LeapFrog 2008 Annual Report Download - page 24

to a decline of sales in the third or fourth quarter in particular, it can have disproportionate negative impact on
our results for the year. For example, with the drastic economic downturn in the third and, particularly, the fourth
quarter of 2008, our sales in the fourth quarter declined to 29% of total net sales for the year, compared to 41%
and 37% of total net sales in 2007 and 2006, respectively.
Failure to predict accurately and respond appropriately to retailer and consumer demand on a timely basis to
meet seasonal fluctuations, or any disruption of consumer buying habits during this key period, such as may
result from the current economic crisis, would harm our business and operating results. For example, the
recession of 2008 caused a rapid decline in consumer spending trends and occurred after many retailers had
already ordered products for the holiday season. This resulted in retailer inventory levels being higher than
expected as the year ended. We expect we will incur losses in the first and second quarters of each year for the
foreseeable future.
Our business depends on highly changeable consumer preferences and toy trends.
Even our successful products typically have a relatively short period of high demand and then sales decrease
as the products mature. For example, net sales of the classic LeapPad platforms in our U.S. Consumer business
peaked in 2002 and have since been declining. We operate in an industry where consumer preferences can
change drastically from year to year. Unlike a subscription or other recurring revenue model, we depend on our
ability to correctly identify changing consumer sentiments well in advance and supply new products that respond
to such changes on a timely basis. Consumer preferences, and particularly children’s preferences, are continually
changing and are difficult to predict. Since our products typically have a long development cycle, in some cases
lasting many years, it can be difficult to predict correctly changing consumer preferences and technology,
entertainment and education trends. To remain competitive, we must continue to develop new technologies and
products and enhance existing technologies and product lines, as well as successfully integrate third-party
technology with our own.
In 2008, we introduced a number of new products and services to the market, and these new products
represented a substantial portion of our 2008 sales. We cannot assure you that any new products or services will
be successful or accepted and adopted by the consumers, and if these new products are not successful, our
business and operating results will be adversely affected. Some of key products launched in 2008 have a high
price point compared to other children’s products. Consumers may be especially resistant in the current economic
climate to purchasing higher-priced products and may elect to defer or omit these discretionary purchases, at
least until the economy improves. This could limit or delay sales of our new products and services and create
pressure to lower our prices.
Our growing strategic focus on web-based products and customer relationship management may not yield
the returns we expect, and may limit the adoption of our products in some international markets.
Our efforts to build a marketing and sales model that relies more on linking directly to consumers through
the Internet remains in its early stages and we cannot be sure whether we will realize our expected return on
investment. Many of our current and planned key products, such as the Tag reading system, the Leapster2 and its
successors, and some of our upcoming learning toys, are built as web-enabled products designed to be connected
to a computer that has Internet access in order to access content and features. As our strategy shifts to
web-enabled products and consumer relationship management, any resistance by parents to buying children’s
products requiring installation of software and connecting the product to a computer could have a more
pronounced effect on our business. Also, launch or adoption of web-enabled products may be limited in regions
where broadband Internet access is not widespread, such as in some international markets. If parents fail to sign
up for the Learning Path or to use it at the rates we expect, or choose not to permit us to send them marketing
e-mail, our investment in building, maintaining and improving our web-based services may not yield the return
on our investment that we anticipate. See also “System failures related to our web store or the websites that
support our web-connected products could harm our business.”
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