LeapFrog 2008 Annual Report Download - page 3

LeapFrog Annual Report 2008
Dear fellow shareholders:
What a year! It was a year of exhilarating favorable momentum (the fi rst nine months), and a year of
jarring economic collapse (the last three months).
As planned, LeapFrog successfully brought to market a portfolio of new and innovative products in 2008
including three compelling connected products: our acclaimed Tag reading system, a web-connected
version of the original Leapster handheld called Leapster2, and Didj, the fi rst customizable gaming and
learning system for kids. Tag, our strategically important new reading system, launched to enthusiastic
customer satisfaction results and received 28 awards including Educational Toy of the Year in the United
States, Australia, and France. Importantly, we also introduced our breakthrough learning feedback
technology, LeapFrog Learning Path, and the extensive network of reward systems, parent community
and advice forums, online demonstration areas, and consumer marketing systems associated with it.
The momentum created by our new products accelerated into the fi rst three quarters, driving sales
results up 23 percent. Gross margins trended upwards, and we produced a healthy operating profi t in the
third quarter. Then consumer sentiment in the all-important fourth quarter fell off sharply…a nine percent
year-over-year reduction in retail demand according to U.S. Department of Commerce estimates1 …and
resulted in the worst holiday toy industry performance in over 25 years. Weakening demand led to steep
competitive discounting and the consumer shifted her orientation towards less expensive products. Our
holiday sell-through was poor in this environment, and our net sales declined 24 percent year-over-year
in the fourth quarter. We ended the year with a very high level of inventory in the channel, and we expect
the fi rst half of 2009 to refl ect the continuing drag of a weak global economy.
Despite the surge of challenges during the fourth quarter, LeapFrog drove fi nancial progress. Sales grew
seven percent year-over-year in the United States and four percent overall to $459 million for 2008. Our
net loss narrowed 33% to $68 million, or $1.07 per share. We recognized several unique charges and
provisions directly tied to the weak economy, yet our gross margin improved slightly and we reduced
operating expenses by 12 percent year-over-year. Operating cash fl ow was $12 million, an improvement
of $27 million from a year ago, and total cash use for the year was only $14 million. We maintained a
healthy balance sheet and ended the year with a solid cash position of more than $79 million, inventories
of approximately $58 million, and no debt.
We have done extensive post-analysis and research regarding the year 2008, with a particular focus on
the fourth quarter. In hindsight, we believe that we could have discounted more at the end of the holiday,
and perhaps adjusted our ad campaign to “sell harder.” However, we do not see any marketing technique,
or product adjustment, or supply-chain demand forecasting model that could have compensated for the
unprecedented drop in general consumer demand throughout the economy which occurred.
1 Based on data from the Advance Monthly Retail Trade & Food Services Survey as published through the U.S. Census Bureau.
Data compares Retail Sales Excluding Food Service for the months of October through December 2008 to the months of October
through December 2007.