RST
$18.17
Rosetta Stone
$.40
2.25%
Earnings Details
2nd Quarter June 2018
Thursday, August 2, 2018 4:16:00 PM
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Summary

Rosetta Stone (RST) Recent Earnings

Rosetta Stone (RST) reported a 2nd Quarter June 2018 loss of $0.18 per share on revenue of $43.5 million. The consensus estimate was a loss of $0.40 per share on revenue of $41.0 million. Revenue fell 5.2% compared to the same quarter a year ago.

Rosetta Stone Inc is a provider of technology-based language learning solutions. The Company offers courses in formats, including online subscriptions, digital downloads, mobile apps, and perpetual CD packages.

Results
Reported Earnings
($0.18)
Earnings Whisper
-
Consensus Estimate
($0.40)
Reported Revenue
$43.5 Mil
Revenue Estimate
$41.0 Mil
Growth
Earnings Growth
Revenue Growth
Power Rating
Grade
Earnings Release

Rosetta Stone Inc. Reports Second Quarter 2018 Results

Literacy segment increases to record $12.7 million in revenue, 29% of total revenue

With the conversion of Consumer Language to SaaS model complete, Rosetta Stone is now fully subscription-based

ARLINGTON, Va., Aug. 02, 2018 (GLOBE NEWSWIRE) -- Rosetta Stone Inc. (NYSE: RST), a world leader in technology-based learning solutions, today announced financial results for the second quarter ended June 30, 2018.

Second Quarter 2018 Highlights

  • Revenue at Lexia, the Company’s Literacy segment, grew 22% year-over-year to a record high of $12.7 million.
      
  • Revenue within the Consumer Language segment declined 15% year-over-year to $15.4 million. The expected revenue decline reflects the transition to a full subscription model in which revenue is recognized ratably over the subscription period, which was completed in the first quarter 2018.
      
  • Total operating expenses increased 1% year-over-year, to $39.2 million.
      
  • At June 30, 2018, the Company had zero debt outstanding and cash and cash equivalents totaled $20.9 million.

“Our second quarter performance highlights the growing power of our Literacy business Lexia, and continued traction creating value within our Consumer Language segment following the transition to a full subscription model,” said John Hass, Chairman, President and Chief Executive Officer. “Lexia’s momentum headed into the critical "back to school" selling season is strong, driven by our expanded literacy product portfolio, and we’re on track to deliver against our sales goal for 2018.  Within our Language business, we’re pleased with our continued progress in important areas of our direct to consumer offering, including mobile apps, and the progress in our Enterprise and Education business, particularly our global corporate business.”

Second Quarter 2018 Financial Review

Revenue:  Total revenue decreased $2.4 million, or 5% year-over-year, to $43.5 million in the second quarter 2018, reflecting declines in the Company's Language segments driven largely by the transition in the Consumer Language segment from 52% perpetual product sales in the second quarter 2017, to 97% subscription-based sales in the second quarter 2018.

Revenue at Lexia grew 22% year-over-year to a record high of $12.7 million in the second quarter 2018.  Literacy sales grew 20% over the prior year period, despite a continuing and expected shift in business activity to Lexia's seasonally strongest "back to school" selling season, which begins late in the second quarter and peaks in the third quarter.

Enterprise & Education ("E&E") Language segment revenue decreased $1.9 million, or 11% year-over-year, to $15.4 million in the second quarter 2018. The decline reflected the Company's strategic decision to exit certain geographies and customer lines on a direct sales basis and reduce overall selling expense, which was part of the E&E Language restructuring announced in March 2016. E&E Language revenue from continuing geographies declined $1.5 million or 10% year-over-year. E&E Language sales decreased 4% year-over-year, primarily reflecting lower sales through the Company’s affiliate and education channels.

Consumer Language segment revenue decreased $2.8 million, or 15% year-over-year, to $15.4 million in the second quarter 2018. The decline was due to a $2.9 million reduction in product revenue, reflecting both the shift to SaaS-based revenue in the DTC channel and lower unit sales in the retail channel following the conversion of various retail partners to sell the Company's subscriptions. Subscription and service revenue increased $0.1 million, or 1% year-over-year, benefiting from an 11% year-over-year increase in subscribers to 417,000 at June 30, 2018.  Subscriber growth was largely driven by the inclusion of lower priced, shorter initial duration subscriptions in the Company’s portfolio. Subscriptions with a duration of one year or less totaled 41% of the subscription unit mix sold in the second quarter 2018, up from 29% in the same quarter last year.

US$ thousands, except for percentages

  Three Months Ended June 30,  
  2018 Mix % 2017 Mix % % change
Revenue from:          
Literacy $12,695  29% $10,370  22% 22%
E&E Language 15,356  35% 17,260  38% (11)%
Consumer Language 15,451  36% 18,275  40% (15)%
Total $43,502  100% $45,905  100% (5)%

Net Loss:  In the second quarter of 2018 the Company reported a net loss of $4.2 million or $(0.18) per diluted share. In the comparable period a year ago, the Company had a net loss of $1.1 million or $(0.05) per diluted share.

Total operating expenses increased $0.2 million, or 1% year-over-year, to $39.2 million in the second quarter 2018 as increased investment in sales and marketing were partially offset by declines in research and development expense and general and administrative expense.

Balance Sheet:  As of June 30, 2018, the Company had zero debt and a cash and cash equivalents balance of $20.9 million.

Deferred revenue at June 30, 2018 totaled $139.7 million and includes $16.6 million from the SOURCENEXT transaction, of which $15.7 million is long-term. Short-term deferred revenue of $93.5 million at June 30, 2018, or approximately 67% of the total balance, will be recognized as revenue over the next 12 months. Before SOURCENEXT deferred revenue, approximately 75% of the total was current at June 30, 2018.

Free Cash Flow and Adjusted EBITDA:  Free cash flow, a non-GAAP financial measure, was an $18.5 million outflow in the second quarter 2018, compared to an outflow of $13.8 million in the second quarter 2017. The year-over-year change in free cash flow primarily reflects the Company's net loss, along with an increase of $1.1 million in capital expenditures.  The Company's capital expenditures primarily relate to capitalized labor on product and IT projects. Free cash flow in the second quarter of 2017 also benefited from the receipt of $2.5 million of SOURCENEXT cash. Adjusted EBITDA, a non-GAAP financial measure, was $1.4 million in the second quarter 2018, compared to $3.9 million in the year ago period. The year-over-year change in Adjusted EBITDA primarily reflects the Company's higher net loss this quarter, compared to the same quarter last year. The Company's cash flow has historically been seasonal, with a net use of cash during the first half of the year and positive cash generation during the second half of the year. With the continued growth at Lexia and the increasing mix of sales from the education marketplace, which is seasonally strongest in the third quarter, it is expected that the majority of the Company's second half positive cash flow will be generated in the third quarter.

Earnings Conference Call

In conjunction with this announcement, Rosetta Stone will host a conference call today at 5:00 p.m. ET during which time there will be a discussion of the results and the Company's 2018 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 on the Investor Relations page 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 August 9. Investors may dial into the replay using 1-412-317-6671 and passcode 13681500.

Caution on Forward-Looking Statements

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by non-historical statements and often include words such as "outlook," "potential," "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," "projects," or similar words or phrases. These statements may include, but are not limited to, statements relating to: our business strategy; guidance or projections related to revenue, Adjusted EBITDA, sales, 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. In addition, forward-looking statements are based on the Company’s current assumptions, expectations and beliefs and 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, performance or achievement to differ materially from those expressed or implied by these forward-looking statements include, but are not limited to: 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 developments or otherwise, except as required by law. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements, risks and uncertainties that are more fully described in the Company's filings with the U.S. Securities and Exchange Commission (SEC), including those described under the section entitled “Risk Factors” in the Company’s most recent quarterly Form 10-Q filings and Annual Report on Form 10-K for the year ended December 31, 2017, and those updated from time to time in our future reports filed with the Securities and Exchange Commission.

Non-GAAP Financial Measures

To supplement the condensed consolidated financial statements, which are prepared and presented in accordance with accounting principles generally accepted in the United States ("GAAP"), the Company uses, and this press release contains references to, the non-GAAP financial measures of financial performance listed below.

  • Sales represents executed contracts received by the Company that are either recorded immediately as revenue or deferred revenue. Therefore, sales is an operational metric and in any one period is equal to revenue plus the change in deferred revenue.
      
  • Adjusted EBITDA is GAAP net income/loss plus interest income and expense, other income/expense, income tax benefit/expense, impairment, lease abandonment and termination, depreciation, amortization, stock-based compensation, restructuring, and strategy and cost-reduction related consulting expenses. In addition, Adjusted EBITDA excludes "Other" items related to non-restructuring wind down and 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 operating activities minus cash used in purchases of property and equipment.
      
  • Segment contribution is calculated as segment revenue less expenses directly incurred by or allocated to the segment. Direct segment expenses include costs and expenses that are directly incurred by or allocated to the segment and include materials costs, service costs, customer care and coaching costs, sales and marketing expenses, and bad debt expense. In addition to the previously referenced expenses, the Literacy segment includes direct research and development expenses and Combined Language includes shared research and development expenses, cost of revenue, and sales and marketing expenses applicable to the Consumer Language and E&E Language segments. Prior periods have been reclassified to reflect our current segment presentation and definition of segment contribution.

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

Management believes that these non-GAAP measures of financial results provide useful information to management and investors regarding certain financial and business trends relating to the Company’s financial condition and results of operations, enabling a better understanding of the long-term performance of the Company’s business. Management uses these non-GAAP measures to compare the Company’s performance to that of prior periods for trend analysis, 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 presentation of this additional financial information is not intended to be considered in isolation from, as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. 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, or in corresponding earnings presentations, and not to rely on any single financial measure to evaluate the Company’s business. The Company’s 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 Inc.

Rosetta Stone Inc. (NYSE: RST) is dedicated to changing people's lives through the power of language and literacy education. The company's innovative digital solutions drive positive learning outcomes for the inspired learner at home or in schools and workplaces around the world.

Founded in 1992, Rosetta Stone's language division uses cloud-based solutions to help all types of learners read, write and speak more than 30 languages. Lexia Learning, Rosetta Stone's literacy education division, was founded more than 30 years ago and is a leader in the literacy education space. Today, Lexia helps students build fundamental reading skills through its rigorously researched, independently evaluated, and widely respected instruction and assessment programs.

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.

Investors:
Laura Bainbridge / Jason Terry
Addo Investor Relations
1-310-829-5400
IR@rosettastone.com


ROSETTA STONE INC.

CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(unaudited)

     June 30, 
 2018
 December 31,
 2017
Assets    
Current assets:    
Cash and cash equivalents $20,925  $42,964 
Restricted cash 73  72 
Accounts receivable (net of allowance for doubtful accounts of $342 and $375, at June 30, 2018 and December 31, 2017, respectively) 23,253  24,517 
Inventory 2,114  3,536 
Deferred sales commissions 9,495  14,466 
Prepaid expenses and other current assets 4,357  4,543 
Total current assets 60,217  90,098 
Deferred sales commissions 6,614  3,306 
Property and equipment, net 33,550  30,649 
Goodwill 49,471  49,857 
Intangible assets, net 17,369  19,184 
Other assets 2,027  1,661 
Total assets $169,248  $194,755 
Liabilities and stockholders' (deficit) equity    
Current liabilities:    
Accounts payable $10,557  $8,984 
Accrued compensation 6,336  10,948 
Income tax payable 48  384 
Obligations under capital lease 452  450 
Other current liabilities 12,628  16,454 
Deferred revenue 93,530  110,670 
Total current liabilities 123,551  147,890 
Deferred revenue 46,187  40,593 
Deferred income taxes 2,084  1,968 
Obligations under capital lease 1,589  1,850 
Other long-term liabilities 32  31 
Total liabilities 173,443  192,332 
Commitments and contingencies    
Stockholders' (deficit) equity:    
Preferred stock, $0.001 par value; 10,000 and 10,000 shares authorized, zero and zero shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively    
Non-designated common stock, $0.00005 par value, 190,000 and 190,000 shares authorized, 24,262 and 23,783 shares issued and 23,262 and 22,783 shares outstanding at June 30, 2018 and December 31, 2017, respectively 2  2 
Additional paid-in capital 198,896  195,644 
Accumulated loss (188,679)  (178,890) 
Accumulated other comprehensive loss (2,979)  (2,898) 
Treasury stock, at cost, 1,000 and 1,000 shares at June 30, 2018 and December 31, 2017, respectively (11,435)  (11,435) 
Total stockholders' (deficit) equity (4,195)  2,423 
Total liabilities and stockholders' (deficit) equity $169,248  $194,755 
 

 

ROSETTA STONE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited) 


  Three Months Ended June 30, Six Months Ended June 30,
  2018 2017 2018 2017
Revenue:        
Subscription and service $42,678  $41,985  $84,176  $83,435 
Product 824  3,920  2,134  10,163 
Total revenue 43,502  45,905  86,310  93,598 
Cost of revenue:        
Cost of subscription and service revenue 7,258  6,058  14,632  12,592 
Cost of product revenue 672  1,533  2,732  3,140 
Total cost of revenue 7,930  7,591  17,364  15,732 
Gross profit 35,572  38,314  68,946  77,866 
Operating expenses:        
Sales and marketing 24,874  24,037  49,065  48,205 
Research and development 6,019  6,348  12,325  12,762 
General and administrative 8,324  8,594  16,856  16,619 
Total operating expenses 39,217  38,979  78,246  77,586 
(Loss) income from operations (3,645)  (665)  (9,300)  280 
Other income and (expense):        
Interest income 23  17  48  30 
Interest expense (81)  (130)  (164)  (245) 
Other income and (expense) (1)  425  (229)  736 
Total other income and (expense) (59)  312  (345)  521 
(Loss) income before income taxes (3,704)  (353)  (9,645)  801 
Income tax expense 454  782  915  1,482 
Net loss $(4,158)  $(1,135)  $(10,560)  $(681) 
Loss per share:        
Basic $(0.18)  $(0.05)  $(0.47)  $(0.03) 
Diluted $(0.18)  $(0.05)  $(0.47)  $(0.03) 
Common shares and equivalents outstanding:        
Basic weighted average shares 22,663  22,248  22,561  22,187 
Diluted weighted average shares 22,663  22,248  22,561  22,187 
 

 

ROSETTA STONE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)(unaudited) 

  Three Months Ended June 30, Six Months Ended June 30,
  2018 2017 2018 2017
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss $(4,158)  $(1,135)  $(10,560)  $(681) 
Adjustments to reconcile net loss to cash used in operating activities:        
Stock-based compensation expense 1,353  1,359  1,936  1,506 
Loss (gain) on foreign currency transactions (125)  (175)  120  (452) 
Bad debt expense (recovery) 136  64  61  (300) 
Depreciation and amortization 3,479  2,987  7,089  6,062 
Deferred income tax expense 81  330  117  630 
(Gain) loss on disposal of equipment (17)  1  (17)   
Amortization of deferred financing fees 34  85  68  156 
Loss from equity method investments   105    100 
Gain on sale of subsidiary   (506)    (506) 
Net change in:        
Accounts receivable (9,907)  (6,993)  1,131  4,195 
Inventory (44)  571  1,423  932 
Deferred sales commissions (7)  539  1,648  2,127 
Prepaid expenses and other current assets 729  136  90  (671) 
Income tax receivable or payable (256)  292  (347)  (245) 
Other assets (235)  190  (401)  192 
Accounts payable 1,667  426  1,609  (1,254) 
Accrued compensation (6,185)  (5,128)  (4,588)  (3,397) 
Other current liabilities (1,135)  (2,663)  (3,548)  (5,652) 
Other long-term liabilities   (9,247)    (485) 
Deferred revenue 274  8,006  (10,565)  (7,257) 
Net cash used in operating activities (14,316)  (10,756)  (14,734)  (5,000) 
CASH FLOWS FROM INVESTING ACTIVITIES:        
Purchases of property and equipment (4,188)  (3,080)  (8,136)  (5,393) 
Proceeds from sale of fixed assets 17    17  2 
Proceeds from the sale of subsidiary   110    110 
Net cash used in investing activities (4,171)  (2,970)  (8,119)  (5,281) 
CASH FLOWS FROM FINANCING ACTIVITIES:        
Proceeds from the exercise of stock options 849  367  1,316  441 
Payment of deferred financing costs   (143)    (143) 
Payments under capital lease obligations (110)  (102)  (225)  (344) 
Net cash provided by (used in) financing activities 739  122  1,091  (46) 
Decrease in cash and cash equivalents (17,748)  (13,604)  (21,762)  (10,327) 
Effect of exchange rate changes in cash, cash equivalents, and restricted cash (469)  (95)  (276)  138 
Net decrease in cash and cash equivalents (18,217)  (13,699)  (22,038)  (10,189) 
Cash, cash equivalents, and restricted cash - beginning of period 39,215  40,107  43,036  36,597 
Cash, cash equivalents, and restricted cash - end of period $20,998  $26,408  $20,998  $26,408 
 

 


 ROSETTA STONE INC.

Reconciliation of GAAP Net Loss to Adjusted EBITDA
(in thousands)
(unaudited)

  Three Months Ended June 30, Six Months Ended June 30,
  2018 2017 2018 2017
GAAP net loss $(4,158)  $(1,135)  $(10,560)  $(681) 
             
Total other non-operating expense (income), net 59  (312)  345  (521) 
Income tax expense 454  782  915  1,482 
Depreciation and amortization 3,479  2,987  7,089  6,062 
Stock-based compensation 1,353  1,359  1,936  1,506 
Restructuring expenses (23)  205  8  985 
Strategy consulting expense       169 
Other EBITDA adjustments 261  16  402  55 
Adjusted EBITDA* $1,425  $3,902  $135  $9,057 
 

* Adjusted EBITDA is GAAP net income/loss plus interest income and expense, other income/expense, income tax benefit/expense, impairment, lease abandonment and termination, depreciation, amortization, stock-based compensation, restructuring, and strategy and cost-reduction related consulting expenses. In addition, Adjusted EBITDA excludes “Other” items related to non-restructuring wind down and 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.

 

ROSETTA STONE INC.
Reconciliation of Cash Used in Operating Activities to Free Cash Flow
(in thousands)
(unaudited)

  Three Months Ended
 June 30,
 Six Months Ended
 June 30,
  2018 2017 2018 2017
Net cash used in operating activities $(14,316)  $(10,756)  $(14,734)  $(5,000) 
Purchases of property and equipment (4,188)  (3,080)  (8,136)  (5,393) 
Free cash flow* $(18,504)  $(13,836)  $(22,870)  $(10,393) 
 

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

 

Rosetta Stone Inc.
Supplemental Information
(unaudited)

 Quarter-Ended Year
Ended
 Quarter-Ended
 Mar 31
2017
 Jun 30
2017
 Sep 30
2017
 Dec 31
2017
 Dec 31
2017
 Mar 31
2018
 Jun 30
2018
 
Revenue by Segment (in thousands, except percentages) 
              
Literacy10,170 10,370 11,028 12,040 43,608 12,384   12,695
E&E Language16,500 17,260 16,529 14,978 65,267 15,436 15,356
Consumer Language21,023 18,275 18,649 17,771 75,718 14,988 15,451
Total47,693 45,905 46,206 44,789 184,593 42,808 43,502
              
YoY Growth (%)             
Literacy34% 30% 26% 23% 28% 22% 22%
E&E Language(10)% (1)% (10)% (16)% (9)% (6)% (11)%
Consumer Language(5)% (10)% (14)% (26)% (14)% (29)% (15)%
Total(1)% —% (5)% (13)% (5)% (10)% (5)%
              
% of Total Revenue             
Literacy21% 22% 24% 27% 24% 29% 29%
E&E Language35% 38% 36% 33% 35% 36% 35%
Consumer Language44% 40% 40% 40% 41% 35% 36%
Total100% 100% 100% 100% 100% 100% 100%
              
Revenues by Geography             
              
United States41,241 39,384 39,661 38,539 158,825 36,965 37,759
International6,452 6,521 6,545 6,250 25,768 5,843 5,743
Total47,693 45,905 46,206 44,789 184,593 42,808 43,502
              
Revenues by Geography (as a %)             
United States86% 86% 86% 86% 86% 86% 87%
International14% 14% 14% 14% 14% 14% 13%
Total100% 100% 100% 100% 100% 100% 100%
 


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