Rosetta Stone, Inc. :RST-US: Earnings Analysis: Q3, 2017 By the Numbers : November 6, 2017

Rosetta Stone, Inc. reports financial results for the quarter ended September 30, 2017.

We analyze the earnings along side the following peers of Rosetta Stone, Inc. – K12 Inc., S&P Global, Inc., Groupon, Inc., Scholastic Corporation, Amazon.com, Inc. and CBS Corporation Class B (LRN-US, SPGI-US, GRPN-US, SCHL-US, AMZN-US and CBS-US) that have also reported for this period.

Highlights

  • Summary numbers: Revenues of USD 46.21 million, Net Earnings of USD -3.23 million.
  • Gross margins narrowed from 81.13% to 77.99% compared to the same period last year, operating (EBITDA) margins now 1.95% from 0.48%.
  • Year-on-year change in operating cash flow of 167.45% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Earnings growth from operating margin improvements as well as one-time items.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2017-09-30 2017-06-30 2017-03-31 2016-12-31 2016-09-30
Relevant Numbers (Quarterly)
Revenues (mil) 46.21 45.91 47.69 51.68 48.69
Revenue Growth (%YOY) -5.11 0.41 -0.64 -10.92 -2.23
Earnings (mil) -3.23 -1.14 0.45 -5.61 -5.45
Earnings Growth (%YOY) 40.74 87.36 106.05 50.92 25.33
Net Margin (%) -6.99 -2.47 0.95 -10.86 -11.2
EPS -0.14 -0.05 0.02 -0.25 -0.25
Return on Equity (%) N/A N/A N/A -1410.3 -120.79
Return on Assets (%) -6.88 -2.49 0.96 -11.35 -10.95

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Market Share Versus Profits

Revenues History
Earnings History

RST-US’s change in revenue this period compared to the same period last year of -5.11% is almost the same as its change in earnings, and is about average among the announced results thus far in its peer group, suggesting that RST-US is holding onto its market share. Also, for comparison purposes, revenues changed by 0.66% and earnings by -184.67% compared to the immediate last period.

Revenues Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Leader, Earnings Focus, Laggard, Revenues Focus

Earnings Growth Analysis

The company’s gross margins showed no year-on-year improvement. In spite of this, the company’s earnings rose, influenced primarily by the improvement in operating margins (EBITDA margins) from 0.48% to 1.95%. For comparison, gross margins were 81.80% and EBITDA margins were 5.50% in the last period.

Gross Margin Versus EBITDA Margin

Quadrant label definitions. Hover to know more

Differentiated; Low Cost, Commodity; Low Cost, Commodity; High Cost, Differentiated; High Cost

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

RST-US’s decline in gross margins were offset by some improvements on the balance sheet. The management of working capital, for example, shows progress. The company’s working capital days are now -138.98 days from -136.92 days for the same period last year. This leads Capital Cube to conclude that the gross margin decline is not altogether bad.

Gross Margin Versus Working Capital Days

Quadrant label definitions. Hover to know more

Customer Financed, Cash Starved, Supplier Financed, Cash Rich

Cash Versus Earnings – Sustainable Performance?

It is important to examine a company�s cash versus earnings numbers to gauge whether its performance is sustainable.

RST-US’s change in operating cash flow of 167.45% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Cash Flow based Earnings, Likely Non-cash Earnings, Low Cash Flow Base, Likely Undeclared Earnings

Margins

The company’s earnings growth has also been influenced by the following factors: (1) Improvements in operating (EBIT) margins from -6.15% to -4.58% and (2) one-time items. The company’s pretax margins are now -5.09% compared to -7.51% for the same period last year.

EBIT Margin Versus PreTax Margin

Quadrant label definitions. Hover to know more

Operation driven Earnings, One-time Favorables, Low Earnings Base, One-time Unfavorables
EBIT Margin History
PreTax Margin History

Access our Ratings and Scores for Rosetta Stone, Inc.

Company Profile

Rosetta Stone, Inc. engages in the provision of technology based language learning solutions. It develops, markets, and sells language learning solutions consisting of software products, online services, and audio practice tools under the Rosetta Stone brand. It operates through the Enterprise and Education, Literacy and Consumer segments. The Enterprise and Education segment offers language-learning to educational institutions, corporations, and government agencies worldwide under a Software-as-a-Service. The Literacy segment offers literacy solutions through Software-as-a-Service model to educational institutions serving grades K through 12. The Consumer segment offers products to individuals and retail partners worldwide. The company was founded by Allen Stoltzfus and John Fairfield in 1992 and is headquartered in Arlington, VA.

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