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Rosetta Stone (RST) |
RST, B, 8 |
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Language education |
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Post-IPO shrs: 20.3mm |
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Arlington, VA |
2005 |
2006 |
2007 |
2008 |
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IPO Mkt |
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Rev ($mm) |
$6 |
$92 |
$137 |
$209 |
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Cap (mm) |
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Gross profit % |
43% |
86% |
85% |
87% |
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$325 |
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Net after-tax income |
-$1.3 |
-$4.1 |
$2.5 |
$13.9 |
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@$16 |
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Net income % |
-22.4% |
-4.5% |
1.8% |
6.7% |
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2008 Quarterly Progression |
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March |
June |
Sept |
Dec |
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Rev ($mm) |
$36 |
$48 |
$60 |
$66 |
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Gross profit % |
86% |
88% |
87% |
86% |
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Net after-tax income |
-$0.4 |
$3.4 |
$6.0 |
$4.9 |
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Net income % |
-1% |
7% |
10% |
7% |
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VALUATION RATIOS* |
IPO Mrkt |
Price / |
Price / |
Price / |
Price / |
% offered |
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Cap (mm) |
Sales |
Earnings |
BookValue |
TangibleBV |
in IPO |
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Rosetta Stone |
$325 |
1.6 |
23.4 |
2.7 |
4.2 |
31% |
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SCORECARD |
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Mgt |
Market |
Market Do- |
Proprie- |
Total |
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1-5, 5 is high |
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Growth |
mination |
tary |
rating |
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20 is perfect |
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2 |
2 |
2 |
2 |
8 |
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*using trailing 12 month sales & earnings numbers for ratios because the business is seasonal, see ‘seasonality’ below |
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Compare & contrast trailing P/E multiples |
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Packaged software |
BBBB |
INTUI |
SYMC |
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. Trailing P/E |
381 |
22 |
Loss |
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. Market cap ($mm) |
$989 |
$8.6bb |
$14bb |
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Note: difficult to find direct 'packaged software' public comparables |
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BBBB, Blackboard -- enterprise software applications and related services to the education industry |
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INTU, Quickbooks -- accounting software |
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SYMC, Symantec -- security/virus software |
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Education , post secondary |
LOPE |
APOL |
CPLA |
LINK |
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. Trailing P/E |
98 |
15 |
30 |
22 |
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. Market cap ($mm) |
$710 |
$10bb |
$828 |
$14bb |
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LOPE, Grand Canyon 89% online, IPO'ed Nov, 2008 |
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APOL, Apollo -- Univ of Phoenix, mostly online |
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CPLA, Capella Education, IPO'ed in 2006 |
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LINK, Lincoln Ed, career-oriented |
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BUSINESS |
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. Self-study teaching/learning involves language learning without translation or grammar explanation
. Courses available in up to 3 levels of proficiency per language, with each level providing approximately 40 hours of instruction and containing multiple units, lessons and activities.
. Four different editions: personal (combined levels 1-3 costs $549), enterprise, classroom and home school. Each edition utilizes the same core software.
. 2008 revenue was 88% from products, 12% from subscriptions/services
. 80% of revenue generated from consumer sales in 2008 (therefore adverse trends in general economic conditions, including retail shopping patterns, may adversely affect top line revenue growth) |
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BACKED BY PRIVATE EQUITY |
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Pre-IPO ABS Capital Partners owns 46%’ Norwest EquityPartners owns 30% |
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ORGANIC, INTERNAL GROWTH |
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. Grew revenue from (buyout) predecessor's $25.4 million in 2004 to $209.4 million in 2008
. A 69% compound (unsustainable) annual growth rate
. 83% of 2008 revenue generated through direct sales channels, which including call centers, websites, institutional sales force and kiosks. Also distributes solutions through select retailers such as Amazon.com, Apple, Barnes & Noble and Borders. |
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SELF-FINANCED GROWTH
. Since inception, RST has financed operations solely through operational cash flow with the exception of the Predecessor acquisition which was funded in part through the sale of preferred and common stock and a $17.0 million term loan from Madison Capital Funding LLC in January 2006 |
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BRANDED AWARENESS LEADER |
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In an unaided (company sponsored) awareness survey RST’s brand was over 40%, more than seven times that of any other language learning company in the United States |
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MARKET SIZE |
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> According to a December 2007 industry analysis that RST commissioned from The Nielsen Company (market research firm), the worldwide language learning industry represented
. more than $83 billion in consumer spending in 2007,
. of which more than $32 billion was for self-study.
> According to the Nielsen survey, the language learning industry in the United States,
. where RST generated 95% of its revenue in 2008
. represented more than $5 billion in consumer spending in 2007
. of which more than $2 billion was for self-study |
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BETTER, MORE COST-EFFECTIVE SOLUTION |
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(a better ‘mousetrap’)
. RST’s approach is for the student to learn a language on their own schedule and for a significantly lower price most classroom-based or one-on-one tutoring alternatives.
. Proprietary solutions have been developed over the past 16 years by professionals with extensive linguistic, educational and instructional technology expertise.
. RST’s content library consists of more than 25,000 individual photographic images and more than 400,000 professionally recorded sound files.
. Result is a rigorous and complete language learning curriculum that is also designed to be flexible, fun and convenient. |
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COMPETITIVE ADVANTAGE |
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Immersion instruction versus traditional language instruction
> Immersion |
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. In which only the target language is spoken, leverages the natural human ability to learn languages.
. Historically provided through classroom courses, private lessons and in-country immersion programs
. These options, however, are often expensive and require students to commute to classrooms or travel to other countries to obtain the immersion experience. |
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> Traditional
. Focused on rote memorization, grammar explanation and word translation, often in a classroom setting.
. Students in this environment may learn a new language sufficiently to pass examinations but often do not achieve conversational fluency.
. While self-study alternatives are generally more affordable and convenient than classroom instruction, many of them rely on this grammar-translation method, often using passive media such as audio and books, which are not interactive and do not provide feedback. |
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GROWTH PLAN |
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> Increase Focus on Sizeable Non-U.S. Markets
. Generated 5% of revenue in 2008 from sales outside the United States.
. According to the Nielsen survey, over 90% of the $83 billion spent in 2007 on consumer language learning products and services worldwide was spent outside the United States |
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> Increase U.S. Market Share
. A selection of RST’s solutions has recently become available in Apple stores and at www.Apple.com. |
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> For institutional business, RST expects to expand its direct sales force along with institutional marketing activities. |
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> Extend Technological and Product Leadership.
. Developing a new web-based service that extends RST’s existing language learning solutions by offering opportunities for practice with dedicated language conversation coaches and other language learners to increase language socialization.
. Expects to provide this web-based service primarily as a bundle with software and audio offerings. In addition, are evaluating opportunities to extend our learning solutions to hand-held devices and also intends to continue to advance proprietary software platform and speech recognition technology.
> Expand Core Product Portfolio |
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MACRO DEMAND RISK FACTORS |
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. Decline in international travel;
. Changes in U.S. laws or policies making it more difficult for foreign persons to visit or take up residence in the United States
. Reduction in the roles of the U.S. armed forces or other governmental agencies in foreign countries.
. Consumer spending
. If effective language learning solutions become available for free including one sponsored by the U.S. Department of Education to help immigrants learn English. Many of these websites offer free language practice opportunities with other language learners. If these free products become more sophisticated and competitive or gain widespread acceptance by the public, demand for RST solutions could decline. |
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SEASONALITY |
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. Consumer revenue is affected by seasonal trends associated with the holiday shopping season
. As a result, the fourth quarter ended December 31, 2008 accounted for 32% of annual revenue in 2008
. Institutional revenue is seasonally stronger in the second and third quarters of the calendar year due to education, home school and government purchasing cycles. |
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COMPETITION |
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Berlitz International Inc., Simon & Schuster, Inc. (Pimsleur), a subsidiary of CBS Corporation, Random House Ventures LLC (Living Language), Disney Publishing Worldwide, a subsidiary of Walt Disney Company, and McGraw-Hill Education, a subsidiary of The McGraw-Hill Companies. |
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INTELLECTUAL PROPERTY
Trademarks, copyrights, trade secrets, pending patents, trade dress and designs |
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HISTORY
Incorporated in Delaware in December 2005 and acquired predecessor, Fairfield & Sons, Ltd., in January 2006. |
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USE OF $43mm in IPO Proceeds |
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(shareholders expect to receive a separate, like amount from their stock sales)
. $9.9mm in debt repayment
. $7mm to pay tax obligations of 10 key employees relating the stock grant issuances
. Remainder for working capital & general corporate purposes |
