,274)
                                      International
                                      segment                                     3,153                  (576)



               Certain
               corporate-
               level
               operating
               expenses
               associated
               with sales
               and
               marketing,
               product
               support,
               human
               resources,
               legal,
               finance,
               information
               technology,
               corporate
               development,
               procurement
               activities,
               research and
               development,
               legal
               settlements
               and other
               corporate
               costs are
               charged
               entirely to
               our U.S.
               segment,
               rather than
               being
               allocated
               between the
               U.S. and
               International
    *          segments.

SOURCE LeapFrog Enterprises, Inc.

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