Third Revised RST 2017 Investor Day Presentation
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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 12 Rosetta Stone 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 MISSION VISION To change lives through the power Every person Can learn to read, of language and literaCy write and speak with ConfidenCe. education. elevant ersonalized ffeCtive ngaging P R E E 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