Third Quarter 2012 Operational and Financial Highlights
- Bookings grew 9%: Total bookings increased 9% year-over-year to $72.1 million from $66.1 million. The increase reflected an 11% increase in Consumer bookings as well as 4% growth in Institutional bookings related to signing new and renewal deals that will be recognized over time. Growth in Consumer bookings was due entirely to an 18% increase in the US, offset by a 10% decrease in International compared with last year.
- Revenue up slightly: Consolidated revenue of $64.3 million increased slightly from $64.2 million a year ago. US Consumer revenue increased 5% reflecting double-digit growth in the company’s direct-to-consumer (DTC) channel, offset by lower contribution from the kiosk channel as the company operated 60 fewer kiosks on average. International Consumer revenue declined 8% primarily due to a decrease in revenues from Japan, in part the result of operating fewer kiosks, and lower sales in Germany, reflecting the shift to an online-only model, partially offset by an increase in Korea from increased sales in the home shopping TV channel. The Institutional business decreased 6% mainly due to the non-renewal of the Army and Marines contracts last year, partially offset by increases in Corporate and International.
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- Adjusted EBITDA: Adjusted EBITDA for the third quarter was $1.8 million, an increase of $3.6 million from ($1.8) million in the third quarter of 2011. The improvement in Adjusted EBITDA was mainly due to the small increase in revenues combined with a 7% or $2.7 million reduction in sales and marketing, partially offset by a $0.4 million increase in general and administrative (G&A) expenses and an increase in research and development costs.
- Valuation Allowance for Deferred Tax Assets: The Company recorded a non-cash charge of $25.6 million in the third quarter of 2012 to establish a valuation allowance against its deferred tax assets (“DTAs”) primarily in the United States. In accordance with US GAAP, Rosetta Stone evaluates its DTAs quarterly to determine if valuation allowances are required. This determination was based on several factors, including whether the company had a three-year historical cumulative pre-tax loss, which the Company crossed in the third quarter, and as a result, the Company recorded a non-cash charge to income tax expense. Establishment of this valuation allowance does not preclude the company from utilizing the DTAs in the future to reduce cash tax payments.
- Net Income: Rosetta Stone recorded a net loss of $33.4 million in the third quarter 2012, compared to a net loss of $1.2 million in the third quarter of 2011. Net loss per share was $1.58 compared to a net loss of $0.06 per share in the prior year period. Net loss for the quarter included the impact of the valuation allowance established against its deferred tax assets. Excluding the impact of this valuation allowance and Google-related legal costs of $1.0 million, Adjusted net loss was $1.7 million compared to a loss of $1.2 million a year ago while Adjusted net loss per share was $0.08 compared with $0.06 net loss per share a year ago.
- Balance Sheet and Cash Flow: Cash, cash equivalents and short-term investments were $126.1 million at September 30, 2012, an increase of $9.8 million compared with $116.3 million at December 31, 2011 and an increase of $14.8 million from the prior year period. The company has no debt. Net cash provided by operating activities in the quarter was $5.4 million compared with ($2.0) million a year ago. Capital expenditures were $0.9 million. Free cash flow for the quarter was $4.5 million, compared with ($4.5) million in the third quarter of 2011.
The company is providing the following update to its guidance for the full year 2012:
- Increasing the range of Adjusted EBITDA* by $2 million to $8 million to $10 million from $6 million to $8 million.
- Maintaining the range of Adjusted net loss** at $6 million to $4 million, but improving Adjusted net loss per share** to a range of $0.20 to $0.30. These figures exclude the Google legal expenses and all adjustments related to recording the valuation allowance so that they are comparable to our previous guidance of a net loss of $4 million to $6 million and net loss per share of $0.20 to $0.33.
- Lowering the range for capital expenditures to $5 million to $8 million compared with previous guidance of $8 million to $11 million.
*Adjusted EBITDA excludes legal expenses related to the lawsuit against Google Inc. and any restructuring costs.**Adjusted net loss and Adjusted net loss per share exclude the impact of legal expenses related to the lawsuit against Google, Inc. and all adjustments related to recording the non-cash tax valuation allowance for deferred tax assets. Non-GAAP Financial Measures This press release contains several non-GAAP financial measures. Adjusted EBITDA is GAAP net income or loss plus interest income and expense, income tax benefit and expense, depreciation, amortization and stock-based compensation expenses. Adjusted EBITDA excludes any expenses related to the lawsuit against Google Inc., and any restructuring costs. Adjusted EBITDA for prior periods has been revised to conform to current definition. Adjusted net loss and adjusted net loss per share exclude the impact of legal expenses related to its lawsuit against Google, Inc. and all adjustments related to recording the non-cash tax valuation allowance for deferred tax assets. Free cash flow is cash flow from operations less cash used in purchases of property and equipment. Bookings represent executed sales contracts received by the Company that are either recorded immediately as revenue or as deferred revenue. 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. These measures are used in monthly financial reports prepared for management and in quarterly financial reports presented to the Company's board of directors. 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 companies, many of which present similar non-GAAP financial measures to investors.
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