Q2 2020 Rosetta Stone Inc Earnings Call

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Good afternoon, and welcome to the Rosetta Stone second quarter 2020 earnings Conference call.

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I would now wait to turn the conference over to units on Investor Relations. Please go ahead.

Thank you good afternoon, everyone. Welcome to is that just on second quarter 2020 earnings Conference call you getting on the call today will be John has chairman and CEO Nikita co president of Rosetta Stone.

As you know, we Tom piano, the company's Chief financial officer, well be available during the Q on a portion of today's call.

We have closed tend to be Investor relations section of our website or does that sound dot com well the earnings release and the slide presentation, which accompanies today's call. We've also posted supplemental information and analysis on our website.

I want to remind everyone, but as always there'll be elements in today's presentation, which are forward looking and are based on a feel the wild 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 in quarterly reports on form 10-Q.

We expect we 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 measure.

The full definition got comparison and a reconciliation of those measures are available on the Alan mentioned presentation and press release.

I will now turn the call over to John.

Good afternoon, Thank you for drilling.

Just to note before we begin the Matt it's under the weather and it's not able to join us on the call.

I would like to begin by thanking everyone. There were set up some team very difficult tumultuous times delivered an exceptional second quarter, whose overarching theme was a commitment to supporting longer. It's it's a high quality solutions and support they need it.

Whether by providing free licenses and the implementation resources to ensure a good experience with our kids love solution to our learn from home program.

Well by providing a free three month consumer offering the students you put him on his first.

Please turn to slide three.

As shown on the slide the team delivered a strong Q2.

I'd like year over year consolidated bookings growth of 41 up with side, including bookings growth of 59% No literacy segment, 92% in a consumer language. We ended the quarter was $31 million gosh no doubt.

First is approximately 11 million that's cash before 10 million who died at the end of June last year.

Growth in Q2 was led by a consumer language, which grew bookings $13.4 million to 27.9.

This is more impressive because in prior years Q2, it's been a seasonally slow corridor and consumer language without the additional capital of the we have in Q1 with new years resolutions were later year with back to school and holiday.

Clearly are a consumer results in Q2 was lifted or they learn from home Oh phenomenon, resulting from the Corona Violets pandemic.

Well, we also benefited from strong alignment of our product offerings with customers, who wants to make the commitment to lighten the language.

Walk through this in more detail enrollment.

Bookings growth in or literacy segment was stronger than we expected earlier core.

Literacy bookings grew 59% to 19.2 million was 7.1 million over its second quarter in 2019.

You too well what does it become relatively smaller in recent years, it's still important the schools use funds from the ending school.

To prepare for the upcoming here.

And in some cases this year that access to incremental federal funds through the kills huh.

Both in the quarter was driven by a few things.

First we've not seen slow down and our renewals that we were concerned about earlier year.

Our customers foods, the uncertainty created by dependent.

Secondly, we have seen strength in Texas, particularly for power.

The district worked through those secondary literacy adoption.

We also saw expansion in existing districts nationwide hopes, but follow through from or learn from home program.

Recall that this is the program we put in place to provide unlimited site licenses that any of our K 12 curriculum solutions to existing customers for the remainder of the 2019 2020 school year.

To help with the immediate move to remote learning brought on by you hear Universal School closures.

Finally, well, we focused on expanding relationships in this industry.

So bookings a new districts his leadership in some cases, we've been talking looks for a few years accelerated a decision making to prepare for an uncertain beginning to the upcoming school year.

On a consolidated basis total revenues for the quarter were $49.2 million, an increase of 7% from Q2 2019.

Revenue growth naturally leg bookings growth and that was the case in Q2 as we built deferred run.

I heard revenue grew by $10.1 million on a sequential basis to a second quarter record up 174.1 million at the end of June.

Net income in Q2 was a loss of 3.6 month.

Well adjusted EBITDA was positive 4.1.

And of course, we're seeing bookings not only show up on the balance sheet and deferred revenue.

We are seeing that in cash.

Burning cash balance was $31.3 million on roughly breakeven operating cash flow.

We now expect strong cash flow generation for the full year.

And the moment, we will walk through a segment financial results in more detail, but I want to begin by highlighting the underlying factors.

That influence grew up in Q2.

Please turn to slide four.

Underpinning all of our business is the fact that we address areas of great.

Well the other K 12 technology providers are also benefiting from the demand for remote capable learning solutions.

We are well positioned given her expertise the largest area of K 12 education teaching children to read.

A fundamental skill with lifelong indications.

During the second quarter customers again demonstrated that they valued the ability to learn the second language you wanted to use the extra time they had at home for self improvement in this area.

Please turn to slide five.

It's clear that during the period when districts in schools are looking for solutions that can move smoothly from supporting classroom instruction to delivering high quality learning at home.

An adult language learners, one flexible access to learn at their own time in place, but our solutions are especially well positioned.

Our product.

Provide personalized construction the travels with the learner.

It was workers use our products their teachers administrators and real time access to their progress and in the case of our K 12 products just specific intervention materials to help in her areas would need.

We're continuing to work to make our products, even better suited to remote learning in areas like providing more support for parents of capable students or access to virtual tutors and our language businesses.

I'm extraordinarily proud to work the team is going to turn that was brought us down into a business that produces high quality learning outcomes.

Please turn to slide six.

You should take four things from today's call.

We said we were off to a strong started after Q1.

We were confident enough about a year, we maintained and in some areas improved guidance as many others understandably stepped back from providing guidance at all.

Based on Q2 performance and our expectations for the rest of the.

We remain confident in our recruiting or outlook today.

Second the underlying reason, we're optimistic about the or the we have worked hard and each of the businesses to set the standard and hoping learners and educators adapt to the impact of dependent on her efforts are the noticed reward.

Third.

Or response has.

Produce significant growth in a consumer language is leading to real opportunities and are K 12 business through the remainder of 2020.

Finally.

We are determined to use this period to ensure that I will set us, though will be even better position as a leader in opposed to covert 19 world.

World that we believe who aligned with our strength as a learning company.

Please turn to slide seven.

Our consumer language business was exceptionally strong Q2 with bookings of $27.9 million.

North of 92% versus the same period in 2019.

This growth was driven by both increased the value we are.

Providing learners and they desire among many to use their time at home during the pandemic to learn new language.

Consumer revenue grew 9% in the quarter to $17.7 million.

The natural lag between bookings growth revenue growth continued to increase from Q2 is a large portion of bookings were from our lifetime product, where we recognize revenues over two years.

Please turn to slide eight.

Enterprise in education bookings in Q2 were $12.2 million decrease of 3.2 million.

The decrease was driven by lower bookings in both enterprise and education portions of segment.

As expected the enterprise business continued to feel they cite the Titan and refocused corporate learning budgets.

Year over year comparison was also negatively affected by the fact that we signed a 1.3 million dollar multiyear paid up front contract within enterprise customer in the second quarter 2019.

The bookings for the K 12 education language portion of this segment. We're also gone relative to last year, but were consistent with our expectations coming into the year.

Eating segment revenues were 13.6 million a decrease of 6% versus Q2 2019.

Reflecting the lower bookings in recent periods.

As the most economically sensitive part of our company. We expect the enterprise language portion of this segment to continue to be negatively affected by the dramatic impact on businesses. The covert nights in crisis Indian and the international in response to it.

That said, we are seeing a little more stability recently and look forward to helping our customers scale their language learning, while reducing costs and improving outcomes.

Because of the lower volume this year than we originally expected, we instituted cost cutting including furloughs related to our enterprise business, which is reducing operating expenses by approximately $4 million on an annual basis in the segment.

The crush shared support groups.

I'd also remind you looking forward to Q3 in 2019, we executed is 7.4 million dollar custom content soundtrack, there will not repeat this year.

When I walk you through our outlook for 2020, the numbers I will reference for enterprise assume no custom content bookings in 2020 as native American tribes that have been the largest customers for this work has been especially hard hit by dependent.

Please turn to slide nine.

I will walk you through.

Performance in our consumer language.

He was an extraordinarily strong quarter in consumer.

In fact, it never seems you to grow sequentially versus Q1, just as we had not previously seen.

Sequential growth in Q1 versus Q4 as we saw earlier this year.

Consumer language growth was due in part to the popularity of our lifetime crop that's incremental bookings on a per unit basis as a raises both the initial sales price and the expected lifetime value of the average customer.

Growth in lifetime began with its introduction on the web in Q4 last year.

And accelerated with the introduction of access to all of her languages, a single subscription product, we called Rosetta Stone unlimited in February of this year.

Lifetime is a natural and appropriate product in the segment of the learning marketplace. We're committed loners, notably in a second language is difficult and takes time.

Well short term subscriptions makes sense for lerner with a temporary need or who are unsure about their come up.

The growth, we're saying from better execution.

Pilloried as at the very end of Q1 through Q2, two living work from home training related to the Cnineteen pandemic.

Consumers were looking for activities pastimes and skills. They could do at home during the extended period of corn team.

Given the near convergence of the introduction that was out of stone in London.

The onset of dependent.

It's impossible to precisely to understand how much about growth in Q2 can be attributed to this effect, but it was clearly significant.

The highlights of our work to improve unit economics are clear and slot.

As you can say both the average initial sales price and the expected lifetime value of her products has grown over the past few quarters do there's a success over the lifetime product.

And not only five time driving more lifetime value learner than short term.

Subscription is turning that value the cash faster because it is paid up front.

In addition, due to the higher ASP, who and concentration for lifetime also with consumers as well as the increase in unit volume because of the demand for our products, we saw strong marketing efficiency metrics.

LTV to CAC in Q2 was 2.3 times overall, we spent 18% more impact year over year, while delivering 92% higher bookings growth.

Remember, though that Q2 last year included a 1.5 million dollar brand market test shut in low in period return.

In total net LTV had grew by 232% year yeah.

Please turn to the next slide who will walk through Rosetta Stone limited lifetime, I'm, a little more detail.

Burning the language difficult, making gains takes continued practice and all too often life gets.

Just one of the reasons why subscription based consumer language learning inherently has low retention rates.

Where's that want to the effective.

And Perficient in the second language I understand this.

For over 27 years was edison's branded product Thomas and spend to support loans the truly want to learn language.

Stepping back we see the marketplace into brought camps.

Line and committed.

Brian customers Dabble in language learning or have a short term me.

Well committed learners understand the time required to succeed.

For the trying customer we operate three month.

Subscription to a single language and attractive press.

But our efforts are targeted to build comprehensive effective solutions for committed lines for access to lifetime learning even at a relatively high price works to relieve the time pressure that comes with learning the language makes the decision to commit easier.

As we've mentioned consistently over many months for consumer business is focused on generating the highest LTV across the broadest number of learns committed learners are valuable in March segment. This marketplace.

The roughly 180 million duets adults with access to the Internet research suggests roughly two thirds have some interest in Marina second language and that roughly one half of those adults are excited by the prospect learning. The language is what it could do for their lives.

But as a group of approximately 60 million customers.

Within this group we believe about one third are deeply committed to learning language and would believe the long term or lifetime product.

The best fit for their need.

It's a target audience for lifetime of over 20 million people in the U.S. Holland.

We have sold lifetime subscriptions to only roughly 1% of this segment.

One of the reasons, we see so much opportunity in this part of the marketplace.

I'd also note that we aren't the only self improvement brand that has realized the fit between mermaids lifetime product offering.

Look for example to the meditation bring training and fitness world as well as other language providers for similar offer.

Next slide please.

We continue to focus on improving the experience for when we when they use our programs a few weeks ago. This was recognized by PC magazine with a perfect five star ratings, the best premium software in like which one.

We have recently focused on integrating human coaching tutor in conjunction with our world class pedagogy.

In Q2, we introduced lives lessons.

Which integrates expert digital video instruction and by our own in house coaching organization into our products.

This enables consumers to have an immersive and efficacious experience.

We also continued to expand our content efforts by integrating new capabilities into our products for video lessons are integrated into our consumer products for real time access.

Wherever and whenever burners on learning.

In addition, we've integrated our speech recognition into these lessons so that consumers can incorporate lives speech practice into on demand cheap.

In addition, we are more aggressively marketing or life triggering capability.

We believe that the integration of human intelligence and personalized softwood was we call and adaptive blended learning is the best way for someone to learn new language.

Bottom line, it's been a busy three months from that and the team.

Which we believe will lead to long term benefits for our language business.

With that I will turn the call over the next we'll talk about or literacy segment.

Thank you John Please turn to slide 12.

Literacy segment revenue in the second quarter was $17.8 million, an increase of 18% of the same period in 2019.

Bookings were 19.2 million in Q2, an increase of 59% over the same period in 2019.

Our bookings during the quarter was driven by both higher new and renewal sales in our direct channel with strong contributions from Texas and some early benefits from our learn from home program.

Please turn to slide 13.

Annual recurring revenue our air our 19% compared to the end of Q2 last year.

While strong air our growth was lower than bookings growth in Q2, largely because of the impact of multiyear deals in Texas, where total new bookings in the state in Q2 were approximately 3.7 million.

The annual recurring revenue added from these deals approximately $500000 at some districts chose to use adoption dollars and enter into eight year hate upfront contracts and a portion of the bookings were attributable to training, which we do not include in there are.

As the growth we expect in the larger second half the year broadens beyond Texas, We expect air our growth to accelerate along with it.

Renewals in the quarter was strong driven by upsells to existing customers lifting the trail trailing 12 month renewal rate to 104%.

Based on our work with customers, we believe unit retention will be strong as well, but the rate within the quarter was positively distorted by our decision to support customers in part through the learn from home program. If they dealt with the impact of cobot 19 by not shutting off access when their license expires.

Consequently, we are not reporting what would not be a meaningful retention rate for Q2, but intend to do so again following Q3.

Please turn to slide 14, I'll talk about how we are supporting our customers and this time of dramatic change.

As you know schools were closed and forced to move to remote learning with incredible speak a little preparation we understood. This would be a difficult transition for our customers and moved quickly to support them.

As we discussed in our first quarter call, we announced a program called learn from home through which every existing customer could receive a free unlimited quite 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 defined customer broadly to include any district, where we have a presence no matter, how big the district or how small our presence and the response was terrific with approximately 10000 school signing up in using our programs.

This increase the total number of active schools during the program period by approximately 12% this.

This is quite impressive for one quarter in a business that's been around for over 36 years.

And importantly, it increased the number of unlimited school licenses, we were supported by almost three times.

Our mission then was to support this rapid acceleration of new school and expanded relationships.

We committed from the beginning to providing the resources needed to ensure that our programs were implemented well with the necessary training to use them.

This time is difficult enough for educators and administrators and our goal is to ease their burden not to add to it and this approach served us well.

The learnt from home program has now ended in our focus has turned to continuing our partnership but that many of these schools as we can converting them to paying customers that they manage the uncertainties in schools schedules. This fall.

Please turn to slide 15.

As John said bookings growth in Q2 exceeded our expectations a number of factors contributed to our performance MCU too.

Our learn from home program in the imperative for schools to build more comprehensive remote and hybrid learning programs for the school year at abroad positive impact on the quarter and we'll continue to benefit us this year.

In effect learnt from home accelerated priorities already in place for 2020, including scaling our historical pilot program and expanding our existing customer relationships to relevance support and high customer satisfaction.

While all the district that participated in the offer where by definition already customers broad exposure that learn from home created to our products similar to an intensive national pilot and the significant goodwill created is helping us out with schools look to build their remote learning plans.

We're also happy with the results of the account segmentation strategy, we implemented beginning of the year. The restructuring has focused our field based sales leaders and account reps on larger new and renewal opportunities, while moving smaller accounts and opportunities to inside account sales managers.

This change is driving the focus to convert and expand the larger opportunities, we're creating while more efficiently managing smaller customers.

In addition, we continued benefit from the growing power of our K 12 portfolio not only our core five and power great products in their own right our ability to bring both to a district expands the problems. We can help school Sol and leads to more strategic conversations often resulting in large mark larger more systemic.

Yeah.

By the end of June over 3000 customers were using more than one of our product up from approximately 350 same time two years ago.

Finally, as I mentioned, we've seen strength in Texas, especially associated with their secondary school adoption.

Please turn to slide 16.

Underpinning our ability to meet the needs of districts facing the challenge to provide high quality learning, whether remotely or in personnel or in a hybrid approach our six key factors.

First our solutions offer a flexible implementation model that allows both the student facing software and the data and information provided to teachers to seamlessly move from classroom to home and back again.

Our products are just easy to use their proven to be effective more on that in a moment.

Especially a standardized assessment for being canceled our ability to provide real time data on student performance and insights into skill gaps to our assessment with that testing capability was critical to teachers and administrators and this remote learning environment.

And when students are at risk of falling behind our solutions are able to quickly close gaps to personalize and targeted instruction.

We're also finding that our ability to facilitate meaningful interactions between students and teachers using our lessening it's highly valued at the time when these interactions are being strain.

Finally, when the importance of the teacher has never been more clear providing remote professional learning opportunities through Lexia Academy. The learning portal for educators has been key.

At this slide makes clear our ability to provide an excellent learning experience because well beyond offering software that can be logged into at home.

Please turn to slide 17.

Our proven ability to provide great outcomes for learners will become even more important school budgets come under pressure as a result, a decrease local and state tax revenues.

Because more than ever districts will demand educational return on the investment they are making.

That end during Q1, we were thrilled that research supporting the efficacy of our flagship solution core five perceived a rating of strong evidence for Esa one of the leading resources educators consult to determine if educational programs adhere to federal efficacy EBIT and standards to strong rating for core five.

Reinforces the robustness of Lexias efficacy evidence portfolio, which includes over 20 peer reviewed research studies.

Very few Ed Tech providers offer programs that have earned strong ratings at both the elementary and secondary level.

Those few that have the evidence for S. analysis estimates that lexias programs have the largest impact on student reading outcomes in both elementary and secondary grades as measured by average effect size.

Please turn to slide 18 for an update on Rosetta Stone English.

I'm happy to let you know that Weve officially launched Rosetta Stone English for sale for the 2000 2021 school year.

On the team began work on this groundbreaking solution, we had an aggressive plan to release RSC. This summer and have now met that goal, even with the beta interrupted by the pandemic.

We're very proud of Rosetta stone English switching innovative so many ways, including its focus on oral language development and the real time reporting it provides teachers and administrators that historically than the limit it to on the understanding progress through annual or twice yearly standardized tests.

We're especially proud of the cultural racial and other forms of representation present in the student facing product and our asset approach to education.

Rosetta Stone English, we honor the native language at the lender as an asset rather than looking at the lack of English language skills as a deficit while sales of RSC. This year are primarily focused on renewing our elementary school customers that are currently using our existing Rosetta Stone Foundation solution. We're very excited about the opportunity we see going forward.

For RSC meet the needs this large and growing population of learners, especially now with school closures disproportionately impacting these students.

With that I'd like to turn the call back over to John to walk through guidance for the year.

Thank you Nick please turn to slide 19.

Turning to guidance and starting with revenue.

We now expect consolidated revenue for the year to be 190 to 200 million Dollarss and total bookings of 216 to 229.

And it would be 7% higher than 2019, the midpoint on revenue and 13% higher bookings.

And the literacy segment, we're raising our revenue guidance to a range of 72 to 76 nine.

An increase of 3.5 million at the midpoint.

We're raising our full year literacy segment bookings outlook to $87 million to $93 million up from approximately 81 day 86 million previously.

This represents bookings growth of 27% to 36 Crystal.

For 2019.

The factors impacting our outlook for the literacy segment includes the opportunities to expand relationships with existing customers.

Created by the learnt from home program.

And the need both existing and new customers have pro solutions to support remote or hybrid learning.

This is being helped by our ability to follow through on a growing number of large opportunities as the result of the strategic sales account realign.

Earlier in the year.

Finally, we see additional bookings in Texas during the second house, but the majority of the Texas impact likely came in Q2.

We still expect new business in new districts to be more difficult 2020, and we might have otherwise you before the pandemic, we're focused our marketing and sales efforts in line with the belief that existing customers or greater opportunity for us this year.

Looking into 2021, we see opportunities to drive growth is districts developing deeper appreciation for the efficacy of our solution.

But a variety of factors may lower bookings growth rate.

We're seeing a 2020, an acceleration in do an up sell business growth.

Given by districts urgent need to plan per remote or hybrid learning. We don't know if the same level of urgency will persist next year.

In addition, somewhat larger than typical dollar amount of our contracts in the literacy segment. This year I've been multiyear in nature driven by adoption sales in Texas, We do not expect this level of multiyear adoption bookings continue next year.

Finally, although we like our relative positioning within tech.

Cool budgets are reduced because of declining tax revenue K 12 education provider its will be negatively impacted.

Turning to our language business.

Consumer we're raising our full year revenue guidance to a range of $69 million to $72 million as we now expect full year consumer bookings of the 80 to 92 million.

Up from 75 to 78 million previously.

$67 million to $69 million at the beginning the year.

This guidance assumes that year over year bookings growth slows in the second half 2020 compared to earlier in the year marketing efficiency declines in the back half and the positive impact some people will remain well core indeed at home uptake.

We also expect consumers year over year bookings growth in the back half to be lower so we lap the original introduction the lifetime product on the web which began to ramp up in Q4 2019.

At the bookings midpoint this translates to 36% growth for the full year.

What's the success of lifetime unlimited the majority of the bookings performance. This year will be recognized as revenues in 2021 and into 2022.

Well, we will benefit from this revenue in future years, we expect bookings next year three negatively impacted relative to this year as people return to work in the quarantine driven sales we received initial phase.

The strength, we're seeing in other parts of the business. This year will be partially offset the pressure we continue to see in or enterprise in education language segment.

Okay 12 language education.

Is performing in line with our expectation and enterprise has seen some stability more recently, we are expecting full year revenue being a range of $49 million to $52 million $1 million lower on each other.

Versus our prior guidance on lower enterprise bookings do they impact from the pandemic.

Recovery in enterprise will be tied in part to recover in Canada.

Turning to profitability.

We are improving our guidance for full year net income so loss of $20 million to $22 million raised from our prior guidance philosophy 20 to 24.

We're also raising our guidance for full year adjusted EBITDA grew approximately $8 million to $12 million up from five to 8 million previously.

The stronger than previously expected bookings, we have seen this year are not directly turning into significantly better.

Outperformance in 2020, because while bookings are recognized as revenues over the life of the underlying.

Subscriptions and contracts expenses are largely recognized upfront.

This concludes variable compensation for non commission employees, where we are accruing.

Potential bonus payments at a higher rate than last year due to the performance we expect in 2020 relative to 2019.

This higher accrual will be offset during the year by lower operating expenses, because we've been diligently managing costs during the pandemic, including the cost action discussed earlier and certain other costs like travel been naturally lower.

We're raising our guidance for operating cash flow to $29 million to $34 million up from 14 to 18 million previously.

Proved outlook for operating cash flow is largely due to the higher bookings delivered in the first half 2020 by the consumer segment and the expected higher book into literacy segment throughout the year.

This guidance continues to assume that we could see lower collections of accounts receivable.

There because we proactively offer our customers more time to pay where they simply pace lower than normal we've not yet seen this into material way. So we would like to be prepared if that occurs.

We expect capital expenditures to be approximately 16 with 70 million in that we will have approximately $13 million to $70 million cashflow. After capex this year.

We expect a year in cash balance of approximately 55 to 60 million with no debt.

Please turn to slide 20.

Like last quarter, we have decided temporarily to provide guidance for the quarter, where you're at.

In addition to the full year.

We hope this provides more clarity during their tumultuous year.

We expect strong year over year bookings growth in Q3, and their literacy segment district seem to be accelerating decision, making to prepare for a variety of back to school scenarios.

Performance quarter today in the current pipeline makes us comfortable with our outlook for two three and literacy.

We also anticipate good bookings performance in Q3, and consumer language, although year over year growth rates will decline relative to the first two quarters is the impact of people learning from home in quarantined decline.

On the downside there will have a significant year over year bookings decline in the in East segment, driven by the enterprise portion of the business largely due to the absence of the 7.4 million dollar custom content deals signed in Q3 2019, as well as ongoing impacts from the pen them.

On a consolidated basis, we expect total Q3 revenue of approximately 48 month.

Up approximately 5% from last year, the GAAP net loss of approximately 7 million.

And positive 2 million an adjusted EBITDA.

Please turn to slide 21, and I will wrap up.

Despite and in some cases because of the challenges created by these difficult times. The team had a strong first half to twentytwenty producing good financial performance well demonstrating continued commitment to helping marketers.

Ultimately it is critical that we do everything we can to leave this crisis with a K 12 business that is stronger and more important to its customers and the language business that has reinvigorated and leader in this space.

With that operator could you. Please open the line to questions.

Yes.

We will now begin the question and answer session.

To ask a question you May press Star then one on your telephone keypad.

If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then to at this time, we will pause momentarily to assemble our roster.

The first question comes from Steven Frankel with Colliers. Please go ahead.

Good afternoon, and thanks for the opportunity John I'll start with the question, you're probably not going to answer but it's on everybody's mind given the press reports of the company.

[noise] potentially going through a process just wanted to see if you were willing to add any insight on that subject.

Yes, Steve. Thank you for asking you are we don't comment somewhat.

Market rumors or speculation regarding a strategic matters of the type, but certainly understand why you're asking.

Okay, then well, let's move on that.

In terms of the free to work program. It sounds like you've got some great results to what extent Nic does that get you district wide mandates, which is one of the things you clearly been working toward over the last couple of years [laughter], Yeah, Hi, Steve. Thanks. So the question. So it certainly is an accelerator.

Peter in terms of our expansion at the district level one of the thing we are seeing right now in the industry.

Is that districts are playing a much more central role in the decision, making I think theres a lot of pressure on districts to make sure. They have learning continuity plans in place and the learn from home program certainly expose districts to our products and a much more deep then and.

Broadway than they had previously and so this is absolutely an accelerator in terms of our relationships with the district level.

Yes.

And Oh, yeah. He made a comment about very strong bookings early in the quarter.

With that with Texas impact or or are you have you seen some dynamic as the quarter progressed or maybe ended this quarter. It says decision cycles are starting to life at given what's going on world.

Yeah. So early in the quarter, absolutely, Texas was a strong state for us and continued to be strong, but we certainly saw the strength and momentum in bookings.

Especially at the end of the second quarter start to materialize outside of Texas as well as a result will learn from home program.

[laughter] now that he sells released a can you give us any insight into how that product is price relative to what you were selling prior in relative to.

What others are getting in the marketplace.

Yes. So you know the price of Rosetta Stone English is more expensive than our literacy programs, but not dramatically more expensive on unlimited site license basis, because obviously they are not serving the needs of every student in the school or district.

We just released the product couple of weeks ago and are really thrilled with first of all the sentiment and reaction we saw from our beta sites and some of the early indications of interest in the product.

Okay and then one last question on the [noise].

Consumer business that they will upsells, the well I'd classes.

As it tutoring.

Where or when will those be a commercially available and start to generate revenue and kind of what do you think the revenue up sell capability of those programs is.

Yes, Steve so they are commercially available now tutoring.

Switches the under the thing that we're we have been testing.

No no pushing out specifically focused on lifetime customers. So lifetime customers are now being offered on a subscription basis access to tutoring.

I'd say, it's still early.

For us to fully understand what the opportunity is there and we're going to continue to test it but there will be bookings attributable to tutoring in our consumer segment this quarter.

Okay, and then one last one for her Nick.

You know I know you said, you're not really focused on new districts, given what's going on.

With co bid.

How material has budgetary shortfalls been in that discussions you've had so far with your existing.

Districts, where are you finding that because they know your product Ah, they're finding a way to pay for it.

Yeah up until this point I'm certainly they have been finding the funds to pay for it and actually we have seen the carriers Act funding make a difference in terms of schools ability to move very quickly.

We have talked about and I continue to believe that driving business and districts, where we don't have relationships is going to be harder that being said, we are seeing some really nice momentum in district that we've been talking to for a number of years, but haven't made inroads into a bit as result of learn from home and as result of the.

Here's our funding are starting to see momentum there in terms of.

Pipeline progression, which is just great.

Great. Thank you so much.

Sure.

The next question is from Alex Paris with Barrington Research. Please go ahead.

Good afternoon, everyone. This is Chris how sitting in for Alex Paris.

This is definitely a unique situation that we're in given the pandemic environment.

And it's nice to cover a company that not only provides guidance that raises guidance.

Misleading off.

You talked about.

Bookings.

As it relates to this past quarter and how you examine the mix of bookings, perhaps changing as we move out of the pandemic, assuming an extended pandemic environment. How do you view a second quarter results as sustainable.

In the level of retention that you would have should this environment continue longer than expected.

In the possibility of the vaccine being pushed out even further.

Yeah, Hey, Chris. Thank you for the question and it's look it's unknown for all of Us <unk>.

The new world for all of Us, but I think if you go segment by segment.

You know a prolonged pandemic.

With the implications that could have tour business, obviously would negatively impact the enterprise segment, I think that would persist possibly longer.

Then we would otherwise like in K 12, I think the.

Clearly, we're seeing as Nick said, both in the second quarter and early in the third an acceleration in decision, making which has been very positive for us given the breadth of our exposure in districts.

And Ah districts across the country.

The reputation of the company in the efficacy of the products I think it's it's a well decisions are never easy budgetary decisions are never easy I think when you can lean into a product that has demonstrated the ability to predict create positive outcomes for students and works extraordinarily well entering.

Uh huh.

And they.

Remote learning environment choosing wachovia.

As a relatively easy thing to do.

Where we'll run into concerns is if you know when schools begin to see their budgets negatively impacted us.

He was factor is Steve was asking about.

It seems as if that's going to be more of a next year problem than a this year problem.

Obviously, we would hope.

That's the federal government comes to.

Some agreement on a broad release package and one that includes additional funding for schools.

Seems as if that will ultimately be the case [noise].

And given that would certainly big.

Positive not just for this year, but also into next year on the consumer side you know it's unknown yeah as we said.

In the.

Original remarks.

Because we introduce Rosetta stone and limited it really about a month before the a pandemic took hold in the U.S.

Dissecting, what part of the lift we've seen in the business is from each it's really hard to tell I think we're reasonably confident that.

How does that impact phase.

We will have a better more sustainable business at a higher level than we had before because her.

You got very positive and that work for that for that product offering.

But you know to some extent were just kind of to see.

That's very helpful and I appreciate the color just moving outside of that question. You mentioned the success that you had in Texas that.

Benefited bookings in the quarter.

Outside of Texas, you're making some inroads as you mentioned, perhaps you can comment there as the as to the inroads, you're making and how you view.

Potential in other states given this challenging environment.

Yeah interesting interesting question because it is very very state by state both in terms of.

When the states received their cares act funding in Wednesday's deliver that funding down to districts and we saw that early in the spring where some states. We're moving forward quickly and other states were still I'm holding off because they didnt have clarity on their funding yet.

But at this point everybody understands what their care sack funding is certainly.

There is different momentum in different states, depending on the relationships, we hadn't districts prior to the pandemic and the exposure. They have had as a part of our learn from home program, but I would say the growth from a geographic standpoint is pretty broad based it's not just one or two pockets of strong growth.

It really is across the country and of districts of all sizes.

Great appreciate the answer and I'll hop back in queue. Thank you.

The next question is from Greg Pendy with Sidoti. Please go ahead.

Hi, guys. Thanks for taking my question I'm, just wondering on the consumer strength can you kind of elaborate I know the shelter in place you kind of mentioned as a potential benefit but I'm just kind of looking at some of the markets that statistics that you guys have put out in the past it looks like you know maybe around 46 billion has been off you know.

Online I'm, sorry about 6 billion, it's been online in about 46 billion has been offline. So do you think that during the pandemic do you think the pie grew in <unk> in terms of interest in learning a language or do you think that maybe there was sort of a shift.

Thanks, Yeah, I know, it's a really good question, Greg and those are you in Oh I'm. The numbers. We've we've shared in the past fast I think the honest answer is.

I think there are people, who have had an ongoing interest and bringing the language may not have been learning offline, but found at the time and the motivation while they were at home to to try and learning Hey, second language and I think that you know that clearly had about oh.

Undoubtedly there were people who were trying to learn a second language facing a community college with the tutor.

That was you know that was not able to.

We continue with the pandemic and I think they may well have moved learning online as well yeah. I think it's our hope is that will create a new normal going forward.

There will be greater interest in greater understanding the benefits of online language learning certainly when we can introduce things like online tutoring as well to substitute for some of that offline learnings. They may have also been doing oh.

And so you know, it's clearly, though it's I think.

Not easily too.

Disentangle, how much is from age, but you know clearly a go through a factor for us in the quarter.

Great. Thanks, a lot.

Your next question is from Ryan Meyers with Lake Street. Please go ahead.

Hi, guys. Just one question for me can you give us some color on how you've been able to work through the sales pipeline given the challenges actually physically or going into new schools and districts.

Sure be glad you're right. So this is Nick it was really interesting to see our sales teams moves to remote selling you know our sales teams were already physically remote most of them spread across the country and had already been doing a lot.

Of their selling remotely, but I'd have to say that it has been very seamless I think partly because of the expertise of our team.

And that the infrastructure and tools, we had in place, but also I think after the initial weeks of schools really not and being in a in a mode of communication schools, realizing that they had to make plans for the fall and actually reaching out to us. So the process of of remote selling has been.

Not yet seamless, but I think really effective.

Well that's good to hear thank you.

The next question is from Ryan Macdonald with Needham and company. Please go ahead.

Yes, hi, everyone I apologize in advance if these questions have already been asked I've been bouncing around to a few calls I guess first off can you talk about in the lexia bookings strength or maybe provide some additional color about the mix there of what you're seeing of success between core five versus power up.

Yeah. So we are seeing success in both areas I think.

You know in the last half of last year and maybe the beginning of this year, we saw a really strong growth from power up and certainly in Texas because of the secondary adoption, both how powerup and our language product foundations had you know really great market acceptance and filling the need, especially for English language learners, but.

Core five has also shown a real strength in terms of of new growth. So it's been very balanced, which I think there's a great thing both in terms of the investments we've made across the portfolio and our ability to support schools and students from kindergarten all the way after 12th grade.

Yeah, and Ryan the other thing over that which is implied by next answer is we're seeing real strength in selling both to the same district that same time as well, which has been really nice.

[noise] excellent and then in terms of Oh, we obviously know about what the potential budget issues that can be causes me look into next year from from cobot in some of the deeper cuts that made me coming without without additional stimulus or funding are you doing anything on the sales process to drive a adoption maybe multi.

Your adoption, whether it's favorable billings terms or or with the new Rosetta stone English products ticket that sort of adoption driven earlier, maybe including that in deals before maybe budgets are potentially cut next year. Thanks.

Yeah. So we are absolutely leading with multiyear options for customers, especially when we know that they have.

Received stimulus money that they need to spend and so that is certainly something that we are communicating to our customers.

And there has always been an attractive price point in terms of multiyear discounts that they can take advantage of so it's not that different from what we normally do except maybe emphasizing and communicating the fact that there are multiyear options.

You know we have always looked at our pipeline that's something that is driven by the experience. The rep has on the ground in conversations with district leaders and certainly as part of that process understanding the funding source and understanding the needs. We're solving allows us to put the best proposal in front end.

Them to solve their needs and hopefully.

Create long term partnerships.

Yeah, and then just a follow on quickly well nics, absolutely right, where we're leaving with that and that is part of the portfolio that a sales person has.

When they're talking to customers, we're not counting on it and the outlook for the year any higher percentage of multiyear deals you know outside of the scan, Texas adoption. If you will then we would typically see and so it's a it's a good strong annual recurring business that we think we're building this year.

Excellent. Thanks for taking my questions and congrats on a great quarter.

This concludes our question and answer session.

I'd like to turn the conference back over to John has for any closing remarks.

Thank you operator, thank everybody for your questions. These are obviously a difficult times for many many people and there are certainly in our thought we will continue to focus on supporting customers learners with the knowledge that ultimately that is the best thing for the company.

As well as the best thing for those learners.

Thank you for joining us and we look forward to speaking with you again.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Yeah.

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Oh.

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Good afternoon, and welcome to the Rosetta Stone second quarter 2020 earnings Conference call.

All participants will be in listen only mode.

Should you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero.

Today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad.

To withdraw your question. Please press Star then too.

Please note this event is being recorded.

Now, let's turn the conference over to units on Investor Relations. Please go ahead.

Thank you good afternoon, everyone. Welcome to is that a second quarter 2020 earnings conference call.

Speaking on the call today will be John <unk>, Chairman and CEO and Nikita co president of Red noticed that Additionally, Tom piano, the company's Chief financial Officer will be available during the Q and a portion of today's call.

We have closed tend to be Investor Relations section of our website I was I just don't Dot com, both the earnings release, and a slide presentation, which accompanies today's call. We've also posted supplemental information and analysis on our website.

I want to remind everyone that as always there'll be elements in today's presentation, which are forward looking and are based on a feel the world and our business as we see them today.

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 quarterly reports on form 10-Q.

We expect we disclaim any obligation to update or revise any forward looking statements, except as required by law.

Today's presentation and discussion also contains about my goes to non-GAAP financial measure.

The full definition got comparison on a reconciliation of those measures are available on the aforementioned presentation and press release.

I'll now turn the call over to John.

Good afternoon, Thank you who joined us.

Before I begin the Madison doesn't go out there and it's not able to join us on the call.

We'd like to begin by thanking everyone. There was set up some team during the cold and tumultuous times delivered an exceptional second quarter who's the overarching theme was a commitment to support in language with a high quality solutions and support they need it.

Whether by providing free licenses and the implementation resources to ensure a good experience with our kids love solution or learn from home program.

Well by providing a free three months consumer offering for students you put long as first.

Please turn to slide three.

As shown on the slide the team delivered a strong Q2 highlighted by year over year consolidated bookings growth of 41, I'll put side, including bookings growth of 59%.

Literacy segment, 92% in consumer language, we ended the quarter with $41 million and cash no doubt versus approximately 11 million that cash before 10 million at the end of June last year.

Growth in Q2 was led by consumer language, which grew bookings $13.4 million to $27.9 million.

This was more impressive because in prior years Q2, it's been a seasonally slow quarter in consumer language without the traditional catalysts that we haven't you want.

New year's resolutions were later in the year with back to school and holiday.

Clearly our consumer results in Q2 was lifted.

They learn from home Oh phenomenon, resulting from the Corona virus pandemic.

But we also benefited from strong alignment of our product offerings.

Customers, who wants to make the commitment to learn from the language I walk through this in more detail in a moment.

Bookings growth in or literacy segment was stronger than we expected earlier quarter.

Literacy bookings grew 59% to 19.2 million was 7.1 million over second quarter in 2019.

Q2, well it has become relatively smaller in recent years, there's still important the schools use funds from the isn't even school year to prepare for the upcoming year.

In some cases this year have had access to incremental federal funds.

The kids Huh.

Broke in the quarter was driven by a few things.

First we have not seen slowdown and renewals that we were concerned about earlier year.

As our customers for the uncertainty created by dependent.

Secondly, we have seen strength in Texas, particularly for power.

The district works through the secondary literacy adoption.

We also saw expansion in existing districts nationwide talked about follow through from our learned from home program.

Recall that this is the program we put in place to provide unlimited site licenses that any of our K 12 curriculum solutions to existing customers for the remainder of the 2019 2020 school year.

To help with the immediate move to remote learning brought on by you hear Universal School closures.

Finally, well, we focused on expanding relationships in this industry.

So bookings in new districts his leadership well in some cases, we've been talking much for a few years.

Accelerated a decision making to prepare for an uncertain beginning to the upcoming school year.

On a consolidated basis total revenues for the quarter were $49.2 million, an increase of 7% from Q2 2019.

Revenue growth naturally legs bookings growth and that was the case in Q2 as we've built deferred revenue.

Deferred revenue grew by $10.1 million on a sequential basis, plus second quarter record up 174.1.

At the end of June.

Net income in Q2 was a loss of 3.69.

Well adjusted EBITDA was positive 4.1.

And of course, we're saying bookings not only show up on the balance sheet deferred revenue.

We are seeing that in cash.

Right ending cash balance was $31.3 million on roughly breakeven operating cash flow.

We now expect strong cash flow generation for the full year.

In a moment, we will walk through a segment financial results in more detail, but I want to begin by highlighting the underlying factors that influence that influenced screw up from Q2.

Please turn to slide four.

Underpinning all of our businesses is the fact that we address it really is a great.

Well the other K 12 technology providers are also benefiting from the demand for remote capable learning solutions, we are well positioned given her expertise in the largest area of K 12 education teaching children to read.

Fundamental scale with lifelong implications.

And during the second quarter customers again demonstrated what they tell you the ability to learn a second language you wanted to use the extra time they had at home for self improvement in this area.

Please turn to slide five.

It's clear that during the period when districts in schools are looking for solutions that can move smoothly from supporting classroom instruction to delivering high quality learning at home.

An adult language learners, one flexible access to learn at their own time in place that our solutions are especially well positioned.

Our products.

Provide personalize construction the travels with the learner.

Whereas use our products for teachers or administrators of real time access to their progress and then the case of our K 12 products just specific intervention materials to help in their areas would need.

We're continuing to work tomato products, even better suited to remote learning in areas like providing more support for parents of Kate students for access to virtual tutors and our language businesses.

I'm extraordinarily proud to work the team has done to turn it was had a stone into a business that produces high quality learning outcomes.

Please turn to slide six.

You should take four things from today's call.

We said we were off to a strong started after Q1.

We were confident enough about a year, we maintained and in some areas improved guidance as many others understandably stepped back from providing guidance at all.

Based on Q2 performance and our expectations for the rest India, we remain confident in our crew in our outlook today.

Second the underlying reason, we're optimistic about the or is that we have worked hard and each of the businesses to set the standard and helping learners and educators adapt to the impact of dependent.

And our efforts are being noticed and reward.

Third our.

Our response has.

Produce significant growth in consumer language misleading to real opportunities and our K 12 business through the remainder of 2020.

Finally.

We are determined to use this period to ensure that I will set us on will be even better position as a leader in opposed to cope with 19.

World that we believe well aligned with our strengths as the learning company.

Please turn to slide seven.

For consumer language business was exceptionally strong in Q2 with bookings of $27.9 million.

Both of 92% versus the same period in 2019.

This growth was driven by both the increase the value we are.

Providing learners and they desire among many to use their time at home during the pandemic to learn new language.

Consumer revenue grew 9% in the quarter to $17.7 million.

The natural lag between bookings growth revenue growth continued to increase in Q2, because a large portion of bookings were from our lifetime product, where we recognize revenues over two years.

Please turn to slide eight.

Enterprise in education bookings in Q2 were $12.2 million decrease of 3.2 million.

The decrease was driven by lower bookings in both enterprise and education portions of segment.

As expected the enterprise business continued to field is like the tightening and refocused corporate learning budgets.

Year over year comparison was also negatively affected by the fact that we signed at 1.3 million dollar multiyear paid upfront contract with an enterprise customer in the second quarter of 2019.

The bookings for the K 12 education language portion of this segment were also down relative to last year, but were consistent with our expectations coming into the year.

Any segment revenues were 13.6 million the decrease of 6% versus Q2 of 2019, reflecting the lower bookings in recent periods.

As the most economically sensitive part of our company.

Expecting enterprise language portion of this segment to continue to be negatively affected by the dramatic impact in businesses. The cobot nights in crisis, and then and the international response to it.

That said, we are seeing a little more stability recently.

I look forward to helping our customers scale their language learning, while reducing costs and improving outcomes.

Because of a lower pagans a share than we originally expected, we instituted cost cutting including per losses related to our enterprise business, which is reducing operating expenses by approximately $4 million on an annual basis in the segment and across shared support groups.

I would also remind you looking forward to Q3 in 2019, we executed a 7.4 million dollar custom content contract that will not repeat this year.

In fact, when they walk you through outlook for 2020, the numbers I will reference for enterprise. So no custom content bookings in 2020 as native American tribes that have been the largest customers for this work has been especially hard hit by dependent.

Please turn to slide nine when it will walk you through.

Performance in our consumer language.

You too as an extraordinarily strong quarter and consumer.

In fact, it never seems you to grow sequentially versus Q1, just as we had not previously seen.

Sequential growth in Q1 versus Q4 as we saw earlier this year.

Consumer language growth was due in part to the popularity of our lifetime crop chats incremental bookings on a per unit basis as a raises both the initial sales price.

The expected lifetime value of the average customer.

Growth in lifetime began with its introduction on the web in Q4 last year.

Accelerated with the introduction of access to all of her languages, a single subscription product, we called Rosetta Stone unlimited.

In February this year.

Well I found as a natural and appropriate product in the segment of the learning marketplace. We're committed learners, notably in the second language is difficult and takes time.

While short term subscriptions makes sense for lerner with a temporary need or who are unsure about their commitment.

The growth, we're seeing from better execution accelerated at the very end of Q1 through Q2 because of the work from home trends related to the Cnineteen pandemic.

So most were looking for activities pastimes and skills. They could do at home during the extended period of corn team.

Given the near convergence of the introduction of was that a stone unlimited.

Onset of depend does.

It is impossible to precisely understand how much of our growth in Q2 can be attributed to this effect, but it was clearly signal.

The highlights of our work to improve unit economics are clear on slot.

As you can say both the average initial sales price and the expected lifetime value of her products has grown over the past few quarters due to the success of the lifetime product.

And not only five time driving more lifetime value learner than short term.

Subscriptions.

Turning that value the cash faster use it as paid upfront.

In addition, due to the higher Asps to concentration for lifetime also with consumers as well as the increase in unit volume given the demand for our products, we saw strong marketing efficiency metrics.

LTV to CAC in Q2 was 2.3 times overall, we spent 18% more uncac year over year, while delivering 92% higher bookings growth.

Remember, though the Q2 last year included a 1.5 million dollar brand market test shut a low in period retirement.

In total net LTV had grew by 232% year yeah.

Please turn to the next slide and who will walk through Rosetta Stone limited lifetime, and a little more detail.

Well remember languages difficult, making gains takes continued practice and all too often likes kits.

Just one of the reasons why subscription based consumer language learning inherently has low retention rates.

Burners that want to the effective.

And Perficient and the second language understand this.

Perfect 27 years, Edison's brand and product Thomas will spend to support loans the truly want to learn language.

Stepping back we see the marketplace into bought camps.

Fine and committed.

Brian customers Dabble in language learning or have a short term me.

Well committed learners understand the time required to succeed.

The trial customer we operate three months.

Subscription to a single language and attractive price.

But our efforts are targeted to build comprehensive effective solutions for committed learners or access to lifetime learning even at a relatively high price works to relieve the time pressure. The comes we'll learn language makes the decision to commit easier.

As we've mentioned consistently over many months a consumer business is focused on generating the highest LTV cross the brought US number of learners committed learners are valuable in March segment just marketplace.

The roughly 180 million U.S. adults with access to the Internet research suggests roughly two thirds have some interest in marine and second language and that roughly one half of those adults are excited by the prospect learning the language because of what it could do for their lives.

As a group of approximately 60 million customers.

Within this group we believe about one third are deeply committed to learn in language and would believe the long term or lifetime product.

The best fit for their needs, that's a target audience for lifetime of over 20 million people in the U.S. Holland.

We have sold lifetime subscriptions to only roughly 1% of this segment just one of the reasons, we see so much opportunity in this part of the marketplace.

I'd also note that we aren't the only self improvement brand as realize the fit between mermaids lifetime product offering.

For example to the meditation brain training and fitness world.

As well as other language providers for similar offerings.

Next slide please.

We continue to focus on improving the experience for learned when they use our programs a few weeks ago. This was recognized by PC magazine with a perfect five star ratings, the best premium software in language fun.

We have recently focused on integrating human coaching tutor in conjunction with our world class pedagogy.

In Q2, we introduced lives lessons, which integrates expert digital video construction by our own in house coaching organization into our products.

This enables consumers to have an immersive and efficacious experience.

We also continued to expand our content efforts by integrating new capabilities into our products for video lessons are integrated into our consumer products for real time access wherever and whenever owners are learning.

In addition, we've integrated our speech recognition into these lessons so that consumers can incorporate lives speech practice.

To on demand sheets.

In addition, we are more aggressively marketing our lives through triggering capability.

We believe that the integration of human intelligence and personalized software was weak calling adaptive blended learning the best way for someone to learn new language.

Bottom line, that's been a busy three months from attitude.

We believe will lead to long term benefits for our language business.

With that I will turn the call over the next to talk about our literacy segment.

Thank you John Please turn to slide 12.

Literacy segment revenue in the second quarter was $17.8 million, an increase of 18% of the same period in 2019.

Bookings were 19.2 million in Q2, an increase of 59% over the same period in 2019.

Our bookings growth in the quarter was driven by both higher new and renewal sales in our direct channel with strong contributions from Texas and some early benefits from our learn from home program.

Please turn to slide 13.

Annual recurring revenue our air our grew 19% compared to the end Thats Q2 last year.

While strong air our growth was lower than bookings growth in Q2, largely because of the impact of multiyear deals in Texas, where total new bookings in the state Q2 were approximately 3.7 million.

The annual recurring revenue added from these deals approximately $500000 as some districts chose to use adoption dollars and enter into eight year paid upfront contracts and a portion of the bookings were attributable to training, which we do not include in there are.

As the growth we expect in a larger second half the year broadens beyond Texas, We expect air our growth to accelerate along with it.

Renewals in the quarter was strong driven by upsells to existing customers lifting the trail trailing 12 month renewal rate to 104%.

Based on our work with customers, we believe unit retention it will be strong as well, but the rate within the quarter was positively distorted by our decision to support customers in part through the lens from home program. If they dealt with the impact of cobot 19 by not shutting off access when their license expires.

Consequently, we are not reporting what would not be a meaningful retention rate for Q2, but intend to do so again following Q3.

Please turn to slide 14, I'll talk about how we are supporting our customers in this time of dramatic change.

As you know schools were closed and forced to move to remote learning with incredible speak a little preparation we understood. This would be a difficult transition for our customers and moved quickly to support them.

As we discussed in our first quarter call, we announced a program called learn from home through which every existing customer could receive a free unlimited site license to any of our curriculum products and our educator professional development platform Lexia Khattami until the end of the school year.

To maximize the impact we define customer broadly to include any district, where we have a presence no matter, how big the district or how small our presence and the response was terrific with approximately 10000 school signing up and using our programs.

This increase the total number of active schools during the program period by approximately 12% this.

This is quite impressive for one quarter in a business that's been around for over 36 years.

And importantly, it increased the number of unlimited school licenses, we were supported by almost three times.

Our mission than whats to support this rapid acceleration of new schools and expanded relationships.

We committed from the beginning to providing the resources needed to ensure that our programs were implemented well with the necessary training to use them.

This time is difficult enough for educators and administrators and our goal is to ease their burden not to add to it and this approach served us well.

The learnt from home program has now ended in our focus has turned to continuing our partnerships, but that many of these schools as we can converting them to paying customers that they manage the uncertainties in school schedules. This fall.

Please turn to slide 15.

As John said bookings growth in Q2 exceeded our expectations a number of factors contributed to our performance in Q2.

Our learnt from home program in the imperative for schools to build more comprehensive remote and hybrid learning programs for the school year had a broad positive impact on the quarter and we'll continue to benefit us this year.

And the fact learned from home accelerated priorities already in place for 2020, including scaling our historical pilot program and expanding our existing customer relationships to relevance support and high customer satisfaction.

While all the district that participate up may offer where by definition already customers. The broad exposure that learn from home created to our products similar to an intensive national pilot and the significant goodwill created is helping us out with schools look to build their remote learning plans.

We're also happy with the results of the account segmentation strategy, we implemented beginning of the year. The restructuring has focused our field based sales leaders and account reps on larger new and renewal opportunities, while moving smaller accounts and opportunities to inside account sales managers.

This change is driving the focus to convert and expand the larger opportunities, we're creating one more efficiently managing smaller customers.

In addition, we continue to benefit from the growing power of our K 12 portfolio not only our core five and power of great products in their own right our ability to bring both to a district expands the problems. We can help schools Sol and leads to more strategic conversations often resulting in a large mark larger more systemic implementation.

Yeah.

By the end of June over 3000 customers were using more than one of our product up from approximately 350 same time two years ago.

Finally, as I mentioned, we've seen strength in Texas, especially associated with their secondary school adoption.

Please turn to slide 16.

Underpinning our ability to meet the needs of district is facing the challenge to provide high quality learning, whether remotely or in person or in a hybrid approach or six key factors.

First our solutions offer a flexible implementation model that allows both the student facing software and the data and information provided to teachers to seamlessly move from classroom to home and back again.

Our products Mark just easy to use their proven to be effective more on that in a moment.

Especially a standardized assessments for being canceled our ability to provide real time data on student performance and insights into skill gaps through our assessment with that testing capability was critical to teachers and administrators and this remote learning environment.

And when students are at risk of falling behind our solutions are able to quickly close gaps to personalize and targeted instruction.

We're also finding that our ability to facilitate meaningful interactions between students and teachers using our lesson. It's highly valued at the time when these interactions are being strain.

Finally, when the importance of the teacher has never been more clear providing remote professional learning opportunities through Lexia Academy. The learning portal for educators has been key.

At this slide makes clear our ability to provide an excellent learning experience goes well beyond offering software that can be log into at home.

Please turn to slide 17.

Our proven ability to provide great outcomes for learners will become even more important school budgets come under pressure as a result of decrease local and state tax revenues.

Because more than ever districts will demand educational return on the investment they are making.

That end during Q1, we were thrilled that research supporting the efficacy of our flagship solution core five perceived a rating of strong evidence for Esa one of the leading resources educators consult to determine if educational programs adhere to federal efficacy evidence standards.

The strong rating for core five reinforces the robustness of Lexias efficacy evidenced portfolio, which includes over 20 peer reviewed research studies.

Very few Ed Tech providers offer programs that have earned strong ratings at both the elementary and secondary level.

Those few that have the evidence for ESA analysis estimates at Lexia programs have the largest impact on student reading outcomes in both elementary and secondary grades as measured by average effect size.

Please turn to slide 18 for an update on Rosetta Stone English.

I'm happy to let you know that Weve officially launched Rosetta Stone English for sale for the 2000 2021 school year.

When the team began work on this groundbreaking solution, we had an aggressive plan to release RSC. This summer and have now met that goal, even with the beta interrupted by the pandemic.

We're very proud of Rosetta stone, English, which is innovative so many ways, including its focus on oral language development and the real time reporting it provides teachers and administrators that historically been eliminate to only understanding progress annual or twice yearly standardized tests.

We're especially proud of the cultural racial and other forms of representation presence in the student facing product and our asset approach to education.

It was that of something less we honor the native language at the lender as an asset rather than looking at the lack of English language skills at the deficit while sales of RSC. This year are primarily focused on renewing our elementary school customers that are currently using our existing Rosetta Stone Foundation solution. We're very excited about the opportunity we see going forward.

For our seat and meet the needs. This large and growing population of learners, especially now with school closures disproportionately impacting these students.

With that I'd like to turn the call back over to John to walk through guidance for the year.

Thank you Nick please turn to slide 19.

Turning to guidance since starting with revenue.

And now expect consolidated revenue for the year to be $190 million to $200 million and total bookings of 216 to 229.

That would be 7% higher than 2019, the midpoint on revenue and 13% higher bookings.

Literacy segment, we're raising our revenue guidance to a range of 70 to 76 nine.

An increase of 3.5 million at the midpoint.

We're raising our full year literacy segment bookings outlook to $87 million to $93 million up from approximately 81 days 86 million previously.

This represents bookings growth of 27% to 36, Chris.

For 2019.

The factors impacting our outlook for the literacy segment include the opportunities to expand relationships with existing customers.

Created by the learning from home program.

And the need both existing and new customers have power solutions to support remote or hybrid learning.

This is being helped by our ability to follow through on a growing number of large opportunities as the result of the strategic sales account realign.

Now it's earlier in the year.

Finally, we see additional bookings in Texas during the second house, but the majority of the Texas impact likely came in Q2.

We still expect new business in new districts to be more difficult in 2020, we might have otherwise see before the pandemic.

We are focused our marketing and sales efforts in line with the belief that existing customers or greater opportunity for us this year.

Looking into 2021, we see opportunities to drive growth is districts developing deeper appreciation for the efficacy of our solution.

But a variety of factors may lower bookings growth rate.

We're seeing a 2020 an acceleration in do an up sell business correct.

Given by districts urgent need to plan per remote or hybrid learning. We don't know if the same level of urgency will persist next year.

In addition, somewhat larger than typical dollar amount of our contracts and the literacy segment. This year have been multi air in nature, driven by adoption sales in Texas, We do not expect this level of multiyear adoption bookings to continue next year.

I'd like although we like our relative positioning within tech.

Cool budgets are reduced because of declining tax revenue K 12 education provider its will be negatively impacted.

Turning to our language business and consumer we're raising our full year revenue guidance to a range of $69 million to $72 million as we now expect full year consumer bookings of the 80 to 92 million.

From 75 to 78 million previously and $67 million to $69 million at the beginning the year.

This guidance assumes that year over year bookings growth slows in the second house twentytwenty compared to earlier in the year marketing efficiency declines in the back half is the positive impact from people learning, while corn seed and home sales.

We also expect consumers year over year bookings growth in the back half to be lower as we lap. The original introduction on the lifetime product underwear, which began to ramp up in Q4 2019.

Thats a bookings midpoint this translates to 36% growth for the full year.

What's the success of lifetime unlimited the majority of the bookings performance. This year will be recognized as revenues in 2021 and into 2022.

And while we will benefit from this revenue in future years, we expect bookings next year being negatively impacted relative to this year as people are returned to work in the quarantine driven sales we received initial phase.

The strength, we're seeing in other parts of the business. This year will be partially offset the pressure, we continue to see and our enterprise and education language segment.

Okay 12 language education.

Is performing in line whats your expectation and enterprise has seen some stability more recently, we are expecting full year revenue to be in a range of $49 million to $52 million $1 million lower on each other.

Versus our prior guidance on lower enterprise bookings go to the impact from the pandemic.

Recovery in the enterprise will be tied in part to recover in economy.

Turning to profitability.

We are improving our guidance for full year net income total loss of $20 million to $22 million.

Raised from our prior guidance the loss of 20 to 24 million.

We're also raising our guidance for full year adjusted EBITDA grew approximately $8 million to $12 million up from five to 8 million previously.

The stronger than previously expected bookings, we are seeing this year, we're not directly turning into significantly better gap performance in 2020.

Yes, while bookings are recognized as revenues over the life of the underlying.

Subscription some contracts expenses are largely recognized upfront.

This concludes variable compensation per noncommission employees, where we are accruing.

Potential bonus payments at a higher rate than last year due to the performance we expect in 2020 relative to 2019.

With higher accrual will be offset during the year by lower operating expenses, because they have been diligently managing costs during the pandemic, including the cost action discussed earlier and certain other costs like travel and been naturally lower.

We're raising our guidance for operating cash flow to $29 million to $34 million up from 14 to 18 million previously.

The improved outlook for operating cash flow is largely due to the higher bookings delivered in the first half 2020 by the consumer segment.

And the expected higher bookings in the literacy segment throughout the year.

This guidance continues to assume that we could see lower collections of accounts receivable.

Hi, there because we proactively offer our customers more time to pay for they simply pay slower than normal we've not yet seen this in a material level, but we would like to be prepared if it occurs.

We expect capital expenditures to be approximately 16 to 17 million then that we will have approximately $13 million to $17 million cash flow. After capex this year.

We expect a year in cash balance of approximately 55 to 60 million with no debt.

Please turn to slide 20.

Like last quarter, we have decided temporarily to provide guidance for the quarter, where you're at an addition to the full year.

We hope this provides more clarity during the tumultuous year.

We expect strong year over year bookings growth in Q3 in or literacy segment district seemed to be accelerating decision, making to prepare for a variety of back to school scenarios.

Our performance quarter today in the current pipeline makes us comfortable with our outlook for two three and literacy.

We also anticipate good bookings performance in Q3 in consumer language, although year over year growth rates will decline relative to the first two quarters is the impact of people learning from home in quarantine the clients.

On the downside there will have a significant year over year bookings declined in the east segment, driven by the enterprise portions of the business largely due to the absence of the 7.4 million dollar custom content deals signed in Q3 2019.

Well as ongoing impacts from dependent.

On a consolidated basis, we expect total Q3 revenue of approximately 48 million.

Up approximately 5% from last year, the GAAP net loss of approximately 7 million.

And positive 2 million an adjusted EBITDA.

Please turn to slide 21, and I will wrap up.

Despite and in some cases because of the challenges created by these difficult times. The team had a strong first half to 2020, producing good financial performance, while demonstrating continued commitment to helping marketers.

Ultimately it it's critical that we do everything we can to leave this crisis, where the K 12 business that is stronger and more important to its customers and a language business that has reinvigorated and leader in this space.

With that operator could you. Please open the line to questions.

Yes.

We will now begin the question and answer session.

You asked a question you May press Star then one on your telephone keypad.

If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then to at this time, we will pause momentarily to assemble our roster.

The first question comes from Steven Frankel with Colliers. Please go ahead.

Hi, good afternoon, and thanks for the opportunity job I'll start with the question, you're probably not going to answer but it's on everybody's mind given the press reports of the company.

Potentially going through a process just wanted to see if you were willing to add any insights on that subject.

Yes, Steve. Thank you for asking you are we don't comment.

Market rumors or speculation regarding strategic matters of that type, but certainly I understand why you're asking.

Okay, then well, let's move on that.

In terms of the freedom or program. It sounds like you've got some great results to what extent Nic does that get users district wide mandates, which is one of the things you clearly been working toward over the last couple of years.

Yeah, Hi, Steve Thanks for the question. So it certainly is an accelerator in terms of our expansion at the district level. One of the thing we are seeing right now in the industry.

Is that districts are playing a much more central role in the decision, making I think theres a lot of pressure on districts to make sure. They have learning continuity plans in place.

And the learn from home program, certainly expose a district to our products that are much more deep bench and.

Broadway than they had previously and so this is absolutely an accelerator in terms of our relationships at the district level.

Yes.

And you made a comment about very strong bookings early in the quarter was that the Texas impact or or you have you seen some dynamic as the quarter progressed or may be ended this quarter that says decision cycles are starting to lap that given what's going on world.

Yeah. So early in the quarter, absolutely, Texas was a strong state for us and continued to be strong, but we certainly saw the strength and momentum in bookings.

Especially at the end of the second quarter start to materialize outside of Texas as well as a result learnt from home program.

[laughter].

[laughter].

Now that he SLS release, a can you give us any insight into how that product is price relative to what you were selling prior in relative to.

What others are getting in the marketplace.

Yes so.

The price of Rosetta Stone English is more expensive than our literacy programs.

But not dramatically more expensive on an unlimited site license basis because.

Obviously, they're not serving the needs of every student and the school or district.

You know, we just released the product couple of weeks ago and are really thrilled with first of all the sentiment and reaction we saw from our beta sites and some of the early indications of interest in the product.

Okay and then one last question on the.

Consumer business, but then they will upsells the.

I've classes.

As it tutoring.

Well when will those be.

Commercially available and start to generate revenue and kind of what do you think the revenue upsells capability of those programs is.

Yes, Steve so they are commercially available now tutoring.

Switches the under the thing that we're we have been testing.

No no pushing out specifically focused on lifetime customers. So lifetime customers are now being offered on a subscription basis access to tutoring.

I'd say, it's still early.

For us to fully understand what the opportunity is there and we're going to continue the touched it but there will be bookings attributable to tutoring and our consumer segment this quarter.

Okay, and then one last one for her Nick.

You know I know you said, you're not really focused on new districts, given what's going on.

With co bid.

How material has budgetary shortfalls been in that discussions you've had so far with your existing.

Districts, where are you finding that because they know your product Ah, they're finding a way to to pay for it.

Yeah up until this point certainly they have been finding the funds to pay for it and actually we have seen the cares act funding make a difference in terms of schools ability to move very quickly.

We have talked about and they tend to believe that driving business and districts, where we don't have relationships is going to be harder that being said, we are seeing some really nice momentum and district that we've been talking to for a number of years, but haven't made inroads into a bit as result of learn from home and as result of the.

Cares Act funding are starting to see momentum there in terms of.

The pipeline progression, which is great.

Great. Thank you so much.

Sure.

The next question is from Alex Paris with Barrington Research. Please go ahead.

Good afternoon, everyone. This is Chris how sitting in for Alex Paris.

This is definitely a unique situation that we're in given that pandemic environments.

And it's nice to cover a company that not only provides guidance but raises guidance.

This leading off.

You talked about.

Bookings.

As it relates to this past quarter and how you examine the mix of bookings, perhaps changing as we move out of the pandemic, assuming an extended pandemic environment. How do you view second quarter results as sustainable.

In the level of retention that you would have should this environment continue longer than expected.

In the possibility of the vaccine being pushed out even further.

Yeah, Hey, Chris. Thank you for the question then.

Some look it's unknown for all of Us <unk>.

The new world for all of Us, but I think if you go segment by segment.

Hey, prolonged pandemic.

With the implications that could have tour business, obviously would negatively impact the enterprise segment, I think that would persist possibly longer.

And we would otherwise like MK htwo.

I think the.

Clearly, we're seeing as Nick said, both in the second quarter and early in the third an acceleration in decision, making which has been very positive for us given the breadth of our exposure in districts.

Districts across the country.

The reputation of accompanying the efficacy of the products I think it's it's a well decisions are never using budgetary decisions are never easy I think when you can lean into a product that has demonstrated the ability to predict create positive outcomes for students and works extraordinarily well in a hurry.

Uh huh.

And I.

Remote learning environment choosing wachovia.

As a relatively easy thing to do.

Where we'll run into concerns is if you know when schools begin to see their budgets negatively impacted us.

He was factor as Steve was asking about.

It seems as if that's going to be more of a next year problems on the sure problem.

Obviously, we would hope.

That's the federal government comes to US some agreement on.

Broad release package and one that includes additional funding for schools. It seems as if that will ultimately be the case.

You know that would certainly big.

Positive not just for this year, but also into next year on the consumer side, it's unknown, yeah as we said.

In the.

Original remarks.

Because we introduced Rosetta stone and limited to really about a month before the a pandemic took hold in the U.S.

Dissecting, what part of the lift we've seen in the business is from each it's really hard to tell I think we're reasonably confident that.

How does that impact faith.

We will have a better more sustainable business at a higher level when we had before because for.

You got very positive and outlook for that for that product offering, but you know to some extent were just kind of to say.

That's very helpful and I appreciate the color.

Just moving outside of that question you mentioned the success that you had in Texas that.

Benefited bookings in the quarter.

Outside of Texas, you're making some inroads as you mentioned.

Perhaps you can comment there.

As to the inroads, you're making and how you view.

Potential in other states given this challenging environment.

Yeah interesting interesting question because it is very very state by state both in terms of.

When the states received their cares hack funding in Wednesday's deliver that funding down to districts and we saw that early in the spring where some states for moving forward quickly and other states were still holding off because they didnt have clarity on their funding yet.

But at this point everybody understands what their cares that funding is certainly.

There is different momentum in different states, depending on the relationships, we had and districts prior to the pandemic and the exposure. They have had as a part of our learnings from home program, but I wouldn't say the growth from a geographic standpoint, this pretty broad based it's not just one or two pockets of strong growth.

It really is across the country.

And of districts of all sizes.

Great appreciate the answer and I'll hop back in queue. Thank you.

The next question is from Greg Pendy with Sidoti. Please go ahead.

Hi, guys. Thanks for taking my question I'm, just wondering on the consumer strength can you kind of elaborate I know the shelter in place you kind of mentioned as a potential benefit but I'm just kind of looking at some of the markets that statistics that you guys have put out in the past it looks like maybe around 46 billion has been off you know.

Online I'm, sorry about 6 billion has been online and about 46 billion has been offline. So do you think that during the pandemic do you think the pie grew into in terms of interest in learning a language or do you think that maybe there were sort of a shift.

Thanks, Yeah, no. It's a really good question, Greg and those are you going Oh and the numbers. We've we've shared in the past that I think the honest answer is yes.

I think there are people, who have had an ongoing interest and bringing the language may not have been learning offline, but found at the time and the motivation.

Well they were at home to to try learning Hey, second language and I think that you know that clearly had about oh.

Oh undoubtedly there were people who were trying to learn a second language face to face in our community College with tutor.

That was you know that was not able to.

Continue with the pandemic and I think they may well have moved learning the online as well yeah. I think it's our hope that that will create a new normal going forward that there will be greater interest in greater understanding the benefits of online language learning.

Certainly when we can introduce things like online tutoring has swelled to substitute for some of that offline learnings. They may have also been doing.

And so it's clearly both its I think.

Not easily to disentangle, how much is from age, but clearly both for a factor for us in the quarter.

Great. Thanks, a lot.

Your next question is from Ryan Meyers with Lake Street. Please go ahead.

Hi, guys. Just one question for me can you give us some color on how you've been able to work through the sales pipeline given the challenges actually physically going into new schools and districts.

Sure be glad you Ryan. So this is Nick it was really interesting to see our sales teams moves to remote selling you know our sales teams are already physically remote most of them spread across the country and had already been doing a lot.

They're selling remotely, but I'd have to say that it has been very seamless I think partly because of the expertise of our team.

And that the infrastructure and tools, we had in place, but also I think after the initial weeks of schools really not and being in a in a mode of communication schools, realizing that they had to make plans for the fall and actually reaching out to us. So the process of of remote selling has been.

I'm not just seamless, but I think really effective.

Well that's good to hear thank you.

The next question is from Ryan Macdonald with Needham and company. Please go ahead.

Yes, hi, everyone I apologize in advance if these questions have already been asked I've been bouncing around to a few calls I guess first off can you talk about in the lexia bookings strength or maybe provide some additional color about the mix there of what you're seeing of success between core five versus power up.

Yeah. So we are seeing success in both areas I think.

You know in the last half of last year and maybe the beginning of this year, we saw a really strong growth from power up and certainly in Texas because of the secondary adoption, both how powerup and our language product foundations had really great market acceptance and filling the need, especially for English language learners, but.

Core five has also shown were real strength in terms of of new growth. So it's been very balanced, which I think has a great thing both in terms of.

The investments we've made across the portfolio and our ability to support schools and students from kindergarten all the way after 12 great.

Yeah, and Ryan the other thing over that which as implied by.

The next answer is are seeing real strength in selling both to the same district at same time.

Well, which has been really nice.

Yeah.

Excellent and then in terms of we obviously know about what the potential budget issues that can be caused as we look into next year from from cobot in some of the deeper cuts that may be coming without without additional stimulus or funding are you doing anything on the sales process to drive a adoption maybe multiyear adoption.

And whether it's favorable billings terms or where with the new Rosetta stone English product ticket that sort of adoption driven earlier, maybe including that in deals before maybe budgets are potentially cut next year. Thanks.

Yeah. So we are absolutely leading with multi year options for customers, especially when we know that they have.

Received stimulus money that they need to spend and so that is certainly something that we are communicating to our customers.

And there has always been an attractive price point in terms of multiyear discounts that they can take advantage of.

So it's not that different from what we normally do except maybe emphasizing and communicating the fact that there are multiyear options.

We have always looked at our pipeline as something that is driven by the experience. The rep has on the ground in conversations with district leaders and certainly as part of the process understanding the funding source and understanding the needs we're solving.

Allows us to put the best proposal in front of them to solve their needs and hopefully.

Create long term partnerships.

And just a follow on quickly well next absolutely right, where we're leaving aside that is part of the portfolio that a sales person has.

When they're talking to customers, we're not counting on outlets for the year any higher percentage of multiyear deals you know outside of this can touch. This adoption. If you will then we would typically see and so it's a good strong annual recurring.

So we think we're building this year.

Excellent thanks for taking my questions and congrats on every quarter.

This concludes our question and answer session I would like to turn the conference back over to John has for any closing remarks.

Thank you operator, thank everybody for your questions. These are obviously difficult times for many many people and there are certainly in our thoughts we will continue to focus on supporting customers learners with the knowledge that ultimately that is the best thing for the company.

As well as the best thing for those learners.

Thank you for joining us and we look forward to speaking with you again.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.