Needham Conference - New York May 17, 2017

Transcription

1 Needham Conference - New York May 7, 207 John Hass Chairman and Chief Executive Officer

2 Caution on Forward-Looking Statements This presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 995. Forward-looking statements can be identified by non-historical statements and often include words such as outlook, potential, "believes," "expects," "anticipates," "estimates," "intends," "plans," "seeks" or words of similar meaning, or future-looking or conditional verbs, such as "will," "should," "could," "may," "might, " "aims," "intends," or "projects. These statements may include, but are not limited to, statements relating to: our business strategy; guidance or projections related to revenue, Adjusted EBITDA, bookings, and other measures of future economic performance; the contributions and performance of our businesses including acquired businesses and international operations; projections for future capital expenditures; and other guidance, projections, plans, objectives, and related estimates and assumptions. A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances. In addition, forward-looking statements are based on the Company s current assumptions, expectations and beliefs and are subject to certain risks and uncertainties that could cause actual results to differ materially from our present expectations or projections. Some important factors that could cause actual results, performance or achievement to differ materially from those expressed or implied by these forward-looking statements include, but are not limited to: the risk that we are unable to execute our business strategy; declining demand for our language learning solutions; the risk that we are not able to manage and grow our business; the impact of any revisions to our pricing strategy; the risk that we might not succeed in introducing and producing new products and services; the impact of foreign exchange fluctuations; the adequacy of internally generated funds and existing sources of liquidity, such as bank financing, as well as our ability to raise additional funds; the risk that we cannot effectively adapt to and manage complex and numerous technologies; the risk that businesses acquired by us might not perform as expected; and the risk that we are not able to successfully expand internationally. We expressly disclaim any obligation to update or revise any forwardlooking statements, whether as a result of new information, future developments or otherwise, except as required by law. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements, risks and uncertainties that are more fully described in the Company's filings with the U.S. Securities and Exchange Commission (SEC), including those described under the section entitled Risk Factors in the Company s most recent quarterly Form 0-Q filings and Annual Report on Form 0-K, as such factors may be updated from time to time. Immaterial rounding differences may be present in this data in order to conform to reported totals. Non-GAAP Financial Measures Today s presentation and discussion also contain references to non- GAAP financial measures. The full definition, GAAP comparisons, and reconciliation of those measures are available in this presentation or in our press release which is posted on our website at Our non-gaap measures may not be comparable to those used by other companies, and we encourage you to review and understand all our financial reporting before making any investment decision. 2

3 Rosetta Stone Well-known brands positioned in large, growing marketplaces Pioneer of technology-based learning solutions Consumer Language successfully transitioning to subscription Enterprise & Education Language focused and positioned for growth Lexia becoming THE Literacy Expert in U.S. K-2 Leveraging recent investments and improved cost structure to drive profitable growth 3

4 204 UNSUSTAINABLE SALES FOUNDATION BUILT Heavy marketing to maintain consumer sales Acquisitions Internal diversification geographic and product line 2 3 Focus to improve execution Reduce costs to improve contribution Reallocate capital especially to Lexia 4

5 Focus to Improve Execution Q5 Reduced investment in Kids Reading Q6 Launched E&E restructuring which closed offices in France, China, and Brazil 3Q5 Sold Korean subsidiary Q7 Licensed Japanese business 5

6 Reduce Costs to Improve Contribution Expenses Reduced Nearly 32% Since 204 SALES AND MARKETING $ GENERAL AND ADMINISTRATIVE $ $40.5 $4.3 S&M 2 34% G&A 2 29% Expenses include GAAP COGS, S&M, R&D and G&A. 2 Data is GAAP, which includes $4.2MM and $5.2MM in total restructuring and other costs in 204 and 206, respectively. 6

7 Reallocate Capital Especially to Lexia Research and Development + Capitalized Labor ($MM), $34.8 $ 27. Language 2 22% In 206, R&D and capitalized labor was 3% of Lexia s revenue Lexia expected to be ~45% of total R&D and capitalized labor in 207 $6.0 $0.5 Lexia 2 75% Expenses include GAAP R&D and capitalized labor on software development. 2 Data is GAAP, which includes $4.2MM and $5.2MM in total restructuring and other costs in 204 and 206, respectively. 7

8 FOUNDATION BUILT 207 Beyond LEVERAGE INVESTMENT Focus to improve execution 4 Continue growth and improve margins at Lexia 2 3 Reduce costs to improve contribution Reallocate capital especially to Lexia 5 6 Growing E&E and partnerships offset consumer WL decline Leverage improved cost base to drive cash flow 8

9 Interest in Rosetta Stone is Strong 206 Metrics Web Visits Product Trial Product Purchase Rosettastone.com 22MM Web Demos.6MM 460K App Downloads 0.9MM North America Source: RS Analysis 9

10 206 Consumer Marketplace BY LANGUAGE (%) BY REGION (%) 40% 8% 60% 82% World Languages English N.A. Outside N.A. Source: Technavio Insights, custom research August 206-March 207 0

11 Consumer Business Mix by 206 Bookings English vs. World Languages (% of units) North America vs. Europe ($MM) DTC vs. Retail ($MM) 7% $6 $ 83% $73 $68 World Languages English N.A. Europe ROW DTC Retail Other Data only includes language-learning consumer bookings. Source: RS Analysis

12 Move to SaaS - Acceleration of Product Investment 992 Release of original Language Learning Software 2009 Introduction of online subscription (TOTALe v4) March 207 Minimal Customer Facing Product Innovation Newly upgrade offering with stories, phrasebook and audio May 206 Release of new native ios application June 207 Implement new features on Android 2

13 Move to SaaS A Superior Business Model Cost Cost Rev Better Product Experience Cross-platform access Immediate updates Increased engagement Reduced Costs Single technology base More efficient marketing spend Lower COGS Increased Top Line New audiences from shorter-term subscriptions Upsell path to additional services Recurring Business Model Means More Predictable Cash Flow 3

14 Move to SaaS Begin to Accelerate Percent of Unit Sales by Product Type [DTC] Q5 Q6 Q7 32% 33% 22% 32% 63% 46% 35% Subscription Download CD 24% 3% North America; Excludes App Sales Source: RS Analysis 4

15 Move to SaaS - Early Trends are Positive LTV vs. CAC Multiple [DTC] Paying Subscribers (000) x 2.2x 2.x x.8x.7x.6x x 223.4x.2x x Q'5 Q'6 Q'7 Q7 Growth 34% Y/Y Q'5 Q2'5 Q3'5 Q4'5 Q'6 Q2'6 Q3'6 Q4'6 Q'7 North America; CAC includes all Sales and Marketing expenses, both Media and non-media. Source: RS Analysis 5

16 Univision Strategic Partnership Establish Scale in Hispanic Segment 40MM U.S. Spanish Speakers 6MM Not yet English proficient 24MM English proficient Sources: U.S. Census; RS Analysis 6

17 SOURCENEXT Strategic Partnership Distribution Scale to Monetize Awareness Rationale: Maximize potential of Japanese opportunity through partner with willingness to invest Our Partner: Leading software distributor in Japan Economics: $3.0MM upfront, plus $0.5MM on closing the acquisition of the Japan entity, and a further additional $6MM to be paid over the next ten years Upside: Potential source of product innovation; right to license and sell SOURCENEXT / Rosetta Stone products outside Japan 7

18 Consumer Language Highlights Large paid language market remains Brand remains strong and relevant Product revitalized and aligned to mobile-first customers Smaller, more efficient business Movement to SaaS showing good early results Upside potential from partnerships 8

19 Enterprise, K-2 Market Opportunity Global Enterprise 206 $.7B 2020 $2.4B Global K $0.8B 2020 $.B Enterprise WL Enterprise English K-2 WL K-2 English Enterprise includes Corporate, Higher Education, Government and Not-for-profit Sources: Technavio Insights, custom research August 206-March 207; RST analysis 9

20 E&E Business Mix by 206 Revenue North America K-2 vs. Enterprise ($MM) Direct vs. Reseller ($MM) U.S. vs. ROW ($MM) $29 $6 $22 $43 $66 $50 Enterprise K-2 Direct Reseller U.S. ROW 20

21 Enterprise Product Strengths Before Catalyst Legacy Strengths Industry-leading True Beginner experience 2 Advanced content in 9 languages 3 SRE designed for language learning 4 Pockets of advanced mobile performance 2

22 Catalyst Solutions Catalyst Investment Integrated best-in-class assessment Combined hours of content into one product Accelerated reporting with harmonized portal Standardized pricing, processing and data 22

23 Distribution Transformation for Efficient Growth 205 Current 207 (TTM as of March 3) Direct Territories Other Reseller Strategic Reseller Territories Direct Sales Offices # Reps 00 6 Bookings Productivity per Rep ~$750K ~$.MM Segment Contribution Margin $22.8MM $29.9MM See appendix for definition 23

24 Enterprise and Education Language Highlights Large and growing opportunity Strong brand Highly profitable U.S. K-2 Language business Refocused Enterprise business ready to grow with the right products 24

25 The U.S. Literacy Crisis Proficient Readers 35% Non-proficient Readers 65% Two-thirds of all U.S. students in grade 4 and grade 8 are non-proficient readers. Struggling readers account for 60% of all students who drop out or fail to graduate on time. Sources: U.S. Department of Education, 205 National Assessment of Educational Progress and Anne E. Casey Foundation, 202 Double Jeopardy: How Third Grade Reading Skills and Poverty Influence High School Graduation 25

26 Lexia Learning Opportunity 3M 35M Students Grades K-8 50,000,000 U.S. Public School Students 5M Students Grades 9-2 8K 70K Schools Grades K-8 00,000 U.S. Public Schools 2K Schools Grades 9-2 Sources: National Center for Educational Statistics and Lexia data. 26

27 Closing the Gap Students reading below grade level declined from 56% to 0% Start Level 56% 35% Grade Below 2+ Grades Below 2% End Level 0% 7% Notes: 205 National analysis of 20,000 students using Lexia Reading in a geographically and ethnically representative sample. 27

28 Closing the Gap Reached Next Grade s EOY Benchmark Reached EOY Benchmark In Student Grade End Level 90% 5% Students reading 35% above grade level increased from 44% to 90% Start Level 44% 4% 49% 39% 26% Notes: 205 National analysis of 20,000 students using Lexia Reading in a geographically and ethnically representative sample. 28

29 Learning Cycle and Product Portfolio Targeted Instructional Resources Independent, Student-Driven Learning PERSONALIZED LEARNING Targeted and Time-efficient Personalized, data-driven and blended instruction Ongoing Data to Drive Instructional Priorities 29

30 Learning Cycle and Product Portfolio Personalized, Data-Driven and Blended Instruction Curriculum Services Assessment PK 5 Student 6 2 ALP Educator 30

31 Positioned to be THE LITERACY EXPERT ELEMENTARY SECONDARY CURRICULUM ASSESSMENT 3

32 Go-to-Market Strategy Bookings Mix 204A 205A 206A 7% 58% 29% Shift from Reseller to Direct 29% 42% 7% Benefits include: Ownership of customer relationship Ability to upsell and cross sell Deeper penetration / bigger deals Service opportunity and follow through Reseller Direct 32

33 Lexia Momentum Schools (000) Annual Student Licenses (MM)

34 Lexia Highlights THE Literacy Experts Pioneer in improving student literacy performance Broad and deep product portfolio Recent transition to direct sales team Upside potential 34

35 207 Guidance $ in MM FY6A FY7E GAAP Revenue $94. Approx. $82 - $85 GAAP Net Loss $(27.6) Approx. $(3-5) Adjusted EBITDA $4.4 Approx. $8 - $0 Capital Expenditures $2.5 Approx. $5 Year-End Cash Balance $36.2 Approx. $44 / No Debt 35

36 2020 Financial Outlook Key Drivers Margin improvement and growing sales at Lexia 2 3 E&E growth and improved S&M efficiency in both Language businesses Combined margin improvement leveraged over relatively fixed G&A base Leveraging recent investment 36

37 2020 Outlook Amounts in $MM FY7E FY20E GAAP Revenue Approx. $82 - $85 Approx. $235 GAAP Net Income/ (Loss) Approx. $(3-5) Approx. $0 Adjusted EBITDA Approx. $8 - $0 Approx. $35 Capital Expenditures Approx. $5 Approx. $4 Year-End Cash Balance Approx. $44 Approx. $00 Free Cash Flow expected to be approx. $30 million as the difference between Bookings and Revenues approximates Capital Expenditures Please see the Appendix for definitions of non-gaap financial measures. 37

38 Rosetta Stone 2020 Balanced, 00% SaaS-learning company with approximately $235MM in revenues and $40MM of ARR 2 Lexia is THE Literacy Expert and continues to drive growth as /3 of total revenue 3 Language businesses are innovating and selling directly and through strategic partners 4 Adjusted EBITDA margins of 5% 2 5 $00MM cash and no debt, assuming no interim use of cash ARR includes Literacy and Enterprise and Education. 2 See definitions of non-gaap financial metrics in appendix 38

39 Q 207 Financial Review

40 Q7 Revenue Revenue by Segment ($MM) Q6 46% 44% 38% 6% Q7 35% 2% Lexia revenue up 34% Y/Y to record high $0.2MM; Pro forma revenue up 20% Y/Y to $0.8MM Consumer revenue down $.MM or 5% Y/Y - Consumer SaaS unit mix increased to 42%, compared to 24% in the year-ago period E&E Language revenue down $.8MM or 0% Y/Y - Markets exited on a direct-sales basis represented $0.7MM, or 4% of total decline Consumer E&E Lexia 40

41 Q7 Metrics Q6A Q7A Lexia ARR (MM) $30.6 $38.5 Renewal Rate (TTM) 93% 84% Enterprise and Education ARR (MM) $6.4 $56.4 Renewal Rate (TTM) 78% 75% Consumer Paying Subscribers (000) Lexia s renewal rate in Q7 was over 95% 4

42 Q7 Segment Contribution Margin Literacy ($MM) 2 9% $.0 % Lexia segment contribution margin increased to $.0MM, up from $0.MM in the year-ago period Definition of segment contribution was revised; includes R&D expense 2 Margin percentage increased to 9% of revenue, up from % in the year-ago period Pro forma segment contribution, which excludes the effects of purchase accounting, was 2% in Q7 and 9% in Q6 $0. Q6 Q7 See appendix for revised definition of segment contribution margin; 2 Lexia segment contribution includes R&D expense. 42

43 Q7 Segment Contribution Margin E&E Language Consumer ($MM) 2 ($MM) 2 Combined Language ($MM) 3 43% 28% $8.4 $0.5 $7. 40% $6.3 $5.0 5% $5.9 34% 23% Q6 Q7 Q6 Q7 Q6 Q7 See appendix for revised definition of segment contribution margin; 2 E&E Language and Consumer are shown before shared Language R&D expense; 3 Combined Language includes R&D expense of $4.9MM in Q6 and $4.5MM in Q7. 43

44 Q7 OPEX $MM OPEX Q6 20% Y/Y Marks 9th consecutive quarter of Y/Y improvement $0.8 $6.6 Q7 $8.0 We have now lapped the E&E Restructuring and expect Y/Y improvements to narrow over balance of the year $6.4 S&M down $6.6MM or 22% Y/Y R&D down $0.2MM or 2% Y/Y $30.8 $24.2 G&A down $2.7MM or 26% Y/Y S&M R&D G&A Includes $2.5MM in total restructuring costs in Q6 and $0.8MM in Q7. 44

45 Q7 Balance Sheet Cash and Cash Equivalents ($MM) $43.0 $36.2 $39.7 Deferred Revenue ($MM) $32.3 $33.0 $99.3 $4.4 $27.6 $3.8 $26.5 $25.0 $0.5 Current Long-Term Q6 4Q6 Q7 Q6 4Q6 Q7 Includes $9.0MM in Q7 received from SOURCENEXT transaction. 45

46 Q7 non-gaap Financial Measures Adjusted EBITDA ($MM) Free Cash Flow ($MM) 2 Net Income / (loss) Adjusted EBITDA CAPEX CFFO $4.3 $7.2 $3.5 $5.2 $5.8 $ ($5.) ($.6) ($2.6) ($2.9) ($2.3) ($7.5) ($5.6) Q6 4Q6 Q7 ($2.5) Q6 4Q6 Q7 See Appendix for definitions and reconciliation of GAAP to non-gaap Financial Measures; 2 CAPEX is Purchases of property and equipment and CFFO is Net cash provided by (used in) operating activities from the Consolidated Statements of Cash Flows 46

47 Appendix

48 Definitions of Statistical Measures Annualized recurring revenue (or ARR ) is computed using the annualized value of active subscription arrangements at the end of the period. ARR is a performance metric used to assess the health and trajectory of our E&E Language and Literacy segments, which we believe aids investors in understanding our segment results. We present ARR as a statistical measure rather than a non-gaap financial measure. ARR should be viewed independently of revenue and deferred revenue, as ARR is a performance metric and is not intended to be combined with either of these items. 48

49 Definitions of Non-GAAP Financial Measures Bookings represent executed sales contracts received by the Company that are either recorded immediately as revenue or as deferred revenue. Adjusted EBITDA is GAAP net income / (loss) plus interest income and expense, other income / expense, income tax benefit and expense, impairment, depreciation, amortization, stock-based compensation, and restructuring expenses. In addition, Adjusted EBITDA excludes Other items related to the litigation with Google Inc., consulting and other related costs associated with the development and implementation of the accelerated strategy and cost reductions, non-restructuring wind down and severance costs, and transaction and other costs associated with mergers and acquisitions, as well as all adjustments related to recording the non-cash tax valuation allowance for deferred tax assets. Adjusted EBITDA for prior periods has been revised to conform to current definition. Free cash flow is cash flow from operating activities minus cash used in purchases of property and equipment. 49

50 Definitions of Non-GAAP Financial Measures Segment contribution is calculated as segment revenue less expenses directly incurred by or allocated to the segment. Direct segment expenses include costs and expenses that are directly incurred by or allocated to the segment and include materials costs, service costs, customer care and coaching costs, sales and marketing expenses, and bad debt expense. In addition to the previously referenced expenses, the Literacy segment includes direct research and development expenses and Combined Language includes shared research and development expenses, costs of revenue, sales and marketing, and general and administrative expenses applicable to the Consumer Language and Enterprise & Education Language segments. 50

51 Adjusted EBITDA and Free Cash Flow See Appendix for definitions and reconciliation of GAAP to non-gaap Financial Measures. 5

52 Revenue and Bookings See Appendix for definitions and reconciliation of GAAP to non-gaap Financial Measures. 52

53 Reconciliation of Revenue and Bookings See Appendix for definitions and reconciliation of GAAP to non-gaap Financial Measures. 53

54 Segment Contribution Please see the Appendix for definitions of non-gaap financial measures. The Literacy segment was previously a component of the "Enterprise & Education" segment and is comprised solely of the Lexia business. Prior periods have been reclassified to reflect our current segment presentation and definition of segment contribution. 54

55 Investor Presentation May 7, 207 Needham Conference New York, NY