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Rosetta Stone Inc (RST)
Q2Â 2019 Earnings Call
Aug 6, 2019, 5:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Greetings and welcome to the Rosetta Stone Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. The question-and-answer session will follow the formal presentation.
[Operator Instructions]
I would now like to turn the conference over to your host. Lasse Glassen; Managing Director, Investor Relations. Thank you.
Lasse Glassen -- Managing Director, Investor Relations
Thank you. Good afternoon, everyone, and welcome to Rosetta Stone second quarter 2019 earnings conference call. Speaking on today's call will be John Haas, Chairman and CEO. Additionally, Nick Gaehde and Matt Hulett, co-presidents of Rosetta Stone, and Tom Pierno, the company's Chief Financial Officer, will also be available during the Q&A portion of today's call.
We had posted to the Investor Relations section of our website at www.rosettastone.com, both the earnings release and the slide presentation that accompanies today's call. We've also posted supplemental information and analysis on our website. The 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 cause the financial results are included in the SEC filings include our most recent Annual Report on Form 10-K and Quarterly Report 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 non-GAAP financial measures. 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 the financial reporting before making any investment decisions.
With that, I'll now turn the call over to John.
Josh Goldberg -- Analyst
Thank you Lasse, and good afternoon, everyone. I'm excited to share with you today the progress we are making in the business, progress demonstrated by a consumer language business that has stabilized with real opportunities for growth in both our core U.S. market and internationally. And progress demonstrated by the fact that the small reading business we bought just a few years ago is now a leader in K12 education technology with an expanding portfolio of outstanding products and exciting opportunities for organic growth.
These opportunities are firmly rooted in the areas that make us a global leader in digital learning. We probably are a pioneer in educational technology with over 60 years of combined experience in transforming the way we learn to read English, we speak a new language, knowledge that is allowing us to have a positive impact on our society. We are now in 100% subscription based SaaS business with high net margins. Our growth will deliver high levels of incremental cash flow as demonstrated by our expectation in more than 40% of incremental revenue will fall to adjusted EBITDA this year and this will grow next year and the year after.
And because we have an iconic brand and have become a scale player in the K12 space, we have significant opportunities for organic, high margin, reinvestment and growth. As you know, we have said this is expected to produce operating cash flow of approximately $38 million next year and $57 million the year after. In a few minutes, we'll talk about how we are managing our business and some of the important activities happening now to deliver this growth. Let me begin with an overview of Q2 results. Total revenue for the quarter were $45.9 million a 6% increase versus the same quarter in 2018. This is our second consecutive quarter of year-over-year revenue growth following four years of declines. Net income for the quarter was a loss of $2.8 million, an improvement from a loss of $4.2 million in the second quarter of 2018. Adjusted EBITDA in the quarter was $2 million versus $1.4 million in the same period in 2018. Turning to slide four, literacy bookings in Q2 were 12.1 million. A 17% increase compared to 10.3 million in Q2 2018, with the increase largely due to some customer, in Q2, that had been expected to renew in Q3. As we said earlier this year, we expected the first half of 2019 to be relatively flat of 2018. But the vast majority of new business this year and the renewal of a portion of the business originated in the first half of prior years will be booked in the second half of 2019. Sitting here in early August, we feel positive about our ability to achieve our literacy growth goals, which have us growing bookings by over 25% year-over-year. Literacy segment revenues grew 19% over the second quarter of 2018 to $15.1 million, while ARR grew 17% to %52.7 million at the end of the quarter. We expect strong revenue in ARR growth in literacy segments to continue in the second half of the year as the expected growth in booking emerges.
2019, is the second consecutive year that bookings growth in the literacy segment will meaningfully exceed GAAP revenue growth. The lag in revenue growth is being driven by the fact that a significant majority of literacy bookings growth occurs in the second half of the year, with most of the revenue recognized in future periods. But all bookings become revenue and this deferral will help drive revenue growth in 2020 and beyond.
Literacy's retention renewal rates remain strong, while its contribution margin improved to $2.4 million in Q2 2019 from $1.8 million in Q2 2018, as growing revenues continue to be more fully leveraged in the business. How will we continue our growth?
Turning to Slide 5, we're growing our literacy business in three ways. First by continuing to expand the number of whole school site licenses that we sell. In the recently completed school year, Lexia was present in over 14000 schools in the U.S, but only 4000 of those schools currently have [Indecipherable] licenses versus seat licenses, leaving the other 10,000 with opportunities to upgrade to whole school solutions. And because we now have a full suite of literacy solutions, we have the opportunity to sell more than one product to each school in a district. Sales of multiple products to a single customer have grown quickly since the introduction of PowerUp increasing from 131 customers using more than at the beginning of 2018 to over 1800 at the end of Q2.
Turning to Slide 6. Our largest near-term opportunity, however, is to serve more schools in districts where we're already represented. Today we serve over 14% of U.S. public schools, but the total opportunity in the districts in which those schools reside reside represents over 40% of all U.S. public schools. Those 26% of U.S. schools that we aren't yet serving are in districts where we have states and can share data with a decision maker that demonstrates our ability to help schools in their own districts succeed. We saw a great example of each of these opportunities in the second quarter when they closed a district wide opportunity, one of the largest districts in California. In 2018, this district expanded their partnership with us, moving from 7 Core5 site licenses to 39 Core5 site licenses and 8 power upside licenses this year based on the impact we had on student literacy performance and the strong partnership we'vebuilt with the district. They expanded to a combined 54 site licenses for Core5 and PowerUp and added the rapid assessment. To know the importance of this large scale implementation committed to a three year term worth over $1.5 million. We now serve over 36,000 students in the district and very long term partnership to improve student literacy performance, academic success across all subject areas and equity for lifelong opportunity.
Next slide, please. Consumer bookings of $14.6 million were flat compared to the second quarter of 2018. Consumer revenues are $16.3 million to 9% , excluding Fed brands as a result of stable year over year bookings and recognition of previously deferred subscription revenue as our deferred revenue balance has grown. As I previewed on our last call, we were more aggressive in testing new channels of marketing spend in Q2 in order to identify additional avenues for customer acquisition. This included testing non-digital offline media that had higher production costs and larger upfront cash outlays. We have not deployed this type of marketing in a meaningful way in five years and believe that was a more stable business, now is an appropriate time to opportunistically try new potentially efficient avenues for growth.
Specifically in Q2, we spent approximately $1.5 million for a targeted test marketing campaign that launched mid-May. As expected, they spend lowered overall Q2 LTV to cap ratio from its recent ranges to 1.5 times, excluding the second quarter brand spend, which had almost no impact on new quarter bookings. The LTV attack would have been 1.8 times in line with seasonal norms.
To be clear, and this does not mean the tests were not successful. As this form of marketing has a longer return profile and its benefits were not expected within the quarter, we will measure success on the basis of traffic and bookings uplift as they develop over time, as well as the impact on certain important brand attributes, including awareness of our consumer app, because it will take time to study these effects. We are not expecting the additional marketing dollars and TV brand advertising this year. We will focus on optimizing that LTV, targeting our historical LTV to CAC ratios for the remainder of 2019. Enterprise and education bookings fell to $15.4 million year-over-year, with the decline driven by the absence of any custom content sales in the quarter versus $1.9 million in custom content sales in Q2 of 2018. E&E revenues in the quarter were down 6% due to lower bookings levels in 2018 in the first half of this year.
So as we've said previously, the timing and size of custom content contracts are difficult to forecast and predict. In fact, despite the decrease in E&E bookings in Q2, we are raising our bookings guidance for E&E for the full year, as we recently agreed to a $7 million custom content deal. The deal has been signed by both parties and funding has been secured by your partner. There is a final formal governance stop, which means it is not completely finalized, so there is some risk it won't close. We expect this step to happen soon and we have included the transaction in our internal forecast and bookings cash and operating cash flow guidance for the year. If it happens as expected, it will be one of the largest single contracts in the 26 year history of Rosetta Stone. We are honored to partner with another American-Indian tribe to preserve and share their language for generations to come because we don't begin to recognize revenues in our custom deals until we begin to deliver content, this deal will have no impact on revenues this year.
Let me spend a moment, on one -- on our thoughts around customer deals generally. We like these partnerships because they leverage the investment we've made in our language infrastructure, support new investment and tools that make the creation of content efficient, have a reasonable margin, although lower than selling existing products and are aligned with our mission as a company in an incredibly impactful way. Given their size and unpredictability, we will continue to assume a relatively small mark in their guidance until realized.
Overall contribution margin for the combined language business was $6.1 million or 20% of revenues flat compared to Q2 last year. Contribution margin in the quarter was negatively impacted by the $1.5 million incremental test marketing campaign spend, which was reflected as a gap expense in the period.
Please turn to the next slide. Total consumers subscribers at the end of Q2 were 533,000, an increase of 28% over the end of future last year and 3% sequentially in the seasonally slower second quarter. Short term subscribers are those with initial terms of twelve months or less, the 44% of the total, up a bit from 40% in Q2, 2018, but stable with 45% we saw in the first quarter of this year. The year-over-year increase in short term subscribers led to a slight decrease in the initial average term length to 13.4 months versus 13.8 months, and the average initial selling price to $93 from $112 versus Q2 of last year. Sequentially, each of these metrics was relatively stable. In order to better analyze the various dynamics of the consumer transition to 100% SaaS subscription business, we have focused on estimated growth in net lifetime value added in each period as a key operating metric. As I discussed previously, and previewed on our last call, Q2 was impacted by approximately $1.5 million in production costs in variable media spending for our offline media test. This impacted both the LTV created in the quarter as a smaller portion of our dollars were spent and faster returning performance marketing and the overall amount of [Indecipherable] incurred in the period.
Turning to Slide 9, consolidated revenues were $45.9 million were 6% higher than a year ago. The second quarter net loss was $2.8 million versus a loss of $4.2 million in Q2 of 2018. The improvement in net loss was driven by the increase in revenues and relatively stable expenses. Adjusted EBITDA on the quarter was $2 million up from $1.4 million in Q2 2018.
Then in cash at $22.8 million included $9.9 million in net borrowings in Q2 2019 to fund our seasonal cash flow point. Net cash and the use of our facility to fund working capital were generally in line with our expectations as we were net user of cash in the 1st half of the year. Like other companies with large K12 businesses. We expect all of our borrowings to be repaid during the second half of 2019. In fact, we started to pay them down in July.
Turning to slide 10. Well, we expect revenue growth to accelerate in the 2nd half of 2019. We're slightly lowering our revenue outlook for the year, driven by the expected timing of the realization as revenues of slightly lower bookings from any excluding custom content.
Any bookings are expected to come in later in the year than previously expected and consequently contribute less to 2019 revenues or in the case of the Customs deal, contribute to revenue beyond 2019, because of the increase in expected bookings that will occur if the custom content deal is finalized more than offsets the slightly lower expectations for the portion that will be realized as revenues into [Indecipherable].
We are raising our guidance for consolidated revenue plus change in deferred revenue. The $203 million on the high end. Bookings and revenue guidance for consumer language remain unchanged, the total revenue expected to grow approximately 10% in 2019. We continue to feel good about the outlook for a literacy business this year. Bookings, revenue and ARR guidance for literacy remained unchanged and represent continued significant year-over-year growth in this part of the business, because of continued strong cost containment our net income outlook remains unchanged despite the revenue time and adjustments to the outlook. Adjusted EBITDA is now likely to be closer to $6 million due to the change of revenue outlook just partially offset and lower expected expenses.
Finally, we are changing our operating cash flow expectations for the year to a range of $17 million to $23 million and are now forecasting an ending cash range of approximately $38 million to $42 million with the high end of both representing the expected finalization of the custom content deal. The high end implies approximately $31 million of cash generation in the second half of 2019.
Next slide, please. Looking forward, as shown on Slide 11, we are excited about the opportunity we see to leverage the investments we have made, especially in our K12 businesses to drive continued top line growth and earnings improvement beyond 2019. We achieve our goals given the high incremental margins in our business, approximately 40% in 2020 and over 50% in 2021 as incremental revenues will become operating cash flow. And because barring additional new product initiatives, we believe we can hold total R&D and CapEx relatively stable the next few years. The growth in operating cash should largely turn into cash on the balance sheet. You will hear later about important advancements in Core5 and our language technology stack that will help us continue to innovate and grow. The investments we have made in our language tech stack, for example, on our important step in reducing our maintenance cost and increasing capital available for growth. In fact, we could improve near-term cash flow further as much of our recent expenditure has been a new products and to complete the rebuild of our language products. But we see exciting opportunities for high margin reinvestment in the business.
I would now like to spend a few minutes and talk about how we are managing the business given the growth in cash generation opportunity that we have. Please turn to slide 12. I believe there are four important factors to understand about our business and the opportunity we have. First, we are a learning company focused on addressing important societal needs. We care about our [Indecipherable] energy ratings and other measures of the constituent impact but our most important measure is the lives we change through language and literacy education. We believe that when we teach a child to read or anyone to speak a second language. We will improve their life. This provides a focus that has made language and English reading, learning solutions standards in the industry.
Second, because we leverage technology to deliver our learning solutions, we have high incremental cash flow margins. This has been clear as operating cash flow improved even as we invested in building the fixed cost infrastructure of our K12 business and will become more clear as growth continues in the future.
Third, because we are now a 100% subscription based SaaS business bookings and revenue are more predictable than they have ever been. Approximately 90% of our literacy customers renewal at the end of their contract and a consumer language approximately one third of our bookings are now from renewing customers. And critically as the SaaS business we now have insight into the needs and behavior, millions of learners using our products across our end markets, K12, enterprise and consumer. This is a unique position and one we are only beginning to benefit from.
Finally, because the leadership position we have in each of our businesses in the key investments we have made from building [Indecipherable] brand to our presence in 17,000 K12 schools world wide we have very attractive organic investment opportunities. This is especially important as we operate in an industry where many of our competitors are driving growth by paying high multiples to acquire businesses.
While we look at strategic transactions and we look to be opportunistic, especially at multiples [Indecipherable] I'm excited that we have areas for organic growth like English language learning in our schools and internationally, we have talked about previously and we'll update you on today. Before I do that, let me share how we think about investment in the business, because while our K12 and language businesses have many similarities that benefit us, they also have distinct characteristics that create attractive and complementary reinvestment opportunities.
Please turn to slide 15. K12 business has a long term investment return profile similar to other high performing enterprises SaaS companies. World class products like Core5 and PowerUp to serve large market opportunities. What's resilient demand which produce strong retention rates driven by quality outcomes, all of which create high growth in net margins.
We invest to build new products and maintain their excellence. But as new business compounds on top of retain customers. We are in substantial incremental cash flow. Despite ongoing investment in current and new products. We are moving into the space in our K12 business. U.S. consumer language business, on the other hand, is an attractive-the more tactical investment opportunity. The educational goals of our language business are the same as in K12, create solutions that delight learners and provide outcomes like K-12, we have the opportunity to leverage technology with high gross margins to drive attractive incremental net returns. The way we create demand in our consumer language business, however, is very different. In K-12 we close business by offering highly effective products sold through a largely fixed cost sales force. Well, like a consumer, we have a business driven by an iconic brand with 90% aided recognition and granular incremental marketing. Lead times are shorter in conversion to paid subscription is responsive to the right stimulation at the right time. We compound the return from this variable marketing spend by recycling it into additional media with a short term positive return and if these marginal returns diminish or become too elongated by reinvesting them long term shareholder value creating opportunities. Over the last five years, the focus of these investments have been to build our K-12 business.
Turning to slide 14. Given our long term compounding opportunity in K-12, it is important to understand how we approach these investments. Our strategy has four pillars, build all of our products in our data sharing and information management platform myLexia. So it has this power and capability continually improve the value proposition of our flagship product Core5. Introduce differentiated products and services can be critical K-12 needs in areas underserved by existing solutions and ensure that we have the right team with the right resources to be the trusted partner in two schools. How have we done. In five years, Lexia has gone from being a one product company to a growing portfolio of world class K-12 products built on a platform myLexia that has implemented in 17,000 schools, a platform that shares with teachers, schools and districts, the critical data and information that empowers them to help their students learn. In 2013, we introduced a new product called Five that is setting the standard for personalized reading and instruction in our schools.
Since then, we have continuously improved the value proposition of Core5 to make it more effective for learners and more important to our customers. We introduced a new animation engine to make the experience more engaging, even on the low end devices often found in our schools. New licensing to allow K-6 schools to use power up in their sixth grade classes, but no incremental cost and just last month, the biggest expansion of content and functionality for Core5 since its introduction. More on that in a bit. But all of this was done to make Core5 a new reading product teachers demand to have in their classrooms. And while we expect teaching young children to read, in other words, Core5 will always be the primary driver of our K-12 business. There is much more that we have been doing and will do. In 2016, we introduced Rapid to provide a computer adaptive screener for K-12 schools. 2018, we introduce Powerup the struggling readers in sixth through 12th grade and delivered a great product and fulfilled an unmet need in the marketplace. In fact, in only a little over a year, PowerUp is already used in over 4000 schools. Approximately 4% of U.S. public schools. Please turn to Slide 15 for the most recent analysis of how core five is producing these outcomes in our schools. You've just finalized our annual analysis of the impact of Core 5, I'm closing the reading gap.
This year, we analyzed almost 900,000 students during the 2000, 2000, 2018, 2019 school year. At the beginning of the year, only 50% of students were working on skills in or above their grade level. That number increased to 91% by the end of the school year.
For students, most at risk of reading failure. Those who started the year two or more grade levels behind, 65% being two or more grade levels of skills in one year sustained growth and achievement. This makes a real difference. One of the key ways we achieve these results by building products and implementing them effectively since they are used with fidelity.
Please turn to Slide 16. I just walked through our most recent efficiency analysis, and last quarter I talked about the cost to individuals and to society as a whole. When we fail to teach a child to read at the appropriate grade level at the right time, but even our products won't help. The schools don't use them. And unfortunately, one of the failures of the educational technology industry is that most products will largely in use by the schools that purchased them. Here too we are different. According to a recent study by Learned Platform, an organization dedicated to expanding equitable access for all students to education technology that works, 63%. Almost two thirds of purchased edtech product licenses are never activated. Learn reports that therefore 65% of students exhibited zero or trivial use. Moreover, they found that only 5% of students actually receive the full recommended dosage.
By comparison, during the 2018-2019 school year, likely customers activated over 80% of the licenses available to them, and over 40% of learners use our software at the prescribed level of intensity eight times better than our industry as a whole, the fact that we are extraordinarily proud of.
Please turn to Slide 17. Next year we will introduce a new product for K-6 emerging bilinguals focused on learning English. Why do we care about this market? First, teaching non-native speakers how to speak and read English, one of the most difficult problems our schools face and there is no one from a pedagogy, technology, trust and brand perspective better able to meet this need than we are. Second, it is a large, fast growing need. Currently, approximately 10% of public school students are non-native English speakers. This is expected to grow to approximately 25% by 2025, according to the National Education Association. We also know that if these children are not equipped with appropriate academic English skills, the chances of success in the classroom are diminished. Third, we have a large adjacent installed base.
Core5 already helps emerging English learners to read English, and Rosetta Stone has used thousands of classrooms to teach English. But we have never offered a solution built for students in schools that specifically focuses on the needs of emerging bilinguals learning English with an emphasis on speaking skills. Like Core 5 and like PowerUp we expect this new product to become the standard in its marketplace, when I say growth, got similarly high growth in net margins. Development is progressing and we intend to begin sales for this product next year for use in 2020-2021 school year. We will have more opportunities like this going forward because we are a trusted partner for our school partners and we know how to build products that work and get used. And we'll do this knowing that growing high retention, high margin revenue streams are attractive to investors as shown by the very high multiples paid for companies in strategic transactions in our industry. The opportunity to organically build these revenue streams while solving problems is very exciting and a number of new product releases are demonstrating how we are doing that this year.
Please turn to Slide 18. We just released major upgrades across our entire literacy product line, including important upgrades to myLexia, Rapid and PowerUp. We also released a brand new program for teachers like the Academy. [Indecipherable] Academy is an amazing e-learning platform that will support our educators, professional growth with researches and strategies to support blended learning, literacy instruction and product implementation that includes expert videos, dynamic interactive content and in-depth course material among the other things. Teaching-reading is difficult. In most elementary school, teachers are not trained for reading, the foundation to knowing how to teach reading. We believe that as Lexia Academy grows, we can better-equip teachers to understand the why of reading the instruction and they're [Indecipherable] to be successful in this area. But our biggest release this year was a significant upgrade to Core5. In fact, this was the largest expansion of capability of content since Core5's original introduction in 2013, the focus of this relates was to deepen and broaden the content for older elementary school students in the third through fifth grade.
So while we are rightly excited to introduce a new K-6 English learning product next year, continuing to expand and improve our core literacy product portfolio is critical to continued growth and learner impact, an area of great importance that hasn't been talked about as much is the fundamental change happening with our language technology platforms.
Please turn to slide 19. Over the last several years, we have been upgrading, migrating our legacy language learning technology platforms to a single technology stack. This effort has included eliminating flash from our products so that they are compatible with modern web browsers and platforms in addition to finishing the migration of our advanced content from multiple historical acquisitions. We're in the final months of this migration and integration, which will result in our customers having a better experience. One result of this effort is that we recently upgraded our world-class enterprise product Catalyst. Our new Catalyst upgrade includes over 2900 hours of goal-driven curriculum that teachers learn -- teachers learners meaningful business and industry language skills. The upgrade includes adaptive assessment technology that aligns to the common European framework of reference for languages or cipher, and a new end-to-end mobile experience for iOS and Android.
More fundamentally, completing this work will now allow our language engineering efforts to focus on more innovation, rather than the flashing and migration work that has consumed much of our effort in recent years. This has been a very, very expensive and not always forward moving process which we will be happy to complete.
Please turn to slide 20. As you know, we are testing our ability to profitably meet the needs of the larger language learning opportunity outside the US. My goal here is to leverage our brand, our content and our ability to provide high quality with Rosetta Stone certified online language instructors to create a unique product offering for demanding international customers. And we will approach selling our solutions differently from our peers. Our intention is to provide customers with tutoring they want, when they want it, not packages of tutoring sessions sold year at a time for a high upfront cost.
South Korea is our test market and we now live for Android users in the country. We view this as a test and we'll treat the investment as such until we learn more about product and pricing fit with the market.
Next Slide, please. Finally, the simple formula for our success is efficacy, time scale, equals impact. Efficacy without scale creates no lasting impact. Scale without efficacy is counterproductive. Think about the ed tech products I mentioned sitting unused in our schools. It takes both to impact society, and that is our goal.
Over the last several years, a lack of profitability came from investing heavily in the K-12 literacy business while simultaneously making the necessary technology, marketing and business model changes in our language businesses like the very large investments that were necessary to modernize our language product platforms and shift to a SaaS subscription base consumer language business.
Now, with a scaled and growing literacy business and a modernized and stabilized language business, we have the opportunity to meaningfully improve profitability as we achieve scale. Our B2B businesses have attractive incremental segment contribution margins of approximately 70% as we leverage high gross margin products and scale distribution. In our consumer language business we actively manage our variable media spend to produce the highest absolute dollar return to reinvest across the portfolio.
But the opportunity to sell our current products at a high incremental margin is necessary, but not sufficient to achieving our ultimate goal. Our presence in K-12 schools and the Rosetta Stone brand are both capable of being scaled beyond our existing products to reach more learners globally. To ensure that we are appropriately positioned to take advantage of these opportunities. Today we are filing with the SEC a $200 million shelf registration statement to take the place of a shelf that expired a few years ago while we were going through the turnaround.
While we have no current need or plans to utilize the authorization I believe it is good corporate practice to have an active shelf registration. We are confident in our direction and the outlook for organic cash flow generation. But a shelf provides us the flexibility to act quickly if we see the opportunities to invest in our business, for example, to finance a strategic transaction to leverage our growing K-12 presence. We will be disciplined stewards of your capital and of course it is possible the shelf will not be used. But I believe we should be prepared for opportunities if they present themselves.
So as we move forward into the critical second half of the year I feel good about where we sit. We expect to have positive revenue growth and operating cash flow this year, just as importantly, I am proud of the work we are doing across the company to provide real value to our learners, as evidenced by the fact that in a sea of unused K-12 products, teachers and their students make time in their day to use Core5 because they know that if they do results will follow. That concludes my prepared remarks. Operator, you can now open the line for questions.
Questions and Answers:
Operator
At this time, we will be conducting a question-and-answer-session. [Operator Instructions] Our first question comes from the line of Steven Frankel with Dougherty. Please proceed with your question.
Steven Frankel -- Dougherty -- Analyst
Good afternoon. Thanks for the opportunity. I'd like John to drill into a couple of things at Lexia. The 89% retention rate kind of jumped out to me, since that's the lowest it's been in a couple of years, and the 100% dollar based renewal rate, I would think with the move to multiple products, the dollar renewal rate should start to go north of 100. So I wonder if you might explain to me what's going on with those two metrics.
John Hass -- Chief Executive Officer & Chairman of the Board of Directors
Hey, Steve it's John. I'm joined by Tom and Nick and Matt as well. Nick and Matt are on the road, I'll let Nick address that and if I have anything to add I'll come back and do so.
Nick Gaehde -- President of Lexia Learning
Hi, Steve, it's Nick. Thanks for the question. As you said, 89% is a slight dip in retention rate from what we've seen historically. As I mentioned on previous calls, we are seeing the impact of the end of what we refer to as grandfathered pricing for legacy customers who had bought our products on a perpetual license basis and then moved to subscription. So we've gradually increased prices on the grandfathered licenses over the years and this year ended that grandfathered pricing. So there are some customers who saw that price increase and decided not to renew. I agree with you on renewal rates that they should pick up above 100% as we see the effect of multiple products being sold to the same customer. I think as you know, Q3 is our biggest quarter by far and so we should start to see the impact of that portfolio selling take place. In these grand fathered customers, could you maybe size that for us in terms of the number of schools and if we've seen the bulk of the drop off, or is this a headwind that you might see in Q3 or Q4?
I don't think we're going to see an acceleration, but certainly with grandfathered pricing ending, we are seeing some -- especially some of the smaller accounts. You know, in some cases not renew. We don't break out the size of that segment, but we'll continue obviously to report on renewal rates and retention rates.
Steven Frankel -- Dougherty -- Analyst
Okay, and maybe give us, if you can, a flavor for how intently you're focused on districtwide selling in this peak selling system season and what you think your chances of success or and maybe some color on that California win that John talked about earlier.
Nick Gaehde -- President of Lexia Learning
Sure. So, you know, as I've said in previous calls, we've invested in our strategic sales team, the team that is focused on those larger district opportunities, both the team that is responding to RFPs, as well as individuals who have experience working at that level. And we are starting to see that pay off. It is a longer game. Some of those, both large district and state level opportunities do take, you know, years to develop. But we are seeing more six figure deals than we have ever seen historically. And I think that's a direct result both of the expanded portfolio and our increased capacity selling at that large district level. In terms of the California opportunity, really exciting opportunity to work with one of the not just largest districts in California, but also a world class district in terms of their ability to significantly move student performance. They were called out in a McKinsey study as one of the top school districts, not just in the country, but in the world. And so to have them not only use our products but after multiple years of using the products expand district wide I think is a testament to the quality of not just the products we've provided but the support we've provided as well.
Steven Frankel -- Dougherty -- Analyst
Great. And on the consumer business I understand you spent the TV money and it's an interesting experiment. Do you sense any competitive changes in the market and do you have any sense for what the right term is for this business today? I'll let Matt address that Steve, but just wanted to say, when you say the right term.
Where do you think the consumer -- how does the consumer want to buy? What do you think their desired term is.
John Hass -- Chief Executive Officer & Chairman of the Board of Directors
All right. Matt, would you like to take that?
Matthew Hulett -- President, Language
Yeah. Hey, Steve. This is Matt. A couple of things on the spend kind of addressing three points. The spend component was a really interesting test. And as John indicated in the call, we're going to spend some time looking through what the tail looks like on that spend. In relation to the competitive component we definitely see competition from both the paid and the free side increasing, although conversely we also see a lot of trial customers coming in from competitors as well. About 44% of our trials they're are actually coming in through other products. So we're also seeing kind of category growth from the competition as well, which is I think net good news for us.
And then lastly, we have seen a small decrease in the initial term length, as indicated on the call slightly from 13.8 months to 13.5. You know, it's a good question, Steve. I think things are basically stabilizing. You know, the last several quarters have been stabilizing in terms of LTV.
The [Indecipherable] obviously went way down the inefficient road from our current kind of 2 to 1 ratio that we had to the brand spend. But I think in general then pretty stable and I expect that to be stable going forward.
Steven Frankel -- Dougherty -- Analyst
Okay. Then a quick last one on live, I think a couple of quarters ago you talked about ending the test sometime in Q3 and going out and marketing the product more fully. What do you think the timing looks like now? And when will you move from Android, which historically is a platform that doesn't generate a lot of revenue in app stores to iOS, where people tend to spend more money?
Nick Gaehde -- President of Lexia Learning
Yes, great question. On the iOS component, we don't have a firm date yet, although that is something we're obviously looking to do. We also have a pretty strong relationship with some of the players in Korea, hence the Android focus. In addition to that, we do have a stand-alone skew in the app store called Rosetta Stone Live that went live literally several weeks ago. So we've moved officially not from beta mode into general availability in the Android App Store.
Steven Frankel -- Dougherty -- Analyst
Okay, great. And how are you marketing, you're just going to leave it to the App Store marketing? Are you doing anything different in Korean market to try to generate interest in this?
Nick Gaehde -- President of Lexia Learning
Its another great question. As you know, we've had strong reseller presence under the Rosetta Stone brand for quite a while, and so we have relatively solid not as good as the United States obviously in aided awareness, but pretty solid in Korea. We're doing both influencer marketing as well as digital marketing, as well as one of the key things we want to do for that business is to be really good at digital acquisition marketing versus the traditional tutoring round of being more off line. And we've seen pretty good early signal around acquiring customers through digital only channels.
Steven Frankel -- Dougherty -- Analyst
Great, I'll let somebody else ask a question. Thank you so much.
John Hass -- Chief Executive Officer & Chairman of the Board of Directors
Thanks, Steve.
Operator
Our next question comes from the line of Alex Paris with Barrington Research. please proceed with your question.
Chris Howe -- Barrington Research -- Analyst
Good afternoon. This is Chris House sitting in for Alex. Leading off and following up on the previous question about the district opportunity in California. Can you provide some perspective as to how many other opportunities maybe not as large are out there for districts and how should we look at the backlog for district opportunities versus where it's been historically?
Nick Gaehde -- President of Lexia Learning
Sure. I'd be glad to answer that. So as I said on the previous question from Steve, we are seeing more large opportunities than we've ever seen and many of those are at the district level. We're not providing detail at this point about the specifics of the pipeline, but are you pleased with the strengthening of the pipeline going into obviously our biggest quarter and do see the investments we've made in district level selling and you know the capacity of the product to work at the district level being something that the market has been looking for and is accepting.
Chris Howe -- Barrington Research -- Analyst
It's very helpful. And I look forward to that. And my next question is on -- you've mentioned it before about the opportunity set that's out there for emerging bilingual in English language learning students. Could you provide some color on what you're seeing as far as the potential runway for this opportunity? And how is this need currently being met in the marketplace?
Nick Gaehde -- President of Lexia Learning
Yeah, I'm glad you remember the term emerging bilingual. I think it's one of the things that we are focused on which is different in this industry. Thinking about those learners not as having a deficit, but as having a real strength being dual language learners. You know, the short answer to Howe is that need being met in the market right now is not very well. Unfortunately, there are not many products or whether it's printed digital that do a good job of supporting those emerging bilinguals. And that's especially true where the bulk of the market is in the case six segments, so products that are geared to those young learners that are appropriate for their age and yet build the skills they need to be successful in school and to access the rest of the curriculum. As John said in his remarks, it is the fastest growing segment of the student population. And we see just a phenomenal opportunity given our experience both on the literacy and language side and the strength of our brand to meet the needs of those students and meet the needs of schools who are increasingly, I think, struggling with how to help those students succeed.
Chris Howe -- Barrington Research -- Analyst
Thank you. And just a last question here. It's a little outside of the box, but if we're to parse out or decompose the Lexia product line, how would you characterize the rate of adoption or engagement or even the potential for runway that's out there for each of the pieces of Lexia portfolio?
Nick Gaehde -- President of Lexia Learning
So, you know as we shared in the presentation that we've shared previously you know, although we are you know really thrilled with the momentum we have over the past number of years, you know, we still have a lot of runway in terms of the market that is still to be addressed. If you just think again about the districts we're already in we have enormous opportunity just to expand within that current footprint in districts where we can actually show data about their students and the performance of those students. Core5 is in about 14% of the market and PowerUp, although, you know, is growing really quickly out of the gate. It's only at about 4 % of the market. So, again, lots of opportunity ahead of us and I think now that we have a comprehensive K-12 portfolio of curriculum and assessment, we're able to meet the needs of schools much more holistically than we were before. And so having a conversation about a given student population and how a individual product can meet the need, we can talk at the district level about all of their literacy challenges and then direct them to the right product given the things that they're trying to accomplish.
Chris Howe -- Barrington Research -- Analyst
Great. Thanks for taking my questions. That's all I have for now.
Nick Gaehde -- President of Lexia Learning
Absolutely.
John Hass -- Chief Executive Officer & Chairman of the Board of Directors
Thanks, Chris.
Operator
Our next question comes from line of John Lewis of Osmium Partners. Please proceed with your question.
John Lewis -- Osmium -- Analyst
Very supportive of your strategy and results. So congratulations on getting the company in the right direction. I guess just to follow on Chris Howe's comment on emerging bilinguals. This is for Nick. What percentage would you say of US students would fall into the emerging bilinguals categories, is it 5%, 10%, 15% or just to size that market a little tighter?
Nick Gaehde -- President of Lexia Learning
Yeah. Hi, John, great question. So in terms of students who are identified as English language learners, students who are identified in districts and receiving support because of that designation, that's about 10% of the student population and is forecast to grow to about 25% by 2025 as John mentioned, when we think about emerging bilinguals, it's a broader market than just the students who have been designated as ELs, right, because there are students who have a certain level of proficiency in English language that don't qualify them for their services, but they still don't have the capacity to maximize their learning potential. And so we're targeting not just those students who are already in EL programs, but a broader segment of the market.
John Lewis -- Osmium -- Analyst
Is the per student spend by district's higher for literacy or emerging bilinguals or in the same bucket?
Nick Gaehde -- President of Lexia Learning
It depends on how you break down literacy. So typically spend on specific student populations, whether it's special ed Title 1 or EL is higher. There are also more funding streams that you can take advantage of. So funding streams both from state and local budgets but in the case of those specific student populations, federal funding streams as well. And so they tend to be places where schools need to and are willing to spend more money and the funding is there that allows them to do that.
John Lewis -- Osmium -- Analyst
Okay, just to finish it up, so it's 10% of the U.S. student population now and you think by 2025 it will be 25%. Is that right?
Nick Gaehde -- President of Lexia Learning
That's the current projection. Yeah.
John Lewis -- Osmium -- Analyst
Okay. Thank you for that, Nick. Matt, I guess I just had a couple of quick questions for you. Really on your life tutoring, I get that -- you know, that you're testing it in South Korea but do you have any targeted, where you would bring that offering to the U.S. or a time ranger anything?
Nick Gaehde -- President of Lexia Learning
We don't -- this year, John, have stated anything beyond South Korea, although, you know, as you know, in our enterprise business, we've been doing like tutoring both one to one and group for years. So we know generally where the right places would be to go to next. But we haven't announced anything formally.
John Lewis -- Osmium -- Analyst
Okay, and then anything, any plans, Matt, on international expansion and consumers that -- are there any country soft circled on when you would take a more aggressive path there? Any any color there?
Matthew Hulett -- President, Language
No, no real additional color. We think that obviously APAC is the largest language learning market by far. It's you know 40% of overall learners are learning some form of language in a APAC and that's primarily English. So we think APAC's generally good opportunity. And Korea has been an interesting spot for us because of the relatively high aided awareness of Rosetta Stone, and it's a market that we feel like we can we can better enter in with not as much capital to be deployed. But I do think APAC in general is a huge opportunity for us. In our EMEA business the consumer is also something that we spend a little bit more time looking at as well. We've been more U.S. centric as you know in our businesses. You know, most of our businesses in consumer is United States, so we have been spending more time thinking about different price and offering bundles. But Korea is really the focus right now.
John Lewis -- Osmium -- Analyst
Got it. Got it. Okay, I appreciate that. And then this is just for John. It's a little bit of a longer comment in a question. Frequently on these calls I bring up really what I see as a large gap between the public value of the business and what the business is worth based on comparable transactions and really to put an exclamation point on top of it, Barron's highlighted last week that there are pockets of software stocks that are now pushing 20 times 2019 revenue without earnings. And you look at Rosetta Stone's guidance of doubling operating cash flow. It puts you in the top 10% of the Russell 2000. Yet Rosetta's at about 90% discount at 2.7 times sales. And if you look at the business on a more relevant apples to apples basis, you guys are trading for about half of M&A valuations. Last year, Campion went private at 4.5 time sales, Archipelago at 4.2 times sales, Renaissance at 4.2 time sales. It sold three times now privately and now that Rosetta is 100% SaaS based model and it still trades at a least a 50 % discount. And since these companies have gone private, I would also think that multiples have done nothing but expand. And I see [Indecipherable] at 13 times revenue and 50 times cash flow. So I continue to see a really wide gap. And you guys have very solid results of 56% incremental cash flow margins, really relevant products. So I guess the question is, where are you trying to bring on, you know, several years ago you had 10 analysts covering the company. Where are you in terms of getting more analysts coverage, roadshows and really getting the story out? Because I don't think it's well followed at all on Wall Street.
John Hass -- Chief Executive Officer & Chairman of the Board of Directors
Yeah. Well, John, we agree with you. Thank you for the context and color. We're very happy that Steve picked up coverage this year. He's been terrific. I think getting the word out and trying to really understand and share the story as he sees it. We are very focused on adding additional coverage. We'll be at five investor conferences over the next month or so. The non-deal roadshow calendar has been quite long. We've not been a blackout. So, I think bottom line, what we have to do is run the business as best we can, tell the story as best we can, and then look for opportunities as they present themselves or as we can create them. I think we're very focused on that. We'll obviously take any help we can get in terms of recommendations for additional coverage, but we are very focused on that.
John Lewis -- Osmium -- Analyst
Well, thank you, John. Just a follow up. I have a good friend who is former CEO and he spent the last nine months trying to raise a spark looking at software companies and SaaS models and couldn't find anything to buy less than 4.5 time, 5 times revenue and just gave up and he had a private equity sponsor. So it is a true outlier -- to have -- for the business model you've built and the transition you've made, you know, relative to everything else and public equity and private market valuations, I think you're stocks considerably undervalued. And congrats on the solid progress. Thanks.
John Hass -- Chief Executive Officer & Chairman of the Board of Directors
Thanks, John.
Operator
Our next question comes from the line of Josh Goldberg with G2 Investment Partners. Please proceed with your question.
Josh Goldberg -- G2 Investment Partners -- Analyst
Hi. Good afternoon, guys. How are you? I just wanted to talk a little more about the selling season in Lexia and you know, specifically some of the big opportunities in Texas and New York. And I have a follow up.
John Hass -- Chief Executive Officer & Chairman of the Board of Directors
Okay. Nick, go ahead.
Nick Gaehde -- President of Lexia Learning
Sure. So, hi, Josh. So, as you know, we have been focused on the opportunities in specific markets across the company or country where we see either funding or tailwinds that allow us to drive growth faster than other potential markets in Texas, where there is a significant amount of adoption money in play now and for the next eight years we have increased the number of sales reps and marketing activity, and are pleased with the kind of momentum we're seeing. Obviously, you know, we are now one month into the third quarter and our are waiting and working to close a lot of business in Texas. I will say that one of the things that we are seeing is a fair amount of competition and a fair amount of competition, not just from, you know, what historically has been our smaller competitive field of digital publishers, but the big publishers as well.
What you sometimes see in those big adoptions is people first prioritizing the big core curriculum and then adding in intervention, supplemental and other products after that. So it is a longer game, and one that will I think pay off for multiple years in terms of the investments that we've made, but we are pleased with the momentum and the return on investment that we believe we'll see in the third quarter coming out of Texas. New York is a little bit different. As you know, being in New York, it is very much historically a building-by-building sales environment. I think with the new administration, there is a move to centralize some of the authority in the long term, but budgets are still at the school building level. Good news is that we are now on the [Indecipherable] purchasing platform, so all schools can now go into [Indecipherable] and use funding to purchase our programs. And we're seeing continued expansion of the business in New York City as a result of being on [Indecipherable] and I think the increased capacity we have in that market.
Josh Goldberg -- G2 Investment Partners -- Analyst
Great. And regarding the contract that you won. Just curious. You know, you put a slide in your deck of i guess aspirational goals for 2020 and 2021, and the 20 number you didn't change even though this sounds like a pretty important deal for you both on revenue and on margin. Can you just help me understand that a bit?
John Hass -- Chief Executive Officer & Chairman of the Board of Directors
Yeah, just just generally. We don't revisit twenty one numbers on an ongoing basis. It's kind of an annual planning cycle. I think even if we did this deal in and of itself, while important, wouldn't wouldn't really move those numbers. It's over three years. So while it's paid upfront, it's essentially $500,000 a year in revenue recognition. And so it wouldn't have a meaningful impact on that. But even if it did, we wouldn't. You'll see the same 2020 numbers have been held constant since the first quarter of the year when we came out with them.
Josh Goldberg -- G2 Investment Partners -- Analyst
Okay, and last question from me. In terms of some of these specific districts, I think you had a slide about, you know, what was your opportunity is on districts that you are already working with, but you haven't been able to sell supposedly on Lexia. Can you just talk about where do you see that playing out over the next sort of six months to 12 months? What I mean by that is, you know, it would seem like those are the easiest opportunities to increase some of those site licenses versus, you know, expanding into new ones. You know, I thought the expansion to existing customers should probably be a little bit easier. And I just wanted to kind of hear from you. If you think that you're north of 30% booking guidance in Lexia is based on new customers versus or new districts versus the existing. Thanks.
Nick Gaehde -- President of Lexia Learning
Yeah. Josh, so it's really both. Obviously, we see the bigger opportunity and expanding in the footprint we are in right now and have certainly created a sales channel and a strategy to expand in the districts we are in. It's one of the reasons we're so excited now about having a comprehensive portfolio of curriculum and assessment because we can come to the district and talk about their needs as I said before from kindergarten through twelfth grade. So that is absolutely a focus. But we also know that we need to continue to drive into districts that we're not in yet. And so we do both. But certainly this year there is more emphasis on expanding in the districts that we are already in than previously.
John Hass -- Chief Executive Officer & Chairman of the Board of Directors
Thanks, Josh.
Operator
Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to management for closing remarks.
John Hass -- Chief Executive Officer & Chairman of the Board of Directors
Thank you, operator. And thank you everyone for joining us tonight. As I said, we'll be attending five investor conferences over the next month or so. We look forward to seeing many of you at one of those stops and talking to you over the next period of time. Thank you. And have a good night, everybody.
Operator
[Operator Closing Remarks]
Duration: 68 minutes
Call participants:
Lasse Glassen -- Managing Director, Investor Relations
John Hass -- Chief Executive Officer & Chairman of the Board of Directors
Nick Gaehde -- President of Lexia Learning
Matthew Hulett -- President, Language
Josh Goldberg -- G2 Investment Partners -- Analyst
Steven Frankel -- Dougherty -- Analyst
Chris Howe -- Barrington Research -- Analyst
John Lewis -- Osmium -- Analyst
