Q2 2019 Earnings Call
Greetings and welcome to the Rosetta Stone second quarter 2019 earnings Conference call.
At this time all participants are in a listen only mode.
Question and answer session will follow the formal presentation, if anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
That's all right at this conference is being recorded I would now like to turn the conference over to your host Asa glass and managing director of Investor Relations. Thank you go ahead.
Thank you good afternoon, everyone and welcome to Rosetta Stone's second quarter 29 to earnings conference call.
Speaking on today's call will be John Hass, Chairman and CEO . Additionally, Nic data emasculate co presidents of was out of stock.
And Tom piano, the company's Chief Financial Officer will also be available during the Q and a portion of today's call.
We have posted to the Investor Relations section of our website at Www Dot Rosetta stone Dot com.
Both the earnings release, and the slide presentation that accompanies todays call.
We've also posted supplemental information and analysis on our website.
The supplemental information will not be read on today's call.
I want to remind everyone that as always there will be elements in today's presentation, which are forward looking and are based on our best view of the world and our businesses as we see them today.
These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially a description of these risks uncertainties and other factors that could cause or financial results are included in yesterday's filings include our most recent annual report on Form 10-K .
And quarterly report on Form 10-Q .
We expressly disclaim any obligation to update or revise any forward looking statements, except as required by law.
Today's presentation and discussion also contains references to non-GAAP financial measures.
The full definition GAAP comparison, a reconciliation of those measures are available in here for much impressed presentation and press release.
Our non-GAAP measures may not be comparable to those used by other companies and we encourage you to review and understand all of the financial reporting before making any investment decisions.
With that I'll now turn the call over to John .
Thank you off and good afternoon, everyone.
I'm excited to share with you.
Today, the progress we're making in the business progress demonstrated by a consumer language business that has stabilized with real opportunities for growth.
But with our core U.S. market and.
Internationally.
And progress demonstrated by the fact that the small rating business. We bought just a few years ago. There's now a leader in K 12 education technology with an expanding portfolio of outstanding products and exciting opportunities for organic growth.
These opportunities are firmly rooted in the areas that make us a global leader in digital learning.
We are probably are a pioneer in educational technology with over 60 years of combined experience in transforming the way we learn to read English speaking new language knowledge that is allowing us to have a positive impact on society.
Yes, we are now at 100% subscription based SaaS business, what kind of margins or growth will deliver high levels of incremental cash flow as demonstrated by our expectation of more than 40% of incremental revenue will fall to adjusted EBITDA. This year.
And that this will grow next year and the year after.
And because we have an iconic brand and it became a scale player in the K 12 space, we have significant opportunities for organic high margin reinvestment in growth.
As you know we have said.
This is expected to produce operating cash flow of approximately 38 million next year.
And 57 million the year after.
In a few minutes talking about how we are managing our business and some of the important activities have been you know to deliver this growth. Let me begin with an overview of Q2 results.
Total revenue for the quarter were 45.9 million, a 6% increase versus the same quarter in 2018.
This is our second consecutive quarter of year over year revenue growth following four years of declines.
Net income for the quarter was a loss of 2.8 million an improvement from a loss of 4.2 million in the second quarter of 2018.
Adjusted EBITDA in the quarter with 2 million versus 1.4 million in the same period in 2018.
Turning to slide four.
Literacy bookings in Q2 were 12.1 million, a 17% increase compared to 10.3 million in Q2 2018.
With the increase largely due to some customers renewing in Q2 that had been expected to renew in Q3.
As we said earlier this year, we expected the first half of 2019 to be relatively flat with 2018 is the vast majority of new business. This year and the renewal of a portion of the business originated in the first half of prior years will be booked in the second half of 2019.
Sitting here in early August we feel positive about our ability to achieve our literacy growth goals, which have us growing bookings by over 25% year over year.
Literacy segment revenues grew 19% over the second quarter of 2018.
To 15.1 million well he our grew 17% to 52.7 million at the end of the quarter.
We expect strong revenue and they are our growth and literacy segment to continue in the second half of the year as the expected growth in bookings emergence.
2019 is the second consecutive year that bookings growth in the literacy segment will meaningfully exceed GAAP revenue growth.
The lag in revenue growth is being driven by the fact that a significant majority of literacy bookings growth occurs in the second half of the year with most of the revenue recognized in future periods, but all bookings become revenue in this deferral will help drive revenue growth in 2020 and beyond.
Literacy is retention and renewal rates remain strong.
Wallets contribution margin improved to $2.4 million in Q2, 2019 from 1.8 million in Q2 2018.
As growing revenues continue to be more fully leveraged in the business.
How will we continue our growth.
Turning to slide five.
We are growing our literacy business in three ways.
First by.
Continuing to expand the number of whole school site licenses that we sell.
In the recently completed school year, Lexia was president and over 14000 schools in the U.S., but only 4000 of the schools currently have site licenses versus seat licenses, leaving the other 10000 as opportunities to upgrade to whole school solutions.
And because we now have a full suite of literacy solutions, we have the opportunity to sell more than one product to each school district.
Sales of multiple products to a single customer have grown quickly since the introduction of power up increasing from 131 customers using more than one product at the beginning of 2018 Dover 1800 at the end of Q2.
Turning to slide six.
Our largest near term opportunity. However is to serve more schools and districts, where we are already represented.
Today, we serve over 14% of U.S. public schools, but the total opportunity in the districts in which the schools reside represents over 40% of all U.S. public schools.
This 26% of your schools that we aren't yet serving our districts, where we have reference sites and can share data with the decision maker that demonstrates our ability to help schools in their own district succeed.
We saw a great example of each of these opportunities in the second quarter when they closed a district wide opportunity one of the largest districts in California.
In 2018, this district expanded their partnership with us.
Moving from seven core or five site licenses to 39 core five site licenses and eight power upside licenses. This year based on the impact we had on student literacy performance and the strong partnership we have built with the district. They expanded to a combined 54 site licenses for Corefive and power up and added the rapid assessment.
And knowing the importance of this large scale implementation committed to a three year term worth over $1.5 million.
We now serve over 36000 students in the district and very long term partnership to improve student literacy performance.
Academic success across all subject areas any and equity for lifelong opportunity.
Next slide please.
Consumer bookings of $14.6 million were flat compared to the second quarter of 2018.
Consumer revenues of $16.3 million grew 9%, excluding fit brains as a result of stable year over year bookings and the recognition of previously deferred subscription revenue as our deferred revenue balance has grown.
And as I previewed on our last call we were more aggressive in testing new channels of marketing spend in Q2 in order to identify additional avenues for customer acquisition.
This included testing non digital offline media that had higher production costs and larger upfront cash outlays.
We have not deployed this type of marketing in a meaningful way in five years and believe that with a more stable business now is an appropriate time to opportunistically try new potentially efficient avenues for growth.
Specifically in Q2, we spent approximately $1.5 million for targeted test marketing campaign launched in mid May.
As expected the spend lower the overall Q2 LTV to CAC ratio from its recent ranges to 1.5 times.
Excluding the second quarter brand spend which had almost no impact on June quarter bookings.
LTV to CAC would have been 1.8 times in line with seasonal norms.
To be clear this does not mean the tests were not successful.
As this form of marketing has a longer return profile and its benefits were not expected within the quarter.
We will measure success on the basis of traffic and bookings uplift as they develop over time.
As well as the impact on certain important brand attributes including.
Clearness of our consumer App.
Because it will take time to study these effects, we're not expecting to spend additional marketing dollars on TV brand advertising this year.
We will focus on optimizing that LTV targeting our historical LTV to CAC ratio is through the remainder of 2019.
Enterprise and education bookings fell to $15.4 million year over year.
With the decline driven by the absence of any custom content sales in the quarter versus $1.9 million in custom content sales in Q2 of 2018.
Any revenues in the quarter were down 6% due to lower bookings levels in 2018 in the first half of this year.
So as we've said previously the timing and size of custom content contracts are difficult to forecast and predict in fact, despite the decrease in any bookings in Q2, we are raising our bookings guidance for any for the full year as we recently agreed to a $7 million custom content deal. The deal has been signed by both parties and funding has been secured by our partner.
There is a final formal governance stop which means it has not completely finalized. So there is some risk it won't close, but we expect to step that to happen soon and we have included the transaction in our internal forecast and bookings cash and operating cash flow guidance for the year.
If it happens as expected it will be one of the largest single contracts in the 26 year history of Rosetta Stone.
We are honored to partner with another American Indian tribe to preserve and share their language for generations to come.
Because we don't begin to recognize revenues in our custom deals until we begin to deliver content. This deal will have no impact on revenues this year.
Let me spend a moment on one on our thoughts around custom deals generally.
We like these partnerships because they leverage the investment we've made in our language infrastructure support new investment in tools that make the creation of content officials have a reasonable margin, although lower than selling existing products and are aligned with our mission as a company in an incredibly impactful way given their size and unpredictability, we will continue to assume a relatively small amount in their guidance until realized.
Overall contribution margin for the combined language business was $6.1 million or 20% of revenues flat compared to Q2 last year.
Contribution margin in the quarter was negatively impacted by the 1.5 million incremental test marketing campaign spend which was reflected as a GAAP expense in the period.
Please turn to the next slide.
Total consumer subscribers at the end of Q2 were 533000.
An increase of 28% over the end of Q2 last year and 3% sequentially in the seasonally slower second quarter.
Short term subscribers are those this with initial terms of 12 months or less for 44% of the total up a bit from 40% in Q2, 2018, but stable up to 45% we saw in the first quarter of this year.
The year over year increase in short term subscribers led to a slight decrease in the initial average term length.
To 13.4 months versus 13.8 months.
And the average initial selling price to $93 from $112 versus Q2 of last year.
Sequentially each of these metrics was relatively stable.
In order to better analyze the varying dynamics since the consumer transition to a 100% SaaS subscription business.
We have focused on estimated gross and net lifetime value added in each period is a key operating metric.
As I discussed previously.
And previewed on our last call Q2 was impacted by approximately $1.5 million production costs.
In variable media spending for our offline media test this impacted both the LTV created in the quarter as a smaller portion of our dollars were spent on faster return in performance marketing.
And the overall amount of CAC incurred in the period.
Turning to slide nine.
Consolidated revenues of $45.9 million were 6% higher than a year ago.
Second quarter net loss was $2.8 million versus the total versus a loss of 4.2 million in Q2 of 2018.
The improvement in net loss was driven by the increase in revenues and relatively stable expenses.
Adjusted EBITDA in the quarter was $2 million up from $1.4 million in Q2 2018.
And in cash of 20.8 million included $9.9 million net borrowings in Q2 2019 to fund our seasonal cash low point.
Net cash in the use of our facility to fund working capital were generally in line with our expectations. As we were a net user of cash in the first half of the year like other companies with large K 12 businesses.
We expect to all of our borrowings to be repaid during the second half of 2019 in fact, we restarted we started to pay them down in July .
Turning to slide 10.
While we expect revenue growth to accelerate in the second half of 2019, we are slightly lowering our revenue outlook for the year driven by the expected timing of the realization as revenues slightly lower bookings from any excluding custom content.
Any bookings are expected to come in later in the year than previously expected and consequently contribute less to 2019 revenues or in the case of the custom deal contribute to revenue beyond 2019.
Because the increase in expected bookings that will occur if the custom content deal is finalized more than offsets the slightly lower expectations for the portion that will be realized as revenues in 2018, we are raising our guidance for consolidated revenue plus change in deferred revenue to $203 million on the high end.
Bookings and revenue guidance for consumer language remain unchanged with total revenue expected to grow approximately 10% in 2019.
We continue we continue to feel good about the outlook for our literacy business this year.
Bookings revenue and EBITDA guidance for literacy remain unchanged and represent continued significant year over year growth in this part of the business.
Because of continued strong.
Cost containment, our net income outlook remains unchanged, despite the revenue time and adjustment to the outlook.
Adjusted EBITDA is now likely to be closer to $6 million due to the change in our revenue outlook, just partially offset by lower expected expenses.
Finally, we are changing our operating cash flow expectations for the year trade range of 17% to $23 million and are now forecasting and ending up ending cash range of approximately $38 million to $42 million with the high end of both representing expected finalization of the custom content deal.
The high end implies approximately $31 million of cash generation in the second half of 2019.
Next slide please.
Looking forward as shown on slide 11, we are excited about the opportunity we see to leverage the investments we have made especially in our K 12 businesses to drive continued top line growth and earnings improvement beyond 2019.
We achieve our goals given the high incremental margins in our business approximately 40% in 2020 and over 50% in 2021 of incremental revenues will become operating cash flow.
And because barring additional new product initiatives. We believe we can hold total R&D and capex relatively stable for the next few years.
The growth in operating cash should largely turn into cash in the balance sheet.
You will hear later about important advancements in core five and our language technology stack that will help us continue to innovate and grow.
The investments we have made in our language Tech stack for example on our important step in reducing our maintenance costs and increasing capital available for growth.
In fact, we could improve near term cash flow further as much of our recent expenditure has been a new products and to complete the rebuild of our language products.
So we see exciting opportunities for high margin reinvestment in the business.
I would now like to spend a few minutes and talk about how we are managing the business given the growth and cash generation opportunity that we have please turn to slide 12.
I believe there are four important factors to understand about our business and the opportunity we have.
First we are learning company focused on addressing important societal needs, we care about our industry ratings and other measures of the constituent impact, but our most important measures. The lives we change through language and literacy education.
We believe that when we teach a child to read or anyone to speak the second language, we will improve their life.
This provides us focus that has made it our language and English reading learning solutions standards in the industry.
Second because we leverage.
Technology to deliver our learning solutions, we have high incremental cash flow margins. This has been clear as operating cash flow improved is that even as we invested in building the fixed cost infrastructure of our K 12 business and will become more clear as growth continues in the future.
Third because we are now a 100% subscription based SaaS business, our bookings and revenue on more predictable than they have ever been.
Approximately 90% of our literacy customers renew at the end of their contract and a consumer language approximately one third of our bookings are now from renewing customers.
And critically as a SaaS business, we now have insight into the needs and behavior millions of learning of learners using our products across our end markets K 12 enterprise and consumer.
This is a unique position and one we are only beginning to benefit from.
Finally because of leadership.
Position, we have in each of our businesses in the key investments. We have made from building or was that just on brand to our presence in 17000, K 12 schools worldwide.
We had very attractive organic investment opportunities.
This is especially important as we operate in an industry, where many of our competitors are driving growth by paying high multiples to acquire businesses.
While we look at our strategic.
Transactions, and we'll look to be opportunistic, especially of multiples weaken I'm excited that we have areas for organic growth like English language learning in our schools and internationally, we have talked about previously and we'll update you on today.
Before I do that let me share how we think about investment in the business because while our K 12 and language businesses have many similarities to benefit us.
They also have distinct characteristics that create attractive and complementary reinvestment opportunities. Please turn to slide 13.
Our K 12 business has a long term investment and return profile similar to other high performing enterprise SaaS companies.
World class products, like Corefive and power up to serve large market opportunities with.
Resilient demand, which produce strong retention rates driven by quality outcomes, all of which create high gross and net margins.
We invest to build new products and maintain their excellence that is new business compounds on top of retain customers. We are in substantial incremental cash flow. Despite ongoing investment in current and new products. We are moving into this phase in our K 12 business.
Our us consumer language business on the other hand is an attractive the more tactical investment opportunity.
The educational goals of our language business or the same as in K 12 create solutions that delight learners and provide outstanding outcomes and Mike K 12, we have the opportunity to leverage.
Technology with high gross margins to drive attractive Incrementals net returns.
The way, we create demand in our consumer language business. However is very different.
The K 12, we closed business by offering highly effective products sold through our largely fixed costs salesforce.
While in consumer.
We have a business driven by.
And iconic brand with 90% aided recognition and granular incremental marketing.
Lead times are shorter and conversion to paid subscription is responsive to the REIT stimulation at the right time.
We compound the return from this variable marketing spend by recycling it into additional media with a short term positive return and as these marginal returns diminish or become too elongated by reinvesting in long term shareholder value, creating opportunities over the last five years. The focus of these investments has been to build our K 12 business.
Turning to slide 14.
Given our long term compound in opportunity and K 12. It is important to understand how we approach these investments.
Our strategy has four pillars.
Sold all of our products on our data sharing and information management platform my lexia to enhance its power and capability.
Continually improve the value.
Proposition of our flagship product core funding.
Introduced differentiated products and services to meet critical K 12 needs in areas underserved by existing solutions.
And ensure that we have the right team with the right resources to be the trusted partner in two schools.
So how have we done.
In five years Lexia has gone from being a one product company to a growing portfolio of World class K 12 products built on a platform. My Lexia that has implemented in 17000 schools the platform that shares with teachers schools and districts to critical data and information that empowers them to help their students learn.
In 2013, we introduced a new product core five.
That is setting the standard for personalized radio construction in our schools.
Since then we have continuously improve the value proposition of core five to make it more effective for learners and more important to our customers.
We introduced a new animation engine to make the experience more engaging even on the low end devices often found in our schools.
New licensing to allow K six schools to use power up in their sixth grade classes that no incremental cost and just last month, the biggest expansion of content and functionality for profiles.
Since its introduction more on that in a bit but all of this was done to make corefive reading product features demand to have in their classrooms.
And while we expect teaching young children to read in other words core five will always be the primary driver of our K 12 business.
There is much more that we have been doing and we'll do.
In 2016, we introduce rapid to provide a computer adaptive screener for K 12 schools.
2018, we introduced Powerup are struggling readers and six through 12 credits and delivered a great product for fulfilled an unmet need in the marketplace.
In fact, and only a little over a year Powerup is already used in over 4000 schools or approximately 4% us public schools.
Please turn to slide 15 for the most recent analysis of how Corefive is producing these outcomes in our schools.
We've just finalized our annual analysis of the impact of Corefive and closing the reading gap.
This year, we analyzed almost 900000 students during the 2000 2000 2018 2019 square.
At the beginning of the year only 50% of students were working on skills in that were above their grade level.
That number increased to 91% by the end of the school year.
For students most at risk of rating failure, those who started the year two or more grade levels behind 65% being two or more grade levels of skills and one year sustained growth and achievement like this makes a real difference.
And one of the key ways. We achieved these results by building product segment and implementing them effectively since they are used with.
Fidelity, Please turn to slide 16.
I just walk through our most recent.
Efficiency analysis, and last quarter I talked about the cost to individuals and to society as a whole when we failed to teach a child to read at the appropriate gauge grade level at the right time.
But even our products will help the schools don't use them and unfortunately, one of the failures of the educational technology industry.
Is that most products were largely in use by the schools to purchase them here too we are different.
According to a recent study by learning platform.
An organization dedicated to expanding equitable access for all students to education technology that works.
63% almost two thirds of purchased Ed Tech product licenses are never activated.
Learn reports that therefore, 65% of students exhibited zero or trivial use.
Moreover, they found that only 5% of students actually received the full recommended dosage.
By comparison during the 2018 2019 school year.
Lexia cast.
We're really proud of.
Please turn to slide 17.
Next year, we will introduce a new product for K six emerging bilinguals focused on learning English.
Why do we care about this market.
First teaching non native speakers, how to speak and read English one of the most difficult problems our schools phase and there was no one from a pedagogy technology Trust and brand.
Perspective, better able to meet this need than we are.
Second it has a large fast growing need currently approximately 10% and public school students are non native English speakers.
This is expected to grow to approximately 25% by 2025, According to the National Education Association.
We also know that if these children are not equipped with appropriate academic English skills. The chances of success in the classroom are diminished.
Third we have a large adjacent installed base.
Core five already helps emerging English learners to read English and Rosetta stone is used in thousands of platforms classrooms to teach English.
So we have never offered.
The solution built for students and schools that specifically focuses on the needs of emerging by bilinguals learning English with an emphasis on speaking skills.
Like Corefive and like Powerup, we expect this new product to become the standard in its marketplace.
And as it grows to have similarly high gross and net margins.
Development is.
Progressing and we intend to begin sales for this product next year for use in the 2020 2021 school year.
We will have more opportunities like this going forward because we are a trusted partner for our school partners and we know how to build products that work and get used and we'll do this knowing that growing high retention high margin revenue streams are attractive to investors.
As shown by the very high multiples paid for companies in strategic transactions in our industry.
The opportunity to organically build these revenue streams, while solving problems and very exciting.
And a number of new product releases are demonstrating how we are doing that this year. Please turn to slide 18.
We just released major upgrades across our entire literacy product line.
Third and important upgrades to my Lexia rapid and power.
We also released a brand new program for teachers Lexia Academy.
Actually Academy is an amazing E learning platform that will support our educators professional growth with resources and strategies to support blended learning literacy instruction in product implementation.
That includes expert videos dynamic interactive content and Indepth course material among other things.
Teaching rating is difficult.
And most elementary school teachers are not trained in the science of reading the foundation for knowing how to teach reading.
We believe that as Lexia Academy grows we can better equip teachers to understand the why of reading instruction.
And they're took four to be successful in this area.
But our biggest release this year was a significant upgrade to core five.
In fact, this was the largest expansion of capability and content since core fives original introduction in 2013.
The focus of this release was to deepen and broaden the content for older Elementary school students in the third through fifth grade.
So while we are rightly excited to introduce a new case ex English learning product next year, continuing to expand improve and improve our core literacy product portfolio is critical to continued growth and murder impact.
An area of great importance that hasn't been talked about.
As much as the fundamental change happening with our language technology platforms.
Please turn to slide 19.
Over the last several years, we have been upgraded migrating our legacy language learning technology platforms to a single technology stack.
This effort has included eliminating flash from our products. So that they are compatible with modern web browsers and platforms. In addition to finishing.
The migration of our advanced content from multiple historical acquisitions.
We are in the final month of this migration and integration, which will result in our customers, having a better experience.
One result of this effort is that we recently upgraded our world class enterprise product catalyst, our new catalyst upgrade includes over 2900 hours of goal driven curriculum that teachers learn teachers learners meaningful business and industry language skills.
The upgrade includes adaptive assessment technology that aligns to the common European framework of reference for languages or suffer.
And a new end to end mobile experience for iOS and Android.
More fundamentally completing this work will now allow our language engineering efforts to focus on more innovation, rather than new d. flashing and migration work that has consumed much of our effort. In recent years. This has been a very very expensive not always forward moving process, which we will be happy to complete please turn to slide 20.
As you know we are testing our ability to profitably meets the needs of the larger language learning opportunity outside the us our goal here is to leverage our brand our confidence and our ability to provide high quality Rosetta stone certified online language instructors to create a unique product offering for demanding international customers.
And we will approach selling our solution differently from our peers.
Our intention is to provide customers the tutor and they want when they want it not packages of tutoring sessions sold year at a time for a high upfront cost.
South Korea as our test market.
And the offering is now live for Android users in the country.
We view this as a test and will treat the investment as such until we learn more about product and pricing fit with the market.
Next slide please.
Finally, the simple formula for our success is efficacy time scale equals impact.
Efficacy without scale creates no lasting impact scale without efficacy is counterproductive.
Think about the Edtech products I mentioned sitting unused in our schools.
It takes both to impact.
Society and that is our goal.
Over the last several years, our lack of profitability came from investing heavily in the K 12 literacy business, while simultaneously, making the necessary technology marketing and business model changes and our language businesses.
Like the very large investments that were necessary to modernize our language product platforms and shift to a SaaS.
Subscription base consumer language business.
Now with a scaled and growing literacy business on a modernized and stabilize language business, we have the opportunity to meaningfully improve profitability as we achieve scale.
Our DTV businesses have attractive incremental segment contribution margins of approximately 70% as we leverage high gross margin products and scale distribution.
In our consumer language business, we actively manage our variable media spend to produce the highest absolute dollar return to reinvest across the.
Portfolio.
But the opportunity to sell our current products at a high incremental margin is necessary, but not sufficient to achieving our ultimate goal our presence in K 12 schools and the Rosetta Stone brand are both capable of being scaled beyond our existing products to reach more learners globally.
To ensure that we are appropriately.
Positioned to take advantage of these opportunities today, we are filing with the FCC, a $200 million shelf registration statement.
To take the place of the shelf that expired a few years ago, when we were going through the turnaround.
While we have no current need or plans to utilize.
The authorization I believe it has good corporate practice to have an active shelf registration.
We are confident in our direction and the outlook for organic cash flow generation, but a shelf provides us the flexibility to act quickly if we see the opportunities to invest in our business for example, too.
Finance eight strategic transaction to leverage our growing K 12 presents we will be disciplined stewards of your capital and of course, it is possible to shelf will not be use but I believe we should be prepared for opportunities if they present themselves.
So as we move forward into the critical second half of the year I feel good about where we set.
We expect to have positive revenue growth and operating cash flow. This year, just as importantly, im proud of the work we are doing across the company to provide real value to our learners as evidenced by the fact that in a sea of unused K 12 products teachers and our students make time in their day to day is core five because they know that if they do results will follow.
That concludes my.
Prepared remarks, operator, you can now open the line for questions.
At this time, we'll be conducting a question and answer session.
I would like to ask a question. Please press star one on your telephone keypad.
Consternation Tama indicate your line is and the question Ken You May Press Star two if you would like to move your questions on the queue for participants using speaker Quinn.
May be necessary to pick up your handset before passing sarkies.
Our first question comes from the line of Steven Frankel with Dougherty. Please proceed with your question.
Hi, good afternoon, thanks for the opportunity like John to drill into a couple of things at Lexia the 89%.
Retention rate kind of jumped out.
To me since that's the lowest it's been in a couple of years.
And.
The 100%.
Dollar based.
Renewal rate I would think with.
The move to multiple products. The dollar renewal rate should start to go north of 100. So I wonder if you might explain to me what's going on with those two metrics.
Sure, Hey, Hey, Steve It's John .
I am joined by Tom and Mick and Matt as well.
None that are on the road.
OLED.
Nick address five cents higher than it's been bad, albeit again.
No come back and do so.
Hi, Steve it's Nick Thanks for the question.
As he said we are 89% is a slight desk.
In retention rate from what we've seen historically as I mentioned on previous calls we are seeing the impact of the and.
What we refer to as grandfathered pricing for our legacy customers, who had bought our products on a perpetual license basis, and then move to subscription. So we have gradually increased prices on the grandfathered on licenses over the years and this year and did that grandfathered pricing. So there are some customers who saw that price increase and decided not to renew.
I agree with you on renewal rates that they should pick up above 100% as we see the effect of multiple products.
Being sold to the same customer.
I think as you know Q3 is our biggest quarter by far and so.
We should start to see the impact of that portfolio selling take place.
And these grandfathered customers could you maybe size that for us in terms of the number of schools and have we seen the bulk of the drop off or is this a headwind that you might see in Q3 or Q or Q4.
I don't think we're going to see an acceleration, but certainly.
With grandfathered pricing ending we are seeing some especially some of the smaller accounts.
In some cases not renew.
We don't break out the size of that segment.
But we will continue obviously to report on renewal rates and.
Retention rates.
Okay, and maybe give us if you can a flavor for.
How intently you're focused on.
District wide selling in this peak selling system.
Season, and what do you think your chances of success are and maybe some color on that California, when that John talked about earlier.
Sure so.
As I've said in previous calls we haven't invested in our strategic sales team. The team that is focused on those larger district opportunities. Both protein that is responding to RSP ease as well as individuals who have experience working at that level.
And we are starting to see that pay off it is a longer game.
Some of those both large district and state level off opportunities do take years to develop.
But we are seeing.
More six figure deals than we have ever seen historically and I think thats a direct result, both of the expanded portfolio and our increased capacity selling at that large district level.
In terms of the California opportunity.
Really exciting opportunity to work with one of them not just largest districts in California, but also a world class districts in terms of their ability to significantly.
Move student performance they were called out in a Mckinsey study as one of the top school districts not just in the country, but in the world and so to have them not only use our products, but after multiple years of using the product expand district wide I think is a testament to the quality of not just the products we've provided but the support we provided as well.
Great and on the consumer business I understand.
You spent that the TV money it is an interesting experiment.
Do you sense any competitive changes.
In the market and do you have any sense for.
What's the right term is for this business today.
Now ill, let Matt address that stays but just so I understand when you say the right term.
And that is where where where do you think the consumer how does the consumer want to buy what are you seeing there.
Their desire to permit.
All right.
Matt would you like to take that.
Yes, Hi, Steve This is Matt a couple of things.
But on the on the spend.
I'll kind of address and three points spend component.
Was it really interesting test and as John indicated on the call we're going to spend some time looking through what the tail looks like on that spend.
In relation to that competitive component.
The.
We definitely see competition.
From both the paid enough for you side.
Increasing.
Although Conversely, we also see a lot of trial customers coming in from competitors as well about 44% of our trial us are actually coming in through other products. So we're also seeing kind of category growth from the competition as well.
Which is I think not good news for us.
And then lastly, we have seen a small decrease in the initial term length as indicated on the call.
Slightly from 13.8 months at 13.5, it's a good question, Steve I think things are.
Basically stabilizing over the last several quarters have been stabilizing in terms of LTV to CAC, obviously went way down the inefficient road from our current kind of two to one ratio that we have to the brand spend but I think in general than pretty stable and I expect that to be stable going forward.
Okay, and then a quick last one on on live I think.
A couple of quarters ago, you talked about ending the test sometime in Q3 and going out and marketing the product more fully.
What do you think the timing looks like now and when we moved from Android, which historically is a.
Platform that doesn't generate a lot of revenue in the apps in the app stores to iOS, where people tend to spend more money.
Yes, great question on the iOS component, we don't have a firm date yet.
Although that is something we're obviously looking to do we also have a pretty strong relationship with some of the players and in Korea, Hence the handbrake focus.
In addition to that we do have a standalone skew in the App store called Rosetta Stone live that that went live literally several weeks ago. So we've moved officially not from beta mode into general availability in the Android App store.
Okay, Great and then and how are you marketing and are you just going to leave it to the App store marketing are you doing anything.
Different in the Korean market to try to generate interest in this.
That's another great question.
As you know we've had.
Strong reseller presence under the Rosetta stone brand for quite a while until we have relatively solid not as good as the United States, obviously in aided awareness, but a pretty solid and Korea.
We're doing both influencer marketing as well as digital marketing as well as one of the key things we want to do for that business is to be really good at digital acquisition marketing versus the traditional tutoring route of being more offline.
And we've seen pretty good early signal around acquiring customers through digital only channels.
Okay, Great I'll, let somebody else ask the question. Thank you so much.
Thanks, Steve.
Our next question comes from the line of Alex Paris with Barrington Research. Please proceed with your question.
Good afternoon. This is Chris how sitting in for Alex.
Leading off in following up on the previous question about the district opportunity in California.
Can you provide some perspective as to how many other opportunities maybe not as large are are out there for districts and.
How should how we should expect.
How should we look at the backlog for district opportunities versus where it's been historically.
Yes.
Sure I'd be glad to answer that so.
As I said.
On the previous question from from Steve We are seeing more large opportunities than than we've ever seen and many of those are at the district level.
We're not providing detail at this point about the specifics of the pipeline, but are pleased with the strengthening of the pipeline going into obviously our biggest.
Quarter and do see the investments, we've made and district level selling and you know.
The capacity of the product to work at the district level being something that the market has been looking for and is accepting.
That's very helpful and I look forward to that and my next question is on.
You mentioned that.
Before about the opportunity set that's out there for emerging bilingual.
An English language learning students.
Could you provide some color on what you're seeing as far as the potential runway for this opportunity and how is this need currently being met.
In the marketplace.
Yes, I'm glad you remember the term emerging bilingual I think it's one of the things that we are focused on which is different in this industry thinking about those learners not as having a deficit, but as having a real strength being dual language learners.
The short answer to how is that need being met in the market right now is not very well.
Unfortunately, there are not many products or whether its printer digital that do a good job of supporting those emerging bilinguals, and that's especially true where the bulk of the market is which is in the K six segments. So products that are geared to those young learners.
That are appropriate for their age and yet build the skills they need to be successful in school and to access the rest of the curriculum.
As John said in his remarks, it is the fastest growing segment of the student population.
And we see just a phenomenal opportunity given our experience on both on the literacy and language side and the strength of our brand too.
Meet the needs of those students and meet the needs of schools, who are increasingly I think.
Struggling with how to help those students succeed.
Okay.
Thank you and just a last question here incidentally, so little outside of the box but.
If were to parse out or.
Decompose the Lexia product line.
How would you characterize the rate of adoption or engagement or even the.
Potential for runway.
That's out there for each of the.
Pieces of the Lexia portfolio.
So.
As we shared in the presentation that we've shared previously although we are you know really thrilled with the momentum we have.
Over the past number of years.
We still have a lot of runway in terms of the market that is still to be.
Addressed.
If you just think again about the districts we're already in.
We have enormous opportunity just to expand within that current footprint.
In districts, where we can actually show data about their students and the performance of those students.
Core five isn't about 14% of the market and Powerup, Although united's grown really quickly out of the gate, it's only at about 4% of the market. So.
Again lots of opportunity ahead of us and I think now that we have a comprehensive K 12 portfolio of curriculum and assessment, we're able to meet the needs of schools much more.
Holistically than we were before instead of having a conversation about a given student population and how a individual product can meet the needs. We can talk at the district level about all of their literacy challenges and then direct them to the right product given the things that they are trying to accomplish.
Great. Thanks for taking my questions. That's all I have for now completely.
Thanks, Chris.
Our next question.
From the line.
Oh.
John Dillon.
Hi Min partners. Please proceed with your question.
Very supportive of your strategy and results. So congratulations on getting the company in the right direction I guess just to follow on Chris How's comment on emerging bilinguals. This is for Nick.
What percentage would you say of U.S. students would fall into the emerging bilinguals category is it 510, 15% or just to size up market a little tighter.
Yeah, Hi, John Great question so.
In terms of students who are identified as English language learners students, who are identified in districts and receiving.
Support because of that designation, that's about 10% of the student population and is forecasted to grow to about 25% by 2025 as John mentioned, when we think about emerging bilinguals.
It's a broader markets then just the students who have been designated as emails right because their students who have a certain level of proficiency in English language that don't qualify them for the services, but they still don't have the capacity to maximize their learning potential on so we're targeting not just those students who are already NGL programs, but a broader segment of the market.
Is the per student spin by districts higher for literacy or emerging bilinguals or in the same bucket.
It depends on how you break down the literacy so typically.
Spend on specific student populations, whether it's special Ed.
Title, one or E mail is higher and they are also more funding streams that you can take advantage of so funding streams, both from state and local.
Budgets, but in the case of the specific student populations federal funding streams as well and so they tend to be.
Places where schools.
We need to and are willing to spend more money.
And the funding is there that allows them to do that.
Okay, just to just finish up so it's 10% of the U.S. spot student population now when you think by 2025, it will be 25%. So right. That's that's the current projection yep okay.
Thank you for that Nick Matt I guess I, just got a couple of quick questions for you.
Early on.
Live tutoring I I get that it's.
That you're testing it in South Korea, but do you have any targeted.
Where are you, where you would bring that offering to us or.
Time range or anything.
We don't we don't this year John .
Have state anything beyond South Korea, Although you know Weve as you know in our enterprise business, we've been doing live tutoring, both one on one and group for years. So we know generally where the the right places would be to go to next but we havent announced anything formally.
Okay, and then anything or any plans.
Matt on international expansion and consumers.
Are there any country soft circled on when you would take a more aggressive path there any any color there.
No no real additional color, we think that obviously APAC is the largest language learning market by far its you know 40% of.
Overall learners are learning some form of language and APAC and that that's primarily English. So we think apacs generally good opportunity and Korea, it's been an interesting spot for us because of the relatively high aided awareness of Rosetta stone and it's a market that we feel like we can we can better enter in with not as much capital to be deployed but I do think APAC in general is a huge opportunity for us and our EMEA business and consumers also something that.
We spent a bit more time looking at as well we've been more U.S centric as you know in our businesses you know a lot most of our businesses and can in consumer is the United States. So we we have been spending more time thinking about different price and offering bundles, but Korea is the really the focus right now.
Got it got it okay. I appreciate that and then this is just a guess for John .
It's a little bit of a longer.
Comment in a question frequently on these calls I bring up really though what I see as a large gap between the public value of the business and what the business is worse.
It based on comparable transactions and.
It really to put an exclamation point on top of it Barron's highlighted last week that there are pockets of software stocks that are now pushing 20 times 2019 revenue without earnings and you look at Rosetta Stone's guidance of doubling operating cash flow.
It puts you in the top 10% of the Russell 2000 kept this yet.
Well that is at about a 90% discount at 2.7 times sales and if you look at the business on a more relevant apples to apples basis, you guys are trading for about half of our M&A valuations last year can be on went private at four and a half time sales archipelago at 4.2 times sales Renaissance at 4.2 times sales it so.
Revenue and 50 times cash flow. So I continue to see a really wide gap and you guys have very solid results of 56% incremental cash flow margins.
You know really relevant products. So I guess the question is.
Where are you on trying to bring on you know several years ago. You had 10 analysts covering the company where are you in terms of getting more analyst coverage road shows and really getting the story out because I don't think it's well followed at all on Wall Street.
Yeah, No well then John we would.
We would agree with you and thank you for the context and color.
We're very happy that Steve picked up.
Coverage. This year. He has been terrific I think getting the word out and trying to really understand.
And share the story as he sees it.
We are very focused on adding additional coverage will be at five and investor conferences over the next month or so.
The non deal road show calendar has been quite long when we've not been a blackout.
So.
I think bottom line, what we have to do is run the business as best we can tell the story and as best we can and then look for opportunities.
As they.
Present themselves or is we can create them.
I think we're very focused on that we'll obviously take any help we can get in terms of recommendations.
For additional coverage, but we are we are very focused on that.
Well. Thank you John I, just to just to follow up I have a good friend as a former CEO and he spent the last nine months.
Trying to raise a spac looking at software companies and SaaS models and couldn't find anything to buy less than four and a half five times revenue and just gave up and the other private equity sponsor. So it is a true outlier.
I have for for the business model, you've built in the transition you've made.
Relative to everything else in public equity and private market valuations I think your stocks considerably undervalued and up.
And congrats on the solid progress thanks.
Thanks, John .
Our next question.
From the line of Josh Goldberg with Gtwo investment partners. Please proceed with your question.
Hi, Good afternoon, guys how are you.
Just wanted to talk a little bit more about the selling season in in.
In Lexia and specifically some of the big opportunities in Texas, and New York and I have a follow up.
Okay Nick.
Sure so.
Hi, Josh So as you know we have been focused on the opportunities.
In specific markets across the company or country, where we see either funding or.
Tailwinds that allow us to drive growth faster than in other potential markets in Texas, where there's a significant amount of adoption money in play now and for the next eight years, we have increased the number of sales reps and the marketing activity and are pleased with the kind of momentum. We're seeing obviously, we are now one month into the third quarter and.
You know our are waiting.
And working to close a lot of business in Texas.
I will say that one of the things that we are seeing is.
Fair amount of competition and a fair amount of competition not just from.
What historically has been our smaller competitive field of digital publishers, but the big publishers as well.
What you sometimes see in those big adoptions as people first prioritizing the big core curriculum, and then adding in intervention supplemental and other products. After that so it is a longer game.
And one that will I think.
Pay off for multiple years in terms of the investments we've made but we are pleased with the momentum and the return on investment that we believe we will see in the third quarter coming out of Texas.
New York is a little different.
As you know being in New York. It is very much historically, a building by building sales environment I think with the new administration.
There is a move to centralize some of the authority in the long term, but budgets are still at the school building level.
Good news is that we are now on the fanbase.
Purchasing platform. So all schools can now go into sammis and youth funding to purchase our programs and were seeing continued.
Expansion of the business in New York City as a result of being on family and I think the increased capacity we have in that market.
Okay, great and regarding the the contract that you won just curious you know you you put a slide in your deck of sort of against Aspirationally goals for 2020 and 21.
And the 20 number you didnt change, even though it sounds like a pretty important deal for you both on revenue and on margin.
Can you just help me understand that will that.
Yeah, just just generally we well we don't revisit.
20, and 21 numbers on an ongoing basis, it's a kind of an annual planning cycle.
I think even if we did.
This deal in and of itself while important wouldnt.
Wouldnt really move those numbers, it's over three years, so while it's paid a friend, it's essentially a 500000 of which of your revenue recognition.
And so we wouldn't have a meaningful impact on that but even if it did we wouldn't you won't see the same 2020 numbers have been held constant since the first quarter of the year when we came out with them.
Okay and last question for me in terms of.
Some of these.
Specific districts I think you had a slide about what was your opportunity is on district see already working with but you haven't been able to upsell specifically on Lexia can you just talk about.
Where do you see that playing out over the next sort of six to 12 months, what I mean by that is.
It would seem like those it easiest opportunities is to increase some of those site licenses versus.
You know expanding into new ones, you know I thought the the expansion to existing customers would probably be a little bit easier and I just wanted to kind of here for me if you think that your.
In the north of 30% booking guidance in Lexia is based on new customers versus or new districts versus the existing thanks.
Yes, Josh so it's it's really both obviously we see.
The bigger opportunity in expanding in the footprint. We are in right now and have certainly created a sales channel and a strategy to expand in the districts. We are in it is one of the reasons. We're so excited now about having a comprehensive portfolio of curriculum and assessment, because we can come to the district and talking about their needs as I said before from kindergarten through Twelveth grade. So that is absolutely a focus but we also know that we need to continue to drive into districts that were not in yet and so we do both but certainly this year. There is more emphasis on expanding in the districts that we're already and then previously.
Thanks, Josh.
Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to management for closing remarks.
Thank you operator, and thanks to everyone for joining us Tonight.
As I said well be attending five investor conferences over the next month or so look forward to seeing many of you.
One of the stops.
And talking to you over the.
The next period of time, Thank you and have a good night everybody.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.