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Rosetta Stone Inc. Reports Third Quarter 2013 Results

(Thomson Reuters ONE via COMTEX) --Rosetta Stone Inc. Reports Third Quarter 2013 Results

Results Reflect Continued Business Transformation;

Reaffirms Pro Forma Adjusted EBITDA Guidance Range for Full-Year 2013

ARLINGTON, VA - November 6, 2013 - Rosetta Stone Inc. (NYSE:RST), a leading provider of technology-based language-learning and reading solutions, today announced financial results for the third quarter of 2013, as summarized below:

US$ thousands                         Three Months Ended
except per-share data                 September 30,             %
                                      2013      2012            change
                                                (As Adjusted)*
Total revenue                         $60,872   $64,279         -5%
Total bookings                        $70,694   $72,125         -2%
Pro forma revenue                     $63,778   $64,279         -1%
Net loss                              ($4,169)  ($32,063)       87%
Net loss per share                    ($0.19)   ($1.52)         87%
Pro forma adjusted net loss           ($2,721)  ($1,265)        -115%
Pro forma adjusted net loss per share ($0.12)   ($0.06)         -100%
Pro forma adjusted EBITDA             ($618)    $2,110          -129%
Cash flow from operations             ($587)    $5,424          -111%
Purchases of property and equipment   ($2,203)  ($941)          -134%
Free cash flow                        ($2,790)  $4,483          -162%

* 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.

"Although the third quarter's performance was mixed we continued to move our long term strategy forward by growing our SaaS business in our Enterprise & Education segment, continuing to shift our consumer business to more digital, introducing literacy and language products into the Kids' space and expanding our retail distribution and presence in iOS and Android ecosystems. In addition, the Lexia acquisition moved us beyond language, broadening our product portfolio into a natural adjacency with reading," said Steve Swad, President and CEO of Rosetta Stone. Swad continued, "However, lower pricing and softness in our retail channel resulted in a decline in Pro Forma Adjusted EBITDA. Despite the results in the quarter, we believe that the underlying transformation of the business is intact and we still expect to deliver full-year Pro Forma Adjusted EBITDA within our previous guidance range."

Third Quarter 2013 Operational and Financial Highlights

- Bookings: Total consolidated bookings of $70.7 million decreased 2% compared to the year-ago period. North American Consumer segment ("NA Consumer") bookings decreased 9% to $38.6 million from $42.3 million, mainly reflecting the absence of the sales from our NA kiosk channel, which was closed early in the second quarter of 2013. Excluding the kiosk channel, NA Consumer bookings were flat year-over-year. The Rest of World Consumer segment ("ROW Consumer") declined 29%, primarily reflecting on-going declines in Asia, partially offset by growth in Germany. Bookings in the Global Enterprise & Education ("E&E") segment increased 27% compared with a year-ago. E&E bookings include two months of results from the acquisition of Lexia Learning. Core E&E bookings, which are before Lexia and exclude de-emphasized network product increased 7% year-over-year.

- Revenue: Total revenue decreased 5% year-over-year to $60.9 million from $64.3 million. NA Consumer revenue decreased 3%, reflecting the absence of sales from the kiosk channel and softer retail channel performance, partially offset by growth in the direct-to-consumer channel. The direct-to-consumer sales channel continued to benefit from cross-selling to community members of Livemocha. Excluding kiosk, core NA Consumer revenue increased 6% year-over-year. ROW Consumer revenue decreased 28% due mainly to decreases in Japan and Korea, partially offset by growth in Germany. E&E revenue grew 4% in the third quarter compared with a year ago.

US$ thousands                   Three Months Ended
                                September 30,
                                2013      2012      % change
Revenue from:
North America Consumer          $ 38,699  $ 39,878  -3%
Rest of World Consumer          7,165     9,903     -28%
Total Consumer                  45,864    49,781    -8%
Global Enterprise and Education 15,008    14,498    4%
Total                           $ 60,872  $ 64,279  -5%

- Pro Forma Adjusted EBITDA: Pro Forma Adjusted EBITDA for the third quarter decreased 129% to ($0.6) million from $2.1 million. The decline was due to the decrease in revenue, which was partially offset by lower cost of goods sold, sales & marketing and general and administrative expenses. Cost of goods sold decreased $0.4 million due to lower revenues and mix shift to lower-cost digital offerings and lower hard-product and studio coaching costs. Sales and marketing (S&M) expenses decreased by $2.0 million. The reduction in sales and marketing expense was primarily due to the absence of NA Consumer kiosk expenses. General and administrative (G&A) expenses also decreased by $0.5 million due to continued cost control efforts even as the third quarter 2013 results included expenses from the addition of Livemocha and Lexia. Offsetting the decreases in S&M and G&A expenses was a $3.6 million increase in research and development costs, reflecting the continued investment being made in product development as well as the additional costs from the Livemocha and Lexia acquisitions. Pro Forma Adjusted EBITDA includes approximately $0.5 million of adjustments, mainly related to severance and restructuring costs.

- Pro Forma Adjusted Net Loss and Pro Forma Adjusted EPS: Pro Forma Adjusted Net Loss was $2.7 million in the third quarter of 2013, compared to Pro Forma Adjusted Net Loss of $1.3 million in the third quarter of 2012. Pro Forma Adjusted Net Loss per share was $0.12 compared to a Pro Forma Adjusted Net Loss of $0.06 per share in the prior year period.

- Balance Sheet and Cash Flow: Cash at the end of the quarter was $113.2 million, an $18.9 million decrease from $132.1 million at June 30, 2013. The decrease was mainly due to the company's acquisition of Lexia for $22.5 million, net of cash acquired, closing adjustments and holdback. The balance sheet remains strong, with no debt. Deferred revenue increased $11.0 million in the quarter to $72.6 million, including the addition of $1.2 million of deferred revenue from the acquisition of Lexia. Free cash flow in the third quarter was ($2.8) million compared with $4.5 million a year ago. The decline in free cash flow reflects the negative Pro Forma Adjusted EBITDA and a decrease in working capital, offset in part by the increase in deferred revenue versus the year ago period and an increase in capital expenditures to $2.2 million in the third quarter compared with $0.9 million a year ago.

Guidance

Based on the company's year-to-date performance and outlook for the fourth quarter, the company is revising its guidance for Pro Forma Revenue, but maintaining its other financial guidance metrics.

2013 Guidance
Pro Forma Revenue                    $270MM to $280MM
Pro Forma Adjusted EBITDA            $14MM to $17MM
Pro Forma Adjusted Net Income/(Loss) ($3MM) to $0MM
Pro Forma Adjusted EPS               ($0.12) to ($0.01)
Weighted Average Shares Outstanding   21.7MM
Capital Expenditures                 $5MM to $8MM

Non-GAAP Financial Measures

This press release contains several non-GAAP financial measures.

- Adjusted EBITDA 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 net loss and adjusted net loss per share exclude the impact of 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.

- Free cash flow is cash flow from operations less cash used in purchases of property and equipment.

- Bookings represent executed sales contracts received by the Company that are either recorded immediately as revenue or as deferred revenue.

- 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 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 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 a webcast today at 4:30 p.m. eastern time (ET) to discuss 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.

Investors may also dial in to the conference line using one of the following numbers:

1-877-407-9039 (toll-free) or

1-201-689-8470 (toll/international)

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. The replay will also be available beginning at 7:30PM ET until November 20, 2013 at 11:59 pm ET via telephone at the following numbers:

1-877-870-5176 (toll-free) or

1-858-384-5517 (toll/international)

Pass Code: 13572591

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 and Lexia Learning. Rosetta Stone is based in Arlington, VA, and has offices in Harrisonburg, VA, Boulder, CO, Austin, TX, San Francisco, CA, Seattle, WA, Concord, MA, Tokyo, Seoul, London, Dubai and Sao Paulo.

"Rosetta Stone" is a registered trademark or trademark of Rosetta Stone Ltd. in the United States and other countries.

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 plans related to Lexia and Livemocha; our ability to successfully integrate Lexia and Livemocha 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.

Investor Contact:

Steve Somers, CFA

ssomers@rosettastone.com

703-387-5876

Media Contact:

Jonathan Mudd

jmudd@rosettastone.com

571-357-7148

Source: Rosetta Stone Inc.

ROSETTA STONE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
                                           Three Months Ended        Nine Months Ended
                                           September 30,             September 30,
                                           2013      2012            2013       2012
                                                     (As Adjusted)*             (As Adjusted)*
Revenue:
Product                                    $34,038   $42,462         $107,087   $127,534
Subscription and service                   26,834    21,817          79,847     67,006
Total revenue                              60,872    64,279          186,934    194,540
Cost of revenue:
Cost of product revenue                    7,325     7,858           21,263     24,087
Cost of subscription and service revenue   3,419     3,327           9,969      11,892
Total cost of revenue                      10,744    11,185          31,232     35,979
Gross profit                               50,128    53,094          155,702    158,561
Operating expenses
Sales and marketing                        34,844    36,830          104,904    110,518
Research and development                   8,797     5,177           25,248     17,944
General and administrative                 13,987    14,474          40,209     41,050
Lease abandonment                          7         -               835        -
Total operating expenses                   57,635    56,481          171,196    169,512
Loss from operations                       (7,507)   (3,387)         (15,494)   (10,951)
Other income and (expense):
Interest income                            21        42              105        141
Interest expense                           (9)       -               (54)       -
Other income (expense)                     (305)     (27)            105        (71)
Total other income (expense)               (293)     15              156        70
Loss before income taxes                   (7,800)   (3,372)         (15,338)   (10,881)
Income tax (benefit) provision             (3,631)   28,691          (3,052)    27,739
Net loss                                   ($4,169)  ($32,063)       ($12,286)  ($38,620)
Net loss per share:
Basic                                      ($0.19)   ($1.52)         ($0.57)    ($1.84)
Diluted                                    ($0.19)   ($1.52)         ($0.57)    ($1.84)
Common shares and equivalents outstanding:
Basic weighted average shares              21,827    21,073          21,587     21,004
Diluted weighted average shares            21,827    21,073          21,587     21,004

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

ROSETTA STONE INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(unaudited)
                                                                                      September 30,  December 31,
                                                                                      2013           2012
                                                                                                     (As Adjusted)*
Assets
Current assets:
Cash and cash equivalents                                                             $113,104       $148,190
Restricted cash                                                                       82             73
Accounts receivable (net of allowance for doubtful accounts of $1,182 and $1,297,     46,339         49,946
respectively)
Inventory                                                                             7,038          6,581
Prepaid expenses and other current assets                                             10,391         8,651
Income tax receivable                                                                 648            1,104
Deferred income taxes                                                                 79             30
Total current assets                                                                  177,681        214,575
Property and equipment, net                                                           18,029         17,213
Goodwill                                                                              49,972         34,896
Intangible assets, net                                                                29,801         10,825
Deferred income taxes                                                                 218            257
Other assets                                                                          3,225          1,680
Total assets                                                                          $278,926       $279,446
Liabilities and stockholders' equity
Current liabilities:
Accounts payable                                                                      $7,588         $6,064
Accrued compensation                                                                  13,094         16,830
Other current liabilities                                                             30,482         36,387
Deferred revenue                                                                      62,168         59,195
Total current liabilities                                                             113,332        118,476
Deferred revenue                                                                      10,463         4,221
Deferred income taxes                                                                 9,251          8,400
Other long-term liabilities                                                           2,627          155
Total liabilities                                                                     135,673        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 September 30, 2013 and December 31, 2012, respectively
Non-designated common stock, $0.00005 par value, 190,000 and 190,000 shares           2              2
authorized, 22,650 and 21,951 shares issued and outstanding at September 30, 2013
and December 31, 2012, respectively
Additional paid-in capital                                                            168,026        160,693
Accumulated loss                                                                      (25,444)       (13,158)
Accumulated other comprehensive income                                                669            657
Total stockholders' equity                                                            143,253        148,194
Total liabilities and stockholders' equity                                            $278,926       $279,446

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

ROSETTA STONE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
                                                                                      Three Months Ended        Nine Months Ended
                                                                                      September 30,             September 30,
                                                                                      2013      2012            2013       2012
                                                                                                (As Adjusted)*             (As Adjusted)*
Cash Flows From Operating Activities:
Net loss                                                                              ($4,169)  ($32,063)       ($12,286)  ($38,620)
Adjustments to reconcile net loss to cash (used in) provided by operating activities,
net of business acquisitions
Stock-based compensation expense                                                      2,525     2,477           6,229      6,208
Bad debt expense                                                                      455       739             682        1,335
Depreciation and amortization                                                         2,409     1,748           7,005      6,230
Deferred income tax provision (benefit)                                               (3,904)   27,052          (4,527)    25,846
Loss on disposal of equipment                                                         41        372             246        752
Net change in:
Restricted cash                                                                       (18)      (13)            (9)        15
Accounts receivable                                                                   (2,338)   (5,165)         5,672      11,149
Inventory                                                                             (1,058)   (479)           (506)      1
Prepaid expenses and other current assets                                             1,150     (128)           (1,593)    662
Income tax receivable                                                                 (420)     660             391        (2,080)
Other assets                                                                          (1,703)   968             (1,662)    (78)
Accounts payable                                                                      (1,986)   2,491           961        (377)
Accrued compensation                                                                  (2,621)   (298)           (4,180)    1,476
Other current liabilities                                                             1,704     1,123           (8,092)    (6,690)
Excess tax benefit from stock options exercised                                       -         18              -          -
Other long-term liabilities                                                           (7)       (1,640)         329        (44)
Deferred revenue                                                                      9,353     7,562           7,606      5,707
Net cash (used in) provided by operating activities                                   (587)     5,424           (3,734)    11,492
Cash Flows From Investing Activities:
Purchases of property and equipment                                                   (2,203)   (941)           (6,415)    (2,939)
Proceeds from (purchases of) available-for-sale securities                            -         1,599           -          9,711
Acquisitions, net of cash acquired                                                    (17,495)  -               (25,675)   -
Net cash (used in) provided by investing activities                                   (19,698)  658             (32,090)   6,772
Cash Flows From Financing Activities:
Proceeds from the exercise of stock options                                           581       830             2,379      830
Repurchase of shares from exercised stock options                                     -         -               (1,040)    -
Tax benefit of stock options exercised                                                -         (18)            -          -
Proceeds from equity offering, net of issuance costs                                  (57)      -               (228)      -
Payments under capital lease obligations                                              (17)      (2)             (213)      (5)
Net cash provided by financing activities                                             507       810             898        825
(Decrease) increase in cash and cash equivalents                                      (19,778)  6,892           (34,926)   19,089
Effect of exchange rate changes in cash and cash equivalents                          812       380             (160)      441
Net (decrease) increase in cash and cash equivalents                                  (18,966)  7,272           (35,086)   19,530
Cash and cash equivalents-beginning of period                                         132,070   118,774         148,190    106,516
Cash and cash equivalents-end of period                                               $113,104  $126,046        $113,104   $126,046

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

ROSETTA STONE INC.
Reconciliation of GAAP Net Loss to Adjusted EBITDA and Pro Forma Adjusted EBITDA
(in thousands)
(unaudited)
                                                            Three Months Ended          Nine Months Ended
                                                            September 30,               September 30,
                                                            2013        2012            2013        2012
                                                                        (As Adjusted)*              (As Adjusted)*
GAAP net loss                                               ($4,169)    ($32,063)       ($12,286)   ($38,620)
Interest (income)/expense, net                              (12)        (42)            (51)        (141)
Income tax (benefit) expense                                (3,631)     28,691          (3,052)     27,739
Depreciation and amortization                               2,414       1,748           6,338       6,230
Depreciation related to restructuring                       (5)         -               667         -
Stock-based compensation                                    2,525       2,477           6,229       6,208
Other EBITDA adjustments                                    565         1,299           5,178       3,392
Adjusted EBITDA**                                           ($2,313)    $2,110          $3,023      $4,808
Purchase accounting impact on acquired deferred revenue     2,906       -               3,217       -
Purchase accounting impact on acquired deferred commissions (1,211)     -               (1,211)     -
Pro Forma Adjusted EBITDA***                                ($618)      $2,110          $5,029      $4,808

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

** Adjusted EBITDA 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.

*** Pro Forma Adjusted EBITDA is Adjusted EBITDA plus the purchase accounting impact on acquired deferred revenue less the purchase accounting impact on acquired deferred commissions.

ROSETTA STONE INC.
Reconciliation of GAAP Net Loss to Adjusted Net Loss and Pro Forma Adjusted Net Loss
(in thousands, except per share amounts)
(unaudited)
                                                                                                           Three Months Ended          Nine Months Ended
                                                                                                           September 30,               September 30,
                                                                                                           2013        2012            2013        2012
                                                                                                                       (As Adjusted)*              (As Adjusted)*
GAAP net loss                                                                                              ($4,169)    ($32,063)       ($12,286)   ($38,620)
Items related to litigation with Google Inc., restructuring and other related costs, and acquisition costs 560         1,299           5,845       3,392
Income tax adjustments **                                                                                  (807)       29,499          650         30,660
Adjusted net loss ***                                                                                      ($4,416)    ($1,265)        ($5,791)    ($4,568)
Purchase accounting impact on acquired deferred revenue                                                    2,906       -               3,217       -
Purchase accounting impact on acquired deferred commissions                                                (1,211)     -               (1,211)     -
Pro forma adjusted net loss ****                                                                           ($2,721)    ($1,265)        ($3,785)    ($4,568)
GAAP net loss per share                                                                                    ($0.19)     ($1.52)         ($0.57)     ($1.84)
Items related to litigation with Google Inc. restructuring and other related costs                         0.03        0.06            0.27        0.16
Income tax adjustments **                                                                                  (0.04)      1.40            0.03        1.46
Adjusted net loss per share ***                                                                            ($0.20)     ($0.06)         ($0.27)     ($0.22)
Purchase accounting impact on acquired deferred revenue                                                    0.13        -               0.15        -
Purchase accounting impact on acquired deferred commissions                                                (0.06)      -               (0.06)      -
Pro forma adjusted net loss per share ****                                                                 ($0.12)     ($0.06)         ($0.18)     ($0.22)
Basic weighted average shares                                                                              21,827      21,073          21,587      21,004
Diluted weighted average shares                                                                            21,827      21,073          21,587      21,004

* 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 loss and adjusted net 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 loss and pro forma adjusted net loss per share are adjusted net loss and adjusted net loss per share 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                        Quarter-Ended
                                                 3/31/  6/30/  9/30/  12/31/ 2011     3/31/  6/30/  9/30/  12/31/ 2012     3/31/  6/30/  9/30/
                                                 11     11     11     11              12     12     12     12              13     13     13
Net Bookings by Market
North America Consumer                           29,814 36,828 35,562 55,209 157,413  41,733 37,295 42,283 57,870 179,181  41,303 39,321 38,629
Rest of World Consumer                           14,996 12,910 11,945 14,166 54,017   12,550 8,113  10,488 10,034 41,185   8,310  6,879  7,471
Worldwide Consumer                               44,810 49,738 47,507 69,375 211,430  54,283 45,408 52,771 67,904 220,366  49,613 46,200 46,100
Global Enterprise and Education                  10,770 16,973 18,555 15,459 61,757   10,984 17,635 19,354 16,423 64,396   10,758 16,883 24,594
Total                                            55,580 66,711 66,062 84,834 273,187  65,267 63,043 72,125 84,327 284,762  60,371 63,083 70,694
YoY Growth (%)
North America Consumer                           -28%   -5%    -14%   6%     -9%      40%    1%     19%    5%     14%      -1%    5%     -9%
Rest of World Consumer                           50%    58%    21%    -7%    25%      -16%   -37%   -12%   -29%   -24%     -34%   -15%   -29%
Worldwide Consumer                               -13%   6%     -7%    3%     -3%      21%    -9%    11%    -2%    4%       -9%    2%     -13%
Global Enterprise and Education                  18%    -1%    -17%   7%     -2%      2%     4%     4%     6%     4%       -2%    -4%    27%
Total                                            -9%    4%     -10%   4%     -2%      17%    -5%    9%     -1%    4%       -8%    0%     -2%
% of Total Net Bookings
North America Consumer                           54%    55%    54%    65%    57%      64%    59%    59%    69%    63%      68%    62%    55%
Rest of World Consumer                           27%    20%    18%    17%    20%      19%    13%    14%    12%    14%      14%    11%    14%
Worldwide Consumer                               81%    75%    72%    82%    77%      83%    72%    73%    81%    77%      82%    73%    65%
Global Enterprise and Education                  19%    25%    28%    18%    23%      17%    28%    27%    19%    23%      18%    27%    35%
Total                                            100%   100%   100%   100%   100%     100%   100%   100%   100%   100%     100%   100%   100%
Revenue by Market
North America Consumer                           28,061 38,606 37,710 53,184 157,561  43,084 36,918 39,878 52,946 172,826  41,385 39,934 38,699
Rest of World Consumer                           14,601 12,014 11,002 12,848 50,465   12,204 8,053  9,903  10,088 40,248   8,570  7,478  7,165
Worldwide Consumer                               42,662 50,620 48,712 66,032 208,026  55,288 44,971 49,781 63,034 213,074  49,955 47,412 45,864
Global Enterprise and Education                  14,316 16,123 15,490 14,494 60,423   14,161 15,841 14,498 15,667 60,167   13,969 14,727 15,008
Total                                            56,978 66,743 64,202 80,526 268,449  69,449 60,812 64,279 78,701 273,241  63,924 62,139 60,872
YoY Growth (%)
North America Consumer                           -32%   0%     2%     19%    -2%      54%    -4%    6%     0%     10%      -4%    8%     -3%
Rest of World Consumer                           49%    57%    13%    -17%   18%      -16%   -33%   -10%   -21%   -20%     -30%   -7%    -28%
Worldwide Consumer                               -17%   9%     5%     10%    2%       30%    -11%   2%     -5%    2%       -10%   5%     -8%
Global Enterprise and Education                  21%    13%    8%     2%     11%      -1%    -2%    -6%    8%     0%       -1%    -7%    4%
Total                                            -10%   10%    5%     8%     4%       22%    -9%    0%     -2%    2%       -8%    2%     -5%
% of Total Revenue
North America Consumer                           49%    58%    59%    66%    58%      62%    61%    62%    67%    63%      65%    64%    64%
Rest of World Consumer                           26%    18%    17%    16%    19%      18%    13%    15%    13%    15%      13%    12%    12%
Worldwide Consumer                               75%    76%    76%    82%    77%      80%    74%    77%    80%    78%      78%    76%    75%
Global Enterprise and Education                  25%    24%    24%    18%    23%      20%    26%    23%    20%    22%      22%    24%    25%
Total                                            100%   100%   100%   100%   100%     100%   100%   100%   100%   100%     100%   100%   100%
Unit Metrics
Product Unit Volume (thousands)                  108.5  140.0  134.3  202.9  585.8    143.0  129.7  146.5  210.7  629.8    141.8  148.6  157.7
Paid Online Learners (thousands)                 16.4   17.1   21.5   26.6   26.6     41.2   48.7   57.4   68.4   68.4     80.6   85.1   88.6
YoY Growth (%)
Product Units                                    -14%   24%    14%    20%    11%      32%    -7%    9%     4%     8%       -1%    15%    8%
Paid Online Learners                             30%    20%    21%    58%    58%      151%   185%   167%   157%   157%     95%    75%    54%
Average Net Revenue Per Unit ($)
Average Net Revenue per Product Unit             $379   $349   $346   $313   $341     $367   $319   $313   $277   $315     $312   $275   $250
Average Net Revenue per Online Learner (monthly) $30    $34    $39    $36    $35      $28    $27    $24    $24    $26      $26    $25    $24
YoY Growth (%)
Average Net Revenue per Product Unit             -4%    -12%   -9%    -9%    -9%      -3%    -9%    -9%    -11%   -8%      -15%   -14%   -20%
Average Net Revenue per Online Learner           -10%   -2%    10%    3%     0%       -6%    -22%   -37%   -32%   -25%     -7%    -6%    -1%
# of Kiosks (end of period)
North America                                    144    117    114    103    103      57     56     57     57     57       56     -      -
Europe                                           15     16     14     13     13       1      1      1      1      1        -      -      -
Asia Pacific                                     78     76     69     58     58       44     42     39     29     29       22     20     9
Total # of Kiosks (end of period)                237    209    197    174    174      102    99     97     87     87       78     20     9
Revenues by Geography
United States                                    41,271 53,418 51,708 65,725 212,122  54,914 50,810 52,167 65,856 223,747  52,791 52,163 51,013
International                                    15,707 13,325 12,494 14,801 56,327   14,535 10,002 12,112 12,845 49,494   11,133 9,976  9,859
Total                                            56,978 66,743 64,202 80,526 268,449  69,449 60,812 64,279 78,701 273,241  63,924 62,139 60,872
Revenues by Geography (as a %)
United States                                    72%    80%    81%    82%    79%      79%    84%    81%    84%    82%      83%    84%    84%
International                                    28%    20%    19%    18%    21%      21%    16%    19%    16%    18%      17%    16%    16%
Total                                            100%   100%   100%   100%   100%     100%   100%   100%   100%   100%     100%   100%   100%
ROSETTA STONE INC.
CONSOLIDATED BALANCE SHEETS - AS RESTATED
(in thousands)
(unaudited)
                                           As of December 31, 2012                                                As of March 31, 2013
                                           As Previously Reported  Impact of Commission Adjustment  As Adjusted*  As Previously Reported       Impact of Commission Adjustment  As Adjusted*
Prepaid expenses and other current assets  $5,204                  $3,447                           $8,651        $7,722                       $3,333                           $11,055
Deferred income taxes (current)            $79                     ($49)                            $30           $75                          ($44)                            $31
Total current assets                       $211,177                $3,398                           $214,575      $193,869                     $3,289                           $197,158
Other assets                               $1,484                  $196                             $1,680        $1,389                       $97                              $1,486
Deferred income taxes (non-current)        $260                    ($3)                             $257          $250                         $0                               $250
Total assets                               $275,855                $3,591                           $279,446      $258,290                     $3,386                           $261,676
Accumulated loss                           ($16,749)               $3,591                           ($13,158)     ($21,449)                    $3,386                           ($18,063)
Total stockholders' equity                 $144,603                $3,591                           $148,194      $141,440                     $3,386                           $144,826
Total liabilities and stockholders' equity $275,855                $3,591                           $279,446      $258,290                     $3,386                           $261,676
                                           As of June 30, 2013                                                    As of September 30, 2013
                                           As Previously Reported  Impact of Commission Adjustment  As Adjusted*  Computed under Prior Method  Impact of Commission Adjustment  As Adjusted*
Prepaid expenses and other current assets  $7,788                  $3,622                           $11,410       $6,457                       $3,934                           $10,391
Deferred income taxes (current)            $136                    ($57)                            $79           $141                         ($62)                            $79
Total current assets                       $187,986                $3,565                           $191,551      $173,809                     $3,872                           $177,681
Other assets                               $1,335                  $165                             $1,500        $3,060                       $165                             $3,225
Deferred income taxes (non-current)        $210                    $0                               $210          $221                         ($3)                             $218
Total assets                               $262,335                $3,730                           $266,065      $274,892                     $4,034                           $278,926
Accumulated loss                           ($25,006)               $3,730                           ($21,276)     ($29,478)                    $4,034                           ($25,444)
Total stockholders' equity                 $140,274                $3,730                           $144,004      $139,219                     $4,034                           $143,253
Total liabilities and stockholders' equity $262,335                $3,730                           $266,065      $274,892                     $4,034                           $278,926

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

ROSETTA STONE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS - AS RESTATED
(in thousands, except per share amounts)
(unaudited)
                                                             Three Months Ended March 31, 2012
                                                             As Previously Reported  Impact of Commission Adjustment  As Adjusted*
Sales and marketing                                          $38,404                 $166                             $38,570
Income (loss) from operations                                ($2,359)                ($166)                           ($2,525)
Income tax provisions (benefit)                              ($742)                  ($66)                            ($808)
Net income (loss)                                            ($1,903)                ($100)                           ($2,003)
Basic net income (loss) per share                            ($0.09)                 ($0.01)                          ($0.10)
Diluted net income (loss) per share                          ($0.09)                 ($0.01)                          ($0.10)
Shares used in computing basic net income (loss) per share   20,942                  -                                20,942
Shares used in computing diluted net income (loss) per share 20,942                  -                                20,942
                                                             Three Months Ended June 30, 2012
                                                             As Previously Reported  Impact of Commission Adjustment  As Adjusted*
Sales and marketing                                          $35,125                 ($6)                             $35,119
Income (loss) from operations                                ($5,045)                $6                               ($5,039)
Income tax provisions (benefit)                              ($160)                  $16                              ($144)
Net income (loss)                                            ($4,544)                ($10)                            ($4,554)
Basic net income (loss) per share                            ($0.22)                 $0.00                            ($0.22)
Diluted net income (loss) per share                          ($0.22)                 $0.00                            ($0.22)
Shares used in computing basic net income (loss) per share   20,995                  -                                20,995
Shares used in computing diluted net income (loss) per share 20,995                  -                                20,995
                                                             Three Months Ended September 30, 2012
                                                             As Previously Reported  Impact of Commission Adjustment  As Adjusted*
Sales and marketing                                          $37,113                 ($283)                           $36,830
Income (loss) from operations                                ($3,670)                $283                             ($3,387)
Income tax provisions (benefit)                              $29,735                 ($1,044)                         $28,691
Net income (loss)                                            ($33,390)               $1,327                           ($32,063)
Basic net income (loss) per share                            ($1.58)                 $0.06                            ($1.52)
Diluted net income (loss) per share                          ($1.58)                 $0.06                            ($1.52)
Shares used in computing basic net income (loss) per share   21,073                  -                                21,073
Shares used in computing diluted net income (loss) per share 21,073                  -                                21,073
                                                             Three Months Ended December 31, 2012
                                                             As Previously Reported  Impact of Commission Adjustment  As Adjusted*
Sales and marketing                                          $41,005                 ($641)                           $40,364
Income (loss) from operations                                $5,044                  $641                             $5,685
Income tax provisions (benefit)                              $1,158                  $12                              $1,170
Net income (loss)                                            $4,006                  $629                             $4,635
Basic net income (loss) per share                            $0.19                   $0.03                            $0.22
Diluted net income (loss) per share                          $0.18                   $0.03                            $0.21
Shares used in computing basic net income (loss) per share   21,166                  -                                21,166
Shares used in computing diluted net income (loss) per share 21,828                  -                                21,828
                                                             Twelve Months Ended December 31, 2012
                                                             As Previously Reported  Impact of Commission Adjustment  As Adjusted*
Sales and marketing                                          $151,647                ($764)                           $150,883
Income (loss) from operations                                ($6,030)                $764                             ($5,266)
Income tax provisions (benefit)                              $29,991                 ($1,082)                         $28,909
Net income (loss)                                            ($35,831)               $1,846                           ($33,985)
Basic net income (loss) per share                            ($1.70)                 $0.09                            ($1.61)
Diluted net income (loss) per share                          ($1.70)                 $0.09                            ($1.61)
Shares used in computing basic net income (loss) per share   21,045                  -                                21,045
Shares used in computing diluted net income (loss) per share 21,045                  -                                21,045
                                                             Three Months Ended March 31, 2013
                                                             As Previously Reported  Impact of Commission Adjustment  As Adjusted*
Sales and marketing                                          $37,060                 $213                             $37,273
Income (loss) from operations                                ($4,138)                ($213)                           ($4,351)
Income tax provisions (benefit)                              $977                    ($9)                             $968
Net income (loss)                                            ($4,700)                ($204)                           ($4,904)
Basic net income (loss) per share                            ($0.22)                 ($0.01)                          ($0.23)
Diluted net income (loss) per share                          ($0.22)                 ($0.01)                          ($0.23)
Shares used in computing basic net income (loss) per share   21,360                  -                                21,360
Shares used in computing diluted net income (loss) per share 21,360                  -                                21,360
                                                             Three Months Ended June 30, 2013
                                                             As Previously Reported  Impact of Commission Adjustment  As Adjusted*
Sales and marketing                                          $33,144                 ($357)                           $32,787
Income (loss) from operations                                ($3,991)                $357                             ($3,634)
Income tax provisions (benefit)                              ($400)                  $13                              ($387)
Net income (loss)                                            ($3,557)                $344                             ($3,213)
Basic net income (loss) per share                            ($0.16)                 $0.01                            ($0.15)
Diluted net income (loss) per share                          ($0.16)                 $0.01                            ($0.15)
Shares used in computing basic net income (loss) per share   21,569                  -                                21,569
Shares used in computing diluted net income (loss) per share 21,569                  -                                21,569
                                                             Three Months Ended September 30, 2013
                                                             Computed under Prior Method  Impact of Commission Adjustment  As Reported
Sales and marketing                                          $35,156                      ($312)                           $34,844
Income (loss) from operations                                ($7,819)                     $312                             ($7,507)
Income tax provisions (benefit)                              ($3,640)                     $9                               ($3,631)
Net income (loss)                                            ($4,472)                     $303                             ($4,169)
Basic net income (loss) per share                            ($0.20)                      $0.01                            ($0.19)
Diluted net income (loss) per share                          ($0.20)                      $0.01                            ($0.19)
Shares used in computing basic net income (loss) per share   21,827                       -                                21,827
Shares used in computing diluted net income (loss) per share 21,827                       -                                21,827

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

This announcement is distributed by Thomson Reuters on behalf of Thomson Reuters clients.

The owner of this announcement warrants that:

(i) the releases contained herein are protected by copyright and other applicable laws; and

(ii) they are solely responsible for the content, accuracy and originality of the

information contained therein.

Source: Rosetta Stone via Thomson Reuters ONE

HUG#1741278

"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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