Q1 2020 Earnings Call
[music].
Good afternoon, ladies and gentlemen, thank you for standing by.
Well consider or is that it's still in first quarter 2020 earnings conference call. At this time, all participants are any listen only mode. A question and answer session will follow the formal presentation should you require operator assistance during the conference. Please press star zero to signal an operator. Please note. This conference is being recorded.
Oh now I turn the conference over to your host Jason Terry Investor Relations. Thank you you may begin.
Thank you good afternoon, everyone welcome to Rosetta Stone's first quarter 2020, <unk> earnings Conference call.
Speaking on the call today will be John has chairman and CEO Nikita Immaculate co presidents of Rosetta Stone.
Additionally, tone piano, the company's Chief financial officer will be available during the Q and a portion of today's call.
We have posted to the Investor Relations section of our web site at Rosetta Stone Dotcom <unk> earnings release in a slide presentation, which accompanies todays call Weve also posted supplemental information.
Analysis on our website <unk>.
I want to remind everyone that as always there will be elements in today's presentation, which are forward looking at are based on her best few 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 could differ materially.
A 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, and quarterly report 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 gap comparison at a reconciliation of those measures are available in the aforementioned presentation and press release.
I will now turn the call over to John.
Good afternoon, and thank you for joining us today.
I'd like to begin by thanking all of the first responders and healthcare workers and our communities on the front lines. The covert 19 pandemic you would also like to thank the teachers administrators and HR professionals working incredibly hard to adapt to challenges they couldn't have envisioned even two months ago.
Closer to home, we're incredibly proud and thankful for the Rosetta stone team.
As shown on slide three.
Well I transitioning and the most important part of the quarter to an entirely new remote work environment.
Team delivered a terrific you want.
Highlighted but year over year bookings growth of 20%.
An incredibly meaningful new initiatives to support customers in this time of uncertainty and suffer.
Today's call will focus on the impact of I covered 19 on her business and our response to it that's we support our customers and partners.
Bookings growth in Q1 was led by a consumer language, which grew bookings by $6.7 million were 42% what are the same period a year ago.
To put this in a perspective this was 14% higher than Q4, 2019, which has always been our strongest quarter seasonally.
As I mentioned in the March call consumer language was having a strong quarter, even before October 19 began to affect People's daily life in United States.
During the last few weeks in March we saw an additional increase themselves, which we attribute to people using their shelter in place time at home to learn a new language.
Bookings growth was also strong K 12 literacy segment.
Literacy bookings grew by 22% for Q1 2019.
Because it is a small new business quarter Q1 in literacy is typically a period in which we don't see much growth.
So we were happy to start the year well.
Especially given the disruption unless you have schools during March.
Total revenues for the quarter were $47.2 million.
An increase of 6% from Q1 2019.
Revenue growth naturally lags bookings growth.
This lag was increased in Q1, but the fact that the majority of or a consumer bookings reaffirm our lifetime product.
Well the LTV of lifetime product sales is the highest.
Our consumer portfolio and its realized immediately as it has paid upfront.
We recognize the bookings as revenues were 24 months so their impact in Q1 revenue was relatively small.
We expect lifetime cells, which produce high upfront cash receipt.
But longer revenue recognition well continue to be a significant portion of our consumer language bookings this year.
Net income in Q1 was a loss of $6.2 million well adjusted EBITDA was positive 1.2 million.
Alright, ending cash balance was $35.1 million on operating cash outflow of 3.5 million.
Remember that Q1 is a seasonally low sales quarter for us well expenses are more consistent throughout the year.
Each of these measures exceeded guidance.
In a moment, we will walk through our segment financial results more detail, but I want to begin by highlighting a few of our covert 19.
Related initiatives that are providing real value to learners and demonstrating the relevance of a reset of stone and Lexia and this new world. Please turn to slide four.
In the future weeks following our March 11th earnings call everything changed in our business changed with it.
To give you. One example is her last earnings call 1500, U.S. schools had announced a personal closures due to covert 19 as of Wednesday April eight only four weeks after the call school closures had risen to 124000.
Over 90% of all schools in the U.S. and 15 states have indicated they would remain closed until the end of the school year. This is now up to 44 states.
In response, the team introduce new offerings in every part of the business the directly addressed customers needs.
In each case, providing free expanded learning opportunities where substantive meaningful.
Among other things we have offered unlimited site licenses for every existing K 12 literacy and language customer because the rest of the school year, along with the necessary services to support these schools and their teachers students and parents.
The software has been made available to districts the represent almost half of the K 12 public school population in the United States.
Every three months student license through our consumer language business to support families, whose children were now learning from home.
And we provided all of our enterprise and consumer language customers.
Software only licenses free access to group tutoring for three months.
Broad access to learning experiences that were directly responsive to the needs of our customers all rolled out in a few short weeks, despite not being on a roadmap as we entered March.
We were able to do this for three reasons first all of our products are built for well suited to a remote learning.
Secondly, we have relationships with our customers based on trust years of providing solutions that work.
The created demand for these learning options when they were offered.
And finally, we have an incredible team that came together to serve customers, even as they adapted to new situations themselves.
Nick and Matt will share more detail and each of these initiatives in a few moments please turn to slide five.
You should take four things from today's call.
We are off to a strong start in 2001.
As demonstrated by the 20% year over year bookings growth in Q1.
Does that assume in both our language in K 12 business is setting the standard in our area is helping customers adapt to the impact of the pandemic.
Well the world, including ours has become more uncertain, we remain optimistic about 2020, and our literacy and consumer language segments.
Finally, we are determined it to use this period to ensure that I was that a stone will be even better positioned as a leader in learning in a post coded 19 world.
Nick in that will build on each of these things.
Now, let me turn the call over the next to talk about our K 12 business.
Nick.
Thanks, John Please turn to slide six.
In our literacy segment revenue at a first quarter was $17.5 million, an increase of 18% of the same period in 2019.
Bookings are five and a half a million dollars in Q1, an increase of 22% over the same period 2019.
Our bookings during the quarter was primarily driven by higher new and renewal sales in our direct channel.
She wants our smallest quarter each year will be this year, we're happy to be off to a strong start.
Please turn to slide seven.
Annual recurring revenues or a our grew 16% in Q1 compared to last year.
There are is driven by our ability to maintain and grow the dollars we received from existing customers answer in new sales.
Retention and renewal rates within the quarter were affected by our decision to support our K 12 customers as they dealt with the impact of coded 19.
Because schools are dealing with very disruptive changes to the way to educate and administer we've made the decision to leave licenses on for customers. Even as license periods came to an end and not to push our customers to pay immediately.
Reported retention renewal rates, maybe affected during 2020 by these actions, we're taking to support schools in response to the pandemic.
For example, we could have higher than normal retention rates, because we are turning schools off at their license and date and lower than normal renewal rates, because we are requesting immediate payment.
Overtime, we expect us to normalize.
Please turn to slide eight and I will talk about how we're supporting learning for customers and this time of change.
As John mentioned, the speed with which schools were closed enforced to move to remote learning was incredible and not something they were equipped for.
We understood this would be a difficult transition for our customers I moved quickly to support them.
On March 13, we announced a program called learn from home for which every existing customer could receive a free unlimited site license to any of our curriculum products and our educator professional development platform Lexia Academy until the end of the school year.
To maximize impact we define customer broadly to include any district, where we have a presence no matter, how big the district or how smaller presence and the response was terrific. Please turn to slide nine.
As you can see on this slide since its introduction seven weeks ago. Approximately 9600 schools took advantage of this free offer and either upgraded site licenses from seat licenses or began their relationship with us with the fight license through the learned from home program.
To put a number of schools and perspective this brings us to more than triple the number of whole school site licenses, we were supporting before this crisis began.
And within these schools, we have seen approximately 2.8 million student accounts being created and over 800000 students already using these licenses that 800000 children, where home access to learning through rest solutions is being made possible through the program.
And the students who are using core five from home are showing a 60% increase in progress in terms of activities completed.
We're partnering with schools to could change you to Maximise access to our program and support student learning.
Next slide please.
The effort to stand up and support this program with significant.
During March in early April we reached out to every customer with a formal offer and set up landing pages for them to <unk> to apply.
We began to post a social media sites and sent out emails with information to support parents as well as teachers and students moved to learning from home.
And we set up new resource pages, including making all of our skilled builders. The thousands of worksheets for students that are usually only available to a teacher through my lexia more accessible to teachers and even available directly to parents for home they use.
It's been particularly encouraging to see the teacher engage with our solutions has actually grown in this crisis as they've been able to rely on the data and information provided through my Lexia to understand the progress of their students and the areas where they need support.
This support has been critically important to the success of the program.
Next slide please.
Offering free licenses to customers is relatively easy supporting them in a way that provides real value to schools and their learners is extraordinarily difficult I believe we're setting the standard for schools. During this crisis and enhancing our reputation in the marketplace as a result.
In fact, Newark, New Jersey on at School districts website added a thank you for Lexia for supporting ran through the learn from home program.
Please turn to slide 12.
Ultimately, we'd like to continue our new or expanded relationship with these customers.
As we have seen over the years I've talked about a number of times our single biggest growth opportunity is to expand into schools and districts, where we already have a presence.
Today, we're using district that represent approximately 48% of the total U.S. public school population.
Currently we serve approximately 11% of students with the other 37% of students, creating the expansion opportunity as we either move schools from seat licenses to whole school site licenses or expand into other schools in the district.
Historically, we have leverage our demonstrated efficacy with students, we serve and a district to drive expansion opportunities.
Now in addition to this information we have 9600 schools that have participated in the learn from home program and either an expanded or new relationship.
We're very focused on this initiative, please turn to slide 13.
Another factor that can support growth. This year is the increase funding provided through the department of education as part of the cares Act through.
Through the care attacked over $13 billion is being distributed to states are title on formulas.
This is an addition to the approximately $14 billion that had already been to leverage the states through their annual title one allocation in the fall of 2019, and we expect will occur again in the fall 2020.
According to the act. These songs must be spent by states within a year or return to the department of education.
In many cases these funds maybe used to replace decreased funding at the state and local levels, if tax revenues shrink or deferred.
But we do expect there will be funding available for our solutions, especially as districts looked and a half their remote learning capabilities in response to the pandemic.
Please turn to the next slide.
Overall, we remain optimistic about the year. Despite all of the issues created for our schools by Cobot 19 more than ever schools are looking for solutions that deliver personalized learning give teachers the data they need to inform instruction and can support learning into virtual environment.
Texas for one looks very promising, especially for Powerup as part of the Texas Secondary School literacy adoption program that began this year.
Outside of Texas, We expect net new business can be more difficult. This year because of the impact of code at 19 as customers are less likely to have the time or the inclination to try something new as they deal with issues confronting their schools.
So the best opportunities are likely to be an expanding and our existing district. We're fortunate to have a broad nationwide presence with significant expansion opportunities and our current customer base.
Looking forward as we emerge from this crisis, we fully expect better solutions, we better positioned than ever before.
Well I will school districts choose our programs over others as educators address the learning gap. That's occurred during this time of transitioning and school closures. They will need programs and partners that have a proven track record for accelerating learning right.
Research has shown that our solutions can close the literacy gap and this will be a critical need this coming summer and fall.
Our blended learning solutions that that well to supporting home learning as students continued to be able to work in our programs. While teachers have real time access to the results to drive instruction and feedback.
We believe and have witnessed during this crisis that maintaining the personal connection between the student and their teachers critical.
We will do more to support this environment, especially because we know schools are already looking to improve and expand their contingency plans for times like this which for some could come again this fall.
Our proven ability to provide great outcomes for learners, whether they're in their school or at home will be especially important if as we expect school budgets next year come under pressure as a result of decrease local tax revenues.
Because now more than ever they can see our solutions work.
Please turn to slide 15.
We announced on the yearend call in March that our new case fix emerging bilingual program Rosetta Stone English at successfully entered its beta phase as a reminder, emergent bilinguals or the fastest growing student population today expected to represent 25% of all students in 2025.
We introduced a program and approximately 30 schools with over 2000 students in eight states, including California, Texas, Florida, and North Carolina.
In many cases as schools closed our beta program was cut short we continue to support some schools and remote learning and actually added a large charter school system to the beta after they close their physical locations.
Fortunately, even with a disruption we were able to collect sufficient data samples and the key areas. We were looking to test to allow us to move forward with her plan commercialization just summer for the 20 2021 school year.
We're excited to add this new solution to our K 12 portfolio later this year.
And with that I'd like to now turn the call over to Matt to update you on our language business.
Thank you Nick please turn to slide 16.
We had a terrific start to the year in our consumer language business driven by the increase value, we are providing learners and more recently they desire among many to use their time at home during that pandemic to learn any language.
Bookings in consumer language in Q1 were 22.6 million a 42% increase over the first quarter 2019.
Consumer revenue grew 5% in the quarter to 16.1 million.
Revenue growth naturally bookings growth. That's the fact increased in Q1, because a large portion of our bookings were from our lifetime product, where we recognize revenue over two years more on this any moment, please turn to slide 17.
Enterprise and education bookings in Q1 were 5.5 million a decrease of 2.1 billion decrease was driven entirely by lower bookings in the enterprise portion of the segment, including a 550000 de bulking up a sale from last year that the customer cancel in Q1 2020, because it is winding down its operation.
The bookings for the K 12 education language portion of this segment were flat to the prior year any segment revenues were 13.6 million a decrease of 6% versus Q1 of 2019, reflecting the lower enterprise bookings.
As the most economically sensitive part of our company. We expect the enterprise language portion of this segment to be negatively affected by the dramatic impact on businesses of the cobot 19 crisis and the international response to it.
In many ways, our enterprise customers look at language learning as critical support for the way in which they conduct their work, but in other cases language learning is viewed as an employee benefit in this environment. We expect renewals for these customers that come under pressure. We also expect new sales to be more difficult corporate learning budget under pressure and HR.
Our team's focus diverted to supporting new work dynamics and their teams.
Please turn to slide 18, and we'll take a closer look at the performance in consumer language.
As we said during the year end call consumer language was off to a strong start even before we began to see any significant uplift from people wanting until their language well sheltering at home.
Remember that the World Health organization did declare cobot 19 at pandemic until March 11, almost halfway through the last month of the quarter.
The improvement we were seeing has been driven by our lifetime product, which is attractive to a distinct customer segment that wants to commit to learning a new language, but it's put off by the final subscription offers that are at odds with the investment in time, they know will be required.
You will recall that in February we significantly upgraded our long term subscription offerings for the first time for all subscriptions 12 month and longer including lifetime learners have access to all the 25 languages and our catalog with a single purchase we call. This Rosetta stone unlimited.
This has significant perceived value for learners, even though based on our experience you learners purchased more than one language overtime.
He did this because as the price leader in the market more value, we can add to our products to drive additional sales that better off we will be at a typical price of $189 that are $99 paid up front product is very attractive for us even relative to the LTV of other skews.
Sales of these lifetime subscriptions, rather than an increase in the average initial sales price a $96 into first quarter 2019, and a $119 into fourth quarter 2019 to $144 in the first quarter. This year.
North American direct to consumer in global App store net LTV added grew 25% over Q1, 2019, and because of lifetime sales significantly more of this LTV was paid upfront.
This is what makes our consumer language business, so attractive the ability to any meaningful positive cash return on our marketing costs almost immediately because we sell a learning product, we don't keep subscribers as long as SaaS based consumer companies and some other areas.
But because our offering has high perceived value we are able to realize significant payment upfront rather than through monthly subscriptions over an extended period of time.
Turning to slide 19, while Q1 was off to a good start we clearly saw the impact that change behavior related to shelter at home orders as we went through March in response to this we made a decision very early to support the families affected by school closures I, providing free three months subscriptions the end trials in school.
Absolutely no strings attached.
All a parent has to do what enter their email and the name of their child School response has been tremendous at this point nearly 350000 parents have signed their children up for the program and while we can be certain there has been somewhat views of the program. Our daily sales tracking would tell us is not that significant we're thrilled.
To be supporting these kids and their families. During this time.
We're also pleased with a wonderful pressed the program that generated as shown on this slide we have had prominent mentions on the today show CNN and the BBC and in people magazine USA today, Orbs, and Oprah magazine and dozens of other publications in fact, so far this year, we have generated over 2 billion.
Media impressions. This is helping us to achieve one of our main goals and the consumer business. This year to make our brand relevant again, not just well now.
As I've said before our biggest competition in the United States language market is the fact that many people don't know we haven't digital products.
Being prominently in the public I with our operating for kids and all of the other media. We have garnered as publications have generated what to do in your time homeless.
Has been a big helping reintroducing or iconic brand that we believe will provide lasting benefits. Please turn to slide 20.
In late March we introduced another service for our consumer language subscribers to add value to our offerings are limited time, we announced that we would provide unlimited group Turing to any paid subscriber.
We did this both to support our learners and have begun to test more fully they use a video based language instruction as a supplement to our core software offering.
Like Nikin, our K 12 business I believe that the best educational results come from when you blend what software and human each do best.
Allowing software to support the learning of rule and repetitive tasks that is required and running a new language, while I tutor provides a tailored support and confidence building that it's so important to success.
In Q2, we have begun to introduce new product offerings that lean into our strategy of combining the best of software with access to human instruction, what we referred to with adaptive blended learning our approach leveraging Rosetta Stone's pioneering digital tutoring technology and operating infrastructure can be a unique competitive advantage versus software only solution.
We believe we can see an increased demand for digital only solutions, including online tutoring, especially since offline schools are literally not available to learners around the world.
We're proceeding carefully in order to understand what is most appealing to learners and will evolve our offering as we receive feedback.
While our consumer language business is being held at the moment bite desire among people to put the additional kind they have at home to good use I believe we can benefit from this period over the long term.
This is an opportunity to reshape the perception or was that a stone among customers from the well known but CD box space language company to the most innovative response of language learning company in the marketplace.
In the meantime, you're very happy with the started the year in or consumer language business and are excited to continue to introduce new innovations to build on the incredible value. We offer learners with that let me turn it over to John to discuss that.
Thanks, Matt Please turn to slide 21.
I want to walk you through the factors impacting or guidance almost all of which are related to covert 19.
Bottom line since March of.
Forecast in the business through this time has become more uncertain.
Consequently, well unlike many others. We are continuing to provide guidance, we have introduced or broaden the existing guidance ranges to better take into account. The additional uncertainties we are seeing.
Some cases to the upside.
For walking through the factors impacting each segment. It is important to reiterate a few things the benefit us across the company. During this unprecedented time.
First we were able to quickly move all of our employees to working from home.
You did this in the middle of March and the team as adjusted exceptionally well.
Secondly, all of our products can be sold delivered and used remotely including from home with full support for both the learner and their teacher in K 12 were there.
Demonstrator in K 12 or in enterprise.
These aspects help us tremendously right now now let me walk through the key aspects, we see influencing each segment this year.
The risks in K 12 include the fact that as Nick said.
We expect creating new bookings from new customers will be more difficult. This year, the schools and districts to deal with a disruption and focus on solutions already in place and the expectation the budgets could be cut in future.
While we expect renewals to be strong payment in some cases may be delayed.
We saw this in the first quarter the schools dealt with adapting to working from home.
On the positive side as I said, we expect our underlying renewal rate when the Eurs complete will again be strong this customer's lean into what they know.
We also believe there's significant opportunity for growth within this existing customer base.
Especially as schools look to broaden their a contingency planning options in the event school closures continue into the fall.
Some cases, we anticipate this will be supported by the relationships and goodwill we have built through and learn from home program.
It may also be helped by the incremental funding provided by the federal government through the carriers Act.
Overall, we are fortunate to have a broad customer base and the marketing sales and customer success organizations.
To support them at a time when scale and a large installed base matters.
Finally, we also expect Texas will be a positive for us this year.
In some cases, because Texas isn't eat your adoption. This will include multiyear deals that are paid up front.
Well this will support bookings in cash and 2020, the impact of multiyear deals on revenues will be smaller.
In enterprise language, we believe our offering because of the efficiency of a blend of software in online tutoring is well positioned relative sense to those companies that focus on off line tutoring solutions.
That said the severe economic recession, we're already in.
Well hurt our enterprise business in the interim.
Like most other business service offerings and enterprise language will be affected by the disruption impacting organizations globally.
We expect this will a depressed those new and renewal sales.
Consumer language the underlying risk is an economic downturn that is prolonged in which causes consumer discretionary spending to decrease meaningfully.
In addition on a GAAP basis.
Access of our lifetime product has met the relatively lessens the bookings we realized in 2020, well be recorded as revenues within the year.
Lifetime revenue is not recognize this year well have a positive effect in 2021 in 2022.
On the positive side, no a number of things that make us optimistic.
Amount of execution work that we've done too.
In addition, the consumer business in a place where we can once again play offense was largely complete late last year.
So terrific acceleration in the business from Q4 net continued in Q1.
This impact was being felt even before the effects of covert nineties.
The U.S.
In addition, the strength of our brand, it's an asset that we've been better leveraging which enables us to be more top of mind toward a consumers.
Hi, 97% brand awareness is an asset that has been helpful for business. This consumers look for activities to occupy that Todd.
In addition.
Since we have been extremely efficient on faster marketing payback channels, we can better manage our variable costs, which are especially important in a challenging macroeconomic cycle.
In the meantime, we continue to benefit from consumers' desires to learn a language from home.
And the improved your value we are providing two products like her unlimited lifetime offer.
On balance we remain optimistic about the outlook in 2020 per literacy indicate what portion of our email segment as well as consumer language. Please turn to slide 22.
Turning to guidance and starting with revenue.
We expect.
Validated revenue year to be 186 million to 194 million down slightly at the high end and with a wider range from our previous guidance.
Hundred 89 million to 190.
5 million.
Let me unpack that.
First with literacy revenue.
Where we are maintaining the high end at 72 million with a low right now 69 million down slightly from our prior low end, no 70 million, reflecting the uncertainty, particularly around new business bookings that I've just discussed to be clear. This is not yet evident in our pipeline, but we believe it is appropriate.
Be more conservative.
This corresponds to full year literacy bookings growth rate of 25% at the high end no change from our prior guidance, but a low end growth rate of 18% down from 20% previously.
Again uncertainty around new bookings growth.
Turning to our language business.
Further pressure, we now seen enterprise portion of Veny, it's expected to be partially offset by strength in consumer.
Perini segment, we now expect full year revenue to be a range of 50 to 53 million.
Down from our prior guidance of 53 to 55 million.
Bookings, a 41 to 46 million down from our prior guidance of 50 to 54 million.
As I noted we believe the enterprise portion of are you need segment is the most vulnerable part of our business impacts from the coded 19 pandemic and so right now it is the only business, we see having the potential for meaningful dollar bookings to revenue reduction.
Relative to our prior outlook.
In consumer on the other hand, we're raising our full year revenue guidance to a range of 67 to 69 million.
By 1 million on both ends from our prior guidance on raised guidance for full year consumer bookings of 75 to 78 million.
Up from 67, the 69 million previously.
An increase of 8.5 million at the midpoint, which translates to 15% growth year over year.
We're continuing to see stronger than originally planned consumer performance in Q2.
But aren't ready to predict that it will continue in the second half a year.
As Matt noted the stronger consumer demand, we're seeing is primarily for lifetime subscriptions, which makes the lag between bookings to revenue growth longer.
We also expect to see increased sales and marketing spend this year in consumer language.
We lean into the opportunity to drive bookings build brand relevance.
Well, we expect most of the spend will have a relatively fast payback on cash basis for gap will be expensed as incurred well revenue will be recognized over as much as two years in the case of our 24 month lifetime products.
Turning to profitability.
We are improving our guidance for full year net loss 20 loss of 20 to 24 in them.
Our prior guidance, a little awesome 25 to 27.
We are also raising our guidance for full year adjusted EBITDA to approximately five to 8 million up from three to 5 million previously.
In raising the high end of guidance for operating cash flow, which is now expected to be 14 to 18 million.
Up from 14 to 16 million.
The reason why the higher expected profitability, there's no doubt into does not fully show up in our guidance for operating cash flow is due to an assumption that we could see slower collections of accounts receivable either because we.
Proactively offer customers more time to pay or they simply pay slower than normal we continue to expect the capital expenditures to be approximately 17.
And then we will be approximately cash flow breakeven for the year.
As we reflect the current uncertainty in our book into revenue outlook, we will continue to be mindful of our expenses as the year Progressive Please turn to slide 23.
Given the general level of uncertainty, we have decided to temporarily to provide guidance for the quarter. We're in an addition to the full year.
We hope this provides a little more clarity we continued to see strong performance in Q2 in consumer language. We also expect to see year over year growth in our K 12 literacy segment.
On the downside, we expect weakness in the enterprise portion.
On a consolidated basis, we expect total Q2 revenue of approximately 46 to 48 million flat to up approximately 5% from last year.
GAAP net loss of approximately 4 million.
In positive $2 million to $3 million, an adjusted EBITDA.
Due to our typical first effusive cash we will again have seasonal borrowings.
It's worth reminding everyone that earlier this year, we increased the size of our credit facility by 67% to 25 million.
Well, we don't expect to me the full amount. This year. It's helpful to have it available in these uncertain times.
As in 2019, we expected in the year with no debt.
Please turn to slide 24.
We had a great start to the year with K 12, and consumer language demonstrating real strength.
There's tremendous opportunity in both businesses and we look forward to sharing their progress as the year moves forward and we learn more.
As you know we believes in the power of adaptive blended margin.
Bringing the best of software in human intelligence together to drive come on.
In response to the pandemic, we're seen acceptance of this approach accelerating in all areas of our business.
The belief that software can be an effective method for learning, especially when coupled with human instruction.
Whether from a teacher, where tutor and almost all cases today delivered online the which in the case of the K 12 teacher well one day soon we hope returned to the classroom with a greater appreciation for its importance.
Hi, there case or strategic intent is to provide both the adaptive personalized software to them burner.
The data and information to empower the human instruction the teacher tutor.
Ultimately, it's critical that we do everything we can to leave this crisis with the K 12 business that is stronger and more important to its customers. The language business that has again viewed as a leader in providing innovative solutions to learn is looking to learn a new language.
Determinations motivating our decisions today, and we'll continue to do so throughout this crisis.
We do this well I believe that we will look back at the 60 plus years of Rosetta Stone Lexias combined history. This preparation for the future learning.
You turn that is rapidly becoming today's reality.
With that operator could you. Please open the line to questions.
Thank you.
At this time, we will be conducting a question answer session. She would like to ask a question. Please press star one on your telephone keypad a confirmation tollway indicate your line is in the question Q. If at any time you wish to remove your question from the Q. Please press star to for participants using speaker equipment, and maybe necessary to pick.
<unk> up here had said before pressing the star He's one moment, please probably poll for questions.
Our first question is from Steven Frankel of Dougherty.
Good afternoon, and thank you for the opportunity. So Nick you threw out a lot of interesting numbers around the work from Earth. The free learning from home opportunities that Youve enabled could you scale those for US maybe so a 9600 schools or remind us.
What kind of success that race that wasn't getting years. Your your schools are signed up and the same with the 800000 student accounts is that.
Home run number or should you have expected something bigger than that.
What is what are these numbers tell us.
Sure. Thanks, Steve Good to hear from you. So we had about half of our established customers take us up on the learned from home offer. So 990 600 schools raise their hand and said, yes, we really want to take advantage of this and expand the accessibility of or programs too.
All students. So those could have been schools that had individual seat licenses or they could have been schools that we didnt have a relationship with in a district, where we had other schools who are using our programs. So you know in essence, we tripled the number of schools that now have access to unlimited license for Steve.
Learning.
You know your question about the number of students that are now active as it is a good question I think we've all read and papers.
About the difficulty in transitioning for schools from you know a physical environment to a virtual environment and one of the critical aspect is that digital divide that a lot of school systems have students, who just simply don't have internet access at home.
I don't have access to devices. You know we have created many more student accounts, but part of that is because the way we create sued the counts is through an automated import from school information systems and sell in some cases district, so poor all of their students into our system.
That being said, we're still seeing that transition to take place.
Whether it was spring break or you know another lag and just getting student set up we're seeing student activity increase.
So I'm I'm really happy with the numbers schools that have taken a step on the offer the number of students that are using the program and now our goal is to support those students to the rest of the school year and start to work with district on planning for the fall.
And through this program are you able to get the contact information for the key decision makers. So that in the fall you can go back and really do try do a land and expand.
Yes, and so it's not even get this you know honestly that the most of the key decision makers made the request to increase access to the program and it's not something where we're waiting for the fall to have those conversations you know schools right now are developing their contingency learning plans.
And so those conversations are happening right now.
Great.
And then you spoke a with good confidence around the Texas opportunity and I know last year that was a disappointment.
So what maybe have you learned over the last few months that give you increased confidence in your ability to to crack Texas in the second round <unk>.
Mhm. So you know this year. In addition to the continuation of proclamation 2019 that was focused on the elementary school market in Texas is the first year the secondary adoption and we've already seen orders come in from Texas and significant new business.
The focus on the secondary adoption I think really highlights the a competitive nature and the ability to meet the needs and students in the power up program. So power up is being selected as a key tool to support E.L. students in Texas, and what's particularly interesting and exciting.
Thing about what we're seeing is that hand in hand in some cases with the purchase of the power a program. There also purchasing our language learning program foundations.
To meet the needs to be L. students. So that combination is an incredibly powerful offering to schools and we're seeing the kind of momentum this year that we hope to see last year.
Okay and then the.
Strong bookings that you saw in Q1, I notice relatively small part of a year, but it's doing.
A good number how much of that was business that maybe slopped over from Q4 versus business that.
So it came in in Q1 that you hadn't had in your pipeline previously.
Yeah. So some of it some of it did come over from Q4 some of the renewals that were late you coming in but even in March with strong Steve and so that gives US you know a good indication that we are seeing interest right and the team of schools, having to make that transition.
Again, you know it is a small quarter and so we're not we're not leaning into the strength of that quarter too much in predicting the year. It's more the pipeline that we're seeing emerge for the second quarter and the third quarter and the strength of the response to the learn from home program that gives us that confidence that being.
That said there is still a lot that we don't know I'm certainly schools are nervous about future budgets and closing you know the budget gap that they're going to have to contend with as state and local tax revenues decline and so they're still absolutely risk in the market.
And we're going to learn a lot over the next four to six weeks.
Great and then for Matt.
Given the success in the lifetime offer over the last two quarters have you kind of made the semi permanent or permanent decision that that's rosetta spot in the marketplace and and so you should expect can you just focus on the.
Lifetime offering from now on and see the the shorter term subs started drip away.
Yeah, Steve Hey, great to hear from you Yeah, we had a great quarters you could as you saw I look at the market in both ways the trying versus committed audience.
And the long term audience that we've hit a really nice.
<unk> is this lifetime audience, where those customers I understand the power of the brand and what we offer and so we're definitely going to be continuing to offer that that skew going forward you know we saw.
Acceleration in Q4, 14% year over year growth, we saw good baseline growth with that skew as we added the unlimited functionality, which is kind of our Netflix for language learning you can pick any language that you want and that continued to grow and so we're seeing great value there and not just existing customers.
Actually we're seeing a lot of interest from net new customers as part of this so yes, and along the way Steve weren't we're going to continue to offer this product we still see a lot of value in our short term subscribers, especially when we start broadening our marketing funnel folks that aren't as aware of Rosetta stone.
Oh, we see this barbell developing a very very short term folks and then and the is long term customers.
Okay, great. Thank you I'll, let somebody else kind of questioning here. Thank you very much.
Thanks.
Our next question is from Ryan Macdonald with Needham and company.
Good afternoon, everyone. Thanks for taking my questions. A one is for start on on one of the comments or I guess in the last Ah on the last answer in relation to school budgets. You know just curious as to what you're hearing from you know school district officials about when they might have more clarity or certainty around you know what.
The budget and yeah, we've heard a little bit that at the start of Q2, given some postponement of major Ed Education conference is that that might be causing a slight disruption in pipeline would love to hear your thoughts in comparison of what you're seeing as well. Thanks.
Sure it could be good to hear from your Ryan So right now it is a little choppy state by state about half the states now understand the cares act funding, they're going to receive and have communicated that down to the districts and that's where we're starting to see some very active conversation.
About half its having communicated that yet and those states or think holding back and being careful not to overcome it until they have visibility into that funding.
In terms of of the the state budgets I think there obviously is concerned about not just this year, but future years and I think schools are are working with states understand now what that budget is going to look like in the future.
So it is uneven but certainly you know that money comes with a lot of flexibility that typically don't see I think people think about his title one but it's just being delivered through title. One formula is now talking about the $13 billion that is that is being delivered to.
Districts. There's also another $3 million as we said that's being delivered to governors, but.
The flexibility is there so that they can do things that in historically they weren't able to do it also comes with the stipulation that it's districts don't spend that money is as it states don't spend that money, they're going to have to deliver it back to the department of education, and then districts have a period of time, where they can spend and if not back to.
Bring it back to the federal government as well so it is meaningful funding and it is going to drive some purchasing behavior in the short term and offset some of the declines in future school budgets.
But there is certainly nervousness about the future.
Absolutely understandable great to see the additional exposure that you've gotten a amongst the schools has this resulted in any sort of any early up sell or renewal activity, thus far or our school generally waiting until sort of we getting through the end of this going here before making those types of decisions.
Yeah, No. We have seen we have seen some of that early activity actually take place in fact, some schools and said you know not only do we plan to move forward aggressively, but we want to start piloting this programming and all of our schools early this year. So that we had experience with it and so it is really very variable district by does.
Strict and state by state right now.
And then lastly on the on I guess in regards to Lexie before I move I've heard a language I'm just it sounds like at least in within the state of Texas. There. There's obviously, some some better than expected traction for for their Rosetta Stone language product. In addition to Powerup just curious how that's been trending versus your initial expectation.
For this year.
So I don't think we were expecting as much uptake of both programs at wants which is a really good surprises in our teams are working well together and it certainly bodes well for the future when Rosetta Stone English is available because right now what we're bringing to the market is.
Our foundations product, which has the product for secondary and we'll continue to be the product for secondary but the belief is that the combination of Rosetta Stone English and our other you know elementary school product core five is going to be a powerful combination as well.
Excellent and then on the on the consumer language business and this would be my last one I'll get back into queue, sorry for all the questions, but you know great to see the number of new sign ups a as a result of of the the free offering any sense or our of what conversion rate.
Yes off of those free users could start to look like as we get into the summer here.
Yes, good question right.
No in fact, our no strings offer was literally no strings that has to offer to to those parents that signed or their children that.
But it's interesting we literally saw no degradation to our daily sales incentives, we provided that offer out into the you know the internet or broadly. So we do see a lot of incremental demand more than we anticipated.
For actually kids using our core software. So we don't have had about future statement around the conversion. We are very surprised at the amount of uptick in that and that offering so nothing to say officially about that but I would say overall there is a very good halo effect.
Both with a adult learners, saying that that program as well as our enterprise customers.
Has some halo effect around that as well. So we don't have anything to say incurs of conversion other than I can say it didn't impact the current business and it positively affected how we are being considered and our other businesses.
Excellent excellent questions.
Our next question from Greg Pendy with Sidoti.
Hi, guys. Thanks for taking my question I'm, just on Rosetta Stone English I might be mistaken, but I believe you guys mentioned that it could add as much as 2 million to the second half of sales and just given everything that's going on and also the disruption during the beta launch is that still something your comp that then.
Yes. It is still something we're confident than it is a you know incredibly under served markets I'm in a market specifically that doesn't have very good digital solutions I think $2 million the fairly conservative number partly due to the fact that we are launching it halfway through the year.
But based on the response, we have seen smart beta program.
The enthusiasm both from teachers and administrators and students you know we remain confident in that product are on track for commercial release this summer.
You know the first order business is going to be too bring customers, who are using our foundations product in the K five segment over to the Rosetta Stone English product, but then also to bring new customers as well as upscale core five customers on that product.
Right. That's helpful. And then just one more I'm just trying to know Stearns offer can you just give us generally.
Any idea on just what the demographic mix I was pile two milestones offer.
You know students I guess K 12 students that well members are using the product just and you think about Apple.
Like you said you had 350000.
Parents take the yeah. They yeah. The offers that we introduced we're still midway through the offer we offer we're offering three months free subscription and about 350000.
Kids have signed up either I'm older kids have signed at themselves or their parents nothing nothing demographically to share about that although I would say that in our core consumer base, 90% of that consumer businesses, United States focused a the remainder is largely gave me a little bit outside of the EMEA. The.
Bulk of those customers that buyer subscriptions today are adults and so I with our foundations product that we sell within school that that Nick mentioned in his team cells. That's been in market for quite awhile. So we do not that there is a large market of children, especially older kids that well.
Finer grade applicability to Rosetta stone in our core learn languages product, but I don't have any demographics. The share other than we are perceived as John mentioned on the earnings calls a CD specific product and we haven't really had a lot of broad brand awareness or it's being a digital product and I would say the more we lean into the.
These offers that get us into new top of funnel.
And more exposure, we're seeing that benefit without any net downside in terms of our core paid subscription business.
That's helpful. Thanks, a lot you bet.
Our next question is from Ryan Meyers with Lake Street capital markets.
Hey, guys. Thanks for taking my questions off those ones for me can you talk about how the seasonality of the business is tracking that you guys are still following your normal seasonal pattern.
Yeah sure. This is John Yep. Thank you for the question you fundamentally we are.
That said, obviously, we are seeing a much bigger first part of the year in consumer than we had expected going into the or for the reasons. We've mentioned dose the success of the lifetime lifetime on unlimited product in the co bid 19 impact as well.
So you know if you kind of unpack our bookings guidance for consumer what that would tell you. If you assume that we continue to have is very strong first half.
It's league in the it implies.
Hey, weaker relative second half, we don't know that that will be the case on the given the uncertainty in the world. That's what we're comfortable with that at this point and so to the one business. That's you know acting a little differently than we would normally expect to see seasonally is the.
So my language business, just because it's just during some so longer it now.
Okay. That's helpful. And then are you guys still on track to grow the literacy sales and marketing organization by 30%.
We are you know I would say broadly across the company.
We have again just to manage costs in this time of Oh, you know unprecedented uncertainty we have been more restrictive and our hiring but the areas that we've continued to emphasize in terms of hiring or those areas that support bookings growth, especially in K 12.
In those areas that you know just important keeping the lights on and so nothing has changed or hiring plans on the K K 12 side in fact, we've been pretty.
Successful in giving that the team up and running.
Okay. That's it for me thanks, guys.
Q.
Our next question is from Alex Paris with Barrington Research.
Hi, guys I'm sorry, this calls going long most of my questions have been asked and answered the congrats about being one of the very few companies to beat on Q1, and not only a keep guidance, but generally rage earnings guidance. Thank you also for the second quarter Guy is that'll help with the seasonality for the year I laughed I just have to.
Small questions left off these free offers and Youre initiatives should support schools in need I I take your four warn you that there could be some additional support costs for those I'm wondering or were those material and are they I'd go away.
You like to address that Nick.
Sure be glad to no you're absolutely right that there are additional support costs. Both in terms of technical support as well as our proactive customer care to make sure that those schools are.
Well served I'm certainly you know we are being careful to you know allocate more services are those customers who are paying for services than we are to the free unlimited offer.
Offers but come to fall you know, we believe that though that work is going to be what fuels stronger relationships and fuels those customers turning into paying customers and purchasing services. So I think it is a investment that is absolutely the right investment to make right now.
And in some cases, you know we were able to shut off some of our lead your typical lead generation programs. Because we were seeing such strong lead flow from the learn from home program and that balance the cost a little bit.
Got you there was some puts and takes it it's absolutely the right thing to do is a corporate citizen or the doing doing well by doing good kinda comes to my or my last question is Ah Ah.
You know given what's going on with the cobot crisis as.
It's descriptions might come to an end you're not begging on these customers to pay the renewal and that sort of thing yacht well.
Is there any accounting treatment that I should be aware of a is there a bad debt component or anything like that or you know from offering these ah Ah flexible terms.
Tom do you want to address yeah, I believe your own sure sure John and I, Alex. Thank you no. These are our.
The ones that Nick was mentioning you know, it's a very small kind of book cohort of customers like they've come up for renewal in the first quarter its falls by far Oh quarterly year collection. So.
Not a material nothing material issue in those special accounting treatment for this and as we roll into the you know we ended the second quarter into the third quarter, we'll reassess where we're at with with all that we have you know we baked into our our cash modeling a certain level.
Expectations around this and so that's part of our guidance, but I will also say that to date, we have not seen any significant a issues from a payment perspective in terms of customer behavior. So looking out for it but but it's not something that that we've seen in a lot of the cuts.
Summers hub have paid.
You organically so it's not like we're carrying a big I'm, a big a big and growing receivable balance or something but based on them.
Great well, thanks, very much everybody.
Thank you Alex.
Ladies and gentlemen, we have reached the end of the question answer session I would like to turn the call back to John Haas for closing remarks.
Great. Thank you operator, thank you everyone for joining the call and for your questions and I would like to reiterate especially as this is teachers.
Appreciate one week and nurses, we began today our thanks for everyone carrying corn supporting all of our families and children. During this period, it's super important we will try and do our part but there are lot of people on the frontline doing amazing things were great for them.
Thank you everyone and good afternoon.
Thank you. This concludes today's conference. Thank you for your participation you may disconnect your lines at this time.
[music].
[music].
[music].