Rosetta Stone (RST) – Hola Lexia
Founded in 1992, and based in Arlington Virginia, Rosetta Stone provides technology-based products to help all types of learners read, write, and speak more than 30 languages. The company currently operates through three segments: Enterprise & Education Language (E&E), Lexia, and Consumer. Per the company’s Q2 investor presentation, here is how revenues are broken down:
In today’s trading session, the following unusual activity took place:
-Buyers of 250 March 10 Calls for 0.90
-Buyers of 350 March 12.5 Calls for 0.30
On the company’s earnings call last week, management provided commentary and potential catalysts that investors may want to keep an eye on:
Lexia – As a quick recap, Rosetta Stone acquired Lexia Learning back in 2013 for $22.5M and its purpose is to provide explicit, systematic, personalized learning in the six areas of reading instruction.
In Q2, the company saw an increase of 22% at the end of Q2 in annual recurring revenue to $39.2M from $32.2M at the end of the second quarter last year. Within the quarter, they saw a large number of pending customer contracts shift from June to expected renewal in the third quarter. It is common for the invoicing of K-12 licenses to move from the second quarter, the end of a school’s fiscal year, to being renewed in the third quarter, the beginning of a school’s next fiscal year. However, the number of renewals that moved from the second to the third quarter this year was uncharacteristically large on both a percentage and absolute basis.
In addition, as retention rate in Lexia’s direct business have exceeded 90% this year and renewal rates have been even higher, the company expects to see and are already seeing these renewals come in during the third quarter.
Consumer Subscription Model – The company is in the process of transitioning their direct business to subscription, meaning they are preparing for the conversion from CD-Box sales to subscription sales. Their goal is to move away from this model as quickly as possible and be 100% subscription.
Management said, “Obviously, it’s a pretty iconic box for consumers. And we want to make sure that they understand that they’re getting the same value from us that they’ve always received. But you’ll see that start to roll out as we get through the balance of the year and would expect that retail will be largely subscription-based as we head towards the end of this year.”
Univision – Finally, on the partner front, the company said they have now largely completed the development work for their initial co-branded product release with Univision to serve the U.S. Hispanic marketplace. CEO Arthur Hass said, “We look forward to launching this offering a little later this year in helping to meet the critical needs of this very large learner base with an excellent partner.”
Private Equity Interest
It may be prudent to point out that back in 2015, Rosetta Stone saw a handful of buyout offers. Specifically:
Russell Glass, managing director of RDG Capital, confirmed that the group made an offer for Rosetta Stone. However, no terms were disclosed at the time.
Osmium Partners issued a press re lease saying they believe the company is undervalued and could attract a strategic buyer at a price of $16 a share or better. They thought companies like Houghton Mifflin Harcourt (HMHC), Pearson plc (PSO), Graham Holdings (GHC), IAC/InterActive (IAC), and Walt Disney (DIS) could be potential acquirers.
Osmium Partners issued a second press release in which they laid out a $13-$17 take-out price based on a sum-of-the-parts analysis.
