Rosetta Stone Keeps Making Progress Despite Losses

Image: Rosetta Stone.

The language-skills programs that Rosetta Stone offers are well-known among those who've tried to learn a new language. Yet what many don't realize is that Rosetta Stone has a much broader scope now, working to offer literacy skills through technology-based platforms as well as business services for enterprise customers. Coming into Wednesday's first-quarter financial report, Rosetta Stone investors expected that ongoing challenges facing the company in its efforts to reinvent itself would force it to experience further revenue declines and net losses, and Rosetta Stone wasn't able to eliminate those completely. Yet the results were somewhat better than those following Rosetta Stone had expected to see. Let's look more closely at the latest from Rosetta Stone and whether it can keep making improvements in its quest to become profitable once again.

Understanding Rosetta Stone's financialsRosetta Stone's first-quarter results managed to top the low expectations that investors had for the company. Revenue fell 18% during the quarter to $48 million, but that wasn't quite as bad as the 19% decline that most investors had set as their benchmark. Similarly, net losses for the quarter were $7.5 million, which represented a big improvement over the $20 million loss that Rosetta Stone suffered in 2015's first quarter. The losses worked out to $0.34 per share, far less than the consensus forecast for a $0.52 per share loss.

A closer look at Rosetta Stone's results reveals sources of relative strength. Growth for the Lexia Literacy segment amounted to 82%, with the number of active monthly students using the Reading Core5 product jumping by 40%. Some of the growth rate came from purchase-accounting adjustments, but even when you take out the influence of those accounting moves, adjusted revenue growth amounted to 38%. Beyond Lexia, the Enterprise & Education Language unit suffered a modest 4% drop in sales, largely reflecting the decision it made in March to exit markets beyond the U.S. and Northern Europe. Higher revenues within North America offset the negative impact of shrinking Rosetta Stone's international presence.

As we've seen in past quarters, though, Rosetta Stone's consumer segment was the main source of weakness. Segment revenue plunged 37%, with the company explaining that its strategy of emphasizing higher-margin opportunities at the expense of top-line growth has reduced overall volume. Declines in promotional campaigns and media spending have cut costs, and longer-term, Rosetta Stone hopes that the immediate hit to revenue stemming from switching to subscription-based sales will pay off with greater sources of recurring revenue. Subscriptions now make up about a quarter of Rosetta Stone's consumer revenue.

Can Rosetta Stone move forward? CEO John Hass celebrated Rosetta Stone's slow but steady progress. "I am pleased to report our fourth consecutive quarter of improved financial results," Hass said, "reflecting the focus and commitment of everyone involved to transform Rosetta Stone and position the Company for future profitability." The CEO also noted that the company met cost-savings targets and thinks it can develop those strategies further.

Yet Rosetta Stone believes there's more to be gained from cost-cutting measures, working to achieve another $19 million to add to the $65 million in annual reductions that it has already realized. Yet Rosetta Stone isn't afraid to spend money, and Hass noted that "we are making substantial investments to enhance our core products across our businesses in order to improve learning outcomes and position the Company for future growth."

Rosetta Stone stock didn't respond dramatically in after-hours trading following the announcement, but whatever near-term share-price move the stock makes isn't nearly as important as its longer-term direction. If Rosetta Stone's strategy starts paying off with breakeven or profitable results within the next year, then investors could see dramatic gains in the hard-hit stock down the road.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Rosetta Stone. 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.

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