LeapFrog 2010 Annual Report Download - page 34

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following management’s discussion and analysis of financial condition and results of operations (“MD&A”)
is intended to help the reader understand our results of operations and financial condition. This MD&A is
provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and
the accompanying Notes in Part II, Item 8 of this report.
OVERVIEW
We design, develop and market a family of innovative technology-based learning platforms, related proprietary
content and learning toys primarily for infants and children through age nine, both at home and in schools around
the world. We have created more than 400 interactive software titles for our platforms, covering subjects such as
phonics, reading, writing and math. In addition, we have a broad line of stand-alone educational products, or
learning toys, that do not require the separate purchase of software and are generally targeted at children from
infancy through age five. Our products are available in five languages (including Queen’s English) and are sold
globally through retailers, distributors, directly to consumers via the leapfrog.com web-store, and directly to
schools.
We generate revenue from selling platform hardware, including our interactive reading systems, our mobile
learning systems, and a range of learning toys. We also generate revenue from the sale of a wide range of content
for our platforms that we develop based on licensed characters or using LeapFrog-owned characters.
We introduced the Learning Path, a web-based service that helps parents track what their children are learning
with our web-connected products, in the United States and Canada in 2008 and in the United Kingdom in early
2009. The Learning Path gives our consumers access to a variety of downloadable content and online rewards
programs that encourage learning. The Learning Path also makes it easier for our consumers to “age up” with our
products. Parents are able to “see the learning” and gain personalized insight into their child’s learning progress.
Many of our products, including the Tag and Tag Junior reading system, launched in 2008 and 2009,
respectively, the Leapster2 and Leapster Explorer mobile learning systems, launched in 2008 and 2010,
respectively, My Pal Scout and My Pal Violet, also launched in 2009, and My Own Leaptop, launched in 2010
are designed to connect to the Learning Path.
Our products compete most directly in the toy industry in the preschool toy and electronic learning aids
categories, both in the United States and in selected international markets. The educational toy category
continues to attract new entrants as well as new innovative products, and competition is significant.
Our business is highly seasonal with a significant portion of our revenue occurring in the second half of the year.
Given relatively low sales volumes in the first half of the year and the relatively fixed nature of many of our
operating expenses, which occur fairly evenly throughout the year, our results of operations have historically
been stronger in our third and fourth quarters relative to our first and second quarters. Conversely, our cash flow
from operations tends to be highest in the first quarter of the year when we collect the majority of our accounts
receivable related to the prior year’s fourth quarter sales. Cash flow from operations generally tends to be lowest
in our third quarter, as accounts receivables collections taper off and we build inventory in preparation for the
fourth quarter holiday season. The reduction in cash flow in the third quarter generally means that our available
cash is at its lowest point for the year in the first month of the fourth quarter.
Although sales in the fourth quarter have historically been higher than any other quarter, this pattern differed in
2008 as a result of the global economic crisis. As retailers reacted to sharply declining consumer spending, our
sales for the fourth quarter of 2008 were significantly below our expectations and constituted a substantially
smaller percentage of our annual sales than fourth quarter sales had in previous years. Fourth quarter net sales in
2008 made up only 29% of total net sales for the year. In 2010 and 2009, we returned to our normal seasonal
pattern with fourth quarter net sales making up 44% and 50% of total net sales for the years, respectively.
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