May 9, 2017 NYSE Caution on Forward-Looking Statements
This presentation contains forward-looking statements within the our ability to raise additional funds; the risk that we cannot effectively meaning of the Private Securities Litigation Reform Act of 1995. adapt to and manage complex and numerous technologies; the risk Forward-looking statements can be identified by non-historical that businesses acquired by us might not perform as expected; and statements and often include words such as “outlook,” “potential,” the risk that we are not able to successfully expand internationally. "believes," "expects," "anticipates," "estimates," "intends," "plans," We expressly disclaim any obligation to update or revise any forward- "seeks" or words of similar meaning, or future-looking or conditional looking statements, whether as a result of new information, future verbs, such as "will," "should," "could," "may," "might, " "aims," developments or otherwise, except as required by law. These factors "intends," or "projects.” These statements may include, but are not should not be construed as exhaustive and should be read in limited to, statements relating to: our business strategy; guidance or conjunction with the other cautionary statements, risks and projections related to revenue, Adjusted EBITDA, bookings, and other uncertainties that are more fully described in the Company's filings measures of future economic performance; the contributions and with the U.S. Securities and Exchange Commission (SEC), including performance of our businesses including acquired businesses and those described under the section entitled “Risk Factors” in the international operations; projections for future capital expenditures; Company’s most recent quarterly Form 10-Q filings and Annual and other guidance, projections, plans, objectives, and related Report on Form 10-K, as such factors may be updated from time estimates and assumptions. A forward-looking statement is neither a to time. prediction nor a guarantee of future events or circumstances. In addition, forward-looking statements are based on the Company’s Immaterial rounding differences may be present in this data in order current assumptions, expectations and beliefs and are subject to to conform to reported totals. certain risks and uncertainties that could cause actual results to differ materially from our present expectations or projections. Some Non-GAAP Financial Measures important factors that could cause actual results, performance or Today’s presentation and discussion also contain references to non- achievement to differ materially from those expressed or implied by GAAP financial measures. The full definition, GAAP comparisons, these forward-looking statements include, but are not limited to: the and reconciliation of those measures are available in this risk that we are unable to execute our business strategy; declining presentation or in our press release which is posted on our website at demand for our language learning solutions; the risk that we are not www.rosettastone.com. Our non-GAAP measures may not be able to manage and grow our business; the impact of any revisions to comparable to those used by other companies, and we encourage our pricing strategy; the risk that we might not succeed in introducing you to review and understand all our financial reporting before and producing new products and services; the impact of foreign making any investment decision. exchange fluctuations; the adequacy of internally generated funds and existing sources of liquidity, such as bank financing, as well as
2 John Hass Opening Remarks / Welcome Chairman and Chief Executive Officer Agenda
Morning Afternoon SESSION SESSION
§ Welcome & Overview § Lexia John Hass Break – Business Review § Educational Mission Nick Gaehde / Collin Earnst Liz Brooke – Customer Panel Liz Brooke § Consumer Language Philip Dunne § Financial Review Tom Pierno / John Hass § E&E Language Matt Hall § Wrap-up John Hass
4 2014 UNSUSTAINABLE SALES
Heavy marketing to maintain consumer sales
Acquisitions
Internal diversification— geographic and product line
5 2014 2015 – 2017 UNSUSTAINABLE FOUNDATION SALES BUILT
Heavy marketing to Focus to improve maintain consumer sales 1 execution
Acquisitions Reduce costs to 2 improve contribution Internal diversification— geographic and Reallocate capital— product line 3 especially to Lexia
6 Focus to Improve Execution
1Q15 • Launched Consumer restructuring and ‘pivot’ to SaaS-based business 1Q16 • Reduced investment in Kids Reading • Launched E&E restructuring which closed • Reduced Consumer retail partners ~50% offices in France, China, and Brazil
3Q15 1Q17 • Accelerated shift in Lexia’s direct sales • Licensed Japanese business • Sold Korean subsidiary • Intention to exit CD-Box business
7 Reduce Costs to Improve Contribution
Expenses Reduced Nearly 32% Since 20141
SALES AND GENERAL AND MARKETING2 ADMINISTRATIVE2 2014 2014 $57.1 $173.2 2016
2016 $40.5 $114.3
S&M2 34% G&A2 29%
1 Expenses include GAAP COGS, S&M, R&D and G&A. 2 Data is GAAP, which includes $4.2MM and $5.2MM in total restructuring and other costs 8 in 2014 and 2016, respectively. Reallocate Capital – Especially to Lexia
Research and Development + Capitalized Labor ($MM)1,2
2014 2016
In 2016, R&D and $34.8 $ 27.1 capitalized labor was 31% of Lexia’s revenue Language2 22%
$10.5 $6.0
Lexia2 75%
1 Expenses include GAAP R&D and capitalized labor on software development . 2 Data is GAAP, which includes $4.2MM and $5.2MM in total restructuring and other costs 9 in 2014 and 2016, respectively. 2015 – 2017 FOUNDATION BUILT
Focus to improve 1 execution
Reduce costs to 2 improve contribution
Reallocate capital— 3 especially to Lexia
10 2015 – 2017 2017 – Beyond FOUNDATION LEVERAGE BUILT INVESTMENT
Focus to improve Continue growth and 1 execution 4 improve margins at Lexia
Reduce costs to Growing E&E and 2 improve contribution 5 partnerships offset consumer WL decline Reallocate capital— 3 6 Leverage improved cost especially to Lexia base to drive cash flow
11 Rosetta Stone
1 Leading learning company with well-known brands
1 Leading learning company with well-known brands
2 Pioneer of technology-based learning solutions
13 Rosetta Stone
1 Leading learning company with well-known brands
2 Pioneer of technology-based learning solutions
3 Large, growing addressable marketplaces
14 Rosetta Stone
1 Leading learning company with well-known brands
2 Pioneer of technology-based learning solutions
3 Large, growing addressable marketplaces
4 Lexia becoming “THE Literacy Expert” in U.S. K-12
Core5 the leader in K-5 Address most critical K-12 Maturing sales force Literacy learning with Literacy curriculum and improving productivity demonstrated efficacy assessment needs
15 Rosetta Stone
1 Leading learning company with well-known brands
2 Pioneer of technology-based learning solutions
3 Large, growing addressable marketplaces
4 Lexia becoming “THE Literacy Expert” in U.S. K-12
5 Language reclaiming its innovation heritage
Consumer transitioning Focused E&E with Leveraging brand and product to subscription improved capabilities with world-class partners
16 Rosetta Stone
1 Leading learning company with well-known brands
2 Pioneer of technology-based learning solutions
3 Large, growing addressable marketplaces
4 Lexia becoming “THE Literacy Expert” in U.S. K-12
5 Language reclaiming its innovation heritage
Leveraging recent investments and improved cost structure to drive 6 profitable growth
Return on recent investments $100MM expense reduction set to emerge in two years
17 Dr. Liz Brooke, CCC-SLP Educational Mission Chief Education Officer Rosetta Stone and Lexia To To
P ersonalized livesthrough change of language and MISSION education. literacy literacy the the
E ffective power write and speak with confidence. with speak and write Every person can learn to read,
E ngaging VISION
R elevant PEER
P ersonalized E ffective Pathway specifically Efficiently moves designed to meet the the learner toward learner’s needs the learning goal
E ngaging R elevant Motivated by content Important and and aware of their connected to own progress future success
20 PEER Across the Company
K-12 Enterprise Consumer
District Literacy United Nations Mark returning Leaders in a large World Food Programme, home to Vietnam for first urban district fighting hunger worldwide time in more than 40 years
21 Rosetta Stone THE Language and Literacy Experts Philip Dunne Consumer Segment SVP Consumer Language Rosetta Stone
1 Large paid language market remains
24 Rosetta Stone
1 Large paid language market remains
2 Brand remains strong and relevant
25 Rosetta Stone
1 Large paid language market remains
2 Brand remains strong and relevant
3 Product revitalized and aligned to mobile-first customers
26 Rosetta Stone
1 Large paid language market remains
2 Brand remains strong and relevant
3 Product revitalized and aligned to mobile-first customers
4 Smaller, more efficient business
Focused on best LTV / CAC channel
27 Rosetta Stone
1 Large paid language market remains
2 Brand remains strong and relevant
3 Product revitalized and aligned to mobile-first customers
4 Smaller, more efficient business
5 Movement to SaaS showing good early results
Modernized through transition Early Read: Unlocks new to mobile first, subscription audience; improves conversion sales model and predictability
28 Rosetta Stone
1 Large paid language market remains
2 Brand remains strong and relevant
3 Product revitalized and aligned to mobile-first customers
4 Smaller, more efficient business
5 Movement to SaaS showing good early results
6 Upside potential from partnerships
Better than forecast Additional partnership Monetize coaching experience in Univision deals leveraging brand and within customer base Hispanic partnership product capability
29 Growing Individual Language Learner Opportunity
2020 $4.6B Worldwide 2016 $2.9B Worldwide
Source: Technavio Insights, custom research August 2016-March 2017 30 Opportunities in English Outside the U.S.
2016 Consumer Marketplace
BY LANGUAGE (%) BY REGION (%)
18%
40%
60%
82%
World Languages English N.A. Outside N.A.
Source: Technavio Insights, custom research August 2016-March 2017 31 Consumer Business Mix by 2016 Bookings1
English vs. North America DTC vs. World Languages vs. Europe Retail (% of units) ($MM) ($MM)
$6 17% $11
83% $73 $68
World Languages English N.A. Europe ROW DTC Retail Other
1 Data only includes language-learning consumer bookings. Source: RS Analysis 32 Move to Mobile First, SaaS Innovation
1992 Release of original Language Learning Software March 2017 Newly upgrade offering with stories, phrasebook Minimal and audio Customer Facing Product 2009 May 2016 June 2017 Introduction of online Innovation Release of new native Implement new subscription (TOTALe v4) iOS application features on Android
33 Consumer Product Overview Targeting Passionate Learners LEARNING COLLABORATIVE COLLABORATIVE Type of Offering STUDY - SELF
FREE $50-$200 $500-1,000+ Spend per Learner
Source: RS Analysis 35 Targeting Passionate Learners LEARNING COLLABORATIVE COLLABORATIVE Type of Offering STUDY - SELF
FREE $50-$200 $500-1,000+ Spend per Learner
Source: RS Analysis 36 Targeting Passionate Learners LEARNING COLLABORATIVE COLLABORATIVE Type of Offering STUDY - SELF
FREE $50-$200 $500-1,000+ Spend per Learner
Source: RS Analysis 37 Targeting Passionate Learners LEARNING COLLABORATIVE COLLABORATIVE Type of Offering STUDY - SELF
FREE $50-$200 $500-1,000+ Spend per Learner
Source: RS Analysis 38 Consumer Interest in Rosetta Stone is Strong
2016 Metrics1
Web Visits Product Trial Product Purchase
Web Demos
Rosettastone.com 1.6MM 22MM 460K
App Downloads 0.9MM
1 North America Source: RS Analysis 39 Smaller, More Efficient Consumer Business
1Q16 $19MM 1Q17 Focus on Contribution Margin $18MM Bookings shift to renewals, 40% mobile app Media optimization for 23% improved marginal return Rightsizing of S&M cost structure
Segment NA LTV Added1 Contribution%
Return on Media for North America 2.9 3.5
1 Estimated amount of Customer Life Time Value added during the period based on historical renewal rates. 40 SaaS – A Superior Business Model
Better Product Experience
• Better product experience • Cross-platform access • Immediate updates • Increased engagement
41 SaaS – A Superior Business Model
Cost
Better Reduced Product Experience Costs
• Better product experience • Single technology base • Cross-platform access • More efficient marketing spend • Immediate updates • Lower COGS • Increased engagement
42 SaaS – A Superior Business Model
Cost Cost Rev
Better Reduced Increased Product Experience Costs Top Line
• Better product experience • Single technology base • New audiences from shorter-term • Cross-platform access • More efficient subscriptions marketing spend • Immediate updates • Upsell path to • Lower COGS • Increased engagement additional services
43 SaaS – A Superior Business Model
Cost Cost Rev
Better Reduced Increased Product Experience Costs Top Line
• Better product experience • Single technology base • New audiences from shorter-term • Cross-platform access • More efficient subscriptions marketing spend • Immediate updates • Upsell path to • Lower COGS • Increased engagement additional services
Recurring Business Model Means More Predictable Cash Flow
44 Move to SaaS is Accelerating
Percent of Unit Sales by Product Type [DTC]1
1Q15 1Q16 1Q17
32% 33%
63% 22% 32%
46% 24% 35% 13% Subscription Download CD
1 North America; Excludes App Sales Source: RS Analysis 45 Early Read – Reaching a New Audience
Customer Profile (Based on 2016)
Demographic CD / Download Short-Term Variable Buyers Subscription Buyers1
Age +20% <45 Yrs 57% 69%
Income $75k+ 57% 53% -7%
1 Subscription duration: 1 month or 3 month Source: RS Analysis, Facebook Audience Insights 46 Early Read – Units are Stabilizing
Y/Y Change in DTC Units Sold1
15%
2% Opening up funnel by unlocking new audiences 1Q15 1Q16 1Q17 Stronger conversion rates from full portfolio offering Momentum from product -29% innovation
Y/Y Change in Media Spend [DTC]1
-14% -23% -32%
1 North America Source: RS Analysis 47 Early Read – LTV / CAC is Improving
LTV vs. CAC Multiple [DTC]1
2.4x
2.2x 2.1x Margin improvement even with shorter-term subscriptions 2.0x 1.7x Early Read: 1.8x 1.6x Short-term subscriptions with 1.6x healthy renewal rates help 1.4x stabilize price
1.2x
1.0x Q1'15 Q1'16 Q1'17
1 North America; CAC includes all Sales and Marketing expenses, both Media and non-Media. Source: RS Analysis 48 Accelerating Paid Subscriber Growth
Paying Subscribers (000)1
352
318 1Q17 Growth 34% Y/Y
282 270 262 SaaS transformation driving up 249 paying subscriber base 223 204 Result: Increased predictability 188 from larger renewal base
Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Q2'16 Q3'16 Q4'16 Q1'17
1 Paying subscribers for North America and Europe 49 Global Growth Through Partnerships
Top 5 Countries Digital English, 2015
China
Strategic Partners United States
South Korea
Japan
Brazil
Source: Ambient Insight 50 Univision Strategic Partnership
Establish Scale in Hispanic Segment
40MM U.S. Spanish Speakers
16MM 24MM Not yet English proficient English proficient
Sources: U.S. Census; RS Analysis 51 SOURCENEXT Strategic Partnership
Distribution Scale to Monetize Awareness § Rationale: Maximize potential of Japanese opportunity through partner with willingness to invest § Our Partner: Leading software distributor in Japan § Economics: $13.0MM upfront, plus $0.5MM on closing the acquisition of the Japan entity, and a further additional $6MM to be paid over the next ten years § Upside: Potential source of product innovation; right to license and sell SOURCENEXT / Rosetta Stone products outside Japan
52 Rosetta Stone
1 Large paid language market remains
2 Brand remains strong and relevant
3 Product revitalized and aligned to mobile-first customers
4 Smaller, more efficient business
5 Movement to SaaS showing good early results
6 Upside potential from partnerships
53 To learn more please visit: RosettaStone.com Matt Hall Enterprise and Education Vice President of Enterprise and Education Enterprise and Education Language Highlights
1 Large and growing opportunity
Combined, Enterprise and Education are +$3.5B category growing 9% as offline transitions to digital
56 Enterprise and Education Language Highlights
1 Large and growing opportunity
2 Strong brand
Brand recognition in core geographies 3X our nearest competitors
57 Enterprise and Education Language Highlights
1 Large and growing opportunity
2 Strong brand
3 Refocused and ready to grow with right products
$70MM SaaS business Additional partnership Focused on focused on best opportunities deals leveraging brand improving retention following reorganization and product capability and renewal rates
58 Enterprise and Education Language Highlights
1 Large and growing opportunity
2 Strong brand
3 Refocused and ready to grow with right products
4 Upside – Transformation of distribution, marketing and operations
Growing reseller Shifted to digital marketing Product changes to drive network in emerging with robust ecosystem of efficiency and improve marketplaces tools; piloting website sales KPIs (e.g., renewal rates)
59 Enterprise Opportunity
2016-2020 Global Enterprise1
2020 Key Dynamics Driving Growth $2.4B • Strategic purchasing 2016 • Return on learning $1.7B • Mobile services • Emerging category expansion
Enterprise WL Enterprise English
1 Enterprise includes Corporate, Higher Education, Government and Not-for-profit Sources: Technavio Insights, custom research August 2016-March 2017; RST analysis 60 K-12 Opportunity
2016-2020 Global K-12 Key Dynamics Driving Growth 2020 $1.1B • Digitalization initiatives
2016 • ELL needs $0.8B • Focus on outcomes • Resources for emerging languages
K-12 WL K-12 English
Source: Technavio Insights, custom research August 2016-March 2017 61 E&E Business Mix by 2016 Revenue
North America K-12 vs. Enterprise Direct vs. Reseller U.S. vs. ROW ($MM) ($MM) ($MM)
$6 $22 $29
$43 $66 $50
Enterprise K-12 Direct Reseller U.S. ROW
62 E&E Business Profile Metrics
Customer LTV/CAC Count
2.4
1
Organizations
New Renew
1 CAC includes all Sales and Marketing expenses 63 E&E Business and Product Evolution
OPPORTUNISTIC GROWTH Leveraging Consumer Product
Language Lesson V3
64 E&E Business and Product Evolution
OPPORTUNISTIC SaaS GROWTH TRANSITION Leveraging Slower Growth vs. Consumer Product Stronger Competitors
Integrated Language Coaching, Lesson V3 Mobile
65 E&E Business and Product Evolution
OPPORTUNISTIC SaaS GROWTH TRANSITION REFACTORING Leveraging Slower Growth vs. Buying, Building Consumer Product Stronger Competitors and Assembling Assets
Livemocha and TellMeMore Acquisitions
Restructured Distribution
Integrated Advanced Language Coaching, English for Lesson V3 Mobile Business
66 E&E Business and Product Evolution
OPPORTUNISTIC SaaS REFINEMENT GROWTH TRANSITION REFACTORING AND GROWTH Leveraging Slower Growth vs. Buying, Building Competitive and Consumer Product Stronger Competitors and Assembling Assets Evolving Offerings
Livemocha and TellMeMore Acquisitions
Restructured Distribution
Integrated Advanced Language Catalyst Single Coaching, English for Lesson V3 Launch Platform Mobile Business
67 Language Product Portfolio
ADVANCED ENGLISH FOUNDATIONS ADVANTAGE FOR BUSINESS
• True Beginner content • Immersive pedagogy • 30 languages
68 Language Product Portfolio
ADVANCED ENGLISH FOUNDATIONS ADVANTAGE FOR BUSINESS
• True Beginner content • Advanced content • Immersive pedagogy • Industry-specific content • 30 languages • 9 languages
69 Language Product Portfolio
ADVANCED ENGLISH FOUNDATIONS ADVANTAGE FOR BUSINESS
• True Beginner content • Advanced content • Advanced English content • Immersive pedagogy • Industry-specific content • Business-focused context, • 30 languages • 9 languages vocabulary
70 Language Product Portfolio
ADVANCED ENGLISH FOUNDATIONS ADVANTAGE FOR BUSINESS
• True Beginner content • Advanced content • Advanced English content • Immersive pedagogy • Industry-specific content • Business-focused context, • 30 languages • 9 languages vocabulary
K-12 Admin Tools Occasional K-12 Use
71 Language Product Portfolio
Assessment and Placement Testing
Enterprise Admin and Reporting Tools
ADVANCED ENGLISH FOUNDATIONS ADVANTAGE FOR BUSINESS
• True Beginner content • Advanced content • Advanced English content • Immersive pedagogy • Industry-specific content • Business-focused context, • 30 languages • 9 languages vocabulary
K-12 Admin Tools Occasional K-12 Use
72 Enterprise Product Strengths Before Catalyst
Legacy Strengths
Industry-leading “True 1 Beginner” experience
Advanced content in 2 9 languages
SRE designed for 3 language learning
Pockets of advanced 4 mobile performance
73 Enterprise Product Roadblocks Before Catalyst
Roadblocks
No assessment and 1 placement
2 No end-to-end content
No cross-product 3 reporting
Cumbersome sales 4 and operations
74 Catalyst Solutions
Catalyst Investment
Integrated best-in-class assessment
Combined 7000+ hours of content into one product
Accelerated reporting with harmonized portal
Standardized pricing, processing and data
75 Product Transformation Next Steps
§ Infinite learning paths to suit learner needs Modular § Teacher-directed content for blended learning Content
Web-based § Self-service transactions for small Sales business, renewals and add-ons
Single Platform
Lower § One development team Maintenance § One set of tools
Education Extension § Leveraging modular content for the classroom § New tools for teachers and administrators
76 Brand Drives Opportunity in Fragmented Marketplace
Win / Loss Assessment Apart from Rosetta Stone, what other vendors did you evaluate?
ENTERPRISE EDUCATION
57% 64% 36% 43%
Only RST Select Others1 Only RST Select Others2
1 Enterprise competitors mentioned included Berlitz, EF, Duolingo, Global English, Babbel, Speexx, Mango and Busuu 2 Education competitors mentioned included Duolingo, Pearson, Middlebury, Imagine Learning, Houghton Mifflin Harcourt and McGraw Hill 77 Source: Evaluserve; 2016 Rosetta Stone Education and Enterprise Win/Loss Analysis Maintaining Strength in K-12
ELL and World Language Key Initiatives 2016 Bookings • New tools for the classroom to support ELLs
45% • Deep relationships through targeted messaging and support • Migrate customers to newer products 55% • Account-based marketing to expand within districts
ELL World Language
78 Distribution Transformation for Efficient Growth
2015
Direct Territories Strategic Reseller Territories Other Reseller Direct Sales Offices
79 Distribution Transformation for Efficient Growth
Current 2017 2015 (TTM as of March 31)
Direct Territories Strategic Reseller Territories Other Reseller Direct Sales Offices
80 Distribution Transformation for Efficient Growth
Current 2017 2015 (TTM as of March 31)
Direct Territories Strategic Reseller Territories Other Reseller Direct Sales Offices
# Reps 100 61 Bookings Productivity per Rep ~$750K ~$1.1MM Segment Contribution Margin1 $22.8MM $29.9MM
1 See appendix for definition 81 Marketing Transformation to Optimize ROI
Marketing infrastructure for a SaaS business CRM Marketing Automation
Web Analytics Customer Marketing Content Management Lower Cost of Acquisition Higher Retention and Renewal Rates Account-Based Predictive Social Selling Marketing Marketing
82 Making Progress on Key Metrics
Renewal S&M Rates up1 Costs down2
2015 2016 2015 75% 74% 54% 2016
46%
1 Renewal rates are calculated as trailing 12 months 2 Segment S&M Costs depicted as % of Revenue 83 Strategic Initiatives: Improve Retention and Renewal
Key Drivers
Demonstrated ROI through Expected 1 assessments Outcomes
Efficient, relevant and timely Faster Growth 2 messaging based on account profiles
Higher LTV 3 Upsell through Catalyst conversation
84 Strategic Initiatives: Extend Catalyst Footprint
Key Drivers
New features expanding Expected 1 category relevance Outcomes Higher 2 Investment in new business pipeline satisfaction
Lower operating 3 Aggressive conversion campaigns costs
85 Strategic Initiatives: Expand Partnerships
Key Drivers
Expected Strong brand 1 Outcomes Broadened 2 Increased product relevance distribution
Product feature 3 Pro-active opportunity identification expansion
86 To learn more please visit: RosettaStone.com Collin Earnst Lexia Learning – Literacy Opportunity Vice President of Marketing and Strategy The U.S. Literacy Crisis
Proficient Readers 35%
Non-proficient Readers 65%
Two-thirds of all U.S. students Struggling readers account for in grade 4 and grade 8 are 60% of all students who drop out non-proficient readers. or fail to graduate on time.
Sources: U.S. Department of Education, 2015 National Assessment of Educational Progress and Anne E. Casey Foundation, 2012 “Double Jeopardy: How Third Grade Reading Skills and Poverty Influence High School Graduation” 89 Lexia Learning Opportunity
50,000,000 3M U.S. Public School Students 35M Students 15M Students Grades K-8 Grades 9-12
100,000 18K U.S. Public Schools 70K Schools 21K Schools Grades K-8 Grades 9-12
Sources: National Center for Educational Statistics and Lexia data. 90 Curriculum and Assessment Spending
K-12 Assessment $3.1B K-12 Literacy Curriculum $1.7B
Digital Formative K-12 Assessment Literacy $0.7B $0.6B
Sources: Parthenon Corporate Survey; The Complete K-12 Report: Market Facts and Segment Analyses 2013 91 Well-positioned in a $5.4B Marketplace
§ Digital marketplace expected to further accelerate growth § Supplemental segment remains fragmented § Literacy remains the largest subject area for spending
K-12 Institutional Instructional Materials Marketplace – 2015
CORE CORE SUPPLEMENTAL SUPPLEMENTAL PRINT DIGITAL PRINT DIGITAL`
Size $1.6B $1.1B $1.3B $1.4B
2010 – 2015 1-3% 2-4% 0-2% 2-4% CAGR 2015 – 2019 (2)-0% 4-6% (2)-0% 4-6% CAGR
92 Trends Driving Adoption of Digital Tools
§ Teachers and schools are primed to embrace technology § Instructional needs favor a blended/ personalized model § Data-driven methodologies and accountability drive the discussion in school districts § Buying patterns favor subscription-based publishers
93 Nick Gaehde Lexia Learning – Overview President Lexia Highlights
1 THE Literacy Experts
Three decades of Deep domain expertise Personalized instruction, literacy education in the largest, most blended learning, computer innovation critical subject category adaptive assessment
95 Lexia Highlights
1 THE Literacy Experts
2 Pioneer in improving student literacy performance
Intelligent Adaptive Learning Nine peer reviewed published studies, Industry leader in research evaluation
96 Lexia Highlights
1 THE Literacy Experts
2 Pioneer in improving student literacy performance
3 Broad and deep product portfolio
K-12 Curriculum, Assessment and Services
97 Lexia Highlights
1 THE Literacy Experts
2 Pioneer in improving student literacy performance
3 Broad and deep product portfolio
4 Recent transition to direct sales team
Sales and Implementation teams with national reach
98 Lexia Highlights
1 THE Literacy Experts
2 Pioneer in improving student literacy performance
3 Broad and deep product portfolio
4 Recent transition to direct sales team
5 Upside potential
Expand product portfolio Increased international sales
99 Lexia Learning Evolution
Research and Early Proof of Efficacy
Company founded NICHD Grants
100 Lexia Learning Evolution
Research Special Education and and Early Proof Perpetual License to General of Efficacy Education and SaaS
Cloud-based product offering
Lexia Reading Core5 Company founded • SaaS NICHD Grants • SpED to General Ed
101 Lexia Learning Evolution
Research Special Education and Pivot from 3rd Party and Early Proof Perpetual License to General Reseller to of Efficacy Education and SaaS Direct Salesforce
Pivot to direct Florida Center for salesforce from Reading Research reseller model Partnership
Cloud-based product offering
Direct service business Lexia Reading Core5 Company founded SaaS NICHD Grants SpED to General Ed
102 Lexia Learning Evolution
Research Special Education and Pivot from 3rd Party Comprehensive and Early Proof Perpetual License to General Reseller to K-12 Product of Efficacy Education and SaaS Direct Salesforce Portfolio
Pivot to direct Florida Center for salesforce from Reading Research reseller model Partnership
Cloud-based product offering
Adolescent Literacy Direct service Program business Lexia Reading Core5 Company founded SaaS NICHD Grants SpED to General Ed
103 Program Effectiveness Validated by Research
Closing the Gap
105 104.4
102.9 100
96.1 95 ELL 90 ELL Control Non-ELL 85 (non-ELL) 82.7 80 PretestPretest PosttestPos2est
Note: GRADE total test standard score changes for ELL treatment and non-ELL control students 104 Closing the Gap
Students reading below grade level declined from 56% to 10%
Start Level 56%
1 Grade Below 2+ Grades Below 35%
End Level 10% 21% 7%
Notes: 2015 National analysis of 210,000 students using Lexia Reading in a geographically and ethnically representative sample. 10 5 Closing the Gap
Reached Next Grade’s EOY Benchmark End Level Reached EOY Benchmark 90% In Student Grade 15% 1 Grade Below 2+ Grades Below
Start Level 56% Start Level 49% 44% 4% 35%
End Level 10% 39% 26% 21% 7%
Notes: 2015 National analysis of 210,000 students using Lexia Reading in a geographically and ethnically representative sample. 10 6 Closing the Gap
Reached Next Grade’s EOY Benchmark End Level Reached EOY Benchmark 90% In Student Grade 15% 1 Grade Below 2+ Grades Below
Start Level 49% 44% 4% Students reading35% above grade level increased from 44% to 90%
39% 26%
Notes: 2015 National analysis of 210,000 students using Lexia Reading in a geographically and ethnically representative sample. 10 7 Go-to-Market Strategy
Bookings Mix 2014A 2015A 2016A
71% 58% 29% Shift from Reseller to Direct Benefits include: Ownership of customer relationship 71% Ability to upsell and cross sell Deeper penetration / bigger deals
42% Service opportunity and follow through 29%
Reseller Direct
108 Learning Cycle and Product Portfolio
Targeted Instructional Resources
Independent, Student-Driven Learning
PERSONALIZED LEARNING Targeted and Time-efficient Personalized, data-driven and blended instruction
Ongoing Data to Drive Instructional Priorities
109 Learning Cycle and Product Portfolio Personalized, Data-Driven and Blended Instruction
Services Curriculum Assessment
PK-5
Student
6-12 ALP
Educator
110 U.S. Literacy Opportunity
ELEMENTARY SECONDARY ASSESSMENT CURRICULUM
111 U.S. Literacy Opportunity
ELEMENTARY SECONDARY ASSESSMENT
ALP CURRICULUM
112 U.S. Literacy Opportunity
ELEMENTARY SECONDARY ASSESSMENT CURRICULUM
113 Lexia Momentum
Schools (000) Annual Student Licenses (MM) 21.9 3.2
19.5 2.7
2.2 17.9
1.6 1.7 15.8
13.8
2012 2013 2014 2015 2016 2012 2013 2014 2015 2016
114 Lexia Customer Panel CUSTOMER PANEL
Karen E. Henery, Ed. D. Director ESL/Multilingual Services Little Rock School District (Arkansas)
Colleen Collins Principal, CICS-West Belden School Distinctive Schools (Chicago)
Tara Beams Assistant Superintendent Public Schools of Edison Township (New Jersey)
116 To learn more please visit: RosettaStone.com Tom Pierno 1Q17 Financial Review Chief Financial Officer 1Q17 Highlights
1 Revenue relatively flat Y/Y at $47.7MM in 1Q17
Lexia up 34% Y/Y at Consumer segment down $1.1MM Y/Y on FX was negative $10.2MM; pro forma lower bookings and an increased mix of $0.4MM, or revenue up 20% Y/Y subscriptions, including shorter-durations approx. 1% to $10.8MM that are being tested
119 1Q17 Highlights
1 Revenue relatively flat Y/Y at $47.7MM in 1Q17
OPEX decreased $9.5MM or 20%Y/Y, representing the Company's 9th 2 consecutive quarter of Y/Y expense reductions
120 1Q17 Highlights
1 Revenue relatively flat Y/Y at $47.7MM in 1Q17
OPEX decreased $9.5MM or 20%Y/Y, representing the Company's 9th 2 consecutive quarter of Y/Y expense reductions
Net income of $0.5MM or $0.02 per diluted share, compared to net loss 3 of $7.5MM or $(0.34) per diluted share in the year-ago period
121 1Q17 Highlights
1 Revenue relatively flat Y/Y at $47.7MM in 1Q17
OPEX decreased $9.5MM or 20%Y/Y, representing the Company's 9th 2 consecutive quarter of Y/Y expense reductions
Net income of $0.5MM or $0.02 per diluted share, compared to net loss of 3 $7.5MM or $(0.34) per diluted share in the year-ago period
Ended the quarter with zero debt and $39.7MM in cash and cash 4 equivalents, up $3.5MM compared to December 31, 2016
Cash balance at March 31, 2017 includes $9.0MM receipt from SOURCENEXT
122 1Q17 Revenue
Revenue by Segment ($MM) • Lexia revenue up 34% Y/Y to record 1Q16 1Q17 high $10.2MM; Pro forma revenue 46% 44% up 20% Y/Y to $10.8MM • Consumer revenue down $1.1MM or 5% Y/Y - Consumer SaaS unit mix increased to 42%, compared to 24% in the year-ago period 38% 35% • E&E Language revenue down $1.8MM or 10% Y/Y - Markets exited on a direct-sales basis represented $0.7MM, or 41% of total decline 21% 16%
Consumer E&E Lexia
123 1Q17 Metrics
1Q16A 1Q17A
Lexia ARR (MM) $30.6 $38.5
Renewal Rate (TTM) 93% 84%
Enterprise and ARR (MM) $61.4 $56.4 Education Renewal Rate (TTM) 78% 75%
Consumer Paying Subscribers (000) 262 352
Lexia’s renewal rate in 1Q17 was over 95%
124 1Q17 Segment Contribution Margin1
Literacy ($MM)2 • Lexia segment contribution margin increased to $1.0MM, up from 9% $0.1MM in the year-ago period • Definition of segment contribution $1.0 was revised; includes R&D expense2 • Margin percentage increased to 9% of revenue, up from 1% in the year-ago period ⎻ Pro forma segment contribution, which excludes the effects of purchase accounting, was 12% in 1Q17 and 9% in 1Q16 1%
$0.1 1Q16 1Q17
1 See appendix for revised definition of segment contribution margin; 2 Lexia segment contribution includes R&D expense. 125 1Q17 Segment Contribution Margin1
Combined E&E Language Consumer ($MM)2 Language ($MM)3 ($MM)2 43% 28% $8.4 $10.5
40% $7.1 $6.3 15% $5.0 $5.9
34%
23%
1Q16 1Q17 1Q16 1Q17 1Q16 1Q17
1 See appendix for revised definition of segment contribution margin; 2 E&E Language and Consumer are shown before shared Language R&D expense; 3Combined Language includes R&D expense of $4.9MM in 1Q16 and $4.5MM in 1Q17. 126 1Q17 OPEX1
$MM OPEX 20% Y/Y • Marks 9th consecutive quarter of 1Q16 Y/Y improvement • We have now lapped the E&E $10.8 1Q17 Restructuring and expect Y/Y improvements to narrow over $6.6 $8.0 balance of the year $6.4 • S&M down $6.6MM or 22% Y/Y • R&D down $0.2MM or 2% Y/Y • G&A down $2.7MM or 26% Y/Y $30.8 $24.2
S&M R&D G&A
1 Includes $2.5MM in total restructuring costs in 1Q16 and $0.8MM in 1Q17. 127 1Q17 Balance Sheet
Cash and Cash Deferred Revenue Equivalents ($MM)1 ($MM) $141.4 $132.3 $27.6 $43.0 $126.5 $33.0 $39.7 $25.0 $36.2 $113.8
$99.3 $101.5
Current Long-Term
1Q16 4Q16 1Q17 1Q16 4Q16 1Q17
1 Includes $9.0MM in 1Q17 received from SOURCENEXT transaction. 128 1Q17 non-GAAP Financial Measures1
Adjusted EBITDA ($MM)1 Free Cash Flow ($MM)2
Net Income / (loss) CAPEX $4.3 Adjusted EBITDA CFFO $7.2 $3.5 $5.8 $5.2
$3.5
0.5 ($5.1) ($1.6) ($2.3) ($2.6) ($2.9)
($2.5) ($5.6)
($7.5) 1Q16 4Q16 1Q17 1Q16 4Q16 1Q17
1 See Appendix for definitions and reconciliation of GAAP to non-GAAP Financial Measures; 2 CAPEX is ‘Purchases of property and equipment’ and CFFO is ‘Net cash provided by (used in) operating activities’ from the Consolidated Statements of Cash Flows 129 John Hass FY2017 Guidance Chairman and Chief Executive Officer 2020 Outlook
Amounts in $MM FY17E FY20E
GAAP Revenue Approx. $182 - $185 Approx. $235
GAAP Net Income/ (Loss) Approx. $(13 - 15) Approx. $10
Adjusted EBITDA1 Approx. $8 - $10 Approx. $35
Capital Expenditures Approx. $15 Approx. $14
Year-End Cash Balance Approx. $44 Approx. $100
Free Cash Flow expected to be approx. $30 million as the difference between Bookings and Revenues approximates Capital Expenditures
1 Please see the Appendix for definitions of non-GAAP financial measures. 131 FY2017 Guidance – Lexia
Segment Contribution ($MM)1, 2
~ $2.5
2016A – 2017E ~6% • Lexia revenue up ~27% $1.5 • Direct expenses up $8MM • Lexia contribution up ~$1MM or ~70% 4%
2016A 2017E
1 2 See appendix for revised definition of segment contribution margin; Lexia segment contribution includes R&D expense. 132 FY2017 Guidance E&E Language and Consumer Segment Contribution1
Enterprise and Education ($MM)2
$29 ~$28
~40%
40%
2016A 2017E
1 See appendix for revised definition of segment contribution margin; 2 E&E and Consumer are shown before shared R&D, S&M and COGS expenses; 3Combined Language includes shared R&D expense of $18.9MM in FY2016 and $17.0MM in 133 FY2017, and shared COGS and S&M expenses. FY2017 Guidance E&E Language and Consumer Segment Contribution1
Enterprise and Consumer ($MM)2 Education ($MM)2
$29 $22 ~ $21 ~$28
~29%
~40%
40% 24%
2016A 2017E 2016A 2017E
1 See appendix for revised definition of segment contribution margin; 2 E&E and Consumer are shown before shared R&D, S&M and COGS expenses; 3Combined Language includes shared R&D expense of $18.9MM in FY2016 and $17.0MM in 134 FY2017, and shared COGS and S&M expenses. FY2017 Guidance E&E Language and Consumer Segment Contribution1
Enterprise and Combined Consumer ($MM)2 Education ($MM)2 Language ($MM)3
$29 $22 ~ $21 $30 ~ $30 ~$28
~29%
~21%
~40%
19%
40% 24%
2016A 2017E 2016A 2017E 2016A 2017E
1 See appendix for revised definition of segment contribution margin; 2 E&E and Consumer are shown before shared R&D, S&M and COGS expenses; 3Combined Language includes shared R&D expense of $18.9MM in FY2016 and $17.0MM in 135 FY2017, and shared COGS and S&M expenses. John Hass 2020 Outlook Chairman and Chief Executive Officer 2020 Financial Outlook – Key Drivers
100% SaaS-business with 1 approximately $235MM in revenue
Margin improvement and growing 2 sales at Lexia Leveraging recent Modestly better margins as E&E investment 3 growth more than offsets decline in Consumer
Combined improvement leveraged 4 over fixed G&A base
137 Lexia Outlook – 2020
Key Drivers
Continued growth of Core5 and Revenue 1 emergence of RAPID, ALP and Outlook implementation and service result in: ~$100MM Growing Increasing customer LTV sales result in unit sales ~$85-90MM revenues Improving experience and productivity 2 of sales team (2.5X 2016)
138 Lexia – Segment Contribution1 Bridge ($MM)
FY2020 Contributions Segment Sales-Based ~33% 1 2 Delta Sales-Based Contribution Contribution Margin RevenueSales - Based ~$85 Sales ~$100 ~+15 Contribution Margin Contribution ~$20 Contribution ~$33 ~+13 ~$2 ~$20 ~$14 ~$1
~$2 ~$(0.5) $2
FY2016 Segment FY2016 RevenueRevenue COGSCOGS S&MS&M R&DR&D G&AG&A FY2020 Segment FY2020 SegmentContribution SegmentContribution Contribution1 Contribution1
1 Segment Contribution is based on revenue. Lexia segment contribution includes R&D expense. 2 Delta between sales and revenue falls to sales-based contribution, except for the additional commission expense on the 139 ~$15MM delta. Enterprise and Education Language Outlook
Key Drivers
Primarily in Enterprise business: 1 Revenue Outlook Catalyst improves fit Growth in direct markets with marketplace and reseller territories ~$90MM in revenues 2020 2 Potential upside from: Up from ~$72MM Improved ability in ELL or other K-12 in 2016 custom content deals product improvement
140 E&E Language – Contribution Bridge1
$MM ~$3 ~$42 ~$3 ~$7
$29
FY2016 Revenue COGS S&M FY2020 Segment Segment Contribution Contribution
1 E&E and Consumer are shown before shared R&D, S&M and COGS expenses; Combined Language includes shared R&D expense and shared COGS and S&M expenses. 141 Consumer Language Outlook
Key Drivers
Growth in U.S. Hispanic partially 1 offsets decline in world language Revenue Outlook Transition to subscription improves 2 conversion ~$60MM in revenues 2020 3 Potential upside from: Down from ~$83MM Better than forecast Additional in 2016 experience in U.S. Hispanic partnership deals
142 Consumer Language – Contribution Bridge1
$MM
$22 ~$(7) ~$4 ~$20
~$1
FY2016 Segment ContributionFY2016 RevenueRevenue COGSCOGS S&MS&M FY2020 Segment ContributionFY2020 Segment Segment Contribution Contribution
1 E&E and Consumer are shown before shared R&D, S&M and COGS expenses; Combined Language includes shared R&D expense and shared COGS and S&M expenses. 143 Combined Language – Contribution Bridge1
$MM
~$(0.5) ~$12 ~$1 ~$45
~$5 $30 ~$(2)
FY2016 Segment FY2016 RevenueRevenue COGSCOGS S&MS&M R&DR&D G&AG&A FY2020 Segment FY2020 SegmentContribution ContributionSegment Contribution Contribution
1 E&E and Consumer are shown before shared R&D, S&M and COGS expenses; Combined Language includes shared R&D expense and shared COGS and S&M expenses. 144 Total Company – Adjusted EBITDA Bridge
$MM ~$2 ~$35 ~$3 ~$18
~$7
~$1 $4
FY2016 Adjusted EBITDAFY2016 RevenueRevenue COGSCOGS S&MS&M R&DR&D G&AG&A FY2020 Adjusted EBITDAFY2020 Adjusted Adjusted EBITDA EBITDA
138 2020 Outlook
Amounts in $MM FY17E FY20E
GAAP Revenue Approx. $182 - $185 Approx. $235
GAAP Net Income / (Loss) Approx. $(13 - 15) Approx. $10
Adjusted EBITDA1 Approx. $8 - $10 Approx. $35
Capital Expenditures Approx. $15 Approx. $14
Year-End Cash Balance Approx. $44 Approx. $100
1 Please see the Appendix for definitions of non-GAAP financial measures. 146 Rosetta Stone 2020
Balanced 100% SaaS-learning company with approximately 1 $235MM in revenues and $140MM of ARR1
2 Lexia is THE Literacy Expert and continues to drive growth
Language has reclaimed innovation heritage and has increased 3 leverage through strategic partnerships
4 Adjusted EBITDA margins of 15%2
5 $100MM cash, assuming no interim use of cash
1 ARR includes Literacy and Enterprise and Education. 2 See definitions of non-GAAP financial metrics in appendix 147 To learn more please visit: RosettaStone.com Appendix Definitions of Statistical Measures
§ Annualized recurring revenue (or “ARR”) is computed using the annualized value of active subscription arrangements at the end of the period. ARR is a performance metric used to assess the health and trajectory of our E&E Language and Literacy segments, which we believe aids investors in understanding our segment results. We present ARR as a statistical measure rather than a non-GAAP financial measure. ARR should be viewed independently of revenue and deferred revenue, as ARR is a performance metric and is not intended to be combined with either of these items.
15 0 Definitions of Non-GAAP Financial Measures
§ Bookings represent executed sales contracts received by the Company that are either recorded immediately as revenue or as deferred revenue. § Adjusted EBITDA is GAAP net income /(loss) plus interest income and expense, other income /expense, income tax benefit and expense, impairment, depreciation, amortization, stock-based compensation, and restructuring expenses. In addition, Adjusted EBITDA excludes “Other” items related to the litigation with Google Inc., consulting and other related costs associated with the development and implementation of the accelerated strategy and cost reductions, non-restructuring wind down and severance costs, and transaction and other costs associated with mergers and acquisitions, as well as all adjustments related to recording the non-cash tax valuation allowance for deferred tax assets. Adjusted EBITDA for prior periods has been revised to conform to current definition. § Free cash flow is cash flow from operating activities minus cash used in purchases of property and equipment.
15 1 Definitions of Non-GAAP Financial Measures
§ Segment contribution is calculated as segment revenue less expenses directly incurred by or allocated to the segment. Direct segment expenses include costs and expenses that are directly incurred by or allocated to the segment and include materials costs, service costs, customer care and coaching costs, sales and marketing expenses, and bad debt expense. In addition to the previously referenced expenses, the Literacy segment includes direct research and development expenses and Combined Language includes shared research and development expenses, costs of revenue, sales and marketing, and general and administrative expenses applicable to the Consumer Language and Enterprise & Education Language segments.
15 2 Adjusted EBITDA and Free Cash Flow1
1 See Appendix for definitions and reconciliation of GAAP to non-GAAP Financial Measures. 153 Revenue and Bookings1
1 See Appendix for definitions and reconciliation of GAAP to non-GAAP Financial Measures. 154 Reconciliation of Revenue and Bookings1
1 See Appendix for definitions and reconciliation of GAAP to non-GAAP Financial Measures. 155 Segment Contribution1
1 Please see the Appendix for definitions of non-GAAP financial measures. The Literacy segment was previously a component of the "Enterprise & Education" segment and is comprised solely of the Lexia business. Prior periods have been reclassified to reflect our 156 current segment presentation and definition of segment contribution. May 9, 2017 NYSE