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Rosetta Stone Inc. Reports Third Quarter Results

The following excerpt is from the company's SEC filing.

Lexia’s Strong Growth Helps Lift Enterprise & Education to Majority of Revenue Mix for First Time as Management Turnaround Delivers

Reduction in Operating Expenses,

Improvement in Net Loss and Diluted EPS

ARLINGTON, VA —

November 4, 2015

— Rosetta Stone Inc. (NYSE: RST), a world leader in technology-based learning solutions, today announced financial results for the

quarter

. Net loss for the

totaled

$7.3 million

$(0.34)

per diluted share, versus a loss of

$16.2 million

$(0.76)

per diluted share, in the year-ago period. Adjusted EBITDA, a non-GAAP financial metric, improved from

$(9.1) million

quarter of

$(1.6) million

Third Quarter

Overview

Total operating expense was down

$17.5 million

compared to the year-ago period

Net loss of

per diluted share, improved versus a loss of

Ended the quarter with

debt and

$34.4 million

in cash and cash equivalents, up

$4.6 million

over

June 30, 2015

Within the Enterprise & Education ("E&E") segment, Lexia's revenue grew

on strong new sales of recently updated products and high renewal rates, along with purchase accounting impacts on prior-year revenue

E&E segment revenue totaled

$25.3 million

and for the first time in the Company's history constituted more than 50% of total revenue

Consumer segment contribution margin percentage increased to

in the year-ago period, largely offsetting the anticipated decline in Consumer revenues

“Strong growth in Lexia, a higher contribution margin percentage and our ongoing cost reduction efforts enabled us to build positive momentum during the third quarter,” said John Hass, Interim President and Chief Executive Officer. “Enhancements to our industry-leading Lexia products and the shift to a largely direct salesforce will drive the growth in that business and accelerate the mix shift towards our more valuable SaaS-based E&E segment. All of these positive developments were key to the transformation plan we announced in March and have been the central focus of management as we continue to execute our turnaround strategy.”

Review

: Total revenue was down

year-over-year to

$49.8 million

, entirely due to the

reduction in Consumer revenue, as management operated that segment of the business to improve its profit margin. The reduction in Consumer revenue was expected and the result of management's decision to conduct fewer promotional campaigns and lower media spending, and to focus on the passionate language learner instead of the mass marketplace. In addition, greater than anticipated success in the sale of 24-month and 36-month Consumer subscriptions had the effect of lowering in-period revenue recognition. Revenue from subscription sales is recognized ratably over the length of the subscription period rather than at the time of sale, as it would be for CD-based Consumer products. The pricing and timing of cash receipts is comparable for both Consumer subscriptions and CD-based products but the contribution margin is higher from subscription sales due to a lower cost of goods sold.

year-over-year to a record

. The strong performance in the E&E segment was driven by Lexia's

revenue increase, which elevated Education to a majority of the E&E segment revenue mix and helped push total E&E revenue to a majority of the overall revenue mix for the first time in the Company's history. Lexia's gr

owth included a 72% year-over-year increase in quarterly bookings, due to strong sales of the recently updated suite of literacy education products and continued high renewal rates. Bookings growth was also aided by the earlier than anticipated closing of some sales by resellers who were notified that we were terminating our agreements with them, in order to transfer those territories to Lexia's growing direct salesforce. In addition, Lexia's reported revenue and revenue growth rate reflects the impact of purchase accounting on prior-year revenue, which lowered Lexia's deferred revenue balance at the time of that acquisition. The Company expects Lexia's year-over-year revenue growth rates will narrow as it laps the impact of purchase accounting.

US$ thousands, except for percentages

Three Months Ended September 30,

% change

Revenue from:

25,332

22,532

24,470

41,983

49,802

64,515

: Net loss in the

per diluted share, compared to the net loss of

per diluted share, in the same quarter last year. The improvement was primarily driven by a

reduction in operating expenses, reflecting the cost savings initiative undertaken in March 2015. Total operating expenses were

$49.7 million

, down

year-over-year, with reductions in all expense categories. The most sizeable reduction was the

$13.5 million

year-over-year decrease in sales and marketing expense, resulting from less promotional activity and the approximately 15% staff reduction in global non-E&E headcount undertaken in March 2015. In addition, general and administrative expense was down

$2.7 million

year-over-year and research and development expense was down

$1.6 million

year-over-year.

Balance Sheet and Cash Flow

: The Company's liquidity improved in the

, as the cash and cash equivalents balance increased to

debt. Deferred revenue totaled

$139.4 million

$11.2 million

$128.2 million

December 31, 2014

. Approximately

$102.7 million

of the total deferred revenue balance, was short-term and will be recognized as revenue over the next 12 months. This quarter marked the first time that short-term deferred revenue exceeded $100 million. Free cash flow, a non-GAAP financial measure, was

$5.2 million

$3.4 million

in the year-ago period. The increase in free cash flow largely reflected the improved net loss. The Company's cash flow is highly seasonal, with a net use of cash during the first half of the year and the second half traditionally being a net generator of cash.

: Revenue-based Adjusted EBITDA, a non-GAAP financial measure, was

$7.5 million

improvement compared to

in the year-ago period. The improvement primarily reflected the Company's improved net loss in the

Earnings Conference Call

In conjunction with this announcement, Rosetta Stone will host a conference call today at 4:30 p.m. ET during which time there will be a discussion of the results and the Company’s business outlook. Investors may dial into the live conference call using 1-201-689-8470 (toll / international) or 1-877-407-9039 (toll-free). A live webcast will also be available in the investor relations section of the Company's website...


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