RST
$18.18
Rosetta Stone
($.36)
(1.94%)
Earnings Details
2nd Quarter June 2019
Tuesday, August 6, 2019 4:16:00 PM
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Summary

Rosetta Stone Lowers Guidance

Rosetta Stone (RST) reported a 2nd Quarter June 2019 loss of $0.12 per share on revenue of $45.9 million. The consensus estimate was a loss of $0.27 per share on revenue of $44.5 million. Revenue grew 5.6% on a year-over-year basis.

The company said it expects 2019 revenue of approximately $187.0 million. The company's previous guidance was revenue of approximately $191.0 million and the current consensus estimate is revenue of $191.0 million for the year ending December 31, 2019.

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
($0.12)
Earnings Whisper
-
Consensus Estimate
($0.27)
Reported Revenue
$45.9 Mil
Revenue Estimate
$44.5 Mil
Growth
Earnings Growth
Revenue Growth
Power Rating
Grade
Earnings Release

Rosetta Stone Inc. Reports Second Quarter 2019 Results

Company delivers year-over-year revenue growth for the second consecutive quarter since 2014, driven by 19% growth from Lexia and 6% growth from Consumer Language

ARLINGTON, Va., Aug. 06, 2019 (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, 2019.

Second Quarter 2019 Highlights

  • Revenue at Lexia Learning ("Lexia"), the Company's Literacy segment, increased 19% year-over-year to a record $15.1 million.
  • Revenue within the Consumer Language segment increased 6% year-over-year to $16.3 million.
  • Revenue within the Enterprise & Education (“E&E”) Language segment decreased 6% year-over-year to $14.5 million.
  • Total operating expenses increased 2% year-over-year, to $40.1 million. Consolidated second quarter net loss was $2.8 million, an improvement of $1.4 million from a net loss of $4.2 million in the same quarter a year ago, driven by higher revenues in our Lexia and Consumer Language segments.
  • Adjusted EBITDA, a non-GAAP financial measure, was $2.0 million in the second quarter 2019, an increase of 42%, compared to $1.4 million in the year-ago period.
  • At June 30, 2019 the Company had $9.9 million in short-term debt outstanding and cash and cash equivalents totaled $20.8 million.

“Our second quarter results continued to demonstrate that we have returned the business to growth, and that this growth is leading to improved profitability,” said John Hass, Chairman and Chief Executive Officer.  “We are now focused on delivering the strong second half growth goals for our Literacy segment, while continuing to build on the turnaround in our Language businesses.”

Mr. Hass continued, “Going forward we will build on these gains to expand our presence in K-12 and leverage the iconic Rosetta Stone brand and world class language product.”

Second Quarter 2019 Review

Revenue: Total revenue in the second quarter of 2019 was $45.9 million, compared to $43.5 million in the second quarter of 2018, primarily due to an increase in Lexia and Consumer Language revenue, partially offset by a decline in E&E Language revenue.

Revenue at Lexia increased 19% year-over-year to $15.1 million. Lexia's sustained revenue growth reflects strong demand for its product portfolio, high retention rates, and increased effectiveness of the Company's direct sales force. Literacy bookings increased over the prior year period reflecting a continuing trend of both new and renewal bookings consolidating into the third calendar quarter, which is the beginning of the school operating year.

Consumer Language segment revenue increased 6%, or 9% excluding decommissioned Fit Brains, year-over-year to $16.3 million, reflecting higher bookings and the benefit of previously deferred subscription revenue. Subscribers grew 28% year-over-year to 533,000 at June 30, 2019. 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 44% of the subscription unit mix at the end of the second quarter 2019, up from 40% at the end of the same quarter last year.  Consumer Language bookings totaled $15.1 million in Q2 2019, up year over year from $14.6 million before the decommissioned Fit Brains.

E&E Language segment revenue decreased 6% year-over-year to $14.5 million. E&E language bookings decreased $2.5 million, or 14% year-over-year, largely driven by the absence of $1.9 million in non-core custom content bookings recorded in the prior-year quarter.

US$ thousands, except for percentages

  Three months ended June 30,    
  2019  Mix %  2018  Mix %  % change 
Revenue from:                  
Literacy $15,101   33% $12,695  29% 19%
E&E Language  14,502   32%  15,356  35% (6)%
Consumer Language  16,339   35%  15,451  36% 6%
Total Revenue $45,942   100% $43,502  100% 6%
                   


Net Loss:  In the second quarter 2019, the Company reported a net loss of $2.8 million, or $(0.12) per diluted share.  In the comparable period a year ago, the Company reported a net loss of $4.2 million, or $(0.18) per diluted share. Total operating expenses increased $0.9 million, or 2% year-over-year, to $40.1 million driven by increases in sales and marketing and general and administrative expense, partially offset by a decrease in research and development expenses.

Balance Sheet: The Company had cash and cash equivalents of $20.8 million and $9.9 million in short term debt at June 30, 2019. Deferred revenue totaled $142.8 million at June 30, 2019, compared to $162.9 million at December 31, 2018. Short-term deferred revenue, which will be recognized as revenue over the next 12 months, totaled $94.2 million, or approximately 66% of the total June 30, 2019 balance.

Free Cash Flow and Adjusted EBITDA: Net cash used in operating activities was $14.8 million in the second quarter of 2019 compared to $14.3 million in the second quarter last year. Free cash flow, a non-GAAP financial measure, was an outflow of $19.8 million in the second quarter 2019, compared to an outflow of $18.5 million in the same period a year ago.

Adjusted EBITDA, a non-GAAP financial measure, was $2.0 million in the second quarter 2019, an increase of 42%, compared to $1.4 million in the year-ago period.

2019 Outlook

The Company is providing the following guidance for the full year ending December 31, 2019 (US$ millions):

   Full Year
  2018 Actual  2019 Guidance
Revenue from:       
Literacy $52.8  $~63.0
Combined Language  120.8  ~124.0
Total Revenue $173.6  $~187.0
Consolidated Revenue Plus Change in Deferred Revenue   181.0  196.0 - 203.0 
GAAP Net Loss  (21.5) ~(15.0)
Adjusted EBITDA  0.2  ~6.0
Operating Cash Flow1  10.4  17.0 - 23.0
Capital Expenditures  16.9  ~20.0
Ending Cash Balance2 $38.1  $     38.0 - 42.0

1 Includes approximately $4.5 million and $0.5 million of SOURCENEXT cash receipts in 2018 and 2019, respectively.
2 Assumes no debt.


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 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 11:59 p.m. ET on Tuesday, August 13, 2019. Investors may dial into the replay using 1-412-317-6671 and passcode 13692171.

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 literacy or 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, 2018, and those updated from time to time in our future reports filed with the Securities and Exchange Commission.

Non-GAAP Financial and Statistical 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 represents executed contracts received by the Company that are either recorded immediately as revenue or deferred revenue. Therefore, bookings 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 the 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:
Lasse Glassen / Jason Terry
Addo Investor Relations
1-310-829-5400
IR@rosettastone.com

Media Contact:
Andrea Riggs
1-917-572-5555
ariggs@rosettastone.com


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

  As of 
 June 30, 2019  December 31, 2018 
Assets       
Current assets:       
Cash and cash equivalents$20,773  $38,092 
Restricted cash 33   82 
Accounts receivable (net of allowance for doubtful accounts of $398 and $372
at June 30, 2019 and December 31, 2018, respectively)
 25,660   21,950 
Inventory 1,652   933 
Deferred sales commissions 10,103   11,597 
Prepaid expenses and other current assets 4,773   4,041 
Total current assets 62,994   76,695 
Deferred sales commissions 6,096   6,933 
Property and equipment, net 39,891   36,405 
Operating lease right-of-use assets 6,373    
Intangible assets, net 15,080   15,850 
Goodwill 49,162   49,239 
Other assets 1,870   2,136 
Total assets$181,466  $187,258 
Liabilities and stockholders' deficit       
Current liabilities:       
Accounts payable$8,472  $8,938 
Accrued compensation 7,444   9,046 
Income tax payable 283   328 
Operating lease liabilities 1,611    
Borrowings under credit facility 9,900    
Other current liabilities 12,278   13,925 
Deferred revenue 94,170   113,378 
Total current liabilities 134,158   145,615 
Deferred revenue 48,661   49,507 
Deferred income taxes 2,261   2,776 
Operating lease liabilities 4,657    
Other long-term liabilities 1,099   1,368 
Total liabilities 190,836   199,266 
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, 2019 and December 31, 2018, respectively)
     
Non-designated common stock, $0.00005 par value, 190,000 and 190,000 shares
authorized, 25,017 and 24,426 shares issued, and 24,017 and 23,426 shares
outstanding, at June 30, 2019 and December 31, 2018, respectively)
 2   2 
Additional paid-in capital 208,396   202,355 
Treasury stock, at cost; 1,000 and 1,000 shares at June 30, 2019 and December 31,
2018, respectively)
 (11,435)  (11,435)
Accumulated loss (202,943)  (199,592)
Accumulated other comprehensive loss (3,390)  (3,338)
Total stockholders' deficit (9,370)  (12,008)
Total liabilities and stockholders' deficit$181,466  $187,258 


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

 Three months ended June 30,  Six months ended June 30, 
 2019  2018  2019  2018 
Revenue$45,942  $43,502  $90,553  $86,310 
Cost of revenue 8,861   7,930   17,287   17,364 
Gross profit 37,081   35,572   73,266   68,946 
Operating expenses               
Sales and marketing 25,800   24,874   49,038   49,065 
Research and development 5,776   6,019   11,514   12,325 
General and administrative 8,566   8,324   17,258   16,856 
Total operating expenses 40,142   39,217   77,810   78,246 
Loss from operations (3,061)  (3,645)  (4,544)  (9,300)
Other income and (expense):               
Interest income 9   23   42   48 
Interest expense (99)  (81)  (159)  (164)
Other income and (expense) 519   (1)  1,315   (229)
Total other income and (expense) 429   (59)  1,198   (345)
Loss before income taxes (2,632)  (3,704)  (3,346)  (9,645)
Income tax expense 175   454   5   915 
Net loss$(2,807) $(4,158) $(3,351) $(10,560)
Loss per share:               
Basic$(0.12) $(0.18) $(0.14) $(0.47)
Diluted$(0.12) $(0.18) $(0.14) $(0.47)
Common shares and equivalents outstanding:               
Basic weighted average shares 23,455   22,663   23,247   22,561 
Diluted weighted average shares 23,455   22,663   23,247   22,561 


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

  Three months ended June 30,  Six months ended June 30, 
 2019  2018  2019  2018 
CASH FLOWS FROM OPERATING ACTIVITIES:               
Net loss$(2,807) $(4,158) $(3,351) $(10,560)
Non-cash adjustments to reconcile net loss to cash used in operating activities:               
Stock-based compensation expense 1,356   1,353   2,576   1,936 
Loss (gain) on foreign currency transactions (517)  (125)  191   120 
Bad debt expense 136   136   123   61 
Depreciation and amortization 3,457   3,479   6,986   7,089 
Operating lease costs 533      1,059    
Deferred income tax (benefit) expense 77   81   (515)  117 
(Gain) loss on disposal or sale of assets 1   (17)  (1,394)  (17)
Amortization of deferred financing costs 19   34   33   68 
Net change in:               
Accounts receivable (12,063)  (9,907)  (3,826)  1,131 
Inventory 111   (44)  (718)  1,423 
Deferred sales commissions 335   (7)  2,332   1,648 
Prepaid expenses and other current assets (30)  729   (819)  90 
Income tax receivable or payable (320)  (256)  (49)  (347)
Other assets (233)  (235)  (89)  (401)
Accounts payable 1,129   1,667   (466)  1,609 
Accrued compensation (3,468)  (6,185)  (1,027)  (4,588)
Other current liabilities 1,298   (1,135)  (1,324)  (3,548)
Operating lease liabilities (516)     (1,060)   
Other long-term liabilities       (31)   
Deferred revenue (3,345)  274   (20,045)  (10,565)
Net cash used in operating activities (14,847)  (14,316)  (21,414)  (14,734)
CASH FLOWS FROM INVESTING ACTIVITIES:               
Purchases of property and equipment (4,995)  (4,188)  (9,709)  (8,136)
Proceeds from sale of assets 400   17   1,396   17 
Net cash used in investing activities (4,595)  (4,171)  (8,313)  (8,119)
CASH FLOWS FROM FINANCING ACTIVITIES:               
Proceeds from the exercise of stock options 2,143   849   2,887   1,316 
Proceeds from borrowings under credit facility 10,500      10,500    
Repayments of borrowings under credit facility (600)     (600)   
Payment of deferred financing costs (45)     (47)   
Payments under financing lease liabilities (112)  (110)  (222)  (225)
Net cash provided by financing activities 11,886   739   12,518   1,091 
Decrease in cash, cash equivalents, and restricted cash (7,556)  (17,748)  (17,209)  (21,762)
Effect of exchange rate changes in cash, cash equivalents, and
restricted cash
 21   (469)  (159)  (276)
Net decrease in cash, cash equivalents, and restricted cash (7,535)  (18,217)  (17,368)  (22,038)
Cash, cash equivalents, and restricted cash—beginning of period 28,341   39,215   38,174   43,036 
Cash, cash equivalents, and restricted cash—end of period$20,806  $20,998  $20,806  $20,998 


ROSETTA STONE INC.
RECONCILIATION OF GAAP NET LOSS TO ADJUSTED EBITDA
(in thousands)
(unaudited)

 Three months ended June 30,  Six months ended June 30, 
 2019  2018  2019  2018 
GAAP net loss$(2,807) $(4,158) $(3,351) $(10,560)
Total other non-operating (income) and expense, net (429)  59   (1,198)  345 
Income tax expense 175   454   5   915 
Depreciation and amortization 3,457   3,479   6,986   7,089 
Stock-based compensation expense 1,356   1,353   2,576   1,936 
Restructuring expense    (23)     8 
Other EBITDA adjustments 269   261   322   402 
Adjusted EBITDA*$2,021  $1,425  $5,340  $135 

* 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 the 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, 
 2019  2018  2019  2018 
Net cash used in operating activities$(14,847) $(14,316) $(21,414) $(14,734)
Purchases of property and equipment (4,995)  (4,188)  (9,709)  (8,136)
Free cash flow *$(19,842) $(18,504) $(31,123) $(22,870)

* 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 
 31-Mar 30-Jun 30-Sep 31-Dec 31-Dec 31-Mar 30-Jun 
 2018 2018 2018 2018 2018 2019 2019 
Revenue by Segment (in thousands, except
percentages)
                     
                      
Literacy 12,384  12,695  13,215  14,472  52,766  14,806  15,101 
E&E Language 15,436  15,356  14,990  14,594  60,376  14,443  14,502 
Consumer Language 14,988  15,451  14,545  15,508  60,492  15,362  16,339 
Total 42,808  43,502  42,750  44,574  173,634  44,611  45,942 
                      
YoY Growth (%)                     
Literacy 22% 22% 20% 20% 21% 20% 19%
E&E Language (6)% (11)% (9)% (3)% (7)% (6)% (6)%
Consumer Language (29)% (15)% (22)% (13)% (20)% 2% 6%
Total (10)% (5)% (7)%   (6)% 4% 6%
                      
% of Total Revenue                     
Literacy 29% 29% 31% 32% 30% 33% 33%
E&E Language 36% 35% 35% 33% 35% 32% 32%
Consumer Language 35% 36% 34% 35% 35% 34% 35%
Total 100% 100% 100% 100% 100% 100% 100%
                      
Revenues by Geography                     
                      
United States 36,965  37,759  37,747  39,936  152,407  39,830  41,179 
International 5,843  5,743  5,003  4,638  21,227  4,781  4,763 
Total 42,808  43,502  42,750  44,574  173,634  44,611  45,942 
                      
Revenues by Geography (as a %)                     
United States 86% 87% 88% 90% 88% 89% 90%
International 14% 13% 12% 10% 12% 11% 10%
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.

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Source: Rosetta Ston