Rosetta Stone Inc. Reports First Quarter 2009 Results

ARLINGTON, Va.--(Business Wire)--
Rosetta Stone Inc. (NYSE:RST) today announced financial results for the
company`s fiscal first quarter ended March 31, 2009.

Total revenue for the first quarter was $50.3 million, an increase of 41%,
compared to $35.6 million in the prior year period. GAAP net income for the
first quarter was $3.2 million, or $0.19 per share, compared to a GAAP net loss
of $432,000, or $(0.23) per share, in the prior year period. Non-GAAP net
income, which excludes stock-based compensation expense and amortization of
intangibles, was $3.5 million, or $0.20 per share, as compared to non-GAAP net
income of $226,000, or $0.01 per share, in the prior year period. A
reconciliation of GAAP to non-GAAP results has been provided in the financial
statement tables included in this press release. An explanation of these
measures is also included below under the heading "Non-GAAP Financial Measures."

"We are pleased with the company`s financial performance in the first quarter,
which was highlighted by strong revenue growth, continued market share gains and
expanding profitability margins. There is a large and growing interest in
language learning among individuals and institutions alike, and Rosetta Stone is
uniquely positioned to capitalize on this demand as a result of our innovative
approach to language learning," said Tom Adams, President and Chief Executive
Officer of Rosetta Stone Inc.

Adams added, "During April, Rosetta Stone achieved an important company
milestone by successfully completing its initial public offering in the face of
a challenging stock market environment. We believe this event and on-going
public status will help to further reinforce Rosetta Stone`s already significant
brand leadership position in the language learning market."

Other First Quarter 2009 Financial Highlights

* Revenue Mix - Product revenue for the first quarter was $42.8 million, or 85%
of total revenues, while subscription and service revenue was $7.5 million,
representing the remaining 15% of total revenues. Consumer revenue was $40.4
million, or 80% of total revenues, while Institutional revenue was $9.9 million,
representing the remaining 20% of total revenues.
* GAAP and non-GAAP Operating Income - GAAP operating income for the first
quarter was $5.5 million, or 10.9% of revenues, compared to an operating loss of
$56,000 for the first quarter of 2008. Non-GAAP operating income, which excludes
stock-based compensation expense and amortization of intangibles, was $6.0
million for the first quarter, or 11.9% of revenues. This represented an
increase of $1.0 million, or 2.8% of revenues, for the same period in 2008.
* Adjusted EBITDA - Adjusted EBITDA, which excludes the impact of stock-based
compensation expense, was $7.3 million, or 14.5% of revenues, for the first
quarter as compared to $2.2 million, or 6.3% of revenues, for the same period in
2008.
* Cash - Cash and Cash Equivalents at March 31, 2009 was $29.4 million, which
does not include approximately $34.2 million in net proceeds generated from the
completion of the company`s initial public offering in April 2009.

Non-GAAP Financial Measures

This press release contains four non-GAAP financial measures: non-GAAP net
income, non-GAAP net income per share, adjusted EBITDA, and non-GAAP operating
income. Management believes that these non-GAAP measures of financial results
provide useful information to investors regarding certain financial and business
trends relating to the company`s financial condition and results of operations.
Management uses these non-GAAP measures to compare the Company's performance to
that of prior periods for trend analyses, for purposes of determining executive
incentive compensation, and for budgeting and planning purposes. These measures
are used in monthly financial reports prepared for management and in quarterly
financial reports presented to the company's board of directors. Management
believes that the use of these non-GAAP financial measures provides an
additional tool for investors to use in evaluating ongoing operating results and
trends and in comparing the company's financial measures with other software
companies, many of which present similar non-GAAP financial measures to
investors.

Management does not consider these non-GAAP measures in isolation or as an
alternative to financial measures determined in accordance with GAAP. The
principal limitation of these non-GAAP financial measures is that they exclude
significant expenses and income that are required by GAAP to be recorded in the
company's financial statements. In addition, they are subject to inherent
limitations as they reflect the exercise of judgments by management about which
expenses and income are excluded from these non-GAAP financial measures.

In order to compensate for these limitations, management presents its non-GAAP
financial measures in connection with its GAAP results. Rosetta Stone urges
investors to review the reconciliation of its non-GAAP financial measures to the
comparable GAAP financial measures, which it includes in press releases
announcing earnings information, including this press release, and not to rely
on any single financial measure to evaluate the company's business.

Reconciliation tables of the most comparable GAAP financial measures to the
non-GAAP measures used in this press release are included at the end of this
release.

Webcast and Conference Call

This news release and the accompanying tables should be read in conjunction with
the additional content that is available on the company`s website, which
includes supplemental financial information as well as a webcast of a conference
call that the company will host to discuss the first quarter 2009 financial
results and its outlook for fiscal year 2009. The conference call is scheduled
for May 11, 2009 at 4:30 p.m. eastern time (ET).

To access this call, dial 888-211-7450 (domestic) or 913-312-6687
(international). Additionally, a live webcast of the conference call will be
available at http://investors.rosettastone.com. Please access the web site at
least 15 minutes prior to the start of the call to register and download and
install any necessary software.

Following the conference call, a replay will be available for 48 hours at
888-203-1112 (domestic) or 719-457-0820 (international). The replay pass code is
4749552. The web cast of this conference call will be archived. Individuals can
access the webcast, as well as the press release and supplemental financial
information, at http://investors.rosettastone.com.

About Rosetta Stone Inc.

Rosetta Stone Inc. is a leading provider of technology-based language learning
solutions consisting of software, online services and audio practice tools,
primarily under the Rosetta Stone brand. Rosetta Stone offers its self-study
language learning solutions in 31 languages. Its customers include individuals,
educational institutions, armed forces, government agencies and corporations.
The company is based in Arlington, Va. For more information, visit
www.RosettaStone.com.

Cautionary Statement Regarding Forward-Looking Statements

Certain statements in this press release are forward-looking statements. In this
context, forward-looking statements often address our expected future business
and financial performance, and often contain words such as "project," "believe,"
"plan," "expect," "anticipate," "estimate," "intend," "should," "would,"
"could," "potentially," "plan," "believe," "seek," "may," or "will." These
forward-looking statements reflect the Company's current views with respect to
future events and are subject to certain risks, uncertainties, and assumptions.
A number of important factors could cause actual results or events to differ
materially from those indicated by such forward-looking statements, including:
demand for language learning software; the advantages of our products,
technology, brand and business model as compared to others; our ability to
maintain effective internal controls or to remediate material weaknesses; our
cash needs and expectations regarding cash flow from operations; our product
development plans, including our plans to develop new web-based services and
expansion of our product portfolio; our plans regarding expansion of our
marketing initiatives and sales force; our international expansion plans; our
plans to increase our kiosks and retail relationships; our ability to manage and
grow our business and execution of our business strategy; our financial
performance; and the costs associated with being a public company and the other
factors described more fully in the Company's filings with the Securities and
Exchange Commission, including our Prospectus filed with the U.S. Securities and
Exchange Commission on April 16, 2009. The Company assumes no obligation to
update the information in this communication, except as otherwise required by
law. Readers are cautioned not to place undue reliance on these forward-looking
statements that speak only as of the date hereof.

We have assessed and will continue to assess the impact on our business of the
general economic downturn and the related impact on consumer spending in
particular. Approximately eighty percent of our revenue comes from the consumer
segment. While we cannot predict what impact the general economic environment
will have on our business, to date the impact has not been material to our
balance sheet, results of operations or cash flows.

ROSETTA STONE INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)

Three Months Ended
March 31,
2009 2008
Revenue:
Product $ 42,839 $ 30,218
Subscription and service 7,445 5,367
Total revenue 50,284 35,585

Cost of revenue:
Cost of product revenue 5,943 4,030
Cost of subscription and service revenue 484 506
Total cost of revenue 6,427 4,536

Gross margin 43,857 31,049

Operating expenses
Sales and marketing 23,612 18,045
Research and development 4,843 4,532
General and administrative 9,887 8,528
Total operating expenses 38,342 31,105

Income (loss) from operations 5,515 (56 )

Other income and expense:
Interest income 30 216
Interest expense (315 ) (296 )
Other income 97 287
Total other income (expense) (188 ) 207

Income (loss) before income taxes 5,327 151
Income tax provision (benefit) 2,132 583

Net income (loss) $ 3,195 $ (432 )

Earnings (loss) per share:
Basic $ 1.65 $ (0.23 )
Diluted $ 0.19 $ (0.23 )

Common shares and equivalents outstanding:
Basic weighted average shares 1,939 1,864
Diluted weighted average shares 17,095 1,864

ROSETTA STONE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
March December
31, 31,
2009 2008
(unaudited)

Assets
Current
assets:
Cash and $ 29,356 $ 30,626
cash
equivalent
s
Restricted 34 34
cash
Accounts 19,708 26,497
receivable
(net of
allowance
for
doubtful
accounts
of $1,268
and
$1,103,
respective
ly)
Inventory, 6,230 4,912
net
Prepaid 9,056 6,598
expenses
and other
current
assets
Deferred 2,282 2,282
income
taxes
Total 66,666 70,949
current
assets

Property 16,341 15,727
and
equipment,
net
Goodwill 34,199 34,199
Intangible 10,612 10,645
assets,
net
Deferred 6,828 6,828
income
taxes
Other 697 470
assets
Total $ 135,343 $ 138,818
assets

Liabilitie
s and
stockholde
rs' equity
Current
liabilitie
s:
Accounts $ 2,461 $ 3,207
payable
Accrued 5,932 8,570
compensati
on
Other 17,738 21,353
current
liabilitie
s
Deferred 14,234 14,382
revenue
Current - 4,250
maturities
of long
-term debt
- related
party
Total 40,365 51,762
current
liabilitie
s

Long-term 9,929 5,660
debt -
related
parties
Deferred 1,468 1,362
revenue
Other long 908 963
-term
liabilitie
s
Total 52,670 59,747
liabilitie
s

Commitment
s and
contingenc
ies

Stockholde
rs'
equity:
Class A,
Series A-1
Convertibl
e
Preferred
Stock,
$0.001 par
value; 269
shares
authorized
;
269 and 26,876 26,876
269 shares
issued and
outstandin
g at March
31, 2009
and
December
31, 2008,
respective
ly
Class A,
Series A-2
Convertibl
e
Preferred
Stock,
$0.001 par
value; 178
shares
authorized
;
178 and 17,820 17,820
178 shares
issued and
outstandin
g at March
31, 2009
and
December
31, 2008,
respective
ly
Class B
Convertibl
e
Preferred
Stock,
$0.001 par
value; 111
and 111
issued and
outstandin
g at
March 31, 11,341 11,341
2009 and
December
31, 2008,
respective
ly
Class A - -
Convertibl
e Common
Stock,
$0.00005
par value;
900 shares
authorized
; zero
shares
issued and
outstandin
g
Class B - -
Convertibl
e Common
Stock,$0.0
0005 par
value;
20,000
shares
authorized
; zero
shares
issued and
outstandin
g
Non
-designate
d common
stock,
$0.00005
par value,
39,100
shares
authorized
, 1,950
and 1,936
shares
issued and 1 1
outstandin
g at March
31, 2009
and
December
31, 2008,
respective
ly
Additional 11,287 10,814
paid-in
capital
Accumulate 15,617 12,422
d income
Accumulate (269 ) (203 )
d other
comprehens
ive loss
Total 82,673 79,071
stockholde
rs' equity
Total $ 135,343 $ 138,818
liabilitie
s and
stockholde
rs' equity

ROSETTA STONE INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)

Three Months Ended Three Months Ended
March 31, 2009 March 31, 2008
GAAP Adjustments non-GAAP GAAP Adjustments non-GAAP
Revenue:
Product $ 42,839 $ - $ 42,839 $ 30,218 $ - $ 30,218
Subscription and service 7,445 - 7,445 5,367 - 5,367
Total revenue 50,284 - 50,284 35,585 - 35,585

Cost of revenue:
Cost of product revenue (1) 5,943 (3 ) 5,940 4,030 (14 ) 4,016
Cost of subscription and service revenue 484 - 484 506 - 506
Total cost of revenue 6,427 (3 ) 6,424 4,536 (14 ) 4,522

Gross margin 43,857 3 43,860 31,049 14 31,063

Operating expenses
Sales and marketing(2) 23,612 (87 ) 23,525 18,045 (784 ) 17,261
Research and development(3) 4,843 (147 ) 4,696 4,532 (80 ) 4,452
General and administrative(4) 9,887 (273 ) 9,614 8,528 (219 ) 8,309
Total operating expenses 38,342 (507 ) 37,835 31,105 (1,083 ) 30,022

Income (loss) from operations 5,515 510 6,025 (56 ) 1,097 1,041

Other income and expense:
Interest income 30 - 30 216 - 216
Interest expense (315 ) - (315 ) (296 ) - (296 )
Other income 97 - 97 287 - 287
Total other income (expense) (188 ) - (188 ) 207 - 207

Income (loss) before income taxes 5,327 510 5,837 151 1,097 1,248
Income tax provision (benefit)(5) 2,132 204 2,336 583 439 1,022

Net income (loss) $ 3,195 $ 306 $ 3,501 $ (432 ) $ 658 $ 226

Earnings (loss) per share:
Basic $ 1.65 $ 1.81 $ (0.23 ) $ 0.12
Diluted $ 0.19 $ 0.20 $ (0.23 ) $ 0.01

Common shares and equivalents outstanding:
Basic weighted average shares 1,939 1,939 1,864 1,864
Diluted weighted average shares 17,095 17,095 1,864 16,794

____________________
(1) Represents stock based compensation expense of $3 and $1 in 2009 and 2008, respectively as well as amortization of intangibles expense of $13 in 2008.
(2) Represents stock based compensation expense of $54 and $33 in 2009 and 2008, respectively as well as amortization of intangibles expense of $33 and $751 in 2009 and 2008, respectively.
(3) Represents stock based compensation expense of $147 and $80 in 2009 and 2008, respectively.
(4) Represents stock based compensation expense of $273 and $219 in 2009 and 2008, respectively.
(5) Non-GAAP tax rate of 40%

ROSETTA STONE INC.
Reconciliation of Adjusted EBITDA to Net Income (Loss)
(in thousands)
(unaudited)

Three Months Ended
March 31, 2009
2009 2008

Net income (loss) $ 3,195 $ (432 )
Interest expense, net 284 80
Income tax expense 2,132 583
Depreciation and amortization 1,224 1,667
Stock-based compensation 477 333

Adjusted EBITDA $ 7,312 $ 2,231

Rosetta Stone Inc.
Investors:
Christopher Martin, 703-387-5927
cmartin@rosettastone.com
or
Media:
Reilly Brennan, 703-387-5863
rbrennan@rosettastone.com

Copyright Business Wire 2009