Rosetta Stone Management Discusses Q3 2012 Results - Earnings Call Transcript

Nov. 7.12 | About: Rosetta Stone (RST)

Rosetta Stone (NYSE:RST)

Q3 2012 Earnings Call

November 07, 2012 4:30 pm ET


Steve Somers

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

Thomas Pierno - Chief Financial Officer


Peter P. Appert - Piper Jaffray Companies, Research Division

Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division

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


Greetings, and welcome to the Rosetta Stone, Inc. Third Quarter 2012 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. Thank you, Mr. Somers, you may begin.

Steve Somers

Thank you very much. Good afternoon, and let me welcome you to Rosetta Stone's Third Quarter 2012 Earnings Call. I'm Steve Somers, Vice President of Investor Relations, and I'm joined today by Steve Swad, Rosetta Stone's President and CEO; and Tom Pierno, CFO, to discuss the operations and financial results for the third quarter and our outlook.

In addition to our commentary, we have made our third quarter earnings results press release, supplemental financial information and a slide deck supporting this webcast available on our IR website at Please review them to find some 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 attach 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, 2011, filed with the SEC in March 2012, which is available in the Investor Relations section of our website. We ask that you review those risk factors before making any investment decision.

Please note that 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. We had a good third quarter as bookings were up year-over-year 9%, with double-digit growth in our consumer business and single-digit growth in our institutional business.

We did a better job managing our expenses and we also made progress shifting the business online, growing online learners to 57,000, up 115% since the beginning of the year and up 167% versus this time last year.

In addition, our institutional business is over 80% online. We also operated more efficiently and lowered expenses, including reducing our kiosk expenses and lowering our international media spend, which allowed us to deliver adjusted EBITDA of $1.8 million, more than double the $1.8 million loss a year ago.

This is now the fourth consecutive quarter of positive adjusted EBITDA contribution as we showed a margin of 2.8% near the high of the 1% to 3% guidance that I outlined for the year.

Year-to-date, our adjusted EBITDA is up $17.8 million from last year's loss through the first 9 months.

In the quarter, we made good progress on our technology platform, which will allow us to begin to introduce new language learning products in the near future, and our cash balance continues to increase giving us flexibility to explore acquisitions that will help strengthen our position and accelerate our strategy.

So overall, we believe the business is getting stronger and we're better positioned for the future. We are managing expenses more tightly and we are making important investments that should help us return to improved growth rates.

My expectation is that this progress will continue with growth coming from leveraging our powerful brand, expanding our distribution and innovating our platform.

I will take you through some of our efforts in each of these areas, and then Tom will dive deeper into the financial results.

Just as I was pleased with the financial performance in the quarter, I am also pleased by the progress and momentum that helped drive the results this quarter and the efforts that will drive future results.

In terms of going to market, in the U.S., we continue to put resources behind our DTC channel, which helped drive North America consumer bookings growth to nearly 20% year-over-year.

During the quarter, we ran very successful back-to-school promotion and also leveraged new sales avenues through Facebook and Groupon.

Not only were these campaigns successful sales drivers, but represent new distribution channels that are allowing us to reach more consumers.

This point is especially clear when considering that over 70% of the claims from our Facebook campaign came from mobile devices.

In addition, our Live Life Fluently creative, which we launched in late June, seems to have had a positive impact in Q3. This combined with our promotional campaigns also boosted results in the retail channel where sell-through or sales to end consumers was up strong double-digits year-over-year.

On the product front, let me highlight that during the quarter, we released a refresh of our flagship TOTALe product. This refresh touches all 3 of our strategic priorities and is an important example of how we are improving engagement and increasing our relevance.

It improves the social aspects of our product with a more pronounced [indiscernible] functionality, upgraded gaming and an enhanced ability to connect with other learners for gaming or practice.

Since this refresh, we've seen a doubling of activities in social portions of our product. Not only do we think that this will lead to better customer experience, but that it creates a more state-of-the-art perception of the brand, improves engagement of our community and makes it easier for us to leverage the viral nature of social media for distribution.

On the cost side of things, we saw the benefits of our reduced kiosk and retail footprint, again, this quarter, while also benefiting from lower box costs and improved efficiencies in coaching.

The combination of the growth in booked sales, combined with our more streamlined operations, helped lower sales and marketing to 52% of bookings, down 8% from last year and down 4% -- 4 points from last quarter.

Our institutional business also had a good quarter, showing bookings growth of 4%, which is reflected in the -- which reflected the continued strength in our corporate and international verticals as we signed several new and renewal contracts in the quarter. This business has demonstrated slow but steady improvements with bookings growth improving through the year, increasing from 2% in Q1 to over 4% in Q3. Not yet great growth, but heading in the right direction.

As it relates to our strategic priorities, let me comment on the specific progress we made in each of the 3 areas of brand, platform and distribution.

With respect to leveraging the brand, we continue to refine our online strategy and are poised to roll out different tiers or product bundles in our consumer business. I expect these tier offerings will better promote our new online product and give our customers greater choice to select the product that best suits their learning style and their budget. This will likely include a range of options that goes from course only, to a full suite that includes course and private studio sessions.

With these offerings, we will expand our product offering along a wider span of prices. These offerings should help us further grow our base of 57,000 online learners, even more so since most of this count only represents the test offerings that we have conducted over the past year or so, and has not been supported with meaningful marketing spend.

As we go into Q4 and 2013 and begin to put our marketing muscle behind the online offerings, we think there exists significant opportunity to further penetrate the market and speak to those customers that prefer an online duration-based service.

In addition to our online efforts, we are leveraging the brand through new adds that target the U.S. Hispanic market and consumers in Asia.

In Japan, we launched ReFLEX, which can expand our brand. I mentioned in the past that we are developing a kid-specific product and we are targeting a first half 2013 launch, which we think will address untapped demand and introduce kids to our brand at an earlier age, as well as reaching their parents in a new way.

With respect to innovating the platform, we've launched functionality so that our product works on the NOOK, and we are working for one for the Kindle Fire. We are also testing functionality on our website that gives customers the option to purchase our product directly as a digital download.

In addition, we also released new cloud-based functionality in TOTALe that recommends next steps in our program based on how a learner is progressing, such as recommending a new lesson, a class with one of our coaches, or a game to practice your skills.

Currently, this is driven by some basic artificial intelligence, but early next year, we expect to launch a more sophisticated version of this AI so that the delivery of content is customized to learners' needs.

This customized learning approach will enable advanced learners to quickly move through or skip certain content pages, or slow down and repeat content pages for learners having trouble.

We believe this capability will particularly help in both the consumer and K-12 channels.

On the distribution front, we made some progress, but are working on additional initiatives. In the quarter, we carried out a successful Groupon offering and expanded sales via Facebook, as I mentioned earlier, while also increasing our mobile engagement.

We signed a few small deals with some airlines and credit card companies. And think there are many more avenues for us to increase our presence.

In Korea, we are testing proctor home-learning, which is where tutors host classes for kids and will be using Rosetta Stone as the primary curriculum.

So from my perspective, we're executing on all 3 of our strategic priorities. We are taking actions that leverage the brand. By that, I mean, we are taking actions to help grow the company into the brand like developing new products, as well as looking to acquire products that we can sell with our brand and through our worldwide distribution channels.

We are investing in our platform to enable key capabilities, such as artificial intelligence, to power the smart delivery of content and to enable mobility so our products travel with you on tablets and smartphones, and also to develop communities so you can practice and communicate socially with others while you learn.

And lastly, we are growing distribution globally while moving into channels and working with partners to increase our presence.

Before turning it over to Tom, let me say that I'm pleased that we settled our trademark infringement lawsuit against Google last week. Google has agreed to meaningfully collaborate with us to combat online ads for counterfeit goods and prevent the misuse and abuse of our trademark on the Internet. I believe that this settlement is a significant victory for consumer protection and it goes a long way toward advancing our goal to strengthen the Rosetta Stone brand and trademark around the world.

Now let me turn the call over to Tom, who will review our financials in detail.

Thomas Pierno

Thanks, Steve, and good afternoon to everyone joining us as well. Overall, I was pleased with the financial performance of the company in the third quarter and our progress, in general, through the first 9 months of the year.

Despite having some hurdles to overcome, in terms of fewer points of kiosk presence and the nonrenewal of military contracts in the prior year, total revenues in the quarter grew slightly to $64.3 million.

Adjusted EBITDA increased $3.6 million from last year, going from negative $1.8 million to a positive $1.8 million. Evidence that the cost-cutting and efficiency efforts that we had implemented are starting to take hold building on the momentum that started in the second quarter.

Even though consolidated revenues were basically flat year-over-year, there is evidence that the business has some momentum and is getting stronger as bookings in the quarter were up 9% and $7.8 million higher than reported revenues.

This reflects both the higher amount of contracts booked in our institutional business as well as the increased bookings from paid subscribers, or what we call online learners, in the consumer business.

Overall, consumer revenues were up 2%, but the nearly 3 million comp hurdle from kiosk closures to the top line masked the growth in our DTC business. Our U.S. consumer business increased 5% versus last year on the strength of our DTC channel, which increased 18%, even though we operated 60 fewer kiosks on average compared to a year ago, which contributed to over $2 million to last year's top line.

If we adjust for this reduction in our kiosk footprint, we would have shown double-digit revenue growth in the quarter.

In our international consumer business, results were still down 8% in the quarter, but the rate of decreases slowed to below double digits for the first time in the last 12 months. The biggest reason for the year-over-year decline was due to our switch to an online-only model in Germany earlier this year.

Despite this, we are encouraged by the growing acceptance and momentum for this product in Germany.

In Asia, our top line results were actually up year-over-year, nearly 20%, as we saw a sharp pick-up in our home shopping channel, which along with modest gains in our DTC channel, lifted results.

While we still have more work to do, international consumers showed signs of improvement.

On the institutional side, revenues were down 6% to $14.5 million, but was still impacted by the $1.3 million drag related to the absence of the military contracts. Excluding those contracts, which dropped off in July of last year, growth would have been positive 2%. I think it is useful to note here that our institutional business is over 80% online subscription and service revenues, which gets reflected in our deferred revenue balance.

Before commenting further on the financials for the quarter, I'd like to call your attention to some new and revised metrics that we are disclosing for the first time today on our supplemental financial table. As we mentioned in our second quarter call, in recent quarters our reported average revenue per unit or ARPU, and unit counts, have reflected the increasing amount of monthly online subscribers in our unit count, as more of our business has and is shifting online and the lower monthly ARPU associated with them.

Starting with this quarter, we are expanding our disclosure to provide 2 sets of volume and pricing metrics for our consumer segment. The first set will be product units, which are box units and downloadable products and their corresponding ARPU, and the second set is ending paid online learners and what their monthly ARPU is for the quarter.

In effect, the product unit metric relates to a one-time sale, while the online learner metric reflects a service sale.

We think that as Rosetta Stone transitions to a more digital business model, this will become an increasingly important way to track and assess the business.

This disaggregation has the effect of removing the impact of lower ARPU and higher units attributable to online learners from our historical reported consumer unit count.

Please note that we have provided this new and revised information back to the first quarter of 2010.

With that said, let me discuss some of these metrics for the quarter, which you can also see in graphical form in our accompanying slide presentation.

Product units increased 9% this quarter to 146,000 units, compared with 134,000 units a year ago, while product unit ARPU was down 9% to $313 from $346 a year ago, and down slightly from $319 in the second quarter.

While revenue from product units was flat with last year, we saw strong growth in online learners. We ended the quarter with over 57,000 online learners, which was up over 115% from the 26,000 that we started the year at and 167% this time last year.

The growth in online learners has been driven by several factors. The first is the broad transition that we are carrying out to move to a more digital model. That has resulted in us introducing online-only products like ReFLEX in Korea and TOTALe in Germany, which are incrementally adding online learners. The biggest driver, however, has been the ongoing test offerings of online services in the U.S., as well as customers who have paid to extend or renew the online service that is included as part of a TOTALe box product bundle.

Monthly online learner ARPU was $24 in the third quarter, down from $39 a year ago and $27 in the second quarter. The reason for the decrease in ARPU is due entirely to the increasing number of 12-month subscriptions, which have been tested in the $20 to $30 per month range over the past year. I think it's important to note here as well that unlike a telco or a media company, our service is a fixed duration one and our early experience is that most online learners purchase and use service and then depart at the end of their term.

Because of this dynamic, we do not think that it is appropriate at this time to think of this base in terms of churn.

With that said, given the high proportion of 12-month contracts in our base, an online learner has a lifetime revenue value of roughly $300, which approximates that of our product unit ARPU.

Because we primarily collect payment upfront and recognize revenues from online subscribers over the term of their contract, the growth of online learners is partially reflected in increases to the cash and deferred revenue balances on our balance sheet.

Moving on, gross profit increased $200,000 to $53.1 million and gross margin increased to 83% from 82%.

Not only was this an improvement versus last year, but was an increase from 81% in the second quarter. The margin gains were driven by lower hard product and coaching costs as we benefited from the shift to online, as well as scale and efficiencies in our coaching operations where per session costs were down 25% year-over-year.

This, despite having delivered over 60% more sessions this quarter.

We believe there may be additional gross margin enhancement opportunities related to coaching as we go to market with our tiered product offerings.

Similar to last quarter and consistent with our initiative to more effectively manage our sales and marketing spend, we were able to lower sales and marketing expenses 7% to $37.1 million versus a year ago. This figure was 57.7% of revenues, a 430 basis-point improvement versus third quarter 2011 and flat with last quarter reflecting efficiencies achieved, despite a more competitive advertising market given the Olympics and the start of the political election season in the U.S.

R&D expenses for the quarter were up 4% to $5.2 million versus $5 million, but up less than 1% year-to-date compared with the first 9 months of last year.

G&A expenses were $14.5 million, up 2.5% versus last year, but include approximately $1 million of costs related to our lawsuit against Google.

Excluding these costs, run rate G&A is down year-over-year. I'd like to point out that fourth quarter results will include additional legal costs related to the Google litigation incurred prior to the recent settlement of the case.

Adjusted EBITDA for the quarter came in at $1.8 million, up 200% compared with negative $1.8 million a year ago. This reflects a margin of 2.8% and a 563 basis-point improvement from last year.

Through the first 9 months of the year, we have delivered $4.7 million of adjusted EBITDA with our seasonally biggest quarter still to come.

To put this into perspective, this is a $17.8 million positive swing at this point in the year compared to last year and reflects the measured and balanced approach that we are taking to turn the business around and set us on a course to achieve our long-term financial targets.

Our reported net loss this quarter was negative $33.4 million or negative $1.58 per share, which includes the impact of a $25.6 million noncash charge to establish a valuation allowance against our deferred tax assets, the vast majority of which was in the U.S.

Excluding the impact of this noncash valuation allowance, as well as the legal costs related to the Google lawsuit, adjusted net loss would have been $1.7 million with an adjusted net loss per share of $0.08.

U.S. GAAP requires companies to assess quarterly whether evaluation allowance is required by evaluating certain criteria, including whether the company had a cumulative 3-year historical pretax GAAP loss. We had disclosed in prior filings that Rosetta Stone might cross into this position before the end of 2012 and, in fact, we did in the third quarter, primarily because high positive income quarters in 2009 have dropped out of the calculation, weighting it more towards the high negative income periods in late 2010 through early 2011.

As a result, we were required to establish this valuation allowance. This does not diminish our ability to utilize these deferred tax assets in future periods by demonstrating a trend of positive earnings and may expire in no less than 20 years.

I want to emphasize that this does not reflect the change in the company's view of its near- or long-term financial outlook as the valuation allowance is significantly the result of past performance.

In fact, we are increasing our adjusted EBITDA guidance for 2012, reflecting the company's improved performance, which I will discuss shortly.

Turning to our financial position. The company's improved operating performance helped boost the total cash, cash equivalents and short-term investments by $5.7 million to $126.1 million, up from $120.4 million at the end of the second quarter and up from $111.3 million a year ago.

This represents almost $6 of cash per share and is the highest cash level ever-reported by the company.

Taken together with the fact that we have no debt, the balance sheet remains very healthy. Deferred revenue in the quarter increased sequentially by $7.8 million to $57.8 million from the previous quarter, reflecting the underlying sales strength in our institutional business, as well as the growing number of consumer online learners.

I think it is also important to point out here that while we have generated adjusted EBITDA of almost $5 million for the first 9 months of the year, we have also created additional value that currently resides on the balance sheet in our deferred revenue balance, which is up $6 million year-to-date bringing the effective 9-month contribution to $11 million.

CapEx in the quarter was $900,000 and we generated $4.5 million of free cash flow compared with negative $4.5 million in the third quarter of last year.

For the first 9 months of this year, free cash flow was $8.6 million versus negative $11.9 million for the comparable period last year, largely reflecting the improved operating results.

When we first announced guidance for the full year 2012 in May, we set a range for adjusted EBITDA of $5 million to $8 million.

After the second quarter, we increased the bottom end to $6 million for a range of $6 million to $8 million. We believe the improvements in the business over the last couple of quarters and the relative outperformance gives us confidence to further lift the range by $2 million, for a new adjusted EBITDA range of $8 million to $10 million.

Consistent with prior commentary, this guidance range does not include any of the legal expenses related to our lawsuit against Google, which we add back for guidance purposes. With the greater emphasis on growing our digital-based business, we are planning to take some actions in the fourth quarter to accelerate our online consumer business. We think this is the right thing to do for the company and will improve our future outlook, but could have the effect of boosting bookings and growing our deferred revenue and cash balances, but moderating revenue growth in the short term.

As a result, even as we are raising our expectations for adjusted EBITDA, we are more likely to come in more towards the low end of our $270 million to $285 million revenue guidance range.

For the year, we also continue to expect adjusted net loss to be between $4 million and $6 million with an adjusted loss per share of $0.20 to $0.30, excluding the impact of the valuation allowance and legal costs related to our lawsuit against Google.

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

Question-and-Answer Session


[Operator Instructions] Our first question is from Peter Appert of Piper Jaffray.

Peter P. Appert - Piper Jaffray Companies, Research Division

So Steve, you're making good progress here in turning the business around. I know you guys, obviously, don't have guidance for '13 and beyond, but I was hoping you might share with us some views of just how we should think about the business evolving over the next couple of years, in the context of what you think are reasonable profit expectations or margin expectations as the business grows and sort of the scale of the revenue opportunity?

Stephen M. Swad

Thanks, Peter. I'm sticking with what I said in our investor commentary when we met in February or March, or whenever that was -- I think it was May. I see 400-plus in revenues. I see operating -- or adjusted EBITDA at low double-digits, and I'm saying it again today and I feel like we've got nice momentum swinging toward that. I like what I'm seeing in the U.S. I like what I'm seeing with our initiatives around digital and I expect those to continue. We saw a little itty-bitty green arrow in Korea, which has not been green for a couple of quarters. We're seeing some slight acceleration in growth in the institutional business. So my 2015 targets remain unchanged and I feel like I've got nice momentum as I'm leaving '12, entering '13. I plan to give more context and numbers the next time we chat, but we got to do budgets and go through process before we do that.

Peter P. Appert - Piper Jaffray Companies, Research Division

Okay, that's helpful. And Steve, do those numbers envision that the ARPU stay more or less in line with where they are now?

Stephen M. Swad

They do. They do. I've said in the past that the ability to teach somebody a language is a nice value proposition and we do it at scale. And our ARPU is roughly $300 and I feel like that's a reasonable zone for us, and I see that zone carrying forward. I'm going to innovate, I'm going to create new things, I'm going to find ways to get more out of my marketing, I'm going to offer new suites of products, but for teaching a language, I feel like a $300 value proposition is a reasonable one and I think that's a reasonable zone right now.

Peter P. Appert - Piper Jaffray Companies, Research Division

And then how about -- the last thing for me then, the online tiers, how should we think about what that could look like?

Stephen M. Swad

I mentioned that in my comments. And it's setting up different tiers for different customers and different price points. So I could see $300 being the middle price point and something above that, call it, $500 or $450 or $499, for those that have more budget and want to invest more, and then probably having something under $300 for those that don't have the money to invest all at once. And so I see playing the demand curve that way and again, I'll have abilities to upsell and cross-sell. And that's what I'm thinking as we move into 2013.

Peter P. Appert - Piper Jaffray Companies, Research Division

But would the kids product be at a lower price point?

Stephen M. Swad

It's too early to tell definitively but our initial -- yes, there will certainly be a SKU that is lower than $300.


Our next question is from Jeff Meuler of Robert W. Baird.

Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division

Could you just talk about online engagement in terms of the SaaS product and I'm, in particular asking, just given your commentary that most of your users depart, kind of at the end of the upfront 12-month buy, and I'm just wondering how much of that is that they were successful and they've already learned the language and are ready to move on, how much of it is learners that are -- you're not seeing good usage from? I guess, if you could just kind of bucket them out in terms of what you're seeing for online user engagement.

Stephen M. Swad

Great question, Jeff. We find that at the moment, it mirrors pretty closely our offline engagement and in offline, you have varying degrees of usage. You have, on one end of the spectrum, those that never use it at all, much like a gym membership, and on the other hand of the spectrum, you have those that can't get enough of our products, go to every coaching session and change their life forever. And so we see that same type of behavior and that same extreme ends of behavior with our online product as well.

Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division

I guess, at the end of the 12-month contract, what are their options? Can they do like a reduced price monthly, where they give you a credit card and you do recurring billing or...

Stephen M. Swad

No, absolutely. There is option -- there are options, natural options, to sign up for another period. Those periods change from 1-month intervals to multi-month intervals and multi-quarter intervals. We also -- and this is important about our online product. What I find compelling is that I have multiple touches to that customer, and so when I introduce a new product like Kids, I can offer that customer other opportunities to learn or to extend their learning to family members.

Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division

Okay, I'm not sure if you're willing to give this but at the end of the 12-month initial online subscription, what percentage of those customers stay with you in some form or fashion beyond that point?

Stephen M. Swad

Yes, we're in early days, but I would think you should be modeling a very small amount. We see -- of course, we see extremes, but your averages should be short. One-month average, sometimes we see 2, something like that. Of course, you see some at 0 and some at 12, and -- but I would tell you to average way down.

Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division

Okay, and then last one for me. Sales and marketing expense, how much of the year-over-year reduction is due to fewer kiosks, and then you also mentioned, I guess, international media spend, but if you can just touch on any other areas where you're cutting and I know you're fine-tuning and moving things around as well, but I just wondered how much is due to the one-time fairly material reduction in the number of kiosks?

Stephen M. Swad

A couple million. That's what I'd guess in that zone. What's important there is 2 things: You saw bookings rise and marketing come down, and so you start to see some leverage that's inherent in the business, and so, we saw more performance out of most of our marketing channels. But to answer your explicit question, a couple $3 million?

Thomas Pierno

Yes, $3 million.

Stephen M. Swad

Yes, a couple $3 million came out for kiosks.


[Operator Instructions] And our next question is from Joe Janssen of Barrington Research.

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

Just 2 quick questions for you. You highlighted a little bit on the strategic partnership side of the business. Are you -- I know it's kind of immaterial small now, but I mean, if we're looking at the pipe and I'm looking into Q4 and maybe the first half of 2013, do you see the ramp-up being material, or is this kind of more of a 12- to 18-month ramp-up?

Stephen M. Swad

As much as I'd like to think earlier, I'd think more later. We've got a nice pipeline. As I said, we did do some deals. We also, I'm pretty proud of the progress we made with Facebook this quarter. I expect that to continue. We also had a nice partnership with Groupon, I'm pretty pleased with that as well. But we've got a number of pipeline opportunities that we're working, and so I just see this steady growth in that area. That's the one that takes 2, 2 counter parties got to come together and agree on terms, agree on strategy, and then execute, and that just takes time. Importantly, I think it was this quarter, it feels like he's been here for a while, we hired a person to head that group and in early days, I'm feeling positive about that person's impact on our company.

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

Have you seen any success in Asia? I think on the opening [ph] you've mentioned, one potential area will be partnering English test prep companies in Asia?

Stephen M. Swad

No. Not saying -- I'd say no. We've got some little things. We've got some -- our pipeline there is actually really nice. We have -- I mentioned this in my comments that in Korea, we've got this new test on what we call proctor tutoring, where there's a person that oversees learning for kids. And that's a distribution deal and it is core, and so that's probably the biggest thing that we've got. And I just remind you that in August of this year, our global head of the consumer business moved to Tokyo, and so on his list is to get these partnerships going as well. It's on my list, clearly, it's also on his list.

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

And just switching gears a bit, one last question, acquisitions, I've been hearing that word a little bit more recently, are you being focused more on kind of wrapping more products around, like the learning of the English content -- or the language content? Or are you like, possible to sales, like the distribution side of it, sales without sales teams?

Stephen M. Swad

More of the former. I see us, I call it, extend the brand. And so I see us doing that by kind of carefully taking the Rosetta Stone brand and extending it both deeper in language and then carefully in a staged way beyond language, because we've got some very strong assets that enable learning and we've got some smart people that know how the brain works, and so taking that asset and extending it is kind of core to our M&A strategy. But I think you should be thinking deeper in language as well as outside of language, and think of it as products that are of high-quality that I could take to our R&D shop and polish up a little bit, and then distribute through our worldwide distribution assets.


[Operator Instructions] Gentlemen, it appears we have no further questions. Would you like to make any closing remarks?

Stephen M. Swad

Yes. I wanted to thank everybody for joining us. To me, my take-away is the strategy has taken hold. We've got some nice sales momentum, particularly in the U.S. Cost management is also taking hold. I'm pleased with our digital transformation. I think we're going to work on that, certainly in Q4, and then into 2013. And I'm also proud of the progress we made on the product side with the TOTALe refresh, the AI and ReFLEX. More to come. Look forward to speaking to you soon.


Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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