LeapFrog Enterprises (NYSE:LF), the multimedia-based educational electronic toy maker had one of this past holiday’s hottest selling items, the LeapPad tablet. With the initial run of LeapPads selling out in June and parents reportedly paying over retail price for the devices as Christmas approached, all eyes were on this week’s financial report for the fourth quarter and full year ending December 31.
The results were good enough to give the stock a slight boost (trading at $6.83 at the time of writing, compared to $5.86 at the start of the month), although it fell 6% in trading after the bell as analysts digested the results. Earnings per share for the quarter beat market expectations at $0.49, but 2011 wasn’t the gangbuster year some might have hoped for based on the LeapPad’s popularity. Among the highlights of the full year results:
- Net sales were up 5%, at $455 million.
- Net income, at $20 million, was four times higher than in 2010.
- Income from operations, at $24 million, was three times higher than in 2010.
- There was a $93 million improvement in cash flow.
- Net income per diluted share of $0.30 was four times higher than in 2010.
How well did sales of the blockbuster LeapPad end up boosting the bottom line? Fourth-quarter consolidated net sales, at $210 million, were up 11% compared to the that same holiday sales quarter in 2010.
Will LeapPad survive the iPad?
Founded in 1995, the California-based company (which went public in 2002) adopted the model used by portable-video-game system manufacturer Nintendo (PINK:NTDOY), selling handheld gadgets that require the purchase of cartridges to provide content. While this locks parents into the LeapFrog ecosphere and ensures recurring revenue after the initial hardware purchase, LeapFrog’s future sales could be knocked down by the same effect that hammered Nintendo last year: increased gaming on mobile devices, and related app sales. LeapFrog did take the step of making downloadable apps available for the LeapPad (it still accepts cartridges), but doing so requires a computer connection and the app selection is limited.
While the idea of handing a kid a $500
Apple (NASDAQ:AAPL) iPad seemed ludicrous a year ago, it’s starting to make sense to more people. And that’s where the danger to LeapPad lies. The $100 device is toughened to be kid-resistant (parents will know there is no such thing as kid-proof), sports a 5-inch touchscreen display, a VGA camera and runs on AA batteries. Additional cartridges average $25 each, while downloadable apps start at $5–in total (with both apps and cartridges) there are currently 123 to choose from.
An iPad starts at $500. A tough, kid-resistant protective case can be picked up for $25. The iPad has a superior display, more responsive touchscreen, better battery life (plus no batteries to buy), a better camera and is capable of playing videos or being used as an e-reader. There are hundreds of thousands of apps available for the device, including tens of thousands of educational apps —many priced at 99 cents. Parents have begun to realize that by buying their kids an iPad, instead of a specialized, single-purpose device like the LeapPad, the content price and availability can more than make up for the initial hardware investment.
The LeapPad lifecycle
When a child outgrows a LeapPad, what then? When a child outgrows the apps on an iPad, the tablet remains fully functional, perfect for video games, multimedia content, e-texts and e-books, and Web browsing, and it could replace a netback for school. LeapFrog promotes its device as an e-reader, but its e-books are proprietary and expensive, and few titles are available. The limited display resolution also hampers its usefulness in this area.
With the iPad approaching its third generation, parents may not even have to make the decision to buy an iPad for their kids. They may decide on an iPad 3 for themselves and hand down the older model, which still runs virtually every app available. And if it isn’t an iPad, the same basic premise holds true for Android tablets or Amazon’s (NASDAQ:AMZN) more compact Kindle Fire—which costs only about $50 more than the LeapPad.
LeapFrog’s shares traded at $11 in 2007; by the time Apple released the iPad in 2010, LeapFron shares had dropped to $5.80 and sunk as low as $2.90 before the LeapPad’s summer 2011 introduction proved so successful and touched off a rally. While LeapFrog offers many other products, the LeapPad has become its most important, and until the company comes up with another home run, much depends on whether the tablet for kids can continue to hold its own against multipurpose “grown-up” competitors. Will the LeapPad continue its successful run in 2012? Not if parents do the math.
