LeapFrog saw its sales improve in the latest quarter, but investors are still looking for something more.
The Emeryville, Calif., toymaker topped Wall Street's expectations Thursday by posting a narrower-than-expected loss, but shares fell because its outlook for the rest of the year is a bit lighter than some had hoped.
In recent years, LeapFrog has seen success with its popular LeapPad2 tablet for young children. But other products have lagged in innovation such as its Tag reading system.
The company tried to change that this week by introducing the LeapReader, which goes beyond Tag, by not only helping teach children to read, but also to write.
"It is a product [LeapReader] that will keep their reading franchise going. It is a better product than Tag—it works on writing as well as reading," said Sean McGowan, a toy industry analyst at Needham & Co.
Tag had come to market in 2008, and created a splash at the time, but without major innovation, the product's sales were sluggish.
The LeapReader is targeted to kids between 4 years old and 8 years old, and will be in the stores in July. The price is set at $49.99, the same as for Tag's reading system, which the company will stop producing by the end of summer.
"This product [LeapReader] brings all of those together: reading with interactive books, learning to write in books and then listening to the vocabulary," said Craig Hendrickson, senior vice president of product marketing for LeapFrog.
Once consumers buy a LeapReader, which consists of a pen with an infrared camera that can read the text or let kids play games and puzzles, they later can buy additional books to use with it. This includes special workbooks for kids to practice writing letters and numbers, guiding them with a voice feedback. The library for it counts more than 150 books, workbooks and audio books.
In partnership with Pixar, LeapReader also will have its first 3-D book with characters from "Monsters University"— a highly anticipated movie that is coming out in June and is a prequel to "Monsters Inc." Kids will see images in the book in three dimensions when they were special glasses.
(Read More: Etch A Sketch's Incredible Toy Legacy — And Burden)
The device can store as many as 40 books or 175 songs and has a USB rechargeable battery is good for five hours of play.
McGowan said that LeapReader is a good niche product but if parents have to choose between LeapPad and LeapReader they will go with LeapPad as it has a video component. The more important question for the company's performance is the innovation they will introduce in the next version of LeapPad. The company launched LeapPad2 in 2012—a year after the first introduction. The new version will have to eliminate the "conspicuous absence" of Wi-—Fi in the tablet, said McGowan.
A big chunk of LeapFrog's revenue comes from LeapPad and the software for it, said Gerrick Johnson, an analyst at BMO Capital.
"This tablet market is very popular—tablets for children; children want to be on tablets, so that helps them [LeapFrog]," Johnson said.
"I think they have the best-selling product out there in the marketplace (for children)," he said.
(Read More: Toys R Us Needs a Business Model Makeover: Roth)
LeapFrog expects its earnings for the year, which largely come in the fiscal third and fourth quarters, to be in the range of 57 cents to 60 cents a share for the year, with sales rising at a high single-digit percentage rate compared with a year ago. Analysts surveyed by Thomson Reuters were predicting the company would earn 61 cents a share on revenue of $624.8 million.
In an interview ahead of the earnings report, McGowan said the company has "proven they are a survivor and they've proven they can generate cash flow." He added, the company has to push harder into other countries and languages to maintain the pace of its growth.