Foreign language and reading education company Rosetta Stone (RST +0.00%) reported earnings for the third quarter on Oct. 29, announcing that sales for the quarter were up 6% from the same period last year. However, the company's "bookings" -- a number that includes the total revenues customers signed up for in the quarter -- were even better, up a strong 16%.
Overall, it looks as if it was a pretty solid quarter, and there might have been some surprise growth in one key area. Let's look at the things that are most important to the company's prospects, because it appears that growth won't come from foreign language software.
1. North American Consumer business could be stabilizing; International falls further
While revenues paid in the quarter declined 6% in the North American Consumer segment, bookings were up 4% to $40.2 million. It's only one quarter, but if this result -- which management said was driven by increased Internet orders -- is the beginning of a trend, that would be huge for the company. However, it's only one quarter, and it's much better to let this play out before making any analysis.
The International Consumer segment gave us more of the same declining results that have become the norm. Revenue fell 22% in the quarter, while bookings fell even more -- 32%. In short, this business has been a major struggle for the company, and so far, its acquisition earlier this year of Tell Me More, the No. 1 language software in Europe, has yet to move the international needle.
2. E&E taking center stage
Total revenue and bookings both increased 50% in Global Enterprise and Education. Bookings of $36.8 million narrowed the gap between it and North American Consumer's $40 million, and the number was higher than the $36.3 million in revenue that North Amercian Consumer produced. However, its $22.5 million in revenue is still well short of the sales in the consumer segment. However, that growth rate should not be ignored. The global education market that Rosetta Stone can compete in -- which now includes both foreign language and reading/literacy programs, is enormous. So far, the company has been awarded long-term contracts by school districts in dozens of states solely based on the products it acquired as part of Lexia Learning in 2013.
At the time of the acquisition, Lexia products were used in more than 14,000 schools, and Rosetta Stone is throwing resources at a serious expansion. Considering that there are close to 100,000 public schools and more than 33,000 private schools in the U.S. alone, this is a massive market. Don't be surprised if E&E becomes larger than the foreign language consumer business in the next year or two.
3. Various and sundry financials
Over the quarter, Rosetta Stone also improved its cash position by $2.8 million and increased deferred revenue (this is tied to the booking growth) by 19%, to $110.9 million. According to the release, more than 75% of deferred revenue will be recognized over the next 12 months. Free cash flow of $3.4 million is a significant improvement from last year's negative $2.8 million.
These all represent positive steps forward, with the caveat that it's just one quarter.
Looking ahead
E&E is really trending in the right direction, and I'm becoming more convinced that this will be Rosetta Stone's growth engine moving forward, despite all the promise of the consumer language business. The reality is, Rosetta Stone has thrown lots of resources at this business for years, and nothing has proven to be sustainable. It's possible that the bump in bookings in the N.A. Consumer segment will lead to continued growth, but I'm not counting on it.
However, if the company can just stabilize that part of its business, it can focus its resources on Enterprise and Education, where both its foreign language and reading/literacy programs will see sustained demand for many years, and the opportunity to grow is enormous. In short, Rosetta Stone isn't about learning a language as much as it's about learning language period. Better to focus on academic institutions than consumers, or so it seems. That's what Rosetta Stone's own sales data is saying.
