LeapFrog 2008 Annual Report Download - page 36

RESULTS OF OPERATIONS
SUMMARY OF CONSOLIDATED RESULTS FOR FISCAL YEARS ENDED DECEMBER 31, 2008,
2007 and 2006
2008 2007 2006
% Change
2008 vs.
2007
% Change
2007 vs.
2006
(Dollars in millions)
Net sales ......................................... $459.1 $ 442.3 $ 502.3 4% -12%
Gross margin (1) ................................... 40% 39% 29% 1 10(2)
Operating expenses ................................. 241.6 274.5 271.7 -12% 1%
Loss from operations ............................... (60.1) (101.2) (124.7) 41% 19%
Net loss per share—basic and diluted .................. $(1.07) $ (1.60) $ (2.31) 33% 31%
(1) Gross profit as a percentage of net sales
(2) Percentage point change in gross margin
Fiscal Year 2008 Compared to Fiscal Year 2007
Net sales increased by 4%, primarily driven by the launch of several new product platforms including Tag,
Leapster2 and Didj, the positive effect of which was partially offset by declining sales of our older products,
some of which were being retired. Foreign currency exchange rates accounted for approximately $4.9 million or
a 1% decrease in net sales during the year. Net sales related to new platform products and related content
introduced in 2008 totaled approximately $121.2 million, or 26% of total net sales.
Gross margin percentage improved slightly as new products launched in 2008 generally had higher margins
and we did not experience the same level of asset write-offs as in 2007. Specifically, the large unamortized
balances of the FLY Fusion-related assets were written down to reflect declining sales trends in 2007. These
improvements to gross margin were partially offset by lower sales through the school channel, increased
discounting, higher sales returns allowances related to weakening consumer demand and higher than expected
retail inventory levels at the end of 2008, and costs associated with a voluntary recall of the Didj recharging
station.
Operating expenses declined 12% reflecting reduced headcount-related expenses and the absence of costs
for legal settlements, offset slightly by an increase in bad debt expense. Over the past three years we have
focused on reducing our cost structure through driving efficiencies. Total fulltime employees declined by 218, or
26%, from December 31, 2007 to December 31, 2008, due to a combination of reductions in force and the
migration of certain aspects of our product development cycle to external parties. Legal costs were considerably
lower in 2008 as 2007 included $11.4 million in patent defense and settlement expenses associated with a patent
lawsuit. Bad debt expense increased by $5.3 million in 2008 due to several customer bankruptcies as well as an
increase in the allowance for doubtful accounts given the weakening retail environment.
The combination of higher net sales and declining operating expenses resulted in an improvement in loss
from operations.
Our basic and diluted net loss per share improved by $0.53 in 2008 as compared to 2007 due primarily to
the decrease in our total net loss, as the weighted average of basic and diluted common shares outstanding
remained relatively level.
Fiscal Year 2007 Compared to Fiscal Year 2006
Net sales decreased by 12% as the decline in sales of products being phased out more than offset the
increase in sales of continuing products. Foreign currency exchange rates accounted for approximately $7.1
million or a 1.4% increase in net sales during the year.
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