Rosetta Stone Inc. Reports First Quarter 2014 Results 70% Growth in Enterprise and Education Business Reflects Continued Momentum in the Company’s Transformation Business Wire ARLINGTON, Va. -- May 7, 2014 Rosetta Stone Inc. (NYSE:RST), a leading provider of technology-based language-learning, reading and brain fitness solutions, today announced financial results for the first quarter of 2014. *Company demonstrates continued progress and growth in Enterprise & Education (“E&E”) business with 70% bookings growth *Results from acquisitions on track and meeting or exceeding plans *Consumer business trending similar to last year but beginning to leverage marketing capabilities, including acceleration of Fit Brains results *Excluding the shuttered North American Kiosk channel, total bookings of $61.2 million grew 6%, while total revenue was down 1% to $60.8 million *Adjusted EBITDA of ($6.7) million versus guidance of ($8-$10) million *Confirms full year 2014 guidance “The first quarter further demonstrated that we are making solid progress in transforming Rosetta Stone,” said Steve Swad, President and Chief Executive Officer of Rosetta Stone. Swad continued, “The expanded product portfolio from acquisitions and new development helped generate solid 70% bookings growth in our E&E segment. I was particularly encouraged by the immediate contribution from sales of the Tell Me More product and strong growth from Lexia Learning. Our Consumer business continued to reflect the effects of varying channel performance with the web channel continuing to drive positive results but retail creating significant drag on overall results. The addition of Fit Brains to the Rosetta Stone portfolio and our ability to accelerate their performance was evidence that we can leverage our marketing platform and cross-sell to our growing user base, now over 9 million.” First Quarter 2014 Operational and Financial Highlights Bookings: Total consolidated bookings, excluding the shuttered North American Kiosk channel, increased 6% to $61.2 million from $57.8 million in the year-ago period. North American Consumer segment (“NA Consumer”) bookings excluding Kiosk decreased 7% to $36.1 million from $38.8 million, primarily reflecting a $4.0 million or 47% decrease in retail channel bookings. Bookings from the direct-to-consumer (“DTC”) channel were flat, while bookings from Fit Brains added an incremental $1.4 million to NA Consumer. Rest of World (“ROW”) Consumer segment bookings declined 18%, primarily reflecting decreases in Asia as the company downsized these markets in the first quarter, partially offset by $0.3 million of incremental bookings from third-party partner sales. Bookings in the Global Enterprise & Education (“E&E”) segment increased 70% compared with a year-ago. Bookings from E&E Language decreased 4% on a pro forma basis while bookings from Lexia increased 35% on a pro forma basis compared with the first quarter of 2013. US$ thousands Three Months Ended March 31, 2014 2013 % change Bookings from: N.A. Consumer ex Kiosk $ 36,141 $ 38,758 -7 % Rest of World Consumer 6,817 8,310 -18 % Global Enterprise and Education 18,282 10,758 70 % Total ex N.A. Kiosk $ 61,240 $ 57,826 6 % Total $ 61,240 $ 60,371 1 % Revenue: Total revenue excluding the shuttered North American Kiosk channel decreased 1% year-over-year to $60.8 million from $61.4 million. NA Consumer revenue excluding Kiosk decreased 7%, primarily reflecting weakness in the retail channel, which declined 37%, and a 1% decrease in DTC. Fit Brains contributed $0.2 million during the quarter. ROW Consumer revenue decreased 22% due mainly to decreases in Japan and Korea. E&E revenue grew 28% in the first quarter compared with a year ago. US$ thousands Three Months Ended March 31, 2014 2013 % change Revenue from: N.A. Consumer ex Kiosk $ 36,214 $ 38,859 -7 % Rest of World Consumer 6,669 8,570 -22 % Global Enterprise and Education 17,882 13,969 28 % Total ex N.A. Kiosk $ 60,765 $ 61,397 -1 % Total $ 60,765 $ 63,924 -5 % *Adjusted EBITDA: Adjusted EBITDA in the first quarter was negative $6.7 million vs. negative $1.1 million a year ago. The decrease in the quarter is mainly due to the $4.0 million decrease in retail bookings and the inclusion of the results from acquisitions this quarter, which operated at a seasonal loss in the first quarter. These decreases were partially offset by contribution from higher bookings from acquisitions and benefits from restructurings in Japan and Korea in the ROW Consumer segment. In connection with the downsizing of its operations in Asia in the first quarter, the company recorded a $2.2 million non-cash goodwill impairment charge for the ROW Consumer segment, which is excluded from Adjusted EBITDA. *Balance Sheet and Cash Flow: Cash at the end of the quarter was $56.0 million compared with $98.8 million at 12/31/13. The decrease in cash was mainly due to the acquisition of Tell Me More S.A. of $28.0MM, the negative Adjusted EBITDA in the quarter and other one-time cash expenses for restructurings, severance and acquisition transaction and integration expenses. Deferred revenue increased $2.7 million in the quarter to $81.5 million compared with $78.9 at 12/31/13. Free cash flow in the first quarter was negative $15.0 million compared with negative $8.2 million a year ago. The decline in free cash flow reflects the lower Adjusted EBITDA, higher one-time items of $4.1 million vs. $0.8 million a year ago and a decrease in working capital, which was partially offset by a decrease in capital expenditures to $1.4 million in the first quarter compared with $2.5 million a year ago. Guidance The company is maintaining its guidance for the full year 2014 as follows: FY 2014 Guidance Amount/Range Commentary Consolidated Bookings $315MM to $325MM Mid-single digit % growth Adjusted EBITDA $18MM to $22MM ~5% margin Shares outstanding ~22MM Capital Expenditures $10MM to $14MM Acquisition Integrations Long-term effective tax rate 39% Non-GAAP Financial Measures This press release contains several non-GAAP financial measures. *Bookings represent executed sales contracts received by the Company that are either recorded immediately as revenue or as deferred revenue. *Adjusted EBITDA is GAAP net income/(loss) plus interest income and expense, income tax benefit and expense, depreciation, amortization and stock-based compensation expense, goodwill impairment plus the change in deferred revenue (excluding acquired deferred revenue) less the change in deferred commissions. In addition, Adjusted EBITDA excludes any items related to the litigation with Google Inc., restructuring and related wind down costs, severance costs and transaction and other costs associated with mergers and acquisitions as well as all adjustments related to recording the non-cash tax valuation allowance for deferred tax assets. Adjusted EBITDA for prior periods has been revised to conform to current definition. *Free cash flow is cash flow from operations less cash used in purchases of property and equipment. Management believes that these non-GAAP measures of financial results provide useful information to investors regarding certain financial and business trends relating to the Company’s financial condition and results of operations. Management uses these non-GAAP measures to compare the Company's performance to that of prior periods for trend analyses, for purposes of determining executive incentive compensation, and for budgeting and planning purposes. These measures are used in monthly financial reports prepared for management and in quarterly financial reports presented to the Company's board of directors. Management believes that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing the Company's financial measures with other software and education-technology companies, many of which present similar non-GAAP financial measures to investors. Management typically excludes the amounts described below when evaluating the Company’s operating performance and believes that the resulting non-GAAP measures are useful to investors and financial analysts in assessing the Company’s operating performance, due to the following factors: *Amortization of Acquired Intangibles. Amortization costs and the related tax effects are fixed at the time of an acquisition, and then amortized over a period of several years after the acquisition and generally cannot be changed or influenced by management after the acquisition. *Stock-based Compensation. Although stock-based compensation is an important aspect of compensation of the Company’s employees and executives, stock-based compensation expense is generally fixed at the time of grant, then amortized over a period of several years after the grant of the stock-based instrument, and generally cannot be changed or influenced by management after the grant. In addition, the impact of shares granted under these plans is considered in the Company’s EPS calculation to the extent the shares are dilutive. *Bookings. Although revenue is an important aspect of measuring Company performance, the Company believes total sales bookings can be a valuable indicator of the Company's performance. The Company is transitioning to a greater amount of subscription sales, which results in an increasing portion of sales being recorded as deferred revenue. Management does not consider these non-GAAP measures in isolation or as an alternative to financial measures determined in accordance with GAAP. The principal limitation of these non-GAAP financial measures is that they exclude significant expenses and income that are required by GAAP to be recorded in the Company's financial statements. In addition, they are subject to inherent limitations, because they reflect the exercise of judgments by management about which expenses and items of income are excluded from these non-GAAP financial measures and may not be calculated in the same manner as other companies’ similarly titled non-GAAP measures. In order to compensate for these limitations, management presents its non-GAAP financial measures in connection with its GAAP results. The company urges investors to review the reconciliation of its non-GAAP financial measures to the comparable GAAP financial measures, which it includes in press releases announcing earnings information, including this press release, and not to rely on any single financial measure to evaluate the company's business. Reconciliation tables of the most comparable GAAP financial measures to the non-GAAP measures used in this press release are included at the end of this release. Earnings Results Webcast This news release and the accompanying tables should be read in conjunction with the additional content that is available on the company’s website. In conjunction with this announcement, Rosetta Stone will host an Earnings Results webcast today at 4:30pm eastern time (ET) during which time there will be a discussion of the results and the company’s business outlook. The webcast will be available live on the Investor Relations page of the company’s website at http://investors.rosettastone.com. A recorded replay of the webcast will be available on the “Investor Relations” page of the company’s web site http://investors.rosettastone.com after the live discussion. About Rosetta Stone Rosetta Stone Inc. (NYSE: RST) is dedicated to changing the way the world learns. The company’s innovative technology-driven language and reading solutions are used by thousands of schools, businesses, government organizations and millions of individuals around the world. Founded in 1992, Rosetta Stone pioneered the use of interactive software to accelerate language learning. Today the company offers courses in 30 languages, from the most commonly spoken (such as English, Spanish and Mandarin) to the less prominent (including Swahili, Swedish and Tagalog). In 2013, Rosetta Stone expanded beyond language and deeper into education-technology with its acquisitions of Livemocha, Lexia Learning, Vivity Labs, and Tell Me More. Rosetta Stone is based in Arlington, VA, and has offices around the world. Cautionary Statement Regarding Forward-Looking Statements Certain information contained in this presentation and certain comments today constitute forward-looking statements for purposes of the safe harbor provisions of The Private Securities Litigation Reform Act of 1995. 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 our 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; our international operations and growth plans; our plans regarding our kiosks and retail relationships; our plans regarding our Enterprise and Education 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 revitalizing our go-to-market strategy; our plans to transition our distribution to more online in the consumer business; our ability to expand our product offerings beyond our core adult-focused language learning solutions, including the launch of Kids reading and brain fitness; our ability to introduce successfully Lexia’s Core5 reading product to the consumer market; our ability to expand our offerings to more devices and apps, our ability to identify and successfully close and integrate additional acquisition targets; our plans with respect to and our ability to successfully integrate Lexia, Livemocha, Tell Me More and Vivity into our business; adverse trends in general economic conditions and the other factors including the “Risk Factors” more fully described 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 year period ended December 31, 2013, which is on file with the SEC. We encourage you to review those factors before making any investment decision. You should not place undue reliance on forward-looking statements because they involve factors that are, in some cases, beyond our control and that could materially affect actual results, levels of activity, performance, or achievements. Today’s presentation and discussion also contains references to non-GAAP financial measures. The full definition and reconciliation of those measures is available in our Form 8-K filed with the SEC on May 7, 2014. 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. 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. Our definitions of non-GAAP measures may not be comparable to the definitions used by other companies, and we encourage you to review and understand all our financial reporting before making any investment decision. ROSETTA STONE INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) (unaudited) March 31, December 31, 2014 2013 Assets Current assets: Cash and cash equivalents $ 55,974 $ 98,825 Restricted cash 50 12,424 Accounts receivable (net of allowance for doubtful accounts of $1,542 and $1,000, 44,932 60,342 respectively) Inventory 8,416 6,639 Prepaid expenses and other current assets 13,257 12,294 Income tax receivable 947 197 Total current assets 123,576 190,721 Property and equipment, net 23,350 17,766 Goodwill 78,560 50,059 Intangible assets, net 39,610 29,006 Other assets 3,317 3,224 Total assets $ 268,413 $ 290,776 Liabilities and stockholders' equity Current liabilities: Accounts payable $ 11,740 $ 10,326 Accrued compensation 11,461 16,380 Obligations under capital lease 667 256 Other current liabilities 33,497 41,936 Deferred revenue 68,861 67,173 Total current liabilities 126,226 136,071 Deferred revenue 12,681 11,684 Deferred income taxes 10,548 9,022 Obligations under capital lease 4,092 217 Other long-term liabilities 2,369 2,539 Total liabilities 155,916 159,533 Commitments and contingencies Stockholders' equity: Preferred stock, $0.001 par value; 10,000 and 10,000 authorized; zero and zero shares issued — — and outstanding March 31, 2014 and December 31, 2013, respectively Non-designated common stock, $0.00005 par value, 190,000 and 190,000 shares authorized, 22,832 and 22,588 shares issued and 21,832 and 21,588 shares 2 2 outstanding at March 31, 2014 and December 31, 2013, respectively Additional paid-in capital 172,982 171,123 Accumulated loss (49,533 ) (29,292 ) Accumulated other comprehensive income 481 845 Treasury stock, at cost, 1,000 shares at March (11,435 ) (11,435 ) 31, 2014 and 1,000 shares at December 31, 2013 Total stockholders' equity 112,497 131,243 Total liabilities and stockholders' equity $ 268,413 $ 290,776 ROSETTA STONE INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (unaudited) Three Months Ended March 31, 2014 2013 (As Adjusted)* Revenue: Product $ 32,371 $ 37,592 Subscription and service 28,394 26,332 Total revenue 60,765 63,924 Cost of revenue: Cost of product revenue 7,824 6,940 Cost of subscription and service revenue 4,347 3,324 Total cost of revenue 12,171 10,264 Gross profit 48,594 53,660 Operating expenses Sales and marketing 39,096 37,273 Research and development 8,773 7,357 General and administrative 16,054 12,588 Goodwill impairment 2,199 - Lease abandonment 3,571 793 Total operating expenses 69,693 58,011 Loss from operations (21,099 ) (4,351 ) Other income and (expense): Interest income 5 41 Interest expense (56 ) (45 ) Other income (expense) 226 419 Total other income 175 415 Loss before income taxes (20,924 ) (3,936 ) Income tax (benefit) provision (683 ) 968 Net loss $ (20,241 ) $ (4,904 ) Net loss per share: Basic $ (0.96 ) $ (0.23 ) Diluted $ (0.96 ) $ (0.23 ) Common shares and equivalents outstanding: Basic weighted average shares 21,125 21,360 Diluted weighted average shares 21,125 21,360 * Certain amounts have been adjusted for the retrospective change in accounting principle for sales commissions. ROSETTA STONE INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Three Months Ended March 31, 2014 2013 (As Adjusted)* Cash Flows From Operating Activities: Net loss $ (20,241 ) $ (4,904 ) Adjustments to reconcile net loss to cash used in operating activities, net of business acquisitions: Stock-based compensation expense 1,406 1,668 Bad debt expense 957 (238 ) Depreciation and amortization 3,434 2,372 Deferred income tax provision (benefit) (756 ) 289 Loss on disposal of equipment 106 141 Goodwill impairment 2,199 - Net change in: Restricted cash 60 32 Accounts receivable 17,916 11,135 Inventory (1,034 ) (746 ) Prepaid expenses and other current assets (213 ) (2,446 ) Income tax receivable (639 ) 413 Other assets 62 105 Accounts payable 512 (209 ) Accrued compensation (8,123 ) (6,412 ) Other current liabilities (9,461 ) (4,253 ) Other long-term liabilities (172 ) 371 Deferred revenue 358 (2,953 ) Net cash used in operating activities (13,629 ) (5,635 ) Cash Flows From Investing Activities: Purchases of property and equipment (1,366 ) (2,528 ) Decrease in restricted cash related to Vivity 12,314 - Labs acquisition Acquisitions, net of cash acquired (40,161 ) - Net cash (used in) provided by investing (29,213 ) (2,528 ) activities Cash Flows From Financing Activities: Proceeds from the exercise of stock options 454 349 Payments under capital lease obligations (61 ) (193 ) Net cash provided by financing activities 393 156 (Decrease) increase in cash and cash (42,449 ) (8,007 ) equivalents Effect of exchange rate changes in cash and (402 ) (872 ) cash equivalents Net (decrease) increase in cash and cash (42,851 ) (8,879 ) equivalents Cash and cash equivalents—beginning of period 98,825 148,190 Cash and cash equivalents—end of period $ 55,974 $ 139,311 * 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 (in thousands) (unaudited) Three Months Ended March 31, 2014 2013 (As Adjusted)* GAAP net loss $ (20,241 ) $ (4,904 ) Interest (income)/expense, net 51 4 Income tax (benefit) expense (683 ) 968 Depreciation and amortization 3,372 1,757 Depreciation related to restructuring 62 615 Goodwill impairment 2,199 - Stock-based compensation 1,406 1,668 Other EBITDA adjustments 8,006 2,088 Change in deferred revenue 475 (3,553 ) Change in deferred commission (1,377 ) 213 Adjusted EBITDA** $ (6,730 ) $ (1,144 ) * 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, goodwill impairment, and stock-based compensation expenses, plus the change in deferred revenue excluding increases in deferred revenue from acquisitions less the change in deferred commissions. Adjusted EBITDA excludes any items related to the litigation with Google Inc., restructuring and related wind down costs, severance costs, and transaction and other costs associated with mergers and acquisitions. Adjusted EBITDA for prior periods has been revised to conform to the current definition. Rosetta Stone Inc. Business Metrics (in thousands) Quarter-Ended Quarter-Ended 3/31/13 6/30/13 9/30/13 12/31/13 2013 3/31/14 Net Bookings by Market North America 41,303 39,321 38,629 52,620 171,873 36,141 Consumer Rest of World 8,310 6,879 7,471 7,300 29,960 6,817 Consumer Worldwide 49,613 46,200 46,100 59,920 201,833 42,958 Consumer Global Enterprise 10,758 16,883 24,594 24,067 76,302 18,282 and Education Total 60,371 63,083 70,694 83,987 278,135 61,240 YoY Growth (%) North America -1% 5% -9% -9% -4% -12% Consumer Rest of World -34% -15% -29% -27% -27% -18% Consumer Worldwide -9% 2% -13% -12% -8% -13% Consumer Global Enterprise -2% -4% 27% 47% 18% 70% and Education Total -8% 0% -2% 0% -2% 1% % of Total Net Bookings North America 68% 62% 55% 63% 62% 59% Consumer Rest of World 14% 11% 10% 9% 11% 11% Consumer Worldwide 82% 73% 65% 71% 73% 70% Consumer Global Enterprise 18% 27% 35% 29% 27% 30% and Education Total 100% 100% 100% 100% 100% 100% Revenue by Market North America 41,385 39,934 38,699 53,998 174,016 36,214 Consumer Rest of World 8,570 7,478 7,165 7,207 30,420 6,669 Consumer Worldwide 49,955 47,412 45,864 61,205 204,436 42,883 Consumer Global Enterprise 13,969 14,727 15,008 16,505 60,209 17,882 and Education Total 63,924 62,139 60,872 77,710 264,645 60,765 YoY Growth (%) North America -4% 8% -3% 2% 1% -12% Consumer Rest of World -30% -7% -28% -29% -24% -22% Consumer Worldwide -10% 5% -8% -3% -4% -14% Consumer Global Enterprise -1% -7% 4% 5% 0% 28% and Education Total -8% 2% -5% -1% -3% -5% % of Total Revenue North America 65% 64% 64% 69% 66% 60% Consumer Rest of World 13% 12% 11% 9% 11% 11% Consumer Worldwide 78% 76% 75% 79% 77% 71% Consumer Global Enterprise 22% 24% 25% 21% 23% 29% and Education Total 100% 100% 100% 100% 100% 100% Unit Metrics Product Unit Volume 141.8 148.6 157.7 233.5 681.6 132.6 (thousands) Paid Online Learners 80.6 85.1 88.6 94.1 94.1 100.4 (thousands) YoY Growth (%) Product Units -1% 15% 8% 11% 8% -6% Paid Online 95% 75% 54% 38% 38% 25% Learners Average Net Revenue Per Unit ($) Average Net Revenue per $312 $275 $250 $234 $263 $273 Product Unit Average Net Revenue per Online $26 $25 $24 $23 $25 $22 Learner (monthly) YoY Growth (%) Average Net Revenue per -15% -14% -20% -15% -16% -13% Product Unit Average Net Revenue per -7% -6% -1% -5% -3% -15% Online Learner # of Kiosks (end of period) North America 56 - - - - - Europe - - - - - - Asia Pacific 22 20 9 3 3 - Total # of Kiosks (end 78 20 9 3 3 - of period) Revenues by Geography United States 52,791 52,163 51,013 67,485 223,451 49,410 International 11,133 9,976 9,859 10,226 41,194 11,355 Total 63,924 62,139 60,872 77,710 264,645 60,765 Revenues by Geography (as a %) United States 83% 84% 84% 87% 82% 81% International 17% 16% 16% 13% 18% 19% Total 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 Vice President, Corporate Development & Investor Relations 703-387-5876 email@example.com or Media Contact: Jonathan Mudd Head of Global Communications 571-357-7148 firstname.lastname@example.org
Rosetta Stone Inc. Reports First Quarter 2014 Results
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