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TheStreet Open House

Rosetta Stone Inc. Reports Third Quarter 2012 Results

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

Cautionary Statement Regarding Forward-Looking Statements

Certain statements in this press release are forward-looking statements, including our guidance for future financial performance and operating targets, and our long-term growth prospects. In this context, forward-looking statements often address our expected future business and financial performance, and often contain words such as “project,” “believe,” “plan,” “expect,” “anticipate,” “estimate,” “intend,” “should,” “would,” “could,” “potentially,” “seek,” “may,” “likely,” “will,” “financial outlook,” “strategy,” or “continue.” These forward-looking statements reflect the company's current views with respect to future events and are subject to certain risks, uncertainties, and assumptions. A number of important factors could cause actual results or events to differ materially from those indicated by such forward-looking statements, including demand for language learning software; the advantages of our products, services, technology, brand and business model as compared to others; our strategic focus; our ability to maintain effective internal controls or to remediate material weaknesses; our cash needs and expectations regarding cash flow from operations; our product development plans; the appeal and efficacy of our products; our expectations regarding capturing lifetime value and a broader range of market segments through such offerings; our plans regarding expansion of our marketing initiatives and sales force; our international expansion and growth plans; our plans regarding our kiosks and retail relationships; our plans regarding our Institutional business; the impact of any revisions to our pricing strategy; our ability to manage and grow our business and execute our business strategy; our financial performance; our actions to stabilize our business in the U.S. consumer market including realigning our cost structure and revitalizing our go-to-market strategy; our plans to transition our distribution to more online in the consumer space; adverse trends in general economic conditions and the other factors described more fully in the company's filings with the U.S. Securities and Exchange Commission (SEC), including the company’s annual report on Form 10-K for the fiscal year ended December 31, 2011, which is on file with the SEC. The company assumes no obligation to update the information in this communication, except as otherwise required by law. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date hereof.

       
ROSETTA STONE INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
 
 
Three Months Ended Nine Months Ended
September 30, September 30,
2012 2011 2012 2011
Revenue:
Product $ 42,462 $ 44,183 $ 127,534 $ 134,541
Subscription and service   21,817   20,019   67,006   53,381
Total revenue 64,279 64,202 194,540 187,922
 
Cost of revenue:
Cost of product revenue 7,858 7,862 24,087 25,430
Cost of subscription and service revenue   3,327   3,447   11,892   8,861
Total cost of revenue 11,185 11,309 35,979 34,291
       
Gross profit   53,094   52,893   158,561   153,631
 
Operating expenses
Sales and marketing 37,113 39,821 110,641 118,175
Research and development 5,177 4,991 17,944 17,829
General and administrative   14,474   14,115   41,050   42,731
Total operating expenses   56,764   58,927   169,635   178,735
 
Loss from operations (3,670) (6,034) (11,074) (25,104)
 
Other income and (expense):
Interest income 42 62 141 224
Interest expense - (1) - (5)
Other income (expense)   (27)   34   (71)   83
Total other income (expense) 15 95 70 302
 
Loss before income taxes (3,655) (5,939) (11,004) (24,802)
Income tax expense (benefit)   29,735   (4,762)   28,833   (9,794)
 
Net loss $ (33,390) $ (1,177) $ (39,837) $ (15,008)
 
Net loss per share:
Basic $ (1.58) $ (0.06) $ (1.90) $ (0.72)
Diluted $ (1.58) $ (0.06) $ (1.90) $ (0.72)
 
Common shares and equivalents outstanding:
Basic weighted average shares   21,073   20,780   21,004   20,724
Diluted weighted average shares   21,073   20,780   21,004   20,724
   
ROSETTA STONE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(unaudited)
September 30 December 31,
2012 2011
 
 
Assets
Current assets:
Cash and cash equivalents $ 126,046 $ 106,516
Restricted cash 58 74
Short term investments - 9,711

Accounts receivable (net of allowance for doubtful accounts of $1,299 and $1,951, respectively)

39,685 51,997
Inventory 6,765 6,723
Prepaid expenses and other current assets 6,306 7,081
Income tax receivable 9,750 7,678
Deferred income taxes   13     10,985
Total current assets 188,623 200,765
 
Property and equipment, net 16,983 20,869
Goodwill 34,867 34,841
Intangible assets, net 10,835 10,865
Deferred income taxes 123 8,038
Other assets   1,884     1,803
Total assets $ 253,315   $ 277,181
 
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 6,959 $ 7,291
Accrued compensation 13,211 11,703
Other current liabilities 28,407 34,911
Deferred revenue   53,787     49,375
Total current liabilities 102,364 103,280
 
Deferred revenue 4,002 2,520
Deferred income taxes 8,102 -
Other long-term liabilities   213     176
Total liabilities 114,681 105,976
 
Commitments and contingencies
 
Stockholders' equity:

Preferred stock, $0.001 par value; 10,000 and 10,000 authorized; zero and zero shares issued and outstanding September 30, 2012 and December 31, 2011, respectively

Non-designated common stock, $0.00005 par value, 190,000 and 190,000 shares authorized, 21,839 and 21,258 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively

2 2
Additional paid-in capital 158,861 151,823
Accumulated income (loss) (20,755 ) 19,082
Accumulated other comprehensive income   526     298
Total stockholders' equity   138,634     171,205
Total liabilities and stockholders' equity $ 253,315   $ 277,181
 
       
ROSETTA STONE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Three Months Ended Nine Months Ended
September 30, September 30,
2012 2011 2012 2011
 
Cash Flows From Operating Activities:
Net loss (33,390 ) (1,177 ) (39,837 ) (15,008 )

Adjustments to reconcile net loss to cash provided by (used in) operating activities

Stock-based compensation expense 2,477 1,836 6,208 4,977
Bad debt expense 739 401 1,335 709
Depreciation and amortization 1,748 2,184 6,230 6,439
Deferred income tax benefit 28,096 (2,493 ) 26,940 471
Loss on sales of equipment 372 2 752 18
Net change in:
Restricted cash (13 ) (4 ) 15 19
Accounts receivable (5,165 ) 4,358 11,149 12,345
Inventory (479 ) 1,121 1 1,361
Prepaid expenses and other current assets 136 820 785 1,371
Income tax receivable 660 (3,991 ) (2,080 ) (12,232 )
Other assets 987 1,108 (78 ) (208 )
Accounts payable 2,491 (2,019 ) (377 ) 738
Accrued compensation (298 ) (1,859 ) 1,476 (1,462 )
Other current liabilities 1,123 (4,069 ) (6,690 ) (3,712 )
Excess tax benefit from stock options exercised 18 (334 ) - (365 )
Other long-term liabilities (1,640 ) 164 (44 ) 152
Deferred revenue   7,562     1,942     5,707     370  
Net cash provided by (used in) operating activities   5,424     (2,010 )   11,492     (4,017 )
 
Cash Flows From Investing Activities:
Purchases of property and equipment (941 ) (2,443 ) (2,939 ) (7,908 )
Proceeds from (purchases of) available-for-sale securities 1,599 105 9,711 (1,801 )
Acquisition, net of cash acquired   -     -     -     (75 )
Net cash provided by (used in) investing activities   658     (2,338 )   6,772     (9,784 )
 
Cash Flows From Financing Activities:
Proceeds from the exercise of stock options 830 559 830 639
Tax benefit of stock options exercised (18 ) 334 - 365
Payments under capital lease obligations   (2 )   (1 )   (5 )   (6 )
Net cash provided by financing activities   810     892     825     998  
 
Increase (decrease) in cash and cash equivalents 6,892 (3,456 ) 19,089 (12,803 )
 
Effect of exchange rate changes in cash and cash equivalents   380     (291 )   441     114  
 
Net increase (decrease) in cash and cash equivalents 7,272 (3,747 ) 19,530 (12,689 )
 
Cash and cash equivalents—beginning of period   118,774     106,814     106,516     115,756  
 
Cash and cash equivalents—end of period $ 126,046   $ 103,067   $ 126,046   $ 103,067  
 
       
ROSETTA STONE INC.
Reconciliation of Net Loss to Adjusted EBITDA
(in thousands)
(unaudited)
 
 
Three Months Ended Nine Months Ended
September 30, September 30,
  2012     2011     2012     2011  
 
Net loss $ (33,390 ) $ (1,177 ) $ (39,837 ) $ (15,008 )
Interest (income)/expense, net (42 ) (61 ) (141 ) (219 )
Income tax expense (benefit) 29,735 (4,762 ) 28,833 (9,794 )
Depreciation and amortization 1,748 2,184 6,230 6,439
Stock-based compensation 2,477 1,836 6,208 4,977
Other EBITDA Adjustments   1,299     189     3,392     443  
 
Adjusted EBITDA* $ 1,827   $ (1,791 ) $ 4,685   $ (13,162 )
 

*Adjusted EBITDA equals GAAP net income or loss plus interest income and expense, income tax benefit and expense, depreciation, amortization, stock-based compensation expenses, restructuring costs and any expenses related to the previously disclosed lawsuit against Google, Inc.Prior period Adjusted EBITDA has been conformed to current definition.

       
ROSETTA STONE INC.
Reconciliation of Net Loss to Adjusted Net Loss
(in thousands except per share amounts)
(unaudited)
 
 
Three Months Ended Nine Months Ended
September 30, September 30,
2012 2012
Adjusted Adjusted
Net loss Loss per share Net Loss Loss per share
Net loss as reported $ (33,390 ) $ (1.58 ) $ (39,837 ) $ (1.90 )
Expenses related to Google lawsuit 966 $ 0.05 1,096 $ 0.05
Income taxes - valuation allowance 30,676 $ 1.46 32,301 $ 1.54
       
 
Adjusted Net Loss* $ (1,748 ) $ (0.08 ) $ (6,440 ) $ (0.31 )
 

*Adjusted Net Loss equals GAAP net loss adjusted for expenses related to the lawsuit against Google, Inc. and all impacts related to recording the valuation allowance.

                                   
Rosetta Stone Inc.
Business Metrics
(in thousands)
                                         
Quarter-Ended Quarter-Ended Quarter-Ended
 
3/31/10   6/30/10   9/30/10   12/31/10   2010 3/31/11   6/30/11   9/30/11   12/31/11   2011 3/31/12   6/30/12   9/30/12   12/31/12   2012

Net Bookings by Market

 
US Consumer 41,631 38,746 41,138 52,243 173,758 29,814 36,828 35,562 54,786 156,990 41,237 37,240 42,042
International Consumer 10,029   8,177   9,860   15,176   43,242 14,996   12,910   11,945   14,589   54,440 13,046   8,168   10,729        
Worldwide Consumer 51,660 46,923 50,998 67,419 217,000 44,810 49,738 47,507 69,375 211,430 54,283 45,408 52,771
 
Worldwide Institutional 9,108   17,110   22,307   14,395   62,920 10,770   16,973   18,555   15,459   61,757 10,984   17,635   19,354        
Total 60,768   64,033   73,305   81,814   279,920 55,580   66,711   66,062   84,834   273,187 65,267   63,043   72,125        
 
YoY Growth (%)
US Consumer 6% -9% -19% -11% -9% -28% -5% -14% 5% -10% 38% 1% 18%
International Consumer 304%   168%   135%   93%   146% 50%   58%   21%   -4%   26% -13%   -37%   -10%        
Worldwide Consumer 23% 3% -7% 1% 4% -13% 6% -7% 3% -3% 21% -9% 11%
 
Worldwide Institutional 8% 28% 5% 37% 18% 18%   -1%   -17%   7%   -2% 2%   4%   4%        
Total 21% 9% -4% 6% 7% -9%   4%   -10%   4%   -2% 17%   -5%   9%        
 
% of Total Net Bookings
US Consumer 69% 60% 56% 64% 62% 54% 55% 54% 65% 57% 63% 59% 58%
International Consumer 16%   13%   14%   18%   15% 27%   20%   18%   17%   20% 20%   13%   15%        
Worldwide Consumer 85% 73% 70% 82% 78% 81% 75% 72% 82% 77% 83% 72% 73%
 
Worldwide Institutional 15%   27%   30%   18%   23% 19%   25%   28%   18%   23% 17%   28%   27%        
Total 100%   100%   100%   100%   100% 100%   100%   100%   100%   100% 100%   100%   100%        
 
 

Revenue by Market

 
US Consumer 41,407 38,748 36,902 44,516 161,573 28,061 38,606 37,710 52,794 157,171 42,671 36,895 39,681
International Consumer 9,815   7,651   9,708   15,516   42,690 14,601   12,014   11,002   13,238   50,855 12,617   8,074   10,094        
Worldwide Consumer 51,222 46,399 46,610 60,032 204,263 42,662 50,620 48,712 66,032 208,026 55,288 44,969 49,775
 
Worldwide Institutional 11,792   14,249   14,316   14,248   54,605 14,316   16,123   15,490   14,494   60,423 14,161   15,843   14,504        
Total 63,014   60,648   60,926   74,280   258,868 56,978   66,743   64,202   80,526   268,449 69,449   60,812   64,279        
 
YoY Growth (%)
US Consumer 5% -8% -28% -25% -16% -32% 0% 2% 19% -3% 52% -4% 5%
International Consumer 297%   154%   137%   101%   147% 49%   57%   13%   -15%   19% -14%   -33%   -8%        
Worldwide Consumer 22% 3% -16% -10% -2% -17% 9% 5% 10% 2% 30% -11% 2%
 
Worldwide Institutional 39%   23%   21%   26%   26% 21%   13%   8%   2%   11% -1%   -2%   -6%        
Total 25%   7%   -9%   -5%   3% -10%   10%   5%   8%   4% 22%   -9%   0%        
 
% of Total Revenue
US Consumer 66% 64% 61% 60% 62% 49% 58% 59% 66% 58% 62% 61% 62%
International Consumer 15%   13%   16%   21%   17% 26%   18%   17%   16%   19% 18%   13%   15%        
Worldwide Consumer 81% 77% 77% 81% 79% 75% 76% 76% 82% 77% 80% 74% 77%
 
Worldwide Institutional 19%   23%   23%   19%   21% 25%   24%   24%   18%   23% 20%   26%   23%        
Total 100%   100%   100%   100%   100% 100%   100%   100%   100%   100% 100%   100%   100%        
 
 

Consumer Revenue by Channel

 
DTC 31,026 25,142 27,500 34,496 118,164 31,856 30,984 31,177 42,368 136,385 36,839 30,951 35,130
Kiosk 9,391 8,683 7,392 9,533 34,999 7,312 7,368 6,987 8,504 30,171 6,483 4,564 4,103
Global Retail 9,608 11,200 9,832 15,413 46,053 2,585 10,752 9,015 14,265 36,616 10,999 8,122 8,911
Home School 1,197   1,374   1,886   590   5,047 909   1,516   1,533   895   4,854 967   1,332   1,631        
Total 51,222   46,399   46,610   60,032   204,263 42,662   50,620   48,712   66,032   208,026 55,288   44,969   49,775        
 
YoY Growth (%)
DTC 24% -5% -6% -2% 2% 3% 23% 13% 23% 15% 16% 0% 13%
Kiosk 14% -7% -25% -28% -14% -22% -15% -5% -11% -14% -11% -38% -41%
Global Retail 34% 46% -27% -12% 0% -73% -4% -8% -7% -20% 325% -24% -1%
Home School -19%   -12%   -28%   -50%   -26% -24%   10%   -19%   52%   -4% 6%   -12%   6%        
Total 22%   3%   -16%   -10%   -2% -17%   9%   5%   10%   2% 30%   -11%   2%        
 
% of Total Consumer Revenue
DTC 61% 54% 59% 57% 58% 75% 61% 64% 64% 66% 66% 69% 71%
Kiosk 18% 19% 16% 16% 17% 17% 15% 14% 13% 15% 12% 10% 8%
Global Retail 19% 24% 21% 26% 23% 6% 21% 19% 22% 17% 20% 18% 18%
Home School 2%   3%   4%   1%   2% 2%   3%   3%   1%   2% 2%   3%   3%        
Total 100%   100%   100%   100%   100% 100%   100%   100%   100%   100% 100%   100%   100%        
 
 

Unit Metrics

 
Product Unit Volume ( thousands) 126.3 112.9 117.6 169.7 526.5 108.5 140.0 134.3 202.9 585.8 143.0 129.7 146.5
Paid Online Learners (thousands) 12.6 14.2 17.7 16.8 16.8 16.4 17.1 21.5 26.6 26.6 41.2 48.7 57.4
 
YoY Growth (%)
Product Units -14% 24% 14% 20% 11% 32% -7% 9%
Paid Online Learners 30% 20% 21% 58% 58% 151% 185% 167%
 
Average Net Revenue Per Unit ($)
Average Net Revenue per Product Unit $395 $398 $382 $343 $376 $379 $349 $346 $313 $341 $367 $319 $313
Average Net Revenue per Online Learner (monthly) $33 $35 $35 $35 $33 $30 $34 $39 $36 $31 $28 $27 $24
 
YoY Growth (%)
Average Net Revenue per Product Unit -4% -12% -9% -9% -9% -3% -9% -9%
Average Net Revenue per Online Learner -10% -2% 10% 3% -7% -6% -22% -37%

 

 

# of Kiosks (end of period)

 
US 190 186 180 173 173 144 117 114 103 103 57 56 57
Europe 9 10 13 15 15 15 16 14 13 13 1 1 1
Asia Pacific 41 50 64 71 71 78 76 69 58 58 44 42 39
Total # of Kiosks (end of period) 240 246 257 259 259 237 209 197 174 174 102 99 97
 

Revenues by Geography

 
United States 52,476 52,139 50,390 57,624 212,629 41,271 53,418 51,708 65,725 212,122 54,914 50,810 52,167
International 10,538   8,509   10,536   16,656   46,239 15,707   13,325   12,494   14,801   56,327 14,535   10,002   12,112        
Total 63,014   60,648   60,926   74,280   258,868 56,978   66,743   64,202   80,526   268,449 69,449   60,812   64,279        
 
Revenues by Geography (as a %)
United States 83% 86% 83% 78% 82% 72% 80% 81% 82% 79% 79% 84% 81%
International 17%   14%   17%   22%   18% 28%   20%   19%   18%   21% 21%   16%   19%        
Total 100%   100%   100%   100%   100% 100%   100%   100%   100%   100% 100%   100%   100%        
 
 
 
 
 
 

Checks

Consumer Revenue 0 0 0 0 0 0 0 0 0 0 0 0 0
Total Revenue 0 0 0 0 0 0 0 0 0 0 0 0 0
 
 
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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