LeapFrog 2011 Annual Report Download - page 32

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 the results of operations and financial condition of
LeapFrog Enterprises, Inc. and its consolidated subsidiaries (collectively, ‘‘LeapFrog’’ or ‘‘we’’, ‘‘us’’ or
‘‘our’’). 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 develop and distribute educational entertainment for children. Our product portfolio consists of multimedia
learning platforms and related content and learning toys. We have developed a number of learning platforms,
including the LeapPad, the Leapster family of multimedia learning platforms and the Tag and Tag Junior
reading systems, which support a broad library of content titles. We have created hundreds of interactive
content titles for our platforms, covering subjects such as phonics, reading, writing and math. In addition, we
have a broad line of stand-alone learning toys that do not require the separate purchase of content. Our
products are available in four languages (including Queen’s English) and are sold globally through retailers,
distributors and directly to consumers via our leapfrog.com online store and our App Center.
We generate revenue from selling our multimedia learning platforms and a range of learning toys. We also
generate revenue from the sale of a wide range of cartridge based and digitally downloadable content and
books for our platforms that we develop based on licensed characters or our LeapFrog-owned characters.
Our multimedia platforms and certain other products connect to our proprietary online LeapFrog Learning
Path, which provides parents personalized feedback on their child’s learning progress and offers product
recommendations to enhance their child’s learning experience. Parents are able to ‘‘see the learning’’ and gain
personalized insight into their child’s learning progress.
Our App Center, launched in 2011, gives our consumers access to a variety of downloadable content for our
multimedia platforms. We also began distributing third party video content for use on our multimedia
platforms through the App Center near the end of 2011, including popular titles such as Dora the Explorer,
SpongeBob Squarepants and Thomas the Tank Engine.
Although our multimedia platform products compete in the electronic learning aids category in the U.S. and in
selected international markets, we increasingly compete in a broader arena with a variety of electronic
products including tablet computers, eBook readers and mobile devices. Our multimedia platforms, such as
our LeapPad learning tablet and Leapster Explorer platform, compete against handheld gaming platforms from
Sony and Nintendo and against mobile devices such as Apple’s iPhone, iTouch and iPad and Android-based
tablets. Our learning toys compete in the preschool toy category of the toy industry in the U.S. and selected
international markets, in which competition is significant.
We invest in R&D of existing and new lines of business that we believe will contribute to our long-term
growth and profitability. We continue to invest in developing new multimedia platforms, related content and
online services based on the latest relevant technologies and consumer trends. For example, in 2011 we
introduced LeapPad, a kid-tough, personalized learning tablet for children with a built-in camera and video
recorder. LeapPad includes art, story, and photo studio applications and two gigabytes of memory on board
and can be used with both cartridges and digital content from our App Center, which was also launched in
2011. We believe delivering high-value, innovative, educational experiences that are fun for children and
engage parents is the key to our future growth.
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. Sales in the
fourth quarter have historically been higher than all other quarters. In 2011, 2010 and 2009, fourth quarter net
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