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Rosetta Stone Inc (NYSE:RST)
Q1 2019 Earnings Call
May 7, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to the Rosetta Stone Incorporated First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) Please note this conference is being recorded.

I will now turn the conference over to your host, Jason Terry, Investor Relations. Mr Terry, you may begin.

Jason Terry -- Addo Investor Relations

Thank you, and good afternoon, everyone. Welcome to Rosetta Stone's first quarter 2019 earnings conference call. Speaking on the call today will be John Hass, Chairman and CEO. Additionally, Nick Gaehde and Matt Hulett, Co-Presidents of Rosetta Stone, and Tom Pierno, the Company's Chief Financial Officer will be available during the Q&A portion of today's call.

We have posted to the Investor Relations section of our website at www.rosettastone.com, both the earnings release and a slide presentation that accompanies today's call. We've also posted supplemental

information and analysis on our website. This supplemental information will not be read on today's call.

I want to remind everyone that as always, there will be elements in today's presentation which are forward looking and are based on our best view of the world and our businesses as we see them today. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially. A description of these risks and uncertainties and other factors that could affect our financial results are included in our SEC filings, including our most recent annual report on Form 10-K and quarterly reports on Form 10-Q. We expressly disclaim any obligation to update or revise any forward-looking statements except as required by law.

Today's presentation and discussion also contains references to the non-GAAP financial measures. The full definition, GAAP comparison and a reconciliation of those measures are available in the aforementioned presentation and press release. Our non-GAAP measures may not be comparable to those used by other companies and we encourage you to review and understand all of our financial reporting, before making any investment decisions.

I will now turn the call over to John.

John Hass -- Chief Executive Officer & Chairman of the Board of Directors

Thank you, and good afternoon. Please turn to slide 3. I am happy to report that the year is off to a positive start and we are pushing forward on a number of initiatives to drive future growth. The opportunities we are pursuing are firmly rooted in the areas that make us a global leader in digital learning. A deep legacy in education technology, with over 60 years of combined experience between Rosetta Stone and Lexia. A differentiated technology portfolio with unique capabilities like our speech recognition engine, the Rosetta Stone animation engine and our patented assessment without testing process. And because we are a scale player, with over 5 million combined paying learners annually, and have an iconic education brand, opportunities for reinvestment and growth are available to us.

I will update you on some of the opportunities we are currently pursuing during today's call, but let me begin with an overview of Q1 results. While a seasonally small quarter, I am pleased that both revenues and earnings came in better than expected across the Company. While much of this outperformance is anticipated to be timing, the year has begun well.

Turning to slide 4, Literacy bookings in Q1 were $4.5 million, in line with expectations and flat with Q1 2018 as both renewals and new business continue to consolidate into the third calendar quarter. Approximately 6% of expected 2019 bookings were recorded in Q1. In fact, also like last year, all of our expected bookings growth is anticipated to come during the school buying season in the second half of the year.

Literacy segment revenues grew 20% over the first quarter of 2018, while ARR grew 18% to $51.7 million at the end of the quarter. Literacy retention and renewal rates remained strong, while its contribution margin improved from $1.9 million in Q1 2018 to $3 million in Q1 2019, as growing revenues began to be more fully leveraged in the business.

Turning to slide 5, Consumer Language bookings of $15.8 million grew 4%, slightly exceeding forecast. In fact, Q1 marked the first quarter that Consumer bookings, excluding SOURCENEXT and Fit Brains, have grown on a year-over-year basis since 2014. Enterprise and Education bookings fell 4% to $7.6 million year-over-year, as expected. Within this, we saw a good performance in our North American corporate business, offset by lower bookings in K-12 Language which has been without significant product investment pending the introduction of our new English Learning product in 2020. More on that initiative in a moment.

Consumer revenues of $15.4 million grew 6%, excluding Fit Brains, as a result of bookings growth and the realization of previously deferred subscription revenue. E&E revenues in the quarter were down 6% due to bookings levels in 2018 and in Q1 of this year. Overall contribution margin for the combined Language business was $7 million, or 23.4% of revenues, up from $3.8 million, or 12.6% of revenues in Q1 last year, reflecting reduced operating expenses in the Language business.

Please turn to the next slide. Total Consumer subscribers at the end of Q1 were 516,000, an increase of 32% over the end of Q1 last year and 7% sequentially. Short-term subscribers, or those with initial terms of 12 months or less,were 45% of the total versus 37% in Q1 2018 and 44% in the fourth quarter of last year. The year-over-year change was driven by continued strong growth in the mobile app store channel. The increase in short-term subscribers led to a decrease in the average term length to 13.7 months versus 15.6 months in both the prior year and prior quarter. This shortening led to a decrease in the average initial selling price to $94 from $100 in Q4 of last year. Most importantly, with expected renewals, the average lifetime value per unit was relatively stable compared to Q4.

Turn to slide 7 please. In order to better analyze the varying dynamics of unit growth and price change during the Consumer transition, we look at estimated gross and net lifetime value added each period. In Q1, net LTV added, or the expected lifetime bookings of the units originated in the quarter, less the fixed and variable costs to acquire those units and renew them in the future, increased from the first quarter last year to $7.6 million due to a decrease in customer acquisition costs of 3%.

The dynamics in our Consumer business are different than those in our enterprise and K-12 businesses, which are sold through higher fixed cost direct sales channels, but have high returns on incremental bookings growth. In the Consumer business, our current variable investment in marketing is returned quickly through purchased subscriptions, but the marginal cost of customer acquisition in each Consumer Language channel increases the more a channel is used. Consequently, as you will hear in a few minutes, we are testing ways to diversify our consumer marketing channels to take advantage of our over 90% aided brand recognition.

Turning to slide 8. Consolidated revenues of $44.6 million were approximately 4% higher than a year ago and represents a positive start to the year in which we expect to see overall Company revenue growth. The first quarter net loss was $0.5 million versus a loss of $6.4 million in Q1 of 2018. The year-over-year improvement in net loss in Q1 was due to the $1.8 million increase in revenue and a reduction in operating expenses of $1.4 million versus Q1 2018. The improvement in results also benefited from the absence of a $1.3 million inventory charge as a part of cost of goods sold taken in Q1 2018, and a one-time gain in other income in 2019 of $1.4 million from the sale of certain assets no longer used in the business.

Adjusted EBITDA in the quarter, which was not affected by the one-time item, was $3.3 million versus a loss of $1.3 million in Q1 2018. Ending cash of $28.3 million exceeded expectations due to the timing of expected cash collections and expenditures within the first half of the year. We will be a user of cash through our seasonal low point for cash in Q2 and as we said in March, we intend to make use of our borrowing facility to meet seasonal cash flow needs. These borrowings are expected to be repaid during the second half of the year.

Turning to slide 9. Despite better-than-expected Q1 results, in part due to the timing issues I mentioned, we are maintaining our financial guidance for the year. The first quarter, with only 14% of total expected bookings, is a small part of what we would like to achieve in 2019.

Next slide please. In addition, as shown on slide 10, we remain comfortable with the outlook beyond 2019 that we discussed during our last call, with the investments we have made, especially in our Literacy segment, driving continued top-line growth and earnings improvement. How will we accomplish our goals in 2019 and build a stronger business for the future? Please turn to slide 11.

In our Literacy business, success will be a product of the positive impact we have on schools and their students and the strategies for expanding our impact. In the past, we have spoken with you about the ways in which we demonstrate efficacy, providing data to schools and districts to show demonstrably improved outcomes for their students and conducting detailed research that is peer-reviewed and published in third-party journals. But there is a broader way of thinking about impact and that is by looking at the way in which our products and the teachers and administrators that use them affect society.

What is the theoretical return on investment for the learners and communities we serve when schools invest in Lexia products? We can begin to answer that question. Our literacy curriculum products cost approximately $10,000 per building for an annual subscription with training services. A typical elementary school in the United States serves approximately 450 children, or $22 per student per year for Lexia. Conservatively, if you assume a student uses either Core5 or PowerUp for four years to fully build fundamental literacy skills, the cost of Lexia for that student would be approximately $88. Think of that as a school's lifetime investment per child. What is the return?

If a school follows national averages, approximately two-thirds of their students will be reading below grade level. And we know that functional illiteracy is highly predictive of a student not graduating or not graduating on time which has tremendous costs for both the student and society as a whole. In fact, a study has shown that the cost to society of someone that drops out of school, including the costs of lower lifetime earnings and a higher likelihood of incarceration, is approximately $125,000 per student. And the problem is huge with 1.2 million students dropping out each year or approximately 7,000 every school day. So how can we help? Through Lexia Core5 we offer the leading adaptive blended learning solution to get children reading at grade level on time or catch them back up if they have fallen behind. Year-after-year, we have demonstrated that if children use Core5 with fidelity for the majority of the school year, they can advance their reading proficiency by two or more grade levels in a year.

And as of last year with the introduction of PowerUp, we provide support for those students who have gaps in their reading skills in middle school and high school. Our products, by providing personalized instruction to learners and empowering teachers with the data and the information they need, are able to reliably help students reach grade level standards and improve their chances of meeting academic requirements and graduating.

To be clear, the ability to read adequately is necessary, but not sufficient, to help at-risk students. But the linkage between a program that demonstrates clear literacy outcomes and helping the child succeed when 85% of learning requires reading is clear. At $10,000 per school, and with a very small percentage of a typical school's per child budget, if we can help even one more child graduate than would have otherwise, it's one of the best investments in our future I have seen.

So I would ask one thing of each of you, because you are all members of a community, even if you aren't parents of school age children, ask your local schools how they teach fundamental reading skills. Ask about graduation levels. And for those kids that drop out, ask if there is a correlation with reading scores. And when you hear that there is, know that solutions exist that can empower teachers and their schools to change the lives of students.

Please turn to slide 12. There are a number of reasons we can expand our impact to reach more students. Our literacy portfolio of curriculum and assessment products is best-in-class and based on 35 years of experience in using technology to support literacy educators. With 16 third-party studies of efficacy that meet the standards of the federal Every Student Succeeds Act, we can demonstrate how our solutions drive positive outcomes and we see the impact of these outcomes in high customer retention and renewal rates. And because of the investments we have made in both product and sales and marketing, we have now achieved that necessary, but difficult goal for success in K-12, scale in customer awareness, product breadth and sales and marketing coverage that provides access to new schools and districts that were previously closed to us.

More tactically, turning to slide 13, we expect to grow our K-12 business in three ways. First, by continuing to expand the number of whole school licenses we sell. We are present in approximately 14,000 schools in the US today. Nearly 4,000 of those schools currently have whole school licenses, and while this is up from 1,300 in 2014, the other 10,000 schools continue to be upgrade opportunities. These opportunities are realized as we become more central to the reading curriculum of our customers across multiple grades.

Please turn to slide 14. And now with a full suite of literacy solutions, we have the opportunity to sell more than one product to each customer whether that customer is a school or a district.We saw this explode in 2018 with the introduction of PowerUp growing from 131 customers using more than one productto over1,100 within the year. This growth continued in Q1 of this year, increasing 37% sequentially to1,583 customers in total.

Next slide please. And our opportunities go beyond upgrading existing customers to whole school licenses or selling them additional products.Aneven larger opportunity is to serve more schools and districts where we are already represented. Today, we serve 14% of US public schools, but the total opportunity in the districts in which those schools reside represents over 40% of all US public schools. This incremental 26% of US schools are in districts where we have reference sites and can produce, and share data demonstrating our ability to help schools like theirssucceed. We continue to pursue the other 60% of schools outside these districts, but existing district expansion is a clear focus.

Next slide please. One of the ways we are looking to leverage our K-12 presence is by introducing additional products to take advantage of our growing footprint and trusted relationships. I believe our ability to do this is important to our future. Our next step is the planned launch in 2020 of a new product to serve one of the most underserved and fastest growing populations in K-12, emerging bilingual or English language learning students. You can visit almost any district in the United States, regardless of size or geographic location, and teachers and administrators will tell you that integrating and helping students succeed who come from families where English is not their native language, is one of the most difficult issues they face. Why are we confident we can meet the challenge of helping those students and their schools, because we have the industry knowledge, assets and expertise to build a compelling product offering and successfully deliver it to customers.

Leveraging our core language training assets, we have been selling language solutions, including English language learning to K-12 schools for many years, andknow the issue schools face on a daily basis. And for the first time, we are bringing together the most important capabilities we possess from across the organization in a single product. Our proprietary speech recognition engine will help build speaking skills. Our highly developed adaptive, intelligent branching and our patented assessment without testing, will sit at the core of the learning journey, connecting the online performance of the student to the teacher-led instruction, while our Rosetta Stone animation engine will bring learning to life in a way that engages and makes the product relevant to students' lives.

And finally, the product is being built on myLexia, ourplatform for providing information and intervention materials to educators that is already in 14,000 school buildings in the US. As we move through the year, we will keep you updated on our progress in this investment.

Next slide please. In our language businesses, our impact will grow as we recapture what originally made Rosetta Stone a leader in digital language learning. Great products built to teach you a language, not words. This is the fundamental difference between Rosetta Stone and many of our competitors. While we respect what they are doing, we aim higher. There is a place for gamified, flashcard based apps to help you learn words. Our goal is to not only to help you build your vocabulary, but to turn that vocabulary into conversations that bring out all of the benefits of a second language. And to reach more learners, one of the assets we will look to leverage further is the Rosetta Stone brand.

Turn to the next slide please. Interestingly, even though we have a widely known brand in the United States, with over 90% aided recognition, we have work to do to help people understand who Rosetta Stone is today. For example, while potential customers associate us with quality, in a recent brand research study that we conducted, about a third of customers that were familiar with us, didn't know that we had a mobile product, let alone an almost 5-star rated app. And even though brand recognition remains strong, there may be opportunities to grow the top of our customer acquisition funnel, if we opportunistically diversify our media spending and catch people when they are looking to invest in language learning.

To help update people's understanding of Rosetta Stone and diversify our media spending, over the next few quarters, we will be investing in a series of offline media tests. We stepped away from this type of marketing over the last few years as we focused on improving the product portfolio and generating near-term operating cash flow. Because this type of media spending typically drives top of funnel traffic, which converts over time, the return is not as immediate as email and other direct channels. As a result, over the next few quarters, we may see a modest decrease in gross and net LTV added and slower subscription growth as we test our ability to diversify our acquisition channels and prime the pump for future growth. We will size our investment appropriately to what we learn.

Please turn to slide 19. Even as we look to produce higher levels of growth in our core US consumer business, we are investing in the larger language learning opportunity internationally. In fact, with over $50 billion spent annually, mostly outside of the US and primarily to learn English, this is the single largest total addressable marketplace we are positioned to serve. Here too we have assets that can help us be successful. For demanding international customers, many of whom have knowledge of English, we are looking to bring together the capabilities we have built to serve not only US consumer learners, but also demanding global enterprise customers, including the ability to learn from a certified Rosetta Stone tutor in an online class.

Blending computer and human intelligence to make both better is our strategy to produce favorable outcomes and improved learner satisfaction, while our competitors force learners to choose between one or the other. We will also approach the marketplace differently from our peers. Our intention is to provide customers the tutoring they want, when they want it, not packages of tutoring sessions sold a year at a time for a high upfront cost.

In Korea last month, we turned on the paywall to test pricing approaches. While very small, this is the next critical step in the learning process. We are early in our testing, and as I have said before, view this as a higher risk investment than others in our portfolio and we will approach it as such. We will provide updates as we learn more.

Next slide please. At Rosetta Stone, we know that we create social good by building great products and growing the number of learners using those solutions. We also understand that as a subscription-based software business, expanding the number of learners is fundamental to profitability. In the past, our lack of profitability came from investing heavily in the K-12 literacy business, while simultaneously making the necessary technology and marketing changes in our language business. Now with a scaled and fast-growing literacy business and a language business that has stabilized, and which we expect to grow, we have the opportunity to meaningfully improve our profitability.

Our B2B businesses have attractive incremental segment contribution margins of approximately 70% even on a GAAP basis, as we leverage high gross margin products and scaled distribution.

In our Consumer business, the incremental segment contribution margin before variable media expense is even higher at approximately 75%. Within this business profile, we actively manage our consumer variable media spend to produce the highest absolute dollar return. The contribution dollars produced by this consumer media spend are valuable, as they are available for reinvestment across our business. But the opportunity to sell our current products at a high incremental margin is necessary, but not sufficient to achieving our ultimate goals.

Our presence in K12 schools and the Rosetta Stone brand are both capable of being leveraged beyond our existing products to reach more learners. While we will look at strategic opportunities that could accelerate building scale, we are not limited in our ability to build additional great products and successfully deliver them to customers. As we do this, we will leverage our brand presence, our sales and marketing infrastructure and business services team to drive high incremental margins.

One example of how we can grow shareholder value, is one I discussed today, the opportunity to build a great product for K-6 ELs that can return a multiple of bookings for every dollar we spend in development. As a Board and management team, we are committed to identifying opportunities like this to leverage the wonderful assets within Rosetta Stone in the service of our learners and owners.

Thank you for listening to our prepared remarks, and operator you can now open the line for questions.

Questions and Answers:

 

Operator

At this time, we'll be conducting a question-and-answer session. (Operator Instruction) Our first question comes from Steven Frankel, Dougherty. Please proceed with your question.

Steven Frankel -- Dougherty & Company -- Analyst

John, you covered a lot of ground here, but let me focus in on a couple of things. Maybe you could give us some insight on to the relative size of the incremental investment in the Consumer business and advertising and kind of where are you thinking of targeting those dollars?

John Hass -- Chief Executive Officer & Chairman of the Board of Directors

Sure. Thanks Steve for the question. Before I address that, I wanted to let you and everyone else on the call know that Tom is here with me in Arlington, that Nick and Matt are on the road, if I need to direct the question or go choose to, to one of Nick or Matt, please bear with us as we do those handoffs.

And I'll let Matt expand on this in just a moment, but it's really within the envelope of our planned consumer marketing spending this year. We're trying to do some very tactical things to see if we can uncover additional opportunities for high-return marketing spend. And we've been pretty limited in the scope that we've used the last few years. And I'll let Matt talk a little more specifically about what some of those areas might be.

Matthew Hulett -- President, Language

Hey, Steven.Great to hear from you. Calling you from the road, as John mentioned. Couple of things, as you know, we're testing learning culture. We haven't really ventured into non-performance based marketing as you know. So we're doing a rather limited test, approximately 10% of our variable marketing, budget and consumer is kind of a basket. We're primarily looking at limited markets in TV. We are not doing a national spend, we're doing a limited city run in TV and then some computer-TV -- some computer-TV advertising. And what we hope to do is, learn what we can do in terms of expansion of our spend, so that we can expand nationally based on that test.

Steven Frankel -- Dougherty & Company -- Analyst

Okay. And I understand the shift to shorter-term subscriptions, but is there -- is there a number that you would view as the bottom where you'd have to do something to change up the business?

John Hass -- Chief Executive Officer & Chairman of the Board of Directors

In terms of the percentage of units sold from shorter term, Steve?

Steven Frankel -- Dougherty & Company -- Analyst

Well, in terms of the average life of a subscription, if it got down to the -- the average customer was only with you for eight or nine months. Is that still a profitable business that you can grow?

John Hass -- Chief Executive Officer & Chairman of the Board of Directors

Yeah. And to be clear, the number that we disclose, the average initial subscription term, so that doesn't include renewals, shorter-term subscriptions or even one or two. We do have renewals in those areas. I think what we seem to be observing, and again Matt, if you want to answer this, please do, is that the, the percentage of new subscription sales coming from shorter-term SaaS has stabilized. We're kind of around 45% now. It's been around there for a couple of quarters now. And I think unless we change something pretty meaningfully with regard to the pricing, we expect to see some stabilization around that area.

Steven Frankel -- Dougherty & Company -- Analyst

Okay. (multiple speakers)

Matthew Hulett -- President, Language

Just to add on to that, oops, go ahead.

Steven Frankel -- Dougherty & Company -- Analyst

No, go ahead please.

Matthew Hulett -- President, Language

A comment, Steven, one quick comment. I agree with what John just said. It's been pretty consistent sequentially on terms of percentage of short-term subscribers as John mentioned, as well as the LTV to CAC ratios, and other metrics that we look at, have been pretty consistent sequentially. So we do feel like from a unit economics perspective, we're at some spaces as John mentioned, we are always testing and we could always decide to change price if we wanted to, but we manage the business to net LTV and that's -- that's generally how we've been managing the business.

Steven Frankel -- Dougherty & Company -- Analyst

Okay. And then for Nick, what do you need to do to more aggressively drive up that district penetration metric? That seems to be kind of a low-hanging fruit to really ramp up your growth rate. And so, what kind of tactics can you deploy to try to get a lot of that done in the next couple of years?

Nick Gaehde -- President of Lexia Learning

Yeah, so Steve, a couple of things that we are doing and I think we've talked about before, one, we now have a much broader suite of products and solutions and services that we can bring to the district where historically we were talking to them about their needs in the elementary schools. We are now talking about their needs from K through 12th grade. And so, the nature of the conversation has changed at the district level that's driving that penetration.

The second is our sales capability. As you know, we've invested in building capacity in that strategic sales team that's focused on driving top-down demand working at the district level and even the state level. So both the things -- both of those things combined are going to, I think drive more district level sales and larger average order sizes.

Steven Frankel -- Dougherty & Company -- Analyst

Okay, great. Thank you.

Operator

Our next question comes from Alex Paris, Barrington Research. Please proceed with your question.

Chris Howe -- Barrington Research -- Analyst

Good afternoon, everyone. This is Chris Howe sitting in for Alex.

John Hass -- Chief Executive Officer & Chairman of the Board of Directors

Hi Chris.

Chris Howe -- Barrington Research -- Analyst

Hey, moving back to 2017 -- I've had this question for a while. Can you provide an update on where the Univision partnership is? How that's been a benefit to Rosetta Stone in driving English language learning? And moving globally, keeping in mind also your partnership with SOURCENEXT in Japan, how should we think about opportunities beyond South Korea? Is the learning curve already established and a rollout of the English language global product would occur more rapidly beyond Korea?And are we still on track for Q3 as a launch for the English language learning product in South Korea?

John Hass -- Chief Executive Officer & Chairman of the Board of Directors

So let me start Chris. With regard to Univision, we ended that partnership last year and -- actually at the end of 2017. Univision had a lot of change within their organization that directly affected the business units that we were working with as they went through some restructurings and so well, I think it was -- there was a very good thesis behind that partnership that was not one that ultimately proved to be successful for us.

SOURCENEXT is very different. We've got very good relationship with SOURCENEXT and I think they're very happy with what they are able to do in the Japanese marketplace. We certainly have been very happy with the relationship we have with them. I'll let Matt talk a little bit more about our worldwide English efforts beginning in Koreain terms of kind of the timing and where we are in that regard.

Matthew Hulett -- President, Language

Yeah, just in terms of timing, we are on track for South Korea launch. It is the South Korea launch. And just to contextualize it, the global language learning space online, plus offline is 50 billion (ph). About 45% of that is in APAC and Korea being one of the Top 3 markets to go after. Yeah, it's been a while since we've been in Rosetta Stone. Korea has a direct presence and we have our reseller there and so early results are very good in terms of customer satisfaction, so we're on track.

Chris Howe -- Barrington Research -- Analyst

Great, it's great. That's helpful. And then see, I guess moving forward, can we perhaps -- in reference to your recent success in Utah, I saw -- I did some research and I saw some of the results that you're posting there as far as the improvements that students are seeing in their reading ability. Can you perhaps share some additional color on how this has helped or you've been able to leverage this success in Utah and other states toward your district penetration and furthering your growth within the Core5 product?

John Hass -- Chief Executive Officer & Chairman of the Board of Directors

Nick, would you like handle that? Yeah, go ahead Matt. Matthew Hulett -- President, Language. Absolutely, absolutely.So a few things. First of all, you know, we just got a terrific partnership in Utah that has helped us understand how to work at that state level. One of the things Utah has done is brought on independent evaluator to look at the results, not just our program in the state, but other programs as well. So the analysis you see is based upon the data gathered by that independent evaluator. Utah has put together a program that I think is a real benchmark for other states to think about how to put brands into place that allowschools to implement new programs and drive Fidelity abuse. So two things to your question. One, we now can talk about a very broad user base on a state that is making pretty remarkable gains. And secondly, we can talk about our model at a state level that other states are now beginning to look at and learn from.

Chris Howe -- Barrington Research -- Analyst

That's great. I'll hop back in the queue. Thank you for taking my questions.

John Hass -- Chief Executive Officer & Chairman of the Board of Directors

Thanks, Chris.

Operator

As a reminder, we are now conducting a question-and-answer session. (Operator Instructions) Our next question comes from Alex Paris, Barrington Research. Please proceed with your question.

Alexander Paris -- Barrington Research -- Analyst

Hi, it's Alex Paris. I didn't think I was going to able to get on this phone, glad I was able to. Just a couple of quick follow-ups.

John Hass -- Chief Executive Officer & Chairman of the Board of Directors

Hi.

Alexander Paris -- Barrington Research -- Analyst

John -- hi, thanks. John, that was a really powerful message that you just gave us on literacy and Lexia specifically, and the return on investment for government through their schools to make. The price is just ridiculously low, you have given what you do. I realize that's just kind of the dynamics of the school industry. But my question is really, the $22 per student and $10,000 a school, what has been average price increases? And is there the ability to increase prices at a reasonable sort of inflation rate going forward?

John Hass -- Chief Executive Officer & Chairman of the Board of Directors

Yeah. There is and we have, although I think strategically, the approach has been to gain share, so that we can capture more of the market and have a bigger impact on students' lives. Then we think ultimately, given retention and our renewal rates in the business, that's the right strategy for us, especially at a time when we are competing with other parties and becoming the incumbent is very powerful thing. But Nick, you might want to address a little bit the ability and how we think about price increases.

Nick Gaehde -- President of Lexia Learning

Sure. So historically, we have introduced price increases. We typically do not do that across the board. We think about the buying behaviors we want to drive and use pricing to drive those behaviors. As John said, you know it is something that we think about as we drive market penetration and that has been our primary focus. But we're also well aware of the competitive environment and how we fit into the price picture out in schools. Ultimately, as we think about pricing at a school level and a district level, there is some flexibility and we continue to think about how to drive purchasing increasingly at the district level and consider that as we think about price strategy.

Alexander Paris -- Barrington Research -- Analyst

Great, thank you for that additional color. Then just a point of clarification. John, when you were talking about contribution margin in Consumer 75% or so, you went a little faster, I was wondering if you could kind of review that -- those comments again, please.

John Hass -- Chief Executive Officer & Chairman of the Board of Directors

Sure. So what we talked about was the -- a few of these GAAP segment contribution margin for each of the segments and kind of referenced that our B2B, which would be the Lexia segment and E&E segment. Both have revenue based contribution margins of approximately 70%. So that would include gross margin less sales and marketing cost effectively, right. The incremental costs from R&D are effectively zero, and so we didn't -- we didn't include that in that view. And that's really how we think about the business and with the ability to grow license count on learners, if you will.

Consumer and -- I differentiated our B2B businesses from Consumer in the following respect; A, both in Lexia and E&E segments, we have a direct sales force, which is relatively -- has relatively high fixed costs for hiring people to be in the field. But the incremental cost of a sale is just the commission, if you will. And so that's a -- and that tends to get more and more efficient the more we sell. Consumer, if you think about it as a channel, as a sales channel, tends to work a little bit differently. The more you use an individual channel, whether it's buying (ph) keywords or sending emails or anything else, the less efficient it becomes. And so kind of the ability -- our ability to, as we talked about on the call, find additional opportunities to drive customer traffic and ultimately conversions. It is really important to grow in the absolute size of that business.

And so, while I referenced the 75% for Consumer, that was before their variable marketing spend, if you will. And it really then just becomes our job. Matt and his team's job is to optimize that spend to produce the highest absolute dollar contribution to the business.

Alexander Paris -- Barrington Research -- Analyst

Thank you very much, I appreciate that.

John Hass -- Chief Executive Officer & Chairman of the Board of Directors

Of course. Thanks for your question Alex.

Operator

Our next question comes from John Lewis, Osmium. Please proceed with your question.

John Lewis -- Osmium Partners, LLC -- Analyst

Hey guys, nice start for the Q1 here. I guess just a couple quick ones. And sorry, if you covered this, but did you give a -- any kind of timeline on when you're going to launch Live Tutoring?

John Hass -- Chief Executive Officer & Chairman of the Board of Directors

Yeah, Matt had confirmed that we will be launching that officially in South Korea in the third quarter.

John Lewis -- Osmium Partners, LLC -- Analyst

And do you have plans to move that outside of South Korea in the fourth quarter, or is that just what happens from there?

John Hass -- Chief Executive Officer & Chairman of the Board of Directors

Yeah, we will test and learn in South Korea and watch that and see how that develops. Obviously, we would like to expand that offering outside of South Korea over time, but we've not yet talked publicly about when that might be and itwill somewhat depend on what we see as we formally launch that in the third quarter.

John Lewis -- Osmium Partners, LLC -- Analyst

Got it. Can you give any color on how you would price that margin or anything on that front?

John Hass -- Chief Executive Officer & Chairman of the Board of Directors

Sure. I'll let Matt address this, but we were trying to take a pretty different pricing approach from the peers we've seen in the marketplace. And that it is a little bit more of a subscription approach, pricing, tutoring on demand as opposed to kind of large upfront payments. We are experimenting, kind of that's why we put up the price wall, so that we can begin to experiment with the best ways to optimize conversion and bring people in. But I'll let Matt expand on that a bit more.

Matthew Hulett -- President, Language

Hey, John. Good to hear from you.

John Lewis -- Osmium Partners, LLC -- Analyst

Hey, Matt.

Matthew Hulett -- President, Language

John had it right. I think the big difference is, first, we are big believers that just like in most markets we've seen, software eating the world and that hasn't happened in such big markets like healthcare yet and in education. And we think the APAC region in particular, obviously you've seen early traction with EdTech Chinese-based tutoring company. And in Korea, what we're trying to do is something rather different, in that the customer acquisition, the way we bring customers into the experience is all through the software, not unlike what we've seen in other industries. That's very different than the other players in this space. They depend heavily on heavy fixed cost call centers, a lot of sales operations to build up each country. And so what we're attempting to do is, build a service that is cost-effective for us to jump into a new market, but also enables us to be rather nimble. Infrastructurally, that's how we're thinking about it.

In terms of the pricing, we're experimenting with a bunch of different options. But in general, we allow the customer to buy Adhoc and a recurring subscription with a number of sessions inside the software package, all within the software and that's unique versus what most people are doing in this space.

John Lewis -- Osmium Partners, LLC -- Analyst

Got it. So there is pretty decent margins for this type of upsell?

Matthew Hulett -- President, Language

Yeah, obviously, we're bullish on it. Yeah.

John Hass -- Chief Executive Officer & Chairman of the Board of Directors

Yeah.

John Lewis -- Osmium Partners, LLC -- Analyst

I guess just a couple of quick ones. You guys have been talking about really focus in international markets on English language learning. And I guess, any markets that you intend to pursue in 2019 or is that more 2020?

John Hass -- Chief Executive Officer & Chairman of the Board of Directors

(multiple speakers) I mean I think our focus -- yeah, go ahead, Matt.

Matthew Hulett -- President, Language

Yeah. No, John, our focus right now is in South Korea. I think you've seen some -- from some of the underlying perspective of how we've been running Consumer, we've been trying to get it to stability. We've seen some good early indicators of that in this quarter, but also we've been funding a lot of these projects within our own operating expense envelope. We're trying to be good stewards of capital allocation.

So, what we really want to do this year is in terms of our two big bets, we obviously -- we talked about brand advertising is one, and then second is the expansion to at least one market. And so we hope to do this year John is, 2019 has really put our toe in the waters of international expansion and then rinse and repeat, based on the metrics that we see.

John Lewis -- Osmium Partners, LLC -- Analyst

Got it.Great. I appreciate it. Thank you.

Matthew Hulett -- President, Language

Thank you.

Operator

We have reached the end of the question-answer session. I will now turn the call back over to John Hass for closing remarks.

John Hass -- Chief Executive Officer & Chairman of the Board of Directors

Thank you, everyone for joining the call today. We're happy to have the year off to a solid start. As I said, look forward to speaking with many of you in the coming days and weeks, and don't forget, today is National Teacher Appreciation Day. Thanks again, and we'll talk soon.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

Duration: 50 minutes

Call participants:

Jason Terry -- Addo Investor Relations

John Hass -- Chief Executive Officer & Chairman of the Board of Directors

Steven Frankel -- Dougherty & Company -- Analyst

Matthew Hulett -- President, Language

Nick Gaehde -- President of Lexia Learning

Chris Howe -- Barrington Research -- Analyst

Alexander Paris -- Barrington Research -- Analyst

John Lewis -- Osmium Partners, LLC -- Analyst

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