Leapfrog Enterprises Inc.

November 14, 2013

Yi Liu, Ye Liang, Charalampos Ntantanis, Caleb Pierson

Agenda• Company Background

• Current Position

• Macroeconomic Outlook

• Industry Overview

• Financial Analysis

• Valuation

• Recommendation

Current Position

• RCMP recommended for purchase 2000 shares @ market (8.20) which resulted in buying 2000 shares @ $8.19 on April 5, 2013

• Current Stock price is $8.13

• This is an unrealized loss of 0.73%

Macroeconomic Outlook• World (and U.S.) population is growing across the

toy consumer age range• Dollars spent on toys increased 7.68% from 2007

to 2012• Youth electronics decreased slightly from 2011 to

2012• Nostalgic/Retro toys are making a big push this

year

• The Consumer Sentiment Index is at the lowest point since 2011

Bloomberg News and Toy Industry Association Inc.

Industry Overview• The U.S. Toy market was worth $22 billion in 2012

• Industry products include dolls/action figures, models, construction kits, scooters, board games, game consoles

• Small companies are able to compete alongside larger businesses by focusing on niche products and by reacting more quickly to new trends

Source: Hoovers

5 Forces for Toys and Games

Source: Marketline

Source: Marketline

5 Forces Analysis

Buyer Power Supplier Power

Threat of New

Entrants

Threat of Substitutes

Degree of Rivalry

Moderate Moderate Moderate High High

Individuals have

relatively little impact

Few large manufacture

s

Patents help protect ideas

Knock off goods

Many companies

offer products

Cost of switching is

low

Suppliers are unlikely to

forward integrate

Easy to self produce and

market

Cost of switching is

low

Short lived popularity

Company Overview• Leapfrog trades on the NYSE with

ticker symbol LF

• Company was founded in 1995 by Michael Wood and Robert Lally and headquartered in Emeryville, California USA

• Focus: Educational Entertainment for Children

• Employees: 552 people on a full-time basis

Source: Company Website and 2012 10k

Business Segments and Operations• United States: 73%, 75%, 80% in 2012, 2011and

2010

• Three large retailers: Wal-Mart Stores, Inc. Toys “R” Us, Inc. and Target Corporation

• International• United Kingdom, France, Canada, Mexico,

Australia, South Africa and Spain.

Source: 2012 10k

Product Portfolio

Source: Company Website

Product Portfolio• Currently sell 2 versions of LeapPad, 2 hand held

computers (GS and the Explorer), 2 sets of eBooks (Tag and the Tag junior), learning toys, and iPhone and iPad apps

• LeapPads -- $120• GS and Explorer -- $70• eBooks -- $25 to $170 bundles• Toys -- $10 to $25• Apps -- $0.99

Source: Company Website

Risk Factors• Highly seasonal – Approximately 75% of total

sales to retailers to occur during the third and fourth quarters.

• Growing strategic focus on online products and services – Depends on consumer acceptance

• Rely on a limited number of manufactures

• Liquidity maybe insufficient to meet the long-term or periodic needs

Seasonality

Source: 2012 10k

SWOT analysisStrength Weaknesses

Portfolio of patents

Strong operating record

Strong growth in LeapFrog school house

Highly dependent on few manufacturers

Pending litigation

Client concentration

Opportunities Threats

Strong cash reserves facilitate new product development

Growing ESOL (English to Speakers of Other Languages) population in US

Leverage strategic relationships

Competition

Seasonal fluctuations

Absence of long-term agreements with retailers

Management Outlook• A number of changes to executive management

team during 2012 and 2011

• Anticipate continued business growth at a pace ahead of the market with net sales expected to increase at high single –digit percentage growth rate

• Plan to make long-term investments in content, international expansion, online communities, systems and new platforms

Major ShareholdersTop Institutional Investors (over 5%)

Wellington Management Company, LLP

6,363,081 9.86 62,612,717 Jun 30, 2013

Wells Fargo & Company 4,539,515 7.03 44,668,827 Jun 30, 2013

Franklin Resources, Inc 4,285,970 6.64 42,173,944 Jun 30, 2013

Vanguard Group, Inc. (The)

3,811,129 5.91 35,900,835 Sep 30, 2013

Source: Yahoo finance

Major ShareholdersTop Mutual Fund Holders

Franklin Templeton-Templeton Global Smaller Companies Fund

2,663,380 4.13 25,089,039 Sep 30, 2013

Templeton Global Smaller Companies Fund, Inc. (USA)

2,663,380 4.13 25,621,715 Aug 31, 2013

Oppenheimer Global Opportunities Fund

2,500,000 3.87 24,600,000 Jun 30, 2013

Wells Fargo Advantage Discovery Fd

2,254,800 3.49 21,691,176 Aug 31, 20

• Well known financial institutions

Source: Yahoo finance

Key People

• Mr. John Barbour, Chief Executive Officer, Director and Member of Non-executive Officer Stock Award Committee

• Raymond L. Arthur, Chief Financial Officer

• Gregory B. Ahearn, Chief Marketing Officer and Executive Vice President

Source: Businessweek

Recent Financial Information

Source: Capital IQ

Recent Financial Information

Source: Capital IQ

Financial Analysis2008 2009 2010 2011 2012

Current Ratio 240.2% 250.8% 321.4% 319.3% 389.2%

Quick Ratio 183.2% 222.2% 256.4% 279.1% 345.4%

Cash Ratio 79.2% 62.7% 26.7% 84.2% 130.5%

Inventory Turnover Ratio 483.7% 786.2% 532.9% 783.5% 834.0%

Days Supply of Inventory 75.47 46.43 68.50 46.59 43.77

A/R Turnover 510.5% 257.7% 274.4% 289.1% 322.9%

Days Sales Outstanding 71.49 141.62 133.02 126.24 113.05

Liquidity Ratios

Financial Analysis

2008 2009 2010 2011 2012

Total Asset Turnover 150.0% 124.1% 147.4% 137.5% 135.5%

Fixed Asset Turnover 2340.8% 2662.1% 2872.5% 2545.4% 2450.3%

Asset Management Efficiency Ratios

Financial Analysis

2008 2009 2010 2011 2012

Tax Burden 102.8% 27.2% 82.8% 106.1% 139.6%

Interest Burden 114.6% 121.4% 70.1% 78.0% 96.5%

Operating Profit Margin -12.64% -2.14% 1.97% 5.28% 11.05%

Asset Turnover 150.0% 124.1% 147.4% 137.5% 135.5%

Leverage 170.1% 158.8% 142.8% 142.2% 130.0%

ROE -38.0% -1.4% 2.4% 8.6% 26.2%

DuPont Analysis (ROE)

Recent Stock Performance

Source: Capital IQ, Yahoo Finance

Metric ValueCurrent Price $8.13

Trailing P/E 7.03

Forward P/E 20.64

Market Cap ($mil) $560.32

Valuation — WACC

Source: Yahoo Finance, Bloomberg

Valuation — DCF

Valuation — Comps.

Source: Capital IQ

Comps. Stock Chart

Source: Yahoo Finance

Decision Drivers

• Strengths• Climbing Revenues • Strong Cash Position• Highly specialized• DCF ($8.57)

• Concerns• Raising competition from big players• Seasonal fluctuations

Recommendation

Hold

Questions?