Rosetta Stone's three goals are to: (1) leverage the brand, (2) innovate the platform, and (3) expand distribution. By making progress on each of these goals, Rosetta Stone has improved its margins in Q2.
Adjusted EBITDA margins were 2 percent in Q2 versus a negative 2 percent a year ago. Rosetta Stone improved margins by eliminating poor performing kiosks, retail locations, SKUs, and media. Some of these actions resulted in lower revenue and revenue declined by 9 percent in Q2. Overall, Rosetta Stone improved margins by reducing costs, not by growing revenue.
Rosetta Stone is still facing challenges in Asia, particularly in Japan where Rosetta Stone closed a lot of kiosks. Revenue in Korea also declined by double digits.
Rosetta Stone's conversation in English product, ReFLEX, is struggling on the consumer side. Rosetta Stone is looking for more distribution partners and have introduced ReFLEX into the institutional market.
In the institutional market, sales in K-12 are still soft because of the loss of federal stimulus for K-12 schools in the United States. Rosetta Stone grew its government business, excluding the 2011 non-renewal of the Army and Marines contract. The corporate and international business are the strongest aspects of Rosetta Stone's current business.
Rosetta Stone acknowledges there is a lot of competition, including apps that are available everywhere for the casual learner.
Rosetta Stone is working on a product for kids. It does not expect any new products by the end of the year.
Financials
Average revenue per unit was $250 versus $360 a year ago. Part of this is due to lower prices, and part is due to a change from boxed products to online products.
To improve revenue, Rosetta Stone is testing different tiers to address customer preferences along different price points, such as un-bundling certain elements of its TOTALe offering like Studio and selling some of those sessions as up sells.
Net loss for Q2 was $0.22 per share, which was flat from a year ago.
Rosetta Stone is modifying guidance to increase the bottom end of adjusted EBITDA range to be $6 million. It full-year 2012 guidance is now $6 million to $8 million. Its revenue guidance is unchanged.
Rosetta Stone's trademark infringement case against Google may result in over $1 million in additional legal expenses in the second half of 2012, which is not included in its guidance.
The full transcript of the earnings conference call can be found on Seeking Alpha at the following link:
http://seekingalpha.com/article/799481-rosetta-stone-s-ceo-discusses-q2-2012-results-earnings-call-transcript
This work is licensed under a Creative Commons Attribution-NoDerivs 3.0 Unported License.
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