LeapFrog banking on new devices to bounce back

June 18, 2012: 8:30 PM ET

With a new tablet for the pre-school set, LeapFrog is aiming to cement a long-awaited turnaround.

leapster_gs

LeapFrog's new LeapsterGS.

FORTUNE -- "You know the difference between this and an iPad," asks John Barbour, the convivial CEO of LeapFrog Enterprises. Barbour, a burly man of 53 with a thick Scottish accent, is holding a LeapPad, the educational company's made-for-kids tablet computer, which is playing the background tune to one of its learning games. Before I get a chance to say "what," Barbour flings the LeapPad at me as if it were a Frisbee.

I duck reflexively as the LeapPad misses the top of my head by just a few inches and crashes against the wall behind me, sending Barbour into a full-throated, good-natured guffaw. I turn to look at the LeapPad, which is intact and still playing the children's jingle, and notice a handful of gashes on the wall. Clearly Barbour has played this trick before. "That may not seem to be a big point," Barbour says after his "ha-ha-ha-ha-ha-ha" dies down. "That is a big point. You want me to try that with an iPad?"

Stunt aside, with the LeapPad, which went on sale last summer, Barbour appears to be delivering on a challenge that stumped several of his predecessors: turning around the perennially struggling LeapFrog (LF). Barbour, an industry veteran who held senior posts at Toys R Us, Hasbro (HAS) and RealNetworks (RNWK), came out of retirement last year to lead LeapFrog. He says the company is beginning to turn a corner, in part, because it has gone back to its roots creating games that are both educational and entertaining and because it has become maniacally focused on details, like how to make a tablet sturdy enough for the 4- to 8-year-old set.

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Following a year of strong LeapPad sales, LeapFrog on Tuesday is unveiling a new version of the $100 tablet that is faster and has more storage. The new LeapPad has two cameras instead of one and far more games than the earlier version. LeapFrog on Tuesday is also introducing a slicker, more capable and more streamlined version of its Leapster Explorer portable gaming device dubbed Leapster GS Explorer.

The new products appear to be well-timed. For the first time in years, Wall Street seems to believe that LeapFrog is on the right track. With revenue and profit margins up, LeapFrog shares are up nearly fourfold from last summer's lows. It's the kind of reward that LeapFrog's long-suffering investors haven't seen in years. The Emeryville, Calif.-based company became an overnight sensation when its original LeapPad -- which was not a tablet but rather a plastic console that turned paper books into interactive talking titles -- became the best-selling educational toy of all time after it was introduced in 1999. LeapFrog quickly became a public company and went on to sell more than 30 million LeapPads.

But after the LeapPad ran its course, LeapFrog paid dearly for its hyper growth. It was forced to downsize and change tack time and again, as it cycled through a handful of CEOs. Many, though not all, of its products were commercial and critical hits, earning LeapFrog the industry's coveted "educational toy of the year" award year after year. But a series manufacturing snafus, inventory problems, and failed efforts to appeal to older kids prevented the company from translating its hits into financial success. Meanwhile rivals like VTech and Fisher-Price put more pressure on LeapFrog, and the company faced additional competition from the likes of Nintendo (NTDOF) and Sony (SNE).

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Analysts now credit Barbour with restoring LeapFrog to health. They say he repaired frayed relationships with retailers, cut expenses further and got revenue on an upward slope with a solid product lineup. They're almost ready to call Barbour's turnaround plan a victory. "It's not the 9th inning, but it is pretty late in the game," says Sean McGowan, an analyst at Needham & Co. "They really have checked off a lot important things."

LeapFrog won't say how many of its LeapPads it has sold, but McGowan estimates that parents have snagged about 1.1 million of the devices. What's more, they've also stocked up on game cartridges, which cost $25 each, and other software titles and movies at a range of lower price points.

Barbour says LeapFrog suffered a long slump because it failed to understand the business it was in. "I think it lost direction," he says. "It became focused more on hardware than it was on content. We are educational entertainment business. We're not a toy company."

To be sure, hardware devices like the new LeapPad and LeapsterGS, which will be available in August, are hugely important and getting them right is critical. But Barbour talks about the devices a bit like Jeff Bezos talks about the Amazon's (AMZN) Kindle Fire -- as vehicle to deliver media. "We've sold over 100 million books," says Barbour. "Our focus on content today, it is far greater than it was 12 months ago."

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The new LeapPad is launching with far more titles than the earlier model, including content licensed from third parties like Nickelodeon. And the redesigned Leapster looks less like a toy for the kindergarten set and more like a cool hand-held gaming device.

To be sure, there is still plenty that could trip up Barbour. For starters, many kids like their LeapPads, but given the choice, would rather play games on their parents' iPads, Kindles Fire or iPods Touch. While most parents may not be willing to buy those pricey devices for their children, many may well give them older models as they upgrade to newer ones. And analysts worry that the new LeapPad, much like the original one, could eventually run its course. The question is whether LeapFrog has established a software and content business that is strong enough to keep kids asking for LeapPads and Leapsters for years to come.

"What's unknown is do they have a platform that can last beyond the typical cycle," says McGowan.

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About This Author
Miguel Helft
Miguel Helft
Senior Writer, Fortune

Miguel Helft is a San Francisco-based Senior Writer at FORTUNE, where he covers Silicon Valley. He joined FORTUNE in August 2011 following a 5-year stint as a reporter at The New York Times covering companies like Apple, Facebook and Google. His knowledge of Silicon Valley and the tech world runs deep. He worked as a software engineer at Sun Microsystems in the late-1980s, and for the past 15 years, he has chronicled major industry events -- from the Microsoft antitrust trial to the dot-com boom and bust - at publications like the Industry Standard, the San Jose Mercury News and the Los Angeles Times. Born and raised in Argentina, Helft emigrated to the U.S. to attend Stanford University, where he earned a BA in Philosophy and a Master's in Computer Science.


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