Rosetta Stone's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Rosetta Stone Inc. (RST)

Q2 2012 Earnings Call

August 8, 2012 4:30 pm ET

Executives

Steve Somers – Vice President-Investor Relations

Stephen Swad – Chief Executive Officer

Thomas Pierno – Chief Financial Officer

Analysts

Peter Appert – Piper Jaffray & Co.

Jeff Mueller – Robert W. Baird & Company Inc.

Brandon Dobell – William Blair & Company LLC

Matthew Kempler – Sidoti & Company LLC

Thomas Allen – Morgan Stanley

Presentation

Operator

Greetings, and welcome to the Rosetta Stone Inc. Second Quarter 2012 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Steve Somers, IR for Rosetta Stone Inc. Thank you, Mr. Somers, you may begin.

Steve Somers

Good afternoon. and let me welcome you to Rosetta Stone’s second quarter 2012 earnings call. I’m Steve Somers, Vice President of Investor Relations, and I’m joined today by Steve Swad, Rosetta Stone’s President and CEO; and Tom Pierno, CFO, to discuss the operations and financial results for the second quarter and our outlook.

In addition to our commentary today, we have made our 2Q ‘12 earnings result press release supplemental financial information, and a slide deck supporting this webcast, available on our IR website at investors.rosettastone.com. Please review them to find important additional information. There are or will be forward-looking statements in our press release, slides, and conversation today.

We offer these statements under the Safe Harbor provided by U.S. law, of course, risks and uncertainties attach to any forward-looking statements. A detailed discussion of such risks and uncertainties is contained in our Form 10-K filed with the SEC in March 2012, which is available in the Investor Relations section of our website. We ask that you review those risk factors before making any investment decisions.

Please note that these forward-looking statements reflect our opinions only as of the date of this presentation, and we undertake no obligation to provide or publicly release the results of any revision to the forward-looking statements in light of new information or future events. We also use non-GAAP numbers in our presentation. The definition of those numbers and their reconciliation to GAAP numbers is available in today’s press release on our website and as filed with SEC today on Form 8-K.

Now here, Steve.

Steve Swad

Thanks, Steve and welcome everyone. overall I think the quarter came in largely as expected. If you recall in May, I said my strategic focus for the company is based on three pillars: leveraging the brand, innovating the platform, and expanding distribution. In pursuing these priorities, I committed to you that we would do it in a fashion that balances margins with growth.

Since we last spoke, we have made progress internally along each of these three priorities. As it relates to Q2 however, the best evidence of our progress was in the improvement in margins, which makes sense, because it takes time to meaningfully drive these other priorities.

Adjusted EBITDA came in at a positive $1.1 million versus a negative $1.3 million a year ago, which represents a positive margin of 2%. this performance fits into the 2% to 3% margin range that I outlined for the full-year 2012, and compares favorably to a negative margin of 2% a year ago.

To drive margins, we took a number of actions. For example, we reduced global headcount by about 5%. We closed over 100 low yielding kiosks since Q2 of last year. We removed low performing SKUs. We pulled back on lower yielding media. We reduced our cost structure in Europe by streamlining our operations in the UK and Germany. And we closed low yielding retail locations in Japan. These actions clearly made the company more efficient. However, some of these actions, particularly those around media and kiosks also resulted in lower revenues year-over-year.

Overall revenues for the second quarter declined 9% with our global consumer business off 11% and our institutional business off 2%. In North America, our consumer business faced somewhat weaker consumer demand, which we managed through some promotions that lasted longer than originally planned. Revenues in the quarter were 4% lower than last year and were influenced by several factors.

The first is that revenues from our kiosks were down, as we operated an average of 74 fewer kiosks this year compared with last year. While this impacted revenues by over $2 million, revenues per kiosk continue to increase year-over-year as we’ve made progress in optimizing this channel.

Despite an overall decline that was mainly driven by our reduced kiosk footprint, our direct-to-consumer channel was up nearly 10% as a solid lift in website traffic offset a slightly lower conversion rate.

On the International Consumer side, revenues declined primarily from our operations in Asia. Previously, I’ve indicated that our challenges in Asia were not likely to be resolved in the near-term, and that perspective was not changed in the second quarter. Because our international challenges are not universal, but rather more country-specific, let me touch on each geography.

Results in Japan were down because of declines in our kiosk retail and DTC channels. Part of the decline was due to our efforts to reduce poor performing kiosks and retail locations. In addition, our important DTC channel has not yet stabilized. While our Japanese business continues to struggle and we are still searching for the right pricing and marketing mix to return to growth, we still think Japan and Asia in general are very attractive markets for language learning.

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