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) -- Shares of

Rosetta Stone

(RST) - Get Rosetta Stone Inc. Report

plunged on Friday after the Arlington, Va.-based maker of language learning software lowered its fourth-quarter outlook, citing weak demand from U.S. consumers.

The company, which said the decision of

Borders Group

to file for bankruptcy protection worsened the situation, also forecast a net loss for the current quarter, well short Wall Street's current expectation for a profit of 15 cents a share in the March-ending period.

The shares were recently quoted at $16.80, down 17.1%, on volume of roughly 1.6 million, more than 13 times the issue's trailing three-month daily average volume of 122,000. The session-low is a new 52-week nadir for the stock, which was up 20% in the past year prior to Friday's sell-off.

Rosetta Stone now expects non-GAAP

generally accepted accounting principles earnings of $5.8 million, or 27 cents a share, for the three months ended in December, down from its prior outlook for earnings of 31 to 41 cents a share, and below the average estimate of analysts polled by

Thomson Reuters

for a profit of 30 cents a share in the period.

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The company sees revenue of $74.2 million and sales bookings of $81.8 million for the quarter. Its prior projection was for revenue of $76 million to $81 million and sales bookings of $82 million to $88 million. Wall Street's consensus view is for revenue of $76.8 million.

"Despite record sales of Rosetta Stone Version 4 TOTALe on both Black Friday and Cyber Monday, our sales to US consumers for the full quarter were below our expectations," said Tony Adams, the company's CEO, in a press release. "The bankruptcy of Borders Group, one of our global retail partners, also negatively affected our revenue and earnings for the fourth quarter."

Adams went on to say that Rosetta Stone is in the process of developing a new strategy for the U.S. consumer market, including " a thorough review of our go-to-market strategy," and it plans to unveil the strategy during an investor webcast on Feb. 28.

Wall Street was already in wait-and-see mode on Rosetta Stone with seven of the nine analysts covering the stock at hold. Jefferies issued a research note following the latest news, maintaining its hold rating on the stock and noting that rising sales and marketing (S&M) expenses also seem to have bedeviled the company, which is slated to report its full fourth-quarter results on Feb. 28.

"Relative to our model, the $3M shortfall in revs was compounded by a $4.5M increase in opex (majority within S&M), which resulted in operating income 65% below our initial estimate ($4M result v us at $11.3M)," said Jefferies, which still has a $22 price target on the stock.

Rosetta Stone did maintain that it's seeing continued strength in its institutional and international markets but the uncertainty in its outlook about the U.S. consumer market did little to inspire confidence in its ability to overcome its struggles. The company said it expects the weakness to continue at least through its current fiscal first quarter (meaning maybe longer) and telegraphed plans to address its expense structure.


Written by Michael Baron in New York.

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Michael Baron


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