RST
$9.94
Rosetta Stone
$.30
3.11%
Earnings Details
2nd Quarter June 2017
Tuesday, August 8, 2017 4:16:26 PM
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Summary

Rosetta Stone (RST) Recent Earnings

Rosetta Stone (RST) reported a 2nd Quarter June 2017 loss of $0.05 per share on revenue of $45.9 million. The consensus estimate was a loss of $0.25 per share on revenue of $42.0 million. Revenue grew 0.4% on a year-over-year basis.

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
($0.05)
Earnings Whisper
-
Consensus Estimate
($0.25)
Reported Revenue
$45.9 Mil
Revenue Estimate
$42.0 Mil
Growth
Earnings Growth
Revenue Growth
Power Rating
Grade
Earnings Release

Rosetta Stone Inc. Reports Second Quarter 2017 Results

Rosetta Stone Inc. (RST), a world leader in technology-based learning solutions, today announced financial results for the second quarter ended June 30, 2017. Revenue in the second quarter 2017 totaled $45.9 million, up from $45.7 million in the year-ago period. The second quarter net loss totaled $1.1 million, or $(0.05) per diluted share. In the year-ago period, the Company had a net loss of $9.0 million, or $(0.41) per diluted share, which included (pre-tax) restructuring and impairment charges totaling $5.4 million.

Second Quarter 2017 Overview

-- Total revenue was essentially flat year-over-year at $45.9 million

Revenue at Lexia, the Company’s Literacy segment, grew 30% year-over-year to a record high $10.4 million. Adjusting for the impact of purchase accounting on Lexia’s revenue, second quarter 2017 revenue would have been $10.9 million and growth would have been 19% year-over-year

Total operating expenses decreased $9.6 million or 20% year-over-year, representing the Company’s tenth consecutive quarter of year-over-year expense reductions. Total operating expenses included a $2.9 million impairment charge in the second quarter 2016, and restructuring charges of $0.2 million and $2.0 million incurred in the second quarter 2017 and 2016, respectively

The Company had zero debt outstanding and ended the quarter with cash and cash equivalents of $26.4 million at June 30, 2017

"The second quarter was a period of continued progress, with relatively flat year-over-year revenue for the second consecutive quarter, after substantial restructuring that characterized the past two years," said John Hass, Chairman, President and Chief Executive Officer. "Through our turnaround efforts we have focused the Company on our best products in our most attractive markets and establishing a more efficient infrastructure, which we believe has put us on the path to profitable future growth.

"To help accelerate our progress, I am excited to announce the hiring of Matt Hulett as President of Language," Hass said. "Matt is an innovative business and product development executive with wide-ranging and relevant SaaS-experience in both consumer and enterprise businesses. Matt will oversee all areas of our language businesses working closely with our leadership team to continue to drive Rosetta Stone forward."

Second Quarter 2017 Review

Revenue: Total revenue increased $0.2 million year-over-year to $45.9 million in the second quarter 2017. Revenue at Lexia, the Company’s Literacy segment, grew 30% year-over-year to a record high $10.4 million. Adjusting for the impact of purchase accounting, Lexia’s revenue would have been $10.9 million in the second quarter 2017 compared to $9.2 million in the year-ago period, and Lexia’s pro forma revenue growth rate would have been 19% year-over-year.

Enterprise & Education ("E&E") Language segment revenue decreased 1% year-over-year to $17.3 million in the second quarter 2017. The strategic decision to exit certain geographies on a direct sales basis, which was part of the E&E Language restructuring announced in March 2016, represented a year-over-year decline of $0.8 million or 35%; revenue from continuing E&E Language geographies was up $0.6 million or 4% year-over-year.

Consumer segment revenue decreased $2.0 million or 10% year-over-year to $18.3 million in the second quarter 2017, reflecting an increased mix of shorter-duration subscriptions, which the Company began testing in the fall of 2016. The number of paid subscribers increased to 375,000, up 38% year-over-year. Subscriptions with a duration of one year or less totaled 42% of the units sold mix in the second quarter 2017, up from 5% in the same quarter last year.

US$ thousands, except for percentages

Three Months Ended June 30,
2017
Mix %
2016
Mix %
% change
Revenue from:
Literacy
$
10,370
22
%
$
7,950
17
%
30
%
E&E Language
17,260
38
%
17,490
38
%
(1
)%
Consumer
18,275
40
%
20,276
45
%
(10
)%
Total
$
45,905
100 %
$
45,716
100 %
--
%

Net Loss: In the second quarter of 2017 the Company reported a net loss of $1.1 million or $(0.05) per diluted share, which included a pre-tax restructuring charge of $0.2 million. In the comparable period a year ago, the Company incurred a net loss of $9.0 million or $(0.41) per diluted share, which included pre-tax charges of $2.9 million for impairment (non-cash) and $2.5 million for restructuring.

Total operating expenses decreased $9.6 million or 20% year-over-year to $39.0 million in the second quarter 2017, which included $2.9 million of impairment in the second quarter 2016. Restructuring expenses of $0.2 million were incurred in the second quarter 2017 and $2.0 million of the total $2.5 million in restructuring expense was included in operating expense in the second quarter 2016. Year-over-year decreases were realized in all three major operating expense categories in the second quarter 2017, with sales and marketing expenses down $4.7 million or 16%, research and development expenses down $0.4 million or 6%, and general and administrative expenses down $1.5 million or 15%. Due to the timing of the E&E Language segment restructuring, the Company expects the magnitude of future operating expense reductions will narrow through the second half of 2017.

Balance Sheet: The Company had zero debt and a cash and cash equivalents balance of $26.4 million at June 30, 2017, which included the receipt of $11.5 million from the previously announced strategic partnership agreement in Japan. Deferred revenue decreased to $134.5 million at June 30, 2017, compared to $141.5 million at December 31, 2016. Short-term deferred revenue, which will be recognized as revenue over the next 12 months, totaled $98.6 million or approximately 73% of the total June 30, 2017 balance.

Free Cash Flow and Adjusted EBITDA: Free cash flow, a non-GAAP financial measure, was $(13.5) million in the second quarter 2017, compared to $(13.2) million in the second quarter 2016. Adjusted EBITDA, a non-GAAP financial measure, improved to $3.9 million in the second quarter, compared to $0.1 million in the year-ago period. 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.

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 2017 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 15. Investors may dial into the replay using 1-412-317-6671 and passcode 13667313.

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, bookings, 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, 2016, 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.

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/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 Enterprise & Education Language segments.

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. (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.

ROSETTA STONE INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(unaudited)
June 30,
December 31, 2016
2017
Assets
Current assets:
Cash and cash equivalents
$
26,367
$
36,195
Restricted cash
41
402
Accounts receivable (net of allowance for doubtful accounts of $547 and $1,072, at June 30, 2017 and December 31, 2016, respectively)
27,980
31,788
Inventory
5,851
6,767
Deferred sales commissions
12,631
14,085
Prepaid expenses and other current assets
4,626
3,813
Total current assets
77,496
93,050
Deferred sales commissions
3,488
4,143
Property and equipment, net
26,670
24,795
Goodwill
49,197
48,251
Intangible assets, net
21,037
22,753
Other assets
1,014
1,318
Total assets
$
178,902
$
194,310
Liabilities and stockholders’ deficit
Current liabilities:
Accounts payable
$
9,476
$
10,684
Accrued compensation
7,444
10,777
Income tax payable
564
785
Obligations under capital lease
422
532
Other current liabilities
16,943
22,150
Deferred revenue
98,582
113,821
Total current liabilities
133,431
158,749
Deferred revenue
35,965
27,636
Deferred income taxes
6,801
6,173
Obligations under capital lease
1,975
2,027
Other long-term liabilities
789
1,384
Total liabilities
178,961
195,969
Commitments and contingencies
Stockholders’ deficit:
Preferred stock, $0.001 par value; 10,000 and 10,000 shares authorized, zero and zero shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively
--
--
Non-designated common stock, $0.00005 par value, 190,000 and 190,000 shares authorized, 23,790 and 23,451 shares issued and 22,790 and 22,451 shares outstanding at June 30, 2017 and December 31, 2016, respectively
2
2
Additional paid-in capital
192,774
190,827
Accumulated loss
(178,025
)
(177,344
)
Accumulated other comprehensive loss
(3,375
)
(3,709
)
Treasury stock, at cost, 1,000 and 1,000 shares at June 30, 2017 and December 31, 2016, respectively
(11,435
)
(11,435
)
Total stockholders’ deficit
(59
)
(1,659
)
Total liabilities and stockholders’ deficit
$
178,902
$
194,310
ROSETTA STONE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three Months Ended June 30,
Six Months Ended June 30,
2017
2016
2017
2016
Revenue:
Subscription and service
$
41,985
$
37,757
$
83,435
$
75,728
Product
3,920
7,959
10,163
17,990
Total revenue
45,905
45,716
93,598
93,718
Cost of revenue:
Cost of subscription and service revenue
6,058
5,575
12,592
10,978
Cost of product revenue
1,533
2,389
3,140
5,034
Total cost of revenue
7,591
7,964
15,732
16,012
Gross profit
38,314
37,752
77,866
77,706
Operating expenses:
Sales and marketing
24,037
28,740
48,205
59,533
Research and development
6,348
6,748
12,762
13,319
General and administrative
8,594
10,118
16,619
20,895
Impairment
--
2,902
--
2,902
Lease abandonment and termination
--
30
--
30
Total operating expenses
38,979
48,538
77,586
96,679
Income (loss) from operations
(665
)
(10,786
)
280
(18,973
)
Other income and (expense):
Interest income
17
10
30
23
Interest expense
(130
)
(121
)
(245
)
(233
)
Other income and (expense)
425
927
736
2,155
Total other income and (expense)
312
816
521
1,945
Income (loss) before income taxes
(353
)
(9,970
)
801
(17,028
)
Income tax expense (benefit)
782
(992
)
1,482
(543
)
Net loss
$
(1,135 )
$
(8,978 )
$
(681
)
$
(16,485 )
Loss per share:
Basic
$
(0.05
)
$
(0.41
)
$
(0.03
)
$
(0.75
)
Diluted
$
(0.05
)
$
(0.41
)
$
(0.03
)
$
(0.75
)
Common shares and equivalents outstanding:
Basic weighted average shares
22,248
21,948
22,187
21,908
Diluted weighted average shares
22,248
21,948
22,187
21,908
ROSETTA STONE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended June 30,
Six Months Ended June 30,
2017
2016
2017
2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
$
(1,135 )
$
(8,978 )
$
(681
)
$
(16,485 )
Adjustments to reconcile net loss to cash used in operating activities:
Stock-based compensation expense
1,359
1,397
1,506
1,818
Gain on foreign currency transactions
(175
)
(818
)
(452
)
(2,343
)
Bad debt (recovery) expense
64
89
(300
)
280
Depreciation and amortization
2,987
3,178
6,062
6,586
Deferred income tax expense
330
336
630
508
Loss on disposal of equipment
1
36
--
36
Amortization of deferred financing fees
85
70
156
132
Loss on impairment
--
2,902
--
2,902
Loss from equity method investments
105
13
100
40
Gain on sale of subsidiary
(506
)
--
(506
)
--
Net change in:
Restricted cash
359
(401
)
372
(360
)
Accounts receivable
(6,993
)
(5,466
)
4,195
12,089
Inventory
571
(738
)
932
(622
)
Deferred sales commissions
539
198
2,127
1,981
Prepaid expenses and other current assets
136
(372
)
(671
)
(1,703
)
Income tax receivable or payable
292
(1,527
)
(245
)
(1,190
)
Other assets
190
238
192
326
Accounts payable
426
(2,199
)
(1,254
)
(1,630
)
Accrued compensation
(5,128
)
(649
)
(3,397
)
1,661
Other current liabilities
(2,663
)
2,268
(5,652
)
(5,921
)
Other long-term liabilities
(9,247
)
(64
)
(485
)
(163
)
Deferred revenue
8,006
608
(7,257
)
(10,367
)
Net cash used in operating activities
(10,397
)
(9,879
)
(4,628
)
(12,425
)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment
(3,080
)
(3,348
)
(5,393
)
(5,934
)
Proceeds from sale of fixed assets
--
38
2
38
Proceeds from the sale of subsidiary
110
--
110
--
Net cash used in investing activities
(2,970
)
(3,310
)
(5,281
)
(5,896
)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of stock options
367
8
441
37
Payment of deferred financing costs
(143
)
--
(143
)
(100
)
Payments under capital lease obligations
(102
)
(94
)
(344
)
(338
)
Net cash (used in) provided by financing activities
122
(86
)
(46
)
(401
)
Decrease in cash and cash equivalents
(13,245
)
(13,275
)
(9,955
)
(18,722
)
Effect of exchange rate changes in cash and cash equivalents
(101
)
(15
)
127
645
Net decrease in cash and cash equivalents
(13,346
)
(13,290
)
(9,828
)
(18,077
)
Cash and cash equivalents--beginning of period
39,713
42,995
36,195
47,782
Cash and cash equivalents--end of period
$
26,367
$
29,705
$
26,367
$
29,705
ROSETTA STONE INC.
Reconciliation of GAAP Net Loss to Adjusted EBITDA
(in thousands)
(unaudited)
Three Months Ended June 30,
Six Months Ended June 30,
2017
2016
2017
2016
GAAP net loss
$
(1,135 )
$
(8,978 )
$
(681
)
$
(16,485 )
Total other non-operating income, net
(312
)
(816
)
(521
)
(1,945
)
Income tax expense (benefit)
782
(992
)
1,482
(543
)
Impairment
--
2,902
--
2,902
Depreciation and amortization
2,987
3,178
6,062
6,586
Stock-based compensation
1,359
1,397
1,506
1,818
Restructuring expenses
205
2,512
985
5,021
Lease abandonment and termination
--
30
--
30
Strategy consulting expense
--
519
169
921
Other EBITDA adjustments
16
304
55
187
Adjusted EBITDA*
$
3,902
$
56
$
9,057
$
(1,508
)

* 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
Six Months Ended
June 30,
June 30,
2017
2016
2017
2016
Net cash used in operating activities
$
(10,397 )
$
(9,879
)
$
(4,628
)
$
(12,425 )
Purchases of property and equipment
(3,080
)
(3,348
)
(5,393
)
(5,934
)
Free cash flow*
$
(13,477 )
$
(13,227 )
$
(10,021 )
$
(18,359 )

* 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
Quarter-Ended
Ended
Mar 31
Jun 30
Sep 30
Dec 31
Dec 31
Mar 31
Jun 30
2016
2016
2016
2016
2016
2017
2017
Revenue by Segment (in thousands, except percentages)
Literacy
7,577
7,950
8,786
9,810
34,123
10,170
10,370
Enterprise & Education Language
18,331
17,490
18,336
17,926
72,083
16,500
17,260
Consumer
22,094
20,276
21,571
23,942
87,883
21,023
18,275
Total
48,002
45,716
48,693
51,678
194,089
47,693
45,905
YoY Growth (%)
Literacy
82
%
68
%
52
%
35
%
56
%
34
%
30
%
Enterprise & Education Language
(4
)%
(6
)%
(6
)%
(6
)%
(5
)%
(10
)%
(1
)%
Consumer
(37
)%
(28
)%
(12
)%
(25
)%
(27
)%
(5
)%
(10
)%
Total
(18
)%
(11
)%
(2
)%
(11
)%
(11
)%
(1
)%
--
%
% of Total Revenue
Literacy
16
%
17
%
18
%
19
%
18
%
21
%
22
%
Enterprise & Education Language
38
%
38
%
38
%
35
%
37
%
35
%
38
%
Consumer
46
%
45
%
44
%
46
%
45
%
44
%
40
%
Total
100
%
100
%
100
%
100
%
100
%
100
%
100
%
Revenues by Geography
United States
39,795
37,626
41,042
44,352
162,815
41,241
39,384
International
8,207
8,090
7,651
7,326
31,274
6,452
6,521
Total
48,002
45,716
48,693
51,678
194,089
47,693
45,905
Revenues by Geography (as a %)
United States
83
%
82
%
84
%
86
%
84
%
86
%
86
%
International
17
%
18
%
16
%
14
%
16
%
14
%
14
%
Total
100
%
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.

Investors:
Frank Milano
ir@rosettastone.com
703-387-5876
Media Contact:
Michelle Alvarez
malvarez@rosettastone.com
703-387-5862

https://resource.globenewswire.com/Resource/Download/18d9f67a-96ef-488d-8bef-cb043bfabc2d?size=1

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