Rosetta Stone (RST)

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Rosetta Stone (RST)

Q4 2012 Earnings Call

February 28, 2013 4:30 pm ET

Executives

Steve Somers

Stephen M. Swad - Chief Executive Officer, President, Principal Accounting Officer and Director

Thomas Pierno - Chief Financial Officer

Analysts

Peter P. Appert - Piper Jaffray Companies, Research Division

Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division

Joseph D. Janssen - Barrington Research Associates, Inc., Research Division

Matthew J. Kempler - Sidoti & Company, LLC

Zack Buckley

David P. Nierenberg - Nierenberg Investment Management Company, Inc.

Matthew Winthrop

Presentation

Operator

Greetings, and welcome to the Rosetta Stone Fourth Quarter 2012 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steve Somers, IR for Rosetta Stone. Thank you. Mr. Somers, you may begin.

Steve Somers

Thank you very much. Good afternoon, and let me welcome you to Rosetta Stone's fourth quarter 2012 earnings call. I'm Steve Somers, Vice President of Investor Relations. And I'm joined today by Steve Swad, Rosetta Stone's President and CEO; and Tom Pierno, CFO, to discuss the operations and financial results for the fourth quarter and our outlook.

In addition to our commentary, we have made our fourth quarter 2012 earnings results press release in a slide deck supporting this webcast available on our IR website at investors.rosettastone.com. Please review them to find important additional information.

As a reminder, There are or will be forward-looking statements in our press release, slides and conversation today. We offer these statements under the Safe Harbor provided by U.S. law. Of course, risks and uncertainties attached to any forward-looking statement. A detailed discussion of such risks and uncertainties is contained in our Form 10-K for the fiscal year ended December 31, 2011, filed with the SEC in March 2012, which is available in the Investor Relations section of our website.

We ask that you review those risk factors before you making any investment decision. Please note these forward-looking statements reflect our opinions only as of the date of this presentation, and we undertake no obligation to provide or publicly release the results of any revision to the forward-looking statements in light of new information or future events. We also use non-GAAP numbers in our presentation. The definitions of those numbers and their reconciliation to GAAP numbers are available in today’s press release on our website and as filed with the SEC today on Form 8-K.

Now let me turn the call over to Steve Swad.

Stephen M. Swad

Thanks, Steve, and welcome, everyone. Overall, I am very pleased with how 2012 developed and finished. Early in the year, I articulated our strategy through 2015. I said we would focus on going deeper in language, as well as extending beyond language into adjacent areas like reading.

I also stated we would move our product to more relevant digital platforms, expand our distribution, focus on growing our consumer and institutional businesses, improve our cost structure relative to sales by cutting empty calorie marketing spend and increase financial discipline to drive expanded margins.

I believe we made good progress in most of these areas. During the year, we made key management changes to help execute our strategy with the addition of a new Chief Product Officer, a new Head of Business Development, a new CFO and a relocation of our Head of Global Consumer to Asia to improve our international operations.

We exceeded our key financial objectives by delivering modest gains in our top line and adjusted EBITDA that was 2x our initial guidance. We also made strides in moving the company's products to the cloud with triple-digit growth in online learners. And we introduced a digital download product that is more relevant, cheaper to deliver and demonstrating good customer acceptance.

We also began offering a new subscription product in our retail channels. And we struck new distribution relationships with Facebook and Groupon. These relationships have helped expand our audience and reach a younger demographic.

With respect to our institutional business, we saw steady gains all year with mid-single-digit growth in Q4. Importantly, in the second half of the year, we shifted almost all of the business in U.S. to a SAS-based renewal product, and we are seeing double-digit growth trends in the subscription portion of this business, driven by success in our corporate, international and emerging markets.

On the challenges side, the top line growth for the company was modest, as we stripped out empty calorie revenue and increased our subscription footprint in both consumer and institutional, which resulted in $11.5 million of new deferred revenue on the balance sheet.

Meanwhile, our international consumer segment continues to underperform versus its potential, particularly in Japan, as we still need to improve that business and then grow in that market.

Overall, I characterize 2012 as a year where the company turned around its financial performance, transitioned the business to a more relevant digital platform and executed on several key initiatives that provide for a solid 2013 and beyond.

Regarding future performance, I want to start by reaffirming my optimism about the opportunities that lie ahead for Rosetta Stone, as well our 2015 goal of $400-plus million of revenues and low double-digit adjusted EBITDA margins.

Future growth will come from launching new products, like Kids and advanced English, as well as introducing products beyond language, such as reading.

With respect to 2013, we're guiding to single-digit improvements in revenue and double-digit improvements in adjusted EBITDA.

The revenue growth is somewhat muted by continued tightening of empty calorie revenue and additional subscription growth, some of which sits on our balance sheet in deferred revenue.

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