Last week, I cautioned investors to take a balanced view of Rosetta Stone's (NYSE: RST) upcoming earnings announcement. Shortly afterward, Rosetta released its preliminary fourth-quarter results.

At first look, they ain't pretty.

Troubles in the consumer market
During the third quarter of 2010, individual consumers accounted for 70% of Rosetta's overall revenue. This huge chunk of the pie -- supported by people like you and me forking over hundreds of dollars -- is now faltering.

Rosetta lowered its expectations in November, and the preliminary release stated that the company wouldn't meet even these lowered expectations. Revenue for the fourth quarter, which had been guided from $76 million to $81 million, now looks likely to land at $74.2 million. Earnings per share, which were expected to end up from $0.28 to $0.38, will now come in at just $0.23. Furthermore, the company predicts continued weakness from the consumer market in the first quarter of 2011.

Though Rosetta is the top dog in the electronic language learning field, it has to compete with the likes of Berlitz, CBS's (NYSE: CBS) Pimsleur, and offerings by Disney's (NYSE: DIS) Publishing Worldwide and McGraw-Hill Publishing (NYSE: MHP). Their cheaper offerings will continue to squeeze Rosetta.

Yet I'm holding my shares ... for now
I guess a part of me isn't surprised by the preliminary results. The consumer market could never have carried Rosetta into the future. Before the release of version 4 TOTALe, the company had virtually no base of repeat customers. There are only so many people out there in the U.S. market willing to pay Rosetta's premium to learn a language. It looks as if that market may be tapped.

But when I originally invested in Rosetta, the U.S. consumer market didn't even factor in. I invested with two growth catalysts in mind:

  • International sales. After all, the No. 1 language people want to learn worldwide is ... English.
  • Institutional sales, representing purchases by multinational corporations, government agencies and, most importantly, schools.

The full color of Rosetta's earnings will be available on Feb. 28. I'll be looking closely to see what kind of traction the company's getting abroad (where Rosetta Stone has enjoyed triple-digit growth over the past year), and among its institutional base. I'm also fully aware that any sales to schools (based on when they normally settle their fiscal budgets) won't be reflected in earnings until the end of the third quarter.

Rosetta is in a tough spot right now. It can't ignore the consumer market; if it did, 70% of its revenue would disappear overnight. At the same time, it knows that institutional and international sales are the wave of their future. The coming months will show how well CEO Tom Adams and his team can navigate the company through stormy waters.

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Fool contributor Brian Stoffel owns shares of Rosetta Stone. Walt Disney and Rosetta Stone are Motley Fool Stock Advisor choices. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.