Please ensure Javascript is enabled for purposes of website accessibility

Rosetta Stone: Finally Speaking Wall Street's Language

By Brian Stoffel – Updated Apr 6, 2017 at 7:57PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Language learning company performs better than expected, but questions remain.

As writers who publish our thoughts publicly, I think it's vitally important to hold ourselves accountable. In that spirit, this article is devoted to a stock I hyped early and often, only to see it continually tank: Rosetta Stone (NYSE: RST).

Competing against products offered by CBS' (NYSE: CBS) Pimsleur, Disney's (NYSE: DIS) Publishing Worldwide, and McGraw Hill (NYSE: MHP), Rosetta's Version 4 Totale has struggled to gain traction, especially in the U.S.

But with its most recent earnings announcement -- which beat analyst estimates by a whopping $0.23 -- there are new reasons to be hopeful ... as well as new reasons to view the company with a skeptical eye. Here's a quick rundown of how its three different segments performed.

U.S. consumers

  • The bleeding finally stopped for this segment, with revenue down only 5% year on year.
  • The rebranding of its products with new ads is in place as promised, and it will now benefit from the popularity of Apple's iPad, since the Rosetta Stone app is up and running.
  • U.S. consumers, which recently account for the "problem area" of Rosetta's sales, now make up a reduced 55% of total revenue.

International consumers

  • Offices will be in place and running in both China and Brazil by year's end.
  • Revenue was up an impressive 58% year on year, showing continued strength.
  • This segment now accounts for 20% of total revenue for the company.

Institutional customers

  • Growth has hit a roadblock here, as revenue was actually down by 1% year on year.
  • The company lost its exclusive contract with the U.S. Army. The Army will be replacing Rosetta Stone with an internally developed service.
  • Institutional buyers -- companies, governments, and schools -- now make up 20% of total revenue.

A mixed bag
Other than the impressive earnings beat, there were other positive signs for the company. For the first six months of the year, revenue from subscriptions -- which will be vital for the company moving forward -- accounted for 26.9% of total revenue. That's more than 10% higher than last year.

At the same time, the company has lost $9.3 million over the past year. And while revenue was up 10% overall compared to 2010's second quarter, accounts receivable were up 35% sequentially. Rosetta's being more lenient with customers' payment terms at the exact moment when it can't afford to.

Learning a new language is hard!
After digesting all this information, I guess I'm right back where I started. I'm not buying, but I'm not selling, either. I'm very interested to see what kind of traction Version 4 Totale has in K-12 districts, and those numbers should be available in the next earnings release. If you'd like to be in the loop and follow all of the latest on this company, I encourage you to add Rosetta Stone to your watchlist.

Fool contributor Brian Stoffel owns shares of Rosetta Stone and Apple. The Motley Fool owns shares of Apple and Rosetta Stone. Motley Fool newsletter services have recommended buying shares of Walt Disney, Rosetta Stone, and Apple, and creating a bull call spread position in Apple. 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Rosetta Stone Inc. Stock Quote
Rosetta Stone Inc.
RST
The Walt Disney Company Stock Quote
The Walt Disney Company
DIS
$99.50 (-2.60%) $-2.66
Paramount Global Stock Quote
Paramount Global
PARA
$20.17 (-3.35%) $0.70
S&P Global Inc. Stock Quote
S&P Global Inc.
SPGI
$317.86 (-1.40%) $-4.51

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.