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Rosetta Stone Inc (RST)
Q1Â 2020 Earnings Call
May 6, 2020, 5:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rosetta Stone First Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Jason Terry, Investor Relations. Thank you. You may begin.
Jason Terry -- Addo Investor Relations
Thank you. Good afternoon, everyone. Welcome to Rosetta Stone's First Quarter 2020 Earnings Conference Call. Speaking on the call today will be John Hass, Chairman and CEO; Nick Gaehde and Matt Hulett, Co-Presidents of Rosetta Stone. Additionally, Tom Pierno, the company's Chief Financial Officer, will be available during the Q&A portion of today's call.
We have posted to the Investor Relations section of our website, at rosettastone.com, both the earnings release and a slide presentation which accompanies today's call. We've also posted supplemental information and analysis on our website. 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 business as we see them today. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially. A description of these risks and uncertainties and other factors that could affect our financial results are included in our most recent annual report on Form 10-K and quarterly reports on Form 10-Q. We expressly disclaim any obligation to update or revise any forward-looking statements, except as required by law.
Today's presentation and discussion also contains references to non-GAAP financial measures. The full definition, GAAP comparison and a reconciliation of those measures are available in the aforementioned presentation and press release.
I will now turn the call over to John.
John Hass -- Chief Executive Officer & Chairman of the Board of Directors
Good afternoon, and thank you for joining us today. We would like to begin by thanking all of the first responders and healthcare workers in our communities on the front lines of the COVID-19 pandemic. We would also like to thank the teachers, administrators and HR professionals working incredibly hard to adapt to challenges they couldn't have envisioned even two months ago.
Closer to home, we are incredibly proud and thankful for the Rosetta Stone team. As shown on Slide 3, while transitioning in the most important part of the quarter to an entirely remote work environment, the team delivered a terrific Q1, highlighted by year-over-year bookings growth of 20% and incredibly meaningful new initiatives to support customers in this time of uncertainty and suffering. Today's call will focus on the impact of COVID-19 on our business and our response to it as we support our customers and learners.
Bookings growth in Q1 was led by our Consumer Language, which grew bookings by $6.7 million or 42% over the same period a year ago. To put this in perspective, this was 14% higher than Q4 2019, which has always been our strongest quarter seasonally. As I mentioned in the March call, Consumer Language was having a strong quarter even before COVID-19 began to affect the people's daily life in the United States. During the last few weeks in March, we saw an additional increase in sales which we attribute to people using their shelter-in-place time at home to learn a new language.
Bookings growth was also strong in our K-12 Literacy segment. Literacy bookings grew by 22% over Q1 2019. Because it is a small new business quarter, Q1 in Literacy is typically a period in which we don't see much growth. So we were happy to start the year well, especially given the disruption in most U.S. schools during March. Total revenues for the quarter were $47.2 million, an increase of 6% from Q1 2019. Revenue growth naturally lags bookings growth. This lag was increased in Q1 by the fact that the majority of our consumer bookings were from our Lifetime product. While the LTV of Lifetime product sales is the highest in our consumer portfolio and is realized immediately as it is paid upfront we recognize the bookings as revenues over 24 months. So their impact on Q1 revenue was relatively small. We expect Lifetime sales, which produce high upfront cash receipt but longer revenue recognition will continue to be a significant portion of our Consumer Language bookings this year.
Net income in Q1 was a loss of $6.2 million, while adjusted EBITDA was positive $1.2 million. Our ending cash balance was $35.1 million on operating cash outflow of $3.5 million. Remember that Q1 is a seasonally low sales quarter for us, while expenses are more consistent throughout the year. Each of these measures exceeded guidance.
In a moment, we will walk through our segment financial results in more detail. But I want to begin by highlighting a few of our COVID-19-related initiatives that are providing real value to learners and demonstrating the relevance of Rosetta Stone and Lexia in this new world.
Please turn to Slide 4. In a few short weeks, following our March 11 earnings call, everything changed and our business changed with it. To give you one example, as of our last earnings call, 1,500 U.S. schools had announced partial closures due to COVID-19. As of Wednesday, April 8, only four weeks after the call, school closures had risen to 124,000. Over 90% of all schools in the U.S. in 15 states have indicated they would remain closed until the end of the school year. This is now up to 44 states.
In response, the team introduced new offerings in every part of the business that directly address customers' needs. In each case, providing free expanded learning opportunities that were substantive and meaningful. Among other things, we have offered unlimited site licenses for every existing K-12 literacy and language customer for the rest of the school year, along with the necessary services to support these schools and their teachers, students and parents. This offer has been made available to districts that represent almost half of the K-12 public school population in the United States; a free 3-month student license through our Consumer Language business to support families whose children were now learning from home; and we provided all of our enterprise and consumer language customers who had software-only licenses, free access to group tutoring for 3 months. Broad access to learning experiences, that were directly responsive to the needs of our customers, all rolled out in a few short weeks despite not being on our road map as we entered March.We were able to do this for 3 reasons. First, all of our products are built for or well suited to remote learning. Secondly, we have relationships with our customers based on trust and years of providing solutions that work, that created demand for these learning options when they were offered. And finally, we have an incredible team that came together to serve customers even as they adapted to new situations themselves. Nick and Matt will share more detail on each of these initiatives in a few moments.
Please turn to Slide 5. You should take four things from today's call. We are off to a strong start in 2020, as demonstrated by the 20% year-over-year bookings growth in Q1. Rosetta Stone in both our Language and K-12 businesses is setting the standard in our areas helping customers adapt to the impact of the pandemic. While the world, including ours, has become more uncertain, we remain optimistic about 2020 in our Literacy and Consumer Language segments. Finally, we are determined to use this period to ensure that Rosetta Stone will be even better positioned as a leader in learning in a post COVID-19 world. Nick and Matt will build on each of these themes.Now let me turn the call over to Nick to talk about our K-12 business. Nick?
Nicholas C. Gaehde -- Co-President & President of Literacy
Thanks, John. Please turn to Slide 6. In our Literacy segment, revenue in the first quarter was $17.5 million, an increase of 18% over the same period in 2019. Bookings were $5.5 million in Q1, an increase of 22% over the same period in 2019. Our bookings growth in the quarter was primarily driven by higher new and renewal sales in our direct channel. Q1 is our smallest quarter each year and will be this year, but we're happy to be off to a strong start.
Please turn to Slide 7. Annual reoccurring revenues or ARR grew 16% in Q1 compared to last year. ARR is driven by our ability to maintain and grow the dollars we receive from existing customers and through new sales. Retention and renewal rates within the quarter were affected by our decision to support our K-12 customers as they dealt with the impact of COVID-19. Because schools are dealing with very disruptive changes to the way they educate and administer, we've made the decision to leave licenses on for customers even as license periods came to an end and not to push our customers to pay immediately. Reported retention and renewal rates may be affected during 2020 by these actions we are taking to support schools in response to the pandemic. For example, we could have higher-than-normal retention rates because we aren't turning schools off at their license end date, and lower-than-normal renewal rates because we aren't requesting immediate payment. Over time, we expect this to normalize.
Please turn to Slide 8, and I will talk about how we're supporting learning for our customers in this time of change. As John mentioned, the speed with which schools were closed and forced to move to remote learning was incredible and not something they were equipped for. We understood this would be a difficult transition for our customers and moved quickly to support them. On March 13, we announced a program called Learn From Home through which every existing customer could receive a free unlimited site license to any of our curriculum products and our educator professional development platform, Lexia Academy, until the end of the school year. To maximize impact, we defined customer broadly to include any district where we have a presence, no matter how big the district or how small our presence. And the response was terrific.Please turn to Slide 9. As you can see on this slide, since its introduction 7 weeks ago, approximately 9,600 schools took advantage of this free offer and either upgraded to site licenses from seat licenses, or began their relationship with us with the site license through the Learn From Home program. To put the number of schools in perspective, this brings us to more than triple the number of whole school site licenses we were supporting before this crisis began. And within these schools, we have seen approximately 2.8 million student accounts being created and over 800,000 students already using these licenses, that's 800,000 children where home access to learning through our solutions is being made possible through the program. And the students who are using Core5 from home are showing a 60% increase in progress in terms of activities completed. We're partnering with schools to continue to maximize access to our program and support student learning.Next slide, please. The effort to stand up and support this program was significant. During March and early April, we reached out to every customer with a formal offer and set up landing pages for them to apply. We began to post to social media sites and sent out emails with information to support parents as well as teachers as students move to learning from home. And we set up new resource pages, including making all of our skill builders, the thousands of worksheets for students that are usually only available to a teacher through myLexia, more accessible to teachers and even available directly to parents for home use. It's been particularly encouraging to see the teacher engagement with our solutions has actually grown in this crisis as they've been able to rely on the data and information provided through myLexia to understand the progress of their students and the areas where they need support. This support has been critically important to the success of the program.
Next slide, please. Offering free licenses to customers is relatively easy, supporting them in a way that provides real value to schools and their learners is extraordinarily difficult. I believe we're setting the standard for schools during this crisis and enhancing our reputation in the marketplace as a result. In fact, Newark, New Jersey on its school districts website, added a thank you to Lexia for supporting them through the Learn From Home program.
Please turn to Slide 12. Ultimately, we'd like to continue our new or expanded relationship with these customers. As we have seen over the years and talked about a number of times, our single biggest growth opportunity is to expand in the schools and districts where we already have a presence. Today, we are used in districts that represent approximately 48% of the total U.S. public school population. Currently, we serve approximately 11% of students with the other 37% of students creating the expansion opportunity as we either move schools from seat licenses to whole school site licenses or expand into other schools in the district. Historically, we have leveraged our demonstrated efficacy with students we serve in a district to drive expansion opportunities.
Now in addition to this information, we have 9,600 schools that have participated in the Learn from Home program in either an expanded or new relationship. We're very focused on this initiative.
Please turn to Slide 13. Another factor that can support growth this year is the increased funding provided through the Department of Education as part of the CARES Act. Through the CARES Act, over $13 billion is being distributed to states through Title I formulas. This is in addition to the approximately $14 billion that had already been delivered to states through their annual Title I allocation in the fall of 2019, and we expect will occur again in the fall of 2020. According to the act, these funds must be spent by states within a year or return to the Department of Education. In many cases, these funds may be used to replace decreased funding at the state and local levels as tax revenues shrink or are deferred. But we do expect there will be funding available for our solutions, especially as districts look to enhance their remote learning capabilities in response to the pandemic.
Please turn to the next slide. Overall, we remain optimistic about the year despite all of the issues created for our schools by COVID-19. More than ever, schools are looking for solutions that deliver personalized learning, give teachers the data they need to inform instruction and can support learning in a virtual environment.Texas, for one, looks very promising, especially for PowerUp as part of the Texas secondary school literacy adoption program that began this year. Outside of Texas, we expect net new business to be more difficult this year because of the impact of COVID-19 as customers are less likely to have the time or the inclination to try something new as they deal with issues confronting their schools.
So the best opportunities are likely to be in expanding in our existing districts. We're fortunate to have a broad nationwide presence with significant expansion opportunities in our current customer base.
Looking forward, as we emerge from this crisis, we fully expect that our solutions will be better positioned than ever before. Why will school districts choose our programs over others? As educators address the learning gap that has occurred during this time of transition and school closures, they will need programs and partners that have a proven track record for accelerating learning. Research has shown that our solutions can close the literacy gap, and this will be a critical need this coming summer and fall.
Our blended learning solutions adapt well to supporting home learning as students continue to be able to work in our programs, while teachers have real-time access to the results to drive instruction and feedback.We believe and have witnessed during this crisis that maintaining the personal connection between the student and their teacher is critical. We will do more to support this environment, especially because we know schools are already looking to improve and expand their contingency plans for times like this, which for some could come again this fall.
Our proven ability to provide great outcomes for learners, whether they're in their school or at home will be especially important if, as we expect, school budgets next year come under pressure as a result of decreased local tax revenues. Because now, more than ever, they can see our solutions work.
Please turn to Slide 15. We announced on the year-end call in March that our new K-6 emergent bilingual program, Rosetta Stone English, has successfully entered its beta phase. As a reminder, emergent bilinguals are the fastest-growing student population today, expected to represent 25% of all students in 2025. We introduced the program in approximately 30 schools with over 2,000 students in 8 states, including California, Texas, Florida and North Carolina. In many cases, as schools closed, our beta program was cut short. We continue to support some schools in remote learning and actually added a large charter school system to the beta after they closed their physical locations. Fortunately, even with the disruption, we were able to collect sufficient data samples in the key areas we were looking to test to allow us to move forward with our planned commercialization this summer for the 2020/2021 school year. We're excited to add this new solution to our K-12 portfolio later this year.
And with that, I'd like to now turn the call over to Matt to update you on our Language business.
Matthew N. Hulett -- Co-President & President of Language
Thank you, Nick. Please turn to Slide 16. We had a terrific start to the year in our Consumer Language business, driven by the increased value we are providing learners and more recently, a desire among many to use their time at home during the pandemic to learn a new language. Bookings in Consumer Language in Q1 were $22.6 million, a 42% increase over the first quarter of 2019. Consumer revenue grew 5% in the quarter to $16.1 million, revenue growth naturally lags bookings growth. This effect increased in Q1 because a large portion of our bookings were from our Lifetime product, where we recognize revenue over 2 years. More on this in a moment.
Please turn to Slide 17. Enterprise and Education bookings in Q1 were $5.5 million, a decrease of $2.1 million. The decrease was driven entirely by lower bookings in the enterprise portion of the segment, including a 550,000 de-booking of a sale from last year that the customer canceled in Q1 2020 because it is winding down its operations. The bookings for the K-12 education language portion of this segment were flat to the prior year.
E&E segment revenues were $13.6 million, a decrease of 6% versus Q1 of 2019, reflecting the lower enterprise bookings. As the most economically sensitive part of our company, we expect the enterprise language portion of this segment to be negatively affected by the dramatic impact on businesses of the COVID-19 crisis and the international response to it. In many ways, our enterprise customers look at language learning as critical support for the way in which they conduct their work. But in other cases, language learning is viewed as an employee benefit. In this environment, we expect renewals for these customers to come under pressure. We also expect new sales to be more difficult with corporate learning budgets under pressure and HR team's focus diverted to supporting new work dynamics in their teams.Please turn to Slide 18, and we will take a closer look at the performance in Consumer Language. As we said during the year-end call, Consumer Language was off to a strong start even before we began to see any significant uplift from people wanting to learn a language while sheltering at home. Remember that the World Health Organization didn't declare COVID-19 a pandemic until March 11, almost halfway through the last month of the quarter. The improvement we were seeing has been driven by our Lifetime product which is attractive to a distinct customer segment that wants to commit to learning a new language, but is put off by the finite subscription offers that are at odds with the investment in time they know will be required.
You will recall that in February, we significantly upgraded our long-term subscription offerings. For the first time for all subscriptions 12 months and longer, including Lifetime, learners have access to all of the 25 languages in our catalog with a single purchase. We call this Rosetta Stone Unlimited. This has significant perceived value for learners, even though based on our experience, few learners purchase more than one language over time. We did this because as the price leader in the market, the more value we can add to our products to drive additional sales, the better off we will be. At a typical price of $189 to $199 paid upfront, the product is very attractive for us even relative to the LTV of other SKUs.
Sales of these Lifetime subscriptions drove an increase in the average initial sales price from $96 in the first quarter of 2019 and $119 in the fourth quarter of 2019 to $134 in the first quarter this year. North American direct-to-consumer and global app store net LTV added -- grew 25% over Q1 2019 and because of Lifetime sales, significantly more of this LTV was paid upfront. This is what makes our consumer language business so attractive, the ability to earn a meaningful positive cash return on our marketing costs almost immediately.Because we sell a learning product, we don't keep subscribers as long as SaaS-based consumer companies in some other areas. But because our offering has high perceived value, we are able to realize significant payment upfront rather than through monthly subscriptions over an extended period of time.
Turning to Slide 19. While Q1 was off to a good start, we clearly saw the impact of changed behavior related to shelter-at-home orders as we went through March. In response to this, we made a decision very early to support the families affected by school closures by providing free 3-month subscriptions to any child in school. Absolutely, no strings attached. All a parent has to do was enter their email and the name of their child's school. The response has been tremendous. At this point, nearly 350,000 parents have signed their children up for the program. And while we can be certain there has been some abuse of the program, our daily sales tracking would tell us it has not been significant. We are thrilled to be supporting these kids and their families during this time.
We're also pleased with the wonderful press the program has generated. As shown on this slide, we have had prominent mentions on The Today's Show, CNN and the BBC and in People's Magazine, USA Today, Forbes and Oprah Magazine and dozens of other publications. In fact, so far this year, we have generated over 2 billion media impressions. This is helping us to achieve one of our main goals in the consumer business this year to make our brand relevant, again, not just well known.
As I've said before, our biggest competition in the United States language market is the fact that many people don't know we have digital products. Being prominently in the public eye with our offering for kids and all of the other media we have garnered as publications have generated what to do in your time at home list, has been a big help in reintroducing our iconic brand that we believe will provide lasting benefits.
Please turn to Slide 20. In late March, we introduced another service for our Consumer Language subscribers to add value to our offerings. For a limited time, we announced that we would provide unlimited group touring to any paid subscriber. We did this both to support our learners and to begin to test more fully the use of video-based language instruction as a supplement to our core software offering. Like Nick in our K-12 business, I believe that the best educational results come from when you blend what software and a human each do best, allowing software to support the learning of rules and repetitive tasks that is required in learning a new language while a tutor provides a tailored support and confidence building that is so important to success.
In Q2, we have begun to introduce new product offerings that lean into our strategy of combining the best of software with access to human instruction, what we referred to as adaptive blended learning. Our approach, leveraging Rosetta Stone's pioneering digital tutoring technology and operating infrastructure can be a unique competitive advantage versus software-only solution. We believe we can see an increased demand for digital-only solutions, including online tutoring, especially since offline schools are literally not available to learners around the world.We are proceeding carefully in order to understand what is most appealing to learners and will evolve our offering as we receive feedback. While our Consumer Language business is being helped at the moment by a desire among people to put the additional time they have at home to good use, I believe we can benefit from this period over the long term. This is an opportunity to reshape the perception of Rosetta Stone among customers from the well-known but CD box-based language company to the most innovative responsive language learning company in the marketplace.
In the meantime, we are very happy with the start of the year in our Consumer Language business and are excited to continue to introduce new innovations to build on the incredible value we offer learners.
With that, let me turn it over to John to discuss guidance.
John Hass -- Chief Executive Officer & Chairman of the Board of Directors
Thanks, Matt. Please turn to Slide 21. I want to walk you through the factors impacting our guidance, almost all of which are related to COVID-19. Bottom line, since March, forecasting the business through this time has become more uncertain. Consequently, while unlike many others, we are continuing to provide guidance, we have introduced or broadened existing guidance ranges to better take into account the additional uncertainties we are seeing, in some cases, to the upside.
Before walking through the factors impacting each segment, it is important to reiterate a few things that benefit us across the company during this unprecedented time. First, we were able to quickly move all of our employees to working from home. We did this in the middle of March, and the team has adjusted exceptionally well. Secondly, all of our products can be sold, delivered and used remotely, including from home and with full support for both the learner and their teacher in K-12 or their administrator in K-12 or in enterprise. These aspects help us tremendously right now.
Now let me walk through the key aspects we see influencing each segment this year. The risks in K-12 include the fact that, as Nick said, we expect creating new bookings from new customers will be more difficult this year, as schools and districts deal with the disruption and focus on solutions already in place and the expectation that budgets could be cut in the future. And while we expect renewals to be strong, payment in some cases may be delayed. We saw this in the first quarter as schools dealt with adapting to working from home.On the positive side, as I said, we expect our underlying renewal rate when the year is complete will again be strong as customers lean into what they know. We also believe there is significant opportunity for growth within this existing customer base, especially as schools look to broaden their contingency planning options in the event school closures continue into the fall. In some cases, we anticipate this will be supported by the relationships and goodwill we have built through our Learn From Home program. It may also be helped by the incremental funding provided by the federal government through the CARES Act. Overall, we are fortunate to have a broad customer base in the marketing, sales and customer success organizations to support them in a time when scale and a large installed base matters.
Finally, we also expect Texas will be a positive for us this year. In some cases, because Texas is an 8-year adoption, this will include multiyear deals that are paid upfront. While this will support bookings and cash in 2020, the impact of multiyear deals on revenues will be smaller. In enterprise language, we believe our offering, because of the efficiency of our blend of software and online tutoring, is well-positioned in a relative sense to those companies that focus on offline tutoring solutions.
That said, the severe economic recession we are already in will hurt our enterprise business in the interim. Like most other business service offerings, enterprise language will be affected by the disruption impacting the organizations globally. We expect this will depress both new and renewal sales.In Consumer Language, the underlying risk is an economic downturn that is prolonged and which causes consumer discretionary spending to decrease meaningfully. In addition, on a GAAP basis, the success of our Lifetime product has meant that relatively less of the bookings we realized in 2020 will be recorded as revenues within the year. Lifetime revenues not recognized this year will have a positive effect on 2021 and 2022 revenues.
On the positive side, and there are a number of things that make us optimistic. The amount of execution work that we have done to position the consumer business in a place where we can once again play offense was largely complete late last year. We saw terrific acceleration in the business in Q4, and that continued in Q1. This impact was being felt even before the effects of COVID-19 in the U.S.
In addition, the strength of our brand is an asset that we have been better leveraging, which enables us to be more top of mind for consumers. Our 97% brand awareness is an asset that has been helpful for our business as consumers look for activities to occupy their time. In addition, since we have been extremely efficient on faster marketing payback channels, we can better manage our variable costs which are especially important in a challenging macroeconomic cycle. In the meantime, we continue to benefit from consumers' desires to learn a language from home and the improved value we are providing through products like our Unlimited Lifetime offer. On balance, we remain optimistic about the outlook in 2020, for literacy and the K-12 portion of our E&E segment, as well as Consumer Language.Please turn to Slide 22. Turning to guidance and starting with revenue, we now expect consolidated revenue for the year to be $186 million to $194 million, down slightly at the high end and with a wider range from our previous guidance of $189 million to $195 million.
Let me unpack that. First with literacy revenue, where we are maintaining the high end at $72 million, with a low end now of $69 million, down slightly from our prior low end of $70 million, reflecting the uncertainty, particularly around new business bookings that I just discussed. To be clear, this is not yet evident in our pipeline, but we believe it is appropriate to be more conservative. This corresponds to a full year literacy bookings growth rate of 25% at the high end. No change from our prior guidance but a low end growth rate of 18%, down from 20% previously. Again, an uncertainty around new bookings growth.
Turning to our language business. The further pressure we now see in the enterprise portion of E&E is expected to be partially offset by strength in consumer. For our E&E segment, we now expect full year revenue to be a range of $50 million to $53 million, down from our prior guidance of $53 million to $55 million, on bookings of $41 million to $46 million, down from our prior guidance of $52 million to $54 million. As I noted, we believe the Enterprise portion of our E&E segment is the most vulnerable part of our business to impacts from the COVID-19 pandemic. And so right now, it is the only business we see having the potential for meaningful dollar bookings and revenue reduction relative to our prior outlook.In consumer, on the other hand, we are raising our full year revenue guidance to a range of $67 million to $69 million, up by $1 million on both ends from our prior guidance on raised guidance for full year consumer bookings of $75 million to $78 million, up from $67 million to $69 million previously, an increase of $8.5 million at the midpoint, which translates to 15% growth year-over-year. We are continuing to see stronger than originally planned consumer performance in Q2, but aren't ready to predict that it will continue in the second half of the year.
As Matt noted, the stronger consumer demand we are seeing is primarily for our Lifetime subscriptions, which makes the lag between bookings and revenue growth longer. We also expect to see increased sales and marketing spend this year in Consumer Language as we lean into the opportunity to drive bookings and build brand relevance. While we expect most of this spend will have a relatively fast payback on a cash basis, for GAAP it will be expensed as incurred, while revenue will be recognized over as much as 2 years in the case of our 24-month and Lifetime products.
Turning to profitability. We are improving our guidance for full year net loss to a loss of $22 million to $24 million, from our prior guidance of a loss of $25 million to $27 million. We are also raising our guidance for full year adjusted EBITDA to approximately $5 million to $8 million, up from $3 million to $5 million previously. And raising the high end of guidance for operating cash flow, which is now expected to be $14 million to $18 million, up from $14 million to $16 million.
The reason why the higher expected profitability we are now guiding to does not fully show up in our guidance for operating cash flow is due to an assumption that we could see slower collections of accounts receivable, either because we proactively offer our customers more time to pay or they simply pay slower than normal.
We continue to expect capital expenditures to be approximately $17 million and that we will be approximately cash flow breakeven for the year. As we reflect the current uncertainty in our bookings and revenue outlook, we will continue to be mindful of our expenses as the year progresses.
Please turn to Slide 23. Given the general level of uncertainty, we have decided temporarily to provide guidance for the quarter we are in, in addition to the full year. We hope this provides a little more clarity. We continue to see strong performance in Q2 in Consumer Language. We also expect to see year-over-year growth in our K-12 Literacy segment. On the downside, we expect weakness in the enterprise portion of the E&E segment. On a consolidated basis, we expect total Q2 revenue of approximately $46 million to $48 million, flat to up approximately 5% from last year, a GAAP net loss of approximately $4 million and positive $2 million to $3 million in adjusted EBITDA. Due to our typical first half use of cash, we will again have seasonal borrowings. It is worth reminding everyone that earlier this year, we increased the size of our credit facility by 67% to $25 million. While we don't expect to need the full amount this year, it is helpful to have it available in these uncertain times. As in 2019, we expect to end the year with no debt.
Please turn to Slide 24. We had a great start to the year with K-12 and Consumer Language demonstrating real strength. There is tremendous opportunity in both businesses, and we look forward to sharing our progress as the year moves forward and we learn more. As you know, we believe in the power of adaptive blended learning, bringing the best of software and human intelligence together to drive learning. In response to the pandemic, we are seeing acceptance of this approach accelerating in all areas of our business. The belief that software can be an effective method for learning, especially when coupled with human instruction, whether from a teacher or a tutor and almost all cases today, delivered online, for which in the case of the K-12 teacher or 1 day soon, we hope, return to the classroom with a greater appreciation for its importance. In either case, our strategic intent is to provide both the adaptive personalized software to the learner and the data and information to empower the human instruction with the teacher or tutor. Ultimately, it is critical that we do everything we can to leave this crisis with the K-12 business that is stronger and more important to its customers and the language business that is, again, viewed as a leader in providing innovative solutions to learners looking to learn a new language. That determination is motivating our decisions today and will continue to do so throughout this crisis. If we do this well, I believe that we will look back at the 60-plus years of Rosetta Stone and Lexia's combined history as preparation for the future of learning, the future that is rapidly becoming today's reality.
With that, operator, could you please open the line to questions.
Questions and Answers:
Operator
[Operator Instructions] Our first question is from Steven Frankel with Dougherty.
Steven Bruce Frankel -- Dougherty & Company
Good afternoon and thank you for the opportunity. So Nick, you threw out a lot of interesting numbers around the work from -- or the free learning from home opportunities that you've enabled. Could you scale those for us, maybe? So 9,600 schools, remind us what kind of success rate that was in getting your schools signed up? And the same with the 800,000 student accounts, is that a home run number or should you have expected something bigger than that? And what do these numbers tell us?
Nicholas C. Gaehde -- Co-President & President of Literacy
Sure. Thanks, Steve. Good to hear from you. So we had about half of our established customers take us up on the Learn From Home offer. So 9,600 schools raised their hands and said, yes, we really want to take advantage of this and expand the accessibility of our programs to all students. So those could have been schools that had individual seat licenses or they could have been schools that we didn't have a relationship with in a district where we had other schools who were using our programs. So in essence, we tripled the number of schools that now have access to unlimited license for student learning.Your question about the number of students that are now active is a good question. I think we've all read in papers about the difficulty in transitioning for schools from physical environment to a virtual environment. And one of the critical aspect is the digital to buy that a lot of school systems have students who just simply don't have Internet access at home and don't have access to devices. We have created many more student accounts, but part of that is because the way we create student accounts is through an automated import from school information systems. And so in some cases, districts will pour all of their students into our system.That being said, we're still seeing that transition take place, whether it was spring break or another lag in just getting students set up, we're seeing student activity increase. So I'm really happy with the number of schools that have taken us up on the offer, the number of students that are using the program. And now our goal is to support those students through the rest of the school year and start to work with districts on planning for the fall.
Steven Bruce Frankel -- Dougherty & Company
And through this program, are you able to get the contact information for the key decision-makers so that in the fall, you can go back and really do try to land and expand?
Nicholas C. Gaehde -- Co-President & President of Literacy
Yes. And so it's not even -- yes, honestly, the -- most of the key decision-makers made the request to increase access to the program. And it's not something where we're waiting for the fall to have those conversations. Schools right now are developing their contingency learning plans. And so those conversations are happening right now.
Steven Bruce Frankel -- Dougherty & Company
Great. And then you spoke with good confidence around the Texas opportunity. And I know last year, that was a disappointment. What maybe have you learned over the last few months that gives you increased confidence in your ability to crack Texas in this second round?
Nicholas C. Gaehde -- Co-President & President of Literacy
So this year, in addition to the continuation of Proclamation 2019 that was focused on the elementary school market in Texas, is the first year of the secondary adoption. And we've already seen orders come in from Texas and significant new business. The focus on the secondary adoption, I think, really highlights the competitive nature and the ability to meet the needs of students in the PowerUp program. So PowerUp is being selected as a key tool to support BL students in Texas. And what's particularly interesting and exciting about what we're seeing is that hand-in-hand, in some cases with the purchase of the PowerUp program, they're also purchasing our Language Learning Program foundations to meet the needs of BL students. So that combination is an incredibly powerful offering to schools, and we're seeing the kind of momentum this year that we hope to see last year.
Steven Bruce Frankel -- Dougherty & Company
Okay. And then the strong bookings that you saw in Q1, I know it's a relatively small part of the year, but it's still a good number. How much of that was business that may be swapped over from Q4 versus business that really came in, in Q1 that you hadn't had in your pipeline previously?
Nicholas C. Gaehde -- Co-President & President of Literacy
Yes. So some of it did come over from Q4, some of the renewals that were late in coming in. But even March was strong, Steve. And so that gives us a good indication that we are seeing interest right in the teeth of schools having to make that transition. Again, it is a small quarter. And so we're not leaning into the strength of that quarter too much in predicting the year. It's more the pipeline that we are seeing emerge for the second quarter and the third quarter and the strength of the response to the Learn from Home program that gives us that confidence. That being said, there is still a lot that we don't know. Certainly, schools are nervous about future budgets and closing the budget gap that they're going to have to contend with as state and local tax revenues decline. And so there's still absolutely risk in the market, and we're going to learn a lot over the next 4 weeks to 6 weeks.
Steven Bruce Frankel -- Dougherty & Company
Great. And then for Matt, given the success in the Lifetime offer over the last two quarters, have you kind of made the semi-permanent or permanent decision that, that's Rosetta's spot in the marketplace? And so we should expect you to focus on the Lifetime offering from now on and see the shorter-term subs start to drip away?
Matthew N. Hulett -- Co-President & President of Language
Yes, Steve, great to hear from you. Yes, we had a great quarter, as you could -- as you saw. I'd look at the market in both ways, the trying versus committed audience, and the long-term audience that we've hit. A really nice spot on is this Lifetime audience, where those customers understand the power of the brand and what we offer. And so we're definitely going to be continuing to offer that SKU going forward. We saw acceleration in Q4, 14% year-over-year growth. We saw good baseline growth with that SKU as we added the unlimited functionality, which is kind of our Netflix for language learning, you can pick any language that you want. And that continued to grow. And so we're seeing great value there and not just existing customers. Actually, we're seeing a lot of interest from net new customers as part of this. So yes, in a long winded way, Steve, we're going to continue to offer this product. We still see a lot of value in our short-term subscribers, especially as we start broadening our marketing funnels, folks that aren't as aware of Rosetta Stone. We see this bar bell developing of very, very short-term folks and these long-term customers.
Steven Bruce Frankel -- Dougherty & Company
Okay, great. Thank you. I'll let somebody else get a question in here.
Nicholas C. Gaehde -- Co-President & President of Literacy
Okay.
Steven Bruce Frankel -- Dougherty & Company
Thank you very much.Thanks.
Operator
Our next question is from Ryan MacDonald with Needham & Company.
Ryan MacDonald -- Needham & Company
Good afternoon, everyone. Thanks for taking my questions. I wanted to start on one of the comments, I guess, on the last answer in relation to school budgets. Just curious as to what you're hearing from school and district officials about when they might have more clarity or certainty around what the budget? And we've heard a little bit that at the start of Q2 given some postponement of major education conferences that, that might be causing a slight disruption in pipeline. I would love to hear your thoughts in comparison of what you're seeing as well? Thanks.
Nicholas C. Gaehde -- Co-President & President of Literacy
Sure. Good to hear from you, Ryan. So right now, it is a little choppy state-by-state. About half the states now understand the CARES Act funding they're going to receive and have communicated that down to the districts, and that's where we're starting to see some very active conversations. But half of states haven't communicated that yet. And those states are, I think holding back and being careful not to over commit until they have visibility into that funding. In terms of the state budgets, I think there obviously is concerned about not just this year, but future years. And I think schools are working with states to understand what that budget is going to look like in the future, so it is uneven. But certainly, that money comes with a lot of flexibility that you typically don't see. I think people think of it as Title I, but it's just being delivered through Title I formulas, and now I'm talking about the $13 billion that is being delivered to districts. There's also another $3 million, as we said, that's being delivered to governors. But the flexibility is there so that they can do things that historically they weren't able to do. It also comes with a stipulation that if districts don't spend that money and if states don't spend that money, they're going to have to deliver it back to the Department of Education. And then districts have a period of time where they can spend it. And if not, they have to bring it back to the federal government as well. So it is meaningful funding and it is going to drive some purchasing behavior in the short-term and offset some of the declines in future school budgets, but there is certainly nervousness about the future.
Ryan MacDonald -- Needham & Company
Absolutely understandable. Great to see the additional exposure that you've gotten among the schools. Has this resulted in sort of any early upsell or renewal activity thus far? Or are schools generally waiting until sort of we're getting through the end of the school year before making those types of decisions?
Nicholas C. Gaehde -- Co-President & President of Literacy
Yes. No, we have seen some of that early activity actually take place. In fact, some schools have said, not only do we plan to move forward aggressively, but we want to start piloting this program in all of our schools early this year so that we have experience with it. And so it is really very variable, district-by-district and state-by-state right now.
Ryan MacDonald -- Needham & Company
And then lastly, on -- I guess, in regards to Lexia, before I move over to language. Just -- it sounds like, at least within the state of Texas, there are -- there's obviously some better-than-expected traction for the real Rosetta Stone language product in addition to PowerUp. Just curious how that's been trending versus your initial expectations for this year?
Matthew N. Hulett -- Co-President & President of Language
So I don't think we were expecting as much uptake of both programs at once, which is a really good surprise, and our teams are working well together. And it certainly bodes well for the future when Rosetta Stone English is available. Because right now, what we're bringing to the market is our foundations product, which is the product for secondary and will continue to be the product for secondary. But the belief is that the combination of Rosetta Stone English and our other elementary school product, Core5, is going to be a powerful combination as well.
Ryan MacDonald -- Needham & Company
Excellent. And then on the Consumer Language business, and this will be my last one, I'll get back in the queue. Sorry for all the questions. But great to see the number of new sign-ups as a result of the free offering. Any sense of what conversion rates off of those free users could start to look like as we get into the summer here?
Matthew N. Hulett -- Co-President & President of Language
That's a good question, Ryan. No, in fact, our no strings offer was literally no strings attached offer to those parents that signed their children up. But it's interesting, we literally saw no degradation to our daily sales as soon as we provided that offer out into the Internet broadly. So we do see a lot of incremental demand more than we anticipated for actually kids using our core software. So we don't have kind of a future statement around the conversion. We are very surprised at the amount of uptick in that offering. So nothing to say officially about that. But I would say, overall, there was a very good halo effect, both with adult learners seeing that program as well as our enterprise customers. It has some halo effect around that as well. So we don't have anything to say in terms of conversion other than, I can say it didn't impact the current business and it positively affected how we are being considered in our other businesses.
Nicholas C. Gaehde -- Co-President & President of Literacy
Excellent. Thanks for the questions.
Operator
Our next question is from Greg Pendy with Sidoti.
Gregory R. Pendy -- Sidoti
Hi, guys. Thanks for taking my questions. Just on Rosetta Stone English. I might be mistaken, but I believe you guys mentioned that it could add as much as $2 million to the second half of sales. And just given everything that's going on and also the disruption during the beta launch, is that still something you're confident in?
Nicholas C. Gaehde -- Co-President & President of Literacy
Yes. It is still something we're confident in. It is an incredibly underserved market and a market specifically that doesn't have very good digital solutions. I think $2 million is a fairly conservative number. Partly due to the fact that we are launching it halfway through the year. But based on the response we've seen from our beta program, the enthusiasm both from teachers and administrators and students, we remain confident in that product and on track for commercial release this summer. The first order of business is going to be to bring customers who are using our foundations product in the K-5 segment over to the Rosetta Stone English product, but then also to bring new customers as well as upsell Core5 customers on that product.
Gregory R. Pendy -- Sidoti
Great. That's helpful. And then just one more. Just on the no strings offer, can you just give us generally any idea on just what the demographic mix was prior to Nordstrom's offer of students, I guess, K-12 students that were members or using the product? Just how you think about it? I think you said you had 350,000 parents take the offer?
Matthew N. Hulett -- Co-President & President of Language
Yes. Yes, the offers that we introduced -- we're still midway through the offer. We offer -- we're offering a 3-month free subscription and about 350,000 kids have signed up, either older kids have signed up themselves or their parents. Nothing demographically to share about that, although I would say that in our core consumer base, 90% of that consumer business is United States focused. The remainder is largely EMEA and a little bit outside of EMEA. The bulk of those customers that buy our subscriptions today are adults. And so with our foundations product that we sell within schools that Nick mentioned and his team sells, that's been in market for quite a while. So we do know that there is a large market of children, especially older kids that will find great applicability to Rosetta Stone in our core learn languages product. But I don't have any demographics to share other than we are perceived, as John mentioned on the earnings call, the CD specific product, and we haven't really had a lot of broad brand awareness of being a digital product. And I would say, the more we lean into these offers that get us into new top of the funnel and more exposure, we're seeing net benefit without any net downside in terms of our core paid subscription business.
Gregory R. Pendy -- Sidoti
That's helpful and thanks a lot.
Matthew N. Hulett -- Co-President & President of Language
You bet.
Operator
Our next question is from Ryan Meyers with Lake Street Capital Markets.
Ryan Robert Meyers -- Lake Street Capital Markets
Hey, guys. Thanks for taking my questions. First one for me. Can you talk about how the seasonality of the business is tracking and if you guys are still following your normal seasonal pattern?
John Hass -- Chief Executive Officer & Chairman of the Board of Directors
Yes, sure. This is John. Thank you for the question. Fundamentally, we are. That said, obviously, we are seeing a much bigger first part of the year in consumer than we had expected going into the year for the reasons we've mentioned, both the success of the Lifetime and Lifetime Unlimited product and the COVID-19 impact as well. So if you kind of unpack our bookings guidance for consumer, what that would tell you, you assume that we continue to have a very strong first half. In the -- it implies a weaker relative second half. We don't know that, that will be the case. But given the uncertainty in the world, that's what we're comfortable with at this point. And so I'd say the one business that's acting a little differently than we would normally expect to see seasonally is the Consumer Language business just because it's just doing so, so well right now.
Ryan Robert Meyers -- Lake Street Capital Markets
Okay. That's helpful. And then are you guys still on track to grow the literacy sales and marketing organization by 30%?
John Hass -- Chief Executive Officer & Chairman of the Board of Directors
We are. I would say, broadly across the company, we have, again, just to manage costs in this time of unprecedented uncertainty, we have been more restrictive in our hiring. But the areas that we've continued to emphasize in terms of hiring, those areas that support bookings growth especially in K-12, in those areas that are just important to keeping the lights on. And so nothing has changed in our hiring plans on the K-12 side. In fact, we've been pretty successful in getting that team up and running.
Ryan Robert Meyers -- Lake Street Capital Markets
Okay. That's it from me. Thanks guys.
Nicholas C. Gaehde -- Co-President & President of Literacy
Thank you.
Operator
Our next question is from Alex Paris with Barrington Research.
Alexander Peter Paris -- Barrington Research
I'm sorry, this call is going long. Most of my questions have been asked and answered. Congrats on being one of the very few companies to beat on Q1 and not only keep guidance but generally raise earnings guidance. Thank you also for the second quarter guidance, that will help with the seasonality for the year. My last -- I just have two small questions left. These free offers and your initiatives to support schools in need. I think you're forewarned that there could be some additional support costs for those. I'm wondering, were those material and are they ongoing?
John Hass -- Chief Executive Officer & Chairman of the Board of Directors
Do you like to address that, Nick?
Nicholas C. Gaehde -- Co-President & President of Literacy
Sure. Be glad to. No, you're absolutely right that there are additional support costs, both in terms of technical support as well as our proactive customer care to make sure that those schools are well served. Certainly, we are being careful to allocate more services to those customers who are paying for services than we are to the free unlimited offers. But come the fall, we believe that, that work is going to be what fuels stronger relationships and fuels those customers turning into paying customers and purchasing services. So I think it is an investment that is absolutely the right investment to make right now. And in some cases, we were able to shut off some of our typical lead generation programs because we were seeing such strong lead flow from the Learn from Home program. And that balanced the cost a little bit.
Alexander Peter Paris -- Barrington Research
Got you. There were some puts and takes. And it's absolutely the right thing to do as a corporate citizen. The doing well by doing good kind of comes to mind. My last question is, given what's going on with the COVID crisis as subscriptions might come to an end, you're not bagging on these customers to pay the renewal and that sort of thing. Is there any accounting treatment that I should be aware of? Is there a bad debt component or anything like that from offering these flexible terms?
John Hass -- Chief Executive Officer & Chairman of the Board of Directors
Tom, do you want to address that? I believe you're on the call?
Thomas M. Pierno -- Chief Financial Officer
Sure. Sure, John and hi, Alex. Thank you. No, these are -- the ones that Nick was mentioning, it's a very small kind of the cohort of customers that have come up for renewal in the first quarter, it's the smallest by far of quarter-to-year from Lexia. So not a material issue and no special accounting treatment for this. And as we roll into the end of the second quarter into the third quarter, we'll reassess where we're at with all that. We've baked into our cash modeling a certain level of expectations around this. And so that's part of our guidance. But I will also say that to date, we have not seen any significant issues from a payment perspective in terms of customer behavior. So we're looking out for it, but it's not something that we've seen. And a lot of the customers have paid organically. So it's not like we're carrying a big and growing receivable balance or something based on that.
Alexander Peter Paris -- Barrington Research
Great. Well, thanks very much. It will be better.
John Hass -- Chief Executive Officer & Chairman of the Board of Directors
Thank you, Alex.
Operator
Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back to John Hass for closing remarks.
John Hass -- Chief Executive Officer & Chairman of the Board of Directors
Great. Thank you, operator. And thank you, everyone, for joining the call and for your questions. And I would like to reiterate, especially as this is Teachers Appreciation Week and Nurses Week begin today, thanks for everyone caring and supporting all of our families and children during this period. It's super important. We will try and do our part, but there are a lot of people on the front line doing amazing things. We're very thankful for them. Thank you, everyone, and good afternoon.
Operator
[Operator Closing Remarks]
Duration: 65 minutes
Call participants:
Jason Terry -- Addo Investor Relations
John Hass -- Chief Executive Officer & Chairman of the Board of Directors
Nicholas C. Gaehde -- Co-President & President of Literacy
Matthew N. Hulett -- Co-President & President of Language
Thomas M. Pierno -- Chief Financial Officer
Steven Bruce Frankel -- Dougherty & Company
Ryan MacDonald -- Needham & Company
Gregory R. Pendy -- Sidoti
Ryan Robert Meyers -- Lake Street Capital Markets
Alexander Peter Paris -- Barrington Research
