Rosetta Stone: Zacks’ Bear of the Day Play

Based in Arlington VA, Rosetta Stone (RSTSnapshot Report) is a leading provider of technology-based solutions for learning languages.  Founded in 1992, the company had its IPO in 2009.

The company operates through three segments: North America Consumer, Rest of World Consumer, and Global Enterprise & Education.  They sell their software products directly as well as through selected retailers.

Disappointing Second Quarter Results

Rosetta reported its Q2 2014 results on August 5. Total revenue excluding discontinued operations, decreased 6% to $57.3 million from $61.2 million, in the same quarter of 2013.

Enterprise & Education revenue grew 32%, but North America Consumer revenue declined 17%, primarily due to weakness in the retail and call center channels. Rest Of World Consumer revenue decreased 27% due mainly to the downsizing in Asia in Q1.

Adjusted EBITDA for the quarter fell to negative $0.1 million compared with $3.7 million in Q2 of 2013, mainly due to lower contribution from North America Consumer, partially offset by an increase in contribution from E&E. Loss for the quarter was $0.74 per share, substantially worse compared to the Zacks Consensus Estimate for a loss of $0.20 per share.

The company reiterated its guidance for the full year 2014

Downward Revisions

Analysts have cut their estimates for the company after disappointing results. Zacks Consensus Estimates now call for loss of ($1.95) per share and ($0.89) per share in 2014 and 2015 respectively, down from ($1.26) per share and ($0.58) per share, 60 days ago.

The Bottom Line

While Rosetta Stone enjoys a market leadership position with its effective and user-friendly products, its declining profitability and persisting pricing pressures continue to pose challenges. Increasing availability of lower cost and free products in the space will result in increased pricing pressures and create headwinds for the stock.

A better Play in the Industry?

Investors looking for a better play in the Computer Software industry could consider Aspen Tech (AZPN), which has jumped to Zacks Rank # 1 (Strong Buy) after delivering a 55.6% positive earnings surprise in the recent quarter.

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