LeapFrog Enterprises Inc. (NYSE:LF)
February 12, 2013 8:30 am ET
John Barbour - Chief Executive Officer, Director and Member of Non-Executive Officer Stock Award Committee
Greg Ahearn - Chief Marketing Officer
Brad Rodrigues - Senior Vice President and General Manager of Digital & Community Development
Raymond L. Arthur - Chief Financial Officer
Well, welcome everyone to our 2013 event. We really appreciate you taking the time to come here today and we are very excited to have the opportunity to talk with you about LeapFrog. So the agenda for today is John Barbour, our CEO, will give an overview of LeapFrog; and then the Jody LeVos, Dr. Jody LeVos, will talk about our educational leadership. Next we have Greg Ahearn, our Chief Marketing Officer, who will talk about our life-changing learning solutions and some of our plans; then we have Brad Rodrigues, who's our SVP of Digital and Community, he'll talk about our initiatives to further develop our community. Then John Barbour, our CEO, will talk about our global opportunities; then Ray Arthur, our CFO, will talk about our financial results. John Barbour will provide a summary, and then we have Jill Waller and Craig Hendrickson who will provide a product overview of our 2013 line.
But before we begin, I want to remind all of you to please turn off your cell phones because it can interfere with the webcast and then also I must read the forward-looking statements.
This presentation includes forward-looking statements about management's expectations, including expectations regarding financial results and planned products and features. Our results may differ materially from those expressed or implied by such forward-looking statements. The risks that could cause our results to differ materially include heavy changeable consumer preferences and toy trends, our ability to achieve anticipated sales level, particularly with respect to newly launched products, the overall economic environment and its effort -- sorry, and its effect on retail business, introductions of products that compete with our platforms by a variety of other company, our ability to respond quickly and cost-effectively to changes in manufacturing costs and the consumer demand for our products and our ability to provide high-quality experiences to consumers with all of our products and services. These risks and others discussed under risk factors in our most recent form 10K and 10-Q filed with the SEC. LeapFrog makes these statements as of February 12, 2013, and disclaims any duty to update them. And I'd now like to introduce John Barbour.
Good morning. It's really nice of you guys to join us this morning. We all know that you guys have really busy schedules and we appreciate you taking the time to be here with us.
And I'd like to start today talking about a topic that is very dear to my heart, it's one of the reasons that I came out of retirement to come into this job and that is children and the state of education today.
Children are our future. There is nothing more important in my life than my sons Jack and James. Most parents want their children to have the best opportunities in life. And if you sit back and look at it, it's interesting, research has shown that performance at kindergarten is a clear measure I'm looking forward academic success as children grow. Yet today, in America, nearly half the children that come out from kindergarten are unprepared and have problems.
When KIPP Ascend School of Chicago, which is a charter school and were bringing in new kids and were testing them, they found that only 4 of 100 kindergartens who's entering were able to recognize numbers and letters. It's quite shocking. Nearly 7% of high school grad -- high school students don't graduate. In the U.S., a high school student drops out every 26 seconds, that's about 7,000 every day, 1.3 million every year. Shocking for the world's richest country. For the first time in history, America's younger generation is less well educated than its parents. No wonder over 50% of Americans are dissatisfied with the quality of education in America today. Because these parents know that jobs will usually lead to more money and a better chance to achieve your potential, that it's a global marketplace now, right? There are more honor students today in India than there are students in America. There are more English speakers today in China than there are in America. Education, knowledge are the keys to opportunity in the future, yet the U.S. continue to fall behind the rest of the world in quality of education. Falling now to #17 in terms of reading and #31 in terms of math. It's quite shocking that countries like Scotland, unbelievable. It's getting -- I think, Scotland [indiscernible].
There are over 650 million in primary schools around the world. English speakers are estimated to double in the next 5 years -- decade, 10 years, sorry. And amazing what that will do is that will make English, again, the #1 spoken language in the world. That's an interesting opportunity and challenge because it creates more competitiveness for our children, while at the same time, interestingly offers a very fascinating opportunity in terms of teaching English as a second language.
So it's no surprise then, when you look at this challenge, this fear of parents, this desire to give your kids the best start in life that parents are looking beyond school to help educate their kids. They're looking for every opportunity they can afford and take advantage of in terms of supplemental education. I think one other big surge you're going to see today is the transformation of LeapFrog, for not just being a toy company but to from being a company that creates and delivers life-changing educational solutions for children.
NPD showed last year that the U.S. toy market declined, yet the education of supplemental education business is showing good growth and that growth will help fuel the growth of LeapFrog as we go forward. We are playing in a bigger game. The classic example of that, we, all over the different times of our life had ourselves been told that, "Hey, if there really were companies that see themselves being the people moving business, they would have invented airlines."
But it's not just our companies. I think a great example of it today is Pepsi and Coke. They were soda companies rather than nonalcoholic refreshment businesses, they're there to spend billions of dollars developing or buying water companies, key companies, sports drink companies, vitamin drink companies. A company's vision for world's business is fundamental to our beloved's future growth and by focusing on supplemental education, by taking advantage of the incredible assets that existed within LeapFrog, we can add focus and make far better opportunity in a far bigger marketplace that will fuel the revolution and the turnaround of LeapFrog.
So in this big growing marketplace, which companies do you believe have the best chance of success? Well you know what, there's nothing beats experience. There's nothing beats a company that's been in the space actually for 18 years despite the fact -- if you actually look in the past, most times, when you ask people what kind of business was this company and they would tell you, it was educational toys rather than educational entertainment. And that may seem a subtlety to many of you, but it's a really big difference. The ability to create compelling, engaging entertainment that children find fun while at the same time being able to embed in that proven life-changing curricula is a really big idea. It changes children's lives. That's one of the incredible assets that this company has, perhaps didn't even realize it had been in the business. It's fascinating to think that this company that said it was an educational toy company. They sold over 100 million books, over 50 million video games, has one of the best-rated DVDs in the history of children's animation. Not bad for a toy company.
Started by this man up here, Mike Wood, with the vision of wanting to teach children how to read, to revolutionize how to teach children to read, gave up his safe job as a patent [ph] attorney in San Francisco, put all of his money on the table and started this business. This vision of a Tom Kalinske, right, who heard the story, saw the opportunity within it and convinced Knowledge Universe to invest in this business. A company that has continually revolutionized developing platforms and toys that kids find fun, they play with, and they sometimes don't even realize that they're learning through the experience.
A company that's created multiple solutions that are #1 in their space. Number 1 in tablets, #1 in gaming, learning gaming, #1 in learn to read, #1 in electronic learning through a plush. A company that helped millions of children so far in this life, a company that has won more awards in this space than any other company.
A company that has won Educational Toy of the Year Award, 8 out of the last 13 years, and won it again the other night at the TOTY Awards. No company has a reputation in the supplemental education space that LeapFrog has.
For the first year ever the toy industry opened up voting for their Toy of the Year to, god forbid, the public. They created the People's Choice Award. The product that won the first-ever People's Choice Award with only consumers voting, LeapPad.
A company that has won more 5 Star Awards for its products than any company in this space. But consumers have voted, right, both with their pocketbooks and have become evangelists. A company with the best brand in the space. A company with people who live every single day of their work day, wanting to help children achieve their potential.
We, as a company, are a believer in karma, sounds strange to say that from a Scotsman, but we do. When we go to award ceremonies, we don't prepare for winning anything. I think that's bad karma. We don't talk about it, nobody prepares for it, nothing at all and we sit there and look in the room and we win something. My job is to select someone to go up and to pick it up, right? And that's usually met with a look of excitement to stand in front of your peers, but also fear of, "Oh my God, what I'm going to say." Right? After the awards ceremony scheduled tonight, I have 3 different people come up to me and say, "One of the things that's really incredible about your people is they talk about the team behind them and the passion this company has for helping children to achieve their potential. The mission that all these incredible people are focused on, they have been re-evangelized over the last 2 years, right? People are sitting in the office, 24/7 most of the times, working with their partners in Hong Kong, Shenzen as we develop this, but singular-mission focused on helping children to achieve their potential.
A company with incredible momentum at the moment. This transition to being an educational entertainment company by focusing on platforms and focusing on life changing content has also transformed the financial performance of our company over the last 2 years. This was not luck. This is a lot of heavy lifting and focusing and transforming this business. It's a little bit like we've been trying to take a taxi company and make it into an airline. It's involved both people change, it's involved focus change, it's involved process change, right but the great news for everyone here is, it's working.
It's working so well that we had, last year, the #1 selling product in terms of NPD, both in the U.S. and in the U.K. A company that is focused on content and has seen its highest profit delivering segments explode, 43% growth in content. Fourfold growth in delivering digital content directly to the consumer over the web. A growth in accessories, all of these are highest profit segments within our business.
When I came in to this business 2 years ago, I'm a pretty optimistic guy, but I never, ever, ever, dreamed that in 2012, we would have not 1, not 2, not 3, but 4 of the best-selling products in terms of NPD in America. We had 3 of the top 4.
So it's interesting, when you look at this business because interestingly, a number of times over the last 6 months, I've been told by people that we are going to get crushed. Right? There's all these new tablets coming in, in the marketplace and these people are way smarter than you, guys. Right? Well, last year, we've got pretty competitive marketplace in this. There was -- 2 new iPad got launched. There was a bunch of Samsung tablets, right? There was a bunch of new Kindles come in to the marketplace and a whole bunch of cheap android tablets, right? And yet, we still became the #1 selling kids electronic tablet in this space for the second year. Right?
The rumors of our demise were greatly exaggerated. I think there are people out there in the market at the moment that don't truly understand the competitive landscape that we fought through last year and we will continue to fight for it, right? This is not our first time at the rodeo, as you, Americans, would say, right? Okay? We are totally focused in this marketplace and we have the best tablet in this space. We have the tablet that was specifically designed for this marketplace and I believe, we sold more tablets for 3 to 8-year old kids, as the tablet than anyone in this marketplace despite all these big companies and all this money they've spent. And we're prepared to deal with more competition this year because we are focused on this marketplace and we have the best assets of any company in this space to deliver both the best hardware but the best content that anyone has in this space.
When parents were asked how they would select a tablet for their kids, the #1 point was, and it was very large part the #1 point, was educational content for the child to experience on it. We have the best content library in this space bar none. Every single piece of content that we deliver has either been developed or selected by a child development expert. We are the only company in this space that does that, because we're the only company in this with 18 years experience in educational entertainment. That was one of the incredible assets that this business had that people continually undervalue. But I think it's important to recognize, we dealt with competition, we've been bloodied by competition and we will continue to beat the competition because this is our business and no one cares more about helping children achieve their potential than LeapFrog does.
We have a connected customer base now that is one of the biggest family networks in the world and a terrific asset for the future, right? There are a few companies in our space that talk on a regular basis to families around the world with children who are looking for this type of opportunity. This type of life-changing experience. So what did I see 2 years ago to come out of retirement to be part of this? What was at LeapFrog that I felt was an incredible asset that was being underutilized and under managed?
Well, first of all, the focus on educational entertainment, right? We're not doing anything else. We don't have products in any other category, right? We are the company that works 24/7 in this space. It's all we talk about. It's all we focus on. It's all we spend our time on. We are not defocused by focusing on teenagers, by focusing on old people like us, but all we do is kids, all we do is help kids achieve their potential.
We have 18 years of experience, right? We've been doing this for a long time. We've had multiple products that have been successes in this marketplace. For those of you that don't know, LeapPad isn't our first success. We actually had another product called LeapPad at one time too, which revolutionize learning to read and we have continually over the years with this business come up with products that have been success at this marketplace. And with the people we've assembled, we're going to continue to come up with products and revolution. So we're going to go way beyond the LeapPad in case anyone would even think if LeapPad would start to slowdown that we're going to have problems.
We've got massive connected consumer base bigger than anybody else in this space. We have the brand in this space, go talk to customers, go do your research. Everybody knows LeapFrog is the leader in educational entertainment and delivering educational solutions to add fun for their kids. We've got proprietary curricula. Most people actually don't know this. Most people have no idea that we have this. But all this stuff doesn't just happen by luck. We have the best child development people in the business who spend their time developing and working with every product we do. And Dr. Jody will take you through what she and her team do. Over the last 12 years, they and to working a product. Their job is to go up into the education world and find everything that is great and proven to enhance the educational experience in our products. And Jody will talk about some of those things today.
So we have 12 years of a curricula that's propriety, it's ours, with scope and sequence that no one else in this space has and if anybody wants to start tomorrow to order to get into this space and compete with us, they are going to need that, right?
In addition, they're going to need to find people who've got lots of experience in melding entertainment with education, because it's not easy. There's lots of products in this marketplace that are filled with education, that -- those of you who are parents like me have bought for kids at times and have been so dry that they get played with once and they end up at the bottom of the toy box. Because education without fun doesn't get played with by kids. And there's lots of products out there with the thin veneer of education. You can find thousands of them right now on other digital networks, thousands, developed by people with no experience in education at all.
They're fun, they're frothy, they're fizzy, they're the soda of educational apps, filled with empty calories. We have people who have spent their life in entertainment companies and people who are the best child development people the space who work daily together to create magic. No other company in this space has a talent base like we have filled with zealots who love this brand, who love this mission, right, and who are really truly focused on helping children achieve their potential.
Focusing on this. Focusing on children. Our office is filled with children every single day. Coming out of retirement was the best decision I've ever made in my life. It has been an incredible journey for the last 2 years. I get to work with amazing talent like these guys to create solutions that changes children's lives. It doesn't get any better than that. Jody?
Thank you. I'm Dr. Jody Sherman LeVos, I head up the learning team at LeapFrog and it is my pleasure to be here today to talk about something that is absolutely the most important to me and that is helping young children get the best start in life that they can. And it's important to me professionally. I devoted my career to that end and also personally. I have 2 little boys, 2 and 5, and getting those little guys ready for kindergarten and ready for life is my top concern. I think it's the top concern of almost every parent. And so I'm going to focus my talk today on why those early years are so important.
In 2002, Dr. Heckman provided an economic model to support something that child development experts and early childhood educators have been saying for decades, and that is, we need to invest in the very young, and that, that investment can matter the most. And what Dr. Heckman showed is that when you invest the same dollar at different points in the life span, you can expect different rates of return. And when he modeled this investment, he found that the greatest return on the investment is when you invest in the youngest of children, before they get into formal schooling. And the reason for that is twofold.
First, you get to harvest that investment for a longer time span by investing in the youngest of our citizens. The second is that those early investments will actually increase the productivity of later investments. So what Dr. Heckman was saying was that early learning to get later learning and early success leads to later success, just as early failure leads to later failure. At LeapFrog, we fundamentally believe that all children deserve an equitable high-quality start to their life.
So why do those first 2 years matter so much? Well, one thing that critical -- one thing that child development experts and neuro psychologists have been talking about for a while are what we call critical periods of development. These are periods in which our brains are primed to obtain learning in meaningful input. It's the windows of opportunity in which we get to learn something the best. And learning occurs long before children take a seat in their first classroom, as we know, and one example of this is language input.
Our brains are primed to receive language input at the very beginning of life. And we can see this in second or third language acquisition. If any of you have tried to obtain a second or third language as an adult, you can probably testify to the challenges of that go along with a learning of language later in life whereas for young children obtaining language in the first 2 years appears almost effortless. Our brains are primed for learning language in those first few years. It's the critical period in which we can best learn language.
We also know that there are concepts that we need to develop early on because they set the foundation for everything that comes afterwards. And if we learn something incorrectly, we can actually obtain a concept that later on becomes very difficult to undo. So here's an example of that. It's something I found in my research. 5 plus 3 equals blank plus 6. What number goes on the line? 2. Thank you. Unfortunately, almost all young children get this equation wrong and even up to 80% of fourth graders get this equation wrong. Does anyone want to guess what number young children think goes on that line? No? 8. Exactly. Young children think 8 goes on that line because they've developed this concept that the equal sign means the answer comes next. They completely ignore this and only focus on this because they believe the equal sign means the answer comes next. That's the concept that they have formed because we live in a "2 plus 2 equals 4" world. This is the type of equation that they see in a textbook. This is what they see in the classroom and what they see in the world all around them. They see over and over what we call canonical equation. And they have formed this concept that the equal sign means the answer comes next. The problem with this is later on when they get into algebra, which is often then coined as the gatekeeper to some of the highest-paying careers there are, they don't understand that the equal sign means the same as. And so early on, we need to develop in children what we call a relational understanding of the equal sign. And those first 2 years are critical for developing this fundamental concept on which everything else follows.
So we know the early years matter to the economist and we know that early years matter to developmental child experts and teachers, but it also matters to another important group, and that is moms. And at LeapFrog, we spend a lot of time talking to moms and families about what is important to them. When we asked over 1,600 moms, "What is top of mind for you when you think about your children, learning and toys?" The #1 response was education. They want experiences that are going to help educate their young children. And the second most popular response was engagement and fun. They want those experiences to be fun for their children and they recognize the importance of fun and education together, which is great news for LeapFrog because that's what we do.
And everything we teach, as JB referred to, is drawn from our Scope and Sequence. And our Scope and Sequence is our proprietary curriculum. It has been developed with collaboration, innovation and it continues to evolve to this day. The Scope and Sequence is a bank of skills. Today, consisting of over 2,600 skills that cover everything that children need to learn and do from birth to early elementary school. It is the foundation for everything we do. It feeds the Learning Path. It's what informs parents about what their children are actually learning and it continues to evolve. Every time we think of a new way to teach something, we have technology that allows us to teach something that we couldn't teach before, we add it to the Scope and Sequence. So it continues to evolve to this day.
And we sift those thousands of skills into our products into meaningful play experiences by using the Scope and Sequence to set what we call learning objectives. Months and sometimes years before we start a product, we're working with the teams to identify what is the learning objective of this title, of this book, of this DVD, and we draw that from our Scope and Sequence.
And then as a learning designer, we work in the trenches with the producers and the artists and the audio leads to identify how to fit those learning objectives into a fun and compelling experience for kids. And as a learning designer, I get to create very fun documents like this one which shows the curriculum data set, and these are detailed and customized for everything we do. We don't rescan our content. We want to know the target audience. We want to know the play and the game design. And we want to know what the truth of the character set, and once we understand that, working with the team, we design customized curriculum. And this involves multiple layers of questions. It involves identifying exactly what needs to be shown on screen, what are the wrong answers, what happens when a child gets the wrong answer, what do they hear and see and how do we scaffold them to the correct answer and then how do they move from the simple to the complex. All of this is outlined in the curricula data set. And all of these questions are attached to skills from the Scope and Sequence in what we call metadata spreadsheet. And the skills from the MDSS, or the metadata spreadsheet, is what feeds the Learning Path.
The skills populate the scone and they are what parents know -- that help parents know what their children are actually learning as they interact with the LeapFrog products.
But of course, at LeapFrog, it's not just what we teach that matters. It's how we teach. And so I want to focus your attention today on our Ultra eBooks, which are an example of how LeapFrog has taken e-reading to the next level. All of our Ultra eBooks have 3 levels of text. You know that children learn to read best when the text exactly matches their own reading skills. So all of our Ultra eBooks have games and comprehension questions that children get to play and what we're actually doing under the hood is affecting their reading skills. And when they go back into the story, the text level is going to be perfect for them. It's not too simple and it's not too difficult. And we also create experiences that are immersive and get kids into the game. So the second screenshot shows the sailboat with dotted line so the players actually connect the lines to -- essentially to a triangle, but they are also drawing the second sail on the sailboat. And all of our design philosophy is around getting kids immersed into the experience so they are active participants in the learning. They're not passive participants.
We also want to teach things in a way that children need to understand them.
We now know that the understanding that children have when they enter kindergarten in math is actually the single strongest predictor of later academic success. Math skills at kindergarten entry are stronger predictors in early literacy skills as well as social and emotional skills. So it's extremely important that children understand math very early on in life. And it's not enough that they can just count to 10. That's great, but they need to understand that the reason 5 comes after 4 is because it's bigger than 4, and that these numbers are equal distant apart for a reason. 5 is halfway to 10 and having this mental linear number line is critical for later success.
Knowing this, we use that representation wherever we can to support early numeracy. Even when we're giving a tutorial about what the number 3 looks like, we don't just show them a 3. We show them a 3 on a number line or we build a game around it.
The bottom screenshot shows one of our games where kids have to find the missing pieces from a stuffed animal's face. And it looks like a search and find game, but it's actually represented again on this number line. It's about presenting the representations that kids need.
We do all of this because we believe that every child deserves the best learning experience as possible, and we have design teachers that are all around creating customized flexible learning experiences. So I'll show you what that means.
Let's say we designed a game that goes from preschool to first grade, 3 levels of content within which there might be 30 sublevels, going from the simplest preschool curriculum all the way through the most complex first grade. And let's say this little girl turns on her LeapPad and she wants to play this game. The profile will tell -- the profile setting on the device will tell the game that she's a preschooler. She doesn't need to select her difficulty level. She doesn't need to decide how challenged she wants to be that day. The device will tell the game where to start. And as she works through the equations and the questions in the game, she's just going to auto-level up because she is doing really well. So again, she doesn't need to do any of the work. The game is going to progress for her based on her performance.
Now this little guy, who happens to be my son, his profile setting may tell the device that he's in kindergarten and he's playing the same game as the little girl, but he starts with very different curriculum because the device has told the game to start at kindergarten. So he starts at kindergarten, but maybe he's not doing so well. He doesn't understand the content of those first few questions. So he's not going to know it, but the game is going auto-level him down until he gets to a sublevel where he's comfortable and he can solve the equations correctly. Maybe he hits the tutorial button and he learns the underlying concept if there's something that happens that now he gets it. He understands. So then that he starts moving forward within the game.
This third little boy also starts the same game. The device tells the game that he's in kindergarten. But what's unique about this little boy is he's played with other LeapFrog games and in those other games, we learned something about this little boy. We've learned that he can master some of the kindergarten curriculum already. In fact, maybe this little boy has already mastered addition with sums to 10 and so what we've done in another LeapFrog game is awarded him with what we call a milestone. It's a tracker that we put on the device that when he plays this game, he doesn't start at that part of kindergarten. He jumps all the way up to addition with sums to 10 because we know something about him. So now his experience is different and he begins to play the game and move up into the first grade curriculum. So an example of how 1 game responds very differently to 3 different children based on their learning needs.
So before I start the video, I just want to summarize by saying, we fundamentally believe that kids deserve the best start in life. We believe they learn best when they have fun and we do all with attention to detail all this work by collaborating together. Thank you very much.
Good morning. We drew straws to see who would follow Jody. I got the short straw. She is incredible and what their team does is fabulous. My name is Greg Ahearn, and I'm the new Chief Marketing Officer at LeapFrog. And Tom, the producer that you saw in that video, what he says and what other people say is we put so much into our products so that kids can get so much out of them. We create educational entertainment experiences that change children's lives. It's like clever combination of this learning that Jody took everybody through and marrying it with engaging entertainment content that makes our experiences so unique and so powerful. But don't just take my word for it. An example of our ability to deliver this world-class content is best captured by what consumers are saying.
And so we went out, we took a look and found the 3 highest-grossing animated films of all time: Toy Story 3, The Lion King and Finding Nemo. And what we did is we went to as trusted a source as you can find for consumers. We went out to the world's largest e-commerce platform, Amazon.com. And people trust their reviews. People participate and they inform each other on these platforms. It's a relatively objective view of what consumers really think of our products and services. So what do they think about these 3 top-grossing animated films of all time? Well, the first thing is for Toy Story 3, they give it 4.5 stars and they give it 585 5-star reviews. Lion King, 4.5 stars and 932 5-star reviews. And then Nemo, again, 4.5 stars and just over 1,000 5-star reviews. But there's a piece of animation that LeapFrog did and we did it back in 2003 and it was called the LeapFrog Letter Factory. And the LeapFrog Letter Factory on Amazon.com gets 4.9 stars and has 1,054 5-star reviews, better rating and more 5-star reviews than the 3 largest-grossing animated films of all time. It's like rock beats scissors, right? Frog beats cowboy, frog beats lion, and yes, frog beats clownfish. So how can this be, right? How does a small educational entertainment company achieve this? What did consumers' parents see in this content? Why does it strike such a cord with them? Well, it's because of this unique combination. This combination of top play experience and top educational experience, put together to create this unique platform. A clever mix that results in a rich learning experience that is just as entertaining to its core audience as major films, but with the nutrition of education baked right in from the very beginning.
What we do? We take a lot of things. We take 8 to 10 months of development for each of these pieces of content. We add in educational experts. We have developers from some of the top game companies that have ever been in business. Professionally performed music, children's copyrighters and thousands of hours of work and forgive me for saying this, we distill it down, right, with passion and empathy, making learning fun to create something that is truly, truly magical.
It all starts with Jody and her team. Jody's team keeps us up with the latest in education, the latest in state standards and the common core guidelines, proprietary Scope and Sequence of key development milestones that is only at LeapFrog. And then we categorize this in the different age groups, different grades, defining essential experiences, the essential basic skills that a child needs at the most critical points of learning.
But we tie this curriculum, we tie this learning and combine it with the best characters and the best brands that are out there, and marry this education with entertainment to create something that's truly breakthrough. And that has resulted in a vast library of content with all the best characters, all the best brands and all the best education. That content was recently rated #1 in sales by NPD in the entire toy industry. But our chart-topping content is just one part of what truly makes us unique.
Our transformation into being a world-class educational entertainment company is about more than just developing our own content. It's also about being a distribution partner for other people's content. So in 2010, we started with 100 pieces of content, mostly our own content. In 2011, that went up to 200, adding in incredible music, videos, and more. And this year, we've topped over 500 pieces of incredibly fun and incredibly educational content to make it a super rich experience for kids to experience on our platforms. But what's most important about all of this and what JB touched on earlier is every piece of content that goes into our App Store is reviewed and approved by LeapFrog learning experts. That's a truly unique component to what we do and how we do it.
We want to make sure parents believe and know that when they allow their child to view any content that comes through a LeapFrog product, that it's safe, that it's age-appropriate, that its content is right.
We have the best partners from Mattel and Hasbro to Nickelodeon and Disney, Kidz Bop in music. It goes across lines. It's both entertainment development companies and its manufacturers, but what the one thing all of these groups have in common is that they all have amazing content that our consumers love. So we don't care if they're a manufacturer. We don't care if they're an entertainment development company. What we care about is that they have truly unique and engaging characters and brands that we can unite with education to make this breakthrough content.
But we want to go beyond that. We have a bigger vision as a company of not just developing content and distributing content. We see ourselves as a way to take some of the best models that are out there and have bits and pieces put together to create the best in terms of creating educational entertainment solutions for kids.
You look at Apple. Apple is an incredible distribution model, the hardware and the platform that takes content and makes it truly simple for people to get what they need quickly and easily.
Disney, an incredible content development, an IP house where they can take new unique entertainment and then blow it out and be able to merchandise that content in a truly major way. And then HBO, of content development and distribution. It used to be that they just ran other people's content on cable, but Game of Thrones, right. They continually develop now their own content. And what we see at LeapFrog is there an opportunity for us because we can create the delivery system in terms of hardware. We can create truly unique content and we can use this platform to distribute not only our own content, but other's content as well.
And entertainment comes in lots of different forms. And we're playing in some of them already. We develop software. We develop truly unique hardware that's made from the ground up for 4 to 7 years old. We make books and have sold over 100 million books since the start of the company. Videos, digitals, toys and more, but there are more opportunities to pursue.
There's development opportunities in content like apps, online, video games, music, all areas that we haven't even touched on yet as a company. You combine that with the areas and types of platforms that are out there today. Tablets, yes, it's the form factor of today. But there are many form factors that are still out there to be worked on. And our goal is not only to develop new platforms, but also to deliver our content through other people's platforms. We believe that this combination between lots of different types of content and lots of different types of platforms that can be developed and platforms in which we can deliver our unique educational entertainment content through, creates a significant amount of combinations for us as a company on a go-forward basis, to create new and exciting and innovative educational entertainment solutions for years to come.
Overlay our highly recognized brand, that raced #1 on almost every quality scale and is valued by parents as the provider of the best educational experiences and the result is world-class solutions that change children's lives. They already exist today. We're combining this content and distributing other people's content in a curated fashion through these propriety platforms, whether it's our toy platform that allows kids to learn basic learning skills from the very beginning starting at 6 months to our learn-to-read platform with Tag that combines physical books in a cool and unique way.
Learn through gaming with our LeapsterGS platform or the LeapPad platform, which is interactive kids developmental learning tablet play. But most importantly is the overlay of all of the incredible content that goes along with this, and this combination continues to deliver spectacular results year in and year out. And a lot of people say they can do this.
A lot of devices and apps claim to be educational, but they're truly not. Jody took you through what it takes to be an educational entertainment solution company. A lot of these companies misalign design in curriculum.
Few actually teach as you play these games, there's no hints and feedback. If you're not personalized, there's no auto-leveling. Within our books, our Ultra eBooks, there's 3 levels. It's a new experience each time a child moves to a different level and challenges them to do better. Minimal enhancements in learning methodology and it's disconnected from parents and family. We provide that feedback loop for parents through the Learning Path.
We solve a crucial need for parents and the most important thing to look at here is everything we do is done with one thing and one thing only in mind. We wake up every day to provide the best educational entertainment solutions that change children's lives and help them reach their potential.
And it's through this clever combination of being designed for kids right from the very beginning from the ground up, our hardware, our software, the way we curate other people's content into our App Store. Making sure that everything is world-class, that's part of our solution. And I boiled it down into a simple equation. An equation is learning plus fun times kids equals amazing, all right.
And this is truly representative of what I said at the beginning, which is we put so much into our solutions so kids can get so, so much out of them. And we're going to continue to develop on a go-forward basis, Joe Waller and Craig Hendrickson later this morning are going to take you through the latest innovations and one of those is taking our Learn to Read business to a whole another level. We're known for the best in learn-to-read platforms. We've sold over 100 million books and we've got a new platform that you'll see this morning that has incredible features and more education in it than ever before.
So in summary, we're on a journey as a company, a journey to create the best educational solutions in the world. And as part of this journey, we will develop the top quality educational entertainment content. We will partner with the best in kids entertainment and brands. We will create new platforms that are fun and engaging for kids and we will utilize others' platforms to distribute LeapFrog-developed content in the future. And the last thing we will do is we will take this to a whole another level by creating a relationship with parents through these solutions that make LeapFrog the trusted source, the trusted guide for them as they go through this journey of their child's education. So I'm going to turn it over to Brad Rodrigues now. He's going to tell you more about that.
Thank you, Greg. Good morning, guys. I'm Brad Rodrigues, and I lead the digital community team at LeapFrog, which I feel like I think it's one of the best jobs at LeapFrog. It's an opportunity to create amazing experience for parents. I've spent the last 9 years at Nike, leading Nike+ digital business most recently. And when this opportunity came up, an opportunity to be involved in creating a digital experience for parents. And alongside that role at Nike, alongside this role now, I've got another job, which I think is a better job and that's being a parent. I've got a 3-year old and a 1-year old at home. They're certainly a handful, as my wife will remind me since she's at home alone with them right now as I'm out here traveling. But it's also a relief for those of you who are parents. The most amazing things a parent can do is the remarkable process to watch your kids learn and grow and develop and see some of that. So for me, being able to be part of building a digital experience and community that's able to help parents and help them ultimately be the best teachers that they can be is a rewarding experience and ultimately, that's where it all starts. And for us, as a company, and our digital team, it starts with being dedicated, supporting parents that help their kids reach their potential. So the obvious is, me like every other parent wants their kid to reach their full potential with, but a lot of times you don't know where to start. Not of all us have background in childhood education. Certainly, this team does here. In my 9 years at Nike, I got some great shoes for my kids, but I really don't have the background in childhood education, so you don't know where to start. And some of the people that you're used to looking to for advice, your parents, different generation. I came from cotton diapers and Mister Rogers, and certainly no kid tablets and Internet, right? It's hard to imagine.
So you don't have the resources that are there to help you. When you look, it's absolutely overwhelming, right? Endless insights in childhood development. You look at Amazon, you search for child learning, 150,000 different books on child, where do you even start with that? And especially the parent, you get enough other things going on, certainly not enough time to wade through that next huge range of quality, different approaches, but you know and have an idea on what is right for you and your kid.
Same thing goes for getting apps. You try to find something educational for your kids. I tried to do this before I came to LeapFrog. When I tried I wanted to find a good educational app. And the reality is there's some fantastic stuff out there, but there's some stuff that is completely worthless. I've got on my iPad a talking purple hippo that does nothing but make inappropriate noises and ask for more money, right? It's similar to my son actually, at this point so. You've got the sense all of these different apps and Apple does do a wonderful job. Certainly, it tries and make sure there's nothing potentially sinister within those apps, but they make no effort and they don't pretend to make an effort to ensure there's actually anything that has true educational value within those apps, right? So you're left to your own devices.
We think there's a big role that LeapFrog can play within that mix. So our goal is to be ultimate learning partner for parents, a trusted resource that parents turn to first for learning solutions, insights and support. Our goal is to answer one question for parents, "What's the best way that you can help your kids right now?" The best way, a parent doesn't want all sorts of different approaches, they want recommendation of here's best way to help you kid. To help your kids. Somebody else's kids, different answers, different skills, but your kids and right now, height and older level, younger right now for them. So that's our objective.
We already have a huge audience. There are 4 million unique visitors in December alone. It's more than BabyCenter. It's 4x Fisher-Price. And we've got a ton of people who already look to us for our advice, products, insights in education. 13 million connected parents, as we've mentioned, right, millions of connected devices. What that does is it creates a huge database on learning. I'd argue potentially, I don't have the data to back it up, but probably the largest database in the world on how kids learn.
So we can see, here's what parents of kids at a certain age actually buy for their kids, here are what those kids engaged with. Here's what questions they get right, which questions they get wrong. Here's how they learn best, right? Huge insights that we have an opportunity to mine, kind of a big data, the opportunity to use data to generate insights. We've got that data. Say that data is from a community, there's millions of parents, kids millions of connected devices, millions of games played. Combine that with the personal level of insight and data, right, as you connect into our world. We'll ask different questions, get an understanding of your kid, and then as you play with the device, we'll get more and more understanding, as Jody walked through and we can change levels, right? It's an amazing personal and community relationship within data that gives us the chance to offer the most personalized recommendations from a product standpoint, content standpoint that you could create out there.
So let's talk about this Learning Path and for those of you who have seen it either on our Connect interface or the website. A great -- sort of a way to expose the scope and sequence we've talked about, here's the way that LeapFrog thinks about learning. You're going to do anything. You can double click within some of those and get an idea, here's the skills that make up those milestones. As you play and your kid experience some of those different games, right; you get -- you can actually go in and get a little world of here's what my kid is engaging in. Here's the questions that he's gotten right or wrong. So use the opportunity, use that data and start to serve up and expose that information to consumers.
All the resources that we already have are for parents, right? So within our site, we got a Parent Resource Center that has well over 1,000 articles on child education, written by people like Jody and her team. Really simple well-written articles that give you a sense of here are some of the best things for your kid.
Alongside that hundreds of printables, activities, free things that give you an ability to keep you kid learning. And to me, this is the most exciting part, an opportunity to create a digital community. This is my kid, I had to work him into the presentation somehow. The ecosystem, the connected world around a kid is unreal, right? So parents, to other parents and families, to the extended families, grandparents, aunts, uncles, right, that whole world, we've manufactured in some cases digital communities around absolutely everything these days, right? But if you think about it, there is probably no more inherently social community than parents, right, moms in particular, right, love to share their kids' achievements, right? Ask questions and be the source of answers among their peers, right? so we've got an inherently social community that we can leverage.
And as you look at our Facebook community, over 870,000 fans within Facebook. It's more than BabyCenter. It's 5x more than PBS KIDS, right? We've already got that audience. It's just amazing to see the level of engagement within that, right? Engaging with LeapFrog products, asking questions and in Nike, we had a small army of people to man the wall, right? And we've got certainly LeapFrog people that do that as well. But we found this amazing, all of the phenomenas of people, mommy bloggers and other moms who effectively man it for us, right? Go onto the well, act as if their LeapFrog employees and answer questions. Here's the best way to use that LeapFrog product for that app or whatever it might be. People who are so engaged with the LeapFrog brand and passion about it and inspire that little community among other parents. We certainly make an effort on our side too to help support that. I think this is one example, a summer camp that we did last summer, an 8-week program. A summer break for kids who are generally doing nothing. Here's an opportunity to keep them learning, right? A series of activities, printables. No charge just a way to keep kids learning throughout that summer break. All comes together into this complete learning solution, right? All these different pieces of community and insights, product recommendations, child usage, data activities that we're able to pull together in a way that I think, in my mind, certainly no other company can in the same way, right?
Certainly, there's some business objectives and rationale behind it. There's a customer lifetime value that comes out of this. There's an ability to drive additional users through word-of-mouth marketing and so forth, but it starts honestly with a commitment, a genuine commitment to being dedicated and supportive parents. What we've got right now, if you look at our site and all digital experiences to me, is amazing. If you look at what we're to have 6 months from now, 9 months from now, 12 months from now, I'd think you're going to be absolutely thrilled with the digital transformation that we're going to have. We got a complete site redesign going on. A lot of the other components, this digital ecosystem. that we're reworking and creating a new interface for. And actually I think -- and reality as; we talked about the market perspective, we're a toy market. We're in the educational entertainment market. You guys can all try to quantify those markets. The reality is there's no limit on this market, right? You think about what we as parents are willing to spend on our kids. There's no limit, right? You will spend anything you possibly can to help your kids reach their potential if you believe that it's going to help them, right? It's up to us to offer compelling solutions and communicate how those solutions offer value. So that, to me, is really exciting and to me being able to pull these together into a digital experience that helps parents is really a fun to be a part of, tight? J.B., back to you --
Thanks, Brad. [French] And sadly, Chris Balding [ph], who I loved you to all have met is in bed at the moment with a bad dose of the flu. And since I'm the only multilingual member of my staff with the ability to speak both Scottish and English. I was asked to fill in, so I'm going to try and wing it and hopefully, you guys will stick with me. And I'm going to talk about the global opportunities facing LeapFrog as we go forward. As I said earlier on, there are 655 million children in primary schools around the world. There's an explosion and a desire from parents to teach their children English because English is the language of the future for the world in terms of business, and you can see that all over the world and especially in Asia, where English speaking has just recently have over the last few years, truly exploded with the number of schools out there.
Big opportunities for us as a company. A company that's international business has been going very nicely. A company where if you look at supplemental education, interestingly, consumers in Asia are spending significantly more of their household income in opportunities as we go forward to deliver education to their kids.
Business has grown 29% CAGR and mix of the business by 760 basis points. A business with still a lot of opportunities because we are still under index invests as a competition in terms of the part play, the international peers on our business. So international is a very big opportunity for us as a business. And we've been performing very well over the last year within those markets. Our U.K. business was up 59%; Canada, 32%; France, 33% and distributors around the world up, 35%. So we're certainly attacking an opportunity and see lots of opportunities as we go forward.
Let me show you some market highlights. In the U.K., last year, we were the #1 selling toy with LeapPad and the #10 selling toy with our content. We were actually the fastest-growing major toy company in that marketplace last year. One of the hottest companies. Any of you who were across at U.K. for Toy Fair could see the enthusiasm that was happening around our business.
We're the #5 product and brand in Australia. And we also launched in France, for the first time, LeapPad. We -- actually France was the first marketplace that we decided to create a local solution beyond English 4 and we created a light strategy. We did a whole bunch of localization, because it's not just localizing the content. It's about the tablet, it's about of the App Center. We launched the product with a really successful PR campaign. And I'll show you some of the examples. Terrific in-store execution and we became the fastest-growing company in the space and France as well and LeapPad became the #1 for selling product in France, which shows that this educational entertainment opportunities, not just an English-speaking opportunity but as a global opportunity. You can see from here, some of the execution we had across the marketplace in France. And our French team are totally jazzed by the opportunity, and in fact, spent quite some time out in the world and -- trying to find the next Steve Jobs, the next French Steve Jobs in the marketplace and fortunately found him and involved him in a PR campaign through YouTube virals. Can you show the video?
Those crazy French, yes? Somebody came up with this as an idea, they stuck it on YouTube and had over 200,000 views. They also came out with another unique way of advertising as well. They did a whole campaign on broken iPads, right? And they drove home the message very clearly there in the campaign, which is "Hey, it's a lot more expensive to replace an iPad than it is to buy a LeapPad." Big success in the marketplace. In addition, we managed to take the French product and sell to it's a little bit of Canada where they speak French too. And it's also big success in that marketplace as well.
So this is actually important for us because we wanted to create-a-test model with cookie cutter to see how we could take our assets and localize them into other marketplaces and that's going to be an important part as we go forward as a business, because as we look to draw business with an expanded business by one, growing our existing marketplaces, we still have a lot of share opportunity in those English-speaking markets. We have a lower share amongst those markets there than we do into the U.S. We're going to take that French success and we're going to build on in France. We did a light launch version. Over the last few months, we've been spending a lot of time building out our content library and getting into France and working with the other media companies to expand our Apps Store in France as well. And we're sitting down now and we're planning for more global expansion in 2014. We are squeezing all the learning of our French campaign and we're now going to look to develop into other marketplaces and we're going to start to develop plans that with localized products, service to the marketing and then to be frank, focus execute as we go forward into some other marketplaces as we go forward. So you are going to see, over the next few years, a continued expansion around the world of the LeapFrog success story. And that will continue to help drive our overall growth in the business.
With no further ado, I'm going to ask Ray Arthur to come up and talk about the financial results. As you can see, he's the only adult that actually works on our team because he's the only one of us who has a tie.
Raymond L. Arthur
Can I have the clicker?
You want to clicker too?
Raymond L. Arthur
Yes, I want a clicker too. I just wear a tie that's what I do.
Raymond L. Arthur
So when was the last time you guys saw a financial sizzle for a CFO, right? Is that great or what? What a year for LeapFrog and its educational entertainment solutions. We improved across every relevant financial metric. In an incredibly tough market with just tons of competition out there. And as I'm sure you're aware being here at Toy Fair, there are not many companies out there that are going to be reporting results like this. So this is going to be a very easy day for me.
For 2012, net sales increased 28%, up $126 million for a total of $581 million, driven by our multimedia content line primarily our platforms, LeapPad, LeapsterGS, content and accessories, offset a little bit by our Reading business, which didn't handle light product related to our Reading systems and Toys.
On a segment basis, in the U.S., we were up 24%, or $83 million to $425 million in total. In our International segment, sales acceleration was even greater than it was in the U.S., up 38% to $43 million -- up $43 million to $156 million in total.
From an operating earnings perspective, operating income increased at an impressive 170%, up $40 million to $64 million for the year. And operating margin came in at about 11%, up 580 basis points from 5.2% in 2011 driven primarily by sales leveraging continued expense control.
EPS quadrupled. Our cash and equivalents rose 67% to $120 million at year end. And, in fact, when we did our earnings call on February 6, we had $192 million in cash on our balance sheet, and I think if you add up every single liability we have, it's about $98 million, so a pretty good position when you still have $180 million in receivables as well. More importantly, we self-funded our operations during the year, and we didn't access our asset base credit line at any time during 2012, so I think it's safe to say in summary, a really stellar year for LeapFrog.
Our business highlights supporting our 2012 performance were many, and a few of them are listed here. And I'm not going to go into each of those in detail, but I would like to highlight a few. First, our share of U.S. preschool electronic learnings category. We ended at over 60%. That is a fairly commanding share of that marketplace, which is growing quickly. And we believe that we're well-positioned to continue growing in that marketplace as we did in 2012, in 2013 and moving forward.
In addition, Brad mentioned we've now got 13 million connected parents that we can start building relationships with and we believe this is huge asset going forward that we can leverage in the future. And the last item I'd like to point out here is that we received over -- or more than 80 industry and parenting awards and inclusions on Top Toy lists and that is really a testimony to the quality of the products that we provide. We really do help kids reach their potential.
While 2012 was a great year, we believe our prospects going forward are even greater. We're a business in transition today. We're well along our transformation from an educational toy company to an educational entertainment company, holding up new and exciting markets and distribution channels for us to pursue. Our market-leading content was the #1 toy in the USA and our library is growing at an exponential rate. All curated by our team of learning experts. We've got a far greater focus on content. We've opened our platform to third parties for the first time this year, now we deliver content for 30
strategic partners with names such as Disney, Nickelodeon and Scholastic, to name a few. And we launched our platforms in new markets as indicated earlier, and did very well, specifically, we introduced LeapPad in France and French-speaking Canada. Yet importantly, still, 95% of our business is done in the English-speaking language, which just is a testimony again, to the international opportunity that we have.
We significantly improved our business execution and we continue with the expense discipline. Our operating expenses were $181 million for 2012 or 31% of sales, which is the lowest percentage of sales this company has experienced since it went public in 2002. In addition, J.B. has added some significant new leadership team members to LeapFrog. Myself, I joined in July; Greg came over from Toys "R" Us in June; and Brad came on the team in July. And excepting myself, these are incredibly talented individuals who have skills that they have developed in many different environments, both very large corporate environments. Toys, very big business; Nike, very big business, but also in smaller environments. Brad in development one of the Nike business, Greg with toysrus.com and with the combination of those experiences, both big company and the entrepreneurial skills that they take in the smaller environments are really the skill set that we need to improve our strategic execution at LeapFrog and to bring our company to the next level, and I think this new management team, in conjunction with existing members, is going to do just that.
Not a lot to say about sales besides they're up quite a bit. Sales were driven by LeapPad, LeapsterGS, content, accessories. Again, it was offset a little bit by end of life platforms in our Reading business, as well as a just tough environment learning for us, I think, with the rest of the toy industry in general. But you can see the CAGR there is pretty healthy. Not many companies are out there doing that today.
On a U.S. segment basis, we grew $83 million from '11 to '12, up 24.3% with a 3-year CAGR of 11%. In international, you can see we're actually accelerating at a faster pace, with a CAGR of 29%, we're up $43 million or 38%. Notable in here is that for international in each of the comparative years, we're actually accelerating sales at a faster growth rate than we are in the U.S.
And from an operating expense trend, operating expenses actually went up from 2011 to 2012 by about $18 million or 11%. But as a percentage of sales, again, the lowest percentage they've been since this company went public in 2002, and you can see there's a 900-basis point improvement from 2009 through 2012.
Operating income, a really great performance for the year at $40 million, almost 170%, a healthy increase of about $40 million in operating earnings. And as to our operating earning margins trend, we've increased in each of the last 3 years, we settled at 11% for 2012. That is the margin percentage that we projected we're going to carry forward in our 2013 planning.
Now we get to the interesting part and this is where I want Jody to develop a game to teach tax accounting on a LeapPad, so that I can explain this better because last time, at our earnings call, I tried to explain taxes, and I failed miserably. And what I want to say here is when you look at our net income trend, it looks great and it is great, but it also has a lot of unusual tax items in it. For instance, in the 2012 number, the $86 million, there's $24 million of kind of 1, I can't all it one-time, but it's an unusual tax benefit from writing a deferred tax asset that was written off back on our balance sheet. I'll talk about it a little later as we go forward and try to explain how I think we need to look at it.
From an EPS perspective, EPS has increased substantially, but again, includes some unusual tax items in here. And, in fact, the way we think you should be looking at our business is basically to take out all those tax impacts that are in our historical financial reporting and to put in a constant effective tax rate. And again, I will explain more of that as we go forward.
We're going to start talking about EBITDA as we go forward and it's really adjusted EBITDA in our case. It's earnings before interest, taxes, depreciation, amortization. It also excludes stock compensation as many high-tech companies do and other income and expense. As you can see from 2011 to 2012, it was a strong year for EBITDA generation, increase in $44 million year-on-year.
And before I go back to taxes, just a little bit on the balance sheet. The cash obviously has increased significantly over the year. We ended with $120 million at year end. And as I mentioned earlier, when we did our earnings release, we were up to $192 million in cash. We did not use our credit line at all during 2012 and do not anticipate using it in 2013. So we're in a very, very strong balance sheet position.
Okay. Now we're learning taxes for me, dummies. What we're trying to do here and the purpose of this slide is to put in front of you what we believe our historical EPS is on a normalized basis. And the way we have done that is we've gone back to our historical reporting and basically backed out any provision for taxes. And then come back to a pretax number, applied an effective tax rate of 37.5%, come back to a revised or an adjusted net income and divided that by fully diluted shares outstanding.
Now what you see is a great increase year-on-year. We go from a loss in 2009 to $0.06, $0,18 and $0.56. A fantastic I think, performance but different than what has been reported previously. And let me tell you the reason I'm suggesting this and I don't know if you are all very familiar to history but LeapFrog, in 2006, got in a position where it had 3 years of accumulated operating losses.
Now, I'm going to get really technical in accounting here, so if anybody gets questions, just raise your hand and I'd love to answer them. Because we're in a position where we were in 3 years accumulated operating losses, the company was required to take an asset it have on its balance sheet, which was a deferred tax asset for accumulated net operating losses and write it off. The answer was to take a big tax expense, $60 million or $70 million in that year and the offset was a reserve that basically made the net valuation of the deferred tax asset related to net operating losses 0, all right? So we basically we wrote off a huge asset at that point in time. From 2007 through 2012, what's was in the tax line for basically U.S. and state taxes was kind of 0. And the way it works is if we had income, we recorded the tax expense, but then what we did was we've took part of that net operating loss that we previously written off, offset that tax expense in our P&L and you see 0 impact, which would create an higher EPS number, of course, right, because there's no taxes.
Okay. Now, the glitch now comes when you get to 2012 because we're now in a situation where LeapFrog has had 3 years of consecutive operating income. Because of that, the technical accounting guidance says, "Gee, you wrote off all that stuff a years ago? Well, maybe you should put that back on the books now." Because we think you're now doing well enough and you can project future income that you can realize that benefit because we think you'll actually be able to use it.
We did that evaluation during 2012, and we determined that we could bring back $20 million of about $100 million of deferred tax asset and put it back on the balance sheet. The result of that is in 2013, when we record operating income, you're going to see a tax expense of approximately 37.5%. It's going to stay in our income statement. The offsetting entry is to record a tax payable, tax expense and then tax payable or liability on our balance sheet. That will be offset -- that tax liability, by the deferred tax asset that we recorded at the end of 2012. We won't pay any cash taxes, nor do we expect to pay any cash taxes at least for the next 2 years.
So that leads to the question as you still got this big deferred tax asset related to the accumulated net operating losses that you don't have on your books, what goes on with that? Well, the technical accounting guidance requires us to wait, and we would wait and as time passes and future prospects become more defined, we will go back and evaluate those prospects against the technical accounting guidance and determine whether the reserve against that $70 million of sales remaining "unrecognized", I put that in quotes, net operating that loss isn't in our balance sheet per se, will be put but back on. If conditions permit, that means that sometime late in 2013, there could and I underline could, be it a situation where we record a $70 million tax benefit to put those NOLs back on our books. In other words, to release the reserve against them. It's about $1 per share impact. So if you try to model this business without normalizing taxes, it's going to look bizarre. You're going to go from $1.25 last year, down to a number that's much lower for 2013. And as you go out and take a stretch of years, you're just going to be going up and down and up and down. For those reasons, we believe that modeling the business, it's appropriate to normalized the tax rates.
And just to show you how we did this and I don't want to get into a math lesson here, but we are required by the SEC when we put our non-GAAP figures to reconcile those to GAAP figures. All we've done here is basically we've gone back and taken our actual net GAAP reported net income and we backed out whatever provision was listed in our external financial reporting, come up with a revised income before taxes, applied the constant effective tax rate, come up with normalized GAAP income, divided it by 5 diluted shares outstanding and come up with a revised EPS. And you can see, if you look, this is as reported EPS. This is the pro forma. In year-over-year, it's not such a big difference as you get out to 2011, a very significant difference, and a very large difference in 2012.
So again, I don't think I did a very good job of explaining this on our earnings call because when I looked at the reports that come out, they're kind of well all over the place. There are some actually at the $0.56 and there are some that at the $1.25. So I'd suggest, if you don't have a good grasp of this or if you need any of your questions answered to see me or see John and we can hopefully explain it. You can point to me, hopefully it's -- hopefully explain a bit. That's why I say we need an educational game on taxes to help me through this.
Okay, turning to guidance. Now we're very excited about our prospects and our guidance. There are few companies at Toy Fair that are going to go out and report, they're going to grow at high-single digit growth rates, especially in this uncertain and difficult economic environment we're in, but we will.
We expect to increase sales at high single digit percentage growth rate versus 2012 for 2013. And in a year where we project to make significant investment in systems, in community and in future products, we expect our operating margins to remain consistent as a percentage of net sales of about 11%.
So we're pretty excited about that. And on a longer term basis, we believe our prospects are bright despite, again, the uncertain industry and economic outlook and the competition that's out there. We expect annual sales growth in the longer-term to be mid-to high single digit. We expect double-digit operating margins and hopefully, they'll grow and meaningful earnings growth and cash flow generation.
So with that, that it back over to John.
Thank you, Ray. Don't ask me a question on tax. I have enough problems with French. And Jody took you through this and one of the things that I just love about working with Jody is her desire to constantly be up to date with what really is out there in terms of the best methods to teach children.
And before I summarize, I want to come to this because there's something incredibly special with this. In September 2010, one of the teaching schools out there found that to help children understand what either side of this is the same, they actually found a simple way of actually changing the way it's taught. They basically said if you teach an equation 6 plus 2 equals 8, but then you turn it on its head and you also teach each equal 8 equal 6 plus 2, tip around the concept of equal saying faster.
We're the only company in the world that has that on our products today. That's the LeapFrog difference, right? We're not the weathering the co-curricular-like skills of 10 years old. We are right at the forefront of changing children's lives and that's one of the things that make us special as a company and something that I'm incredibly proud of. Our learning members are out there all the time, reading every single thing out there on improving ways of helping develop children, and we're the first company in the world that puts it in our product. That's why we get the ratings, that's why we get the sales and that's why our brand is so special.
So anyway, let me summarize. Thank you for being here today. I really appreciate it. Hopefully, you get a sense of just the incredible passion we have for children. The incredible passion we have for changing children's lives. The passion we have for our children and for many of us, it just makes an incredible working environment. As I look at our company and I look at the difference, as I said earlier, this is our business. This is what we do every day. This is what I do 24/7, right? It's something that we all have just an incredible excitement and passion for. We're evangelists, we're vellets, right? If you can hopefully get that sense from us and everything we do, consistently, not just standing here in front of a presentation, every interview that we give on TV, every interview we give outside, this isn't just something we talk, right? We walk the talk, we live the talk every day. We have 18 years of expense. No company in this space has the experience that we have as a company, has the continual track record of success. And we've got amazing assets and many of these assets are really difficult to copy, right? Anyone who thinks that somebody can come into our space and crush us really quickly, never say never, but I think it's highly unlikely it's going to happen, right? So when somebody tells you that all these tablets are going to crush us, you know what, tell them, "You know what, these guys had pretty big competition last year and they've managed to get through it pretty well." And when it really concerns doing kid's tablet rather than adult tablets, stop thinking as a mom, not as a dad and realize its content that changes children's lives, not after [ph], right? It's the content that changes the children's lives.
And I think hopefully you see it today. One of the things I've tried to do here is try and grow and develop some of our employees that we have in the company. Incredible talent like Jody, who, just to me, epitomizes everything that is great about LeapFrog and also go out there and find people who have played successfully in far bigger games than this. I want to share myself with people who played at multibillion companies and being fast movers and shakers in those businesses but at the same time, have been at the sharp end of a fast-moving changing business. They're entrepreneurs. They're intrapreneurs. They've lived with those issues, are going through lots of change, lots of growth sometimes decline, but this is not just corporate bureaucrats who played at dead companies, they're successful, successful professionals and executives. And I feel incredibly lucky to have these guys on my team and as I say when I come to work in the morning and I see the people we have, I realize just what a powerful asset they are for our future.
As you look to that future, this transition from educational toy to educational entertainment is not semantics. It is a really, really big idea and a big journey. It transforms this business. It takes this business to a totally different level. And so when you look at the results that we're achieving, it is not just because we've lifted our game. It is not just because we've got these great talents in our business or we brought more talent into our business. It's because we are focusing the marketplace that is growing. I've done many turnarounds, and I can tell you they're a lot easier when the water is rising, but it's not just rising in the U.S. It's rising around the world and there's lots of opportunity to take what we've got and expand it around the world. So what are the opportunities? You sit back and you're looking at LeapFrog and you say to yourself, "Wow, look at this band of zealots. Look at these evangelists go next." Well, first of all, again, it's a growing marketplace. There's lots of opportunities for us to attack, right? Unlike that slow somewhat declining toy business that most of our competitors play in today. And I'm not trying to knock it. But I think it's really important to realize that you know what, kids are changing. Kids have different interests, right? Kids are tech savvy, right? That world is changing. And as you've seen in the past, a lot of traditional toy companies find that really difficult to because it's very different than their existing business models.
And we can take our existing multimedia learning platforms, tablets and our gaming systems and we can expand it. There's a lot of talk about, "Oh my God, are these guys close to saturation?" We're not even close. We're not -- it's incredible to even think of that. There are 4 million new kids in America every single year. If you look at kids from 3 through 8, right, do the math. You can see how many million kids are there, and by the way, they don't have one tablet for that lifetime. So when you go do your math, you have to understand that they have more than one tablet over those 5 to 8, 4 years, 5 years. They're kids, right? You got to build that into your model. We're not even close to saturation at our marketplace, even just in the U.S. Forget what's happening globally around the world, right? No. That saturation is not going even going to come in to this business, I believe, in my lifetime. Not close, okay?
We'll go forward and we'll look at new platforms. We can take what we've done into other platforms, right? We've have projects, in-house right now to take what we do onto our vehicles because there are other ways that kids get entertained and there's other types of breakdown [ph] for us as a business, and we are excited about some of those new platforms we can work on.
We can expand internationally, right? It's a global marketplace with a lot of explosion. Not just in Europe, not just in the States. Asia, especially. Look at the number of new schools teaching English today in China. Look at the number of schools exists today in Korea. Look at the amount of money people in Asia spend on supplemental education, right? Because they understand that English is the language of the future and they want their kids to learn it, and you're looking for every opportunity they can to help their kids learn English. That's an opportunity in the marketplace that we've not really touch yet. English as a second language and we believe, again, looking into the future, not next week but looking into the future, teaching English as a second language using educational entertainment could be a very lucrative opportunity for this business as we go forward.
We can deliver a lot of solutions via other platforms. We play on iTunes at the moment. But we, like most people on iTunes, can't make much money doing it, right? If anybody knows of lots of competitors that are making loads of money on iTunes right now other than Apple, tell me about them. I've met with 8 different studios over the last 4, 5 months whose investors are trying to offload them because that really exciting opportunity isn't coming out lucrative, right? Either you've got to make these really frothy apps that you don't put a lot of money into and you sell them for nothing or very little because to be frank, not many parents of 3 to 6 year olds want advertising in their apps that they put in front of kids, right? And many of them certainly don't want any type of free model with buy-in later on because they don't want to see the credit card filled with bills that their kids' did, right? Those models aren't working that well for 3 to 5 year olds, right? Okay.
We have content on there. We see the numbers. We are a pretty good brand on that place and I can tell you right now, it is not clearly or nearly as profitable as the platform we're on at the moment. But if someone else comes up with a model that works, you know what, we'll be pretty fast -- or there's weaker up with a model that works, we will find a way to move on to those platforms.
And if you think iTunes is tough, you should see Android. Go talk to some of the stewards you talked to and ask what is this much money they're making on Android at the moment, right? It's a fallacy to think that there's loads of people out there making money and LeapFrog is just stupid, right? We are not stupid in that front at all.
At the same time, there are millions of platforms out there that we see an opportunity at some time to take what we do and deliver on to it. And we're working on it right now and we have some ideas on how to do that, right? But -- and we're looking all the time, and we're talking all the time to companies about what's happening in that marketplace. So whenever we interview someone for a job, right, or you're checking the reference, okay? And you had a you to chit-chat, chit-chat, chit-chat with the reference, and you're just picking the right time to pop the most important question of all and you have got him where it kind of laid-back and then you say, "Hey, would you hire that person, again?" And you can always hear it, there's that millisecond of a pause. And you know the answer before they say one thing. The same thing goes if you go talk to studios and they go chit-chat, chit-chat, chit-chat. You and iTunes chit-chat, chit-chat, chit-chat. Are you making any money? Well, it's about the tool. It's about the tool. It's really about the too. When someone talk to me it's about the tail, it's like "Come on, do you think I was born yesterday, right? I'm Scottish, I'm not stupid. Right?" So I promise you, we are looking at other platforms and we believe our business will perform on other platforms. We, at the moment, unfortunately, like most other people out there, just haven't found a way to make significant money on it and get a return on our asset. But I promise you that is going to happen at some time, and we're going to be in there right at the front, and we're going to be taking this brand because our brand fits those consumers beautifully. In fact, I will put forward an argument that parents that were on an iPad are probably more likely to buy a LeapPad for their kid because they want their iPad for them and they don't want it broken, right? So don't always consider the other tablets out there are just competitors. They're actually facilitators for what we want to do as well, So lots of opportunity for what we do going forward
But it's not just other platforms, it's really the content. It's the content that changes children's lives, and there's lots of other forms of content that we can take our recipe and apply to, right? Lots of other form. We can expand. We've just done a big deal with Lionsgate, right? We're actually bringing development of the DVDs back in-house and Lionsgate is going to distribute it through the regular channels and we're going to distribute it through our platforms. We have people who know how to make this. For those of you who want to come to our office, we have recording studios in our office, right? We have the talent in our house right now to do some of these things and do them really well. We've done a 4 DVD deal with Lionsgate. It's a radical deal on a marketplace. We're going to develop it. They're going to distribute it. We have experience in these things. The fact that the company kind of forgot that we had it, and we weren't really focused on it is another story. We know we have it today and we're going to take advantage of it. We're going to continue to develop other forms of content. There's lots of other forms of content that are today are compelling but engaging for kids where we think we can add this magic of education and we see content, which just happens to be our most profitable part of the business and we see lots of expansion on that going forward. Both in terms of us developing it, but of course us, delivering it, right? And Brad said earlier, moms are pretty busy. They don't have the time to go shop around and try to find something they can download. They want a trusted partner. They want a company like LeapFrog and with the community around that they can learn from and share with, which I think is a massive opportunity that we have unlike any other company in our space to drive more content and content solutions as we go forward and become incredibly pure.
One of the major studios told us recently they're actually selling more content on our platform than they're selling through some of the big other distributors in the marketplace, right? Go talk to any of our partners, I hear that Mattel -- no, sorry I apologize, that Hasbro actually has a LeapPad on the Toy Fair this year, right? Because of the success they're having delivering content to our consumer base. If you're a content developer in children, where are you going to be able to go and find that many kids through a simple environment out there? We have millions of families connected into our systems that offer opportunity to deliver other people's content and to be frank, in the future, deliver other services. Right? There's are some big ideas in there as you dig through it.
Parents, kids, caregivers, the ability to understand what the child is learning. The ability to celebrate those magical moments, where the child reads for the first time. When a child does a piece of animated content that they've developed on a LeapPad like they can do today and then immediately send to all their friends in Facebook, right? That's the richness of what we do. I wanted to go find someone that fitted our culture, right, that really had a passion for creating out their community. I think there's a massive community opportunity. I think BabyCenter does an incredible job and being there for parents who are having a baby.
But there's no one out there who is there for the next important step for parents in helping them guide them through the educational of their children, right? I dream of us creating that opportunity. I dream of the people coming to LeapFrog.com to find out what to do. To find out what on a rainy day, what could keep the kids amused and at the same time have them educated. We're going on a long car ride, right? My four year old just wet themself, how do I deal with that, right? I think we can aggregate all of the other company. I think that bringing Brad in here and his experience, with his focus and our investment, we can take community to another level and become a trusted partner with parents, I think that an amazing asset that very few companies comes not even close to.
Of course, we're going to run the business like a Scottish business, right? One of the amazing things about our company is for the size, age and for the success we've achieved is we only get one Wall Street Journal. Ray gets it first, I get it second. I hate when he has his lunch, reading it, I've got to get the crumbs off. But seriously, we only get one Wall Street Journal. I am truly Scottish in this one, right? Truly. I had rare [ph] with a hotel the other night there in my room and asked them. I demanded the room that they comp me for that night in the lady had the audacity to say, to me, "What are you worried about? The company's paying for it, right" It's just in my dreams in all sincerity. And we run our business really tight. because nothing quite like having somebody come and say. "I need a new computer." And say, "I'd like a Wall Street Journal of my own. Don't underestimate the power of frugality, right? We are not scared to invest in the business. We have a clear ROI, but we are not famous for wasting money as a company okay?
We're sitting on a very large war chest. We're sitting today, and now as I say, we've expanded our team. Some of us can spend more time out there looking at other opportunities to accelerate our growth. This has been a really exciting Toy Fair for us because we've had a whole variety of companies and projects there and a lot of different forms of entertainment to talk about where we could walk together in terms of partnerships, where we could work together in terms of licenses or where we even become investors and buy those companies, right?
There's nothing quite like having cash, right? And we've got lots of it, and we're going to continue to build it, and we're going to continue to use it in the best ways for our business going forward, right? We're going to look at every opportunity to build our business as we go forward whether its acquisitions, whether it's potential share buyback, we're going to look at every type of opportunities to drive our business. And we're going to make those decisions like it's our company because it's our company. We live this business as it's our company every single day, and we're incredibly excited about it. We're excited about the future. As I said early on, this has been the best decision of my life to come and work with great people to do really cool stuff. I never dreamed that we would be where we are 2 years into this business. I think it's a testament to the success and talent that we have and testament to our decision to move into a different marketplace that's growing rather than the really tough business of the toy business. And I think my view is you aren’t seen nothing yet. There's lots of opportunities for us to go forward and we'll try our best. We'll make some mistakes as we go forward but we'll learn from them, but I think we are a really good bet as team, and I bet with my money and I'm going to continue to do that because I believe in this business and I believe in the mission it's in. So we're going to finish now. We're going to take a 5-minute break, if you want to go to the bathroom. Ray, Karen and I will be outside to answer questions. If you want tax questions answered, don't look at me, look at Ray. But beyond that, we'll answer any questions you have. And we're going to start in about 5 minutes to 10 minutes, and we're going to move off the web now and we're going to bring a team in to give you a sense of what about some of the new products we're going to launch in 2013.
We really appreciate your support. Really appreciate your enthusiasm for our business, and we look forward to keeping you updated on our journey. Thank you.
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