INVESTOR PRESENTATION 2018 - Reach, Relevancy and Recurring Revenue DECEMBER 2018 - Rosetta Stone

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INVESTOR PRESENTATION 2018 - Reach, Relevancy and Recurring Revenue DECEMBER 2018 - Rosetta Stone
INVESTOR PRESENTATION 2018
Reach, Relevancy and Recurring Revenue
DECEMBER 2018
INVESTOR PRESENTATION 2018 - Reach, Relevancy and Recurring Revenue DECEMBER 2018 - Rosetta Stone
Safe Harbors
Forward-Looking Statements                                                                additional funds; failure to adapt to and manage technological changes; the risk
This presentation contains forward-looking statements that reflect, when made, our        that businesses acquired by us might not perform as expected; the inability to
current views with respect to current events and financial performance. All               successfully expand internationally; and the failure to maintain information privacy
statements that address future operating, financial or business performance or our        and security, as well as those discussed in our filings with the Securities and
strategies or expectations are forward-looking statements and may include, but are        Exchange Commission, including our most recent Annual Report on Form 10-K and
not limited to, statements relating to: our business strategy; guidance or projections    our Quarterly Reports on Form 10-Q. New risks and uncertainties arise from time to
related to revenue, Adjusted EBITDA, bookings, and other measures of future               time, and it is impossible for us to predict these events or how they may affect us.
economic performance; the contributions and performance of our businesses                 We disclaim any intention or obligation to update or revise any forward-looking
including acquired businesses and international operations; projections for future        statements, whether as a result of new information, future events and/or
capital expenditures; and other guidance, projections, plans, objectives, and related     otherwise, except to the extent required by law.
estimates and assumptions. In some cases, you can identify these statements by
forward-looking words such as “may,” “might,” “will,” “should,” “expects,” “plans,”       Non-GAAP Financial Measures
“anticipates,” “believes,” “estimates,” “predicts,” “projects,” “potential,” “outlook,”   Today’s presentation and discussion also contain references to non-GAAP financial
or “continue,” and other comparable terminology. Such forward-looking statements          measures. The full definition, GAAP comparisons, and reconciliation of those
are subject to many risks, uncertainties and factors relating to our operations and       measures are available in this presentation or in our press release which is posted
business environment, which may cause our actual results to be materially different       on our website at www.rosettastone.com. Our non-GAAP measures may not be
from any future results expressed or implied by such forward-looking statements.          comparable to those used by other companies, and we encourage you to review
Factors that could cause actual results to differ materially from these forward-          and understand all our financial reporting before making any investment decision.
looking statements include, but are not limited to, the inability to execute our
business strategy; declining demand for our products; the impact of any revisions to
our pricing strategy; the inability to introduce new products and services; the           Immaterial rounding differences may be present in this presentation in order to
effectiveness of our marketing; the adequacy of internally generated funds and            conform to reported totals.
existing sources of liquidity, such as bank financing, as well as our ability to raise

                                                                                                                                    | © 2018 Rosetta Stone Ltd. All rights reserved. |   2
INVESTOR PRESENTATION 2018 - Reach, Relevancy and Recurring Revenue DECEMBER 2018 - Rosetta Stone
Reach, Relevancy and Recurring Revenue

              Reach                 Relevancy           Recurring Revenue
          Reach Over 5MM       Rigorously Researched     100% Subscription-
         Discerning Learners     and Independently     based Business Building
              Annually           Evaluated Reading       Recurring Revenue
                                Programs and Iconic
                               Language Brand Drive
                                     Relevancy

                                                                 | © 2018 Rosetta Stone Ltd. All rights reserved. |   3
INVESTOR PRESENTATION 2018 - Reach, Relevancy and Recurring Revenue DECEMBER 2018 - Rosetta Stone
We Have Changed Fundamentally

  FROM HERE (2014)...                                                                     ...TO HERE (2018)

                           800K   756,936

                           700K
                           600K
                                            503,471
                           500K
                           400K                       366,288

                           300K                                 213,589
                           200K
                           100K                                           10,911
                             K
                                   2014      2015      2016      2017     2018 E

                                                CD Unit Sales

  Predominantly Consumer                                                           Serving Over 5MM Learners Through
   Language CD Business                                                            Three Different Demanding End Users
                                                                                       (K12, Consumers, Corporate)

                                                                                            | © 2018 Rosetta Stone Ltd. All rights reserved. |   4
INVESTOR PRESENTATION 2018 - Reach, Relevancy and Recurring Revenue DECEMBER 2018 - Rosetta Stone
We Address Big Societal Needs

       Childhood Literacy in the U.S.                                                                                          Second Language Learning Worldwide
• Achievement Gap: 64% of 4th graders are non-                                                                             • ~$50BN in spend in 2020
  proficient readers / 85% of public school                                                                                • 1.5BN English Language Learners
  curriculum delivered via reading
• Literacy is largest area of curriculum spend in US
  public schools
                1.   SOURCE: U.S. Department of education, National Center f or Education Statistics, National Assessment of Educational Progress (NAEP), selected years., 992-2015
                      Reading Assessments, NAEP Data Explorer. See Digest of Education Statistics 2015, table 221.10.
                2.   Ambient Insight, The 2015-2020 Worldwide Digital English Language Learning Market, 2016.                                                                         | © 2018 Rosetta Stone Ltd. All rights reserved. |   5
                3.   ThoughtCo., How Many People Learn English? An Estimated 1.5 Billion People Are Studying the Language Worldwide, October 08, 2018.
INVESTOR PRESENTATION 2018 - Reach, Relevancy and Recurring Revenue DECEMBER 2018 - Rosetta Stone
Why We Win – K-12

Best-in-Class Literacy Curriculum and Assessment Portfolio
• 35 years of technology driven experience in K-12 literacy
• Broadest and deepest K-12 Literacy portfolio

Demonstrated Ability to Dramatically Improve Outcomes
• 15 third-party reviewed studies of Literacy efficacy that meet ESSA standards of evidence
• Annual studies indicate students of all abilities make substantial progress in Core5
• Driving consistently high retention (Q3-93%) and renewal rates (Q3-100%)

Marketplace Scale and Leadership
• Served ~13,500 schools and 3.8MM students in the U.S. in 2017/18 school year
• THE Journal Reader’s Choice #1 Overall K-12 Technology – ahead of Google and Apple

                                                                              | © 2018 Rosetta Stone Ltd. All rights reserved. |   6
INVESTOR PRESENTATION 2018 - Reach, Relevancy and Recurring Revenue DECEMBER 2018 - Rosetta Stone
Broad and Deep Digital Literacy Portfolio
 Students at all levels and grades work at their own pace through personalized learning paths

      Grades
      PreK-5

      Grades
      6-12
                                                                         IMPLEMENTATION
                                                                            SERVICES

     Educator
     Data Platform

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INVESTOR PRESENTATION 2018 - Reach, Relevancy and Recurring Revenue DECEMBER 2018 - Rosetta Stone
As Every Student Keystroke or Click is Captured in Our Products,
Teachers are Empowered to Provide Personalized Instruction
 Core5 uses its patented Assessment Without Testing to predict the   As students progress online, Teachers are provided information on rate and accuracy of
            likelihood of meeting year-end benchmarks                      over 89 separate activity types so they can focus instruction where needed

                                                                                      Teachers are then provided over 400 pages of “skill builders”
                                                                                                for their students to build automaticity

                                                                                                                 | © 2018 Rosetta Stone Ltd. All rights reserved. |   8
INVESTOR PRESENTATION 2018 - Reach, Relevancy and Recurring Revenue DECEMBER 2018 - Rosetta Stone
Evidence Based, Research Proven
Published Research: 2006 - 2018
Independent Peer-Reviewed Journal Studies

                                            | © 2018 Rosetta Stone Ltd. All rights reserved. |   9
INVESTOR PRESENTATION 2018 - Reach, Relevancy and Recurring Revenue DECEMBER 2018 - Rosetta Stone
Efficacy Drives Demand - Utah
 UTAH RESULTS 2017-18:
 194 Schools | 60,000 Students (K-3)

 90% of students meeting usage targets
 are reading on or above grade level.
And Recognized K12 Leadership

        2018 Readers Choice Awards
           #1 Top Overall Technology
           #1 Best Reading Program
           #1 Favorite Adaptive/Personalized Learning Tool
           #1 Top Educational Game or Gamified Learning Tool
           #1 Top Technology Adopted in the Last 12 Months

                                                               | © 2018 Rosetta Stone Ltd. All rights reserved. |   11
Power of the Literacy Portfolio to Drive Higher LTV
Large Urban District in Wisconsin

                                                   2 Core5 unlimited site licenses with
                                                   Implementation Services

                                                   15 Core5 unlimited site licenses with
                                                   Implementation Services

                                    1. ThoughtCo., How Many People Learn English? An Estimated 1.5 Billion People Are
                                       Studying the Language Worldwide, October 08, 2018.
                                                    Purchased PowerUp and renewed Core5.
                                    2. Ambient Insight, The 2015-2020 Worldwide Digital English Language Learning

                                    3.
                                       Market, 2016.
                                                    34 unlimited site licenses and $300k
                                         EF EPI, reported in Quartz, GLOBISH ON THE RISE: The world is getting better at
                                                    annual contract value
                                         English—but some countries are learning faster than others, February 23, 2018.

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Helping Growth Significantly Outpace the Industry
                                                                                          Bookings and Revenues by Year
                                                                                                           ($ Millions)

                                      70.0
                                                                                                                                                         ~60
                                      60.0
                                                                                                                                                                     ~52
                                      50.0                                                                                              47.5
                                                                                                                                                43.6
                                      40.0                                                                            38.4
                                                                                      33.9                                      34.1

                                      30.0
                                                     23.1                                          21.9
                                      20.0
                                                                   9.9
                                      10.0

                                       0.0
                                                         FY 2014                          FY 2015                         FY 2016         FY 2017           FY 2018E 1
                                                                                                               Bookings      Revenues

1 Based on guidance of approaching $60MM in bookings and $52MM in revenues. See appendix for “bookings” definition.

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With Opportunity for More - Expansion and Greenfield
                                              9%
                    14%                    Students
                  Schools

               22%                                          41% of Schools*
                                                           46% of Students*
             Districts                                  Within Existing Footprint

                                           Expansion Opportunity:
                                           While we serve 14% of US public
                                           schools, they are in districts that
                                           total over 40% of those schools
           *Out of (In US):
103,000 Public Schools; 13,300 Districts
        47.4 million Students

                                                  | © 2018 Rosetta Stone Ltd. All rights reserved. |   14
Next? Leverage K12 Opportunity
Combining Sales Resources (2019) and Investing in New English Learning Product to Build on Opportunity

K-12 Today                                                  K-12 Vision 2020
• Literacy sales growing ~25%                               • Best-in-class Literacy suite and Emerging Bilingual
• Full Literacy product suite                                 product
• 45 Sales people                                           • ~75 highly productive salespeople and world-class
                                                              customer success team
                                                            • Combined Literacy and K-6 EL with high retention rates
                                                              continuing to grow at ~25%

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Why We Win – Language

Iconic Brand
• ~$1.4BN in sales and marketing spend since 2009 have build brand
• 84% aided awareness in the US; over 3x nearest competitor

Marketplace Leading Technology
• 7K+ hours of CEFR-aligned business and cultural content
• 10K+ virtual tutoring sessions per month
• New Innovation: Seek and Speak, Your Plan, Translation

Scale Across Markets
• Over $120MM in combined 2018 bookings across Consumer and Enterprise & Education
• Substantial ongoing investment in Research & Development to drive future growth

                                                                       | © 2018 Rosetta Stone Ltd. All rights reserved. |   16
Iconic Language Brand…                                  …That Dominates

SOURCE: 2018 Rosetta Stone U.S. brand awareness study

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With Marketplace Leading Technology

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Driving 20% Increase in Consumer Subscribers Over LTM
Global Consumer Subscriber Base
(000)
500
                                                                                                                     447
                                                                                           417
                                                         395
400                    370

300

200

100
                    Q4 2017                           Q1 2018                          Q2 2018                     Q3 2018

See Appendix for definitions and reconciliation of GAAP to non-GAAP Financial Measures and Statistical Measures.

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Hired World-Class Talent Into Language Business

      MATT HULETT           DR. LIZ BROOKE                 JERRY HUANG             PHILIP DUNNE
        President          Chief Learning Officer      SVP Strategy and Business   SVP Consumer
                                                             Development

      GREGORY SPILS         MARK MOSELEY                 CHRISTINA KOZLOFF         ANDREA RIGGS
   VP Product Management   VP, IT and Operations              VP Brand               Head of PR

                                                New in last 3 years

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To Drive Innovation and Leverage Core Assets
                                               Your Plan
  Seek and Speak
                   Translations

                   Flash Cards

                   Grammar
                   Guides

                                        | © 2018 Rosetta Stone Ltd. All rights reserved. |   21
With the Potential to Disrupt All Areas of Language Learning
                                           In a survey of Rosetta Stone Learners in China, Korea and Brazil we
   Offline Only           eLearning Only    found most learners use multiple language products or services.

                                                                         Use other products too

              Virtual Blended
                  Learning
                                                                        Use tutoring or other offline
                                                                        products too

      Digital             eLearning and                January 2018, RST Internal Research of Language Learners
   Tutoring Only             Tutoring                  that have used a Rosetta Stone product in 2017. n = 237

                                                                                  | © 2018 Rosetta Stone Ltd. All rights reserved. |   22
Next? A Unique & Compelling Solution for International Learners

      Professional Tutors:
      Live Anywhere on Any
      Device Sold and
      Delivered Through
      Our Software

                                                 | © 2018 Rosetta Stone Ltd. All rights reserved. |   23
Investment Considerations

                                  •   Over 100,000 U.S. Public schools
1. Scalable Opportunities         •   $50BN Global Language market / 1.5BN Global English Language learners

                                  •   3.8MM Literacy learners / 1MM Enterprise and K-12 Language learners / 0.5MM Consumer
2. Large Current Base:
                                      Language subscribers provide tremendous reach
   5MM Learners                   •   Broad range of customers in K12, Consumer and Corporate provides unique insights into needs

3. Uniquely Relevant in the       •   84% Aided awareness for Rosetta Stone; over 3X peers
   Marketplaces We Serve          •   15 third party reviewed studies of Literacy efficacy that meet ESSA standards of evidence

                                  •   Methods: ABL (Adaptive Blended Learning), Immersion, Assessment Without Testing
4. Compelling Combination of      •   Capabilities: True Accent proprietary speech recognition engine, Rosetta Stone animation engine,
   Product Assets                     10K+ Tutoring Sessions per month
                                  •   Content: 7K+ hours of CEFR-aligned language content, Full portfolio of Literacy solutions
                                  •   Momentum: Literacy bookings CAGR of 27% since 2014 / Consumer subscriptions increasing
5. Driving Growth Opportunities   •   Expect: Consolidated bookings and revenue growth in 2019, 1st time since 2014
                                  •   Future Upside: K-12 EL and global Consumer English Language learning

                                  •   80% gross margin
6. With Margin Leverage           •   Leverage in R&D and Sales & Marketing
                                  •   Relatively flat G&A

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FY 2018 Guidance

                                                                                 FY 2017 Actual                                                            FY 2018 Guidance

                                                             Literacy                 Language                                            Literacy                 Language
  $MM                                                        Segment                  Segments               Consolidated                 Segment                  Segments                   Consolidated

  Revenue                                                      $43.6                    $141.0                    $184.6                      $52                     ~$121                         ~$173
  Revenue + Change in Deferred
                                                               $47.5                    $134.5                    $182.0                      $60                     ~$124                         ~$184
  Revenue1,2
  GAAP Net Loss                                                                                                    $(1.5)                                                                           ~$(25)
  Adjusted EBITDA                                                                                                  $13.3                                                                             ~$(2)
  Capital Expenditures                                                                                             $12.9                                                                             ~$16
  Change in Deferred Revenue2                                   $3.9                     $(6.5)                    $(2.6)                     ~$8                        ~$3                         ~$11
  Ending Cash Balance                                                                                              $43.0                                                                             ~$39
1 See Appendix for definitions and   reconciliation of GAAP to non-GAAP Financial Measures and Statistical Measures. | 2 Before $12.9MM from SOURCENEXT in 2017 and $4.5MM in 2018 (Language and Consolidated).

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Appendix
Definitions – Statistical Measures
Annualized recurring revenue (or “ARR”) is computed using the                 North America Consumer DTC and Global App Sales CAC: The Customer
annualized value of active subscription arrangements at the end of the        Acquisition Cost, or CAC, is an operating metric calculated as the sum of
period. ARR is a performance metric used to assess the health and             Consumer GAAP sales and marketing expenses in a period plus affiliate
trajectory of our E&E Language and Literacy segments, which we believe        commission expenses that are classified as cost of goods sold, adjusted to
aids investors in understanding our segment results. We present ARR as a      reflect the lifetime app store commissions incurred on the initial app sale
statistical measure rather than a non-GAAP financial measure. ARR             plus an estimate of app commission expenses on future renewals.
should be viewed independently of revenue and deferred revenue, as
ARR is a performance metric and is not intended to be combined with           CAC per Unit is CAC divided by total new unit sales net of returns for
either of these items.                                                        North America DTC and Global App sales.

North America Consumer DTC and Global App Sales LTV per Unit: The             The LTV-to-CAC ratio is calculated as LTV per Unit divided by CAC per Unit.
Lifetime Value per unit, or LTV per unit, is an operating metric calculated   Net LTV Added is calculated as LTV Added minus CAC.
as the combined value of customers' initial purchases plus an estimate of
future renewals based on the median renewal rates observed for recent         Prior period amounts have been restated to be comparable to the
renewals of similar products. The per unit metric is expressed as the         current period methodology. In addition, prior period LTV, CAC and Net
weighted average LTV per unit of all products sold during a given period.     LTV metrics presented for a given period may change over time as the
                                                                              most current retention experience for that period is used to update the
LTV Added is the LTV per unit multiplied by total new unit sales net          calculations of those operating metrics.
of returns.

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Definitions – Non-GAAP Financial Measures
Bookings represents executed contracts received by the Company that         Free cash flow is cash flow from operating activities minus cash used in
are either recorded immediately as revenue or deferred revenue.             purchases of property and equipment.
Therefore, sales is an operational metric and in any one period is equal
                                                                            Segment contribution is calculated as segment revenue less expenses
to revenue plus the change in deferred revenue.
                                                                            directly incurred by or allocated to the segment. Direct segment
Adjusted EBITDA is GAAP net income/loss plus interest income and            expenses include costs and expenses that are directly incurred by or
expense, other income/expense, income tax benefit/expense,                  allocated to the segment and include materials costs, service costs,
impairment, lease abandonment and termination, depreciation,                customer care and coaching costs, sales and marketing expenses, and
amortization, stock-based compensation, restructuring, and strategy and     bad debt expense. In addition to the previously referenced expenses, the
cost-reduction related consulting expenses. In addition, Adjusted EBITDA    Literacy segment includes direct research and development expenses
excludes "Other" items related to non-restructuring wind down and           and Combined Language includes shared research and development
severance costs, and transaction and other costs associated with            expenses, costs of revenue, sales and marketing, and general and
mergers and acquisitions, as well as all adjustments related to recording   administrative expenses applicable to the Consumer Language and E&E
the non-cash tax valuation allowance for deferred tax assets. Adjusted      Language segments. Prior periods have been reclassified to reflect our
EBITDA for prior periods has been revised to conform to current             current segment presentation and definition of segment contribution.
definition.

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Consolidated Highlights – Q3 2018
•       Ongoing sales1 growth of 11%, the first YOY sales increase since 2014
•       Record Literacy sales of $34 million, more than all of 2015, and up 37% YOY
•       Consumer Language sales stable to prior year for the first time since 2014
•       E&E sales decline of $2 million YOY

                     Ongoing Sales1                                                      Adjusted EBITDA2                  Cash and Cash Equivalents
              3Q17                         3Q18                                        3Q17                        3Q18     3Q17                             3Q18

              $24.9                        $34.0                                        $2.7
                                                                                                                            $40.1
               $19.8                       $17.5                                                                                                             $31.8
               $16.0                       $16.1
                                                                                                                   -$0.7
1 See     Consumer
      Appendix                   E&E
               for definitions and reconciliation Literacy
                                                  of GAAP to non-GAAP
Financial Measures and Statistical Measures. Prior period ARR has
been updated
1 Before     to reflect
         SourceNext  andcurrent period presentation.
                           Discontinued FitBrains
2 See   Appendix for definitions and reconciliation of GAAP to non-GAAP Financial Measures and Statistical Measures.

                                                                                                                            | © 2018 Rosetta Stone Ltd. All rights reserved. |   29
Adjusted EBITDA and Free Cash Flow1

1 See   Appendix for definitions and reconciliation of GAAP to non-GAAP Financial Measures and Statistical Measures.

                                                                                                                       | © 2018 Rosetta Stone Ltd. All rights reserved. |   30
Revenue and Sales1

1 See   Appendix for definitions and reconciliation of GAAP to non-GAAP Financial Measures and Statistical Measures.

                                                                                                                       | © 2018 Rosetta Stone Ltd. All rights reserved. |   31
Reconciliation of Revenue and Sales1

1 See   Appendix for definitions and reconciliation of GAAP to non-GAAP Financial Measures and Statistical Measures.

                                                                                                                       | © 2018 Rosetta Stone Ltd. All rights reserved. |   32
Segment Contribution1

1 See   Appendix for definitions and reconciliation of GAAP to non-GAAP Financial Measures and Statistical Measures.

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