Rosetta Stone Inc. Reports Second Quarter 2015 Results

Net Loss Narrows by 48% Reflecting 20% Growth in Enterprise & Education Segment Revenue, Driven by Lexia, Combined with Management’s Actions to Reduce Costs

ARLINGTON, Va.--()--Rosetta Stone Inc. (NYSE: RST), a world leader in technology-based learning solutions, today announced financial results for the second quarter 2015. Revenue totaled $51.4 million, down $5.9 million compared to $57.3 million in the year-ago period. Net loss for the second quarter 2015 totaled $8.2 million, or $(0.38) per diluted share. In the year-ago period, net loss totaled $15.8 million, or $(0.74) per diluted share.

Second Quarter 2015 Overview

  • Revenue in the Enterprise & Education (“E&E”) segment totaled $23.3 million, up $3.9 million compared to $19.4 million in the year-ago period, reflecting the benefit of purchase accounting impacts, which lowered revenue in the second quarter 2014, and 46% growth in Literacy bookings; Language bookings decreased year-over-year due, in part, to a lower amount of multi-year paid upfront deals and currency impacts
  • Segment contribution was 38% of revenue for the Consumer segment, up from 25% in the second quarter last year, reflecting a higher return on media spend and heightened focus on profitability
  • Total operating expense was down $10.7 million versus prior year quarter
  • Additional $12 million in annualized cost savings initiatives identified, on top of the $50 million announced in March 2015
  • Net loss of $8.2 million, or $(0.38) per diluted share; net loss included restructuring charges and other related costs totaling $1.3 million (pre-tax)
  • Revenue-based Adjusted EBITDA, a non-GAAP financial measure, totaled $(0.3) million, up from $(9.0) million in the year-ago period
  • Ended the quarter with $29.8 million in cash with no debt outstanding

“We continue to transform Rosetta Stone into a more attractive SaaS-based business. Improving margins in our Consumer business, combined with capital allocations to accelerate the growth in our E&E business, will enable us to deliver long-term value,” said John Hass, Interim President and Chief Executive Officer. “We are working quickly to establish a lower cost base as we move into 2016. The $50 million in cost reduction actions taken earlier this year are starting to more fully show in our results, while the additional $12 million in annualized cost savings announced today will begin to be realized by the end of the year.”

Second Quarter 2015 Review

Revenue: Total revenue of $51.4 million was down 10% year-over-year as the transition to make E&E the Company’s dominant segment continued during the second quarter. E&E revenue increased 20% year-over-year to reach a record 45% of the total revenue mix; E&E revenue growth also benefitted from the impact of lower revenue in the second quarter 2014 resulting from purchase accounting impacts on acquired deferred revenue from Lexia and Tell Me More. The Company expects the year-over-year revenues to become more comparable as it laps the purchase accounting impact which will result in lower revenue growth rates than what were experienced in the second quarter 2015. Consumer segment revenue declined $9.8 million, reflecting management’s strategic decision to reduce media spending and manage that business for targeted Adjusted EBITDA.

           
US$ thousands, except for percentages

Three Months Ended

June 30,

2015 2014 % change
Revenue from:
Enterprise & Education 23,291 19,414 20 %
Consumer 28,120 37,901 (26 )%
Total 51,411 57,315 (10 )%
 

Net Loss: Net loss in the second quarter 2015 improved 48% to $(8.2) million, compared to $(15.8) million in the second quarter a year ago. The improvement primarily reflected a higher gross profit percentage, the cost savings initiative undertaken in March 2015 and lower variable incentive compensation expense. Gross profit as a percent of revenue improved 340 basis points year-over-year to 82.5% in the second quarter 2015. Total operating expenses were $10.7 million lower, as improvements were realized in all major expense categories. Sales and marketing expense was down 19% year-over-year to $30.6 million, due to the decision to conduct fewer promotional campaigns and lower media spending. Research and development expense was down 17% year-over-year to $7.0 million, reflecting a narrowed focus on product enhancements and new initiatives. General and administrative expense was down 15% year-over-year to $11.9 million, largely due to the 15% staff reduction in global non-E&E headcount undertaken in March 2015.

Balance Sheet and Cash Flow: Cash at the end of the second quarter 2015 was $29.8 million, compared with $64.7 million at December 31, 2014. Deferred revenue totaled $123.2 million, compared to $128.2 million at December 31, 2014. Of the total deferred revenue balance, approximately 72% was short-term and will be recognized as revenue over the next 12 months. Free cash flow, a non-GAAP financial measure, was $(16.1) million in the second quarter 2015, compared with $(7.7) million in the year-ago period. The decline in free cash flow largely reflected payments for severance and consulting resulting from the change in strategy and previously announced cost reductions, along with changes in working capital and a smaller increase in deferred revenue. The Company’s cash flow is highly seasonal, with a net use of cash during the first half of the year that has historically narrowed over the remaining two quarters, with the fourth quarter traditionally being a net generator of cash.

Adjusted EBITDA: Revenue-based Adjusted EBITDA, a non-GAAP financial measure, was $(0.3) million, a favorable change of $8.7 million year-over-year, primarily reflecting the Company’s improved net loss in the second quarter 2015.

Effective this quarter, the Company will guide to GAAP revenue but no longer guide to Bookings (a non-GAAP financial measure). Accordingly, investors should disregard prior Bookings guidance, as previous statements made with respect to Bookings will not be updated.

Similarly, investors should disregard prior Bookings-based Adjusted EBITDA guidance, as the Company has reverted to a revenue-based definition of Adjusted EBITDA which no longer adjusts for the change in deferred revenue or the change in deferred commissions. This change is consistent with the fact that the Company will no longer communicate Bookings guidance. The Company’s prior Bookings-based computation of Adjusted EBITDA would have been $1.2 million, an improvement of $1.1 million compared to $0.1 million in the year-ago period.

Earnings Conference Call

In conjunction with this announcement, Rosetta Stone will host a conference call today at 5:30 p.m. ET during which time there will be a discussion of the results and the Company’s business outlook. Investors may dial into the live conference call using 1-201-689-8470 (toll / international) or 1-877-407-9039 (toll-free). A live webcast will also be available in the investor relations section of the Company's website at http://investors.rosettastone.com. A replay will be made available soon after the live conference call is completed and will remain available until midnight on August 12. Investors may dial into the replay using 1-858-384-5517 and passcode 13613827.

Caution on Forward-Looking Statements

This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts, and often include words such as "believes," "expects," "anticipates," "estimates," "intends," "plans," "seeks" or words of similar meaning, or future-looking or conditional verbs, such as "will," "should," "could," "may," "might, " "aims," "intends," or "projects." These statements may relate to: our revised business strategy; guidance or projections related to revenue, Adjusted EBITDA, bookings, and other measures of future economic performance; the contributions and performance of our businesses including acquired businesses and international operations; projections for future capital expenditures; and other guidance, projections, plans, objectives, and related estimates and assumptions. A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances might not occur. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our present expectations or projections. Some important factors that could cause actual results to differ materially from what we say in our forward-looking statements include: the risk that we are unable to execute our business strategy; declining demand for our language learning solutions; the risk that we are not able to manage and grow our business; the impact of any revisions to our pricing strategy; the risk that we might not succeed in introducing and producing new products and services; the impact of foreign exchange fluctuations; the adequacy of internally generated funds and existing sources of liquidity, such as bank financing, as well as our ability to raise additional funds; the risk that we cannot effectively adapt to and manage complex and numerous technologies; the risk that businesses acquired by us might not perform as expected; and the risk that we are not able to successfully expand internationally. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. These and other risks and uncertainties are more fully described in the Company's filings with the U.S. Securities and Exchange Commission (SEC). We encourage you to review those documents before making any investment decision.

Non-GAAP Financial Measures

This press release also contains several references to 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, other income/expense, income tax benefit and expense, depreciation, amortization and stock-based compensation expense. In addition, Adjusted EBITDA excludes impairments, any items related to the litigation with Google Inc., consulting and other related costs associated with the development and implementation of the accelerated strategy and cost reductions, restructuring and related wind down costs, severance 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 operating activities minus cash used in purchases of property and equipment.

The definitions, GAAP comparisons, and reconciliation of those measures with the most directly comparable GAAP financial measures are available in this press release, which is posted on our website at www.rosettastone.com.

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, and for budgeting and planning purposes. 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.

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. The Company’s non-GAAP measures may not be comparable to those used by other companies, and we encourage you to review and understand all our financial reporting before making any investment decision.

About Rosetta Stone Inc.

Rosetta Stone Inc. (NYSE: RST) is dedicated to changing people’s lives through the power of language and literacy education. The Company’s innovative, personalized language and reading programs drive positive learning outcomes in thousands of schools, businesses, government organizations and for millions of individual learners around the world.

Founded in 1992, Rosetta Stone pioneered the use of interactive software to accelerate language learning and is widely recognized today as the industry leader in providing effective language programs. The Company’s cloud-based programs allow users to learn online or on-the-go via tablet or smartphone, whether in a classroom, in a corporate setting, or in a personal learning environment. Rosetta Stone is also a leader in the literacy education space, helping millions of students build fundamental reading skills through its Lexia Learning division. Additionally, the Company's Fit Brains business offers personalized brain training programs developed by neuroscientists and award-winning game designers to be fun and help keep your brain sharp.

Rosetta Stone is based in Arlington, VA, and has offices and operations around the world. For more information, visit www.rosettastone.com. “Rosetta Stone” is a registered trademark or trademark of Rosetta Stone Ltd. in the United States and other countries.

   

ROSETTA STONE INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

(unaudited)

 
June 30, 2015 December 31, 2014
Assets
Current assets:
Cash and cash equivalents $ 29,803 $ 64,657
Restricted cash 100 123
Accounts receivable (net of allowance for doubtful accounts of $1,514 and $1,434, at June 30, 2015 and December 31, 2014, respectively) 43,530 76,757
Inventory, net 7,636 6,500
Deferred sales commissions 11,426 10,740
Prepaid expenses and other current assets 6,472 5,038
Income tax receivable 1,100   464  
Total current assets 100,067 164,279
Deferred sales commissions 5,088 4,362
Property and equipment, net 25,231 25,277
Goodwill 56,892 58,584
Intangible assets, net 31,081 34,377
Other assets 1,898   1,525  
Total assets $ 220,257   $ 288,404  
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 8,762 $ 19,548
Accrued compensation 10,148 14,470
Obligations under capital lease 372 594
Other current liabilities 33,786 56,157
Deferred revenue 88,590   95,240  
Total current liabilities 141,658 186,009
Deferred revenue 34,577 32,929
Deferred income taxes 1,910 1,554
Obligations under capital lease 2,696 3,154
Other long-term liabilities 991   1,313  
Total liabilities 181,832 224,959
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value; 10,000 and 10,000 shares authorized, zero and zero shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively
Non-designated common stock, $0.00005 par value, 190,000 and 190,000 shares authorized, 23,156 and 22,936 shares issued and 22,156 and 21,936 shares outstanding at June 30, 2015 and December 31, 2014, respectively 2 2
Additional paid-in capital 181,986 178,554
Accumulated loss (131,057 ) (102,998 )
Accumulated other comprehensive loss (1,071 ) (678 )
Treasury stock, at cost, 1,000 and 1,000 shares at June 30, 2015 and December 31, 2014, respectively (11,435 ) (11,435 )
Total stockholders' equity 38,425   63,445  
Total liabilities and stockholders' equity $ 220,257   $ 288,404  
 
   

ROSETTA STONE INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

 
Three Months Ended June 30, Six Months Ended June 30,
2015   2014 2015   2014
Revenue:
Product $ 14,209 $ 28,125 $ 34,183 $ 60,497
Subscription and service 37,202   29,190   75,670   57,583  
Total revenue 51,411 57,315 109,853 118,080
Cost of revenue:
Cost of product revenue 3,719 7,269 9,356 15,093
Cost of subscription and service revenue 5,301   4,691   10,966   9,038  
Total cost of revenue 9,020   11,960   20,322   24,131  
Gross profit 42,391   45,355   89,531   93,949  
Operating expenses:
Sales and marketing 30,555 37,833 70,705 76,930
Research and development 6,953 8,368 15,925 17,142
General and administrative 11,920 14,002 27,674 30,055
Impairment 160 451 2,199
Lease abandonment and termination   118     3,688  
Total operating expenses 49,588   60,321   114,755   130,014  
Loss from operations (7,197 ) (14,966 ) (25,224 ) (36,065 )
Other income and (expense):
Interest income 7 5 11 10
Interest expense (93 ) (50 ) (181 ) (106 )
Other income and (expense) (503 ) (248 ) (2,084 ) (22 )
Total other income and (expense) (589 ) (293 ) (2,254 ) (118 )
Loss before income taxes (7,786 ) (15,259 ) (27,478 ) (36,183 )
Income tax expense (benefit) 389   491   581   (191 )
Net loss $ (8,175 ) $ (15,750 ) $ (28,059 ) $ (35,992 )
Loss per share:
Basic $ (0.38 ) $ (0.74 ) $ (1.31 ) $ (1.70 )
Diluted $ (0.38 ) $ (0.74 ) $ (1.31 ) $ (1.70 )
Common shares and equivalents outstanding:
Basic weighted average shares 21,689   21,252   21,355   21,188  
Diluted weighted average shares 21,689   21,252   21,355   21,188  
 
   

ROSETTA STONE INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 
Three Months Ended June 30, Six Months Ended June 30,
2015   2014 2015   2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,175 ) $ (15,750 ) $ (28,059 ) $ (35,992 )
Adjustments to reconcile net loss to cash used in operating activities:
Stock-based compensation expense 2,108 1,953 3,395 3,359
Loss on foreign currency transactions 323 1,695
Bad debt expense 542 515 952 1,472
Depreciation and amortization 3,333 3,460 6,683 6,894
Deferred income tax expense (benefit) 84 292 379 (464 )
Loss (gain) on disposal of equipment (1 ) 3 (2 ) 109
Amortization of debt issuance costs 36 68
Loss on impairment 160 451 2,199
(Income) from equity method investments (9 ) (9 )
Net change in:
Restricted cash 7 (43 ) 24 17
Accounts receivable 7,119 (5,064 ) 31,665 12,852
Inventory 790 687 (1,167 ) (347 )
Deferred sales commissions (1,506 ) (2,557 ) (1,447 ) (3,934 )
Prepaid expenses and other current assets (177 ) (113 ) (1,499 ) 423
Income tax receivable (189 ) (13 ) (633 ) (652 )
Other assets 155 47 (159 ) 737
Accounts payable (6,337 ) (1,192 ) (10,738 ) (680 )
Accrued compensation (2,944 ) 4,666 (4,090 ) (3,457 )
Other current liabilities (10,834 ) (2,592 ) (19,875 ) (12,053 )
Other long-term liabilities (96 ) (78 ) (321 ) (250 )
Deferred revenue 2,312   11,305   (3,919 ) 11,663  
Net cash used in operating activities (13,299 ) (4,474 ) (26,606 ) (18,104 )
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,771 ) (3,178 ) (5,153 ) (4,544 )
Decrease in restricted cash for Vivity acquisition 12,314
Acquisitions, net of cash acquired (1,526 ) (1,688 ) (41,687 )
Other investing activities (280 )   (280 )  
Net cash used in investing activities (3,051 ) (4,704 ) (7,121 ) (33,917 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of stock options 188 37 642
Payment of financing fees (7 ) (34 )
Payments under capital lease obligations (93 ) (305 ) (375 ) (366 )
Net cash (used in) provided by financing activities (100 ) (117 ) (372 ) 276  
Decrease in cash and cash equivalents (16,450 ) (9,295 ) (34,099 ) (51,745 )
Effect of exchange rate changes in cash and cash equivalents 329   160   (755 ) (241 )
Net decrease in cash and cash equivalents (16,121 ) (9,135 ) (34,854 ) (51,986 )
Cash and cash equivalents—beginning of period 45,924   55,974   64,657   98,825  
Cash and cash equivalents—end of period $ 29,803   $ 46,839   $ 29,803   $ 46,839  
 
   

ROSETTA STONE INC.

Reconciliation of GAAP Net Loss to Adjusted EBITDA

(in thousands)

(unaudited)

 
Three Months Ended June 30, Six Months Ended June 30,
2015   2014 2015   2014
GAAP net loss $ (8,175 ) $ (15,750 ) (28,059 ) (35,992 )
Total other non-operating (income) and expense 589 293 2,254 118
Income tax expense (benefit) expense 389 491 581 (191 )
Impairment 160 451 2,199
Stock-based compensation 2,108 1,953 3,395 3,359
Depreciation and amortization 3,333 3,460 6,683 6,894
Other EBITDA adjustments 1,331   561   7,765   8,567  
Adjusted EBITDA* $ (265 ) $ (8,992 ) $ (6,930 ) $ (15,046 )
 

* Beginning Q2 2015, Adjusted EBITDA is GAAP net income/(loss) plus interest income and expense, other income/expense, income tax benefit and expense, depreciation, amortization, and stock-based compensation expense. In addition, Adjusted EBITDA excludes impairments, any items related to the litigation with Google Inc., consulting and other related costs associated with the development and implementation of the accelerated strategy and cost reductions, restructuring and related wind down costs, severance costs, and transaction and other costs associated with mergers and acquisitions, as well as all adjustments related to the non-cash tax valuation allowance for deferred tax assets. Adjusted EBITDA for prior periods has been revised to conform to the current definition. See below for a reconciliation of the definition of Adjusted EBITDA prior to Q2 2015 which included the impact of the change in deferred revenue (excluding acquired deferred revenue) less the change in deferred commissions.

 
  Three Months Ended June 30,   Six Months Ended June 30,
2015   2014 2015   2014
Adjusted EBITDA using definition beginning Q2 2015 $ (265 ) $ (8,992 ) (6,930 ) (15,046 )
Change in deferred revenue 2,944 11,689 (5,002 ) 12,165
Change in deferred commission (1,518 ) (2,556 ) (1,412 ) (3,933 )
Adjusted EBITDA using definition prior to Q2 2015 $ 1,161   $ 141   $ (13,344 ) $ (6,814 )
 
   

ROSETTA STONE INC.

Reconciliation of Cash Used in Operating Activities to Free Cash Flow

(in thousands)

(unaudited)

 

Three Months Ended
June 30,

Six Months Ended
June 30,

2015   2014 2015   2014
Net cash used in operating activities $ (13,299 ) $ (4,474 ) $ (26,606 ) $ (18,104 )
Purchases of property and equipment   (2,771 )   (3,178 )   (5,153 )   (4,544 )
Free cash flow* $ (16,070 ) $ (7,652 ) $ (31,759 ) $ (22,648 )
 

* Free cash flow is cash flow from operations minus cash used in purchases of property and equipment.

 
     

Rosetta Stone Inc.

Business Metrics

(unaudited)

 
Quarter-Ended Year

Ended

Quarter-Ended
Mar 31

2014

  Jun 30

2014

  Sep 30

2014

  Dec 31

2014

Dec 31

2014

Mar 31

2015

  Jun 30

2015

Revenue by Segment (in thousands, except percentages)

 
Enterprise & Education 17,882 19,414 22,532 24,872 84,700 23,168 23,291
Consumer 42,883     37,901     41,983     54,386     177,153     35,274     28,120    
Total 60,765 57,315 64,515 79,258 261,853 58,442 51,411
 
YoY Growth (%)
Enterprise & Education 28 % 32 % 50 % 51 % 41 % 30 % 20 %
Consumer (14

)

%

(20

)

%

(8

)

%

(11

)

%

(13

)

%

(18

)

%

(26

)

%

Total (5

)

%

(8

)

%

6 % 2 % (1

)

%

(4

)

%

(10

)

%

 
% of Total Revenue
Enterprise & Education 29 % 34 % 35 % 31 % 32 % 40 % 45 %
Consumer 71   % 66   % 65   % 69   % 68   % 60   % 55   %
Total 100   % 100   % 100   % 100   % 100   % 100   % 100   %
 

Revenues by Geography (in thousands, except percentages)

 
United States 49,410 46,637 51,592 64,431 212,070 46,189 41,539
International 11,355     10,678     12,923     14,827     49,783     12,253     9,872    
Total 60,765     57,315     64,515     79,258     261,853     58,442     51,411    
 
Revenues by Geography (as a %)
United States 81 % 81 % 80 % 81 % 81 % 79 % 81 %
International 19   % 19   % 20   % 19   % 19   % 21   % 19   %
Total 100   % 100   % 100   % 100   % 100   % 100   % 100   %
 

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.

 

Contacts

Rosetta Stone Inc.
Investors:
Frank Milano, 703-387-5876
ir@rosettastone.com
or
Media Contact:
Michelle Alvarez, 703-387-5862
malvarez@rosettastone.com

Release Summary

Rosetta Stone Q2 2015 Earnings

Contacts

Rosetta Stone Inc.
Investors:
Frank Milano, 703-387-5876
ir@rosettastone.com
or
Media Contact:
Michelle Alvarez, 703-387-5862
malvarez@rosettastone.com