LeapFrog 2009 Annual Report Download - page 3

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 o 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
tra 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.
1Please 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.
2Based on data provided by The NPD Group, Inc.
3Non-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