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Rosetta Stone Inc. Reports Third Quarter 2009 Results

ARLINGTON, Va.--(BUSINESS WIRE)--Nov. 5, 2009-- Rosetta Stone Inc. (NYSE:RST), a leading provider of technology-based language learning solutions, today announced financial results for the company’s fiscal third quarter ended September 30, 2009.

Total revenue for the third quarter was $67.2 million, an increase of 12%, compared to $59.8 million in the prior year period. GAAP net income for the third quarter was $5.3 million, or $0.25 per share, which exceeded the high-end of the company’s most recent earnings per share guidance. Non-GAAP net income, excluding stock-based compensation expense, amortization of intangibles expense and fees associated with the company’s canceled secondary stock offering, was $6.0 million, or $0.29 per share. A reconciliation of GAAP to non-GAAP results has been provided in the financial statement tables included in this press release. An explanation of these measures is also included below under the heading “Non-GAAP Financial Measures.”

“During the third quarter we saw strong results in both our institutional and international businesses, although we faced some challenges in our US consumer business. Despite our challenges, we feel that Rosetta Stone’s overall third quarter results were solid, including strong growth in our institutional subscription sales, which led to a sharp increase in our deferred revenue,” said Tom Adams, president and chief executive officer.

Adams added, “While we resolved our internet marketing issues during the quarter, we feel that the current economic environment is having an effect on our US consumer business, resulting in greater variability in our operating results as we head into the holiday season. However, we remain confident in Rosetta Stone’s core value proposition and our long-term growth prospects. Our international business and institutional channels are critical to our long-term success, and each are experiencing strong growth. We also expect our US consumer business to deliver increased revenue growth when the economic environment improves.”

Other Third Quarter 2009 Financial Highlights

  • Revenue Mix - Product revenue for the third quarter was $58.2 million, or 87% of total revenues, while subscription and service revenue was $9.1 million, representing the remaining 13% of total revenues. Consumer revenue was $50.9 million, or 76% of total revenues, while Institutional revenue was $16.3 million, representing the remaining 24% of total revenues.
  • Average Sales Per Unit and Unit Volume – Average sales price per unit increased 12% on a year-over-year basis, from $317 to $355. This increase was the result of a shift in the sales mix towards multi-level bundled products and the discontinuation of certain lower end offerings. Bundled solutions represented approximately 65% of third quarter total unit volume, an increase of approximately 15 percentage points compared to the prior year. Total unit volume was flat on a year-over-year basis, however, it increased by approximately 9% after adjusting for the discontinuation of the company’s 3-month online subscription offering in October 2008.
  • GAAP and non-GAAP Operating Income - GAAP operating income for the third quarter was $7.9 million. Non-GAAP operating income, which excludes stock-based compensation expense, amortization of intangibles and expenses associated with the canceled secondary stock offering, was $9.1 million for the third quarter of 2009, or 13% of revenues.
  • Adjusted EBITDA - Adjusted EBITDA, which excludes the impact of stock-based compensation expense and expenses associated with the canceled secondary stock offering, was $10.5 million, or 16% of revenues, for the third quarter of 2009.
  • Deferred Revenue – Deferred revenue was $27.2 million, an increase of $8.9 million from the end of the previous quarter, due primarily to the signing of a $5.0 million contract with the Army and an increase in subscription-based sales to educational institutions.
  • Cash - Cash and Cash Equivalents at September 30, 2009 were $71.2 million, an increase from $66.2 million at the end of the previous quarter.

Financial Outlook

Rosetta Stone management is issuing guidance for the fourth quarter and full year 2009 as follows:

Fourth Quarter of 2009:

  • Total revenue of $72.0 to $76.0 million
  • GAAP net income of $7.8 to $8.8 million
  • GAAP diluted net income per share of $0.36 to $0.41
  • Non-GAAP diluted net income per share of $0.39 to $0.44
  • Adjusted EBITDA of $14.9 to $16.5 million
  • Diluted weighted-average shares outstanding of approximately 21.3 million

Full Year 2009:

  • Total revenue of $246.0 to $250.0 million
  • GAAP net income of $9.0 to $10.0 million
  • GAAP diluted net income per share of $0.45 to $0.50
  • Non-GAAP diluted net income per share of $1.14 to $1.19
  • Adjusted EBITDA of $42.0 to $43.6 million
  • Diluted weighted-average shares outstanding of approximately 20.2 million

The above statements are based on current expectations. These statements are forward-looking, and actual results may differ materially.

Non-GAAP Financial Measures

This press release contains four non-GAAP financial measures: non-GAAP net income, non-GAAP net income per share, adjusted EBITDA, and non-GAAP operating income. These measures differ from GAAP in that they exclude amortization primarily related to acquired intangibles, stock-based compensation expenses, IPO related compensation expenses, and fees associated with the Company’s canceled secondary stock offering in August 2009. Adjusted EBITDA is GAAP net income or loss plus interest expense, income tax expense, depreciation, amortization and stock-based compensation expenses, IPO related compensation expenses and fees associated with the Company’s canceled secondary stock offering in August 2009. 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 companies, many of which present similar non-GAAP financial measures to investors.

Management typically excludes the amounts described above 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.
  • IPO related Compensation. Although the IPO related compensation was an important aspect of compensation for the company’s key employees that played a material role in the growth and success of the company, it was an award that was triggered by the company’s initial public offering in April 2009.
  • Fees associated with canceled secondary stock offering. As part of a canceled secondary stock offering in August 2009 the company incurred certain legal, accounting, and printing expenses that are one-time in nature and not reflective of the company’s underlying performance.

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. Rosetta Stone 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.

Webcast and Conference Call

This news release and the accompanying tables should be read in conjunction with the additional content that is available on the company’s website, which includes supplemental financial information as well as a webcast of a conference call that the company will host to discuss the third quarter 2009 financial results and its outlook for fiscal year 2009. The conference call is scheduled for November 5, 2009 at 4:30 p.m. eastern time (ET).

To access this call, dial 888-211-7262 (domestic) or 913-312-0947 (international). Additionally, a live webcast of the conference call will be available at http://investors.rosettastone.com. Please access the web site at least 15 minutes prior to the start of the call to register and download and install any necessary software.

Following the conference call, a replay will be available until November 19, 2009 at 888-203-1112 (domestic) or 719-457-0820 (international). The replay pass code is 4553361. The web cast of this conference call will be archived. Individuals can access the webcast, as well as the press release and supplemental financial information, at http://investors.rosettastone.com.

About Rosetta Stone

Rosetta Stone Inc. is changing the way the world learns languages. Rosetta Stone provides interactive solutions that are acclaimed for the speed and power to unlock the natural language-learning ability in everyone. Available in more than 30 languages, Rosetta Stone language-learning solutions are used by schools, organizations and millions of individuals in over 150 countries throughout the world. The company was founded in 1992 on the core beliefs that learning a language should be natural and instinctive and that interactive technology can replicate and activate the immersion method powerfully for learners of any age. The company is based in Arlington, Va. For more information, visit RosettaStone.com.

“Rosetta Stone” is a registered trademark of Rosetta Stone Ltd.

Cautionary Statement Regarding Forward-Looking Statements

Certain statements in this press release are forward-looking statements, including our guidance for the fourth quarter of 2009 and the full year 2009 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,” or “will.” 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, technology, brand and business model as compared to others; 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, including our plans to develop new web-based services and expansion of our product portfolio; our plans regarding expansion of our marketing initiatives and sales force; our international expansion plans; our plans to increase our kiosks and retail relationships; our ability to manage and grow our business and execute our business strategy; our financial performance; the general economic downturn and related impact on consumer spending in particular; and the costs associated with being a public company and the other factors described more fully in the Company's filings with the Securities and Exchange Commission, including the Company’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2009, filed with the U.S. Securities and Exchange Commission on August 11, 2009. 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,
2009   2008 2009   2008
Revenue:
Product $ 58,151 $ 53,139 $ 149,663 $ 124,988
Subscription and service   9,065     6,664     24,297     18,143  
Total revenue 67,216 59,803 173,960 143,131
 
Cost of revenue:
Cost of product revenue 7,798 7,871 20,934 17,869
Cost of subscription and service revenue   1,210     705     2,204     1,789  
Total cost of revenue 9,008 8,576 23,138 19,658
                       
Gross Profit   58,208     51,227     150,822     123,473  
 
Operating expenses
Sales and marketing 32,263 25,727 83,023 65,510
Research and development 6,125 5,018 21,069 13,308
General and administrative   11,914     8,889     44,967     26,272  
Total operating expenses   50,302     39,634     149,059     105,090  
 
Income from operations 7,906 11,593 1,763 18,383
 
Other income and (expense):
Interest income 55 109 109 423
Interest expense (8 ) (194 ) (348 ) (714 )
Other income   45     (31 )   81     81  
Total other income (expense) 92 (116 ) (158 ) (210 )
 
Income before income taxes 7,998 11,477 1,605 18,173
Income tax provision   2,695     5,456     399     9,222  
 
Net income $ 5,303   $ 6,021   $ 1,206   $ 8,951  
 
Earnings per share:
Basic $ 0.26   $ 3.13   $ 0.09   $ 4.72  
Diluted $ 0.25   $ 0.36   $ 0.06   $ 0.53  
 
Common shares and equivalents outstanding:
Basic weighted average shares   20,177     1,921     13,229     1,895  
Diluted weighted average shares   20,988     16,931     19,462     16,876  
 
 
ROSETTA STONE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
 
 
  September 30,   December 31,
2009 2008
(unaudited)
 
Assets
Current assets:
Cash and cash equivalents $ 71,168 $ 30,626
Restricted cash 64 34
Accounts receivable (net of allowance for doubtful accounts of $1,643 and $1,103, respectively) 40,470 26,497
Inventory, net 8,726 4,912
Prepaid expenses and other current assets 7,160 6,598
Income tax receivable 4,470 -
Deferred income taxes   2,282     2,282  
Total current assets 134,340 70,949
 
Property and equipment, net 18,625 15,727
Goodwill 34,199 34,199
Intangible assets, net 10,610 10,645
Deferred income taxes 6,828 6,828
Other assets   790     470  
Total assets $ 205,392   $ 138,818  
 
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 3,456 $ 3,207
Accrued compensation 7,615 8,570
Other current liabilities 23,832 21,353
Deferred revenue 25,433 14,382
Current maturities of long-term debt - related party   -     4,250  
Total current liabilities 60,336 51,762
 
Long-term debt - related parties - 5,660
Deferred revenue 1,728 1,362
Other long-term liabilities   623     963  
Total liabilities 62,687 59,747
 
Commitments and contingencies
 
Stockholders' equity:

Class A, Series A-1 Convertible Preferred Stock, $0.001 par value; zero and 269 shares authorized; zero and 269 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively

- 26,876

Class A, Series A-2 Convertible Preferred Stock, $0.001 par value; zero and 178 shares authorized; zero and 178 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively

- 17,820

Class B Convertible Preferred Stock, $0.001 par value; zero and 115 shares authorized; zero and 111 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively

- 11,341

Preferred Stock, $0.001 par value; 10,000 and zero shares authorized; zero and zero shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively

- -

Class A Convertible Common Stock, $0.00005 par value; zero and 900 shares authorized; zero and zero shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively

- -

Class B Convertible Common Stock,$0.00005 par value; zero and 20,000 shares authorized; zero and zero shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively

- -

Non-designated common stock, $0.00005 par value; 190,000 and 39,100 shares authorized; 20,364 and 1,936 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively

2 1
Additional paid-in capital 129,258 10,814
Accumulated income 13,629 12,422
Accumulated other comprehensive loss   (184 )   (203 )
Total stockholders' equity   142,705     79,071  
Total liabilities and stockholders' equity $ 205,392   $ 138,818  
 
 
ROSETTA STONE INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
 
 
  Three Months Ended   Three Months Ended
September 30, 2009 September 30, 2008
GAAP   Adjustments   non-GAAP GAAP   Adjustments   non-GAAP
Revenue:
Product $ 58,151 $ 58,151 $ 53,139 $ - $ 53,139
Subscription and service   9,065           9,065     6,664     -     6,664  
Total revenue 67,216 67,216 59,803 - 59,803
 
Cost of revenue:
Cost of product revenue (1) 7,798 (10 ) 7,788 7,871 (1 ) 7,870
Cost of subscription and service revenue   1,210           1,210     705     -     705  
Total cost of revenue 9,008 (10 ) 8,998 8,576 (1 ) 8,575
                                   
Gross Profit   58,208     10     58,218     51,227     1     51,228  
 
Operating expenses
Sales and marketing(2) 32,263 (207 ) 32,056 25,727 (43 ) 25,684
Research and development(3) 6,125 (290 ) 5,835 5,018 (127 ) 4,891
General and administrative(4)   11,914     (641 )   11,273     8,889     (226 )   8,663  
Total operating expenses   50,302     (1,138 )   49,164     39,634     (396 )   39,238  
 
Income from operations 7,906 1,148 9,054 11,593 397 11,990
 
Other income and (expense):
Interest income 55 - 55 109 - 109
Interest expense (8 ) - (8 ) (194 ) - (194 )
Other income   45     -     45     (31 )   -     (31 )
Total other income (expense) 92 - 92 (116 ) - (116 )
 
Income before income taxes 7,998 1,148 9,146 11,477 397 11,874
Income tax provision (5)   2,695     431     3,126     5,456     149     5,605  
 
Net income $ 5,303   $ 717   $ 6,020   $ 6,021   $ 248   $ 6,269  
 
Earnings per share:
Basic $ 0.26   $ 0.30   $ 3.13   $ 3.26  
Diluted $ 0.25   $ 0.29   $ 0.36   $ 0.37  
 
Common shares and equivalents outstanding:
Basic weighted average shares   20,177     20,177     1,921     1,921  
Diluted weighted average shares   20,988     20,988     16,931     16,931  
 
 

 

(1)

Represents stock based compensation expense of $10 and $1 in 2009 and 2008, respectively

(2)

Represents stock based compensation expense of $207 and $43 in 2009 and 2008, respectively

(3)

Represents stock based compensation expense of $290 and $127 in 2009 and 2008, respectively

(4)

Represents stock based compensation expense of $472 and $226 in 2009 and 2008, respectively, as well as $169 of fees associated with the company’s canceled secondary stock offering

(5)

Non-GAAP tax rate of 37.5%

 
ROSETTA STONE INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
 
 
  Nine Months Ended   Nine Months Ended
September 30, 2009 September 30, 2008
GAAP   Adjustments   non-GAAP GAAP   Adjustments   non-GAAP
Revenue:
Product $ 149,663 $ 149,663 $ 124,988 $ - $ 124,988
Subscription and service   24,297           24,297     18,143     -     18,143  
Total revenue 173,960 173,960 143,131 - 143,131
 
Cost of revenue:
Cost of product revenue (1) 20,934 (22 ) 20,912 17,869 (14 ) 17,855
Cost of subscription and service revenue   2,204           2,204     1,789     -     1,789  
Total cost of revenue 23,138 (22 ) 23,116 19,658 (14 ) 19,644
                                   
Gross Profit   150,822     22     150,844     123,473     14     123,487  
 
Operating expenses
Sales and marketing(2) 83,023 (881 ) 82,142 65,510 (2,364 ) 63,146
Research and development(3) 21,069 (5,737 ) 15,332 13,308 (344 ) 12,964
General and administrative(4)   44,967     (14,925 )   30,042     26,272     (683 )   25,589  
Total operating expenses   149,059     (21,543 )   127,516     105,090     (3,391 )   101,699  
 
Income from operations 1,763 21,565 23,328 18,383 3,405 21,788
 
Other income and (expense):
Interest income 109 - 109 423 - 423
Interest expense (348 ) - (348 ) (714 ) - (714 )
Other income   81     -     81     81     -     81  
Total other income (expense) (158 ) - (158 ) (210 ) - (210 )
 
Income before income taxes 1,605 21,565 23,170 18,173 3,405 21,578
Income tax provision (5)   399     8,087     8,486     9,222     1,277     10,499  
 
Net income $ 1,206   $ 13,478   $ 14,684   $ 8,951   $ 2,128   $ 11,079  
 
Earnings per share:
Basic $ 0.09   $ 1.11   $ 4.72   $ 5.85  
Diluted $ 0.06   $ 0.75   $ 0.53   $ 0.66  
 
Common shares and equivalents outstanding:
Basic weighted average shares   13,229     13,229     1,895     1,895  
Diluted weighted average shares   19,462     19,462     16,876     16,876  

 

 
(1) Represents stock based compensation expense of $22 and $1 in 2009 and 2008, respectively as well as amortization of intangibles expense of $13 in 2008.
(2) Represents stock based compensation expense of $470 and $112 in 2009 and 2008, respectively as well as IPO related compensation expense of $377 in 2009 and amortization of intangibles expense of $34 and $2,252 in 2009 and 2008, respectively.
(3) Represents stock based compensation expense of $704 and $344 in 2009 and 2008, respectively as well as IPO related compensation expense of $5,033 in 2009.
(4) Represents stock based compensation expense of $1363 and $683 in 2009 and 2008, respectively, as well as IPO related compensation expense of $13,393 in 2009 and $169 of fees associated with the company's canceled secondary stock offering
(5) Non-GAAP tax rate of 37.5%
 
 
Nine Months Ended September 30, 2009
  Stock   IPO related
Compensation Compensation
Expense Expense
Cost of product revenue 22 -
Sales and marketing 470 377
Research and development 704 5,033
General and administrative   1,363   13,393
Total   2,559   18,803
 
 
ROSETTA STONE INC.
Reconciliation of Net Income to Adjusted EBITDA
(in thousands)
(unaudited)
 
 
  Three Months Ended   Nine Months Ended
September 30, 2009 September 30, 2009
2009   2008 2009   2008
 
Net income $ 5,303 $ 6,021 $ 1,206 $ 8,951
Interest expense, net (47 ) 85 239 291
Income tax expense 2,695 5,456 399 9,222
Depreciation and amortization 1,420 1,848 3,914 5,224
Stock-based and IPO-related compensation 979 397 21,362 1,140
Fees associated with canceled secondary stock offering 169 - 169 -
                 
Adjusted EBITDA $ 10,519   $ 13,807 $ 27,289 $ 24,828
 

Source: Rosetta Stone Inc.

Rosetta Stone Inc.
Investor Contact:
Christopher Martin, 703-387-5927
cmartin@rosettastone.com
or
Media Contact:
Reilly Brennan, 703-387-5863
rbrennan@rosettastone.com

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: Statements in this press release regarding Rosetta Stone PR's business which are not historical facts are "forward-looking statements" that involve risks and uncertainties. For a discussion of such risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking statements, see "Risk Factors" in the Company's Annual Report or Form 10-K for the most recently ended fiscal year.
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