Rosetta Stone Disappoints in Any Language

Every language has different words and phrases to express disappointment. Rosetta Stone (NYSE: RST  ) is hearing them all this morning, after the language-software specialist scrapped a secondary offering and warned of a gloomy near-term outlook.

The peculiar nugget in Rosetta's miss missive is that sales are humming along just fine. The interactive educator is still expecting $245 million to $248 million in revenue this year, well ahead of the $209.4 million it rang up in 2008.

Rosetta's shortcomings are on the bottom line, where it is now expecting non-GAAP earnings to clock in between $1.14 and $1.18 a share. The new range is $0.08 per share lower than its original guidance. Marketing missteps, costlier development, and a general lack of cost containment will be pressuring margins this year.

Rosetta should have gotten its act together before going public earlier this year. Investors don't like to be let down by market rookies. Shares were off by as much as 30% this morning, despite what's technically a mere 6% to 7% miss on the bottom line.

IPOs need to come out of the gate running. Fellow 2009 debutantes OpenTable (Nasdaq: OPEN  ) , Bridgepoint Education (NYSE: BPI  ) , and Changyou.com (Nasdaq: CYOU  ) have delivered better-than-expected results in their initial quarters as public companies. Anything less is a confidence killer.

Rosetta seemed to be making all of the right moves. It soared after going public at $18 a share back in April. It topped Wall Street's profit targets in its first quarterly report as a public company. It also turned heads last month, when it charged Google (Nasdaq: GOOG  ) with trademark infringement and sued the search giant, on the basis that it was profiting from Rosetta's brand.

However, now the push for a secondary offering so close to the IPO appears flat-out greedy. The secondary was being withdrawn this morning, and that move is just another alert for the market. Rosetta Stone just wasn't ready for prime time.

The whole thing is a disappointment, in all of the 30 languages that Rosetta covers.

Some interesting ways to profit from the IPO void:

Google and OpenTable are Motley Fool Rule Breakers recommendations. Try any of our Foolish newsletter services free for 30 days. They'll help you brush up on the language of money.

Longtime Fool contributor Rick Munarriz is a fan of new stocks, and he has even recommended several fresh IPOs to newsletter readers in the past. He owns no shares in any of the companies mentioned in this story and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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  • Report this Comment On August 17, 2009, at 10:52 PM, renothecat wrote:

    This writer trades Rosetta Stone on a regular basis.

    Its a one of a kind stock.

    Its recent disappointment will be short lived within a quarter.

    Here's a stock trading at a forward P/E of about 20 after todays rout.

    The stock has become as volitaile as Google but don't take this out of context. It is no Google.

    I last sold RST at 29.00 in after hours trading after the earnings came out for a hefty profit.

    I sold what was left of my position the next morning for 29.50 before it shot up to 32.

    Just last Friday my gap filling 26.90 GTC was filled and I bought more at 27.30 before it closed at 28.35.

    After today's shock I bought more at 22.49 and again at 20.89.

    A few times I traded this stock I was wrong and paid too much but I still made good money.

    Will I pull it off this time or will I prove to be a common fool instead of a Motley Fool.

    I don't think so. If I did I would have dropped the stock that I bought on Friday like an 8 track tape player at a Jonas Brothers concert.

    Will International trade slow.

    Will bilingual communication slow.

    Will another company purvey a better idea for learning a language anytime soon.

    These are the questions I ask myself from time to time.

    The secondary offering that was just cancelled was an offering by mostly by its biggest holders.

    With a volume today of nearly 5 million today this could prove to be a bottom and the holders will try again later.

    It might take three months to get back up to the high 20's but the fundamentals are solid in any language.

  • Report this Comment On August 17, 2009, at 10:58 PM, renothecat wrote:

    Renothecat will comment tomorrow on the trading of Rosetta Stone.

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