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| 8-K - 8-K - ROSETTA STONE INC | draftform8-kxregulationfdd.htm |
Rosetta Stone
Reach, Relevancy and Recurring Revenue
BMO Back to School Education Conference
September 14, 2017
2
Caution on Forward-Looking Statements
This presentation 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," or "projects.” These statements may include, but are not
limited to, statements relating to: our business strategy; guidance or
projections related to revenue, Adjusted EBITDA, bookings, 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 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, as such factors may be updated from time
to time.
Immaterial rounding differences may be present in this data in order
to conform to reported totals.
Non-GAAP Financial Measures
Today’s presentation and discussion also contain references to non-
GAAP financial measures. The full definition, GAAP comparisons, and
reconciliation of those measures are available in this presentation or
in our press release which is posted on our website at
www.rosettastone.com. Our 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.
68%
10%
18%
4%
3
Rosetta Stone 2014
% Total Revenues in 2014
Consumer Lexia Education Enterprise
Non-Recurring Consumer
Dominated Business …
… Doing Too Many Things in
Too Many Places
§ Four acquisitions in eight
months
§ 15 offices, 8 outside the U.S.
§ Product investment spread
broadly
4
Singular Objective
Build a Profitable and Growing
Recurring Revenue Business
5
Step 1: Expenses Reduced 33%1
2014 $MM
1 Amounts are before restructuring and severance related charges of $4.2MM and $5.2MM in 2014 and 2016, respectively
Results:
§ R&D1 down 23%
§ COGS1 down 36%
§ S&M1 down 34%
§ G&A1 down 30%
§ Restructured Consumer
§ Sold Korean operations
§ Restructured E&E
§ Closed/shrank every office but Lexia
§ Licensed Japanese marketplace
56 39
171
112
52
34
33
25
G&A S&M COGS R&D
2016
6
Step 2: While Investing in Lexia
930
476
Language and G&A 49%
2014
2016
Lexia Headcount1
536
Language and G&A
Headcount1
Lexia 151%
2017 YTD
June
1 Full-time headcount.
84
181
211
2014
2016
2017 YTD
June
Lexia – From 8% to 30% of Full-Time HC in 30 Months
7
Why Invest in Lexia?
§ 2/3 of U.S. students in grades 4 and 8 are non-proficient
readers
§ Struggling readers account for 60% of students who
drop out or fail to graduate on time
Sources: U.S. Department of Education, 2015 National Assessment of Educational Progress and Anne E. Casey
Foundation, 2012 “Double Jeopardy: How Third Grade Reading Skills and Poverty Influence High School Graduation”;
Lexia actively served 16K schools/school districts at March 31, 2017.
Huge TAM
Great Need
21K Schools
Grades 9-12
70K Schools
Grades K-8
100,000
U.S. Public Schools
16K
Notes: 2017 National analysis of 712,000 students using Lexia Reading in a geographically and ethnically representative sample.
8
§ Students reading below grade
level declined from 53% to
11% in one school year
§ Most 3rd party published
studies of any program
Start Level
53%
19%
34%
End Level
11%
7%
1 Grade Below
2+ Grades Below
Why Invest in Lexia?
Demonstrated Efficacy
9
2014 2016
23.1
38.4
66% Growth in Sales
Land
Investment in Direct Sales
and Support
§ Own the Relationship
$MM
Lexia Growth Strategy
10
Lexia Growth Strategy
$38.4MM
Retention1 Above 90%
1 Retention rate is on TMM basis.
89% 95%
1Q16 2Q16 3Q16 4Q16 1Q17 2Q17
Investment in
Implementation Services
§ Own the Relationship
§ Own Success
Service
11
Lexia Growth Strategy
Unlimited School Licenses
~3,300
2014 2016
Expand
~2,300
~2,900
August
2017
Moving Classrooms to
Schools, Schools to
Districts
2015
~1,300
12
$MM1
3Q15 2Q17 4Q15 1Q16 1Q17 2Q16 4Q16 3Q16
Growing Annualized Recurring Revenue
1See Appendix for definitions and reconciliation of GAAP to non-GAAP Financial Measures. Prior period ARR has been
updated to reflect current period presentation.
25
27
29
31
33
35
37
39
41
43
45
3Q '15 4Q '15 1Q '16 2Q '16 3Q '16 4Q '16 1Q '17 2Q '17
39
26
Lexia Growth Strategy
13
Lexia Growth Strategy
~40% of Sales People < 1 Year
Sales Rep Tenure1 % of Total % of 2-Years+
2 Years+ 33% 100%
1 Year – 2 Years 26% 80%
Less than 1 Year 22% 33%
New 17% NM
1 At July 31, 2017
1
Accelerate - Improve Sales Productivity
14
INSTRUCTION
6-12
K-5
Accelerate (Pre-2016 / 17)
Lexia Growth Strategy
ASSESSMENT
15
INSTRUCTION
Lexia Growth Strategy
Accelerate – Portfolio Sale (2016 / 17)
6-12
K-5
ASSESSMENT
16
ASSESSMENT INSTRUCTION
6-12
K-5
Lexia Growth Strategy
Adolescent
Literacy
Program
Accelerate – Portfolio Sale (2018 and Beyond)
§ Significant TAM – 100K U.S. public schools
§ Great Need – 2/3 of kids reading below grade level
§ Demonstrated Efficacy – Significant improvement in reading
levels; 90%+ retention and renewal rates
§ Broad Reach – 16K schools1, ~3 million kids
§ Productivity Increase – Increasing sales experience lowers CAC
§ Growing LTV – Soon-to-be-completed Literacy portfolio
§ Emerging Profitability – Profit emerges as investments levered
17
Lexia Learning Opportunity
1Lexia actively served 16K schools/school districts at March 31, 2017.
18
Lexia 2020
Revenue
COGS
S&M
R&D
Segment
Contribution
2016 Expected Growth 2020E
$34.1
4.8
21.7
4.1
1.5
$85 to $90
~$20
~27% CAGR
G&A 2.1
Target ~ 20% FCF1 Contribution Margins With Growth
$MM
Segment FCF1 $0.5 ~$18
~91% CAGR
~145% CAGR
1 See Appendix for definitions and reconciliation of GAAP to non-GAAP Financial Measures.
19
English Dominates Language Learning
$4.6 Billion Digital Marketplace in 2020
Source: Technavio Insights, custom research August 2016-March 2017 and The British Council.
40%
60%
82%
18%
N.A. Outside N.A. English World Languages
TAM By Geography (%) TAM By Language (%)
1.5 Billion
English
Language
Learners
20
Investment Focused on English Language
Enterprise
Catalyst Opens English
Consumer
Focused on Mobile &
Subscription Sales and Partners
21
Initially Traded Revenue for Margin in E&E
62 58
3Q15 2Q17
E&E Contribution Margin % E&E ARR ($MM)
31%
43%
3Q15 2Q17
E&E
Restructuring
– 1Q16
E&E
Restructuring
– 1Q16
22
Building a Sustainable Consumer Business…
8% 5% 5% 6%
26% 11% 15% 16%
17%
15%
18%
28%
22%
69% 62%
50%
35%
CD
Digital Download
Long-term Subscription1
Short-Term Subscription2
Type of Unit Sold
2014 2016 2015 2013
2017 YTD
June
CDs from 79% to 35% ⎯ Soon to Approach 0
1 More than one year subscription term.
2 One year or less subscription term.
Mostly Retail
79%
13%
2Q16 2Q17
23
…With a Renewable Portfolio
Increased Unit Mix of “Renewable” Sales in 1H 2017
1 Excludes renewal subscription unit sales.
2 North America DTC; CAC includes all Sales and Marketing expenses, both Media and non-Media.
LTV-to-CAC Multiple2
1.8x
1.5x
0%
20%
40%
60%
80%
100%
2016 YTD June 2017 YTD June
Term >1 Year Term <1 Year CDs & Downloads
57%
82%
17%
17% 1%
26%
Overall Unit Sales up 4% Y/Y
24
Focused on English Language Opportunity
Sources: U.S. Census; RS Analysis
24MM
English proficient
16MM
Not yet English proficient
40MM
U.S. Spanish Speakers
Univision Strategic Partnership
Establish Scale in the U.S. Hispanic Segment
§ Significant TAM – Huge and growing English Language
Learning need; 1.5 billion English learners worldwide1
§ Iconic Brand – Iconic brand in U.S. with worldwide reach
§ Serious Outcomes – Serving genuine needs with expertise
§ Recurring Revenue – Approaching 100%-SaaS business;
More predictable, sustainable model
§ Growth Opportunities – Partnerships (e.g., Univision),
Global ESL/EFL (English as a Second or Foreign Language)
and K12 ELL (English Language Learning)
25
Rosetta Stone Language Opportunity
1The British Council estimate.
26
Language Businesses 2020
$MM
Revenue
COGS
S&M
R&D
Segment
Contribution
2016 Expected Growth 2020E
$160.0
23.9
86.9
18.9
29.8
$150 to $155
~45
Roughly Flat
G&A 0.5
Segment FCF1 $18.0 ~$38
Target ~25% FCF1 Contribution Margin
~11% CAGR
~21% CAGR
1 See Appendix for definitions and reconciliation of GAAP to non-GAAP Financial Measures.
68%
18%
40%
23%
16%
21%
27
Rosetta Stone Today
Education Becoming our Largest Segment in a
More Balanced Business
TODAY: Q2 2017 Revenue Mix
K-12: 39%
Consumer Lexia Education Enterprise
2014 Revenue Mix
K-12:
14%
28
Rosetta Stone Today – 2017 Guidance
Amounts in $MM FY16A FY17E
GAAP Revenue $194.1 Approx. $182 – $185
GAAP Net Loss $(27.6) Approx. $(13 – 15)
Adjusted EBITDA1 $4.4 Approx. $8 - 10
Capital Expenditures $12.5 Approx. $14
Year-End Cash Balance $36.2 Approx. $44
2H Cash Increase +$6.5 Approx. +$17.6
1 See Appendix for definitions and reconciliation of GAAP to non-GAAP Financial Measures.
Restructuring Language and G&A
§ Transition to Consumer SaaS-sales creating temporary drag
§ Cost base lowered, but not fully levered
Reinvesting in Lexia
§ Q2 cash R&D 35% of revenue as we invest in growth
§ Investing in direct sales force to build future productivity
§ Result – Lexia Contribution1 19% vs. Language 25% in Q2
29
Why Not Highly Profitable Yet?
Restructuring and Reinvesting Simultaneously
1. Contribution as a percentage of pro forma revenue
30
Rosetta Stone Consolidated 2020 Outlook
$MM 2017E2 Expected Growth 2020E
Revenue $183.5 ~$235~9% CAGR
Targeting 2020 15% Adj. EBITDA and 10+% FCF1 Margins
Adj. EBITDA1 $9 ~$35~57% CAGR
FCF1 $(5)3 ~$30~$36MM
1 See Appendix for definitions and reconciliation of GAAP to non-GAAP Financial Measures
2 Based on current company 2017 full year or year end guidance. Midpoint where appropriate.
3 Before cash received from SOURCENEXT transaction but after certain restructuring and one-time items..
Year-End Cash $44 ~$56MM ~$100
RST
RST today
Opportunity
31
Why Does this Matter?
Source: 2017 River Cities SaaS Operating Metrics & Valuation Benchmarking Study.
Public Markets Recognize the Value of
Profitable and Growing Recurring Revenue Businesses
§ Large addressable marketplaces; growing digital
share
§ Iconic Brand and Expertise in Language and
Demonstrated Efficacy in Literacy
§ Nearing 100%-SaaS, Recurring Revenue business
§ Multiple opportunities for growth
§ Growth expected to bring profitability and cash
generation
32
Changing Lives through Language and Literacy
Our Mission
Change Lives Through Language
and Literacy Education
Thank You
Appendix
§ Annualized recurring revenue (or “ARR”) is computed using the annualized value of active
subscription arrangements at the end of the period. ARR is a performance metric used to
assess the health and trajectory of our E&E Language and Literacy segments, which we
believe aids investors in understanding our segment results. We present ARR as a statistical
measure rather than a non-GAAP financial measure. ARR should be viewed independently
of revenue and deferred revenue, as ARR is a performance metric and is not intended to be
combined with either of these items.
35
Definitions of Statistical 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, 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 current definition.
§ Free cash flow is cash flow from operating activities minus cash used in purchases of property and
equipment.
§ Segment contribution is calculated as segment revenue less expenses directly incurred by or allocated to
the segment. Direct segment expenses include costs and expenses that are directly incurred by or
allocated to the segment and include materials costs, service costs, customer care and coaching costs,
sales and marketing expenses, and bad debt expense. In addition to the previously referenced expenses,
the Literacy segment includes direct research and development expenses and Combined Language
includes shared research and development expenses, costs of revenue, sales and marketing, and general
and administrative expenses applicable to the Consumer Language and Enterprise & Education
Language segments.
§ Segment free cash flow is Adjusted EBITDA plus the change in deferred revenue, less the change in
deferred commissions, less capital expenditures.
36
Definitions of Non-GAAP Financial Measures
37
Adjusted EBITDA and Free Cash Flow1
1 See Appendix for definitions and reconciliation of GAAP to non-GAAP Financial Measures.
Amounts ($000)
Quarterly Quarterly
1Q16 2Q16 3Q16 4Q16 FY16 1Q17 2Q17
GAAP net income (loss) $ (7,507) $ (8,978) $ (5,452) $ (5,613) $ (27,550) $ 454 $ (1,135)
Total non-operating (income) expense, net (1,129) (816) (524) 596 (1,873) (209) (312)
Income tax (benefit) expense 449 (992) 1,793 1,253 2,503 700 782
Impairment 0 2,902 1,028 0 3,930 0 0
Depreciation and amortization 3,408 3,178 3,226 3,510 13,322 3,075 2,987
Stock-based compensation 421 1,397 1,639 1,449 4,906 147 1,359
Restructuring expenses 2,509 2,512 162 10 5,193 780 205
Lease abandonment and termination 0 30 0 1,614 1,644 0 0
Strategy consulting expense 402 519 458 577 1,956 169 0
Other EBITDA adjustments (117) 304 85 56 328 39 16
Adjusted EBITDA $ (1,564) $ 56 $ 2,415 $ 3,452 $ 4,359 $ 5,155 $ 3,902
Amounts ($000)
Quarterly Quarterly
1Q16 2Q16 3Q16 4Q16 FY16 1Q17 2Q17
Net cash provided by/(used in) operating activities $ (2,546) $ (9,879) $ 6,479 $ 7,186 $ 1,240 $ 5,769 $ (10,397)
Purchases of property and equipment (2,586) (3,348) (3,694) (2,886) (12,514) (2,313) (3,080)
Free Cash Flow $ (5,132) $ (13,227) $ 2,785 $ 4,300 $ (11,274) $ 3,456 $ (13,477)
38
Revenue and Bookings1
1 See Appendix for definitions and reconciliation of GAAP to non-GAAP Financial Measures.
Amounts ($000)
Quarterly Quarterly
1Q16 2Q16 3Q16 4Q16 FY16 1Q17 2Q17
Revenue
Literacy $ 7,577 $ 7,950 $ 8,786 $ 9,810 $ 34,123 $ 10,170 $ 10,370
Enterprise & Education ("E&E") Language
Enterprise 11,044 10,479 11,041 10,554 43,118 9,408 9,914
North America K-12 7,287 7,011 7,295 7,372 28,965 7,092 7,346
Total E&E Language 18,331 17,490 18,336 17,926 72,083 16,500 17,260
Consumer 22,094 20,276 21,571 23,942 87,883 21,023 18,275
Total Revenue $ 48,002 $ 45,716 $ 48,693 $ 51,678 $ 194,089 $ 47,693 $ 45,905
Bookings
Literacy $ 3,817 $ 9,433 $ 17,923 $ 7,221 $ 38,394 $ 5,300 $ 8,628
Enterprise & Education ("E&E") Language
Enterprise 7,906 8,972 12,553 11,071 40,502 6,034 10,203
North America K-12 2,877 9,184 11,643 5,438 29,142 2,890 8,354
Total E&E Language 10,783 18,156 24,196 16,509 69,644 8,924 18,557
Consumer 22,911 18,234 19,203 24,413 84,761 18,495 27,299
Total Bookings $ 37,511 $ 45,823 $ 61,322 $ 48,143 $ 192,799 $ 32,719 $ 54,484
39
Reconciliation of Revenue and Bookings1
1 See Appendix for definitions and reconciliation of GAAP to non-GAAP Financial Measures.
Amounts ($000)
Quarterly Quarterly
1Q16 2Q16 3Q16 4Q16 FY16 1Q17 2Q17
Reconciliation of Revenue to Bookings
Literacy
Segment revenue $ 7,577 $ 7,950 $ 8,786 $ 9,810 $ 34,123 $ 10,170 $ 10,370
Segment change in deferred revenue (3,760) 1,483 9,137 (2,589) 4,271 (4,870) (1,742)
Bookings $ 3,817 $ 9,433 $ 17,923 $ 7,221 $ 38,394 $ 5,300 $ 8,628
Enterprise & Education ("E&E") Language
Segment revenue $ 18,331 $ 17,490 $ 18,336 $ 17,926 $ 72,083 $ 16,500 $ 17,260
Segment change in deferred revenue (7,548) 666 5,860 (1,417) (2,439) (7,576) 1,297
Bookings $ 10,783 $ 18,156 $ 24,196 $ 16,509 $ 69,644 $ 8,924 $ 18,557
Consumer
Segment revenue $ 22,094 $ 20,276 $ 21,571 $ 23,942 $ 87,883 $ 21,023 $ 18,275
Segment change in deferred revenue 817 (2,042) (2,368) 471 (3,122) (2,528) 9,024
Bookings $ 22,911 $ 18,234 $ 19,203 $ 24,413 $ 84,761 $ 18,495 $ 27,299
Total revenue $ 48,002 $ 45,716 $ 48,693 $ 51,678 $ 194,089 $ 47,693 $ 45,905
Change in deferred revenue (10,491) 107 12,629 (3,535) (1,290) (14,974) 8,579
Total bookings $ 37,511 $ 45,823 $ 61,322 $ 48,143 $ 192,799 $ 32,719 $ 54,484
40
Segment Contribution1
1 Please see the Appendix for definitions of non-GAAP financial measures. The Literacy segment was previously a component of the
"Enterprise & Education" segment and is comprised solely of the Lexia business. Prior periods have been reclassified to reflect our
current segment presentation and definition of segment contribution.
Segment Contribution
Amounts ($000)
Quarterly Quarterly
1Q16 2Q16 3Q16 4Q16 FY16 1Q17 2Q17
Revenue:
Literacy segment $ 7,577 $ 7,950 $ 8,786 $ 9,810 $ 34,123 $ 10,170 $ 10,370
Enterprise & Education ("E&E") Language segment 18,331 17,490 18,336 17,926 72,083 16,500 17,260
Consumer segment 22,094 20,276 21,571 23,942 87,883 21,023 18,275
Shared services 0 0 0 0 0 0 0
Combined Language 40,425 37,766 39,907 41,868 159,966 37,523 35,535
Total revenue $ 48,002 $ 45,716 $ 48,693 $ 51,678 $ 194,089 $ 47,693 $ 45,905
Segment contribution:
Literacy segment $ 57 $ 439 $ (364) $ 1,400 $ 1,532 $ 961 $ 1,591
E&E Language segment 6,297 6,903 8,064 7,818 29,082 7,119 7,357
Consumer segment 5,040 3,934 6,233 6,295 21,502 8,357 6,060
Shared services (5,457) (4,982) (4,758) (5,562) (20,759) (4,990) (4,672)
Combined Language 5,880 5,855 9,539 8,551 29,825 10,486 8,745
Total segment contribution $ 5,937 $ 6,294 $ 9,175 $ 9,951 $ 31,357 $ 11,447 $ 10,336
Segment contribution margin percentage:
Literacy segment 1% 6% -4% 14% 4% 9% 15%
E&E Language segment 34% 39% 44% 44% 40% 43% 43%
Consumer segment 23% 19% 29% 26% 24% 40% 33%
Rosetta Stone
Reach, Relevancy and Recurring Revenue
BMO Back to School Education Conference
September 14, 2017