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Rosetta Stone: Finally Speaking Wall Street's Language

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As writers who publish our thoughts publicly, I think it's vitally important to hold ourselves accountable. In that spirit, this article is devoted to a stock I hyped early and often, only to see it continually tank: Rosetta Stone (NYSE: RST  ) .

Competing against products offered by CBS' (NYSE: CBS  ) Pimsleur, Disney's (NYSE: DIS  ) Publishing Worldwide, and McGraw Hill (NYSE: MHP  ) , Rosetta's Version 4 Totale has struggled to gain traction, especially in the U.S.

But with its most recent earnings announcement -- which beat analyst estimates by a whopping $0.23 -- there are new reasons to be hopeful ... as well as new reasons to view the company with a skeptical eye. Here's a quick rundown of how its three different segments performed.

U.S. consumers

  • The bleeding finally stopped for this segment, with revenue down only 5% year on year.
  • The rebranding of its products with new ads is in place as promised, and it will now benefit from the popularity of Apple's iPad, since the Rosetta Stone app is up and running.
  • U.S. consumers, which recently account for the "problem area" of Rosetta's sales, now make up a reduced 55% of total revenue.

International consumers

  • Offices will be in place and running in both China and Brazil by year's end.
  • Revenue was up an impressive 58% year on year, showing continued strength.
  • This segment now accounts for 20% of total revenue for the company.

Institutional customers

  • Growth has hit a roadblock here, as revenue was actually down by 1% year on year.
  • The company lost its exclusive contract with the U.S. Army. The Army will be replacing Rosetta Stone with an internally developed service.
  • Institutional buyers -- companies, governments, and schools -- now make up 20% of total revenue.

A mixed bag
Other than the impressive earnings beat, there were other positive signs for the company. For the first six months of the year, revenue from subscriptions -- which will be vital for the company moving forward -- accounted for 26.9% of total revenue. That's more than 10% higher than last year.

At the same time, the company has lost $9.3 million over the past year. And while revenue was up 10% overall compared to 2010's second quarter, accounts receivable were up 35% sequentially. Rosetta's being more lenient with customers' payment terms at the exact moment when it can't afford to.

Learning a new language is hard!
After digesting all this information, I guess I'm right back where I started. I'm not buying, but I'm not selling, either. I'm very interested to see what kind of traction Version 4 Totale has in K-12 districts, and those numbers should be available in the next earnings release. If you'd like to be in the loop and follow all of the latest on this company, I encourage you to add Rosetta Stone to your watchlist.

The Steve Jobs Betrayal
You may already know that in the final year of his life, Jobs revealed a stunning betrayal — and told his biographer, "I will spend my last dying breath... and every penny of Apple's $40 billion in the bank to right this wrong." What was it that made Jobs so irate — and why could it make a few in-the-know investors some major profits over the coming months and years?

Enter your email address below to find out what made Jobs so enraged!

Fool contributor Brian Stoffel owns shares of Rosetta Stone and Apple. The Motley Fool owns shares of Apple and Rosetta Stone. Motley Fool newsletter services have recommended buying shares of Walt Disney, Rosetta Stone, and Apple, and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 10, 2011, at 10:11 PM, JohnConners wrote:

    Motley advisers keep missing the point about the

    army and marine contracts. The Rosetta Stone ads

    all said, "Used by the US Army," to give the impression that Rosetta Stone is the instructional

    material for the Army. In fact RS was made available

    to armed services members, but RS was never used

    at the Defense Language Institute as the primary

    instructional system. The Army has its own system that it has used for years and is much more detailed

    and comprehensive than the few levels RS offers.

    Whenever RS goes into a new market, there is an

    initial surge because naive people give it a try, but

    as it is used they find it is not a linguistically sophisticated program, in that it is not sequenced according to linguistic principles. RS thinks that their technological aspects are sophisticated, but

    they are paired with poor linguistics. That is why

    the market in the US is dropping. Few schools,

    considering RS' enormous efforts, have adopted

    the RS program and many that bought it no longer use it. The

    foreign language systems used in the schools of

    China, Japan, and Korea will continued to be used.

    RS will get some initial sales, but they cannot penetrate the school market because the English

    programs are an integrated part of the established

    school curricula in these several countries. The stock price is currently artificially elevated because

    of the three million shares that have been sold short. RS is far from a miracle system and is ignored by foreign language specialists and linguists. As you look at the history of RS, before

    its purchase by the two venture companies, you will

    see that it is a copy of other systems. It is not their

    invention and, I believe, they do not know how

    language acquisition takes place. For example,

    advertising that their program mimics first language learning is absurd. What babies use a

    microphone and repeat words into it to determine

    whether their pronunciation is correct? What baby

    practices conversation when beginning to listen to

    language. RS is an unfortunate educational

    model.

  • Report this Comment On August 24, 2011, at 4:04 AM, Windsurfing1 wrote:

    They keep missing the numbers I am looking for. International growth should have stayed at a growth rate north of 100%, as it started off two years ago. It's plunge to 58% described in this article as a success.... I liked the company, but I think it is over, unless they come up with really cheap introductory offer south of 50 USD, as I proposed multiple times already.

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Related Tickers

5/25/2012 4:00 PM
RST $13.79 Up +0.01 +0.07%
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