Rosetta Stone Inc. Reports Fourth Quarter and Full Year 2012 Results

  Rosetta Stone Inc. Reports Fourth Quarter and Full Year 2012 Results

Strong Close to the Year Helps Deliver $13.8 million of Adjusted EBITDA for FY
                                    2012;

          Ends Year with All-Time High Cash Balance of $148 million;

          Company Expects 16% to 30% Adjusted EBITDA Growth in 2013

Business Wire

ARLINGTON, Va. -- February 28, 2013

Rosetta Stone Inc. (NYSE:RST), a leading provider of technology-based
language-learning solutions, today announced financial results for the fourth
quarter 2012, as summarized below:

                                                                       
US$ thousands      Three Months Ended               Year Ended
except per-share   December 31,            %        December 31,             %
data
                   2012       2011        change   2012        2011         change
Total revenue      $78,701     $80,527     -2   %   $273,241    $268,449     2    %
Total bookings     $84,327     $84,834     -1   %   $284,762    $273,187     4    %
                                                                             
Net                $4,006      ($4,979 )   180  %   ($35,831 )  ($19,988 )   -79  %
income/(loss)
Net
income/(loss)      $0.19       ($0.24  )   179  %   ($1.70   )  ($0.96   )   -77  %
per share:
                                                                             
Adjusted net       $3,370      ($1,531 )   320  %   ($1,274  )  ($16,391 )   92   %
income/(loss)(1)
Adjusted net
income/(loss)      $0.15       ($0.07  )   314  %   ($0.06   )  ($0.79   )   92   %
per share: (1)
                                                                             
Adjusted EBITDA    $9,126      $7,073      29   %   $13,811     ($6,090  )   327  %
(2)
                                                                             
Cash flow from     $23,409     $7,391      217  %   $34,901     $3,373       935  %
operations
Purchases of
property and       ($1,248 )   ($2,032 )   39   %   ($4,187  )  ($9,940  )   58   %
equipment
Free cash flow     $22,161     $5,359      314  %   $30,714     ($6,567  )   568  %
                                                                             

(1) Adjusted net income (loss) and adjusted income (loss) per share exclude
the impact of items related to its litigation with Google, Inc., restructuring
costs as well as all adjustments related to recording the non-cash tax
valuation allowance for deferred tax assets. Adjusted net income (loss) for
prior periods has been revised to conform to current definition.

(2) Adjusted EBITDA is GAAP net income (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., and restructuring costs. Adjusted EBITDA
for prior periods has been revised to conform to current definition.

Definitions and reconciliations for all non-GAAP measures are provided in this
press release.

Steve Swad, President and Chief Executive Officer of Rosetta Stone, said, “I
am very pleased with how Rosetta Stone performed in 2012. Early in the year we
set the strategy and since then we have been executing at a pace that meets or
exceeds our expectations. The business transitioned during the year as we
shifted the focus of the business to more online and digital, growing our
consumer Online Learner base 157% to over 68,000 and launching a digital
downloadable version of our product on our website. We also utilized new
partners to expand distribution and increased our social and mobile
engagement.” Swad continued, “As we move through 2013, we have more
opportunities ahead of us and we plan to invest further in product development
to capitalize on these opportunities and deliver new and innovative products
to our customers.”

Fourth Quarter and Full Year 2012 Operational and Financial Highlights

  *Bookings: Total bookings decreased less than 1% in the fourth quarter
    year-over-year to $84.3 million as 5% growth in the North American
    Consumer segment (“NA Consumer”) and 6% growth in the Institutional
    segment were offset by a $4.1MM decrease from the Rest of World Consumer
    segment (“ROW Consumer”). Full year 2012 bookings increased 4%, reflecting
    14% growth in NA Consumer and 4% growth in Institutional, offset by a 24%
    decrease in ROW Consumer. Growth in NA Consumer for the quarter and the
    year reflects increases in Product Unit sales and Paid Online Learners as
    the Company leveraged new partners and increased online and digital sales.
    Decreases in ROW Consumer bookings reflected weakness in Japan and the
    absence of Product Unit sales in Germany compared with a year-ago.
  *Revenue: Consolidated revenue decreased 2% in the fourth quarter
    year-over-year to $78.7 million from $80.5 million a year ago. NA Consumer
    revenue decreased less than 1% reflecting both the shift to Online Learner
    sales and lower average selling price for Product Units. ROW Consumer
    revenue decreased 21% due to ongoing softness in Japan and the absence of
    Product Unit sales in Germany reflecting the shift to an online-only
    business. Both NA and ROW Consumer segment revenue were impacted by a
    rationalization of our kiosk channel. Institutional revenue increased 8%
    in the fourth quarter where strength in the Corporate and International
    verticals offset softness in K-12. Full year 2012 revenue increased 2%
    representing 10% growth in NA Consumer, partially offset by a 20% decline
    in ROW Consumer and a slight decrease in Institutional. The Institutional
    business was impacted by the non-renewal of the Army and Marines contracts
    in 2011, which impacted revenue in each of the first three quarters of
    2012 and was partially offset by increases in Corporate, International and
    Emerging Markets.

                                                                 
US$ thousands      Three Months Ended             Twelve Months Ended
                   December   December            December  December
                   31,        31,                 31,        31,
                   2012       2011       %        2012       2011       %
                                         change                         change
Revenue from:
North America      $52,946    $53,184    0%       $172,826   $157,561   10%
Consumer
Rest of World      10,088     12,848     -21%     40,248     50,465     -20%
Consumer
Total Consumer     63,034     66,032     -5%      213,074    208,026    2%
Institutional      15,667     14,494     8%       60,167     60,423     0%
Total              78,701     80,526     -2%      273,241    268,449    2%
                                                                        

  *Adjusted EBITDA: Adjusted EBITDA for the fourth quarter was $9.1 million,
    a 29% increase versus $7.1 million in the fourth quarter of 2011. The
    improvement in Adjusted EBITDA was due to lower operating expenses that
    offset the decline in fourth quarter revenue. Cost of Goods Sold decreased
    $1.9 million due to lower hard-product box costs and a shift to online
    offerings. Sales and marketing expenses and general and administrative
    (G&A) expenses also both decreased by $1.6 million and $1.8 million,
    respectively, on a normalized basis after adjusting the fourth quarter of
    2011 for stock-compensation expense related to the cancellation of the
    Company’s Long Term Incentive Plan (“LTIP”) in that period. For the full
    year 2012, Adjusted EBITDA increased $19.9 million to $13.8 million from
    negative $6.1 million in 2011. The improvement in Adjusted EBITDA
    primarily reflects 2% revenue growth combined with a $9.2 million
    reduction in sales & marketing expenses and a $3.5 million decrease in G&A
    expenses, on a normalized basis, as the company improved its selling and
    marketing efficiency and better leveraged its fixed operating structure.
    Improvements in sales and marketing were mainly due to reducing the
    company’s kiosk footprint and more effectively managing media spend,
    particularly in ROW Consumer.
  *Adjusted Net Income and Adjusted EPS: Rosetta Stone recorded Adjusted Net
    Income of $3.4 million in the fourth quarter 2012, compared to Adjusted
    Net Loss of $1.5 million in the fourth quarter of 2011. Adjusted Net
    Income per share was $0.15 compared to an Adjusted Net Loss of $0.07 per
    share in the prior year period. For full year 2012, Rosetta Stone recorded
    Adjusted Net Loss of $1.3 million, compared to Adjusted Net Loss of $16.4
    million for the full year 2011. Full year 2012 Adjusted Net Loss per share
    was $0.06 compared to an Adjusted Net Loss of $0.79 per share in the prior
    year period Adjusted Net Income and Adjusted EPS.
  *Balance Sheet and Cash Flow: Cash, cash equivalents and short-term
    investments increased $22.2 million to $148.3 million at December 31, 2012
    from $126.1 million at September 30, 2012, and increased $32.0 million
    compared with $116.3 million at December 31, 2011. The company has no
    debt. Free cash flow in the fourth quarter was $22.2 million compared with
    $5.4 million a year ago. For the full year 2012, free cash flow was $30.7
    million compared with ($6.6) million for 2011. Capital expenditures were
    $4.2 million for 2012 compared with $9.9 million for 2011. The fourth
    quarter cash flow from operations included $8.0 million in cash tax
    refunds.

Financial Outlook

The company is providing the following guidance for the full year 2013:

                                  
2013 Guidance                      
                          Range
($ Millions)              Low       High
Revenue                     $280      $290
Growth rate from 2012       2%          6%
                                        
Adjusted EBITDA             $16         $18
Growth rate from 2012       16%         30%
                                        
Adjusted Net Income         ($1)        $1
Growth rate from 2012       66%         134%
                                        
Adjusted EPS                ($0.02)     $0.04
Growth rate from 2012       87%         127%
                                        
Shares Outstanding (MM)     21.5        21.5
                                        
Capital Expenditures        $5          $8
                                        

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 income (loss) and adjusted net income (loss) per share exclude
the impact of items related to its litigation with Google, Inc., restructuring
costs and transaction and other costs associated with mergers and acquisitions
as well as all adjustments related to recording the non-cash tax valuation
allowance for deferred tax assets.

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.

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. 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 March 14, 2013 via telephone at the following numbers:

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

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

Pass Code: 409560

About Rosetta Stone

Rosetta Stone Inc. provides cutting-edge interactive technology that is
changing the way the world learns languages. The company’s proprietary
learning techniques—acclaimed for their power to unlock the natural
language-learning ability in everyone—are used by schools, businesses,
government organizations and millions of individuals around the world. Rosetta
Stone offers courses in over 30 languages, from the most commonly spoken (like
English, Spanish and Mandarin) to the less prominent (including Swahili,
Swedish and Tagalog). The company was founded in 1992 on the core beliefs that
learning to speak a language should be a natural and instinctive process, and
that interactive technology can activate the language immersion method
powerfully for learners of any age. Rosetta Stone is based in Arlington, VA.,
and has offices in Harrisonburg, VA, Boulder, CO, Tokyo, Seoul, London, 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 kiosks and retail relationships; our plans regarding
our Institutional 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 realigning our cost
structure and revitalizing our go-to-market strategy; our plans to transition
our distribution to more online in the Consumer segment; 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, 2011, which is on file with the SEC. The company assumes no
obligation to update the information in this communication, except as
otherwise required by law. Readers are cautioned not to place undue reliance
on these forward-looking statements that speak only as of the date hereof.

                                                              
ROSETTA STONE INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
                                                                   
                                                                   
                                                                   
                             Three Months Ended      Twelve Months Ended
                             December 31,            December 31,
                             2012       2011         2012          2011
Revenue:
Product                      $ 53,384   $ 60,841     $ 180,919     $ 195,382
Subscription and service      25,317    19,686     92,322      73,067  
Total revenue                  78,701     80,527       273,241       268,449
                                                                   
Cost of revenue:
Cost of product revenue        9,596      11,067       33,684        36,497
Cost of subscription and      3,335     3,758      15,226      12,619  
service revenue
Total cost of revenue          12,931     14,825       48,910        49,116
                                                                
Gross profit                  65,770    65,702     224,331     219,333 
                                                                   
Operating expenses
Sales and marketing            41,005     43,316       151,646       161,491
Research and development       5,510      6,389        23,453        24,218
General and administrative    14,211    19,300     55,262      62,031  
Total operating expenses      60,726    69,005     230,361     247,740 
                                                                   
Income (loss) from             5,044      (3,303 )     (6,030  )     (28,407 )
operations
                                                                   
Other income and
(expense):
Interest income                46         78           187           302
Interest expense               -          0            -             (5      )
Other income (expense)        74        60         3           142     
Total other income             120        138          190           439
(expense)
                                                                   
Net income (loss) before       5,164      (3,165 )     (5,840  )     (27,968 )
income taxes
Income tax expense            1,158     1,814      29,991      (7,980  )
(benefit)
                                                                   
Net income (loss)            $ 4,006    $ (4,979 )   $ (35,831 )   $ (19,988 )
                                                                   
Net income (loss) per
share:
Basic                        $ 0.19     $ (0.24  )   $ (1.70   )   $ (0.96   )
Diluted                      $ 0.18     $ (0.24  )   $ (1.70   )   $ (0.96   )
                                                                   
Common shares and
equivalents outstanding:
Basic weighted average        21,166    20,920     21,045      20,773  
shares
Diluted weighted average      21,828    20,920     21,045      20,773  
shares

                                                               
ROSETTA STONE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(unaudited)
                                                   December 31,   December 31,
                                                     2012          2011
                                                                  
                                                                  
Assets
Current assets:
Cash and cash equivalents                          $  148,190     $   106,516
Restricted cash                                       73              74
Short term investments                                -               9,711
Accounts receivable (net of allowance for
doubtful accounts of $1,297 and $1,951,               49,946          51,997
respectively)
Inventory                                             6,581           6,723
Prepaid expenses and other current assets             5,204           7,081
Income tax receivable                                 1,104           7,678
Deferred income taxes                                79            10,985
Total current assets                                  211,177         200,765
                                                                  
Property and equipment, net                           17,213          20,869
Goodwill                                              34,896          34,841
Intangible assets, net                                10,825          10,865
Deferred income taxes                                 260             8,038
Other assets                                         1,484         1,803
Total assets                                       $  275,855    $   277,181
                                                                  
Liabilities and stockholders' equity
Current liabilities:
Accounts payable                                   $  6,064       $   7,291
Accrued compensation                                  16,830          11,703
Other current liabilities                             36,387          34,911
Deferred revenue                                     59,195        49,375
Total current liabilities                             118,476         103,280
                                                                  
Deferred revenue                                      4,221           2,520
Deferred income taxes                                 8,400           -
Other long-term liabilities                          155           176
Total liabilities                                     131,252         105,976
                                                                  
Commitments and contingencies
                                                                  
Stockholders' equity:
Preferred stock, $0.001 par value; 10,000 and
10,000 authorized; zero and zero shares issued        —               —
and outstanding December 31, 2012 and December
31, 2011, respectively
Non-designated common stock, $0.00005 par value,
190,000 and 190,000 shares authorized, 21,951
and 21,258 shares issued and outstanding at           2               2
December 31, 2012 and December 31, 2011,
respectively
Additional paid-in capital                            160,693         151,823
Accumulated income (loss)                             (16,749 )       19,082
Accumulated other comprehensive income               657           298
Total stockholders' equity                           144,603       171,205
Total liabilities and stockholders' equity         $  275,855    $   277,181

                                                              
ROSETTA STONE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
                                                                   
                         Three Months Ended          Twelve Months Ended
                         December 31,                December 31,
                          2012        2011        2012        2011    
                                                                   
Cash Flows From
Operating Activities:
Net income (loss)          4,006         (4,979  )     (35,831 )     (19,988 )
Adjustments to
reconcile net income
(loss) to cash
provided by (used in)
operating activities,
net of business
acquisitions
Stock-based                1,801         7,376         8,009         12,353
compensation expense
Bad debt expense           485           519           1,820         1,228
Depreciation and           1,847         2,285         8,077         8,724
amortization
Deferred income tax        95            (1,768  )     27,035        (1,297  )
benefit
Loss on sales of           31            300           783           318
equipment
Net change in:
Restricted cash            (14     )     (8      )     1             11
Accounts receivable        (10,840 )     (17,403 )     309           (5,058  )
Inventory                  184           1,807         185           3,168
Prepaid expenses and       1,085         (712    )     1,870         659
other current assets
Income tax receivable      8,595         6,420         6,515         (5,812  )
Other assets               303           183           225           (25     )
Accounts payable           (863    )     (1,185  )     (1,240  )     (447    )
Accrued compensation       3,617         2,662         5,093         1,200
Other current              7,325         7,691         635           3,979
liabilities
Excess tax benefit
from stock options         -             -             -             (365    )
exercised
Other long-term            (55     )     (204    )     (99     )     (52     )
liabilities
Deferred revenue          5,807       4,407       11,514      4,777   
Net cash provided by
(used in) operating       23,409      7,391       34,901      3,373   
activities
                                                                   
Cash Flows From
Investing Activities:
Purchases of property      (1,248  )     (2,032  )     (4,187  )     (9,940  )
and equipment
Proceeds from
(purchases of)             -             (1,500  )     9,711         (3,301  )
available-for-sale
securities
Acquisition, net of       -           -           -           (75     )
cash acquired
Net cash provided by
(used in) investing       (1,248  )    (3,532  )    5,524       (13,316 )
activities
                                                                   
Cash Flows From
Financing Activities:
Proceeds from the
exercise of stock          32            161           862           800
options
Tax benefit of stock       -             -             -             365
options exercised
Payments under capital    (210    )    (279    )    (215    )    (285    )
lease obligations
Net cash provided by      (178    )    (118    )    647         880     
financing activities
                                                                   
Increase (decrease) in
cash and cash              21,983        3,741         41,072        (9,063  )
equivalents
                                                                   
Effect of exchange
rate changes in cash      161         (292    )    602         (177    )
and cash equivalents
                                                                   
Net increase
(decrease) in cash and     22,144        3,449         41,674        (9,240  )
cash equivalents
                                                                   
Cash and cash
equivalents—beginning     126,046     103,067     106,516     115,756 
of period
                                                                   
Cash and cash
equivalents—end of       $ 148,190    $ 106,516    $ 148,190    $ 106,516 
period

                                                              
ROSETTA STONE INC.
Reconciliation of Net Income (Loss) to Adjusted EBITDA
(in thousands)
(unaudited)
                                                                   
                                                                   
                            Three Months Ended       Twelve Months Ended
                            December 31,             December 31,
                             2012      2011       2012        2011    
                                                                   
Net income (loss)           $ 4,006     $ (4,979 )   $ (35,831 )   $ (19,988 )
Interest                      (46   )     (78    )     (187    )     (297    )
(income)/expense, net
Income tax expense            1,158       1,814        29,991        (7,980  )
(benefit)
Depreciation and              1,847       2,285        8,077         8,724
amortization
Stock-based compensation      1,801       7,376        8,009         12,353
Other EBITDA Adjustments     360       655        3,752       1,098   
                                                                   
Adjusted EBITDA*            $ 9,126    $ 7,073     $ 13,811     $ (6,090  )
                                                                   

* 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.

                                                              
ROSETTA STONE INC.
Reconciliation of GAAP net income (loss) before taxes to adjusted net income
(loss)
(in thousands, except per share amounts)
(unaudited)
                                                                   
                                                                   
                           Three Months Ended        Twelve Months Ended
                           December 31,              December 31,
                            2012       2011       2012        2011    
GAAP Net income (loss)     $ 4,006      $ (4,979 )   $ (35,831 )   $ (19,988 )
Items related to
litigation with Google,      360          655          3,752         1,098
Inc. restructuring and
other related costs
Income tax adjustments *    (996   )    2,793      30,805      2,499   
Adjusted Net income        $ 3,370     $ (1,531 )   $ (1,274  )   $ (16,391 )
(loss) **
                                                                   
GAAP net income (loss)     $ 0.19       $ (0.24  )   $ (1.70   )   $ (0.96   )
per share
Items related to
litigation with Google,      0.01         0.03         0.18          0.05
Inc. restructuring and
other related costs
Income tax adjustments *    (0.05  )    0.14       1.46        0.12    
Adjusted net income        $ 0.15      $ (0.07  )   $ (0.06   )   $ (0.79   )
(loss) per share **
                                                                   
Diluted weighted average     21,828       20,920       21,045        20,773
shares
                                                                             

* For adjusted net income (loss) purposes, we use a 39% effective tax rate
which represents the projected, long term effective tax rate on adjusted
pretax income. Our adjusted tax rate assumes full use of loss and credit
carryforwards without reduction for valuation allowances.

** Adjusted net income (loss) and adjusted net income (loss) per share exclude
the impact of items related to its litigation with Google, Inc., restructuring
costs and transaction and other costs associated with mergers and acquisitions
as well as all adjustments related to recording the non-cash tax valuation
allowance for deferred tax assets. Adjusted net income (loss) for prior
periods has been revised to conform to current definition.


Rosetta Stone Inc.
Business Metrics
(in thousands)

                                                                                                                                       
                Quarter-Ended                                          Quarter-Ended                                          Quarter-Ended
                                                                                                                                                  
                3/31/10  6/30/10  9/30/10  12/31/10  2010          3/31/11  6/30/11  9/30/11  12/31/11  2011          3/31/12  6/30/12  9/30/12  12/31/12  2012
Net Bookings
by Market
                                                                                                                                                                       
North America   41,631    38,746    41,138    52,243     173,758       29,814    36,828    35,562    55,209     157,413       41,733    37,295    42,283    57,870     179,181
Consumer
Rest of World   10,029   8,177    9,860    15,176    43,242        14,996   12,910   11,945   14,166    54,017        12,550   8,113    10,488   10,034    41,185
Consumer
Worldwide       51,660    46,923    50,998    67,419     217,000       44,810    49,738    47,507    69,375     211,430       54,283    45,408    52,771    67,904     220,366
Consumer
                                                                                                                                                                       
Worldwide       9,108    17,110   22,307   14,395    62,920        10,770   16,973   18,555   15,459    61,757        10,984   17,635   19,354   16,423    64,396
Institutional
Total           60,768   64,033   73,305   81,814    279,920       55,580   66,711   66,062   84,834    273,187       65,267   63,043   72,125   84,327    284,762
                                                                                                                                                                       
YoY Growth
(%)
North America   6%        -9%       -19%      -11%       -9%           -28%      -5%       -14%      6%         -9%           40%       1%        19%       5%         14%
Consumer
Rest of World   304%     168%     135%     93%       146%          50%      58%      21%      -7%       25%           -16%     -37%     -12%     -29%      -24%
Consumer
Worldwide       23%       3%        -7%       1%         4%            -13%      6%        -7%       3%         -3%           21%       -9%       11%       -2%        4%
Consumer
                                                                                                                                                                       
Worldwide       8%       28%      5%       37%       18%           18%      -1%      -17%     7%        -2%           2%       4%       4%       6%        4%
Institutional
Total           21%      9%       -4%      6%        7%            -9%      4%       -10%     4%        -2%           17%      -5%      9%       -1%       4%
                                                                                                                                                                       
% of Total
Net Bookings
North America   69%       60%       56%       64%        62%           54%       55%       54%       65%        57%           64%       59%       59%       69%        63%
Consumer
Rest of World   16%      13%      14%      18%       16%           27%      20%      18%      17%       20%           19%      13%      14%      12%       14%
Consumer
Worldwide       85%       73%       70%       82%        78%           81%       75%       72%       82%        77%           83%       72%       73%       81%        77%
Consumer
                                                                                                                                                                       
Worldwide       15%      27%      30%      18%       22%           19%      25%      28%      18%       23%           17%      28%      27%      19%       23%
Institutional
Total           100%     100%     100%     100%      100%          100%     100%     100%     100%      100%          100%     100%     100%     100%      100%
                                                                                                                                                                       
                                                                                                                                                                       
Revenue by
Market
                                                                                                                                                                       
North America   41,407    38,748    36,902    44,516     161,573       28,061    38,606    37,710    53,184     157,561       43,084    36,918    39,878    52,946     172,826
Consumer
Rest of World   9,815    7,651    9,708    15,516    42,690        14,601   12,014   11,002   12,848    50,465        12,204   8,053    9,903    10,088    40,248
Consumer
Worldwide       51,222    46,399    46,610    60,032     204,263       42,662    50,620    48,712    66,032     208,026       55,288    44,971    49,781    63,034     213,074
Consumer
                                                                                                                                                                       
Worldwide       11,792   14,249   14,316   14,248    54,605        14,316   16,123   15,490   14,494    60,423        14,161   15,841   14,498   15,667    60,167
Institutional
Total           63,014   60,648   60,926   74,280    258,868       56,978   66,743   64,202   80,526    268,449       69,449   60,812   64,279   78,701    273,241
                                                                                                                                                                       
YoY Growth
(%)
North America   5%        -8%       -28%      -25%       -16%          -32%      0%        2%        19%        -2%           54%       -4%       6%        0%         10%
Consumer
Rest of World   297%     154%     137%     101%      147%          49%      57%      13%      -17%      18%           -16%     -33%     -10%     -21%      -20%
Consumer
Worldwide       22%       3%        -16%      -10%       -2%           -17%      9%        5%        10%        2%            30%       -11%      2%        -5%        2%
Consumer
                                                                                                                                                                       
Worldwide       39%      23%      21%      26%       26%           21%      13%      8%       2%        11%           -1%      -2%      -6%      8%        0%
Institutional
Total           25%      7%       -9%      -5%       3%            -10%     10%      5%       8%        4%            22%      -9%      0%       -2%       2%
                                                                                                                                                                       
% of Total
Revenue
North America   66%       64%       61%       60%        62%           49%       58%       59%       66%        58%           62%       61%       62%       67%        63%
Consumer
Rest of World   15%      13%      16%      21%       17%           26%      18%      17%      16%       19%           18%      13%      15%      13%       15%
Consumer
Worldwide       81%       77%       77%       81%        79%           75%       76%       76%       82%        77%           80%       74%       77%       80%        78%
Consumer
                                                                                                                                                                       
Worldwide       19%      23%      23%      19%       21%           25%      24%      24%      18%       23%           20%      26%      23%      20%       22%
Institutional
Total           100%     100%     100%     100%      100%          100%     100%     100%     100%      100%          100%     100%     100%     100%      100%
                                                                                                                                                                       
                                                                                                                                                                       
Consumer
Revenue by
Channel
                                                                                                                                                                       
DTC             31,026    25,142    27,500    34,496     118,164       31,856    30,984    31,177    42,368     136,385       36,839    30,953    35,136    39,345     142,273
Kiosk           9,391     8,683     7,392     9,533      34,999        7,312     7,368     6,987     8,504      30,171        6,483     4,564     4,103     4,092      19,242
Global Retail   9,608     11,200    9,832     15,413     46,053        2,585     10,752    9,015     14,265     36,616        10,999    8,122     8,911     18,593     46,625
Home School     1,197    1,374    1,886    590       5,047         909      1,516    1,533    895       4,854         967      1,332    1,631    1,004     4,934
Total           51,222   46,399   46,610   60,032    204,263       42,662   50,620   48,712   66,032    208,026       55,288   44,971   49,781   63,034    213,074
                                                                                                                                                                       
YoY Growth
(%)
DTC             24%       -5%       -6%       -2%        2%            3%        23%       13%       23%        15%           16%       0%        13%       -7%        4%
Kiosk           14%       -7%       -25%      -28%       -14%          -22%      -15%      -5%       -11%       -14%          -11%      -38%      -41%      -52%       -36%
Global Retail   34%       46%       -27%      -12%       0%            -73%      -4%       -8%       -7%        -20%          325%      -24%      -1%       30%        27%
Home School     -19%     -12%     -28%     -50%      -26%          -24%     10%      -19%     52%       -4%           6%       -12%     6%       12%       2%
Total           22%      3%       -16%     -10%      -2%           -17%     9%       5%       10%       2%            30%      -11%     2%       -5%       2%
                                                                                                                                                                       
% of Total
Consumer
Revenue
DTC             61%       54%       59%       57%        58%           75%       61%       64%       64%        66%           66%       69%       71%       62%        67%
Kiosk           18%       19%       16%       16%        17%           17%       15%       14%       13%        15%           12%       10%       8%        6%         9%
Global Retail   19%       24%       21%       26%        23%           6%        21%       19%       22%        17%           20%       18%       18%       30%        22%
Home School     2%       3%       4%       1%        2%            2%       3%       3%       1%        2%            2%       3%       3%       2%        2%
Total           100%     100%     100%     100%      100%          100%     100%     100%     100%      100%          100%     100%     100%     100%      100%
                                                                                                                                                                       
                                                                                                                                                                       
Unit Metrics
                                                                                                                                                                       
Product Unit
Volume          126.3     112.9     117.6     169.7      526.5         108.5     140.0     134.3     202.9      585.8         143.0     129.7     146.5     210.7      629.8
(thousands)
Paid Online
Learners        12.6      14.2      17.7      16.8       16.8          16.4      17.1      21.5      26.6       26.6          41.2      48.7      57.4      68.4       68.4
(thousands)
                                                                                                                                                                       
YoY Growth
(%)
Product Units                                                          -14%      24%       14%       20%        11%           32%       -7%       9%        4%         8%
Paid Online                                                            30%       20%       21%       58%        58%           151%      185%      167%      157%       157%
Learners
                                                                                                                                                                       
Average Net
Revenue Per
Unit ($)
Average Net
Revenue per     $395      $398      $382      $343       $376          $379      $349      $346      $313       $341          $367      $319      $313      $277       $315
Product Unit
Average Net
Revenue per
Online          $33       $35       $35       $35        $35           $30       $34       $39       $36        $35           $28       $27       $24       $24        $26
Learner
(monthly)
                                                                                                                                                                       
YoY Growth
(%)
Average Net
Revenue per                                                            -4%       -12%      -9%       -9%        -9%           -3%       -9%       -9%       -11%       -8%
Product Unit
Average Net
Revenue per                                                            -10%      -2%       10%       3%         0%            -6%       -22%      -37%      -32%       -25%
Online
Learner
                                                                                                                                                                       
                                                                                                                                                                       
# of Kiosks
(end of
period)
                                                                                                                                                                       
North America   190       186       180       173        173           144       117       114       103        103           57        56        57        57         57
Europe          9         10        13        15         15            15        16        14        13         13            1         1         1         1          1
Asia Pacific    41        50        64        71         71            78        76        69        58         58            44        42        39        29         29
Total # of
Kiosks (end     240       246       257       259        259           237       209       197       174        174           102       99        97        87         87
of period)
                                                                                                                                                                       
Revenues by
Geography
                                                                                                                                                                       
United States   52,476    52,139    50,390    57,624     212,629       41,271    53,418    51,708    65,725     212,122       54,914    50,810    52,167    65,856     223,747
International   10,538   8,509    10,536   16,656    46,239        15,707   13,325   12,494   14,801    56,327        14,535   10,002   12,112   12,845    49,494
Total           63,014   60,648   60,926   74,280    258,868       56,978   66,743   64,202   80,526    268,449       69,449   60,812   64,279   78,701    273,241
                                                                                                                                                                       
Revenues by
Geography (as
a %)
United States   83%       86%       83%       78%        82%           72%       80%       81%       82%        79%           79%       84%       81%       84%        82%
International   17%      14%      17%      22%       18%           28%      20%      19%      18%       21%           21%      16%      19%      16%       18%
Total           100%     100%     100%     100%      100%          100%     100%     100%     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.


Contact:

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