Rosetta Stone Management Discusses Q1 2013 Results - Earnings Call Transcript

May. 8.13 | About: Rosetta Stone (RST)

Rosetta Stone (NYSE:RST)

Q1 2013 Earnings Call

May 08, 2013 4:30 pm ET

Executives

Steve Somers - Vice President of Corporate Development, Investor Relations & Treasury

Stephen M. Swad - Chief Executive Officer, President and Director

Thomas M. Pierno - Chief Financial Officer and Principal Accounting Officer

Analysts

John D. Crowther - Piper Jaffray Companies, Research Division

Nick Nikitas - Robert W. Baird & Co. Incorporated, Research Division

Brandon Burke Dobell - William Blair & Company L.L.C., Research Division

Matthew J. Kempler - Sidoti & Company, LLC

Joseph D. Janssen - Barrington Research Associates, Inc., Research Division

Operator

Greetings, and welcome to the Rosetta Stone Inc. First Quarter 2013 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Steve Somers, IR for Rosetta Stone Inc. Mr. Somers, you may begin.

Steve Somers

Good afternoon, and let me welcome you to Rosetta Stone's First Quarter 2013 Earnings Call. I'm Steve Somers, Vice President of Corporate Development and Investor Relations. And I'm joined today by Steve Swad, Rosetta Stone's President and CEO; and Tom Pierno, our CFO, to discuss the operations and financial results for the first quarter and our outlook.

In addition to our commentary, we have made our 1Q '13 earnings results press release and the slide deck supporting this webcast available on our IR website at investors.rosettastone.com. Please review them to find important additional information.

There are or will be forward-looking statements in our press release, slides and conversation today. We offer these statements under the Safe Harbor provided by U.S. law. Of course, risks and uncertainty is attached to any forward-looking statement. A detailed discussion of such risks and uncertainties is contained in our Form 10-K for the fiscal year ended December 31, 2012, filed with the SEC in March 2013, which is available on the Investor Relations section of our website. We ask that you review those risk factors before making any investment decision. Please note these forward-looking statements reflect our opinions only as of the date of this presentation, and we undertake no obligation to provide or publicly release the results of any revision to the forward-looking statements in light of new information or future events.

We also use non-GAAP numbers in our presentation. The definitions of those numbers and their reconciliation to GAAP numbers are available in today’s press release on our website and as filed with the SEC today on Form 8-K.

Now here's Steve.

Stephen M. Swad

Thanks, Steve, and welcome, everyone. As we have previously laid out, our strategy is to leverage the Rosetta Stone brand by bringing new products into the fold, to innovate the platform by bringing social and mobile to our product suite and to expand distribution. During Q1, I'm happy to report that we played some offense with respect to executing this strategy. In particular, we meaningfully invested in product and platform while still delivering growth in adjusted EBITDA. We also continued our shift towards a more digital business model. We launched a couple new mobile apps, and we also pushed further into the cloud by acquiring Livemocha. Let me address each of these strategic initiatives.

With respect to product, we made very significant strides to broaden our experience and skill base to accelerate new product development and future growth. We opened new offices in Austin and San Francisco to tap into the talent pool in those locations and, at the same time, reduced approximately 70 product positions in our Virginia locations. In a short period of time, we launched a handful of new products that are targeted at mobile customers.

In April, we launched a new Android app that offers a free taste of our product and drives customers to trial and then purchase. In less than 3 weeks, with no advertising or marketing, it has over 50,000 downloads and a 5-star rating. The app engages customers and is driving them to Rosetta Stone's website where they subsequently are purchasing our core TOTALe product. Similarly, we recently soft launched a suite of free travel apps called Rosetta Stone Navigator series in Apple's App Store. These too are getting traction, further exposing our brand and products to potential customers.

While these are not game changers, the products will tap into the power of the massive iOS and Android ecosystems and enable many more people to interact with our brand, which will generate leads and, ultimately, sales.

Over time, we expect this type of activity will become a way of attracting customers for trial and conversion, lessening our need for traditional TV and print advertising.

We also made further progress in shifting the channel distribution in our Consumer business. Our focus on digital products and distribution over the past 18 months led to our decision to shutter our remaining U.S. kiosks early last month. With that initiative now complete, we are redeploying resources to invest in more profitable channels, such as our key North American DTC and retail channels, which, together, saw mid-single digit growth in the quarter. In addition, online learners and digital downloads now make up approximately 20% of Consumer revenues versus only 5% a year ago.

Another key development since our last call was that we acquired Livemocha. This acquisition provides Rosetta Stone with a sophisticated, extensible and cloud-based technology platform, which will allow us to modernize our existing products and accelerate our digital transformation and migration to downloadable, mobile and cloud-based products. It also gives us a foundation from which we can rapidly develop all of our new products. Livemocha brings with it an international community of over 16 million members and provides us with much broader global reach and an engaged community of learners in Latin America, Asia and eastern Europe. With this extended consumer base, we plan to offer a tiered series of learning products and services from low-priced more simplistic offerings to higher-end more sophisticated ones and, therefore, address more customer needs and price points along the demand curve.

From a bookings perspective, I'm seeing growth in 2 of our 3 segments after adjusting for comparability and actions relating to the transformation of the business. Specifically, in North American Consumer, we saw mid-single digit growth year-over-year, excluding the low-margin kiosk channel, which we've wound down. In the Institutional segment, bookings grew at high-single digit rates in the quarter after excluding sales of onetime network product, which we have deemphasized as we move that business to a cloud-based recurring business. Growth in both North America Consumer and Institutional are consistent with what we've said previously and underscore our confidence that we are making progress and can deliver growth this year.

Our Rest of World Consumer business, however, continues to show shrinkage, down more than 25% in the quarter even after adjusting for the absence of box product sales in Germany a year ago, with most of that decline coming from Japan. During Q1, to stabilize our Japan business, we hired a new country manager and engaged specialized market consultants. This has led us recently to adopting a new go-to-market strategy for Japan that alters our target consumer group and improves our value proposition by reducing our price, changing our messaging and shifting the focus of our communications. We are also tightening up on our deployment of capital until this focused approach shows consistent signs of progress.

Korea and Europe were also softer than expected in the quarter, but not to the degree seen in Japan. We have developed tactical initiatives to improve those markets through the rest of the year, and we are beginning to see recurring revenue from our new proctor channel in Korea take hold. In terms of net results, I was pleased by the growth in adjusted EBITDA and improvements in adjusted EBITDA margins. We accomplished this, while also investing substantially in product development, which will drive future growth.

In terms of our shift to digital, we continue to make progress on this front. As I mentioned, we're already selling 95% online in our Institutional business. On the Consumer side, we again grew online learners by nearly triple digits to over 80,000. Digital downloads, which we just introduced in late Q4, represented almost 10% of product units in Q1. Together, online learners and digital downloads make up 20% of total Consumer revenues versus only 5% a year ago.

As far as where we are in terms of our plan to reach the 2013 and beyond objectives, I feel that the first quarter confirmed that we are making the right moves and we are on the right path. We will have to start to deliver more growth on the top line now that we have largely shifted away from the slower-growth products and channels. That growth is going to come from new products, better distribution and acceleration of the strategy through acquisition.

In 2013, we are still expecting single-digit growth from our core North America Consumer segment, and we still anticipate low-double digit Institutional bookings growth, with all of these growth coming towards the second half of the year, when the comp hurdle from deemphasized network sales dissipates. That being said, we are still expecting bookings and revenue to increase beginning in Q2.

Now let me turn the call over to Tom.

Thomas M. Pierno

Thanks, Steve, and good afternoon, everyone. Financial performance in the first quarter continues to move in the direction that we have set out as we again delivered incremental improvements in our results, particularly in adjusted EBITDA and margin. Total company bookings in the quarter decreased 8% to $60.4 million.

However, as Steve mentioned, several factors related to business model changes and shifts in our channel mix are affecting comparisons to last year. For example, within our North America consumer segment, DTC and retail were up over 5% year-over-year. However, total bookings were off 1% to $41.3 million. The decline in North America consumer was due to decreases in the homeschool and kiosk channels, which are being deemphasized or phased out. We expect that these changes will continue to impact year-on-year comparisons for the remainder of 2013.

On the international side, our Rest of World Consumer segment declined by $4.2 million or 34%. Bookings were down in all geographies, with Japan driving almost half of the decrease in the segment. Because we moved our business in Germany to online only in 1Q '12, the absence of hard product sales in Germany had a $1.2 million impact on the year-over-year comparison. Beginning with the second quarter, our German business will no longer have this comp issue. In fact, since going to online-only in Germany last year, we have grown our online and digital download business there almost back to pre-transition levels, reflecting consumer acceptance and acclimation to our new model.

We continue to work on each of our 3 key international consumer regions: Korea, Japan and Europe, with new management and tactics, but also with an eye on limiting the amount of capital being deployed in these areas. Overall, consumer product units sold declined 1% to 142,000 units in the first quarter while average revenue per unit, or ARPU, decreased 15% to $312 from $367. This decrease reflects the impact of promotional pricing in the quarter, as well as channel mix shift with more sales coming from online offers through daily deal partners like Groupon and Amazon and fewer units from the higher ARPU but lower-margin kiosk channel.

In terms of online learners, we once again grew at high rates, up 95% to over 80,000 paid online learners at the end of the quarter. These paid online learners had monthly ARPU of $26, down from $28 a year ago, but up from the last 2 quarters. The decline in monthly ARPU is primarily a function of an increasing mix of 12-month access versus very high priced but low-volume legacy subscriptions that we have been testing and offering and not as a result of price discounting. In general, the lifetime revenue of an online learner is roughly the same as that of a purchase of the box at about $300. Of the $50 [ph] million of Consumer revenue that we recorded, approximately 20% now comes from paid online learners and digital downloads compared to just 5% a year ago.

Turning to our Institutional segment, bookings were down 2% in the quarter to $10.8 million, but our subscription service grew at high-single digit rates as last year's first quarter included over $1 million of installed network product sales, mostly into the K-12 vertical. We still have one more quarter where comps will be affected by network product sales in the year-ago period. Growth came primarily from our international markets with Korea and Japan, as well as Brazil, all showing healthy increases.

Looking at the income statement. There were a couple of key things in the quarter that I want to discuss. The first is that the ongoing transition to more online and digital continues to deliver improved gross margins, which increased 330 basis points to approximately 84% from 80.6% a year ago, and with the result of the shift to more lower-cost online distribution, greater efficiencies in our coaching operations and lower box costs. In addition, adjusted EBITDA and adjusted EBITDA margin continue to improve year-over-year. For the first quarter of this year, adjusted EBITDA increased 39% to $2.4 million and adjusted EBITDA margin improved approximately 130 basis points from a year ago.

As we've been discussing since last year's first quarter, we have been undertaking transformation activities that are not representative of ongoing operations in order to effect change. These actions, which, this quarter included a realignment of R&D headcount, the decision to shutter remaining U.S. kiosks, reduce headcount in other areas and adjust our international facility acquirements, resulted in $2.7 million of other EBITDA adjustments that we've added back to calculate adjusted EBITDA.

We anticipate that these actions will assist us in achieving our 2015 margin goals of 10% to 13%.

Our balance sheet remained strong at the end of the first quarter with an aggregate of $139.4 million of cash or approximately $6.50 of cash per share compared with $148.3 million at 12/31. The decrease in cash from year-end was primarily due to a $7 million decrease in working capital combined with capital expenditures of $2.5 million. The decrease in working capital was related to reductions in accrued compensation for 2012 bonuses, other current liabilities, primarily payments of accrued marketing expenses, and the decreases in deferred revenue partially offset by collections of accounts receivable.

Free cash flow in the quarter was negative $8.2 million compared with positive $1.7 million a year ago. Deferred revenue was $59.9 million, an increase of $12.2 million compared with a year ago and a decrease of $3.6 million from the end of last year, reflecting normal seasonality for us. As we close the $8.5 million cash acquisition of Livemocha at the beginning of April, our quarter end cash balance does not reflect this outflow.

Our guidance for the year for revenues and adjusted EBITDA are unchanged. We continue to expect revenues to be between $280 million to $290 million. Please note that we are maintaining this guidance even as we expect approximately $10 million to $11 million in lost sales from shutting down the remaining U.S. kiosk. We will partially make up for this by investing in higher-yielding channels and through the addition of the Livemocha-related sales. For adjusted EBITDA, we continue to expect $16 million to $18 million even with the anticipated near-term impact from Livemocha.

While we are leaving both revenue and adjusted EBITDA guidance unchanged, we expect that results will be weighted toward the second half of the year, when we expect to begin to realize the benefits of actions taken in the first half of the year. Our guidance for adjusted net income remains in a range of negative $1 million to positive $1 million and adjusted EPS to be in the range of negative $0.02 to a positive $0.04. There is also no change to our CapEx guidance of $5 million to $8 million. For 2013, we are still expecting to generate positive free cash flow with all of the increase expected to occur in the second half of the year.

Although we aren't providing specific guidance for the second quarter, we would like to point out that 2Q is typically our lowest adjusted EBITDA quarter and this year will also be negatively impacted by the addition of Livemocha since we aren't able to immediately realize the benefits of the acquisition in this quarter. Accordingly, we expect adjusted EBITDA to be flat to slightly down versus prior year.

Before we move to Q&A, let me note that today, we also filed a universal shelf registration, including approximately 8.4 million shares held by our 2 largest insider shareholders, ABS and Norwest, whose positions have been unchanged since the company went public in 2009. This shelf registration provides maximum flexibility when raising capital, allowing both the company and registered shareholders to be opportunistic in raising capital in the future. It also creates the opportunity to satisfy market demand for securities through block trades and provides the company a convenient vehicle to access the capital markets for to potential future M&A.

With that, operator, we are ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Peter Appert with Piper Jaffray.

John D. Crowther - Piper Jaffray Companies, Research Division

This is John Crowther on for Peter. I'd first like to talk a little bit about marketing and advertising spend. You obviously had some good traction in the U.S. consumer market despite rolling out -- or phasing out the kiosks here towards the end of the quarter. So I'm just wondering if you could maybe talk a little bit about any potential shifts in channels you're marketing to. You've talked a little bit about daily deals and some new production channels that you're using, like Groupon and Facebook. Wondering if you can just talk about -- a little bit about your mix and where maybe you're seeing some stronger return and maybe how that might evolve here over the next couple of quarters.

Stephen M. Swad

Yes, John, this is Steve. Thanks for your question. Yes, I think this quarter, we saw some strength in the retail sector in the U.S. and that came from our traditional marketers, but mostly from the daily deal folks as well. And we had a new distributor join us, and we expect that to continue. We also continue to have success on Facebook, which is a relatively new platform for us. And I think, importantly, over time, we're going to use our product -- or case of our product as a way to engage customers. And that acts as -- I think of it as advertising with a long shelf life, and so I think you're going to see more of that come from us. And that will change the mix of advertising, and, in fact, that will end up in our product line, but there will be elements of our product investments that behave like marketing; they generate interest in our product, interest in our brand and, then, convert to leads and then, ultimately, sales. And over the -- over my 2015 vision, expanding distribution is one of my top 3 priorities, and really that means keep finding people where they are. And we have a long way to go there. We're making decent progress, but we still have a long way to go.

John D. Crowther - Piper Jaffray Companies, Research Division

Okay, great. And then, just a question here. Obviously, you've put a lot of emphasis here on product development initiatives. And just wondering, as we look at the numbers on the expense side for this quarter, part of that, maybe increase on a sequential basis, is due to the restructuring. But just wondering, are -- did we really see a full quarter of sort of this incremental investment there? Or is that going to pick up here as we move through the year?

Stephen M. Swad

It's going to pick up. I believe that we have the right leadership in place to bring new markets -- or new products to market. We have certainly a strong brand to assist, and we're going to invest in that area. Just like I said -- as we closed out last year, I said 2013 was a key year for our investments in product. You're seeing the beginning of that, and you're right, it does include some restructuring. But even -- and so the run rate is lower than the quarter. But remember, we bought Livemocha in early Q2. So you'll see a lot of those costs fold through there, and we're making investments there. We think that's the key to the success of this company going forward, that, combined with our strong brand and good distribution.

John D. Crowther - Piper Jaffray Companies, Research Division

Okay. And then just lastly, on the international front, I mean, you called out a few markets of weakness. Just interesting, if there's anything you can learn from what you're doing in the U.S. right now. Some of those initiatives on mobile sounded very interesting to help in international markets or as you talked about in Japan, having to sort of change the brand message or the message a little bit. Is it really trying to figure out what's working in each individual market?

Stephen M. Swad

Yes, I think, you've got to take each market on its own. I'd say Europe and U.K., in particular, behaved the most like the U.S., but it is a much different market. Germany is different. I think we're going to start seeing a few small green arrows in Germany as we enter into Q2. If you're -- and I said it in my comments, in Q1 we had some mismatch in comparables. Last year, we sold boxes, and this year, we don't. And starting Q2, you start to get clean comparables so I'm expecting a small green arrow in Germany. I'm also starting to see some traction in this proctor model in Korea, and it's way too early to lean in and high five, but yet, I see a big market and I see some nice signs. And so I'm hopeful as we progress through the year, I start highlighting some green arrows in Korea. And as I said, explicitly in Japan, we've got a number of initiatives that we're taking right now to try to turn the direction of that business around. And while I don't think I'm going to see any immediate turns, I should, in a couple of quarters, start showing some green arrows there, too.

Operator

Our next question comes from Jeff Meuler with Robert W. Baird.

Nick Nikitas - Robert W. Baird & Co. Incorporated, Research Division

This is Nick Nikitas on for Jeff. Previously, you mentioned the first quarter started out a little slower than you anticipated, and just wondering with the light top line results, did you see -- was it more of a continuation of the decline versus an expected pickup? Or was there more of an accentual -- a sequential, excuse me, acceleration? And if so, is that mostly across the Rest of World Consumer or what segments?

Stephen M. Swad

No, we said in Q4 that we had a slower start to Q1.

Thomas M. Pierno

Versus last year.

Stephen M. Swad

Versus last year, yes, and that was in the Institutional business. We called that out in Q4, explicitly, and with a little bit in DTC as well. And we saw a little bit more traction as we closed out the quarter in DTC and in institutions -- in the Institutional business. But we did start out slower than last year and slower than we thought we would. We saw it pickup, though, a little bit in March.

Nick Nikitas - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then just looking at renewal rates. I think you mentioned that there was somewhat substantial improvements across Institutional segment and then a slight uptick in Consumer. Was there a continuation of that during 1Q or any changes to note?

Stephen M. Swad

It's a great question. I said in my comments that I continue to believe that the Institutional business is going to grow low-double digits. And embedded in that belief is that we continue to make traction on our ability to get renewals of key accounts. And we've made some investments in that area in people and in systems, and it's beginning to show some success. And we're going to continue to make investments, and we expect to continue to have success. So that's a key element. And it's much more the case in the Institutional business than in the Consumer business. In fact, we're just starting to make some small investments in the Consumer business. I really think the way to do better on the renewals of the Institutional business is to work on our product, and so we have some plans that are just going on the roadmap, to be honest, to focus on that. And then, we're going to supplement that with some people resources and system resources because those things can move the needle.

Nick Nikitas - Robert W. Baird & Co. Incorporated, Research Division

Okay, great. And then one last one for me. It sounds like you're doing some pretty exciting things with the Android app and Expedia partnership and as well as the acquisition of Livemocha. And I realize it's pretty early, but as far as driving customers to the website, any initial read on conversion rates or sequential acceleration throughout the quarter?

Stephen M. Swad

Way too early to say, "Hey, this is a big deal." But I -- it is exciting, I agree with you. And it is in the future that we need to get to consumers on their mobile devices. I am just absolutely positive of that. And we, for the first time, demonstrated an ability to do that. And I said, we had 50,000 downloads in 3 weeks, and that's not a game changer for this company. But those customers, we put in the high-quality lead category, and, based on early days, they are performing as very high-quality leads. And so that shows -- my words, a little bit of a green arrow. I'd like those numbers to be much bigger, and I'd get more excited. But I think we're on the right path, and we're going to continue to play in that space and figure it out. I think it's key to our future. In changing, like, the business model of the company, right now, as you know, we spend over $0.50 on $1.00 on marketing. And about 1.5 years ago, I guided that, that would drop below $0.50 to $0.45, and I actually hope someday I say we can do better than that. I think a longer-term business model would do better than that. And one key element to doing that is getting your product to engage with customers around the world, and the iOS platform and the Android platforms can do that. And our products are also engaging products. You can speak to them. They speak back to you. And so I feel like we've got some room to improve here. And we just started, and I'm pleased with our progress. I think you'll see a little more progress when we come out next quarter, too.

Operator

Our next question comes from Brandon Dobell with William Blair & Company.

Brandon Burke Dobell - William Blair & Company L.L.C., Research Division

Just want to make sure I understand the puts and takes between the lost kiosk revenue and the contribution from Livemocha. I get there's a little bit going back and forth here from revenues and expenses, but I want to make sure I understand how the impact of that flows into Q2, but probably more importantly, the back half of the year. So if I can just kind of make sure I get my head on straight with that one in particular, how we think about the impact to gross margin looking at the back half of the year from those 2 things.

Stephen M. Swad

Yes, I'll give you my perspective to start. And then, Tom, you may want to jump in. Think of the kiosk channel as a low-margin channel, and think of it going away in April. And I think Tom said there's roughly $10 million-ish in revenues over the rest of the year, and if you thought that was very low margin, you'd be right. And so pull out an equal amount-ish of expenses and you're in the zone. And then, with respect to -- so I think that will help you kind of model out the impact of no more kiosk. Importantly, we are going to take those moneys and invest them in more efficient channels, and that doesn't come overnight. You just don't walk down a different aisle in a store and say, "Okay, here's the efficient channels." But we are already beginning to deploy money in more efficient channels, and so you should see marketing spend stay at reasonable levels, but you should see yields on those -- on that spend increase, and certainly, over time, you'll see that. So that's, that. And so in your mind's eye, take out low margin and think, "I'm going to do more search. I'm going to do more Internet marketing and more marketing on my website, and that has higher yields to it." And then with respect to Livemocha, we guided, I think in Tom's comments, that in Q1, it's a net drag, and we filed those financial statements as part of our 8-K, and so you may want to look at them. And in my recollection, it was single digit revenues for a year, $4 million to $5 million of revenues for a year. And my recollection with EBITDA was negative $4 million something. And so we are obviously -- remember the reason for the acquisition is platform, that was key, and that won't come through in revenues; that will come through over time with quicker products to market. And then, we also inherited or purchased this nice community, and you should see monetization of that community. And we are actually designing plans as we speak. To do that, we're going to start out very small, very slow, not be disruptive. We want to keep the community feel, but we're going to try to offer a series of offers to that community, see if we can monetize it better. But I would be thinking low, low, low-single digits a quarter, especially in the early days.

Thomas M. Pierno

And we're not necessarily going to be guiding to that or disclosing that going forward. And also, most of what Steve was talking about in terms of what I'll put in the category as synergy, revenue synergies, will show up in other channels of the business. And so it's not like we're going to have a Livemocha segment or bucket. And so the -- we're really integrating the ops of Livemocha. And so to segregate that out going forward is going to be increasingly difficult as it just becomes integrated into the business.

Brandon Burke Dobell - William Blair & Company L.L.C., Research Division

Okay. Looking at the online ARPU and then kind of user trends. How do you think about the back and forth or puts and takes of driving to a lower monthly ARPU in exchange for driving higher online usage? And you mentioned a number of kind of new product directions that's could be coming out the next several quarters. Should we think about those as driving the ARPU lower, maintaining but just with different kinds of products? I guess I'm just trying to get a feel for how to -- if we're looking at price and volume, kind of model them, I guess.

Stephen M. Swad

Yes, great question. Long term, we think we're going to have a suite of products above $300, at $300 and below $300, and we expect the higher volumes to be at the lower prices. There are more people in the U.S., in particular, that are below $300 than above $300. And -- but we expect to play up and down that demand curve. In the near term as we remove higher ARPU kiosk sales and the lower ARPU retail sales continue and they continue to be a bigger part of our total mix, and we also said we're lowering price in Japan, I think that the trend that's been happening over the last couple of years is going to continue in the near term. Notwithstanding that, we're trying, and in market right now, we've got some higher-priced online offerings that include one-on-one coaching. So we're going to try to mute those trends. But I think for your purposes, you should be thinking those trends are going to continue, notwithstanding our efforts to mute them. And I'll highlight with -- or to you when we start getting traction on these higher end offerings that we're testing. Just so you know, my view is the company can play harder than it's currently playing against one-on-one tutors and competitive, like, postcollege classrooms. And so I'd like to fine-tune our marketing efforts and go hard and buy some keywords and come out with a very, very high-priced but good-value offering for essentially one-on-one tutoring on demand, along with a regimen of how to learn a language. And so I'm hopeful that, that takes hold. But it's too early for me to lean into that.

Brandon Burke Dobell - William Blair & Company L.L.C., Research Division

Okay. And then final one for me. Sounds like a little more confidence about the back half of the year in the Institutional channel. I guess, just trying to get a feel for the drivers behind that confidence. Is it the people and things you already have in place? Or is it expectations for how those people will kind of come online in the second quarter to drive business in the third and fourth quarter? Or I guess, said a different way, is the pipeline that you have right now and the assumptions you're making around conversion of that pipeline, supportive, I guess, think about back half of the year growth?

Stephen M. Swad

Yes, a couple of things, and you've got many of them. The first thing that comes to mind is we are seeing progress in our renewal efforts. And so we see that contributing as we go through the year. And the bigger periods for this business are Q2 and Q3 so that impacts more in the latter half of the year. And secondly, we have improved our sales force and we've made some investments early this year in, we call them, big game hunters, people that can close large deals. And we're seeing very, very tiny, but good progress in Q1 and in our expectation. And their compensation is driven on pretty significant increases as time passes, and so I think that will help as well. And then, lastly, it's math that we -- in the first half of the year, we sold network product, which is product that comes in all at once, and that's selling effort was materially reduced in Q3 and Q4. And so our comparable gets easier in the back half, and that's why I was talking about high-single digit growth in Q1 taking out that network products. So in Q3 and in Q4, if we did nothing else, I'd expect high-single digit -- our base business to keep growing high-single digits. And I think we can do better than that through these initiatives and get it into double digits.

Operator

[Operator Instructions] Our next question comes from Matthew Kempler with Sidoti.

Matthew J. Kempler - Sidoti & Company, LLC

So I wanted to follow up on the Livemocha platform and get a better feel for what you think is the timeline to integrate that platform with the Rosetta applications that you brought to market and are bringing to market.

Stephen M. Swad

Yes, Matt, that's a great question. That team is a high-production team. We're really happy with what we see so far, and we're happy with the way the team is integrated. And we have incentives built in for a migration to occur. They're in the midst of migrating from one platform to the other for their own products. And so we're working -- they're working on moving that through, and we expect that to happen in July. And then, we are also working on moving our products there. I don't see -- I think on the Consumer side, that's going to be 2013. We're going to try for earlier, but that's my guess. Importantly, though, I'm hopeful that we start seeing some sales from that in 2013 in our Institutional business that we have the ability to ingest customer content and package it in a way that will allow that customer to teach globally. And in that, we are going to start selling before the end of Q2, and I'm pretty excited about that. And we have a customer or 2 that have expressed interest in that already. And so that could be a new revenue stream for us where we work with you as a customer to ingest your content and then our platform delivers that content to the corporate employees around the world. And that, we're going to get some traction on. I think in Q -- we're going to start selling in Q2. I don't know if I have a customer, but I would expect to have a customer using that before we end the year, for sure.

Matthew J. Kempler - Sidoti & Company, LLC

Okay. And then regarding Japan, can you talk about, a little bit more, some of the findings that came out of working with this consulting group and maybe the new country manager that you brought onboard? And then in pricing, what are some of the changes in direction that we're taking?

Stephen M. Swad

Yes, I'm a little guarded because we're in a competitive space. And I don't want my competitors to know much before I move. But I will tell you, and I did in my comments, that product is good. So out of the 4Ps, and we had people as the fifth P, I changed the leadership, and so one P is changed and it's material. The new leader is much different, much more hands-on, much more driven, much more in touch with the customer. And so I just -- I am sensing good things. It's early days. I don't want to overstate it, but I'm sensing good things. And then messaging and distribution, and so we're going to make changes to 4 out of the 5 Ps, everything but product. And pricing is going to come down, and I'm just going to hold at that.

Matthew J. Kempler - Sidoti & Company, LLC

Okay. Regarding the reaffirmed revenue guidance, does that -- how much of that is based on just getting to the easier comparisons in Germany and with your Institutional segments and other segments as we move through the second half of this year versus needing to see actual improvements in some of these underlying businesses as we go through the rest of the year?

Stephen M. Swad

Yes, I mean, it's got to be underlying improvements. The biggest drivers are underlying improvements in the business.

Thomas M. Pierno

Absolutely, Matt.

Stephen M. Swad

Yes. There are little things, but those things are little ones.

Thomas M. Pierno

Yes, I mean, they're meaningful to a quarter, but in terms of the scope of the year, it's definitely improvements in the business.

Operator

Our next question comes from Alex Paris with Barrington Research.

Joseph D. Janssen - Barrington Research Associates, Inc., Research Division

Yes, this is Joe Janssen filing in for Alex Paris. Steve, I apologize if you already addressed this, I've been jumping in between calls, but with regards to the Livemocha acquisition, you've -- call it, you've made your one acquisition goal, or your bogey, within the first 4 months of the year. Kind of given the relative small size, as well as the remaining cash on the balance sheet, how should I be thinking in the back half here what -- in terms of maybe additional acquisitions or...

Stephen M. Swad

Yes, I agree with you, Joe, that -- I said last year that we would do a deal in 2013, and we did one and it was a small one. And I -- the company has the capability to do another one, and we're in the market looking as we speak. The guiding principles remain the same. We want something that will accelerate the strategy, and so we're still looking. It's hard for me to commit that something will happen because it takes 2 to tango, but I really -- I would consider it a failure if we didn't do another deal. And just like last time, I said, we look at 10s, we look at 20s and even 30s. But our zone is, call it, $20 million -- $10 million, $20 million. That would be good. If I could write the script, I'd like to write a script that we had another acquisition that accelerates our strategy and it's 20 -- in the 20s.

Joseph D. Janssen - Barrington Research Associates, Inc., Research Division

Would we be surprised to see -- I mean, given with Livemocha, you've kind of -- you've hit on -- be at the platform, and you've gotten more distribution in terms of the 19 million customers. Now would we be looking along the lines of a different product then?

Stephen M. Swad

Yes, yes. I -- yes, again, if I could write the script, that will be in the script. I was intrigued with Livemocha because of the platform and the timing of the acquisition. So we had just hired a new chief product officer. We are in the midst of building out our roadmap for new products. New products are key to the growth of this company. And to provide West, our Chief Product Officer, with a platform that is almost ready to go was not only strategic, but it was the right time for that move. And so our goal now is to put products on that platform. That's our goal.

Operator

Ladies and gentlemen, there are no further requests for questions at this time. I'll turn it back to management.

Stephen M. Swad

Okay, guys. I think you're just seeing a continuation of the transformation. There's more to come. We're working hard, and we'll check in, in a quarter or so. Take care.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

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