rst-ex991

Continued Year over Year Growth in Revenue, reflects Record Q3 Literacy Revenue and Bookings plus Growth in Consumer Revenue

ARLINGTON, VA —November 6, 2019 — Rosetta Stone Inc. (NYSE:RST), a world leader in technology-based learning solutions, today announced financial results for the third quarter ended September 30, 2019.

“Our third quarter results are largely indicative of the incredible products we offer to our customers to address real societal needs and the continued turnaround of our Language business,” said John Hass, Chairman and Chief Executive Officer. “We generated record revenue within the Literacy segment and meaningful revenue growth in the Consumer Language segment. We were especially pleased that total bookings for the quarter grew 21% year over year.”

Mr. Hass continued, “We move into the fourth quarter of 2019 with momentum and look forward to a strong finish to 2019. We are excited to leverage our expertise in K-12, our portfolio of world class products and our iconic Rosetta Stone brand to offer literacy and language learning to a much wider and diverse addressable market.”

Revenue: Total revenue in the third quarter of 2019 was $45.5 million, compared to $42.8 million in the third quarter of 2018, primarily due to an increase in Lexia and Consumer Language revenue, partially offset by a slight decline in E&E Language revenue.

Revenue at Lexia increased 18% year-over-year to $15.6 million. The increase in Lexia revenues was a function of continued strong retention and renewal rates.

Consumer Language segment revenue increased $1.3 million, or 9%, year-over-year to $15.8 million, reflecting stable bookings and the benefit of previously deferred subscription revenue. Subscribers grew 21% year-over-year to 539,000 at September 30, 2019. Subscriber growth was largely driven by the inclusion of lower priced, shorter initial duration subscriptions in the Company’s portfolio. Subscriptions with a duration of one year or less totaled 42% of the subscription unit mix at the end of the third quarter 2019, down from 43% at the end of the same quarter last year. Consumer Language bookings totaled $16.3 million in Q3 2019, up year over year from $16.1 million.

E&E Language segment revenue decreased 6% year-over-year to $14.1 million. E&E language bookings increased $6.7 million, or 38% year-over-year, largely driven by the closing of the large custom content deal that was announced in August.

Net Loss: In the third quarter 2019, the Company reported a net loss of $2.9 million, or $(0.12) per diluted share. In the comparable period a year ago, the Company reported a net loss of $6.5 million, or $(0.28) per diluted share. The improvement in net loss of $3.6 million was driven by higher gross profit of $2.1 million and $2.0 million in lower variable incentive compensation expense based on reduced funding expectations, partially offset by increased professional fees and sales and marketing expenses during our peak selling season.

Balance Sheet: The Company had cash and cash equivalents of $36.2 million and no debt outstanding at September 30, 2019. Deferred revenue totaled $178.8 million at September 30, 2019, compared to $162.9 million at December 31, 2018. Short-term deferred revenue, which will be recognized as revenue over the next 12 months, totaled $123.1 million, or approximately 69% of the total September 30, 2019 balance.

Free Cash Flow and Adjusted EBITDA: Net cash provided by operating activities was $29.1 million in the third quarter of 2019 compared to $14.5 million in the third quarter last year. Free cash flow, a non-GAAP financial measure, was $25.1 million in the third quarter 2019, compared to $10.9 million in the same period a year ago.

Adjusted EBITDA, a non-GAAP financial measure, was $2.5 million in the third quarter 2019, an improvement, compared to negative $0.7 million in the year-ago period.

The Company is providing the following guidance for the full year ending December 31, 2019 (US$ millions):

¹Includes approximately $4.5 million and $0.5 million of SOURCENEXT cash receipts in 2018 and 2019, respectively.

In conjunction with this announcement, Rosetta Stone will host a conference call today at 5:00 p.m. ET during which time there will be a discussion of the results and the 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 at http://investors.rosettastone.com. A replay will be made available soon after the live conference call is completed and will remain available until 11:59 p.m. ET on Wednesday, November 13, 2019. Investors may dial into the replay using 1-412-317-6671 and passcode 13695547.

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by non-historical statements and often include words such as "outlook," "potential," "believes," "expects," "anticipates," "estimates," "intends," "plans," "seeks" or words of similar meaning, or future-looking or conditional verbs, such as "will," "should," "could," "may," "might," "aims," "intends," "projects," or similar words or phrases. These statements may include, but are not limited to, statements relating to: our business strategy; guidance or projections related to revenue, Adjusted EBITDA, sales, and other measures of future economic performance; the contributions and performance of our businesses including acquired businesses and international operations; projections for future capital expenditures; and other guidance, projections, plans, objectives, and related estimates and assumptions. A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances. In addition, forward-looking statements are based on the Company’s current assumptions, expectations and beliefs and are subject to certain risks and uncertainties that could cause actual results to differ materially from our present expectations or projections. Some important factors that could cause actual results, performance or achievement to differ materially from those expressed or implied by these forward-looking statements include, but are not limited to: the risk that we are unable to execute our business strategy; declining demand for our literacy or language learning solutions; the risk that we are not able to manage and grow our business; the impact of any revisions to our pricing strategy; the risk that we might not succeed in introducing and producing new products and services; the impact of foreign exchange fluctuations; the adequacy of internally generated funds and existing sources of liquidity, such as bank financing, as well as our ability to raise additional funds; the risk that we cannot effectively adapt to and manage complex and numerous technologies; the risk that businesses acquired by us might not perform as expected; and the risk that we are not able to successfully expand internationally. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future developments or otherwise, except as required by law. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements, risks and uncertainties that are more fully described in the Company's filings with the U.S. Securities and Exchange Commission (SEC), including those described under the section entitled “Risk Factors” in the Company’s most recent quarterly Form 10-Q filings and Annual Report on Form 10-K for the year ended December 31, 2018, and those updated from time to time in our future reports filed with the Securities and Exchange Commission.

To supplement the condensed consolidated financial statements, which are prepared and presented in accordance with accounting principles generally accepted in the United States ("GAAP"), the Company uses, and this press release contains references to, the non-GAAP financial measures of financial performance listed below.

The definitions, GAAP comparisons, and reconciliation of those measures with the most directly comparable GAAP financial measures are available in this press release or in the corresponding earnings presentation, which are posted on our website at www.rosettastone.com.

Management believes that these non-GAAP measures of financial results provide useful information to management and investors regarding certain financial and business trends relating to the Company’s financial condition and results of operations, enabling a better understanding of the long-term performance of the Company’s business. Management uses these non-GAAP measures to compare the Company’s performance to that of prior periods for trend analysis, 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 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.

The presentation of this additional financial information is not intended to be considered in isolation from, as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. 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, or in corresponding earnings presentations, and not to rely on any single financial measure to evaluate the Company’s business. The Company’s non-GAAP measures may not be comparable to those used by other companies, and we encourage you to review and understand all our financial reporting before making any investment decision.

Rosetta Stone Inc. (NYSE: RST) is dedicated to changing people's lives through the power of language and literacy education. The company's innovative digital solutions drive positive learning outcomes for the inspired learner at home or in schools and workplaces around the world.

Founded in 1992, Rosetta Stone's language division uses cloud-based solutions to help all types of learners read, write and speak more than 30 languages. Lexia Learning, Rosetta Stone's literacy education division, was founded more than 30 years ago and is a leader in the literacy education space. Today, Lexia helps students build fundamental reading skills through its rigorously researched, independently evaluated, and widely respected instruction and assessment programs.

For more information, visit www.rosettastone.com. "Rosetta Stone" is a registered trademark or trademark of Rosetta Stone Ltd. in the United States and other countries.

	As of
	September 30, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	36,205		$	38,092
Restricted cash		45			82
Accounts receivable (net of allowance for doubtful accounts of $508 and $372 at September 30, 2019 and December 31, 2018, respectively)		33,093			21,950
Inventory		1,523			933
Deferred sales commissions		11,872			11,597
Prepaid expenses and other current assets		4,922			4,041
Total current assets		87,660			76,695
Deferred sales commissions		7,788			6,933
Property and equipment, net		40,206			36,405
Operating lease right-of-use assets		6,078			—
Intangible assets, net		14,699			15,850
Goodwill		48,678			49,239
Other assets		1,786			2,136
Total assets	$	206,895		$	187,258
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable	$	8,757		$	8,938
Accrued compensation		8,902			9,046
Income tax payable		192			328
Operating lease liabilities		1,701			—
Other current liabilities		11,436			13,925
Deferred revenue		123,103			113,378
Total current liabilities		154,091			145,615
Deferred revenue		55,729			49,507
Deferred income taxes		2,331			2,776
Operating lease liabilities		4,301			—
Other long-term liabilities		1,022			1,368
Total liabilities		217,474			199,266
Commitments and contingencies
Stockholders' deficit:
Preferred stock, $0.001 par value; 10,000 and 10,000 shares authorized, zero and zero shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively)		—			—
Non-designated common stock, $0.00005 par value, 190,000 and 190,000 shares authorized, 25,060 and 24,426 shares issued, and 24,060 and 23,426 shares outstanding, at September 30, 2019 and December 31, 2018, respectively)		2			2
Additional paid-in capital		210,475			202,355
Treasury stock, at cost; 1,000 and 1,000 shares at September 30, 2019 and December 31, 2018, respectively)		(11,435	)		(11,435	)
Accumulated loss		(205,860	)		(199,592	)
Accumulated other comprehensive loss		(3,761	)		(3,338	)
Total stockholders' deficit		(10,579	)		(12,008	)
Total liabilities and stockholders' deficit	$	206,895		$	187,258

	Three months ended September 30,						Nine months ended September 30,
	2019			2018			2019			2018
Revenue	$	45,456		$	42,750		$	136,009		$	129,060
Cost of revenue		9,416			8,768			26,703			26,132
Gross profit		36,040			33,982			109,306			102,928
Operating expenses
Sales and marketing		24,700			24,948			73,738			74,013
Research and development		5,517			6,465			17,031			18,790
General and administrative		8,687			8,510			25,945			25,366
Total operating expenses		38,904			39,923			116,714			118,169
Loss from operations		(2,864	)		(5,941	)		(7,408	)		(15,241	)
Other income and (expense):
Interest income		6			23			48			71
Interest expense		(119	)		(82	)		(278	)		(246	)
Other income and (expense)		(33	)		99			1,282			(130	)
Total other income and (expense)		(146	)		40			1,052			(305	)
Loss before income taxes		(3,010	)		(5,901	)		(6,356	)		(15,546	)
Income tax (benefit) expense		(93	)		588			(88	)		1,503
Net loss	$	(2,917	)	$	(6,489	)	$	(6,268	)	$	(17,049	)
Loss per share:
Basic	$	(0.12	)	$	(0.28	)	$	(0.27	)	$	(0.75	)
Diluted	$	(0.12	)	$	(0.28	)	$	(0.27	)	$	(0.75	)
Common shares and equivalents outstanding:
Basic weighted average shares		23,609			22,814			23,369			22,647
Diluted weighted average shares		23,609			22,814			23,369			22,647

	Three months ended September 30,						Nine months ended September 30,
	2019			2018			2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(2,917	)	$	(6,489	)	$	(6,268	)	$	(17,049	)
Non-cash adjustments to reconcile net loss to cash provided by (used in) operating activities:
Stock-based compensation expense		1,412			1,452			3,988			3,388
Loss (gain) on foreign currency transactions		10			(94	)		201			26
Bad debt expense		165			49			288			110
Depreciation and amortization		3,938			3,802			10,924			10,891
Operating lease costs		545			—			1,604			—
Deferred income tax (benefit) expense		(195	)		320			(710	)		437
(Gain) loss on disposal or sale of assets		5			29			(1,389	)		12
Amortization of deferred financing costs		18			34			51			102
Net change in:
Accounts receivable		(7,726	)		(9,445	)		(11,552	)		(8,314	)
Inventory		129			433			(589	)		1,856
Deferred sales commissions		(3,470	)		(2,841	)		(1,138	)		(1,193	)
Prepaid expenses and other current assets		(220	)		785			(1,039	)		875
Income tax receivable or payable		(90	)		(50	)		(139	)		(397	)
Other assets		331			(6	)		242			(407	)
Accounts payable		304			(1,645	)		(162	)		(36	)
Accrued compensation		1,483			3,609			456			(979	)
Other current liabilities		(574	)		(421	)		(1,898	)		(3,969	)
Operating lease liabilities		(515	)		—			(1,575	)		—
Other long-term liabilities		—			—			(31	)		—
Deferred revenue		36,439			24,949			16,394			14,384
Net cash provided by (used in) operating activities		29,072			14,471			7,658			(263	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(4,011	)		(3,564	)		(13,720	)		(11,700	)
Proceeds from sale of assets		—			—			1,396			17
Net cash used in investing activities		(4,011	)		(3,564	)		(12,324	)		(11,683	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of stock options		669			231			3,556			1,547
Proceeds from borrowings under credit facility		—			—			10,500			—
Repayments of borrowings under credit facility		(9,900	)		—			(10,500	)		—
Payment of deferred financing costs		—			(4	)		(47	)		(4	)
Payments under financing lease liabilities		(109	)		(111	)		(331	)		(336	)
Net cash provided by (used in) financing activities		(9,340	)		116			3,178			1,207
Increase (decrease) in cash, cash equivalents, and restricted cash		15,721			11,023			(1,488	)		(10,739	)
Effect of exchange rate changes in cash, cash equivalents, and restricted cash		(277	)		(124	)		(436	)		(400	)
Net increase (decrease) in cash, cash equivalents, and restricted cash		15,444			10,899			(1,924	)		(11,139	)
Cash, cash equivalents, and restricted cash—beginning of period		20,806			20,998			38,174			43,036
Cash, cash equivalents, and restricted cash—end of period	$	36,250		$	31,897		$	36,250		$	31,897

* Adjusted EBITDA is GAAP net income/loss plus interest income and expense, other income/expense, income tax benefit/expense, impairment, lease abandonment and termination, depreciation, amortization, stock-based compensation, restructuring, and strategy and cost-reduction related consulting expenses. In addition, Adjusted EBITDA excludes “Other” items related to non-restructuring wind down and 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 the current definition.

RECONCILIATION OF CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES TO FREE CASH FLOW

* Free cash flow is cash flow from operations minus cash used in purchases of property and equipment.

	Quarter-Ended												Year Ended			Quarter-Ended
	Mar 31			Jun 30			Sep 30			Dec 31			Dec 31			Mar 31			Jun 30			Sep 30
	2018			2018			2018			2018			2018			2019			2019			2019
Revenue by Segment (in thousands, except percentages)

Literacy		12,384			12,695			13,215			14,472			52,766			14,806			15,101			15,587
E&E Language		15,436			15,356			14,990			14,594			60,376			14,443			14,502			14,074
Consumer Language		14,988			15,451			14,545			15,508			60,492			15,362			16,339			15,795
Total		42,808			43,502			42,750			44,574			173,634			44,611			45,942			45,456

YoY Growth (%)
Literacy		22	%		22	%		20	%		20	%		21	%		20	%		19	%		18	%
E&E Language		(6	)%		(11	)%		(9	)%		(3	)%		(7	)%		(6	)%		(6	)%		(6	)%
Consumer Language		(29	)%		(15	)%		(22	)%		(13	)%		(20	)%		2	%		6	%		9	%
Total		(10	)%		(5	)%		(7	)%		—			(6	)%		4	%		6	%		6	%

% of Total Revenue
Literacy		29	%		29	%		31	%		32	%		30	%		33	%		33	%		34	%
E&E Language		36	%		35	%		35	%		33	%		35	%		32	%		32	%		31	%
Consumer Language		35	%		36	%		34	%		35	%		35	%		34	%		35	%		35	%
Total		100	%		100	%		100	%		100	%		100	%		100	%		100	%		100	%

Revenues by Geography

United States		36,965			37,759			37,747			39,936			152,407			39,830			41,179			40,891
International		5,843			5,743			5,003			4,638			21,227			4,781			4,763			4,565
Total		42,808			43,502			42,750			44,574			173,634			44,611			45,942			45,456

Revenues by Geography (as a %)
United States		86	%		87	%		88	%		90	%		88	%		89	%		90	%		90	%
International		14	%		13	%		12	%		10	%		12	%		11	%		10	%		10	%
Total		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.

	Full Year
	2018 Actual			2019 Guidance
Revenue from:
Literacy	$	52.8		$	~62.0
Combined Language		120.8		~120.0
Total Revenue	$	173.6		$	~182.0
Consolidated Revenue Plus Change in Deferred Revenue		181.0		~197.0
GAAP Net Loss		(21.5	)	~(15.0)
Adjusted EBITDA		0.2		~6.0
Operating Cash Flow¹		10.4		~18.0
Capital Expenditures		16.9		~18.0
Ending Cash Balance²	$	38.1		$	~42.0

	Three months ended September 30,
	2019		Mix %			2018		Mix %			% change
Revenue from:
Literacy	$	15,587		34	%	$	13,215		31	%		18	%
E&E Language		14,074		31	%		14,990		35	%		(6	)%
Consumer Language		15,795		35	%		14,545		34	%		9	%
Total Revenue	$	45,456		100	%	$	42,750		100	%		6	%