News Release

Rosetta Stone Inc. Reports First Quarter 2015 Results

Enterprise & Education Segment Revenue Increases 30% Year-over-Year, Benefitting from Acquisitions; Narrows Net Loss During Seasonally Slowest, Smallest Quarter of Year

ARLINGTON, Va.--(BUSINESS WIRE)--May 6, 2015-- Rosetta Stone Inc. (NYSE: RST), a world leader in technology-based learning solutions, today announced financial results for the first quarter 2015.

First Quarter 2015 Overview

  • Year-over-year, total revenues decreased 4% to $58.4 million; total bookings (a non-GAAP financial measure as defined on page 3) decreased 18% to $50.5 million reflecting lower promotional pricing and advertising spending in the Consumer segment and the effects of a strengthening dollar across both the Enterprise & Education and Consumer segments
  • Implemented a 15% reduction in non-Enterprise & Education headcount, which resulted in a restructuring charge of $6.3 million in the quarter, primarily related to severance. The Company expects to reduce annualized costs by approximately $50 million in part through this restructuring plan
  • Net loss of $19.9 million, or $0.95 per diluted share; net loss included other EBITDA adjustments and impairments, including restructuring charges and other related costs totaling $6.7 million (pre-tax)
  • Adjusted EBITDA (a non-GAAP financial measure as defined on page 3) loss of $14.5 million
  • Ended the quarter with $45.9 million in cash with no debt outstanding

John Hass, Interim President and Chief Executive Officer, said: “In the month since my appointment at the beginning of the second quarter, I have been pleased to find a passionate, focused team that is working hard to create and deliver the language and literacy products that help change our learners’ lives. Each day has been a validation of the opportunity I saw even before I joined the Board of Rosetta Stone—millions of people in the U.S. and around the world need to learn to speak and read English and other world languages, and we have the most trusted brand in the space and a suite of innovative products to help them.”

“To realize this opportunity we have three priorities moving forward,” Hass continued. “We will optimize the profitability of our Consumer business, we will deliver the right products in the right way to efficiently grow our K-12 and Corporate businesses, and we will simplify and increase the efficiency of our business overall. There is much work to be done and while the benefits of this effort will not all be realized overnight, we are working hard to drive the necessary changes and deliver on its promise as quickly as possible.”

First Quarter 2015 Review

Revenue: Total consolidated revenue in the first quarter 2015 decreased 4% to $58.4 million from $60.8 million in the year-ago period. Enterprise & Education (“E&E”) segment revenue grew 30% in the first quarter compared with a year ago, primarily due to the impact of lower revenue in the first quarter 2014 resulting from purchase accounting impacts on acquired deferred revenue from Lexia and Tell Me More; we expect the year-over-year revenues to become more comparable as we lap the purchase accounting impact which will result in lower revenue growth rates than what we experienced in the first quarter 2015. Consumer segment revenue decreased 18%, reflecting lower promotional pricing and the Company’s strategic decision to maximize the profitability, rather than the size of this segment.

     
US$ thousands, except for percentages Three Months Ended March 31,
2015   2014 % change
Revenue from:
Enterprise & Education 23,168 17,882 30

 %

Consumer 35,274 42,883 (18 )%
Total 58,442 60,765 (4 )%
 

Bookings: Total consolidated bookings in the first quarter 2015 decreased 18% to $50.5 million from $61.2 million in the year-ago period. E&E segment bookings decreased 18% to $15.0 million from $18.3 million in the year-ago period. On a constant currency basis, E&E segment bookings were down $2.0 million or 7%. Consumer segment bookings decreased 17% to $35.5 million from $42.9 million, reflecting lower promotional pricing and reduced advertising spending.

     
US$ thousands, except for percentages Three Months Ended March 31,
2015   2014 % change
Bookings from:
Enterprise & Education 14,954 18,282 (18 )%
Consumer 35,542 42,958 (17 )%

Total

50,496 61,240 (18 )%
 

Net Loss: Net loss in the first quarter 2015 was $19.9 million, or $0.95 per diluted share. This performance is consistent with the historically slow seasonal performance in the first quarter. Net loss included other EBITDA adjustments and impairments, including restructuring charges and other related costs totaling $6.7 million (pre-tax). In the year-ago period, net loss was $20.2 million, which included $10.2 million (pre-tax) in other EBITDA adjustments and impairments. Those year-ago charges included the acquisition and integration of Tell Me More, charges to exit Japan along with excess space in our corporate headquarters, as well as an impairment charge for Rest of World Consumer goodwill.

Adjusted EBITDA: Adjusted EBITDA in the first quarter 2015 was a loss of $14.5 million, compared to a loss of $7.0 million in the year-ago period. On a constant currency basis, Adjusted EBITDA would have been a loss of $13.2 million, down $6.2 million compared to last year. The increased Adjusted EBITDA loss in the first quarter 2015 was primarily due to the decline in bookings, which was partially offset by a decline in operating expenses.

Balance Sheet and Cash Flow: Cash at the end of the first quarter 2015 was $45.9 million, compared with $64.7 million at December 31, 2014. Deferred revenue totaled $120.2 million, a decrease of $8.0 million compared to $128.2 million at December 31, 2014. Approximately 74% of the total deferred revenue balance was short-term and will be recognized as revenue over the next 12 months. Free cash flow (a non-GAAP financial measure as defined on page 3) in the first quarter 2015 was negative $15.7 million, compared with negative $15.0 million in the year-ago period. The decrease in free cash flow reflects a $0.3 million improvement in net cash used in operating activities, offset by a $1.0 million increase in capital expenditures. The Company’s cash flow is historically seasonal, in which the Company typically expends cash during the first half of the year and generates cash in the second half of the year.

Guidance

The Company has decided to no longer communicate quarterly guidance. For the full year, we are modifying the prior guidance for E&E bookings of $122 million to $130 million, as we are now tracking to the low end of this range, in part due to the currency effect as well as first quarter performance. We are also now tracking to the mid-point of our prior guidance for Adjusted EBITDA and capital expenditures, which were full year Adjusted EBITDA of approximately $10 million and capital expenditures of approximately $11 million. Both the share count estimate of 22 million and the effective tax rate of 39% remain unchanged. Compared to the cash balance of approximately $65 million at December 31, 2014, we expect to end 2015 with a cash balance down mid-teen levels on lower Adjusted EBITDA and higher cash restructuring costs versus our view in March. This guidance is caveated by the fact that we are in the early stage of our transformation work and strategic decisions, while positive for the long-term health of the business, could have near-term impacts on revenues, bookings, Adjusted EBITDA and cash, which are not reflected in our current guidance.

Earnings Conference Call

In conjunction with this announcement, Rosetta Stone will host a conference call today at 5:30 p.m. ET during which time there will be a discussion of the results and the Company’s business outlook. Investors may dial into the live conference call using 1-201-689-8470 (toll / international) or 1-877-407-9039 (toll-free). A live webcast will also be available in the investor relations section of the Company's website at http://investors.rosettastone.com. A replay will be made available soon after the live conference call is completed and will remain available until midnight on May 13. Investors may dial into the replay using 1-858-384-5517 and passcode 13606966.

Caution on Forward-Looking Statements

This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts, and often include words such as "believes," "expects," "anticipates," "estimates," "intends," "plans," "seeks" or words of similar meaning, or future-looking or conditional verbs, such as "will," "should," "could," "may," "might, " "aims," "intends," or "projects." These statements may relate to: our revised business strategy; guidance or projections related to bookings, Adjusted EBITDA, and other measures of future economic performance; the contributions and performance of our businesses including acquired businesses and international operations; projections for future capital expenditures; and other guidance, projections, plans, objectives, and related estimates and assumptions. A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances might not occur. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our present expectations or projections. Some important factors that could cause actual results to differ materially from what we say in our forward-looking statements include: the risk that we are unable to execute our business strategy; declining demand for our language learning solutions; the risk that we are not able to manage and grow our business; the impact of any revisions to our pricing strategy; the risk that we might not succeed in introducing and producing new products and services; the impact of foreign exchange fluctuations; the adequacy of internally generated funds and existing sources of liquidity, such as bank financing, as well as our ability to raise additional funds; the risk that we cannot effectively adapt to and manage complex and numerous technologies; the risk that businesses acquired by us might not perform as expected; and the risk that we are not able to successfully expand internationally. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. These and other risks and uncertainties are more fully described in the Company's filings with the U.S. Securities and Exchange Commission (SEC). We encourage you to review those documents before making any investment decision.

Non-GAAP Financial Measures

This press release also contains several references to non-GAAP financial measures.

  • Bookings represent executed sales contracts received by the Company that are either recorded immediately as revenue or as deferred revenue.
  • Adjusted EBITDA is GAAP net income/(loss) plus interest income and expense, other income/expense, income tax benefit and expense, depreciation, amortization and stock-based compensation expense, impairment plus the change in deferred revenue (excluding acquired deferred revenue) less the change in deferred commissions. In addition, Adjusted EBITDA excludes any items related to the litigation with Google Inc., consulting and other related costs associated with the development and implementation of the accelerated strategy and cost reductions, restructuring and related wind down costs, severance costs, and transaction and other costs associated with mergers and acquisitions, as well as all adjustments related to recording the non-cash tax valuation allowance for deferred tax assets. Adjusted EBITDA for prior periods has been revised to conform to current definition.
  • Free cash flow is cash flow from operations minus cash used in purchases of property and equipment.

The definitions, GAAP comparisons, and reconciliation of those measures with the most directly comparable GAAP financial measures are available in this press release, which is posted on our website at www.rosettastone.com.

Management believes that these non-GAAP measures of financial results provide useful information to investors regarding certain financial and business trends relating to the Company’s financial condition and results of operations. Management uses these non-GAAP measures to compare the Company’s performance to that of prior periods for trend analyses, for purposes of determining executive incentive compensation, and for budgeting and planning purposes. Management believes that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing the Company’s financial measures with other software and education-technology companies, many of which present similar non-GAAP financial measures to investors.

The Company urges investors to review the reconciliation of its non-GAAP financial measures to the comparable GAAP financial measures, which it includes in press releases announcing earnings information, including this press release, and not to rely on any single financial measure to evaluate the company’s business. Our non-GAAP measures may not be comparable to those used by other companies, and we encourage you to review and understand all our financial reporting before making any investment decision.

About Rosetta Stone

Rosetta Stone Inc. (NYSE: RST) is dedicated to changing the way the world learns. The Company's innovative technology-driven language, reading and brain-fitness solutions are used by thousands of schools, businesses, government organizations and millions of individuals around the world. Founded in 1992, Rosetta Stone pioneered the use of interactive software to accelerate language learning. Today the Company offers courses in 30 languages, from the most commonly spoken (such as English, Spanish and Mandarin) to the less prominent (including Swahili, Swedish and Tagalog). Rosetta Stone has expanded beyond language and deeper into education-technology with its acquisitions of Livemocha, Lexia Learning, Vivity Labs, and Tell Me More. Rosetta Stone is based in Arlington, VA, and has offices around the world. For more information, visit www.rosettastone.com.

"Rosetta Stone" is a registered trademark or trademark of Rosetta Stone Ltd. in the United States and other countries.

 
ROSETTA STONE INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(unaudited)
 
   

March 31,
2015

 

December 31,
2014

Assets
Current assets:
Cash and cash equivalents $ 45,924 $ 64,657
Restricted cash 106 123

Accounts receivable (net of allowance for doubtful accounts of $1,410 and $1,434, at March 31, 2015 and December 31, 2014, respectively)

50,909 76,757
Inventory, net 8,408 6,500
Deferred sales commissions 10,678 10,740
Prepaid expenses and other current assets 6,258 5,038
Income tax receivable 895   464  
Total current assets 123,178 164,279
Deferred sales commissions 4,318 4,362
Property and equipment, net 25,019 25,277
Goodwill 56,402 58,584
Intangible assets, net 32,203 34,377
Other assets 1,787   1,525  
Total assets $ 242,907   $ 288,404  
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 15,071 $ 19,548
Accrued compensation 12,981 14,470
Obligations under capital lease 361 594
Other current liabilities 44,914 56,157
Deferred revenue 88,589   95,240  
Total current liabilities 161,916 186,009
Deferred revenue 31,634 32,929
Deferred income taxes 1,810 1,554
Obligations under capital lease 2,722 3,154
Other long-term liabilities 1,087   1,313  
Total liabilities 199,169 224,959
Commitments and contingencies
Stockholders' equity:

Preferred stock, $0.001 par value; 10,000 and 10,000 shares authorized, zero and zero shares issued and outstanding at March 31, 2015 and December 31, 2014, respectively

Non-designated common stock, $0.00005 par value, 190,000 and 190,000 shares authorized, 23,268 and 22,936 shares issued and 22,268 and 21,936 shares outstanding at March 31, 2015 and December 31, 2014, respectively

2 2
Additional paid-in capital 179,878 178,554
Accumulated loss (122,882 ) (102,998 )
Accumulated other comprehensive loss (1,825 ) (678 )

Treasury stock, at cost, 1,000 and 1,000 shares at March 31, 2015 and December 31, 2014, respectively

(11,435 ) (11,435 )
Total stockholders' equity 43,738   63,445  
Total liabilities and stockholders' equity $ 242,907   $ 288,404  
 
 
ROSETTA STONE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
 
    Three Months Ended March 31,
2015   2014
Revenue:
Product $ 19,974 $ 32,371
Subscription and service 38,468   28,394  
Total revenue 58,442 60,765
Cost of revenue:
Cost of product revenue 5,637 7,824
Cost of subscription and service revenue 5,665   4,347  
Total cost of revenue 11,302   12,171  
Gross profit 47,140   48,594  
Operating expenses:
Sales and marketing 40,150 39,096
Research and development 8,972 8,773
General and administrative 15,754 16,054
Impairment 291 2,199
Lease abandonment and termination   3,571  
Total operating expenses 65,167   69,693  
Loss from operations (18,027 ) (21,099 )
Other income and (expense):
Interest income 4 5
Interest expense (88 ) (56 )
Other income and (expense) (1,581 ) 226  
Total other income and (expense) (1,665 ) 175
Loss before income taxes (19,692 ) (20,924 )
Income tax expense (benefit) 192   (683 )
Net loss $ (19,884 ) $ (20,241 )
Loss per share:
Basic $ (0.95 ) $ (0.96 )
Diluted $ (0.95 ) $ (0.96 )
Common shares and equivalents outstanding:
Basic weighted average shares 21,018   21,125  
Diluted weighted average shares 21,018   21,125  
 
 
ROSETTA STONE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
    Three Months Ended March 31,
2015   2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (19,884 ) $ (20,241 )
Adjustments to reconcile net loss to cash used in operating activities:
Stock-based compensation expense 1,287 1,406
Loss on foreign currency transactions 1,372
Bad debt expense 410 957
Depreciation and amortization 3,350 3,434
Deferred income tax expense (benefit) 295 (756 )
Loss (gain) on disposal of equipment (1 ) 106
Amortization of debt issuance costs 32
Loss on impairment 291 2,199
Net change in:
Restricted cash 17 60
Accounts receivable 24,546 17,916
Inventory (1,957 ) (1,034 )
Deferred sales commissions 59 (1,377 )
Prepaid expenses and other current assets (1,322 ) 536
Income tax receivable (444 ) (639 )
Other assets (314 ) 690
Accounts payable (4,401 ) 512
Accrued compensation (1,146 ) (8,123 )
Other current liabilities (9,041 ) (9,461 )
Other long-term liabilities (225 ) (172 )
Deferred revenue (6,231 ) 358  
Net cash used in operating activities (13,307 ) (13,629 )
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,382 ) (1,366 )
Decrease in restricted cash for Vivity acquisition 12,314
Acquisitions, net of cash acquired (1,688 ) (40,161 )
Net cash used in investing activities (4,070 ) (29,213 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of stock options 37 454
Payment of financing fees (27 )
Payments under capital lease obligations (282 ) (61 )
Net cash (used in) provided by financing activities (272 ) 393  
Decrease in cash and cash equivalents (17,649 ) (42,449 )
Effect of exchange rate changes in cash and cash equivalents (1,084 ) (402 )
Net decrease in cash and cash equivalents (18,733 ) (42,851 )
Cash and cash equivalents—beginning of period 64,657   98,825  
Cash and cash equivalents—end of period $ 45,924   $ 55,974  
 
 
ROSETTA STONE INC.
Reconciliation of GAAP Net Loss to Adjusted EBITDA
(in thousands)
(unaudited)
 
    Three Months Ended March 31,
2015   2014
GAAP net loss $ (19,884 ) $ (20,241 )
Total other non-operating (income) and expense 1,665 (175 )
Income tax expense (benefit) expense 192 (683 )
Impairment 291 2,199
Stock-based compensation 1,287 1,406
Depreciation and amortization 3,350 3,434
Other EBITDA adjustments 6,434 8,006
Change in deferred revenue (7,946 ) 475
Change in deferred commission 106   (1,377 )
Adjusted EBITDA* $ (14,505 ) $ (6,956 )
 

* Adjusted EBITDA is GAAP net income/(loss) plus interest income and expense, other income/expense, income tax benefit and expense, depreciation, amortization, and stock-based compensation expense, impairment, plus the change in deferred revenue (excluding acquired deferred revenue) less the change in deferred commissions. In addition, Adjusted EBITDA excludes any items related to the litigation with Google Inc., consulting and other related costs associated with the development and implementation of the accelerated strategy and cost reductions, restructuring and related wind down costs, severance costs, and transaction and other costs associated with mergers and acquisitions, as well as all adjustments related to the non-cash tax valuation allowance for deferred tax assets. Adjusted EBITDA for prior periods has been revised to conform to the current definition.

 
ROSETTA STONE INC.
Reconciliation of Cash Used in Operating Activities to Free Cash Flow
(in thousands)
(unaudited)
 
    Three Months Ended March 31,
2015   2014
Net cash used in operating activities $ (13,307 ) $ (13,629 )
Purchases of property and equipment (2,382 ) (1,366 )
Free cash flow* $ (15,689 ) $ (14,995 )
 

* Free cash flow is cash flow from operations minus cash used in purchases of property and equipment.

 
ROSETTA STONE INC.
Reconciliation of Revenue to Bookings
(in thousands)
(unaudited)
 
   

Three Months Ended
March 31,

2015   2014

Enterprise & Education Segment

Segment revenue $ 23,168 $ 17,882
Segment change in deferred revenue (8,214 ) 400
Bookings* $ 14,954 $ 18,282

Consumer Segment

Segment revenue $ 35,274 $ 42,883
Segment change in deferred revenue 268   75
Bookings* $ 35,542 $ 42,958
 
Total Revenue $ 58,442 $ 60,765
Change in Deferred Revenue (7,946 ) 475
Total Bookings* $ 50,496   $ 61,240
 

* Bookings represent executed sales contracts received by the Company that are either recorded immediately as revenue or as deferred revenue. Bookings are calculated in total and at the operating segment level as revenue plus the change in deferred revenue.

 
Rosetta Stone Inc.
Business Metrics
(unaudited)
       
Quarter-Ended

Year
Ended

Quarter-
Ended

Mar 31
2014

 

Jun 30
2014

 

Sep 30
2014

 

Dec 31
2014

Dec 31
2014

Mar 31
2015

Net Bookings by Segment (in thousands, except percentages)

 
Enterprise & Education 18,282 29,171 36,898 28,827 113,178 14,954
Consumer 42,958   39,834   45,251   67,740   195,783   35,542  
Total 61,240 69,005 82,149 96,567 308,961 50,496
 
YoY Growth (%)
Enterprise & Education 70 % 73 % 50 % 20 % 48 % (18 )%
Consumer (13 )% (14 )% (2 )% 13 % (3 )% (17 )%
Total 1 % 9 % 16 % 15 % 11 % (18 )%
 
% of Total Net Bookings

 

Enterprise & Education 30 % 42 % 45 % 30 % 37 % 30 %
Consumer 70 % 58 % 55 % 70 % 63 % 70 %
Total 100 % 100 % 100 % 100 % 100 % 100 %
 

Revenue by Segment (in thousands, except percentages)

 
Enterprise & Education 17,882 19,414 22,532 24,872 84,700 23,168
Consumer 42,883   37,901   41,983   54,386   177,153   35,274  
Total 60,765 57,315 64,515 79,258 261,853 58,442
 
YoY Growth (%)
Enterprise & Education 28 % 32 % 50 % 51 % 41 % 30 %
Consumer (14 )% (20 )% (8 )% (11 )% (13 )% (18 )%
Total (5 )% (8 )% 6 % 2 % (1 )% (4 )%
 
% of Total Revenue
Enterprise & Education 29 % 34 % 35 % 31 % 32 % 40 %
Consumer 71 % 66 % 65 % 69 % 68 % 60 %
Total 100 % 100 % 100 % 100 % 100 % 100 %
 

Revenues by Geography (in thousands, except percentages)

 
United States 49,410 46,637 51,592 64,431 212,070 46,189
International 11,355   10,678   12,923   14,827   49,783   12,253  
Total 60,765   57,315   64,515   79,258   261,853   58,442  
 
Revenues by Geography (as a %)
United States 81 % 81 % 80 % 81 % 81 % 79 %
International 19 % 19 % 20 % 19 % 19 % 21 %
Total 100 % 100 % 100 % 100 % 100 % 100 %
 

Prior period data has been modified where applicable to conform to current presentation for comparative purposes. Immaterial rounding differences may be present in this data in order to conform to Financial Statement totals.

       
Quarter-Ended

Year
Ended

Quarter-
Ended

Mar 31
2014

 

Jun 30
2014

 

Sep 30
2014

 

Dec 31
2014

Dec 31
2014

Mar 31
2015

Consumer Unit Metrics (in thousands, except percentages)

 
Product Unit Volume 132.6 130.4 166.4 313.7 743.1 134.0
Paid Online Learners 100.4 108.1 129.5 169.2 169.2 189.2
 
YoY Growth (%)
Product Units (6 )% (12 )% 6 % 34 % 9 % 1 %
Paid Online Learners 25 % 27 % 46 % 80 % 80 % 88 %
 
Average Net Revenue Per Unit ($)
Average Net Revenue per Product Unit $ 273 $ 238 $ 211 $ 147 $ 200 $ 184
Average Net Monthly Revenue per Online Learner $ 22 $ 19 $ 16 $ 15 $ 16 $ 16
 
YoY Growth (%)
Average Net Revenue per Product Unit (13 )% (13 )% (16 )% (37 )% (24 )% (33 )%
Average Net Monthly Revenue per Online Learner (15 )% (24 )% (33 )% (35 )% (36 )% (27 )%
 

Prior period data has been modified where applicable to conform to current presentation for comparative purposes. Immaterial rounding differences may be present in this data in order to conform to Financial Statement totals.

Source: Rosetta Stone Inc.

Rosetta Stone Inc.
Investors:
Frank Milano, 703-387-5876
ir@rosettastone.com
or
Media Contact:
Michelle Alvarez, 703-387-5862
malvarez@rosettastone.com

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: Statements in this press release regarding Rosetta Stone PR's business which are not historical facts are "forward-looking statements" that involve risks and uncertainties. For a discussion of such risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking statements, see "Risk Factors" in the Company's Annual Report or Form 10-K for the most recently ended fiscal year.