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Edited Transcript of RST earnings conference call or presentation 6-Mar-19 10:00pm GMT

Q4 2018 Rosetta Stone Inc Earnings Call

Arlington Mar 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Rosetta Stone Inc earnings conference call or presentation Wednesday, March 6, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* A. John Hass

Rosetta Stone Inc. - Chairman & CEO

* Matthew N. Hulett

Rosetta Stone Inc. - Co-President & President of Language

* Nicholas C. Gaehde

Rosetta Stone Inc. - Co-President & President of Lexia Learning

* Thomas M. Pierno

Rosetta Stone Inc. - CFO

* Jason Terry

ADDO Investor Relations - IR

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Conference Call Participants

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* Eric Martinuzzi

Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst

* Chris Howe

Barrington Research Associates, Inc., Research Division - Senior Investment Analyst & Research Analyst

* John Hartnett Lewis

Osmium Partners, LLC - Managing Partner, CIO, and Co-Founder

* Patrick Retzer

Retzer Capital Management, LLC - Analyst

* Steven Bruce Frankel

Dougherty & Company LLC, Research Division - Senior VP & Director of Research

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Presentation

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Operator [1]

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Greetings, and welcome to Rosetta Stone's Fourth Quarter and 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Jason Terry, Investor Relations for Rosetta Stone. Thank you. Please, begin.

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Jason Terry, ADDO Investor Relations - IR [2]

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Thank you. Good afternoon, everyone. Welcome to Rosetta Stone's Fourth Quarter and 2018 Earnings Conference Call. Speaking on the call today will be John Hass, Chairman and CEO; and Nick Gaehde and Matt Hulett, Co-Presidents of Rosetta Stone. Additionally, Tom Pierno, the company's Chief Financial Officer, will be available during the Q&A portion of today's call. We have posted to the Investor Relations section of our website at www.rosettastone.com, both the earnings release and the slide presentation that accompanies today's call.

We've also posted supplemental information and analysis on our website. This supplemental information will not be read on today's call. I want to remind everyone that as always there'll be elements in today's presentation, which are forward-looking and are based on our best view of the world and our business as we see them today. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially. A description of these risks and uncertainties and other factors that could affect our financial results are included in our SEC filings, including our most recent annual report on Form 10-K and quarterly reports on Form 10-Q.

We expressly disclaim any obligation to update or revise any forward-looking statements except as required by law.

Today's presentation and discussion also contains references to non-GAAP financial measures. The full definition, GAAP comparison and a reconciliation of these measures are available in the aforementioned presentation and press release. Our non-GAAP measures may not be comparable to those used by other companies, and we encourage you to review and understand all of our financial reporting before making any investment decisions.

I will now turn the call over to John.

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A. John Hass, Rosetta Stone Inc. - Chairman & CEO [3]

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Thank you, and good afternoon. As has become our custom at the beginning of the year, we will spend a little more time and talk about the changes that have occurred in our business, discuss where we see ourselves today and share with you what we expect moving forward.

Please turn to Slide 3. As always, everything begins with our mission. To change lives through the power of language and literacy education. By dedicating ourselves to producing real demonstrable outcomes in our core areas of language and literacy, we make a difference in the lives of the 2/3 of children in our schools that are reading below grade level and the young woman in Berlin looking to advance her career by learning English.

Slide 4, please. To achieve these outcomes, we are transforming ourselves into a global leader in digital learning solutions. We begin from a legacy that is unique in our industry, a combination of 2 companies both founded on the idea of using technology to change the way people learn.

With over 60 years of a combined focus in education technology, unlike more recent entrants, we have a level of expertise that manifests itself in areas like the depth and breadth of our literacy businesses' peer-reviewed research and in the quality of the language businesses' pedagogy and content. Our shared history has allowed the creation of differentiated technology and capabilities, like our speech recognition engine, the Rosetta Stone animation engine and a decade of experience in tutoring that serve us well today, but which will be even more important in the future as we bring them together in new products.

Our position in language learning is clear. We have nearly 1.5 million paid users accessing our solutions directly or through their school or employer. In literacy, where we currently serve approximately 17,000 schools and 4 million students, no one can match our record for demonstrated efficacy. And Rosetta Stone has one of the most widely known brands in learning, which is a competitive advantage that has more potential than we are currently realizing.

Next slide, please. To unlock these assets we had to change. From a company in 2014 that was dominated by a transactional Consumer Language business to a multi-disciplinary learning company with over 5 million paid learners in 2019. And as a learning company, we will provide the optimal research-backed experience for each learner by adapting to their needs whether it is an immersive software path or providing them a blended learning experience with a teacher or tutor empowered by data and information.

Please turn to Slide 6. And we are changing lives. We know, for example, that achieving appropriate levels of literacy is highly correlated with higher lifetime earnings and lower levels of incarceration. According to a 2013 study by Dr. Carolyn Carlson at Washburn University, approximately 7,000 students drop out of high school every day, with 60% doing so primarily because of low literacy skills.

As these young people leave schools and enter the work environment with low literacy skills, not only do they earn less, they cost society more. In fact, if all of the students who dropped out in the 2011 class had, in fact, graduated, the nation's economy would benefit by $150 billion in additional income over the course of their lifetimes, staggering opportunity costs.

But it can change, and that is what we are working to do every day. With our product portfolio, our focus on improving student literacy, performance and reducing dropout rates begins in kindergarten and continues through middle and high school.

In 2018, we made progress in making the company the business and the engine of change that we want to be.

Please turn to Slide 7 for an overview of our full year results.

Today, we've reported that fourth quarter revenues were $44.6 million, stable with the fourth quarter of 2017, the first time this has happened operationally since 2014. This is the inflection point we have been working towards. Total 2018 revenues of $173.6 million decreased 6%. Within this, literacy revenue grew by 21% in 2018 on bookings growth of 23%.

The decrease in consolidated revenues was driven primarily by changes to our Consumer Language business model as it transitioned to subscription service. In 2018, only 3% of consumer new unit sales were a perpetual versus approximately 46% in 2017, with the attendant decrease in immediately recognized revenues.

Importantly, even as our consumer bookings and revenues fell in 2018, the gross lifetime value originated by our North American consumer direct business, or the total bookings we expect to receive from our subscriptions sold in the year, rose by 6% to $58.9 million versus 2017. We have now finished the transition from a perpetual to a subscription in our consumer business and expect 2019 to be relatively normal for year-over-year comparisons.

Total adjusted EBITDA was $0.7 million in the fourth quarter, $2 million better than previously expected. For the full year, adjusted EBITDA was $0.2 million, the decline of $13.2 million versus 2017, driven primarily by the decline in our consumer revenues and an increase in operating expenses in our literacy segment.

Operating cash flow in 2018 was $10.4 million, including $4.5 million from SOURCENEXT. Capital expenditures were $16.9 million, an increase of $3.9 million year-over-year, driven by a decision during the year to invest in new products, including the new K-6 English learner product and the new international Adaptive Blended Learning product in a consumer. Additional investment in 2018 drove a simplified and capability-enhanced language platform that Matt will discuss in a few minutes. We have $38.1 million of cash and no debt at year-end, in line with expectations.

Next slide. It is clear that the business has changed fundamentally since 2014. It is more balanced with greater opportunity for a predictable growth. Today, we report 3 segments, each of which constitute approximately 1/3 of our total business in 2018. Across these segments, 46% of total bookings in 2018 were from K-12 customers, a percentage that will continue to grow.

We like K-12 because demand is relatively consistent from year to year, and while the solutions required are demanding and increasingly require research-based evidence that they positively impact student performance, they do not require high levels of customization. To get to the place where we can offer great solutions and growth opportunities in both language and literacy, required reallocating how we spend our investment dollars.

Please turn to Slide 9. Even as we've reduced total company operating expenses since 2015, we reallocated our spend from language to literacy to take advantage of the opportunity we saw to build distribution and round out our product portfolio.

During this period, literacy spend more than doubled as a percentage of total spend, from 14% in 2015 to 33% in 2018.

Next slide, please. Those of you that know K-12 well, understand that the most successful companies have 2 things in common: products that demonstrably work in a national sales force and implementation in training team to bring them to market. Many K-12 companies never have either one, very few have both. Because of the investments we've made over the last 3 years, we now have a productive direct sales force and service team and a portfolio of products that make our literacy suite the best in the marketplace.

Please turn to Slide 11. Looking back, our decision to invest in literacy has been a good one. Driving a compound annual growth rate in bookings of 26% since 2014, our confidence in continuing this growth is driven in part by our knowledge of what the team overcame as they delivered these results.

First, beginning just a few years ago, we hired, trained and equipped a completely new sales and customer success team while continuing to grow. When we drove this growth, even as the weighted average length of our literacy contracts fell from 29 months to under 17 months, a decrease of 12 months or approximately 1 year of bookings. This decrease occurred as purchasers moved away from multiyear adoptions generally; and as Core5 specifically, increasingly was viewed as part of general curriculum and funded in the annual operating budget.

Because we are generally paid upfront as the average contract life has shortened, it has led to fewer dollars being booked for each contract, all else being equal. This created a headwind to bookings growth the last few years. The good news is much of the shift seems to have occurred and because our retention rates regularly exceed 90%, with a renewal rates of 100% or more, lifetime value was deferred, not lost.

Turn to Slide 12 please. Even as we were building our Literacy business, we were reimagining the products and the go-to-market strategies in our language business. On the product front, we introduced Catalyst for enterprise and natively built mobile products for iOS and Android. While deflashing, consolidating and moving off of old legacy language systems.

The legacy work will largely conclude by the end of the year, but it has absorbed a substantial share of language R&D effort and spend over the last few years and hindered us from moving forward as quickly and efficiently as we would have liked. But under Matt's leadership, we are, once again, seeing the innovation that was a previous hallmark of our language business.

Slide 13, please. We have transformed the value proposition in our Consumer Language business. Moving from selling high-priced CDs, downloads and multiyear subscriptions to offering a portfolio of subscription products. While this improves the demographics of the business and is driving unit growth, the transition significantly affected the timing in which we realized both revenues and bookings.

Next slide, please. Ultimately, bookings are a function of the number of units we sell and the lifetime value of each of those units. In the past, calculating expected bookings was simple, as almost the entire lifetime value of a purchaser was received at the time of sale of a CD or a long-term subscription. Over the last few years, this has fundamentally changed.

In 2017, we transitioned our web-based business to subscription pricing. This improved demographics leading to increased unit sales but decreased the average initial sales price, as sales previously made to customers where the expected LTV was received upfront, like CDs, moved to shorter-term subscriptions where the initial price was lower, but the LTV was largely made up through renewals. In 2018, we completed the process by transitioning both our App Store and retail businesses.

Overall, you can see the average initial life per unit fell from 22 months in 2016 to under 14 months in 2018. The shortening of initial term was reflected in average sales price per unit, which fell from $175 to $105. This had a meaningful temporary impact in bookings because, for the first time, a large portion of the expected lifetime value of a consumer customer was being deferred to future periods. Simply, in 2016, almost 90% of the expected LTV of a customer was realized at initial sale. In 2018, we realized less than 2/3.

We expect the average initial selling price of new units sold in 2019 to trend down as the percentage of short-term subscriptions grow but expect this to be more than offset by unit growth. So like literacy, Consumer Language has experienced a trend of shortening subscription terms and deferred value realization with the attendant decrease in the period bookings.

Turning to Slide 15, please. This transition in a Consumer Language is why we have emphasized lifetime value created. LTV brings everything together and allows us to compare products with different dynamics, like CDs and short-term subscriptions. During 2018, gross lifetime value created grew by 6% to $58.9 million. So since 2015, each of our businesses has fundamentally changed its product portfolio and go-to-market strategy. We believe these changes would lead to growth and expanding margins as investments are leveraged and as the masking effects of the transition lift. 2019 is the beginning of that future.

Slide 16, please. The future that will see us focus on leveraging our 2 biggest assets: a growing presence in K-12 schools and the Rosetta Stone brand.

With that, please turn to Slide 17, and I will turn the call over to Nick to talk about our strategy for K-12.

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Nicholas C. Gaehde, Rosetta Stone Inc. - Co-President & President of Lexia Learning [4]

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Thank you, John. It wasn't long ago that the business I lead had 1 primary Literacy product, a small direct sales force with the majority of sales coming from an indirect sales team and less than $20 million in bookings.

Now as we bring together our literacy and language sales teams and look to the introduction of our K-6 English learning, or EL product next year, on a consolidated basis, we will have approximately 75 commissioned salespeople selling a world-class portfolio of both literacy and language products, driving continued strong growth with improving margins. In total, one of the strongest leaders in the K-12 marketplace.

Slide 18, please. So why are we successful? We win in K-12 because we have knowledgeable experts and the best literacy curriculum and assessment portfolio in the marketplace. The efficacy of our products has been demonstrated over decades, 16 third-party reviewed studies highlight the rigor of our research and support our ability to meet the standard of evidence of the Every Student Succeeds Act that now guides federal education funding.

We believe this level of demonstrated proof is unmatched in our industry and allows us to rise above competitors in what matters most to teachers and administrators, improving learner outcomes. And now more than ever, we're a recognized leader in K-12, having served approximately 17,000 schools and 4 million learners in 2018.

We were selected #1 in every major category ahead of great companies like Apple and Google in the Annual THE Awards that recognize excellence in educational technology.

Next slide, please. And while Core5 remains our flagship literacy product, we're seeing increased contributions from the entire portfolio led by PowerUp. PowerUp is our literacy curriculum product for nonproficient readers in middle school and high school. PowerUp meets an underserved need in our schools and extends our ability to address the needs of schools from kindergarten through 12th grade.

As a portfolio, Core5 and PowerUp along with RAPID, our K-12 computer-adaptive literacy assessment, provide us the opportunity to have dialogues with schools and districts focused on all of their literacy needs. From helping English learners so they can thrive in traditional classroom settings to building vocabulary skills for socioeconomically disadvantaged students, we can provide systematic and explicit reading instruction for students with learning disabilities and improve high school graduation rates.

By helping solve these and other problems we have become a trusted partner to thousands of school districts. And our ability to solve problems is having an impact. During 2018, the number of customers using more than one of our literacy products grew approximately 785%.

Continuing to drive multiproduct sales as a trusted partner to our schools is one of the reasons why we're so excited to bring our K-12 literacy and language sales teams to closer alignment this year, and to introduce our new English learner product that will meet critical and growing needs in our schools. At the beginning of the year, the K-12 language sales team began reporting to me. Bringing the K-12 sales teams together over time will enable us to increase our reach and have the biggest impact on our customers.

Our K-6 English Learner or EL product is a great opportunity for us to leverage our presence in schools. We start with a core of schools already partnering with us for their EL needs. For the first time, we're bringing together key capabilities, from our speech recognition and animation engines to our patented Assessment Without Testing methodology, to provide (technical difficulty) class solution for the fastest-growing student population.

Importantly, we're building the product on our myLexia platform that is currently serving over 17,000 schools, providing actionable data and information for everyone, from the teacher to the superintendent. Expanding the use of myLexia across curriculum areas is an exciting opportunity for us and a strategy to ensure customer success.

Overall, I'm happy with the progress we've made in developing our EL product since we first talked to you about it in the fall and look forward to its launch in 2020.

Turn to Slide 20, please. In the meantime, we continue to pursue other opportunities that have served us well in the recent years. A key area of focus has been to move customers from seat to whole school licenses. As Core5 has moved from intervention to an essential part of the school literacy curriculum, the number of whole school licenses has grown from a little under 1,300 in 2014 to over 3,800 last year. And at $8,500 per school, the license portion alone of these sales represents an installed base of almost $33 million on an annual basis.

And the upside in our remaining customer base is even larger. Over 10,000 current K-12 customer schools remain on seat rather than site licenses at a lower per school annual order value.

Please turn to Slide 21. An even larger opportunity for growth is to serve new customers in our existing footprint. Approximately 14% of all U.S. public school licensed 1 or more of our literacy products today. Those 14% of schools however, are in districts that together account for 41% of all U.S. public schools. Districts where we have reference accounts and the ability to show leaders the performance data for students and schools in their districts. And districts where now, with PowerUp, we can be part of every school's literacy curriculum and not just in elementary schools. We will not ignore the 59% of schools where we have no in-district representation today. But the 41% within our existing footprint is the biggest opportunity to expand our school relationships.

These 3 areas: sales of additional products to existing schools, sales of whole school licenses to existing seat-licensed schools and sales to new schools and districts where we already have a presence, are the best opportunities to continue to leverage our presence in K-12.

And with that, please turn to Slide 22, and I'll turn the call over to Matt, who'll walk you through his priorities in the language business.

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Matthew N. Hulett, Rosetta Stone Inc. - Co-President & President of Language [5]

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Thanks, Nick. In language our focus is squarely on the segment of the marketplace we're geared to, adult language learners around the world. I've had 2 priorities since I started the company a little over a year ago. Stabilize the overall language business and to develop and deploy a strategy to set us up for growth. The result of this focus was a decision to put more emphasis on our Consumer Language business. And consumer opportunity represents the largest addressable learning audience with English being the most popular with over 1.5 billion learners around the world.

Last year, we finished our work migrating our perpetual CD business to a SaaS subscription model. We also focused on developing our now burgeoning mobile subscription business. Our overall focus was to invigorate growth by investing in more product innovation and overall go-to-market improvements to generate a growing base of consumer subscriptions. The subscribers grew to 487,000 at the end of last year, an increase of 32% since the end of 2017. In 2019, we will continue to drive the momentum in our U.S. Consumer Language business that began in 2018.

The U.S. is an attractive commercial geography for us. Our brand has great resonance and is synonymous with language learning. We have begun to grow here again because we are providing learners the best value in our history. We've invested in mobile-first innovations and different pricing options that are attractive to a wider audience. In short, our strategy for the U.S. consumer is an enhanced product experience with new pricing structures that, while a premium to our peers, better match their needs.

In addition to fuel more efficiency in our business over the long term and to provide more leverage to our R&D investment, we're in the process of simplifying and reducing the number of platforms our language products utilize and segregating important capabilities, like our speech recognition engine and advanced content into individual services that can be more easily shared across our businesses.

This work and the work to deflash our products has been substantial lifts the last few years, but will largely end later this year. When completed, we will be able to more easily and efficiently bring advanced content to our consumer learners and more innovation and engagement features to our enterprise customers.

In the future, I expect our Catalyst product and our consumer product will start to resemble each other, which will benefit both learners and us. We already see early signs of this synergy. For example, we recently introduced to our enterprise learners the Seek & Speak feature released to consumers late last year, which uses AI and augmented reality in a mobile context to deliver a more personalized and immersive experience.

As part of our platform consolidation process, we're gearing up for a major upgrade to Catalyst, our best-in-class enterprise solution. In the next 2 quarters, we will be releasing our next version of the software that we dubbed Catalyst Season 2. This enables us to provide a new modernized platform and allows us to leverage content and functionality in both our enterprise and adult consumer base.

Slide 23, please. With new products for consumer and enterprise customers, we are able to address a full range of needs, but ultimately, our learner is still an adult trying to learn a second language. This allows us to share content and functionality across our segments. And we believe that we have the superior product within our marketplace.

Evidence of this was a tremendously positive feedback from our customers as well as industry awards. We are proud to have recently won a Tabby Award for the second year in a row for the best mobile product in the education category, as well as just winning the PC Magazine's Editors' Choice Award for the best language learning software for the seventh year in a row.

An important capability that we have refined to our experience with our enterprise customers is video tutoring. We fundamentally believe that unlocking the potential of providing human tutoring in concert with our world-class content is going to be an important innovation for the company.

Slide 24, please. And we intend to continue to expand the awareness and usage of our recent mobile innovations throughout 2019. We like to innovate on single platforms, test, and then replicate if the results are positive. For example, Your Plan, which allows a learner to set goals and receive ongoing feedback was introduced to Android users in December of 2018. Based on our experience with these users, we're bringing this engagement feature to iOS users in 2019.

Next slide, please. As I mentioned earlier, consumers are a big focus for us. However, the U.S. is not the largest commercial or geographic opportunity for language learning. We see huge demand to address the entire spectrum of learners' needs, from excellent expert tutoring to incredible e-learning content. And we believe, this will be extremely attractive for audiences especially outside the U.S.

In 2019, we're bringing Adaptive Blended Learning, or ABL as we call it, to Consumer Language learners via test marketing in South Korea. As a reminder, ABL is bringing together self-directed adaptive software with a tutor, or in the case of K-12, a teacher; in both cases, powered by data and information to provide the optimal learning experience. We believe that a combination of computer intelligence and human intelligence is the best solution for learners.

We launched an MVP version of this experience in November of last year. We chose South Korea for our test because it is a huge, demanding marketplace, generally considered the second to third largest language learning commercial opportunity in the world, and it is competitive. If we can be successful in South Korea, we are reasonably confident that the efficacy of our offering would warrant expanding into other markets. We're committed to being smart and agile with our test, and we're optimistic based on early customer satisfaction and other data points.

I now have a full year with Rosetta Stone under my belt. In 2018, we demonstrated we could drive subscriber growth and increase the lifetime value of the customers who purchased our products. E&E had a more difficult year. But we see positive momentum in our U.S. and EMEA enterprise sales efforts. And I'm really excited to finish polishing up the product portfolio in 2019, as we put all of our focus on the future.

With that, please turn to Slide 26, and I'll hand the call back to John.

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A. John Hass, Rosetta Stone Inc. - Chairman & CEO [6]

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Thanks, Matt. Our mission is to change lives through language and literacy education. We are positively impacting society through our work, and we expect our influence to grow. To achieve this, we will be the expert in K-12 helping children learn to communicate through best-in-class reading and language solutions. And we will build on the turnaround in our U.S. consumer and global enterprise Language businesses and test to see if we can successfully bring a tutoring and software solution to demanding international customers to drive upside.

So let me turn to guidance for 2019 and the trends we expect beyond this year. Slide 27, please. In 2019, we expect consolidated revenue growth of 10% to approximately $191 million through a combination of 20% revenue growth in Literacy, 8% revenue growth in consumer and relatively flat revenues in E&E.

Our 2019 revenue expectations would have been higher, but because we expect approximately 80% of total Literacy bookings and 100% of Literacy bookings growth to occur in the second half of the year, the impact of its bookings growth on our consolidated revenue this year is diminished. Our revenue growth guidance assumes the total bookings growth will approach 10% in 2019.

Within this, we expect Literacy bookings to grow over 25% to $74 million, a little faster than 2018. Our expectation is driven by continued strong retention renewal rates, the ongoing maturation of our sales team, a full year of PowerUp sales opportunities, and the reopening of a few markets, like Texas, that we were largely excluded from in recent years. Consistent with bookings growth, we expect Literacy's annual recurring revenue, or ARR, to grow a little more than 25% this year.

Consumer bookings, excluding SOURCENEXT and Fit Brains, are expected to grow 6% to $67 million. We expect this growth to be driven by a larger pool of our renewable customers entering the year and expected subscription unit growth within the year of approximately 30% or 150,000 net new subscribers.

E&E bookings are expected to decline $1 million to $58 million due to our deemphasis of custom content projects and declines in our K-12 language business pending the introduction of our new K-6 English language product next year. We expect this to be offset by growth in enterprise bookings.

Turning to profitability. We expect a GAAP net loss of $15 million in 2019 with adjusted EBITDA of approximately $8 million. Operating cash flow is expected to be $19 million, an improvement of approximately $13 million before SOURCENEXT payments. We expect this cash flow to be reinvested in the business and to be cash flow breakeven in 2019.

While we expect accelerating revenue growth in 2019 for the first time since 2014, this will not immediately turn into the cash flow we had previously expected for 3 reasons: first, results in parts of our language business in 2018, including retail in consumer as it went through the transition to a subscription and a few smaller less core enterprise lines were not as strong as we had expected; second, while we are creating the amount of lifetime value in our direct consumer business we had planned on, it is being realized more slowly because a greater portion will come from renewals than planned, deferring receipt of cash; finally, we made the decision to increase product investment primarily to fund development of our K-6 English learner product. Teaching the fastest growing K-12 population, those students that don't natively speak English, to speak English is an amazing opportunity to change lives, leverage our position in schools and accelerate growth.

Let me turn to Q1. While we don't normally provide quarterly guidance, given how close it is to the end of the quarter, we would like to share our outlook. I would remind everyone that Q1 is a very small quarter with approximately 14% of expected bookings for the year. This is especially the case in Literacy, where bookings are expected to be down slightly from Q1 of 2018 and to constitute only 5% of total Literacy bookings for the year.

At this point, we expect total Q1 revenue of $43 million to $44 million, slightly up with last year, a GAAP net loss of $5 million to $6 million and break-even adjusted EBITDA, a modest improvement over last year. Operating cash flow is expected to be use of $19 million as our costs are largely fixed across the year. But this, as noted, is our lowest bookings quarter. We expect capital expenditures of approximately $5 million in the quarter. Due to this first half use of cash, I expect that we will have some seasonal borrowings. We expect to have positive net cash at all times and intend to end the year with no debt.

As implied by our full year guidance, we expect revenue growth and operating profitability to accelerate as we move through 2019, in line with the seasonal bookings growth in our business. In fact, nearly 3/4 of our year-over-year revenue growth is expected to be in the second half of 2019. To give you a sense, if we achieve our revenue expectation for the year with the bookings progression we expect, Q4 revenues will be 15% higher than our expectation for Q1. This would be an annualized run rate of approximately $200 million, laying the foundation for the coming years.

So let's look at 2020 and 2021. Please turn to Slide 28, and I will walk you through our expectations for growth and margin expansion. Margin improvement and growing subscription software businesses is driven by a few factors. In sales and marketing, as headcount growth slows and as we renewals become a larger share of bookings, productivity rises and margins improve.

In R&D, improvement comes with the ability to spread investment over a broader customer base. And in G&A, there is an opportunity to drive additional business through those business support areas that are either fixed or semi-variable. These are the opportunities in our business as the rapid recent investment in Literacy slows and as language begins to grow.

In 2020, we expect total revenues to grow to approximately $225 million. We expect the increase in revenues to be driven primarily by our Literacy segment, where we expect total revenues of $84 million, an increase of 33% over 2019 guidance. That is an important number, so let me unpack it.

We expect to be able to grow Literacy bookings in 2019 at a rate in line with our historical growth rate of 26% for the reasons discussed earlier. As a result, part of the increased growth is realizing, as revenues in 2020, the bookings growth we see for this year. The balance is driven by our expectation that bookings growth will accelerate above 30% in 2020, in part, as we begin to bring our K-6 English language learning product online.

In 2020, we currently expect Consumer Language revenue to grow to $78 million, and E&E Language to be relatively flat, in part, as we renew some of our E&E K-12 customers in the Literacy segment on the new EL product.

In 2020, we expect adjusted EBITDA and operating cash flow margins of approximately 9% and 17%, respectively. Approximately 120 basis points of margin improvement is expected to come from sales and marketing as the headcount growth in Literacy sales and other support areas slows and as a greater share of our bookings come from more efficient renewals.

Another approximately 200 basis points of margin improvement is expected to come as we leverage research and development costs in K-12 across a bigger base of schools and as the deflashing and consolidation work in language ends later this year. The balance of the improvement is expected to come from leverage in G&A. The margin improvement opportunity in 2020 is clear if we deliver the top line growth we expect.

In 2021, we expect growth of 15% to $260 million in total revenue. Growth will be led by Literacy, which by 2021 is expected to account for over 40% of total revenues, and will have the full year benefit of the new K-6 English learner product.

I would note that a portion of our revenue growth in 2020 and 2021 is related to expectations for the English language offering we are bringing to South Korea this year. While we are happy with the early testing and excited about the opportunity, given how early it is, this is the part of our outlook with the most inherent risk.

The revenues in our consumer guidance for this effort are approximately $7 million and $13 million in 2020 and 2021, respectively. Our profitability and cash flow estimates for the 2-year period are not dependent on this opportunity.

In 2021, we expect adjusted EBITDA and operating cash flow margins of 12% and 22%, respectively, on an additional approximately 30, 90 and 180 basis points improvement in sales and marketing, research and development and G&A, respectively.

Finally, we expect capital expenditures to peak in 2020 at $22 million before declining to $18 million, 2021 as the upfront investments and our major new initiatives are completed.

The opportunity for us is clear. And for the first time, the math is becoming more transparent, more understandable and more predictable. Continue to grow Literacy bookings at a rate in excess of 25% for the next few years, consistent with historical trends and the investment we have made; accelerate Consumer Language bookings growth on the back of a growing renewal pool and subscriber base; and grow the enterprise portion of our E&E segment, while K-12 language within E&E shrinks somewhat as we move a portion of that business to the Literacy segment. On top of this, make a thoughtful, calculated investment to see if we can realize the tremendous opportunity in the international English language learning marketplace.

If we do this, we will have mid-teens consolidated revenue growth and can drive 400 and 500 basis points of margin improvement in 2019 and 2020, respectively, and then additional 300 to 400 basis points each year for a few years thereafter.

2019 is an important year. It is the year in which the masking effects of multiple business lines in transition that have complicated our conversations with you will dissipate. And bookings and revenue growth from previous investments will emerge more clearly. Profitability will improve, and we will set the stage for continued growth and margin improvement in the future.

If we do our jobs well, we will deliver for investors and continue to expand the positive impact we are having on society as we change lives through language and literacy education. Thank you. And operator, we would now like to open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Alex Paris, Barrington Research.

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Chris Howe, Barrington Research Associates, Inc., Research Division - Senior Investment Analyst & Research Analyst [2]

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This is Chris Howe sitting in for Alex. Great quarter. Two topics I wanted to hit on, the first being Lexia. At your Investor Day, you had mentioned about Kansas. Any update there? And as we look at these state-level relationships, which states or geographies would possess the most potential for Lexia?

And following up on that, how would you assess the progression of top-down versus bottom-up selling of Lexia in the quarter and how it's looking for 2019?

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Nicholas C. Gaehde, Rosetta Stone Inc. - Co-President & President of Lexia Learning [3]

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This is Nick Gaehde. Great question. So we did have a statewide contract in Kansas and have a good established base there as a result of that. What I think I spoke about at Investor Day was our progress in Utah, where we also have a statewide contract as the result of an early literacy program and now have about 259 schools using our products in that state.

In terms of other opportunities at a state level, we are also, as I mentioned at Investor Day, focused on Texas, where there is a statewide adoption both in the elementary space and the secondary space, which is about $1 billion of spending over the next 8 years. And so we've invested heavily in our capacity in Texas.

As I mentioned also, we have built more capacity and resources and expertise in our top-down selling teams. And so I think now both top-down and bottom-up capabilities are in place, which is an important investment for our future growth.

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Chris Howe, Barrington Research Associates, Inc., Research Division - Senior Investment Analyst & Research Analyst [4]

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That's helpful. And then the last topic I wanted to touch on is the sales force. As you move towards 2021, that might be far out. But more specifically, what are your plans there for sales headcount? And what's the latest status update on the maturation of the sales force? What type of potential can you extract from the existing sales force without adding additional headcount?

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Nicholas C. Gaehde, Rosetta Stone Inc. - Co-President & President of Lexia Learning [5]

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Right. So we have seen continued maturation of the Literacy sales force over the last 3 years with increasing productivity per rep, which is great news and continues our thesis of as reps gain experience, they are able to deliver higher quota numbers. When we think about the number of sales reps, it's also an indication of our strategy to bring our K-12 literacy and K-12 language sales teams together over time. And when you look at the combined sales force, it is about 75 sales reps, which is I think what we need to cover the nation as we launch the new EL product.

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Chris Howe, Barrington Research Associates, Inc., Research Division - Senior Investment Analyst & Research Analyst [6]

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Okay. And for perspective, average sales per rep -- as you expand your market share, where should we expect that metric to trend over time to be at an optimum level?

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Nicholas C. Gaehde, Rosetta Stone Inc. - Co-President & President of Lexia Learning [7]

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Right. So in 2018, we were a little over $900,000 and $920,000 per rep, and 2019 will be over $1 million per rep. As the channel matures and as we bring sales teams together, we have an opportunity to segment that sales channel so that we have some reps focused on smaller renewals, some reps focused on the holding level sales and some focused on larger districts and state initiatives.

So we're going to continue to see that average performance per rep go up but I think what's more important just thinking about the segmentation of the channel and its ability to target different levels of the market.

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Operator [8]

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Our next question comes from the line of Steven Frankel with Dougherty.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [9]

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Nick, I'll start with you. There's clearly a huge opportunity around district mandates. How much of that moving from school to school to district is in your control, it's selling harder to the right person versus it requires a change in how this particular district buys products?

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Nicholas C. Gaehde, Rosetta Stone Inc. - Co-President & President of Lexia Learning [10]

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Great question, Steve, and great to hear from you. One of the things that we are seeing because of our longevity in the market and the footprint we have in 17,000 schools is the ability to go from a individual school in the district up to the district leadership and have conversations now across their entire literacy needs.

The best sales tool we have is being able to bring student performance information and data about the gains that students have made using our programs and individual schools up to the district. And when they see that, there is just a enormous support for continuing to expand within the district. As I said on the call, it is probably our biggest opportunity to continue to expand in the district footprint we currently have.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [11]

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Okay. And the timing on breaking into Texas, what's the purchase cycle like? So when should we expect the first bookings in Texas?

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Nicholas C. Gaehde, Rosetta Stone Inc. - Co-President & President of Lexia Learning [12]

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So we're already starting to see that emerge in our pipeline. It's really -- the funding comes into play this summer and then continues for the next 8 years. And there are 2 proclamations in place. One was proclamation 2019, which is focused on the elementary school market and then proclamation 2020, which is focused on the secondary market. And the timing of those are slightly different. The secondary market lags a little bit behind the elementary school market.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [13]

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Okay. And then switching to the Consumer Language business, I didn't quite get the timing on the English language, worldwide English product. Kind of when do you make the decision to move out of beta into a broader release? And what do you need to learn or see to make the go-forward decision?

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Matthew N. Hulett, Rosetta Stone Inc. - Co-President & President of Language [14]

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It's Matt. Great to hear from you again. It's a great question. We are actively in beta as John mentioned on the call. We're getting really positive feedback from a usage perspective. I would say by Q3 would be kind of the time frame we're looking at there. But thus far, really positive indications from our learners in South Korea.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [15]

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And if you go forward, is it just in South Korea in 2019? Or you would open up to multiple geographies once you exit beta?

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Matthew N. Hulett, Rosetta Stone Inc. - Co-President & President of Language [16]

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Yes, it's a great question. We are looking just at one target market, although we see massive opportunity not only in the APAC region but outside as well. So in terms of how we expand from there, I think we're going to take a very measured approach like we do in most things. And then as we see more success and unit economics pan out the way we want it to, we'd expand from there.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [17]

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Okay. And then, Nick, let me come back to you. And I realize that Q4 isn't a big bookings quarter, but relatively soft year-over-year growth in Literacy bookings below -- it was only low teens rather than something that I thought maybe could be north of 20%.

Was there anything in the year-ago quarter that made this a particularly tough comp? Or should we just not even focus on Q4 because it's such a small portion of the entire year and really focus on the Q3 numbers going forward?

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Nicholas C. Gaehde, Rosetta Stone Inc. - Co-President & President of Lexia Learning [18]

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Yes, what you're going to see, I think, is a continued consolidation of our business into the end of Q2 and Q3. I think you're going to also see that kind of compression affecting Q1. As we become more part -- a bigger part of the school's curriculum, sort of core curriculum, an essential component of what they're doing in literacy, it's becoming part of their operating budget and therefore, is part of what schools are typically spending either at the end of the year but more typically at the beginning of the next school year.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [19]

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Okay. And then -- and one last one for you. The consolidation of the E&E K-12 sales force into your group, is the big benefit down the line in 2020 when you get that ELL product and go out and sell it? Or is there something you might get in the interim by having that group more closely in line with your group?

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Nicholas C. Gaehde, Rosetta Stone Inc. - Co-President & President of Lexia Learning [20]

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Correct. So with that group reporting to me now, Steve, we are -- the leadership of the sales team is spending more time thinking about how to share opportunities, making sure that reps know each other across the channel and building opportunities together. But the real advantage is going to come in 2021 when we start to bring those teams together.

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Operator [21]

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Our next question comes from the line of Eric Martinuzzi with Lake Street Capital Markets.

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Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [22]

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Yes, a question for Matt regarding the bookings trend year-on-year for Q4. I understand the shift to the shorter-term subscription impacting bookings to some extent, but where -- as the beginning of November, there was an expectation, I think, that it was going to be roughly flat year-on-year and we wound up down 9%. What was the major puts and takes between what we thought and what we wound up with in Q4 consumer bookings?

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Matthew N. Hulett, Rosetta Stone Inc. - Co-President & President of Language [23]

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One of the trends that we saw in softness was in retail as a component of that, and the exact percentage is not at the top of my head. But we did see some weakness in the retail segment.

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Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [24]

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And help me understand that, just -- this is -- these are subscriptions sold at retail, which -- the channel here.

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Matthew N. Hulett, Rosetta Stone Inc. - Co-President & President of Language [25]

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Yes, we have a number of different big box and also online retailers that we sell through. It's not really a subscription product per se. We sell a fixed subscription in a box that isn't renewable. And so those products had, had a difficult time. I think we've communicated the nonstrategic businesses, like retail and other aspects to the business, and we've continued to struggle a bit there.

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Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [26]

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Understand. And given that, I think we were down -- at least the back half of 2018, the bookings for consumer were down kind of mid-single digits. I was kind of surprised, pleasantly surprised but still surprised, to see kind of a mid-single digits outlook for 2019. How does that play out first half versus back half, that positive mid-single-digit full year number?

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Thomas M. Pierno, Rosetta Stone Inc. - CFO [27]

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Yes. This is Tom, Eric. We haven't really guided to that. But generally, you should expect a seasonality similar to what we saw in 2018 for consumer. You've got a lower Q2 and Q3 and then a little bit higher in Q1 and Q4.

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Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [28]

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Okay. So just kind of mirror...

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Matthew N. Hulett, Rosetta Stone Inc. - Co-President & President of Language [29]

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And just to add onto that, Q4 does tend to be our best performing quarter in terms of overall bookings.

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A. John Hass, Rosetta Stone Inc. - Chairman & CEO [30]

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And Eric, it's John. I think, again, one of the things that gives us confidence going into this year is the delta between the lifetime value we originated last year and the actual bookings that came through. So in that direct consumer business, we had a little over $50 million in bookings but originated closer to $58 million, $59 million of lifetime value. The difference between those 2 will come in and will largely come in this year.

And so for the first time in a meaningful way, we come into the year with a bit of a wind at our back as opposed to wind in our face since we were transitioning from a perpetual model to a subscription model. And so that gives us a fair amount of confidence as we go through the year.

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Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [31]

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Understand.

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Thomas M. Pierno, Rosetta Stone Inc. - CFO [32]

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Yes. And this is Tom again. Just to put a finer point. Probably 3/4 of the growth in consumer will be in the back half from a bookings perspective.

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Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [33]

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Okay. That's helpful. Right. And then I know we talked about the evidence of closer ties, is what I'm looking for, between Literacy and Language outside of -- obviously, we need to have closer ties with the training up of the sales force. But what are we doing outside of that? I don't know whether I should start with Nick or Matt or maybe start with John, but evidence of closer ties is what I'm looking for.

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Nicholas C. Gaehde, Rosetta Stone Inc. - Co-President & President of Lexia Learning [34]

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So when we think about the K-12 opportunity, we are just incredibly well positioned given both the brands we have and the technology and the expertise. So when we think about the new EL product that we are launching, we are bringing the expertise of both the language and literacy teams to bear on that product and the technology that you see in the speech recognition and the animation engine. So it's the first time that we're able to work across the company to build a new product to address that market segment.

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Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [35]

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Okay, that's helpful. And then you talked -- Nick, you talked about the 75 reps. As of the Analyst Day, I thought we were talking about we were at 45 in November of 2018 and we expected to kind of ramp up that K-12 education, the English language thrust. That was going to ramp over time to 75. You made it sound like that, that had already happened. Help me understand that.

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Nicholas C. Gaehde, Rosetta Stone Inc. - Co-President & President of Lexia Learning [36]

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Sure. When we talk about 75 reps, what we're talking about is the combined teams that are in Literacy and Language today. So the 45 is what we had on the Literacy side in our sales channel in 2018. That's actually growing by 5 additional reps in 2019 on the Literacy side. And then you think about the Language sales team coming together for over the next few years and that team combines about 75 sales reps.

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Operator [37]

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Our next question comes from the line of John Lewis with Osmium.

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John Hartnett Lewis, Osmium Partners, LLC - Managing Partner, CIO, and Co-Founder [38]

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Just a couple of quick ones. So I guess, if I were to -- if I'm looking at your Slide 28 correctly, it looks like your guidance for 2021 net cash would be about $93 million, $94 million. Your old guidance was around, before the earn in -- Analyst Day was around $100 million. So is that -- so that's basically where you should be by 2021, right?

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A. John Hass, Rosetta Stone Inc. - Chairman & CEO [39]

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Correct. To be clear, the old guidance was around 2020. And so for the reasons that we talked about, that's moved back. But yes, that is the guidance for 2021.

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John Hartnett Lewis, Osmium Partners, LLC - Managing Partner, CIO, and Co-Founder [40]

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Got you. And the other thing, I guess, I would just highlight because we always have these discussions on shareholder value and unlocking what we think is an extremely undervalued stock, but if you were to just give a 10 multiple of 2021 operating cash flow plus the cash by 2021, it's $29 a share. And so I guess with this -- just your stock at $15.60 is trading at 5.7x 2021 operating cash flow, and I mean you look out in SaaS-based software companies today, especially in K through 12, most of them trade at more than that in terms of price to sales. So I guess with that backdrop and how much cash you should have falling onto your balance sheet, why -- what is -- I guess what is the reason why we haven't seen a $20 million to $30 million share repurchase?

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A. John Hass, Rosetta Stone Inc. - Chairman & CEO [41]

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Yes, John, I think, honestly, the only reason you haven't seen that at this point is a need on our part to lift the seasonal low cash balance. We -- as we have become more of a K-12 company and as the consumer business has become more steady throughout the year, the first half of the year is a meaningful user -- we use a meaningful amount of cash. I think as we're able to lift that -- as we're able to build the overall cash balance, such that the seasonal low point is higher, I think share repurchase would be very attractive option for us at levels where we're trading today, especially as we look at a business now that we have significantly more confidence in, where we're now and can truly show real GAAP revenue growth and not have to talk about the mechanics of a transition and where we start to expect to see meaningful margin improvement. Ultimately, if that's not recognized by the market and fully and if the -- and as we lift the cash balance, that's something that's certainly I and the board would seriously consider.

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John Hartnett Lewis, Osmium Partners, LLC - Managing Partner, CIO, and Co-Founder [42]

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The other thing I was just going to say was, I mean, you look at how many companies trade at 1.6x revenue. I think -- I don't even think distressed consulting firms trade at that type of valuation in many cases. You've got a company that's 100% SaaS software based growing really sticky business, and I guess it's -- you look at -- we continue to look at the industry. Renaissance has now sold for the third time since it went private to Francisco Partners. Renaissance, when they crossed the $100 million in revenue, there was a bidding war. Stock business sold for $480 million. Now with K through 12, Literacy plus Language, you guys should be over $100 million a year in bookings, and you have far better revenue growth. So I guess the question really comes down to what are we going to do to unlock this value because I feel like one of the big challenges for Rosetta is we have a complexity discount. We have some discounts that have sustained themselves for the better part of the last 24 months. And I guess just where are you guys? I mean, you guys took the step to separate K through 12 and consumer and enterprise starting January 1. But what are you guys doing? If you're not buying back stock, what are we going to do to close this huge gap between what a buyer would pay for this business and where language is in public equity?

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A. John Hass, Rosetta Stone Inc. - Chairman & CEO [43]

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Yes. Well, look, to address kind of the implication of that, if a buyer is more willing to recognize the value that we as a management team and the board ultimately sees in the plan, that's certainly something the board would always have the opportunity to consider. The ownership structure is a little less important to us than maximizing value for shareholders and maximizing our ability to execute the mission of the company, which is obviously very important to all of us as employees of the business. In the interim, until or in case that does not happen, the things we are focused on are, first, leaving the complexity of the story behind. I truly believe, in 2019, we will go a long way towards doing that. We will show revenue growth. We will no longer have to talk about -- or focus as much on things like lifetime value created in the consumer business because you'll start to see consistent subscriber growth. You'll start -- a typical metric. You'll start to see bookings and revenue growth, typical metrics, which were very hard to show as we were going through a transition. But now largely through that, we think those will become much more clear, especially as we get through the year. We will continue to show strong bookings and revenue growth in our K-12 business, and we will continue to clarify the 2 businesses. The other benefit of bringing the 2 businesses together isn't just the K-12 sales team and what we can do on the product front. It's really allowing Nick and his team to focus on K-12 and over time, Matt and his team to focus on the adult language learner and take the business, which has largely been 3 different segments and trying to support 3 different areas and, as much as we can, making them 2 large significant areas. Matt talked about the fact that he is going to, over time, bring his enterprise and his consumer products closer and closer together. And the more we can do things like that and really focus on 2 big customer universes, adult language learners and K-12, be more efficient we can be and we can drive better margin improvement. Look, I think investors in the past -- I understand that it's been complicated. We weren't profitable, and we weren't showing progress through our GAAP numbers. And I think that's now behind us. And we will be spending our time out with investors and in conferences making sure that they understand what we see.

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John Hartnett Lewis, Osmium Partners, LLC - Managing Partner, CIO, and Co-Founder [44]

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Just one other quick one. If you saw the Cambium deal, I think that was $680 million. I think that was 4.5x sales, and I want to say mid-teens multiple of EBITDA. I think they were a much lower percentage of SaaS-based revenue. They had some businesses shrinking, some growing, but it was 4.5x revenue. And I guess, what is your read on the Cambium transaction relative to the Rosetta assets?

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A. John Hass, Rosetta Stone Inc. - Chairman & CEO [45]

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Yes. Yes, look, we know Cambium well. We have a lot of respect for them. Some of their products compete for at least dollars in the literacy space with Core5 and other things that we're doing. I think they had a -- they built a very nice business. I believe, ultimately, our K-12 business is more coherent, dependent on a smaller set of higher-quality products and is a business, which we believe has a long runway for growth. And I know we're making an investment and we're asking shareholders to do this with us but we could not be more excited about the EL opportunity that we see as well because we truly believe we will have a best-in-class product in the marketplace for a market that is so underserved in our schools, so desperately needed that we are quite confident that, that will be a wonderful addition to that portfolio as well. So look, we feel -- I'm not going to compare and contrast too much. We -- I would rather have our K-12 set of businesses than any other set of K-12 businesses in the industry.

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John Hartnett Lewis, Osmium Partners, LLC - Managing Partner, CIO, and Co-Founder [46]

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Got you. I'll leave it at this. Just looking up off the cuff, I mean they're 25% smaller in revenue and they add up a transaction that's over 100% of Rosetta's market cap today. So I think you guys have very attractive operating cash flow growth over the next -- through 2021 and I would love to see you guys take more action to unlock shareholder value that I think is massively undervalued in public markets. So I'll leave it at that.

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Operator [47]

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Our next Question comes from the line of Steven Frankel with Dougherty.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [48]

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Yes. So let me ask a big picture question. I appreciate you laying out not only a 2020 outlook but a 2021 outlook. So I thought that was really interesting. And I guess, that begs the question: what are the 1 or 2 biggest risk factors that might prevent you from reaching that vision that you laid out here tonight?

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A. John Hass, Rosetta Stone Inc. - Chairman & CEO [49]

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Yes. Steve, that's really good question. Well, look, I think a lot of things used to keep me up at night. I still have a tremendous amount of anxiousness but I will tell you, my overall confidence level in the outlook has never been higher than it is today having now largely transitioned the businesses and seeing -- having watched Lexia replicate strong growth year after year despite some of the headwinds we talked about. I spent real time, probably maybe too much, talking about the headwinds that we experienced in consumer and Literacy as contract lengths shortened. It's not something we've talked about before, but to continue to grow 25%, 26% bookings growth rate through that is pretty impressive. So I'm highly confident that we can continue to grow the Literacy business, and when the new EL product is introduced, that will grow nicely as well. Will it grow as fast as we think? I don't know. Maybe not. Maybe it'll grow a little more. Maybe it'll grow a little less. But it's going to be a strong grower. Do I believe we can grow our consumer business? Yes. We pointed out one of the risks and actually quantified maybe the biggest single risk in the actual numbers you see on the page, and that's the worldwide English product that we're introducing in South Korea. I went the extra step of actually telling you, which I wouldn't normally do for a product, what's in the outlook for that because, honestly, it is riskier, right? It's a new market for us. It's a new approach to a market for us. It's probably the largest TAM in our entire company, so there's risk. And so we called that out for you. And I think it's fair to look at that separately as an analyst and as an investor. The K-12 language business, we're going to be introducing a new EL to serve English learners in kindergarten through sixth grade that does not yet address the K-12 world language business or the seventh through 12th grade English learner business. We hope there's some spillover benefits, but those are not products we've invested a lot in. Frankly, the products where we focused and invested, I feel really good about. So those are 2 risks I might point out.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [50]

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Okay, then in consumer, I think, given the market dynamics and given the -- what's going on, I think, the numbers look very good. I'm also seeing Babbel spend what looks like to be tens of millions of dollars, if not, more but saturating the airwaves with ads. What do you think's happened to your market share over the last 12 months?

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Matthew N. Hulett, Rosetta Stone Inc. - Co-President & President of Language [51]

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That's a great question. This is Matt. I think it's been -- the U.S. markets, depending on the source, the addressable marketplace is $400 million to $500 million depending on what analyst report you look at. I would say it had been declining but stabilized. I haven't seen the official report on where we are in terms of overall market share, but I still think we're one of the dominant players. We certainly look at other folks. Babbel, in particular, they've certainly grown quite nicely across different markets, including United States. I can't comment on where they are in terms of market share because they are a private company, but in terms of how we think about the business and our growth, one of the things that we haven't invested in is diverse marketing spend. That's an area that, to be honest, we haven't had the ability to spend into since we hadn't stabilized the business. We primarily are performance marketing only in our spend. We are looking at diversifying that. I think we talked about that at Investor Day, and we'll be rolling out some diverse marketing that's brand oriented in Q2 as a test. But I would say that our market share has stabilized, and I would expect it to grow given some of the guidance that you've seen today.

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Operator [52]

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Our next question comes from the line of Patrick Retzer with Retzer Capital.

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Patrick Retzer, Retzer Capital Management, LLC - Analyst [53]

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So I want to congratulate you not only a good quarter and year but frankly, the job you and your team has done over the last several years to turn this company around is nothing short of amazing, especially considering the outlook you've given us for the next few years. So thanks for your efforts. Beyond that, I just wanted to second the motion. It'll be exciting to see a buyback when you guys get around to that.

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A. John Hass, Rosetta Stone Inc. - Chairman & CEO [54]

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Thank you, Pat, and thanks for the -- for your nice thoughts. A lot of our employees listen to these calls, and I would send your wishes directly to all of them. A lot of people have worked really hard within this business over the last few years because they believe in this company and they believe in what we do. And a lot of them are shareholders too, and we want them to be absolutely rewarded for their work. So thank you.

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Patrick Retzer, Retzer Capital Management, LLC - Analyst [55]

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Well, Great. Keep up the good work.

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A. John Hass, Rosetta Stone Inc. - Chairman & CEO [56]

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And thank you, Pat. And I think given the hour, we'll conclude here. As I hope you can tell, we're really excited for 2019. I've never felt as well positioned across the business as I do today, and so we look forward to speaking with many of you in coming days and in upcoming conferences and answering as many of the questions that you have as we can. Thank you again, and have a good night.

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Operator [57]

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Thank you. This will conclude tonight's teleconference. You may disconnect your lines at this time, and thank you for your participation.