Rosetta Stone Inc. Reports Fourth Quarter 2013 Results

47% Growth in Enterprise and Education Business Demonstrates Momentum of Transformation

ARLINGTON, Va.--()--Rosetta Stone Inc. (NYSE:RST), a leading provider of technology-based language-learning, reading and brain fitness solutions, today announced financial results for the fourth quarter of 2013, as summarized below:

   
US$ thousands Three Months Ended
except per-share data December 31, %
2013   2012 change
(As Adjusted) *
Total revenue $ 77,711 $ 78,701 -1 %
Total bookings $ 83,987 $ 84,327 0 %
 
Net income (loss) $ (3,848 ) $ 4,635 -183 %
Net income (loss) per share $ (0.18 ) $ 0.22 -182 %
 

Adjusted EBITDA (new definition)

$ 7,899 $ 14,753 -46 %
 

Pro forma revenue

$ 81,663 $ 78,701 4 %

Pro forma adjusted EBITDA

$ 6,020 $ 9,767 -38 %
 

Pro forma adjusted net income

$ 1,101 $ 3,761 -71 %

Pro forma adjusted net income per share

$ 0.05 $ 0.17 -71 %
 
Cash flow from operations $ 11,802 $ 23,409 -50 %
Purchases of property and equipment $ (2,526 ) $ (1,248 ) 102 %
Free cash flow $ 9,276 $ 22,161 -58 %
 
*Certain amounts have been adjusted for the retrospective change in accounting principle for sales commissions.
 
Definitions and reconciliations for all non-GAAP measures are provided in this press release.
 

“The transformation that we have been undertaking at Rosetta Stone really started to gather momentum in the fourth quarter. Recent efforts focusing on our Enterprise and Education (“E&E”) segment began to evidence themselves with 47% E&E bookings growth including the addition of Lexia,” said Steve Swad, President and Chief Executive Officer of Rosetta Stone. Swad continued, “We also experienced 7% growth in the North America direct-to-consumer (“DTC”) channel, our largest, which partially offset a 23% decline in our North America retail channel. We also furthered our strategy in the fourth quarter by launching a new product, Advanced English for Business, in our E&E segment, announced the acquisitions of Tell Me More and Fit Brains (Vivity Labs), which will broaden and diversify our product portfolio. We also repurchased one million shares of stock.”

“Overall, 2013 was an active and transformational year for Rosetta Stone. We remade our product development capabilities, launched new products and apps, deepened our commitment to language while also moving beyond language to extend our reach. We continued our shift to more digital and mobile product delivery, and moved away from lower-yielding channels like kiosks, while at the same time investing in our E&E business. We believe that all of these actions have positioned Rosetta Stone to deliver higher quality top line growth and margin enhancement over the next couple of years,” concluded Swad.

Fourth Quarter 2013 Operational and Financial Highlights

Bookings: Total consolidated bookings of $84.0 million decreased slightly from $84.3 million in the year-ago period. North American Consumer segment (“NA Consumer”) bookings decreased 9% to $52.6 million from $57.9 million, reflecting the absence of $3.4 million of bookings from our kiosk channel, which was closed early in the second quarter of 2013 and a decrease in retail channel bookings. Bookings from the direct-to-consumer channel grew at a mid-single digit percentage rate, partially offsetting the declines from retail and kiosk. Excluding the kiosk channel, NA Consumer bookings decreased 3% year-over-year. Rest of World Consumer segment (“ROW”) bookings declined 27%, primarily reflecting a continuation of declines in Asia, partially offset by growth in Germany. Bookings in the Global Enterprise & Education (“E&E”) segment increased 47% compared with a year-ago. Core E&E bookings, which exclude bookings from Lexia and certain de-emphasized network product, increased 24% year-over-year. Bookings from Lexia registered 18% pro forma growth in the fourth quarter compared with the fourth quarter of 2012.

   
US$ thousands Three Months Ended
December 31,
2013   2012 % change
Bookings from:
North America Consumer $ 52,620 $ 57,870 -9 %
Rest of World Consumer

7,300

10,034

-27 %
Total Consumer 59,920 67,904 -12 %
Global Enterprise and Education

24,067

16,423

47 %
Total $ 83,987 $ 84,327 0 %
 

Revenue: Total revenue of $77.7 million decreased 1% year-over-year from $78.7 million. NA Consumer revenue increased 2%, reflecting the absence of sales from the kiosk channel and decreases in the retail channel, partially offset by growth in the direct-to-consumer channel. Excluding kiosk, core NA Consumer revenue increased 9% year-over-year. ROW Consumer revenue decreased 29% due mainly to decreases in Japan and Korea, partially offset by growth in Germany. E&E revenue grew 5% in the fourth quarter compared with a year ago.

   
US$ thousands Three Months Ended
December 31,
2013   2012 % change
Revenue from:
North America Consumer $ 53,999 $ 52,946 2 %
Rest of World Consumer

7,207

10,088

-29 %
Total Consumer 61,206 63,034 -3 %
Global Enterprise and Education

16,505

15,667

5 %
Total $ 77,711 $ 78,701 -1 %
 
  • Adjusted EBITDA: Note: In the fourth quarter, the Company changed its definition of Adjusted EBITDA. Adjusted EBITDA, as referred to in this release, starts with the same definition that we had previously but adds back the change in deferred revenue excluding increase in deferred revenue from acquisitions and subtracts the change in deferred commissions to arrive at the new definition. Please see the definitions below for a complete definition of Adjusted EBITDA.

    Adjusted EBITDA in the fourth quarter was $7.9MM vs. $14.8MM a year ago. The decrease in the quarter is due to a limited number of factors.

    First, fourth quarter 2013 NA retail bookings decreased $4.3 million versus fourth quarter 2012. Second, media spend in North American consumer increased $3.0 million, helping to drive higher traffic to our website and an 11% increase in product units. Finally, we spent about $3.2 million more on R&D than in the year-ago period. This reflected additional investment to develop new products as well as additional spending related to the inclusion of Livemocha and Lexia.
  • Balance Sheet and Cash Flow: Cash at the end of the year was $98.8 million, a $14.3 million decrease from $113.1 million at September 30, 2013. The decrease in cash was mainly due to the pending acquisition of Vivity Labs for which $12.3 million in cash was placed in escrow (included in restricted cash) as of December 31, 2013 and the repurchase of 1 million shares of stock for $11.4 million, partially offset by free cash flow of $9.3 million in the quarter. The balance sheet continues to be solid with no debt. Deferred revenue increased $6.3 million in the quarter to $78.9 million. Free cash flow in the fourth quarter was $9.3 million compared with $22.2 million ($13.6 million before a tax refund of $8.6 million) a year ago. The decline in free cash flow reflects the lower Adjusted EBITDA and a decrease in working capital, an increase in capital expenditures to $2.5 million in the fourth quarter compared with $1.2 million a year ago. In addition, in the first quarter of 2014 we paid $28 million in cash related to the acquisition of Tell Me More.

Guidance

The company is providing the following guidance for the full year 2014:

 
FY 2014 Guidance
   

Amount/Range

Commentary

Consolidated Bookings $315MM to $325MM Mid-single digit % growth
 
Adjusted EBITDA $18MM to $22MM ~5% margin
 
Shares outstanding ~22MM
 
Capital Expenditures $10MM to $14MM Acquisitions & Acquisition Integrations
 
Long-term effective tax rate   39%    
 

Non-GAAP Financial Measures

This press release contains several non-GAAP financial measures.

  • Bookings represent executed sales contracts received by the Company that are either recorded immediately as revenue or as deferred revenue.
  • Adjusted EBITDA is GAAP net income/(loss) plus interest income and expense, income tax benefit and expense, depreciation, amortization and stock-based compensation expense plus the change in deferred revenue excluding increase in deferred revenue from acquisitions less the change in deferred commissions. In addition, Adjusted EBITDA excludes any items related to the litigation with Google Inc., restructuring 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 current definition.
  • Free cash flow is cash flow from operations less cash used in purchases of property and equipment.
  • Pro Forma Revenue is GAAP revenue plus the purchase accounting impact on acquired deferred revenue.
  • Pro forma adjusted EBITDA is GAAP net income/(loss) plus interest income and expense, income tax benefit and expense, depreciation, amortization and stock-based compensation expenses. Pro forma adjusted EBITDA excludes any items related to the litigation with Google Inc., restructuring 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, plus the purchase accounting impact on acquired deferred revenue less the purchase accounting impact on acquired deferred commissions. Pro forma adjusted EBITDA for prior periods has been revised to conform to current definition.
  • Pro forma adjusted net income/(loss) and pro forma adjusted net income (loss) per share exclude the impact of items related to its litigation with Google Inc., restructuring 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, plus the purchase accounting impact on acquired deferred revenue less the purchase accounting impact on acquired deferred commissions. Pro forma adjusted net income/(loss) and pro forma adjusted EPS for prior periods has been revised to conform to current definition.

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 and education-technology companies, many of which present similar non-GAAP financial measures to investors.

Management typically excludes the amounts described below when evaluating the Company’s operating performance and believes that the resulting non-GAAP measures are useful to investors and financial analysts in assessing the Company’s operating performance, due to the following factors:

  • Amortization of Acquired Intangibles. Amortization costs and the related tax effects are fixed at the time of an acquisition, and then amortized over a period of several years after the acquisition and generally cannot be changed or influenced by management after the acquisition.
  • Stock-based Compensation. Although stock-based compensation is an important aspect of compensation of the Company’s employees and executives, stock-based compensation expense is generally fixed at the time of grant, then amortized over a period of several years after the grant of the stock-based instrument, and generally cannot be changed or influenced by management after the grant. In addition, the impact of shares granted under these plans is considered in the Company’s EPS calculation to the extent the shares are dilutive.
  • Bookings. Although revenue is an important aspect of measuring Company performance, the Company believes total sales bookings can be a valuable indicator of the Company's performance. The Company is transitioning to a greater amount of subscription sales, which results in an increasing portion of sales being recorded as deferred revenue.

Management does not consider these non-GAAP measures in isolation or as an alternative to financial measures determined in accordance with GAAP. The principal limitation of these non-GAAP financial measures is that they exclude significant expenses and income that are required by GAAP to be recorded in the Company's financial statements. In addition, they are subject to inherent limitations, because they reflect the exercise of judgments by management about which expenses and items of income are excluded from these non-GAAP financial measures and may not be calculated in the same manner as other companies’ similarly titled non-GAAP measures.

In order to compensate for these limitations, management presents its non-GAAP financial measures in connection with its GAAP results. 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, and not to rely on any single financial measure to evaluate the company's business.

Reconciliation tables of the most comparable GAAP financial measures to the non-GAAP measures used in this press release are included at the end of this release.

Investor Day Webcast

This news release and the accompanying tables should be read in conjunction with the additional content that is available on the company’s website.

In conjunction with this announcement, Rosetta Stone will host an Investor Day webcast today at 9:00 a.m. eastern time (ET) during which time there will be a discussion of the results and the company’s business outlook.

The webcast will be available live on the Investor Relations page of the company’s website at http://investors.rosettastone.com.

A recorded replay of the webcast will be available on the “Investor Relations” page of the company’s web site http://investors.rosettastone.com after the live discussion.

About Rosetta Stone

Rosetta Stone Inc. (NYSE: RST) is dedicated to changing the way the world learns. The company’s innovative technology-driven language and reading solutions are used by thousands of schools, businesses, government organizations and millions of individuals around the world. Founded in 1992, Rosetta Stone pioneered the use of interactive software to accelerate language learning. Today the company offers courses in 30 languages, from the most commonly spoken (such as English, Spanish and Mandarin) to the less prominent (including Swahili, Swedish and Tagalog). In 2013, Rosetta Stone expanded beyond language and deeper into education-technology with its acquisitions of Livemocha, Lexia Learning, Vivity Labs, and Tell Me More. Rosetta Stone is based in Arlington, VA, and has offices around the world.

Cautionary Statement Regarding Forward-Looking Statements

Certain statements in this press release are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, 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,” “guidance,” “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 solutions; 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 and services; 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 operations and growth plans; our plans regarding our retail relationships; our plans regarding our E&E 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 realign our cost structure and revitalize our go-to-market strategy; our plans to transition our distribution to more online in the Consumer business; our mergers and acquisitions plans; our ability to successfully integrate Lexia, Livemocha, FitBrains (Vivity Labs) and Tell Me More into our business; 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, 2012, 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 BALANCE SHEETS
(in thousands, except per share amounts)
(unaudited)
 
  December 31,   December 31,
2013 2012
(As Adjusted)*
 
Assets
Current assets:
Cash and cash equivalents $ 98,825 $ 148,190
Restricted cash 12,424 73

Accounts receivable (net of allowance for doubtful accounts of $1,000 and $1,297, respectively)

60,342 49,946
Inventory 6,639 6,581
Prepaid expenses and other current assets 12,294 8,681
Income tax receivable   197     1,104  
Total current assets 190,721 214,575
 
Property and equipment, net 17,766 17,213
Goodwill 50,059 34,896
Intangible assets, net 29,006 10,825
Other assets   3,224     1,937  
Total assets $ 290,776   $ 279,446  
 
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 10,326 $ 6,064
Accrued compensation 16,380 16,830
Other current liabilities 42,192 36,387
Deferred revenue   67,173     59,195  
Total current liabilities 136,071 118,476
 
Deferred revenue 11,684 4,221
Deferred income taxes 9,022 8,400
Other long-term liabilities   2,756     155  
Total liabilities 159,533 131,252
 
Commitments and contingencies
 
Stockholders' equity:

Preferred stock, $0.001 par value; 10,000 and 10,000 authorized; zero and zero shares issued and outstanding December 31, 2013 and December 31, 2012, respectively

Non-designated common stock, $0.00005 par value, 190,000 and 190,000 shares authorized, 22,588 and 21,951 shares issued and 21,588 and 21,951 shares outstanding at December 31, 2013 and December 31, 2012, respectively

2 2
Additional paid-in capital 171,123 160,693
Accumulated loss (29,292 ) (13,158 )
Accumulated other comprehensive income 845 657

Treasury stock, at cost, 1,000 shares at December 31, 2013 and zero shares at December 31, 2012

  (11,435 )   -  
Total stockholders' equity   131,243     148,194  
Total liabilities and stockholders' equity $ 290,776   $ 279,446  
 

* Certain amounts have been adjusted for the retrospective change in accounting principle for sales commissions.

 
 
ROSETTA STONE INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
       
Three Months Ended Twelve Months Ended
December 31, December 31,
2013 2012 2013 2012
(As Adjusted)* (As Adjusted)*
Revenue:
Product $ 49,705 $ 53,384 $ 156,792 $ 180,919
Subscription and service   28,006     25,317   107,853     92,322  
Total revenue 77,711 78,701 264,645 273,241
 
Cost of revenue:
Cost of product revenue 10,928 9,596 32,191 33,684
Cost of subscription and service revenue   3,554     3,335   13,523     15,226  
Total cost of revenue 14,482 12,931 45,714 48,910
       
Gross profit   63,229     65,770   218,931     224,331  
 
Operating expenses
Sales and marketing 41,200 40,364 146,104 150,882
Research and development 8,747 5,510 33,995 23,453
General and administrative 16,223 14,211 56,432 55,262
Lease abandonment   7     -   842     -  
Total operating expenses   66,177     60,085   237,373     229,597  
 
(Loss) income from operations (2,948 ) 5,685 (18,442 ) (5,266 )
 
Other income and (expense):
Interest income 12 46 117 187
Interest expense (7 ) - (61 ) -
Other income (expense)   263     74   368     3  
Total other income (expense) 268 120 424 190
 
(Loss) income before income taxes (2,680 ) 5,805 (18,018 ) (5,076 )
Income tax provision (benefit)   1,168     1,170   (1,884 )   28,909  
 
Net (loss) income $ (3,848 ) $ 4,635 $ (16,134 ) $ (33,985 )
 
Net (loss) income per share:
Basic $ (0.18 ) $ 0.22 $ (0.75 ) $ (1.61 )
Diluted $ (0.18 ) $ 0.21 $ (0.75 ) $ (1.61 )
 
Common shares and equivalents outstanding:
Basic weighted average shares   21,353     21,166   21,528     21,045  
Diluted weighted average shares   21,353     21,828   21,528     21,045  
 

* Certain amounts have been adjusted for the retrospective change in accounting principle for sales commissions.

 
       
ROSETTA STONE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Three Months Ended Twelve Months Ended
December 31, December 31,
2013 2012 2013 2012
(As Adjusted)* (As Adjusted)*
 
Cash Flows From Operating Activities:
Net (loss) income $ (3,848 ) $ 4,635 $ (16,134 ) $ (33,985 )

Adjustments to reconcile net (loss) income to cash provided by operating activities, net of business acquisitions

Stock-based compensation expense 3,012 1,801 9,241 8,009
Bad debt expense 738 485 1,420 1,820
Depreciation and amortization 2,630 1,847 9,635 8,077
Deferred income tax provision (benefit) 658 107 (3,869 ) 25,953
Loss on disposal of equipment 32 31 278 783
Net change in:
Restricted cash (28 ) (14 ) (37 ) 1
Accounts receivable (15,149 ) (10,840 ) (9,477 ) 309
Inventory 398 184 (108 ) 185
Prepaid expenses and other current assets (1,918 ) 504 (3,511 ) 1,165
Income tax receivable 436 8,595 827 6,515
Other assets (18 ) 243 (1,680 ) 166
Accounts payable 2,741 (863 ) 3,702 (1,240 )
Accrued compensation 3,283 3,617 (897 ) 5,093
Other current liabilities 12,342 7,325 4,250 635
Excess tax benefit from stock options exercised - - - -
Other long-term liabilities 152 (55 ) 481 (99 )
Deferred revenue   6,341     5,807     13,947     11,514  
Net cash provided by operating activities   11,802     23,409     8,068     34,901  
 
Cash Flows From Investing Activities:
Purchases of property and equipment (2,526 ) (1,248 ) (8,941 ) (4,187 )
Proceeds from (purchases of) available-for-sale securities - - - 9,711
Increase in restricted cash for Vivity acquisition (12,314 ) - (12,314 ) -
Acquisitions, net of cash acquired   -     -     (25,675 )   -  
Net cash (used in) provided by investing activities   (14,840 )   (1,248 )   (46,930 )   5,524  
 
Cash Flows From Financing Activities:
Proceeds from the exercise of stock options 78 32 2,457 862
Repurchase of shares from exercised stock options - - (1,040 ) -
Proceeds from equity offering, net of issuance costs - - (228 ) -
Purchase of treasury stock (11,435 ) - (11,435 ) -
Payments under capital lease obligations   (28 )   (210 )   (241 )   (215 )
Net cash (used in) provided by financing activities   (11,385 )   (178 )   (10,487 )   647  
 
(Decrease) increase in cash and cash equivalents (14,423 ) 21,983 (49,349 ) 41,072
 
Effect of exchange rate changes in cash and cash equivalents   144     161     (16 )   602  
 
Net (decrease) increase in cash and cash equivalents (14,279 ) 22,144 (49,365 ) 41,674
 
Cash and cash equivalents—beginning of period   113,104     126,046     148,190     106,516  
 
Cash and cash equivalents—end of period $ 98,825   $ 148,190   $ 98,825   $ 148,190  
 

* Certain amounts have been adjusted for the retrospective change in accounting principle for sales commissions.

 
 
ROSETTA STONE INC.
Reconciliation of GAAP Net Income (Loss) to Adjusted Net Income (Loss) and Pro Forma Adjusted Net Income (Loss)
(in thousands, except per share amounts)
(unaudited)
       
 
Three Months Ended Twelve Months Ended
December 31, December 31,
2013 2012 2013 2012
(As Adjusted) *

(As Adjusted) *

 
GAAP net income (loss) $ (3,848 ) $ 4,635 $ (16,134 ) $ (33,985 )
 
Items related to litigation with Google, Inc., restructuring and other related costs, and acquisition costs 838 360 6,681 3,752
Income tax adjustments **   1,886     (1,234 )   2,537     29,425  
Adjusted net income (loss) *** $ (1,124 ) $ 3,761   $ (6,916 ) $ (808 )
 
Purchase accounting impact on acquired deferred revenue 3,952 - 7,169 -
Purchase accounting impact on acquired deferred commissions   (1,727 )   -     (2,938 )   -  
Pro forma adjusted net income (loss) **** $ 1,101   $ 3,761   $ (2,685 ) $ (808 )
 
GAAP net income (loss) per share $ (0.18 ) $ 0.21 $ (0.75 ) $ (1.61 )
Items related to litigation with Google, Inc. restructuring and other related costs 0.04 0.02 0.31 0.18
Income tax adjustments **   0.09     (0.06 )   0.12     1.40  
Adjusted net income (loss) per share *** $ (0.05 ) $ 0.17   $ (0.32 ) $ (0.04 )
 
Purchase accounting impact on acquired deferred revenue 0.18 - 0.33 -
Purchase accounting impact on acquired deferred commissions   (0.08 )   -     (0.14 )   -  
Pro forma adjusted net income (loss) per share **** $ 0.05   $ 0.17   $ (0.12 ) $ (0.04 )
 
Basic weighted average shares 21,353 21,166 21,528 21,045
Diluted weighted average shares 21,821 21,828 21,528 21,045
 

* Certain amounts have been adjusted for the retrospective change in accounting principle for sales commissions.

 
** For adjusted net income (loss) and pro forma adjusted net income (loss) purposes, we use a 39% effective tax rate which represents the projected, long term effective tax rate on adjusted pretax income. Our adjusted tax rate assumes full use of loss and credit carryforwards without reduction for valuation allowances.
 
*** Adjusted net income (loss) and adjusted net income (loss) per share exclude the impact of items related to its litigation with Google Inc., restructuring 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.
 
**** Pro forma adjusted net income (loss) and pro forma adjusted net income (loss) per share are adjusted net income (loss) and adjusted net income (loss) per share plus the purchase accounting impact on acquired deferred revenue less the purchase accounting impact on acquired deferred commissions.
 
 
ROSETTA STONE INC.
Reconciliation of Revenue to Pro Forma Revenue
(in thousands)
(unaudited)
       
 
Three Months Ended Twelve Months Ended
December 31, December 31,
2013 2012 2013 2012
 
GAAP revenue $ 77,711 $ 78,701 $ 264,645 $ 273,241
Purchase accounting impact on acquired deferred revenue   3,952   -   7,169   -
 
Pro Forma revenue* $ 81,663 $ 78,701 $ 271,814 $ 273,241
 
* Pro forma revenue is GAAP revenue plus the purchase accounting impact on acquired deferred revenue.
 
 
ROSETTA STONE INC.
Reconciliation of GAAP Net Income (Loss) to Adjusted EBITDA (old definition) and Pro Forma Adjusted EBITDA
(in thousands)
(unaudited)
       
Three Months Ended Twelve Months Ended
December 31, December 31,
Old Definition 2013 2012 2013 2012
(As Adjusted)* (As Adjusted)*
 
GAAP net income (loss) $ (3,848 ) $ 4,635 $ (16,134 ) $ (33,985 )
Interest (income)/expense, net (5 ) (46 ) (56 ) (187 )
Income tax (benefit) expense 1,168 1,170 (1,884 ) 28,909
Depreciation and amortization 2,630 1,847 8,968 8,077
Depreciation related to restructuring - - 667 -
Stock-based compensation 3,012 1,801 9,241 8,009
Other EBITDA adjustments   838     360     6,014     3,752  
Adjusted EBITDA (old definition)** $ 3,795   $ 9,767   $ 6,816   $ 14,575  
 
Purchase accounting impact on acquired deferred revenue 3,952 - 7,169 -
Purchase accounting impact on acquired deferred commissions   (1,727 )   -     (2,938 )   -  
Pro Forma Adjusted EBITDA**** $ 6,020   $ 9,767   $ 11,047   $ 14,575  
 
 
 
ROSETTA STONE INC.
Reconciliation of GAAP Net Income (Loss) to Adjusted EBITDA (new definition)
(in thousands)
(unaudited)
 
Three Months Ended Twelve Months Ended
December 31, December 31,
New Definition 2013 2012 2013 2012
(As Adjusted)* (As Adjusted)*
 
GAAP net income (loss) $ (3,848 ) $ 4,635 $ (16,134 ) $ (33,985 )
Interest (income)/expense, net (5 ) (46 ) (56 ) (187 )
Income tax (benefit) expense 1,168 1,170 (1,884 ) 28,909
Depreciation and amortization 2,630 1,847 8,968 8,077
Depreciation related to restructuring - - 667 -
Stock-based compensation 3,012 1,801 9,241 8,009
Other EBITDA adjustments   838     360     6,014     3,752  
Adjusted EBITDA (old definition)** $ 3,795   $ 9,767   $ 6,816   $ 14,575  
 
Change in Deferred Revenue 6,277 5,627 13,490 11,521
Change in Deferred Commission   (2,173 )   (641 )   (4,245 )   (764 )
Adjusted EBITDA (new definition)*** $ 7,899   $ 14,753   $ 16,061   $ 25,332  
 
* Certain amounts have been adjusted for the retrospective change in accounting principle for sales commissions.
 
** Adjusted EBITDA (old definition) 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 items related to the litigation with Google Inc., restructuring costs and transaction and other costs associated with mergers and acquisitions. Adjusted EBITDA for prior periods has been revised to conform to current definition.
 
*** Adjusted EBITDA (new definition) is Adjusted EBITDA (old definition) plus the change in deferred revenue less the change in deferred commissions excluding increase in deferred revenue from acquisitions.
 
**** Pro Forma Adjusted EBITDA is Adjusted EBITDA (old definition) plus the purchase accounting impact on acquired deferred revenue less the purchase accounting impact on acquired deferred commissions.
 

                         
Rosetta Stone Inc.
Business Metrics
(in thousands)
                               
Quarter-Ended Quarter-Ended
 
3/31/12   6/30/12   9/30/12   12/31/12   2012 3/31/13   6/30/13   9/30/13   12/31/13   2013

Net Bookings by Market

 
North America Consumer 41,733 37,295 42,283 57,870 179,181 41,303 39,321 38,629 52,620 171,873
Rest of World Consumer 12,550   8,113   10,488   10,034   41,185 8,310   6,879   7,471   7,300   29,960
Worldwide Consumer 54,283 45,408 52,771 67,904 220,366 49,613 46,200 46,100 59,920 201,833
 
Global Enterprise and Education 10,984   17,635   19,354   16,423   64,396 10,758   16,883   24,594   24,067   76,302
Total 65,267   63,043   72,125   84,327   284,762 60,371   63,083   70,694   83,987   278,135
 
YoY Growth (%)
North America Consumer 40% 1% 19% 5% 14% -1% 5% -9% -9% -4%
Rest of World Consumer -16%   -37%   -12%   -29%   -24% -34%   -15%   -29%   -27%   -27%
Worldwide Consumer 21% -9% 11% -2% 4% -9% 2% -13% -12% -8%
 
Global Enterprise and Education 2%   4%   4%   6%   4% -2%   -4%   27%   47%   18%
Total 17%   -5%   9%   -1%   4% -8%   0%   -2%   0%   -2%
 
% of Total Net Bookings
North America Consumer 64% 59% 59% 69% 63% 68% 62% 55% 63% 62%
Rest of World Consumer 19%   13%   14%   12%   14% 14%   11%   10%   9%   11%
Worldwide Consumer 83% 72% 73% 81% 77% 82% 73% 65% 71% 73%
 
Global Enterprise and Education 17%   28%   27%   19%   23% 18%   27%   35%   29%   27%
Total 100%   100%   100%   100%   100% 100%   100%   100%   100%   100%
 
 

Revenue by Market

 
North America Consumer 43,084 36,918 39,878 52,946 172,826 41,385 39,934 38,699 53,998 174,016
Rest of World Consumer 12,204   8,053   9,903   10,088   40,248 8,570   7,478   7,165   7,207   30,420
Worldwide Consumer 55,288 44,971 49,781 63,034 213,074 49,955 47,412 45,864 61,205 204,436
 
Global Enterprise and Education 14,161   15,841   14,498   15,667   60,167 13,969   14,727   15,008   16,505   60,209
Total 69,449   60,812   64,279   78,701   273,241 63,924   62,139   60,872   77,710   264,645
 
YoY Growth (%)
North America Consumer 54% -4% 6% 0% 10% -4% 8% -3% 2% 1%
Rest of World Consumer -16%   -33%   -10%   -21%   -20% -30%   -7%   -28%   -29%   -24%
Worldwide Consumer 30% -11% 2% -5% 2% -10% 5% -8% -3% -4%
 
Global Enterprise and Education -1%   -2%   -6%   8%   0% -1%   -7%   4%   5%   0%
Total 22%   -9%   0%   -2%   2% -8%   2%   -5%   -1%   -3%
 
% of Total Revenue
North America Consumer 62% 61% 62% 67% 63% 65% 64% 64% 69% 66%
Rest of World Consumer 18%   13%   15%   13%   15% 13%   12%   11%   9%   11%
Worldwide Consumer 80% 74% 77% 80% 78% 78% 76% 75% 79% 77%
 
Global Enterprise and Education 20%   26%   23%   20%   22% 22%   24%   25%   21%   23%
Total 100%   100%   100%   100%   100% 100%   100%   100%   100%   100%
 
 

Unit Metrics

 
Product Unit Volume (thousands) 143.0 129.7 146.5 210.7 629.8 141.8 148.6 157.7 233.5 681.6
Paid Online Learners (thousands) 41.2 48.7 57.4 68.4 68.4 80.6 85.1 88.6 94.1 94.1
 
YoY Growth (%)
Product Units 32% -7% 9% 4% 8% -1% 15% 8% 11% 8%
Paid Online Learners 151% 185% 167% 157% 157% 95% 75% 54% 38% 38%
 
Average Net Revenue Per Unit ($)
Average Net Revenue per Product Unit $367 $319 $313 $277 $315 $312 $275 $250 $234 $263
Average Net Revenue per Online Learner (monthly) $28 $27 $24 $24 $26 $26 $25 $24 $23 $25
 
YoY Growth (%)
Average Net Revenue per Product Unit -3% -9% -9% -11% -8% -15% -14% -20% -15% -16%
Average Net Revenue per Online Learner -6% -22% -37% -32% -25% -7% -6% -1% -5% -3%
 
 

# of Kiosks (end of period)

 
North America 57 56 57 57 57 56 - - - -
Europe 1 1 1 1 1 - - - - -
Asia Pacific 44 42 39 29 29 22 20 9 3 3
Total # of Kiosks (end of period) 102 99 97 87 87 78 20 9 3 3
 

Revenues by Geography

 
United States 54,914 50,810 52,167 65,856 223,747 52,791 52,163 51,013 67,438 223,405
International 14,535   10,002   12,112   12,845   49,494 11,133   9,976   9,859   10,273   41,241
Total 69,449   60,812   64,279   78,701   273,241 63,924   62,139   60,872   77,711   264,645
 
Revenues by Geography (as a %)
United States 79% 84% 81% 84% 82% 83% 84% 84% 87% 82%
International 21%   16%   19%   16%   18% 17%   16%   16%   13%   18%
Total 100%   100%   100%   100%   100% 100%   100%   100%   100%   100%
 

Contacts

Rosetta Stone Inc.
Investor Contact:
Steve Somers, CFA, 703-387-5876
ssomers@rosettastone.com
or
Media Contact:
Jonathan Mudd, 571-357-7148
jmudd@rosettastone.com

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Contacts

Rosetta Stone Inc.
Investor Contact:
Steve Somers, CFA, 703-387-5876
ssomers@rosettastone.com
or
Media Contact:
Jonathan Mudd, 571-357-7148
jmudd@rosettastone.com