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Ugly news from Rosetta Stone (RST). The language-study software company reduced earnings guidance for the current quarter and full year. Interestingly, it is not because of a dropoff in sales. The company explains that it is a mix of higher than expected costs to get its new products to market, as well as a pretty serious marketing screwup.

“During the current quarter, the company has incurred higher sales and marketing costs and higher product development costs than previously anticipated,” stated Mr. Helman. “In addition, in the ordinary course of business, we frequently test new types of marketing media. In the current quarter, we experimented with a significant amount of internet and television test marketing programs and we did not expeditiously terminate certain of those programs that were not yielding acceptable results. We also changed our media mix, increasing radio and long-form television as a proportion of the mix, which resulted in lower than expected returns during the current quarter.”

Mr. Helman further stated, “Due to the success of Levels 4 and 5, which we just released in English (US) and Spanish (Latin America) in May 2009, we have accelerated product development expenses in order to expedite bringing four additional languages to market in levels 4 and 5 prior to the 2009 holiday season.”

While the company kept revenue guidance in tact, these marketing issues are signaling that those revenues are getting harder to come by. Aware that this announcement would spook the street, a group of selling stockholders decided that this is not the time to unload their shares -- only a WEEK after filing to do so. That's why I'm always highlighting IPO's like Rosetta Stone, because if you partake in the offering, you're taking the other side of the trade with exiting venture backers...

Disclosure - no position

Source: Sloppiness at Rosetta Stone