Published Online: February 1, 2005
Published in Print: February 2, 2005, as Software Struggle

Education Inc.

Software Struggle

LeapFrog Company Falls Below Forecast

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The educational software and toy company LeapFrog Enterprises Inc. is treading in rough financial waters, and industry watchers are keeping a close eye on the former dot-com darling to see whether it will sink or swim.

In mid-December, company officials adjusted LeapFrog’s 2004 net sales to be “significantly below” its October forecast of between $680 million and $710 million.

“The uncertainty of the retail industry this [holiday] season, and the inherent volatility of the toy industry,” are two big reasons for adjusting the company’s outlook, said Bill Chiasson, the chief financial officer of LeapFrog, in a Dec. 16 conference call with analysts.

Lackluster sales and higher operating and logistical expenses resulted in a 40 percent drop in net income in the third quarter of 2004, compared with the third quarter of 2003, for LeapFrog.

Shares on the New York Stock Exchange on Jan. 26 traded at $12.71, down almost 60 percent from the preceding 52-week high of $31.40 a share.

LeapFrog is in the world of “edutainment,” one that combines education and entertainment, said J. Mark Jackson, a senior analyst at Eduventures, a Boston-based market-research firm that tracks the education industry.

“It’s an incredibly tough industry,” he said, “and any slippage is going to reflect on them.”

The company needs another hit product to climb out of its slump, such as its popular LeapPad laptop device that teaches spelling and reading, said Kirsten Edwards, a vice president and analyst with Think Equity Partners, an investment bank based in San Francisco.

In fact, LeapFrog is trying to do just that, with the unveiling last month of the FLY Pen Top Computer, a “talking” digital pen that can translate an English word into Spanish, or draw a piano keyboard on special paper and then play the virtual piano. The $99 device, which is being marketed to 8- to 14-year-olds, will be sold beginning in the fall.

So-called “tweens,” which marketers define as children ages 8 to 14, spend $38 billion of their own money each year on a variety of purchases, according to the Rockville, Md.-based

“It’s definitely a gamble for them,” Ms. Edwards said of LeapFrog’s FLY Pen Top Computer. “There’s a lot of money in this market, but it’s hard to target that market.”

However, both analysts looked favorably on LeapFrog’s recent partnership with Baltimore-based Educate Inc. to open up to 20 retail learning centers in Wal-Mart stores.

“We expect to see more of this [type of partnership] in the future,” said Mr. Jackson.

Vol. 24, Issue 21, Page 8

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