Q3 2019 Earnings Call
Greetings, ladies and gentlemen, and welcome to the Rosetta Stone third quarter 2019 earnings Conference call at this time, all participants Arnold listen only mode.
A question and answer session will follow the formal presentation should anyone required operators systems. Please press star zero on your telephone keypad.
And it's now my pleasure to introduce your host Mr., Jason Terry. Thank you you may begin.
Thank you good afternoon, everyone welcome to <unk> third quarter 2019 earnings conference call speaking on the calc they will be John have chairman and CEO , along with Nikita Immaculate Co President covers at ASCO.
This when we talk you know the company's Chief financial Officer will be available during the Q, what a portion of today's call.
We posted to the Investor Relations section of our website that's done dot com.
The earnings release, and a slide presentation, which accompanies todays call. We've also posted supplemental information and analysis on our website.
I want to remind everyone. That's always there will be elements in todays presentation, which are forward looking at our based on our best feel the world and our business it looks even today.
These statements are subject to a number of risks and uncertainties that could cause actual results could differ materially.
Description of these risks and uncertainties and other factors that could affect our financial results are included in our most recent annual report on Form 10-K quarterly reports on Form 10-Q , we expressly disclaims 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 food definition GAAP comparison at a reconciliation of those measures are available in the upper mentioned presentation a press release.
Now I'll turn the call over to John .
Thank you want to walk him or her one.
We have a lot to cover took place turning to slide two.
We have shared the flight with here a few times in the past, let me be clear as to why this background is critical to our future we have the experience and expertise to the leader in helping people build.
The communication skills necessary to improve their lives.
There is a child learning to read in the classroom right adult work in the second language <unk> retirement, we build equity and deliver positive suicidal change.
Please turn to slide three for a review of our consolidated results.
Consolidated bookings in the third quarter grew 21% Beatty $1.5 million the contribution from every segment of the business.
So is the largest fear over your increase in organic bookings in the history of the company that is indicative of what we're capable of doing during the seasonally important third quarter, but it is not all we are capable of we expected more and more talk today about what it will take to deliver exam.
Consolidated revenues grew 6% during the quarter to 45.5 million, our largest quarter over quarter dollar increase from 2019.
Certainly with over $80 million in bookings and $45 million in Robin as we added 36 nine to deferred revenue in the quarter.
Net income to Q3 was a loss of 2.9 million.
<unk> 3.6 million over the same period in 2018.
This was driven by higher revenues and lower variable incentive compensation expense, partially offset by increased sales and marketing expense during our peak selling season.
Adjusted EBITDA in the quarter improved to 2.5 billion versus a loss of 700000 mid 2018.
We ended the quarter with 36.2 minor cash no doubt.
25 million dollar increase at our net cash position since the end of Q2, that's 29 million of operating cash flow important all units cutbacks.
When we utilized or seasonal borrowing facility, we said it would be repaid by the end of the year.
We're pleased that we repaid the like fully in Q3 will not use that again, Michigan.
Let's move to the performance of our business units beginning with literacy on slide four and I will turn the call over to Nick.
Thank you John and good afternoon, everyone literacy bookings in the third quarter were a record $41 million, an increase of 21% versus the third quarter of 2018 to put this in context. This represents more than 85%. The total bookings we recorded all of 2017 and more than doubled the.
Full year Ilecs your joined the Rosetta Stone family, but as John said, we expected more in Q3.
Revenue in Q3 in the literacy segment was record with a record 15.6 million increased 18% over Q3 2018.
Literacy segment contribution more than doubled from 1 million 2.1 million relative to Q3 last year.
The key to bookings and revenue growth in Q3 was continued improvement in new sales performance for our core distribution channels, along with strong dollar based renewal rate.
Oh unpack each of these in a moment first let me talk about the timing of bookings this year as it continues to evolve.
The third quarter is a seasoned which school budgets are really I mean, it's critical to our growth. This year. However, we expect full year bookings growth <unk> growth to be positively impacted by bookings about Q3 and Q4 in fact based on business today and our current pipeline, we expect bookings in Q4 to be approximately 30% higher than in Q4.
Last year why are we seeing more bookings growth in Q4 this year than in past years.
First we heard from many districts that the federal funding that support schools with large low income population was released later this year than last copying many schools to delay both new and renewal purchases.
Secondly, as our business has grown the volume of open deals at the end of the third quarter is growing as well many of these spilled into Q4 and her closing now.
Overall I'm pleased with the growth in our core markets. He distribution channel, we continue to penetrate our existing district as well as the 60% to the market, where we currently don't have a breadth.
Over the past 12 to 18 month, we invested in staff and marketing initiatives, along with product and services to open up these targeted location.
The selective and focused in our approach where that was access can yield six or seven figure contract the time to gain acceptance in wind programs as well as overcome a tranche competition is significant.
That said, we have made solid progress in places like New York City, Arizona and Virginia.
Texas has proven to be more challenging and although we have had district wins in that market have grown new business in that state by over 40%. This year overall closed businesses unless somebody had hoped.
Many district of Texas to focus their initial adoption on filling traditional core print based literacy curriculum need another deferred the selection of providers for digital blended learning solutions like hours.
We're committed to the Texas opportunity and expect to see more success next year and the years following a districts a breath or supplemental break you don't need.
In all cases, we're confident that weekend when we consistently demonstrate significant impact on student performance. These relationships will expand over time.
Please turn to the next slide.
We've made progress growing our present spoken districts, where we did not have customers and im districts, where we have been able to expand based on the strength of our partnerships and the performance gains of the students we serve and the third quarter, we saw an increase over 35% and the number of new districts compared a number of new drug districts in the third.
Third quarter of 2018.
And even when we start with small initial purchase that it represents a toehold to expand in future years, there's more opportunity here.
Let's turn to the next slide.
The investments in our product portfolio enable us to expand our district penetration and also the lifetime value of our customers. This growth was achieved through multi building and multi product sales with the launch of power up two years ago, we began to build our presence in middle and high school.
In two years, we are brought this solution for non perficient readers to over 4000 school.
Please turn to slide.
The growth in bookings in Q3 drove a 16% increase in air are they $55.5 million. This growth was driven by an increasingly productive sales force more solutions to offer has shown through continued strong renewal performance in the third quarter.
Retention rates are 88%, while renewal rates were 102%.
We're achieving rates in K 12, which are very strong even as our business has undergone significant growth in structural change. This speaks to the excellent value we deliver to our customers.
We conducted extensive analysis to understand the factors behind customers, who don't run through that contract, we see fewer larger accounts that do not renew with the majority of nonrenewals occurring among smaller accounts that said, we're not satisfied if we lose any customers. We're confident that doesn't mature as an organization, we can do a better job.
<unk>, providing our customer success Tampa the data they need to identify accounts that are showing early signs that they might not renew and then re established customer commitment and minimize the risk of cancellation.
Please turn to slide eight.
As we looked at the end of 2019, a beyond its important to remember what we are building. The continued penetration of core five an elementary schools. The introduction of new products like power up and the building of a national direct sales and service team have driven bookings growth.
That has been compounding since 2014 at an average of 25% it's almost doubled our business in three years now we need to do that again, please turn to slide nine.
And we can't because even as we grow we remain underpenetrated in the markets. We already serve we can triple the number of schools. We're in just by fully penetrating all schools and those districts, where we already have a present.
To make a difference even more lives we're going to make a large targeted investment in K 12 fail marketing and service teams that support our customers. Please turn to slide 10.
Over the past two years the size of our Salesforce has grown slowly even as we grew bookings by almost 50%.
Well Rep productivity has gone up it will probably it will be approximately $1.2 million. This year in hindsight that that's come at the expense of opportunities to grow our business more quickly with existing and new customers. This became clear to us as we're closing the largest Q3 and Lexia history.
We have a capacity unstructured issue not a business opportunity issue.
Directed by this concept the business not for strong sustainable and profitable growth well take a number of steps.
First we're expanding the size of our field sales team as importantly, structurally build efficient capacity will be focusing field reps on bigger accounts and new business opportunities, while investing in our inside sales teams with the capacity and skill to grow our large volume smaller customers. This will be a high ROI investment.
Getting the right people at the right level focused on the right account.
This is a step change investment that we will not need to repeat near future, but is warranted given the scale of the opportunity in front of.
Please turn to slide 11.
We're confident in this investment because we have the solutions fundamental to the success in K 12.
Portfolio World Class literacy products and soon a new product to serve the needs of English language learners. No. Other company has the deep experience and expertise to serve the needs of all students and to be the leader and literacy and language education.
Next slide please.
And these products address a big market with great societal need a need that it's unfortunately highlighted in the recent relief on the federal governments Nate scores also called the nation's report card.
The 2019 scores for reading showing alarming to clients student proficiency, where the average eighth grade reading score decline in more than half of the stage compared with the average score in fourth grade declining 17 states.
The good news that this crisis is getting national attention.
Most importantly, we know from our 36 years experience and deep portfolio of research that we can be a powerful force to change these trends and provide students with the opportunity succeed not only in school, but in the life.
For an update on the performance for our language business, Let me turn the call over to Matt.
Thanks, Nick.
Bookings in our language language segments totaled 40.5 million in Q3 with enterprise in education bookings growing 6.7 million or 38% over Q3 last year, driven by 37.4 million long term custom content deal we announced in early August .
While consumer sentiment bookings were flat on a year over year basis.
Total revenues for the language segments were 29.9 million in Q3, an increase of 1% over the same period last year within that's consumer revenues were 15.8 million an increase of 9% from Q3 2018, well any revenues as opposed to bookings were 14.1 million a decrease of six.
Percent from Q3 2018.
Consumer language revenues were negatively impacted in the quarter by a higher mix of long term subscription down in the same period last year. These sales are attractive from an LTV perspective, but have the effect of lowering in period revenues as the bookings are deferred over a longer period of time.
And our any segment I would call out the improved performance of our enterprise business outside of custom globally. These bookings grew 5% in Q3 versus the same quarter last year, even as we transition to existing customers to our new solution next slide please.
We formally announce the introduction of our new product to serve business customers Rosetta Stone enterprise earlier in Q3. This is the successor to catalyst made possible by the consolidation of our technology stacks that we discussed on the last call. It introduced notable functionality like proprietary standards aligned assessment task.
Limited access to live online tutoring sessions from highly trained tutors, who are native speakers and our 7000 hours are beginning to advance content corporate customers now have the most robust cross platform learning product in the market.
Lastly, it is important to note that we have completed the majority of our migration and de flashing work across our language platforms. We are excited when burden the R&D team to build on what is already the best in class consumer Enterprise language learning solution.
Please turn turn to the next slide and I will walk you through consumer language performance.
As expected consumer in Q3 returned to more traditional metrics and more profitable unit economics as results were not impacted by the brand marketing test expenses that affected second quarter results.
Average initial sales price <unk> increased to one or two on the strength of a greater proportion of long term yet himself LTV to CAC was 1.7.
To be clear this means our margin per unit after all incurred an expected future marketing cost was over 40%.
Couple this with the fact that the payback period is very short immediate in the case of our long term subs and you can see why this business is attractive.
While the consumer business has stabilized I bookings and revenue basis year over year increased competition in our traditional performing marketing channels has increased the cost for paid media you can see the compression of our customer acquisition efficiency in our per unit economics.
We have the best product in the market as evidenced by our high NPS, an app store rating, our unrivaled, 97% brand awareness that there were competitive advantage that we have not yet built on as we transform product and pricing.
We are evaluating or spend which has largely been focused on shorter payback cycles to include more longer term payback marking cycles in 2020.
Please turn to slide 16.
Well it gives us confidence that this is the right strategy, we have to assets necessary for success, we have consumer and enterprise products that are the best in the marketplace that was not true in either case, just a few years ago and we have the tools to do more.
That's believe platform consolidation behind us, we will accelerate innovation and take advantage of everything from our software to a decade of experience delivering virtual online tutoring on a global basis.
And supporting all of this is the best brand in the United States and one of only a few that could begin to extend globally I will now turn the call back to John .
Thanks, Matt Let me now turning to guidance for this year and the initial look at 2020, please turn to slide 17.
We began 29 team with goals are growing bookings and revenues, improving adjusted EBITDA and becoming cash flow positive all while investing in future. We will accomplish each of these but our bookings growth has not been a strong as we expected for the reasons we discussed.
We now expect bookings of approximately 71 million then literacy were 21% growth over 2018. This a strong growth, but leaves a short of our expectations.
We expect total bookings of $126 million language and consolidated bookings of 197 million, 9% higher than 28 team.
Because of lower expected bookings were lowering our year end revenue guidance to 182 million shares.
It was $1 million lower for literacy and $2 million for each of the language segments consolidated revenue is expected to grow 5% this year.
We see upside to our prior guidance for net income and adjusted EBITDA as we continue to manage expenses, we are maintaining our estimate of a loss of 15 million and adjusted and adjusted EBITDA of six month.
Both adjusted EBITDA and net income would be higher but for the fact that more of our R&D costs than expected are being expensed rather than capitalize capex is now expected to be 18 million down from our prior guidance of 29.
Finally, we continue to expect to pay in the air with 42 million in cash no doubt.
All of this is a start to the improved the longer term performance we expect.
Want to make sure that performance is sustainable and backed by the plans and investments required to build intrinsic value.
I also don't want guidance to be an impediment to our that's actually making or your confidence. Please turn to slide 18.
Given the lower starting point and more competitive operating environment and U.S. consumer we're revising our prior outlook for next year, we're providing this.
Preliminary outlook today, we'll finalize guidance as part of our year end, calling in March.
Good for 2020 as the following features.
Celebrating growth literacy and relatively flat expenses across most of the company with the upfront investment occasional sales and marketing and implementation services, Nick outlined beating the major exception.
Let me start with a walk through of our preliminary view of bookings and revenue.
We expect literacy bookings to grow 25% to 30% up from 21% this year.
Because almost all K 12 bookings growth occurred in the second half revenue growth will grow more slowly.
We expect literacy revenue and 2020 in the range of 75 to 78 million were 21% to 26% higher than this year.
This is lower than our prior outlook in part because of lower starting point, but our confidence in delivering these goals is high.
Growth will be driven by continued penetration of core five was increasing contribution from power up.
Okay, five yell solution will add to growth in 2020, we want to be conservative about its launch may do things to enable its long term penetration and maximize its intrinsic values such as using unpaid but partially paid pilots.
Consumer language, given the current competitive unit cost.
Hi, Mike we want to be more conservative in forecasting or U.S. business.
At the same time, we intend to thoughtfully investing our brand and building top of funnel traffic in recognition of the new Rosetta stone.
Outside of the U.S., we've referred to our work in Korea is having higher risk.
We remain excited about the opportunity for blended language learning there and these are broadly but to de risk the outlook have eliminated these revenues and our 2020 outlook.
We expect slightly higher consumer language revenue was $64 million to $66 million in 2020.
Any any language, we expect revenues to be down slightly as growth in enterprise is more than offset by decline in education language as part of this business moves to the literacy segment.
Total language revenues are expected to be approximately $117 million to $121 million in 2020.
It is the largest change towards the top line relative to our prior 2020 outlook.
On a consolidated basis. This produces revenues in 2020 of approximately $192 million to $199 million were 9% growth and the high end on total bookings of 210 to 218.
Moving to investments and profitability, we expect to again whole genome relatively flat in 2020.
Total R&D, including Capex is also expected to be flat next year, but the benefits of completing our platform consolidation language offsetting a small increase at lexia.
Sales and marketing as a percentage of revenues will grow in 2020, as we invest in our K 12 infrastructure to sustain growth for the next few years.
Since joining a Rosetta stone six years ago Lexia team has it had an almost unblemished record of me getting that schools compounded growth at 25% of here.
This year, we had consistently high expectations, but found that as we extended our ability to grow new business, while serving the needs of thousands of existing customers exceeded the capacity of our current structure.
To address this we are adding capacity by accelerating changes to make greater use of inside sales teams to more efficiently target existing customers with smaller renewals in order to expand the capacity of our field team to target larger customers and new opportunities.
We will make these investments will modestly improving EBITDA on cash flow by holding other expenses across the company largely flat.
In total we expect 2020 adjusted EBITDA of approximately $10 million, an operating cash flow of approximately 20 to 24 million with capital expenditures of approximately 18 to 20 million.
Because of the more conservative bookings outlook. This is lower than originally expected.
Putting this in context adjusting for bookings that we received from sort of snacks and custom content deals operating cash flow. In 2018 was $4 million 2020 is expected to be an almost 20 million dollar improvement in operating cash flow in two years. This is indicative of what we can do as our business scales.
As we look beyond 2020, we believe Lexia will grow bookings at a rate of 25% for at least the next few years remember we are adding a new product to the portfolio.
This would produce revenue growth and below 20% range on an ongoing basis.
Consumer any language should grow bookings and revenue at a mid to high single digit right before they offset from the movement of K five yell sales to Lexia.
This out what concerns no meaningful contribution and the opportunities we expect to have to grow in new markets and both K 12 and consumer.
We will leverage DNA and they've investments, we're making today in R&D and realize the scale benefit of the sales and marketing investments in Lexia.
This will produce EBITDA and operating cash flow margins of 8% to 12% in 14% to 16% respectively. These are not peak margins operating cash flow margins should reach 18% to 20% as the business scales further.
Next the filing of our shelf registration statement raise questions about how we think about managing capital and building value that I would like to address please turn to the next slide.
So how do we think about capital management building value for shareholders.
Our goal is to maximize the intrinsic value of our business something we've worked hard to do over the last five years third the restructuring of our language business on our investments in K 12.
We measure intrinsic values to the cash flow, we expect to generate between now and a future period appropriate for each business or major investment.
To do this we looked at investment opportunities independently to draw judgments as to the appropriate period over which value should be considered.
In K 12, our ability to address large and difficult problems and grow customer accounts. Once one has let us to consider investments over a longer period big market opportunities and the compounding returns available in K 12, or the drivers of the large multiyear investments we have made new products like power.
Why is this important in the context and shelf filing first internal investment has and will continue to be prioritized over acquisitions.
We have the people that expertise necessary to build world class literacy and language products and we prefer to build products on our own platforms like my Lexia and with our own technologies, many of which our patented or our proprietary.
Finally, we're aware of the price of our shares in the market ultimately, we manage intrinsic value like per share basis issuing shares for any purpose is considered in this context, especially when we were trading at a discount to the intrinsic value of the business we're building.
Siderar K 12 portfolio.
We are five is one of the most valuable solutions in education technology. It serves the largest slice of education budget teaching them kids to read has achieved scale and is continuing to grow at a fast rate and power up which is new and only beginning to penetrate its total addressable opportunity and then there is our fourth how many all product.
Today. It is a very large investment one of the largest in our history, but no associated tuck ins, but we look at the transformative product. We are building you consider that the fastest growing part of the school population consists of students learning English as the second language, we could not be more excited.
That's been nice products, while expenses building long term sustainable intrinsic value.
Does this close the door to acquisitions that does not.
We consider small tuck in acquisitions Blackshear was in 2013, where we can leverage assets like or data platform distribution and brand and could consider something more transformational, but the bar is very high because the internal possibilities are great.
Finally in the future there will be the opportunity to increase per share intrinsic value to the repurchase of our own stock at a discount to the value we see in our business.
As we have gone through the process of the rebuilding our language business and investing in to build K 12, we've not had the balance sheet capacity to repurchase shares even as the price has been attractive.
As our cash flow after internal investment grows in the seasonal low point of our cash balance increases.
This capacity will increase and repurchase would become a consideration next slide please.
Let me and with an invitation.
In March we will hold our next Investor day, what should you expect to learn.
You will hear how we are changing lives and providing profound societal good.
You will see demonstrations of exciting their products, including our English language learning product I predictable below you away.
You will hear how we intend to build on our foundation as the literacy expert in K 12, due to the expert and literacy and language.
And you will hear how we will take greater advantage to the equity in the Rosetta stone brand, new and exciting ways.
We're excited to share our plans and look forward to see new in March.
With that operator could you. Please open the call the questions.
Thank you, ladies and gentlemen will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
Total indicate your line is another question Q you Me press star to she'd like to remove your questions from the Q.
Participants using speaker equipment, it may be necessary to pick up the handset before pressing the star <unk>.
One moment please poll for questions.
Our first question comes from the line of Alex Paris with Barrington Research. Please proceed with your question.
Good afternoon, everyone. This is Chris how sitting in for Alex Paris.
Hi, Chris Chris.
Hi.
Lots of questions here, but no particular order.
Your upfront investment that you're making in sales and marketing.
Can you talk more about this.
In regard to how're, you balancing growth for new customers.
While not moving your eye off the ball when it comes to growth within existing accounts.
Sure Chris I think that's a question for me this is Nick.
You know obviously, our customer base has grown substantially over the past few years and is made up both of large customer accounts and smaller customer accounts one of the investments, we're making in sales and marketing is to ensure that we're aligning the right cost structure with the right customer segment. We believe we can.
To be more efficient serving those smaller renewals with one set of team members and then focusing other teams on those larger higher value accounts and so it's an expansion of our inside sales team to focus on the high volume low value customers and expansion of our field sales teams to continue to drive.
Those larger customers and new business forward.
That's great. Thank you and.
Next moving to margins I'm in the past you have mentioned the 40% of incremental revenue that will fall to adjusted EBITDA.
Can you talk about this and if there's room for potential expansion opportunities whether that be through expense rationalization.
For future price increases.
Yeah, I think it's the biggest near term opportunities in business mix.
The the highest incremental margin parts of our business or the B to B businesses. The school based business in the enterprise business as those businesses grow more quickly than the overall business that will improve margin.
In of itself.
We've been very disciplined in terms of costs, we took $120 million out of costs for a few years ago was essentially kept most of those costs flat DNA has been flat now for a number of years than we expected to be again.
R&D has been relatively flat, although theres going to shift in mix from language to literacy, which we expect to.
The way, we expect to see that continue next year now the not in the language team have completed their platform.
Consolidation on the language side, we think we have opportunity to reduce costs, there and innovate more but we believe that especially with the launch of the new L. product next year that there is room for.
Very high intrinsic value of investment on the R&D side.
We are making the onetime investment in sales and marketing, but frankly, we're doing that in the context of still improving margins in the literacy segment.
We think we will grow bookings concert.
We do believe we're setting ourselves up for longer term growth with more efficient investment by as Nick said, focusing the right people on the right accounts.
Higher value people in the field focused on the biggest opportunities.
That's very helpful. John and my last question relates to the challenges that you mentioned in Texas.
There are shift more towards the traditional core print agenda.
Just moving on this topic can you talk about other states other than Texas that represents similar.
Potential prior to the change in expectation in Texas.
On a relative basis that you see as a open field opportunity for the company.
Sure so.
First of all I think as we've spoken about in previous calls we continue to work.
In Utah to expand that opportunity and we're thrilled with the expansion of our Utah business, which is a state funded initiative. This year, where we continue to really drive significant performance gains and work with more and more schools and students.
There are other opportunities that we have targeted this year based upon funding and based upon sort of opportunities that we see in specific markets like New York City in Virginia in Arizona, where we were able to allocate sales and marketing dollars to those specific opportunities.
As far as a result, you know really significant growth there.
We believe that there are opportunities in the future to continue to target those higher level opportunities as we've said before you know we've built the capacity at a higher level now where were working at the state level identifying not only legislative changes, but funding sources that.
Previously, we really were not participating in and we believe that the important part of our future growth strategy.
That's helpful. Appreciate the color thanks, everyone I'll hop back in the King.
Chris.
Thank you. Our next question comes from line of Steven Frankel of Dougherty. Please state your question.
Hi, Good afternoon, Nick we start with the bookings mess and maybe help me understand.
How much of that was.
Not enough feet on the street, how much of that was Texas and how much of that was deals that slipped into Q4 just to help us can understand that's an outdoor Steve yep, absolutely. So I'll start with Texas, where obviously as we've spoken about before there was a lot of funding and play because.
The reading adoption that is a eight year funding cycle. So there is still a lot of opportunity in Texas.
We had higher expertise expectations, even though we did grow 40% in that market. This year, we had higher expectations and part of that I think is due to the fact that some of the big publishers really did.
Grab a lot of the adoption of dollars for core curriculum upfront and now we are focused on continuing to execute and Texas, because we see it as a as a continued to see it as an opportunity.
But that's going to come a little a little slower and we're seeing a strong pipeline for 2020.
So that was part of it the other part is as you know we've invested in some of our higher level sales activities.
Working at the state and large district level, we have high expectations, there and continue to have high expectations, but they're taking a little longer to materialize then than we had thought.
And then the third part was not necessarily feed on the street out in the marketplace, but more having as I said for the right teams focused on the right segment of the market is just as we've grown the volume of deal has expanded considerably and we have a structural issues that.
We're now focused on solving and I think have a good clear strategy on how to fall to make sure that we can do a better job of managing that high volume low value business and the future. So hopefully that answers your question.
All except for one piece, which is help me understand that dynamic of delays in federal funding leading to deals getting pushed to Q4, because normally you I wouldn't expect Q4 bookings to be up 30% plus <unk> yeah no yeah.
Yeah, Great question so.
The federal funding, we're talking about is specific to title title, one which is focused on obviously low income populations and it did drop later this year not necessarily to state, but from states to districts and so we heard from a lot of the schools that we were working with that they did.
And have the funding allocated that the district level, yet we're starting to see some of those deals close now which is a lot of what's driving the higher growth in Q4, along with the overflow from Q3 in terms of the volume of activity that we're not closing.
Okay, and then that notion.
Let's take yeah sell out of the guidance for 2020.
How much of that is driven by.
Your de risking how much of that is well, we're trying to sell a new product with a new salesforce.
And it it's a new category.
Maybe it starts slower than you thought three months ago.
Yeah, So we're being conservative about the new email product it doesn't launch until back to school season, and so we are missing as we knew we would the first half of the air from a selling cycle standpoint.
<unk>.
But we're really excited about the future of that product. So much so that were being aggressive about some of the things we need to do to pave the way for acceleration in future years like unpaid piloting partial pilots really focused on ceding the market because there is such a huge opportunity and this is such a unique and innovative product.
Okay, and switching to Mads side of the business Miss the first time.
I've heard you really talk about competition, so maybe let's talk about what changed there and what per Bennett, the LTV to CAC ratio from Wally improved sequentially. It didn't get back to that to a two times, which is what's been more typical for you.
Yeah, just broadly I'll talk on the competitive situation and then get to the unit economics that can best situation is something we havent talked about before and you know at a macro level variable marketing year over year is actually slightly declined.
While we've had more increased pricing competition on things like cost per install CPC and traditional performance marketing metrics and this has been the more pronounced Q3 season, where we've seen a lot of seasonality and a lot of spend but it's been more aggressive sand the past themselves, calling that out because as you know majority of our.
Variable marketing spend has been performance based meaning bottom of the funnel people, who specifically want to learn language and happened I know there was that as Don brand, we have pretty much maximize our efficiency in that channel and we've learned a lot from our brand test and we have a lot more competition in that space and so.
We wanted a flaig or outlook in the future for that headwind, but also stayed the fact that we're very confident we have a well known brand and we haven't flex the brand variable marketing muscles before so it and in short it's got more competitive, but we're very confident we have a brand that a customer is really enjoy the products from and b.
He.
Understand the value from that product and then specifically on unit economics, there was a decline year over year on the LTV side, primarily due to pricing within trying different pricing and testing conns concepts in terms of trial, which lowered LTV year over year, we kept unit economics, the same for cap it didn't generate.
Net incremental LTV due to the pricing competition so.
On a sequential basis, you'll see LTV generally flat and year over year, you Didnt see a decline.
Okay and.
The decision to take worldwide English out at the forecast for next year or.
What have you learned in the last three months about that product and does it make you see it as.
More of a risk and less of a product that you think will well work.
Yeah, we've said in previous calls that that investment is very speculative and we've laid out in the past we thought we'd be conservative in our outlet to take that out.
Our outlook.
We're very excited about Asia, we've learned a lot from that product, we're very bullish on what we call adaptive blended learning marrying software with tutoring and our software, but we thought it at this point would be best in March prudent to take that out of outlook to reset expectations.
Okay, and then John .
One more question on this notion or resetting our expectations.
You know going from the prior 20 million.
In EBITDA for 2020 to 10, a pretty severe cut back.
Maybe walk us through.
What the deltas are there sure.
It's about a third lower starting point.
So you know over the course.
The last of little bit last quarter, and then you know certainly this quarter, we have reduced or bookings outlook for this year.
No we've gone through died in detail swiftly.
Lower starting point those bookings turned into two revenues here, certainly a little bit the share, but mostly next year.
I think we've been reflective of that.
And looking at our guidance for next year, particularly.
On the language side I think we've yet to what we've brought to the literacy guidance down it's still 25% to 30% bookings growth, which we think is very healthy also very achievable you know, especially with the launch of a new product and what is just as we talked about the overall momentum.
That we're seeing business.
I'm glad Youre I, we don't like having a phone call, where we have to lower guidance.
And I'm not suggesting.
That we've we've added you know cushion to next year in any significant way, but we want to reflect the reality that we're saying Oh I'm, which is the rig in the they wanted to be a little more conservative on the K 12 side and the increased competitive.
Dynamics that we're seeing the U.S. consumer.
Specifically and I think we feel really good about outlook for the enterprise business.
We feel really good about lexia, but you as consumer until we can change the dynamic.
In that business, we are going to be disciplined allocators of capital.
And we think that is the right thing to do we're not going to we're not going to work, we aren't going to spend our way into revenue growth in that business, we're going to run the business to be as profitable as we can we believe there will be opportunities to change the dynamic, but we're not imagining notice in the in the in the future.
Forecast, we're going to prove it first and then deliver those numbers.
Okay. Thanks.
Thank you.
Mike.
Ladies and gentlemen, if you'd like to ask a question you May press star one on your telephone keypad.
Next question comes from the line of Eric Martin Easy with Lake Street Capital Markets. Please proceed with your question.
I wanted to follow up on the literacy bookings.
Shortfall in Q3.
I think I've got to hear that you've kind of boiled it down to two major items and I can follow the.
Give me the slightly slower release of the federal dollars at the.
Right from the state to the district, but I was I'm still struggling with the deal process. It I'm, writing fast here, but I was trying to capture a done deal under deal processing volume is that to say that you had the the pipeline there, but didnt have the ability to process it by quarter end or is it.
Yeah, no the pipe the pipe that's a great question, Eric the pipeline was there.
It was just a matter of a lot of smaller deals and the ability of our salespeople to be on top of that kind of volume ultimately as we said, it's a structure issue that will be solved by segmenting, our sales teams a little more carefully analyze.
Finding the right teams with the right cost structures for the right market segments, but it really was.
A spillover of high volume.
Into the fourth quarter, which as we said is driving some of the growth in the fourth quarter that we typically don't see.
Okay, and then as a follow up to that how can we wouldn't metrics can we.
Observer are you guys looking to capture to show that.
Sure.
They are in other words, hey, we're going to higher 10 inside sales reps and we currently have three more we're going to process X number of deals per week in advance at quarter end. So we don't have a log jam what are you doing what have you changed as far as the operational aspects of that.
Yeah, So we will be adding capacity both to our field sales team to make sure that we're continuing to drive that new business and those larger accounts with the right people and then I think more importantly, almost we're building a stronger inside sales presence in so.
Making sure that we can take the high volume renewals less strategic business off of our account executives plates and putting it.
On the on the plates of the inside sales teams I think are better positions that are capable of driving that high volume low value business.
And so that when we are.
Are you comfortable sharing metrics with less than the numbers up you know what would you had on September thirtyth than what you hope to have.
Number 31st store.
30, how will we be able to measure your progress in executing answer.
Yeah, I think we're not sharing those details yet I think investor day is going to be the right place for us to share an update on our channel strategy and some of the changes, we're making investments, we're making at that level of detail.
Okay.
And then as I look to be the slide seven is this slide that you have that covers the.
The retention rates that you see there on the literacy side and.
And in a bit of it down trend.
Can you remind me you mentioned a couple of items so more to the key driver there.
Aside from what we just covered if that's all it then I guess I've answered my question, but is it simply the processing here because it doesn't seem like it's just a Q3 issue it seems like it's been.
Issue, that's perpetuated for a few quarters now on the retention rates, Yeah, I think it goes hand in hand with.
The volume of the business. So we talked about one thing which is the structure of the sales channel. The other thing that we are doing is.
Taking the incredibly rich data, we have about our customers and equipping our customer success team with better health data about those accounts and so our ability to identify accounts that look like they are tailing off in terms of engagement early and to reestablish that engagement.
I think is going to be improved by giving those teams that health data and so we have we have already started to do that and we're excited about how that's going to impact the business and retention rates in the future, but I'll also say that now these are still really strong retention rates and I'm very strong.
Renewal rates, which we are excited about it speaks to the value, we're delivering and the satisfaction of our customers.
Okay.
Then switch shifting over to the the language side just to come.
You get a layer deeper there where are you finding the greatest challenges coming from in the USA consumer side, if you could name those competitors or.
To be except that you've got insight there would be helpful.
Yeah, there's a number a a paid competitors that had entered the market rather aggressively and I think there the usual suspects.
Most of the competition that we see isn't that a traditional paid performance channels you normally see one aspect it as John mentioned I want to reinforce and his previous statements was that we're gonna be very measured and disciplined in terms of how we deploy a variable marketing dollars.
In our variable marketing playbook, and I would say that you know the traditional competitors in the performance marketing space, how to think about headwind in terms of our spend.
But in particular, you know the folks that are venture capital base and or private had certainly entered the space and deployed a lot of capital both an offline marketing online marketing and I think he could point to somebody more obvious ones like babble, who has been a very aggressive underpaid subscription variable marketing campaigns.
So you know, we're going again be very balanced and how we view the world a year over year, our marketing spend the down from variable marketing perspective, and we're going to look to reallocate capital to flex some of our brand muscle and a very measured way.
Okay I'll leave it there just editorial comment you do have.
I think you've taken difficult medicine this quarter as a team. It is very much in expectations game in the stock market and hopefully we've reset ourselves here to a point for 2020, where we can.
Can meet or exceed because there are so many attractive aspects to the business. So I'll leave it there.
Thank you, Eric and frankly, I think that's very good way to close.
I think those comments are appropriate.
And we look forward to meeting and exceeding your expectations in the future and meeting and exceeding our own. Obviously this is critically important to all of us.
Managers of your capital than your trust. So thank you for joining US Tonight, and we look forward to speaking with many of you going forward.
Thank you ladies and gentlemen. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.
Got it.