Rosetta Stone: Out-of-Favor, Misunderstood Industry Leader

Jim Roumell presented his in-depth investment thesis on Rosetta Stone (NYSE: RST) at Best Ideas 2016.

Rosetta Stone is an out-of-favor, misunderstood industry leader. The company is the global leader in language education and owns literacy software company Lexia Learning. The company continues to gain momentum toward building a long-term sustainable business model leveraging a unique brand with sizable market opportunities in the language and literacy digital marketplaces. Subscription and service revenue was 72% of revenue mix in the last quarter. Cost-cutting initiatives are clearly paying off, as the company’s adjusted EBITDA was a negative $1.6 million in the third quarter vs. a negative $9.1 million in the prior year’s quarter. The company announced it has identified an additional $15 million in cost reductions. Since becoming interim CEO in April 2015, John Hass has delivered on the promised goal of managing a leaner more focused company; 3/31/15 net cash was $46 million and the company estimates year-end cash to be in the mid-$40 million range. The company remains debt free with access to a $25 million credit line. The consumer business is being rationalized, with a strong focus on the passionate language learner not served by the free app market. The efficacy of RST’s offering was underscored recently by the University of California’s decision to certify the company’s Spanish offering as a way to allow high school students to meet their college admission language requirement. E & E language continues to be a weak spot, but the new enterprise platform, Live Mocha, will be selectively introduced in the fourth quarter for beta testing and should gain traction with the inclusion of much needed placement and assessment tools demanded by enterprise customers.

About the instructor:

Jim Roumell entered the securities industry in 1986. Before founding the firm in 1998, he was a Registered Principal at Raymond James Financial Services, Inc. Mr. Roumell is a frequent contributor to Manual of Ideas Global and has been featured in such publications as Barron’s, Kiplinger’s, Value Investor Insight, Financial Planning Magazine, and The Washington Post. He is listed and quoted in “The Art of Value Investing: How the World’s Best Investors Beat the Market.” Mr. Roumell was selected to participate in, and won, two consecutive Wall Street Journal stock picking contests in 2001 and 2002. He is a Board Member and Chairman of the Investment Committee of Wayne State University Foundation. He is also a Board Member and serves on the Investment Committee of Amalgamated Casualty Insurance Company. Mr. Roumell is a graduate of Wayne State University in Detroit, Michigan.

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