The Executive Interview series, as part of Tech Investment Insights, provide you with exclusive interviews with newsmakers, industry leaders, and experts in the technology industry.
Interviews do not imply endorsement of the company, its products, or any associated securities. Rather, it is meant to provide you more information for your consideration from those currently directly in the industry itself.
I recently had the opportunity to interview John Hass, Chief Executive Officer and Chairman of the Board of Directors of Rosetta Stone (RST). Rosetta Stone is an education technology company founded in 1992 and has been a public company since April 2009.
Hass, who served for decades in various leadership roles in the global banking world, has served as CEO of Rosetta Stone since 2015 and Chairman of the Board of Directors since 2016.
While Rosetta Stone had a difficult time in the public markets during its first few years, in the middle of the Great Recession, since 2017 it has made a big resurgence and currently has a market capitalization of approximately $566 million. From January 1, 2019 to August 2, 2019, Rosetta Stone's stock was up 31.46% as compared to the S&P 500's 16.96% gain. From January 1, 2017 to August 2, 2019 Rosetta Stone's stock was up 142% as compared to the S&P 500's 30.96% gain. Clearly something was happening at the company worth noting and examining.
The company made $173 million in revenue in 2018, a decrease from $184 million in 2017. This was largely due to a decrease in product revenue while increase in subscription and service revenue as the company changed its business model to be subscription-based. The company's net loss also increased from $1.5 million to $21.4 million, better than its worst periods but also distant from its best.
The education technology sector has seen massive shifts in recent years both in terms of money as well as in its products and infrastructure. Major recent developments have included custom learning, cloud computing utilization, virtual reality usage, speech-to-text, and more. It is estimated to continue to see significant growth in the upcoming few years as new products are created and new users brought into the sector.
ER: What would you describe as Rosetta Stone's line of business and the sector it operates in?
JH: Rosetta Stone is in two lines of business -- language learning and K-12 literacy. We operate in the education technology sector.
ER: When many people think of Rosetta Stone they think of its language learning products. However Rosetta Stone has expanded far beyond that into other education technology services. What is the strategy behind and vision for this?
JH: While we have expanded beyond language learning we have stayed true to our focus on helping people communicate with each other. This led us to focus on an area of great need and where we can have a positive impact - helping children in our schools learn to read through our Lexia Literacy business.
For decades approximately two-thirds of children in the U.S. have been reading below grade level (source: National Assessment of Educational Progress). This can have a devastating impact on their ability to succeed in school and in life after they leave school (e.g. The Literacy Project Foundation found that three out of five people in U.S. prisons can’t read; 85% of all juveniles who interface with the court system are functionally low literate according to the Nat'l Center for Education Statistics). Complicating this is the fact that at least 85% of school curriculum is delivered via reading (source: Annual Growth for all students, Catch-Up Growth for Those Who are Behind, Lynn Fielding, Nancy Kerr, & Paul Rosier).
With Lexia we have a business that has been entirely focused on helping teachers and our schools solve this problem for over three decades. When I joined Rosetta Stone one of the first things that stood out to me was the efficacy of Lexia's solutions as demonstrated by results in schools and third-party reviewed research. Consequently, we made the decision to invest significantly in Lexia in two primary areas. First, we have built a complete suite of literacy products that can serve children whether they are a new learner, regardless of ability, or an older struggling reader. Secondly, Lexia used to sell and service its products primarily through third parties. Over the last three years we have built a direct sales, implementation and training team to develop those trusted relationships with our school partners ourselves.
ER: Rosetta Stone recently moved from a perpetual product business model to a subscription sales model. Could you explain what prompted this transition, its impact, and how Rosetta Stone hopes to benefit from this?
JH: The move to a subscription model is the direct result of moving away from a boxed CD-based format to web and app-based software. Our learners want to experience our products when and where it is convenient for them, whether at home, at the office or on the road. When we made the move to mobile-based products, the transition to subscription followed naturally. With subscription pricing that varies with the initial term, we are able to respond to the needs of our learners, whether they have a short-term desire to refresh their language skills or are embarking on a longer journey to learn a second language.
The other primary benefit of the subscription sales model is that as we continually improve our products, we can push those benefits out to learners and provide product updates on-the-go, which we could never do when it was a box of CDs.
The impact of the transition has been positive. It has allowed us to build a relationship with our learners and better understand their habits and needs. For us it has created a deferred revenue balance and a source of future bookings through renewals that provide more stability than we had previously in this business.
ER: The development of the Internet services sector has significantly disrupted the software space in many ways. Rosetta Stone has been around since the beginning of the Internet age - how has the company adapted, and hopes to continue to adapt, to changes in web and mobile?
JH: We’ve adapted according to what our customers want and need. Providing a seamless learning experience across desktop and mobile devices became the clear path forward when we saw that most of our learners were using a mobile device for at least part of their learning. Over the past three years, mobile usage has exploded -- it's gone from being less than 10% to 85% of usage for our consumer language learners today.
Consumers today want the convenience of learning when and where it is best for them. Offering learning experiences through a mobile device provides the opportunity to enrich and innovate the educational experience. This can be as simple as providing you with reminders that help you reach your learning goals, or as complex as using the object recognition technology in your phone to identify objects around you, translate them into the language you are learning, and carry out a conversation about that object -- a learning program that we introduced late last year called Seek & Speak.
The combination of our investment in mobile technology, combined with the depth and quality of our educational content and pedagogy is recognized by our customers who give us a 4.9-star rating in the app store. Additionally, in a recent survey of Rosetta Stone customers, nearly 75% tried learning a language from a different program before they chose Rosetta Stone, and 91% of our users would recommend Rosetta Stone to others for learning a new language.
ER: In the 2018 fiscal year Rosetta Stone's revenue was roughly evenly distributed across its Literacy, E&E Language, and Consumer Language segments. Which products and segments does Rosetta Stone believe have the most potential for the company's future growth?
JH: We see opportunity in all of our segments but clearly the one that has been growing the fastest has been our K-12 Literacy segment. The underlying needs of our schools, the ongoing transition in K-12 education and our ability to provide solutions with unmatched research-based efficacy positions us well to have strong growth in this part of our business.
ER: In 2018 Rosetta Stone reported a net loss of about $21.5 million and guides for a $15 million net loss in 2019. This is a major improvement from some of Rosetta Stone's worst years, such as 2014, but also a far cry from its profitability levels in, say, 2010 and 2009. How does the company hope to reverse course and restore profitability?
JH: Returning to net income profitability is important. In the meantime, we expect to have positive adjusted EBITDA this year and for this to improve meaningfully over the next few years. As a subscription-based learning company with very high gross margins, the key to improving profitability is growth. With growth we will profitably leverage the investments we have made to build our Literacy segment and to transform our language products and go-to-market strategies.
ER: What in your opinion are some of the most transformative developments in the education technology space as a whole right now worth watching?
JH: Two things.
First, differentiation based on the quality of outcomes. Schools, for example, are increasingly demanding to see a return on the investment they are making in education technology products. This means that solutions increasingly need to demonstrate that they are producing positive outcomes for students backed by real research. Schools aren’t awed by technology anymore. They are becoming discerning customers.
Second, returning human beings to a more central role as instructors in the learning process. While Rosetta Stone provides technology-based learning solutions, we recognize the importance of human intelligence in the learning process. Social and emotional connection between a student and his or her teacher is critical to effective learning outcomes. The industry is seeing this in the growth of virtual tutoring companies around the world. For us, this can mean empowering teachers in the classroom to help their students learn to read or providing live virtual language tutors to demanding corporate customers, and maybe someday, consumers.
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This article was originally published on Seeking Alpha as part of Tech Investment Insights.