Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Rosetta Stone Inc (NYSE:RST)
Q3 2019 Earnings Call
Nov 6, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, ladies and gentlemen, and welcome to the Rosetta Stone Third Quarter 2019 Earnings Conference Call. [Operator Instructions] A question-and-answer session will follow the formal presentation. [Operator Instructions]

It is now my pleasure to introduce your host Mr. Jason Terry. Thank you. You may begin.

John Hass

Thank you, and welcome, everyone. We have a lot to cover so please turn to slide two. We have shared this slide with you a few times in the past. Let me be clear as to why this background is critical to our future. We have the experience and expertise to be the leader in helping people build the communication skills necessary to improve their lives. Whether it is a child learning to read in a classroom or an adult learning a second language in retirement, we build equity and deliver positive societal change.Please turn to slide three for a review of our consolidated results. Consolidated bookings in the third quarter grew 21% to $81.5 million with contributions from every segment of the business. largest year over year increase in organic bookings in the history of the company. And it's indicative of what we are capable of doing during the season only important third quarter, but it is now All we're capable of. We expected more and we'll talk today about what it will take to deliver that.

Consolidated revenues grew 6% in the quarter to $45.5 million, our largest quarter-over-quarter dollar increase in 2019. Importantly, with over $80 million in bookings and $45 million in revenues, we added $36 million to deferred revenue in the quarter. Net income in Q3 was a loss of $2.9 million, an improvement in $3.6 million over the same period in 2018. This was driven by higher revenues and lower variable incentive compensation expense, partially offset by increased sales and marketing expense during our peak selling season.Adjusted EBITDA in the quarter improved to $2.5 million, versus a loss of $700,000 in 2018. We ended the quarter with $36.2 million of cash and no debt. A $25 million increase in our net cash position since the end of Q2 on $29 million of operating cash flow and $4 million of capex. When we utilized our seasonal borrowing facility we said it would be repaid by the end of the year. We are pleased that we repaid the line fully in Q3 and we will not use it again this year.

Let's move to performance of our business units beginning with Literacy on slide four and I will turn the call over to Nick.

Nick Gaehde -- President of Lexia Learning

Thank you, John, and good afternoon, everyone. Literacy bookings in the third quarter were a record $41 million, an increase of 21% versus the third quarter of 2018. To put this in context, this represents more than 85% of the total bookings we recorded in all of 2017 and more than double the full year Lexia joined the Rosetta Stone family. But as John said, we expected more in Q3.

Revenue in Q3 in the Literacy segment was a record $15.6 million, an increase of 18% over Q3 2018. Literacy segment contribution more than doubled from $1 million to $2.1 million relative to Q3 last year. The key to bookings and revenue growth in Q3 was continued improvement in new sales performance through our core distribution channels, along with strong dollar-based renewal rates.I will unpack each of these in a moment, but first let me talk about the timing of bookings this year, as it continues to evolve. The third quarter is the season in which school budgets are released and it is critical to our growth. This year, however, we expect full year bookings growth to be positively impacted by bookings in both Q3 and Q4.

In fact, based on business to date and our current pipeline we expect bookings in Q4 to be approximately 30% higher than in Q4 last year. Why are we seeing more bookings growth in Q4 this year than in past years? First, we heard from many districts that the Federal funding that supports schools with large low income populations, was released later this year than last, causing many schools to delay both new and renewal purchases. Secondly, as our business has grown, the volume of open deals at the end of the third quarter has grown as well. Many of these spilled into Q4 and are closing now.Overall, I am pleased with the growth in our core markets and distribution channels. We continue to penetrate our existing districts, as well as the 60% of the market where we currently don't have a presence. Over the last 12 months to 18 months, we invested in staff and marketing initiatives along with product and services to open up these targeted locations. We have been selective and focused in our approach, aware that while success can yield six or seven figure contracts, the time to gain acceptance and win programs as well as overcome entrenched competition is significant.

That said, we have made solid progress in places like New York City, Arizona and Virginia. Texas has proven to be more challenging and although we have had district wins in that market, and have grown new business in that state by over 40% this year, overall closed business has been less than we had hoped. Many districts in Texas have focused their initial adoptions on filling traditional core print-based literacy curriculum needs and have deferred the selection of providers for digital blended learning solutions like ours.We are committed to the Texas opportunity and expect to see more success next year and the years following as districts address their supplemental curriculum needs. In all cases, we are confident that when we consistently demonstrate significant impact on student performance these relationships will expand over time.

Please turn to the next slide. We have made progress growing our presence, both in districts where we did not have customers and in districts where we have been able to expand based on the strength of our partnerships and the performance gains of the students we serve. In the third quarter, we saw an increase of over 35% in the number of new districts compared to the number of new districts in the third quarter of 2018. And even when we start with small initial purchases it represents a toe hold to expand in future years. There is more opportunity here.Please turn to the next slide. The investments in our product portfolio enable us to expand our district penetration and also the lifetime value of our customers. This growth is achieved through multi-building and multiproduct sales. With the launch of PowerUp two years ago we began to build our presence in middle and high schools. In two years we have brought this solution for non-proficient readers to over 4,000 schools.

Please turn to slide seven. The growth in bookings in Q3 drove a 16% increase in ARR to $55.5 million. This growth was driven by an increasingly productive sales force with more solutions to offer, and is shown through continued strong renewal performance in the third quarter. Retention rates were 88% while renewal rates were 102%. We are achieving rates in K12 which are very strong, even as our business has undergone significant growth and structural change. This speaks to the excellent value we deliver to our customers. We conduct extensive analysis to understand the factors behind customers who don't renew their contracts, We see fewer larger accounts that do not renew, with the majority of non-renewals occurring among smaller accounts. That said, we are not satisfied if we lose any customers. We are confident that as we mature as an organization, we can do a better job of providing our Customer Success teams with the data they need to identify accounts that are showing early signs that they might not renew, and then reestablish customer commitment and minimize the risk of cancellation.

Please turn to slide eight. As we look to the end of 2019 and beyond, it is important to remember what we are building. The continued penetration of Core5 in elementary schools, the introduction of new products like PowerUp, and the building of a national direct sales and service team have driven bookings growth. Growth that has been compounding since 2014 at an average of 25% has almost doubled our business in three years. Now we need to do that again Please turn to slide nine. And we can because even as we grow, we remain underpenetrated in the markets we already serve. We can triple the number of schools we are in just by fully penetrating all schools in those districts where we already have a presence. To make a difference in even more lives we are going to make a large, targeted investment in K-12 sales, marketing and service teams that support our customers.Please turn to Slide 10. Over the past two years the size of our sales force has grown slowly even as we grew bookings by almost 50%. While rep productivity has gone up, it will be approximately $1.2 million this year, in hindsight it has come at the expense of opportunities to grow our business more quickly with existing and new customers; this became clear to us as we were closing the largest Q3 in Lexia's history.

We have a capacity and structure issue. Not a business opportunity issue. To rectify this and set the business up for strong, sustainable and profitable growth, we will take a number of steps. First, we are expanding the size of our field sales team. As importantly, to structurally build efficient capacity we will be focusing field reps on bigger accounts and new business opportunities while investing in our inside sales teams with the capacity and skill to grow our large volume of smaller customers.This will be a high ROI investment. Getting the right people, at the right level, focused on the right accounts. This is a step change investment that we will not need to repeat in the near future, but is warranted given the scale of the opportunity in front of us.Please turn to Slide 11. We are confident in this investment because we have the solutions fundamental to the success in K-12. A portfolio of world-class Literacy products and soon a new product to serve the needs of English Language learners. No other company has the deep experience and expertise to serve the needs of all students and to be the leader in Literacy and Language education.

Next slide please. And these products address a big market with great societal need. A need that is unfortunately highlighted in the recent release of the federal government's NAEP scores, also called the Nation's Report Card. The 2019 scores for reading show an alarming decline in student proficiency where the average eighth-grade reading score declined in more than half of the states compared with the average score in fourth-grade declining in 17 states.The good news is that this crisis is getting national attention. Most importantly, we know from our 36 years of experience and deep portfolio of research that we can be a powerful force to change these trends and provide students with the opportunity to succeed not only in school, but in life.

For an update on the performance of our Language business let me turn the call over to Matt.

Matt Hulett -- President, Language

Thanks, Nick. Bookings in our Language segments totaled $40.5 million in Q3 with Enterprise and Education bookings growing $6.7 million, or 38% over Q3 last year driven by the $7.4 million long-term custom content deal we announced in early August, while Consumer segment bookings were flat on a year-over-year basis.Total revenues for the Language segments were $29.9 million in Q3, an increase of 1% over the same period last year. Within this, Consumer revenues were $15.8 million, an increase of 9% from Q3 2018, while E&E revenues as opposed to bookings were $14.1 million, a decrease of 6% from Q3 2018.Consumer Language revenues were negatively impacted in the quarter by a higher mix of long-term subscriptions than in the same period last year. These sales are attractive from an LTV perspective but have the effect of lowering in-period revenues as the bookings are deferred over a longer period of time.In our E&E segment, I would call out the improved performance of our Enterprise business, outside of custom, globally. These bookings grew 5% in Q3, versus the same quarter last year, even as we transitioned existing customers to our new solution. Next slide please.

We formally announced the introduction of our new product to serve business customers, Rosetta Stone Enterprise, earlier in Q3. This is the successor to Catalyst made possible by the consolidation of our technology stacks that we discussed on the last call. It introduced notable functionality like proprietary, standards-aligned Assessment Tests, unlimited access to live online tutoring sessions from highly trained tutors who are native speakers, and over 7,000 hours of beginning to advanced content. Corporate customers now have the most robust cross-platform learning product in the market.Lastly, it is important to note that we have completed the majority of our migration and deflashing work across our Language platforms. We are excited to unburden the R&D team to build on what is already the best-in-class consumer and enterprise language learning solutions.

Please turn to the next slide and I will walk through Consumer Language performance. As expected, Consumer in Q3 returned to more traditional metrics and more profitable unit economics as results were not impacted by the brand marketing test expenses that affected second quarter results. Average initial sales price per unit increased to $102 on the strength of a greater proportion of long term unit sales. LTV to CAC was 1.7.To be clear, this means our margin per unit after all incurred and expected future marketing costs was over 40%. Couple this with the fact that the payback period is very short, immediate in the case of our long-term subs, and you can see why this business is attractive. While the consumer businesses stabilize on their bookings and revenue basis year a year, increased competition and our traditional performing marketing channels has increased the cost for paid media.

You can see that compression of customer acquisition efficiency in our per unit economics. We have the best product in the market as evidenced by our high NPS and app store rating. Our unrivaled 97% brand awareness is a rare competitive advantage that we have not yet built on as we transformed product and pricing. We are evaluating our spend, which has largely been focused on shorter payback cycles to include more longer-term payback marketing cycles in 2020.Please turn to Slide 16. What gives us confidence that this is the right strategy? We have the assets necessary for success. We have consumer and enterprise products that are the best in the marketplace. That was not true in either case just a few years ago. And we have the tools to do more. As we leave platform consolidation behind us we will accelerate innovation and take advantage of everything from our software to a decade of experience delivering virtual online tutoring on a global basis. And supporting all of this is the best brand in the United States and one of only a few that could begin to extend globally.

I will now turn the call back to John.

John Hass

Thanks, Matt. Let me now turn to guidance for this year and an initial look at 2020. Please turn to slide 17. We began 2019 with goals of growing bookings and revenues, improving adjusted EBITDA and becoming cash flow positive, all while investing in the future. We will accomplish each of these, but our bookings growth has not been as strong as we expected for the reasons we discussed. We now expect bookings of approximately $71 million in Literacy, or 21% growth over 2018. This is strong growth but leaves us short of our expectations.

We expect total bookings of $126 million in Language and consolidated bookings of $197 million, 9% higher than in 2018. Because of lower expected bookings we are lowering our year end revenue guidance to $182 million. This is $1 million lower for Literacy and $2 million for each of the Language segments.Consolidated revenue is expected to grow 5% this year. We see upside to our prior guidance for net income and adjusted EBITDA as we continue to manage expenses, but we are maintaining our estimate of a loss of $15 million and adjusted EBITDA of $6 million. Both adjusted EBITDA and net income would be higher but for the fact that more of our R&D costs than expected are being expensed rather than capitalized. capex is now expected to be $18 million, down from our prior guidance of $20 million.

Finally, we continue to expect to end the year with $42 million in cash and no debt. All of this is a start to the improved longer-term performance we expect. And we want to make sure that performance is sustainable and backed by the plans and investments required to build intrinsic value. I also don't want guidance to be an impediment to our decision making or your confidence.Please turn to Slide 18. Given the lower starting point and the more competitive operating environment in U.S. Consumer, we are revising our prior outlook for next year. We are providing this preliminary outlook today, and will finalize guidance as part of our year-end call in March.Our outlook for 2020 has the following features. Accelerating growth in Literacy and relatively flat expenses across most of the company, with the up-front investment in K-12 sales and marketing and implementation services Nick outlined, being the major exception.

Let me start with a walk through of our preliminary view of bookings and revenue. We expect Literacy bookings to grow 25% to 30% up from 21% this year. Because almost all K-12 bookings growth occurs in the second half, revenue growth will grow more slowly. We expect Literacy revenue in 2020 in a range of $75 million to $78 million, or 21% to 26% higher than this year. This is lower than our prior outlook, in part because of a lower starting point, but our confidence in delivering these goals is high.Growth will be driven by continued penetration of Core5 with increasing contribution from PowerUp. Our K-5 EL solution will add to growth in 2020, but we want to be conservative about its launch and may do things to enable its long-term penetration and maximize its intrinsic value such as using unpaid or partially paid pilots.In Consumer Language, given the current competitive unit cost dynamic we want to be more conservative in forecasting our U.S. business. At the same time, we intend to thoughtfully invest in our brand and building top of funnel traffic and recognition of the new Rosetta Stone.

Outside of the U.S., we have referred to our work in Korea as having higher risk. We remain excited about the opportunity for blended language learning there and Asia broadly, but to derisk the outlook, have eliminated these revenues in our 2020 outlook. We expect slightly higher Consumer Language revenue of $64 million to $66 million in 2020.In E&E Language, we expect revenues to be down slightly as growth in Enterprise is more than offset by a decline in Education Language, as part of this business moves to the Literacy segment. Total Language revenues are expected to be approximately $117 million to $121 million in 2020. This is the largest change to the topline relative to our prior 2020 outlook. On a consolidated basis this produces revenues in 2020 of approximately $192 million to $199 million, or 9% growth on the high end and total bookings of $210 million to $218 million.Moving to investments and profitability, we expect to again hold G&A relatively flat in 2020. Total R&D, including capex, is also expected to be flat next year with the benefits of completing our platform consolidation in Language, offsetting a small increase at Lexia.Sales and marketing as a percentage of revenues will grow in 2020 as we invest in our K-12 infrastructure to sustain growth for the next few years. Since joining Rosetta Stone six years ago, the Lexia team has had an almost unblemished record of meeting its goals, compounding growth at 25% a year. This year we had consistently high expectations but found that as we expanded, our ability to grow new business, while serving the needs of thousands of existing customers exceeded the capacity of our current structure.

To address this we are adding capacity by accelerating changes to make greater use of inside sales teams to more efficiently target existing customers with smaller renewals, in order to expand the capacity of our field team to target larger customers and new opportunities. We will make these investments while modestly improving EBITDA and cash flow by holding other expenses across the company largely flat.In total, we expect 2020 adjusted EBITDA of approximately $10 million and operating cash flow of approximately $20 million to $24 million with capital expenditures of approximately $18 million to $20 million. Because of the more conservative bookings outlook this is lower than originally expected. Putting this in context, adjusting for bookings that we received from SourceNext and custom content deals, operating cash flow in 2018 was $4 million.2020 is expected to be an almost $20 million improvement in operating cash flow in two years. This is indicative of what we can do as our business scales. As we look beyond 2020, we believe Lexia will grow bookings at a rate of 25% for at least the next few years. Remember we are adding a new product to the portfolio. This would produce revenue growth in the low 20% range on an ongoing basis.

Consumer and E&E Language should grow bookings and revenue at a mid to high single digit rate before the offset from the movement of K-5 EL sales to Lexia. This outlook assumes no meaningful contribution from the opportunities we expect to have to grow in new markets in both K-12 and Consumer. We will leverage G&A and the investments we are making today in R&D, and realize the scale benefit of the sales and marketing investment in Lexia. This will produce EBITDA and operating cash flow margins of 8% to 12% and 14% to 16%, respectively. These are not peak margins.Operating cash flow margins should reach 18% to 20% as the business scales further. Next, the filing of our shelf registration statement raised questions about how we think about managing capital and building value that I would like to address.Please turn to the next slide. So how do we think about capital management and building value for shareholders? Our goal is to maximize the intrinsic value of our business. Something we have worked hard to do over the last five years through the restructuring of our Language business and our investments in K-12. We measure intrinsic value through the cash flow we expect to generate between now and a future period appropriate for each business or major investment.

To do this we look at investment opportunities independently to draw judgements as to the appropriate period over which value should be considered. In K-12, our ability to address large and difficult problems and grow customer accounts once won, has led us to consider investments over a long period. Big market opportunities and the compounding returns available in K-12 are the drivers of the large, multi-year investments we have made in new products like PowerUp.

Why is this important in the context of the shelf filing? First, internal investment has and will continue to be prioritized over acquisitions. We have the people and expertise necessary to build world-class literacy and language products. And we prefer to build products on our own platforms, like myLexia, and with our own technologies, many of which are patented or proprietary.Finally, we are aware of the price of our shares in the market. Ultimately, we manage intrinsic value on a per share basis. Issuing shares for any purpose is considered in this context, especially when we are trading at a discount to the intrinsic value of the business we are building. Consider our K-12 portfolio. Core5 is one of the most valuable solutions in education technology. It serves the largest slice of the education budget, teaching young kids to read, has achieved scale and is continuing to grow at a fast rate. Add PowerUp, which is new and only beginning to penetrate its total addressable opportunity.

And then there is our forthcoming EL product. Today it is a very large investment, one of the largest in our history, with no associated bookings. But we look at the transformative product we are building, and consider that the fastest growing part of the school population consists of students learning English as a second language, and we could not be more excited. Investing in these products, while expensive, is building long term, sustainable, intrinsic value.Does this close the door to acquisitions? It does not. We consider small tuck-in acquisitions, as Lexia was in 2013, where we can leverage assets like our data platform, distribution and brand, and could consider something more transformational, but the bar is very high because the internal possibilities are great.

Finally, in the future there will be the opportunity to increase per share intrinsic value through the repurchase of our own stock at a discount to the value we see in our business. As we have gone through the process of rebuilding our Language business and investing to build K-12, we have not had the balance sheet capacity to repurchase shares even as the price has been attractive.As our cash flow after internal investment grows, and the seasonal low point of our cash balance increases, this capacity will increase and repurchase would become a consideration. Next slide please.

Let me end with an invitation. In March, we will hold our next Investor Day. What should you expect to learn? You will hear how we are changing lives and providing profound societal good. You will see demonstrations of exciting new products including our English Language learning product. I predict it will blow you away. You will hear how we intend to build on our foundation as the literacy expert in K-12, to be the expert in Literacy and Language. And you will hear how we will take greater advantage of the equity in the Rosetta Stone brand in new and exciting ways. We are excited to share our plans and look forward to seeing you in March.

With that, operator could you please open the call to questions.

Matt Hulett -- President, Language

Thank you, ladies and gentlemen

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Alex Paris with Barrington Research. Please proceed with your question.

John Hass

Hi, Chris.

Nick Gaehde -- President of Lexia Learning

Hi, Chris.

Chris Howe -- Barrington Research -- analyst

Hi. Lots of questions here, but no particular order, your upfront investment that you're making in sales in marketing, can you talk more about this in regard to how are you balancing growth for new customers while not moving your eye off the ball when it comes to growth within existing accounts?

Nick Gaehde -- President of Lexia Learning

Sure, Chris. I think that's a question for me. This is Nick. Obviously, our customer base has grown substantially over the past few years and has made up both of large customer accounts and smaller customer accounts. One of the investments we are making in sales and marketing is to ensure that we are aligning the right cost structure with the right customer segment.

We believe we can be more efficient serving those smaller renewals with one set of team members and then focusing other teams on those larger higher value accounts. And so it's an expansion of our inside sales team to focus on those high volume, low value customers and expansion of our field sales teams to continue to drive those larger customers and new business forward.

Chris Howe -- Barrington Research -- analyst

That's great. Thank you. And next moving to margins, in the past, you have mentioned the 40% of incremental revenue that will fall to adjusted EBITDA. Can you talk about this and if there's room for potential expansion opportunities, whether that be through expense rationalization or future price increases?

John Hass

Yes. I think it's the biggest near-term opportunities in business mix. The highest incremental margin parts of our business or the B2B businesses, the school-based business and the enterprise business as those businesses grow more quickly than the overall business that will improve margin in and of itself. I think we've been very disciplined in terms of costs we took $120 million out of costs a few years ago and essentially kept most of those costs flat.

G&A has been flat now for a number of years and we expect it to be again. R&D has been relatively flat, although there's been a shift in mix from language to literacy, which we expect to though, we expect to see that continue next year. Now that Matt and the language team have completed their platform consolidation on the language side. We think we have opportunity to reduce costs there and innovate more.

But we believe that especially with the launch of the new EL product, next year that there its room for very high intrinsic value of investment in the R&D side. We are making a onetime investment in sales and marketing, but frankly we're doing that in the context of still improving margins in the literacy segment. We think we will grow bookings faster. And we do believe we're setting ourselves up for a longer-term growth with more efficient investment by as Nick said, focusing the right people on the right accounts, higher value people in the field focused on the biggest opportunities.

Chris Howe -- Barrington Research -- analyst

That's very helpful, John. And my last question relates to the challenges that you mentioned in Texas. Their shift more toward the traditional core print agenda. Just moving on this topic, can you talk about other states other than Texas that represents similar potential prior to the change in expectation in Texas, on a relative basis, that you see as open field opportunity for the company?

Nick Gaehde -- President of Lexia Learning

Sure. So first of all, I think as we've spoken about in previous calls, we've continued to work in Utah to expand that opportunity. And we're thrilled with the expansion of our Utah business, which is a state funded initiative this year where we continue to really drive significant performance gains and work with more and more schools and students. There are other opportunities that we have targeted this year based upon funding and based upon sort of opportunities that we see in specific markets like New York City and Virginia and Arizona, where we were able to allocate sales and marketing dollars to those specific opportunities and saw as a result, really significant growth there.

We believe that there in the future to continue to target those higher level opportunities. As we've said before, we've built a capacity at a higher level now where we're working at the state level identifying not only legislative changes, but funding sources that previously we really were not participating in and we believe that's a important part of our future growth strategy.

Chris Howe -- Barrington Research -- analyst

That's very helpful. Appreciate the color. Thanks, everyone. I'll hop back in the queue.

John Hass

Thanks, Chris.

Operator

Thank you. Our next question comes from the line of Steven Frankel with Dougherty. Please proceed with your question.

Steven Frankel -- Dougherty -- Analyst

Hi, good afternoon. Nick, can we start with the bookings mix and maybe help me understand how much of that was not enough feet on the street, how much of that was Texas and how much of that was deals that slipped into Q4 just to help us kind of understand the phenomenon?

Nick Gaehde -- President of Lexia Learning

Yes, absolutely. So I'll start with Texas where obviously as we've spoken about before, there was a lot of funding in play because of the reading adoption. That is a eight-year funding cycle. So there is still a lot of opportunity in Texas. We had higher expectations even though we did grow 40% in that market this year, we had higher expectations. And part of that I think is due to the fact that some of the big publishers really did grab a lot of the adoption dollars for core curriculum up front.

And now we are focused on continuing to execute the Texas, because we see it as a continue to see it as an opportunity. But that's going to come a little slower and we're seeing a strong pipeline for 2020. So that was part of it. The other part is, as you know, we've invested in some of our higher level sales activities, working at the state and large district level. We have high expectations there and continue to have high expectations, but they're taking a little longer to materialize then we had thought.

And then the third part was not necessarily feet on the street out in the marketplace, but more having as I said before, the right teams focused on the right segment of the market. It's just as we've grown, the volume of deals has expanded considerably. And we have a structural issue that we're now focused on solving and I think have a good clear strategy on how to fall to make sure that we can do a better job of managing that high volume, low value business in the future. So hopefully that answers your question,

Steven Frankel -- Dougherty -- Analyst

All except for one piece, which is help me understand that dynamic of delays in federal funding leading to deals getting pushed to Q4, because normally I wouldn't expect Q4 bookings to be up beyond 30% plus.

Nick Gaehde -- President of Lexia Learning

Yes, great question. So the federal funding we're talking about is specific to title, title one which is focused on few low income populations. And it did drop later this year, not necessarily to state, but from states to districts. And so we heard from a lot of the schools that we were working with that they didn't have the funding allocated at the district level yet. We're starting to see some of those deals closed now, which is a lot of what's driving the higher growth in Q4 along with the overflow from Q3 in terms of the volume of activity that we're not closing.

Steven Frankel -- Dougherty -- Analyst

Okay. And then the notion of let's take ESL out of the guidance for 2020, how much of that is driven by your de-risking, how much of that is, well, we're trying to sell a new product with a new sales force and it's a new category and maybe it starts slower than you thought three months ago.

Nick Gaehde -- President of Lexia Learning

Yes. So we are being conservative about the new EL product. It doesn't launch until back-to-school season. So we are missing as we knew we would the first half of the year from a selling cycle standpoint. But we're really excited about the future of that product. So much so that we're being aggressive about some of the things we need to do to pave the way for acceleration in future years, like unpaid pilots and partial pilots really focused on seeding the market, because there is such a huge opportunity and this is such a unique and innovative product.

Steven Frankel -- Dougherty -- Analyst

Okay. And swing to math side of the business, this is the first time I've heard you really talk about competition. So maybe let's talk about what changed there and what prevented the LTV-to-CAC ratio from while we improved sequentially, it didn't get back to the two times, which is what's been more typical for you.

Nick Gaehde -- President of Lexia Learning

Yes, just broadly I'll talk about the competitive situation and then get to the economics. The competitive situation is something we haven't talked about before. And at a macro level, variable marketing year-over-year is actually slightly declined, while we've had more increased pricing competition on things like cost per install, CBC and traditional performance marketing metrics.

And this has been the more pronounced Q3and where we've seen a lot of seasonality and lot of spend, but it's been more aggressive than what we've seen in the past. And so we're calling that out, because as you know, majority of our variable marketing spend has been performance-based, meaning bottom of the funnel, people who specifically want to learn a language and happen to know there was at a stone brand. We have pretty much maximized our efficiency in that channel.

And we've learned a lot from our brand test and we have a lot more competition in that space. And so we wanted a flake or outlook in the future for that headwind, but also state the fact that we're very confidently, we have a well known brand. And we haven't flexed those brand variable marketing muscles before. So in short, it's gotten more competitive, but we're very confident we have a brand that A, customers really enjoy the products from. And B, understand the value from that product.

And then specifically on unit economics, there was a decline year-over-year on the LTV side, primarily due to pricing within trying different pricing and testing concepts in terms of trial, which lowered LTV year-over-year. We kept unit economics the same for CAC, but didn't generate net incremental LTV due to the pricing competition. So on a sequential basis, you'll see LTV, generally flat and year-over-year you didn't see a decline.

Steven Frankel -- Dougherty -- Analyst

Okay. And the decision to take worldwide English out of the forecast for next year. What have you learn in the last three months about that product? And does it make you see it as a more of a risk and less of a product that you think will work.

Nick Gaehde -- President of Lexia Learning

Yes, we've said in previous calls that, that investment is very speculative and we've flagged that in the past. We thought we'd be conservative in our outlook to take that out of our outlook. We're very excited about Asia. We've learned a lot from that product. We're very bullish on what we call adaptive blended learning, learning software with tutoring in our software. But we thought at this point, it'd be best and more prudent to take that out of outlook to reset expectations.

Steven Frankel -- Dougherty -- Analyst

Okay. And then, John, one more question on this notion of resetting expectations. Going from a prior $20 million in EBITDA for 2020 to $10 million, pretty severe cutback. Maybe walk us through what the deltas are there

John Hass

Sure. It's about a third lower starting point. So over the course of the last a little bit last quarter and then it certainly this quarter, we have reduced our bookings outlook for this year. Now we've gone through that in detail. So we have a lower starting point in those bookings turn into revenues, certainly, a little bit this year, but mostly next year. I think we've been reflective of that in looking at our guidance for next year, particularly on the language side. I think we've brought the literacy guidance down, it's still 25% to 30% bookings growth, which we think is very healthy, also very achievable. Especially, with the launch of a new product and with the as we talked about the overall momentum that we're seeing in the business.

But we don't like having the phone call where we have to lower guidance, and I'm not suggesting that we've added cushion to next year in any significant way, but we want to reflect the reality that we're seeing, which is the wanting to be a little more conservative on the K-12 side and the increased competitive dynamics that we're seeing in U.S. consumer, specifically.

And I think we feel really good about the outlook for the enterprise business. We feel really good about Lexia, but U.S. consumer until we can change the dynamic in that business, we are going to be disciplined allocators of capital. We think that is the right thing to do. We're not going to spend our way into revenue growth in that business. We're going to run that business to be as profitable as we can. We believe there will be opportunities to change the dynamic, but we're not imagining those in the future forecast. We're going to prove it first and then deliver those numbers.

Alex Paris -- Barrington Research -- Analyst

Okay, thanks.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Eric Martinuzzi with Lake Street Capital Markets. Please proceed with your question.

Eric Martinuzzi -- Lake Street Capital Markets -- analyst

I wanted to follow-up on the literacy bookings, the short fall in Q3. I think I've got it here that you've kind of boiled it down to two major items and I can follow the, excuse me, the slightly slower release of the federal dollars that the state from the states to the district. But I was I'm still struggling with the deal process, I'm writing fast here, but I was trying to capture it in the deal under deal processing volume. Is that to say that you had the pipeline there, but didn't have the ability to process it by quarter end or is it something else?

John Hass

Yes, that's a great question, Eric. The pipeline was there. It was just a matter of a lot of smaller deals, and the ability of our sales people to be on top of that kind of volume. Ultimately, as we said, it's a structure issue that will be solved by segmenting our sales teams a little more carefully and aligning the right teams with the right cost structures to the right market segments. But it really was, a spillover of high volume into the fourth quarter, which as we said, is driving some of the growth in the fourth quarter that we typically don't see.

Eric Martinuzzi -- Lake Street Capital Markets -- analyst

Okay. And then as a follow-up to that, how can we what metrics can we observe or are you guys looking to capture to show that you're you've improved there. In other words, hey, we're going to hire 10 inside sales reps and we currently have three more. We're going to process X number of deals per week in advance at quarter end, so we don't have a logjam. What are you doing? What have you changed as far as the operational aspects of that pipeline?

John Hass

Yes. So we will be adding capacity both to our field sales teams to make sure that we're continuing to drive that new business and those larger accounts with the right people. And then I think more importantly, almost we're building a stronger inside sales presence. And so, making sure that we can take the high volume renewals, less strategic business off of our account executives plates and putting it on the plates of the inside sales teams, I think are better positions that are capable of driving that high volume, low value business.

Eric Martinuzzi -- Lake Street Capital Markets -- analyst

That's how we're looking for. Are you comfortable sharing metrics with us, the numbers of, what you had on September 30 and what you hope to have December 31 or March 30. How will we be able to measure your progress and executing against that plan?

John Hass

Yes. I think, we're not sharing those details yet. I think Investor Day is going to be the right place for us to share an update on our channel strategy and some of the changes we're making and investments we're making at that level of detail.

Eric Martinuzzi -- Lake Street Capital Markets -- analyst

Okay. And then as I looked at the Slide seven is the slide that you have that covers the retention rates that you see there on the literacy side. And it's been a bit of a downtrend, can you remind me, you mentioned a couple of items. So what's the key driver there aside from what we just covered? If that's all, then I guess that I've answered my own question, but is it simply the processing here, because it doesn't seem like it's just a Q3 issue. It seems like it's been an issue that's perpetuated for a few quarters now on the retention rates.

John Hass

Yes, I think it goes hand in hand with the volume of the business. So we talked about one thing, which is the structure of the sales channel. The other thing that we are doing is, taking the incredibly rich data we have about our customers and equipping our customer success team with better health data about those accounts. And so our ability to identify accounts that look like they are tailing off in terms of engagement early and to reestablish that engagement, I think is going to be improved by giving those teams that health data.

And so we have already started to do that and we're excited about how that's going to impact the business and retention rates in the future. But I'll also say that these are still really strong retention rates and very strong renewal rates, which we are excited about and speaks to the value we're delivering and the satisfaction of our customers.

Eric Martinuzzi -- Lake Street Capital Markets -- analyst

Okay. And then shifting over to the language side, just if I could get a layer deeper there, where are you finding the greatest challenges coming from in the USA consumer side? If you could name those competitors or to the extent that youve got insight there would be helpful?

Nick Gaehde -- President of Lexia Learning

Yes. There's a number of paid competitors that had entered the market rather aggressively, and I think they're the usual suspects. Most of the competition that we see is in the traditional paid performance channels that you'd normally see. One aspect that John mentioned I wanted to reinforce, and his previous statements was that we're going to be very measured and disciplined in terms of how we deploy variable marketing dollars, in our variable marketing playbook and I would say that, the traditional competitors in the performance marketing space haven't had us think about headwinds in terms of our spend.

But in particular, the folks that are venture capital base and/or private has certainly entered the space and deployed a lot of capital both in offline marketing, online marketing. And I think you could point to some of the more obvious ones like Babbel, who's been a very aggressive in their paid subscription variable marketing campaigns.

So we're going again be very balanced in how we view the world, year-over-year, our marketing spend has been down from variable marketing perspective and we're going to look to reallocate capital to flex some of our brand muscle in a very measured way.

Eric Martinuzzi -- Lake Street Capital Markets -- analyst

Okay. I'll leave it there. Just a editorial comment, you do have I think you've taken difficult medicine this quarter as a team. It is very much an expectations game in the stock market. And hopefully, we've reset ourselves here to a point for 2020, where we can meet or exceed, because there are so many attractive aspects to the business. So I'll leave it there.

John Hass

Thank you, Eric. And frankly, I think that's very good way to close. I think those comments are appropriate. And we look forward to meeting and exceeding your expectations in the future and maybe an exceeding our own. Obviously, this is critically important to all of us, managers of your capital and your trust. So thank you for joining us tonight and we look forward to speaking with many of you going forward.

Operator

[Operator Closing Remarks]

Duration: 53 minutes

Call participants:

John Hass

Nick Gaehde -- President of Lexia Learning

Matt Hulett -- President, Language

Chris Howe -- Barrington Research -- analyst

Steven Frankel -- Dougherty -- Analyst

Alex Paris -- Barrington Research -- Analyst

Eric Martinuzzi -- Lake Street Capital Markets -- analyst

More RST analysis

All earnings call transcripts

AlphaStreet Logo