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Rosetta Stone (NYSE:RST)

Q1 2014 Earnings Call

May 07, 2014 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

Timothy Connor - William Blair & Company L.L.C., Research Division

Matt Blazei - Lake Street Capital Markets, LLC, Research Division

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

Matthew J. Kempler - Sidoti & Company, LLC

Operator

Greetings, and welcome to the Rosetta Stone Inc. First Quarter 2014 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, Investor Relations for Rosetta Stone Inc. Thank you, Mr. Somers, you may begin.

Steve Somers

Good afternoon, and let me welcome you to Rosetta Stone's First Quarter 2014 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 today, we have made our first quarter '14 earnings results press release and a 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 uncertainties are attached to any forward-looking statements. A detailed discussion of such risks and uncertainties is contained in our Form 10-K for the fiscal year ended December 31, 2013, filed with the SEC in March 2014, 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. A definition 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. When we hosted our Investor Day in late February, we talked a lot about the ongoing transformation that we're executing at Rosetta Stone. This transformation includes focusing on our growing Enterprise and Education business and pursuing a strategy to expand our user base and cross-sell in our Consumer business. To carry this transformation out, we're also focused on integrating our recent acquisitions as well as developing new products for future growth. I'm pleased to report that we are making solid progress on all of these fronts.

For the quarter, we posted 70% bookings growth in our E&E segment while our Consumer business performed as expected, and our integration and new product development progressed nicely. The highlight of the quarter is the solid performance in our SaaS-based E&E business driven by the immediate contribution from sales of the Tell Me More product and the strong growth from Lexia. Our Consumer business continue to reflect the effects of varying channel performance with the web channel again driving positive growth but the retail channel causing a drag on overall results. The addition of Fit Brains to the Rosetta Stone Consumer portfolio was a positive one, and our ability to accelerate their performance was evidence that we can leverage our marketing platform and grow our consumer user base, which is now over 9 million.

Before going into further detail on the business and the quarter, I want to take a couple of minutes to review the rationale behind the Lexia and Tell Me More acquisitions as well as our approach for integrating the 2 companies. As we've discussed for a couple of years, our overarching strategic direction has been to broaden our mission into being a learning company while deepening our capabilities in language. In the third quarter of last year, we expanded Rosetta Stone into children's reading with the acquisition of Lexia. Lexia expanded our presence in the K-12 market and gave us a leading-edge reading product that naturally expands our SaaS-based E&E business. It also provides us with expertise in reading and the opportunity to expand further in international and consumer markets. From an operational standpoint, our plan has been to pursue a light-touch integration, allowing Lexia to focus on selling its new subscription product and building out its direct sales force while taking advantage of a few cross-selling opportunities and back-end integration.

The acquisition of Tell Me More, which we closed in the second week of January, provided a natural and complementary fit that deepened our capabilities in the global language space. With complementary, intermediate and advanced language solutions primarily for the E&E segment, this acquisition now gives Rosetta Stone the ability to deliver a comprehensive suite of language learning solutions to corporations, schools and government agencies around the world. Tell Me More also generates a more global footprint, particularly in Europe and China, and expands our presence with corporations and higher-ed institutions. Lastly, since Tell Me More was a direct competitor, we have leverage and scale opportunities that we are working to realize. Unlike Lexia, Tell Me More is a full integration requiring significant effort, most of which is taking place in the first half of this year.

For the first quarter, we delivered bookings and adjusted EBITDA that were in line with our guidance and expectation. This performance was achieved in the face of significant integration with Tell Me More. Despite that integration disruption, the teams were able to cross-sell Tell Me More product in the first quarter at a level that exceeded my expectations. We also aligned the Tell Me More employees into new reporting structures and, importantly, began to merge the customer management systems.

Overall, the addition of the robust Tell Me More product suite and strong geographical presence in Europe and China has generated a lot of excitement in the marketplace, which is translating to a growing pipeline for the business. On the product side, we reworked the Tell Me More UI/UX to be cleaner, and we rebranded the product as Rosetta Stone. We expect to roll out this refresh product over the next couple of months. With this new look and as the combined sales force gets more comfortable at selling our new language learning suite, we expect our position in the marketplace to strengthen and improve as we progress throughout the year.

Lexia also gained significant momentum during the quarter with over 35% pro forma bookings growth compared to Q1 2013. The shift to a subscription model is showing nice progress, and since that model was only introduced in Q3 last year, we don't have meaningful renewal data. But based on feedback from teachers and schools, we expect to see very high rates of renewal. Core5 recently won a prestigious Academics' Choice award, and midterm results from the Kansas Reading Initiative indicates sharp improvements in reading achievement for students that used this product. The rate of students reading at or above grade level doubled using Lexia Core5 from 36% to 72%. These are really, really impressive results.

One of our major product development activities this year is adapting Lexia's Core5 reading product to be suitable for the consumer market. This is on track for a Q4 launch. So we believe that we're taking advantage of our 2 segments, which is a competitive advantage.

On the North America Consumer side, we saw the business trends similar to last quarter. The softness that we saw in the retail channel continued in the first quarter due to the absence of daily-deal activity. Our DTC business was down slightly in the quarter, but the sharp decline in retail drove overall decrease in North America Consumer. Within the DTC channel, we continue to drive positive growth via the web channel, which is the largest portion of our business, but call center bookings declined as more customers are going directly to the web.

This was the first quarter with Fit Brains in the portfolio, which contribute over $1 million of bookings. With Fit Brains, we directed some marketing efforts to enhance its prominence in the Apple and Google ecosystems, which helped drive download activity. Total Fit Brains downloads are now over 8 million. With this increased download activity, Fit Brains now occupies the #1 or #2 ranking in the mobile ecosystem for Brain Fitness.

Central to our strategy in North America is to grow the customer base and then cross-sell multiple products to this expanding base. While we are in early days and don't have much to report yet, we think our ability to accelerate Fit Brains downloads and rankings is a good indication that we can grow our user base from various product categories. Next, we'll be strategically offering multiple products to these customers. Also during the quarter, we made strides in changing our website to offer more than our TOTALe language product. We are testing heavily and expect to be offering on our website Fit Brains and Tell Me More's products as well as our apps by Q3 of this year.

Overall, I feel we moved the needle in the right direction in the first quarter and that the transformation we are undertaking is taking hold and we are creating value. For the balance of the year, we'll continue to be focused on driving growth in our E&E business while integrating Tell Me More, developing new reading products for the Consumer business that'll address the kids market, expanding Fit Brains and furthering our strategy to leverage our brand and deliver multiple products to a growing customer base.

Now let me turn the call over to Tom.

Thomas M. Pierno

Thanks, Steve. And good afternoon, everyone. Echoing Steve's broader commentary on the first quarter, from a financial standpoint, the quarter was generally in the range of our expectations with total bookings just about at the midpoint of our guidance and adjusted EBITDA coming in better than guidance. Since we exited the North America kiosk channel in early 2Q of last year, all of my bookings commentary today on comparisons to last year's first quarter will exclude the kiosk channel so we can focus the following commentary on the performance of the ongoing business.

With that said, total consolidated bookings in the first quarter were up 6% versus the prior year to $61.2 million, which was in our guidance range of $60 million to $63 million. Bookings from our E&E segment increased 70% to $18.3 million, which was at the midpoint of our guidance for 60% to 80% growth. As we discussed at our Investor Day, this growth was driven by the acquisitions of Lexia and Tell Me More.

Let me unpack this performance for you a bit. Since Tell Me More is a complete integration and we already integrated the sales teams in the first quarter, it is not possible to split out Tell Me More from Rosetta Stone at this point. So we look at this piece as one, which we refer to as E&E Language. For the quarter, E&E Language grew 36% to $14.7 million versus $10.8 million a year ago. On a pro forma basis, assuming we had owned Tell Me More a year ago, growth was down 4% in the quarter. This result was within our expectations as we communicated that we anticipated some disruptions in Year 1 of the integration, particularly in the first half of the year when most of the heavy lift is occurring. As a reminder, our expectation for E&E Language on a full-year basis is mid-single-digit-percent growth with flat-to-positive growth in 2Q, which will build towards a double-digit exit rate at year end.

On the literacy side of E&E, Lexia delivered $3.6 million of bookings and pro forma growth of 35%. The market for digital reading in K-12 is growing, and Lexia is starting to see good acceptance of its new Core5 reading program while its efforts to enhance its sales force are demonstrating good progress. As a reminder, our E&E business is nearly 100% SaaS-based, and we think that the growth we are delivering is evidence of a value that we are delivering to customers and the benefit of recurring revenue streams.

Switching to our North America Consumer segment. Bookings were $36.1 million, down 7% from a year ago. Continued growth in our web channel was more than offset by a weak retail channel. While we anticipated that retail would continue to be weak, it was softer than expected and was down by $4 million in the quarter or almost 50%. Most of this decline can be attributed to lower daily-deal activity.

Our DTC channel, which consists of website sales and call center operations, was essentially flat in the quarter. If you look at each piece, however, we drove double-digit percentage web sales growth, which was offset by decreases in our call center. We believe call center sales will continue to shift to the web. Partially offsetting the decrease in the North America Consumer language business was over $1 million contribution from Fit Brains, which reflected over 100% growth on a pro forma basis.

In the Rest of World Consumer segment, bookings were down 18% to $6.8 million in the quarter versus last year. This decrease was driven entirely by our Asian markets, where we shut down our company-owned operations in Japan and moved to a third-party model and downsized Korea to focus more on our proctor-assisted learning channel. Our European operations, however, grew at double-digit rates in the quarter, helped in part by the addition of France to our operations. We also had modest incremental bookings in the quarter from third-party partner operations in several countries that were launched in the fourth quarter of 2013. Rest of World Consumer bookings in aggregate were consistent with our guidance for them to be flat to down 10% for the full year with decreases in subsequent quarters expected to ease.

In looking at our consumer product unit and paid online learning metrics, total product units decreased 6% to 133,000 units compared with 142,000 units a year ago. The year-over-year decrease primarily reflects the absence of unit sales from our North American kiosk channel in the first quarter of 2013 as well as our decision to downsize our Asian operations and shift our model in Japan to the third-party partner model. Average revenue per product unit or ARPU decreased 12% to $273 from $312 in last year's first quarter. Overall, Consumer product revenue decreased 18% versus the first quarter of last year.

Paid online learners grew 25% to 100,000 at the end of the quarter while monthly ARPU declined modestly to $22 compared with the fourth quarter of 2013. ARPU has been effectively flat in the mid-20s for the past 1.5 years, reflecting the predominance of our 12-month access offering in the high $200 range. Revenue from paid online learners was up 9% to $6.3 million from last year. As part of our transformation, we are driving more consumer sales from online and digital offerings, where we now derive about 42% of our Consumer revenue compared with about 20% a year ago.

In terms of how we performed from a bottom-line perspective, we had negative $6.7 million of adjusted EBITDA in Q1 '14 versus negative $1.1 million a year ago. This result was better than our guidance for negative $8 million to $10 million. The year-over-year decrease was mainly due to 2 factors. The first is the $4 million decline in North America retail bookings with almost all of that dropping straight to adjusted EBITDA. The second factor is the inclusion of the results of acquisitions this year, which operated a seasonal loss in the first quarter. Partially offsetting these factors was the contribution from higher bookings from our acquisitions and benefits from restructurings in Japan and Korea.

Included with our adjusted EBITDA this quarter is $8 million of one-time adjustments compared to $2.1 million in the first quarter of 2013. These adjustments relate primarily to lease termination, severance, restructuring expenses and acquisition transaction and integration expenses. In connection with the downsizing of our operations in Asia in the quarter and the lowered expectations for this business longer term, we also recorded a noncash $2.2 million goodwill impairment in our Rest of World Consumer segment that we exclude from adjusted EBITDA.

Because of the significant pivots we are making in the business and the subsequent charges related to these actions, we have a summary economic income statement that reflects all of the one-time adjustments into their respective line items in the appendix of our slide presentation. This should give you more transparency into how the business is trending on an economic basis and how we are looking at the business internally.

Our balance sheet remains solid with $56 million of cash at the end of the quarter compared with $98.8 at 12/31/13. The decrease in cash was mainly due to the acquisition of Tell Me More of $28 million, the negative adjusted EBITDA in the quarter and other one-time cash expenses for restructuring and related wind-down costs, severance and acquisition transaction and integration expenses. We continue to have no debt on the balance sheet at quarter end. Deferred revenue increased $2.7 million in the quarter to $81.5 million compared with $78.9 million at 12/31/13. Approximately 85% of this deferred revenue balance will be recognized over the next 12 months, providing a high-quality future revenue stream.

Free cash flow in the first quarter was negative $15 million compared with negative $8.2 million a year ago. The decline in free cash flow reflects the impact of lower adjusted EBITDA, higher one-time cash adjustments and a decrease in working capital, offset by a decrease in capital expenditures to $1.4 million in the first quarter compared with $2.5 million a year ago. Normalizing free cash flow for one-time cash items in each quarter will result in negative free cash flow of $10.9 million in Q1 '14 versus $7.4 million a year ago. As a reminder, we are highly seasonal in the first quarter with most of our cash generation coming in the second half of the year. This is particularly true this year due to our acquisitions.

Based on the performance of the business in the first quarter and the continuing positive momentum we see from our transformation, we are confirming our fiscal year 2014 guidance for bookings to be in a range of $315 million to $325 million and adjusted EBITDA to be in the range of $18 million to $22 million. We still anticipate capital expenditures to be between $10 million and $14 million. Consistent with our comments regarding the weak retail channel, we increased our bad debt reserve in the quarter due to 1 slow-paying retail partner that distributes our software to retailers like Best Buy and Staples. Our full-year adjusted EBITDA guidance assumes no accounts receivable writeoffs related to this partner.

With respect to the second quarter, we expect total bookings to be between $68 million and $72 million. We anticipate E&E bookings growth of 55% to 75%, including mid-teens percentage growth from Lexia and flat-to-positive growth from Language on a pro forma basis. North American Consumer bookings, excluding kiosk, are expected to be flat-to-down single-digit percents while Rest of World Consumer bookings will be down about 25%, reflecting the downsizing in Asia. We expect that adjusted EBITDA will be in the range of negative $2 million to positive $2 million for the quarter.

Overall, we continue to be pleased with the direction that we are headed in and look forward to reporting further progress next quarter. Thank you, and we're happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Tim Connor from William Blair.

Timothy Connor - William Blair & Company L.L.C., Research Division

Just wanted to dig in a little bit on the E&E bookings growth that you're expecting, organic bookings growth acceleration that you're expecting toward the end of the year. I guess, how are you tracking towards that goal? And then specifically, what's giving you the confidence there?

Stephen M. Swad

Tim O, this is Steve. Yes, we said when we had our last investor meeting that we thought that Q1 would start out slow because we were changing everything. We were changing who reports to whom and comp plans and territories, and with that comes some disruptions. And we hit almost exactly where we thought we'd be. And then, as the sales team gets accustomed to selling the full suite, we think we're going to see an acceleration of growth. And I think we guided single-digit growth with a double-digit exit rate in Q4. I still feel like that's where we think we're going to end up. The positives are minimal. We've been at this now a quarter. I see our backlog, our pipeline growing nicely. And I see a couple, 3 or 4 large deals that are hit or miss. And so -- and I see the sales teams cross-selling. So I mentioned in my comments that Q1 sales of Tell Me More product were above what I thought they'd be. And so all of those are a little indicators that we're on the path that we thought we'd be on.

Timothy Connor - William Blair & Company L.L.C., Research Division

Longer term in the E&E business, where do you think you'll start to see more scale?

Stephen M. Swad

Oh, goodness. I think we're going to see it accelerate as we progress through the year. So I think Q2 will be better than Q1, and Q3 will be better than Q2. And as you know, Q3 is the biggest quarter for that unit largely because of the education segment. And then longer term, I see double-digit growth as we continue to consolidate and meet the needs of corporations that have a need to teach language. And what's interesting to me is there are very few folks that offer the breadth and depth of language. And so some of these bigger contracts that I'm referencing that are pending, we're bidding for them. They're for a suite of languages, and we find that we play pretty well in that space. And so my expectation is that's going to continue, and my expectation is that we'll see this unit continue to grow for many years into the future. And I've told you, I think, double-digit growth is a reasonable way to think about this unit as we go out beyond this year.

Timothy Connor - William Blair & Company L.L.C., Research Division

Yes, that makes sense, and that's in line with your previous commentary. I don't think I was 100% clear. Which cost line items, whether it's your cost of services, sales and marketing, G&A or R&D, where specifically do you think you'll get more scale on the expense lines for E&E?

Stephen M. Swad

Okay. Good question. I think at the uber level we think that as that renewal base grows, that's where you see this business scale. You see it both in the costs of service or renewal are minimal. And so you just see the beauty of a SaaS business that's growing. And then we also see -- we see opportunity as we're combining the Tell Me More and Rosetta Stone operations to just pull costs out, repetitive costs, that we are both doing and consolidating smart spots and go to market in a smarter way and in a more focused way. And so I think you'll see some synergies as we go through the year and even into next year from the combination of those 2 businesses.

Operator

Our next question comes from the line of Matt Blazei from Lake Street Capital Markets.

Matt Blazei - Lake Street Capital Markets, LLC, Research Division

A couple of questions for me that aren't necessarily related to the quarter itself. You've spoken a lot about the integration of your acquisitions and, obviously, about all the work you've been doing on Tell Me More. Do you sort of have a timeline in place in terms of when you want to have that integration complete in Tell Me More? Because you had talked earlier about spending the first half of '14 focusing on integration before you started to think about continuing to expand your portfolio.

Stephen M. Swad

Yes. I think that still holds true. We made a lot of progress in this quarter. I'm pleased with the progress. And it's not sexy stuff. It's -- we're on Salesforce.com now, and we weren't 3, 4 weeks ago. And so you can see all the customer touches. We got another rev of that to do over the next 60 days as well. But that's an example. We're on -- we're close to being on 1 general ledger. That's an example. Our service departments are talking better together. That's an example. So there were a number -- I think, importantly, our face to the customer, we kicked off, at the end of February -- or at the end of January and kind of in earnest went to market in early February, early mid-February, and I'm pretty proud of that. And so that's going well. Our pricing is unified. We get reporting that's coming in well. So I feel like we did a lot of heavy lifting. None of it's sexy. We've got more to do. I think by the time I talk to you again most of the heavy lifting will be done. We'll still be tweaking and improving and condensing and consolidating for the next 2 quarters, I think. I think -- I'm hoping we're done, done by the end of this year. But most of the heavy lifting I hope will be done by the next time we talk.

Matt Blazei - Lake Street Capital Markets, LLC, Research Division

Okay. And one other thing. You had mentioned in your -- on your Analyst Day that your direct sales force in the E&E business was up to about 150, maybe a little more than 150 salespeople. Where do you stand now? And sort of what are your goals in terms of getting full-market coverage out there?

Stephen M. Swad

I'm pretty happy with the sales force as it stands. We -- as you know, we use both direct sales and indirect sales. We're actually making some moves on the indirect side to get some locations that we're currently not covering. And I could see us, with time, bolster our Brazilian sales force. I could also see the Middle East bolster. But like, right this minute, I'm pretty happy with the size of our force, and I'm more focused on productivity and execution than I am growing that sales force right this minute.

Matt Blazei - Lake Street Capital Markets, LLC, Research Division

Okay. And Tom, a question for you. Obviously, you had a negative $15 million in free cash flow for this year and -- I mean for this quarter. When you talk about your CapEx and your EBITDA guidance that you put out there, do you still see yourself as free cash flow positive for 2014?

Thomas M. Pierno

We do, yes. We're maintaining that guidance, Matt. So that's the goal. We are highly seasonal as I said in the remarks, so we're a net cash user in the first half and a net cash generator in the back half. And really the fourth quarter is the biggest quarter of the 2 in the second half of the year. So -- but given all that, historically, that's just how we've seen it playing out -- played out. We still feel that, that will be the case this year.

Matt Blazei - Lake Street Capital Markets, LLC, Research Division

Okay. And then just to clarify 1 other metric. Do I understand then correctly that the integration of Tell Me More has sort of made the organic comparisons that you've made before in the E&E business more difficult?

Thomas M. Pierno

That's right. That's right. Because now the -- the sales integration happened, as Steve said, almost immediately. And so there -- it's a true portfolio sale that's happening right now, so the salespeople are out in the field selling a portfolio. And so to try to compare sales this year to last year per se of Rosetta Stone product when they may have made a decision that the Tell Me More product may have been better suited in that particular case with that particular customer. But then they didn't have it, they would have probably sold a Rosetta Stone product; and vice versa, it becomes difficult. So that's why we just put them together and just called it E&E Language for comparison purposes because that is kind of what they are right now.

Matt Blazei - Lake Street Capital Markets, LLC, Research Division

Did you give out a growth rate for Lexia for year-over-year?

Stephen M. Swad

We did; 35%, Matt.

Thomas M. Pierno

35%

Stephen M. Swad

Pro forma.

Operator

Our next question comes from the line of Nick Nikitas from Robert Baird.

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

Looking at the paid online learners, look like the growth is still strong there but decelerated a little bit year-over-year. Could you guys just talk about the timing that renewals are playing into that and maybe just the difference between the growth and net adds that you're seeing?

Stephen M. Swad

Yes. Nick, good question. That portfolio has an average life of just over a year. Sometimes it's 13 months; sometimes it's 14 months. And so I think of it generally as a 13-month contract for most of the folks there. And so you're seeing a replenishment of last year's with new. We have plans later in the year to start offering Brain bundles that'll -- as you know, that language is very healthy for the brain. And as you also know, we bought a brain fitness company called Fit Brains. And so we've got plans to kind of offer both of those in a bundle, a Brain bundle. And our hope is that we get some extension of usage beyond that 13 months, and that should help that number grow. But what you're seeing essentially is the prior year stuff turning off and new stuff going on.

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

And then just -- we talked about the acquisitions. But looking at the internal pipeline for product development, do you guys see any traction across maybe your kids product or any other areas to note in that regard?

Stephen M. Swad

Yes. We're getting a bunch of compliments from folks on our products. And so I'm pretty pleased with that. We're getting high usage. We got a couple of million voice samples from our downloads. And as you know, in -- right now, we are working on 2 products that will be directed to our kids reading, and one will also interject some modest levels of a second language in Spanish. And so we think that's a big part of what we're working on for 2014, and you'll start seeing that in late Q3, early Q4, certainly in time for the holiday season. And it's leveraging, in my mind, the work that we've done in the kids area both as Rosetta Stone through those apps and then, importantly, through Lexia. So we're taking the brains of the Lexia product and bringing it to life in a consumer way, and that should be ready as well by Q4. And so I'm pretty excited about it. And I also -- I would ask you to look at a release we did this last quarter that showed the results of the Kansas work in Lexia. And I mentioned it in my comments that the students that were using Lexia doubled in their proficiency, which was well, well, well beyond our expectations, and so we're pretty excited. We're 6 months into that initiative, and we're seeing really meaningful results. And so the idea of taking that kind of product to the consumer is pretty interesting to me, and I'm excited about it.

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

Okay. And then just one last one for me. You mentioned on the Rest of World Consumer that you saw some strength throughout Europe, benefiting from France. On an organic basis, were you up year-over-year just within Europe as well?

Stephen M. Swad

Yes, yes. Europe did what it said it would do. And so it was up on an organic basis, and then it benefited from -- by a small amount, by the way -- from the French operations of Tell Me More.

Operator

[Operator Instructions] Our next question comes from the line of Matt Kempler from Sidoti & Company.

Matthew J. Kempler - Sidoti & Company, LLC

So there's a little bit of information overload here. So I was hoping you can just kind of prioritize and recap the top 3 initiatives that you feel are going have the biggest impact on turning around the business as we move through the year.

Stephen M. Swad

Yes. That's an excellent question. It's growing E&E. To that, I guided $115 million of bookings. And Matt, to me, the takeaway is we're on track. And then a sub-note in that is that Lexia contributes $20 million of that, and they're well on their way to doing that. And so I feel like that's a big priority. The second priority under that, after Lexia, is that we integrate Tell Me More well, and we start to see growth as we exit the year. And I feel like the integration is going well. And so that's the focus of our company. That's where value creation's happening, and I feel good about that. As it relates to the Consumer side of the business, I think this notion of Fit Brains growing its base and then us creating some cross-selling opportunities between the language learning base we have and the 8 million downloads they have is an important metric. And you'll see that get some traction. As we exit Q2, we'll be able to report some traction. And certainly as we close out the year, I think you'll see even more traction. But the idea of cross-selling and creating multiple revenue streams from our customers is the critical point with Consumer, and we're early days in that in this quarter. I think -- I feel good about the progress we're making on growing the Fit Brains base, but we need to begin now to cross-sell, and that will come as we progress through the year.

Matthew J. Kempler - Sidoti & Company, LLC

And then on the Consumer side, the comment about the retail primarily impacted by less daily-deal activity. Can you discuss the decision process behind pulling back on daily deals? And is retail in secular decline? Or do you expect that to stabilize at some point?

Stephen M. Swad

A couple of things. Retail, I think of in 2 buckets, brick-and-mortar retail and e-tail. And then in e-tail, I think of daily deals and then other. And daily deals are lumpy. By definition, they're lumpy, and we're seeing less momentum in that channel for us. So we're testing some new products. We're testing new locations. We're testing new SKUs, but that daily-deal channel is performing less well this year than it did last year. And then brick-and-mortar retail has had headwinds all through 2013, and we expect that to continue. And that's in the guidance we gave. And in fact the daily-deal activity was in our guidance, that the decline that we saw was expected in our guidance. We had a little softness outside of that, but it was minimal. So retail is performing the way we thought. I see headwinds on brick-and-mortar, and I see headwinds on daily deal although I think you saw the biggest piece of it in this quarter. I think next quarter is going to be better.

Matthew J. Kempler - Sidoti & Company, LLC

Okay. And then just going back to the Lexia pilot for Kansas, the results there. So that is a pilot, so can you discuss what this means for that pilot in particular, the results that you're seeing? And maybe how these results might help you with opportunities with other states or other districts down the line?

Stephen M. Swad

Yes. No, it's a -- a pilot is 1 way to say it. A statewide contract is another way to say it. So there are thousands of kids on this product, and we're super proud of it. And we're super proud of these results, and we're going to market these results to other states with the hope of getting much broader and deeper penetration in these other states. It's a big initiative. And as you know, it happened right around when we bought it. I think either right before or right after. And so we have been dedicating resources -- the Lexia team has been dedicating resources to ensure a smooth transition of our product into that state, and we're seeing fantastic results, absolutely fantastic results. Matt, 1 other thing. I also wanted to say we launched or we announced an assessment program in the middle of the quarter. And so in my mind -- and it's a brand-new product offering for Lexia and certainly 1 for Rosetta Stone. And the idea there is to compete with others around assessment and to offer an assessment product that's a stand-alone product. But if you sense that you have literacy skills, we have a product that could help on that. So I like the idea of assessment combined with Lexia's Core5 product. I really am excited about the combination of those 2 things, and we're going to begin beta testing this assessment product in 2014 with the hopes of launching it in 2015. And I think that's a nice supplement to this existing product that we have.

Operator

There are no further questions. I'd like to hand the call back over to management for closing comments.

Stephen M. Swad

Okay. My takeaway is we did what we said we'd do, and I look forward to talking to you in about 90 days. Take care.

Operator

This does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.

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Source: Rosetta Stone's (RST) CEO Stephen Swad on Q1 2014 Results - Earnings Call Transcript

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