Downloadable Content That Engages Children and Provides Them with Richer Interactive Learning Experiences
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2009 Annual Report LeapFrog® Learning Path and Product Portfolio Strategy The Learning Path combines LeapFrog’s proprietary curriculum and technology with the power of the web to bring new levels of engagement, customization, and personalization to LeapFrog products. The Learning Path builds direct one-to- one relationships with parents by empowering them with personalized feedback about their children’s learning progress and by suggesting specifi c LeapFrog products that will further develop their children’s skills—helping children to graduate through LeapFrog’s product line and benefi t from a broad content portfolio. The Learning Path has customizable online and downloadable content that engages children and provides them with richer interactive learning experiences. Learning Path Strategy @kjkXikjn`k_ ( Xgif[lZk¿ Gif[lZk ) - ^iX[lXk`fe GcXpXe[c\Xie Xepn_\i\# Xepk`d\ Gif[lZk , i\Zfdd\e[Xk`fej :fee\Zk# * aljk]fipfl Zljkfd`q\ Xe[gcXp! + G\ijfeXc`q\[ c\Xie`e^ ]\\[YXZb Product Portfolio Strategy 9iXe[@ekif[lZk`fe Gif[lZk>iX[lXk`fe 9iXe[CfpXckp -" )$+ +$/ +$/ dfek_j p\Xij p\Xij p\Xij C\Xie`e^Kfpj @ek\iXZk`m\I\X[`e^ <[lZXk`feXc>Xd`e^ *LeapWorld™ online gaming site is currently in a beta test with some Leapster2 owners and will be available for Leapster2, Leapster Explorer™ and Tag™ in 2010. Disney/Pixar elements © Disney/Pixar • © 2009 Lucasfi lm Ltd. & TM. All rights reserved. Used under authorization. • © 2009 VIACOM INTERNATIONAL INC. All rights reserved. TM & © 2009 Marvel • Dr. Seuss properties ™ & © 1957 Dr. Seuss Enterprises, L.P. All Rights Reserved. Dear Fellow Shareholders: Despite the challenging macroeconomic environment, we set high goals for LeapFrog in 2009…to build our brand equity, grow our share in the Electronic Learning Toys category, dramatically reduce retail inventory levels, achieve break-even earnings, and improve our products to drive earnings in 2010. Against the goals and environment described above, our results in 2009 were excellent. We achieved four percent growth in retail point-of-sale (sales by retailers to consumers) dollars compared to a one percent decline for the toy industry.1 Our share of the Electronic Learning Toys category was up four points to 44 percent.2 Retail inventories ended the year in healthy shape across the board and were 29 percent lower than the prior year. We achieved near-breakeven net income with a net loss of just $2.7 million, an improvement of $66 million year-over-year, and very importantly our non-GAAP net income before stock-based compensation rose to $8 million, up from a non-GAAP net loss before stock-based compensation of $57 million in 2008.3 This great performance was due to strong execution at retail, dramatically reduced expenses, and benefi ts from the Learning Path. Importantly, we want to also applaud an outstanding performance contributed by the LeapFrog employee team. Strong Execution at Retail In 2009, we increased consumer sales by off ering a strong product portfolio with a broader assortment of prices (and lower prices where necessary), increasing our overall retail shelf space, and implementing new forecasting systems and processes to better align channel inventory with retail point-of-sale. We maintained a strong presence at our largest retailers, while increasing our focus on sales through online retailers, department stores, and electronics stores. The result was that we grew retail point-of-sale, expanded and gained share in the Electronic Learning Toys category, and signifi cantly improved our brand metrics. Dramatically Reduced Expenses We reinvented our cost structure in 2009 by improving operational systems and processes, focusing on fewer but more strategic projects, making further reductions in general and administrative costs, and reducing marketing expenses due to the marketing benefi ts of our LeapFrog® Learning Path system. As a result, gross margin improved by two points, operating expenses declined more than 30 percent, and we strengthened our fi nancial position. Benefi ts from the LeapFrog® Learning Path In 2009, we began to leverage our Learning Path system and deliver personalized product suggestions to our connected customers. We now have three million connected customers in our Learning Path system, up from one million a year ago. During 2009, we delivered 300 million personalized marketing impressions to our customers, which contributed to our strong point-of-sale performance and benefi tted both retailers and LeapFrog. While direct sales through leapfrog.com increased 18 percent in 2009, the Learning Path also drove traffi c to retail stores with nearly 200,000 retail transactions tracked to the Learning Path. The Learning Path also helped LeapFrog build brand awareness and improve brand perception. More than 50 percent of people we surveyed said that the Learning Path increased their perception of LeapFrog. Based on our survey data, more than half of Tag™ Reading System owners bought a LeapFrog product based on a recommendation from the Learning Path or from a LeapFrog email, and the majority of those purchases were made at retail. 1 Please see Retail Point-of-Sale Dollars below for an explanation of this operating metric. Estimates for the overall toy industry are based on information provided by The NPD Group, Inc. 2 Based on data provided by The NPD Group, Inc. 3 Non-GAAP net income before stock-based compensation is a non-GAAP fi nancial measure. Please see “Use of Non-GAAP Financial Information” below and the attached reconciliation schedule for more information about these measures. LeapFrog Annual Report 2009 2010 and Beyond We enter 2010 poised for growth—our product portfolio is excellent, we will launch important innovations in our platforms and content, the Learning Path connected strategy is already showing results, our cost structure is dramatically improved, and retail inventories are lean. We believe that we are at the turning point for strong sales growth and profi tability in 2010. Interactive Reading—New forms of content will be released for Tag™ and Tag™ Junior. Content will expand beyond traditional books to include maps of the world and the United States. New types of books will be introduced, including game and puzzle books. We also expect to off er online books, available through LeapWorld and as downloadable content. Both Tag and Tag Junior are being redesigned to make them easier to use and will off er a new enhanced-appeal look, including some versions that will resemble popular characters. Mobile Learning—We will launch a powerful new mobile learning system that will transform our “Educational Gaming” business into a business that allows kids to play and learn with the fi rst handheld mobile computer for kids … called Leapster Explorer™. With its Linux-based operating system, it will be about fi ve times more powerful than the current Leapster2. It will also have a touch screen, off er video, and serve both as a game system and a children’s e-Book platform. With this more powerful mobile learning product, we will off er much richer content including Globe: Earth Adventures which will allow children to explore the world and learn about places, cultures, and topics far beyond the ABCs and 1-2-3’s of traditional learning products. Leapster Explorer will be fully integrated with our innovative, online LeapWorld™ playground and serve as a marketplace where children can acquire new features and applications with points earned during offl ine and online play. We believe this transformation of our business from educational gaming into mobile learning … individual learning across a vast array of subjects, available anytime, anywhere … will grow our business from its traditional boundaries just as mobile computing for “grown-ups” has transformed the computer industry. Learning Toys—Building on the success of My Pal Scout, we will introduce our second connected learning toy, My Own Leaptop™, which will be a play computer that can be personalized with a child’s name and receive “emails” from family and friends. New role-play toys will be introduced, such as Fix & Learn Speedy, LeapFrog’s fi rst ever car role-play product. Popular toy lines such as Learn & Groove® and Fridge Phonics® have also been updated. New toys appropriate for drug store chains will be introduced and serve to extend the LeapFrog® brand into new channels. LeapWorld—We will roll out LeapWorld beyond Leapster2 to Tag and Leapster Explorer. LeapWorld is a safe, online learning world for kids age four to nine. In LeapWorld, kids play and learn with online games that reinforce core literacy and math skills as well as introduce new subjects like science, language skills, and social studies. LeapWorld is diff erent from other online play experiences in that it is tightly integrated with LeapFrog’s family of products. LeapFrog Learning Path—We expect the number of connected customers to expand from three million today to between six and seven million in a year. Retail Distribution—In 2010, we will expand our sales distribution with current and new retail partners, including bookstores. Online distribution of our products will also continue to increase, both on leapfrog.com and on our many retail partners’ websites. As we look ahead, we are enthused about our many opportunities in 2010 and beyond. There are many new and exciting products in development for 2011 and 2012; we have an innovative and strong product pipeline that will dramatically enhance the way children learn and play. Today our products off er a personalized learning journey; tomorrow they will off er a personal learning adventure. Learning is going to expand beyond the ABCs and 1-2-3’s to include a vast array of subjects such as science, geo-literacy, languages, and social studies. Platforms will transform from educational gaming to mobile learning, where learning can happen anywhere, anytime.