Rosetta Stone Inc.'s (RST) CEO John Hass on Q2 2018 Results - Earnings Call Transcript

Rosetta Stone Inc. (NYSE:RST) Q2 2018 Results Earnings Conference Call August 2, 2018 5:00 PM ET

Executives

Jason Terry - IR

John Hass - President, CEO, Chairman

Thomas Pierno - CFO

Analysts

Alex Paris - Barrington Research

Steven Frankel - Dougherty & Company

Kevin Manthie - Lake Street Capital Markets

John Lewis - Osmium Partners

Operator

Greetings and welcome to the Rosetta Stone Incorporated Second Quarter 2018 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host today, Jason Terry, IR firm for Rosetta Stone Incorporated. Please go ahead.

Jason Terry

Thank you. Good afternoon everyone. Welcome to the Rosetta Stone's second quarter 2018 earnings conference call. Speaking on the call today will be Rosetta Stone's Chairman, President, and CEO, John Hass. Additionally, Tom Pierno, the company's Chief Financial Officer will be available during the Q&A portion of today's call

We have posted to the Investor Relations section of our website at www.rosettastone.com, both the earnings release and a slide presentation that accompanies today's call. We've also posted supplemental information and analysis on our website. This supplemental information will not be read on today's call.

I want to remind everyone that as always, there will be elements in today's presentation which are forward looking and are based on our best view of the world and our businesses as we see them today. We undertake no obligation to update such forward looking statements.

Cautionary comments regarding forward looking statements are outlined on slide two today's presentation, which apply to our comments today. Today's presentation and discussion also contains references to non-GAAP financial measures. The full definition, GAAP comparison, and a reconciliation of those measures are available in the aforementioned presentation and press release.

Our non-GAAP measures may not be comparable to those used by other companies and we encourage you to review and understand all of our financial reporting before making any investment decisions.

I will now turn the call over to John.

John Hass

Thank you, Jason and good afternoon. Over the last few quarters, these calls have focused on a high-level discussion of our products, businesses, and goals for the future. Going forward I would like to go deeper in some of the key areas that investors often ask us about. In doing so, we hope to build a library of knowledge to help you better understand our business.

Today as students prepare to go back to school, I will discuss why literacy is a focus for us, the company, otherwise best known for the quality of its language software. But before it turn to the literacy discussion, let me share a few updates from the quarter.

Overall, turning to slide three, we are a different business than we were just a few years ago. We have a powerful and growing K-12 literacy franchise and a highly profitable, more predictable language business.

Our sales are now 100% subscription based and as this base of predictable size sales grows, it will lead to improving cash flow as we leverage a significantly reduced cost structure.

As we've said in the past, absent new opportunities to invest in the business or returning capital to shareholders, we expect to grow our cash balance to approximately $100 million by the end of 2020 with increasing cash flow from there.

Turning to slide four. I was very happy with the performance of our literacy business in the second quarter. Literacy sales grew 20% over the same period in 2017 to $10.3 million, while ARR increased to $45 million.

As a reminder, when we say sales, we are referring to a signed contract or transaction. The majority of which are paid up front that is recognized as revenue over the duration of the license activation term.

We achieve this growth despite the fact that similar to last year, we are seeing both renewals and new business sales shift from the second to the third quarter. In fact, the just completed month of July was larger in terms of sales than the entire second quarter and is 40% higher than July of last year, was by far the largest single month in last year Lexia's history.

We believe the shift of sales to Q3 represents both an industry trend and a change for Lexia as our products move to the center of schools' literacy curriculum and consequently follow school cycle for operating budgets.

Lexia's importance to school customers is demonstrated by their extraordinarily high retention rate. 94% in Q2, the ninth consecutive quarter above 90%. The period which coincides with when we assumed sales and the implementation responsibility in most of the U.S.

With strong growth and retention, we remain on track to hit our $60 million literacy sales goals this year. This would represent an increase of a little over 25% from 2017. Importantly, while we are building out sales support areas, we expect to achieve this growth with little additional direct sales headcount versus last year.

If we achieve our direct sales expectations for the year, sales per average sales rep will grow from approximately $875,000 in 2017 to approximately $1 million in 2018. One of the ways we will continue to make progress is through our initiative to service and partner with some of the largest school districts in the country; an area that we began to focus on during the latter half of 2017.

These opportunities carry longer lead-times and as such we, don't expect to see the benefit until next year. But we are happy to be included in these conversations and to be considered for these types of larger scale implementations.

Our positive momentum in this area is supported by the evolution of our literacy product and services portfolio with the recent additions of RAPID and especially PowerUp. I'll share one example which is highlighted on slide five. In collaboration with one of our third-party sales partners, last year we were invited into a large California school district to pilot a RAPID Assessment product.

While the RAPID pilot is ongoing, the introduction allowed us to bring Core5 and PowerUp into the conversation at the district level. This led to the district purchasing 39 new unlimited Core5 school licenses and seven new combined Core5 PowerUp licenses in more than sevenfold increase in the size of our relationship with the district.

Each of our products Core5, PowerUp, and RAPID played a critical role in growing this relationship. And this is not an isolated case. We are seeing the products in our literacy portfolio, especially, Core5 and PowerUp reinforce each other as we offer customers compelling solutions that are easy to implement regardless of need. Continually improving our product portfolio therefore remains a focus.

Slide six lists critical releases across our entire literacy portfolio that were introduced in time for the new school year. I'll highlight two. Core5 Version three 3 takes us out of flash and browser, but unlike many competitors, as we move from flash to HTML5, we upgraded the codebase to include our own animation engine based on industry standards that allows us to move the engagement of our award-winning literacy learning program to new levels.

We also released PowerUp Version 1.1. PowerUp is Lexia's literacy learning product for older, struggling, learners in grades six through 12 that was launched in January. This is an important content release for PowerUp, which incorporates many new features that were directly driven by feedback from our customers. [Indiscernible] in our literacy team can't wait to share Core5 and PowerUp with you during our Investor Day, which I will talk about more at the end of my comments.

In language, highlighting on slide seven, I was pleased with the performance of our enterprise and education team. While sales were down overall, primarily due to lower sales of custom content and sales through our affiliate channel, ARR was up on a sequential basis for the second consecutive quarter and totaled $55.8 million. We continue to see progress in our corporate business and expect this to become increasingly apparent as we focus on larger, critical need use cases for our customers.

As an example in July we were awarded a global contract from a Fortune Global 500 consulting firm that we expect to be at least $1 million annually. The largest annual corporate deal in our history. It includes over 10,000 language licenses and capitalizes on our ability to provide virtual online tutoring to their learners around the world. This was a competitive process for marquee client and is a perfect example of an opportunity that would have been very difficult to compete for prior to the introduction to Catalyst.

In fact we lost an RFP for this client five years ago before we were able to offer the comprehensive product and tutoring solution through Catalyst that we have today. Armed with these improved capabilities, Fortune 500, and larger accounts generally, will remain a concerted focus for our E&E team.

In consumer language, we're seeing progress in important areas of our direct-to-consumer or DTC channel and in particular mobile apps with growth in new unit sales in total subscribers at attractive LTVs. The strong performance in DTC was offset by weakness in our retail channel which did not meet our expectations as we shifted from selling physical products to subscription licenses.

While retail is down substantially year-over-year, it is expected to be only about 10% of our consumer language business. We're beginning to see some signs of improved performance as we work with our partners to better position and market our new subscription products through their channels.

Consumer sales are also being temporarily affected by the year-over-year shift to shorter term subscriptions that have lower upfront per unit sales prices this lowers immediate tells relative to longer term subscriptions or perpetual sales that is largely made up over time to higher renewal rates.

Any the perpetual to subscription transition is not without its bumps in transitional carts. But today I feel good about our execution.

As shown on slide eight growing BTC unit sales drove total subscribers from $395,000 at the of Q1 to $417,000 at the end of Q2 with the growth coming from short-term subscriptions.

You can see on the right hand side of the slide, the short-term subscriptions, those with an initial subscription term of one year or less are now almost 60% of our total outstanding units up from less than 10 in 2016.

In aggregate on slide nine, consumer net LTV added in Q2 was $6.2 million, an increase of 3% versus the same period in 2017. Remember that our goal in consumer is to maximize and grow the aggregate dollar amount of net long-term value created each quarter.

We could operate consumer at higher LTV to cap ratios, but would sacrifice aggregate profitability in dealing some. I'm very happy that our consumer business after accounting for essentially all 16 variables sales and marketing costs that's what people and marketing dollars produced over $6 million in net volume through initial sales and expected future renewals during the seasonally slowest quarter of the year.

Consumer is creating substantial value for us and it's the opportunity to create even more in the future. We are doing this today by optimizing the balance of subscription growth, while maintaining attractive sales per subscriber.

Over time we will look for ways to accelerate growth and add TV per customer. Matt Hulett and team are intensely focused on this opportunity. The pace of testing and innovation occurring in consumer is higher than it has ever been.

On slide 10, let me conclude this portion of the call by confirming our revenue adjusted EBITDA in net income guidance for the year. I would remind everyone that the recent gas performance deteriorated this year even as we expect sales to grow due to the temporary effects of the conversion of our consumer business to a full subscription model.

We are confirming our sales guidance for literacy and E&E language. We are lowering our sales outlook in consumer language to $66 million due to the performance of retail and the higher than expected mix of short-term subscriptions.

We now expect consolidated sales to be approximately $192 million, which represents sales growth of $10 million after three years of declines. We expect to end the year with $45 million in cash, an increase of $24 million from the end of Q2.

This was a little lower than previously estimated. I would now like to spend the rest of my time discussing literacy has grown to become one of the two pillars of our business. On slide 11, it begins with our mission as a company to change people's lives through the power of language and literacy education.

Helping people to speak and to read is the core of who we are. With this mission, we are focusing our efforts on two of the most important societal needs and learning today. Childhood literacy in the United States and the desire to learn English globally.

Through this call, I will focus on what is driving the literacy need in the United States and why we are well-positioned to address it. In the future, we will focus on the opportunity in English language learning.

On slide 12, childhood literacy in the United States is often said to be in a crisis. Unfortunately, this label doesn't fit the facts and the crisis suggests a moment in time. The United States, however, has persistently failed to build sufficient literacy skills in its children. In fact, for decades two-thirds of eighth grade students as shown on this slide with the yellow line, they are been classified as non-proficient readers. This is from what is known as the nation's report card.

The National Assessment of Educational Progress, which is completed every two years. We see a similar trend over the years in the fourth grade results. This is the fundamental problem in K-12 education in the United States and a critical issue for all of us.

Non-proficient readers are not just more likely to struggle in school, but are also more likely to drop out or fail to graduate on time, creating persistent challenges throughout their lives, impacting our society as a whole. As a country, we recognize this problem. So, why has it endured for so long? Imagine if you will a well-funded traditional second grade classroom.

Turning to slide 13, there might be 22 children in the room with the teacher. In that classroom, they might spend 90 minutes a day in their literacy block using materials from traditional providers. That means if the teacher wants to spend time with each student individually, they would have just about four minutes per student. Not much time.

Oftentimes, the teachers don't have the critical tools and data needed to understand what the needs of each child are and even if they did, they couldn't provide individualized instruction to address them.

Consequently, they are left teaching to the mean and we know from research and experience that each child is different. Children learn in different ways and each student's learning pace may be different than his or her peers. They struggle with different areas of literacy acquisition and receive varying levels of support inside and outside the classroom. Consequently, the conventional approach doesn't work very well even in the best circumstances.

Now, assume the school has greater burdens. There are 30 kids in the classroom, reducing the teacher's time to three minutes per student. Soon many of the children come from homes where providing educational support outside of school is more difficult due to time or economic constraints.

In many instances, they are merging bilinguals, learning English while trying to progress in school. In the thousands of schools with these facts are the norm not the exception, educators will struggle to be successful. They are limited to traditional approaches.

So, when we consider all of these factors, it is actually quite easy to see teaching a child to read can be quite difficult. But there is help. Instructional software that empowers students and educators and provides alternative, individualized paths to instruction, transforms the traditional one-size-fits-all approach.

Turning to slide 14 and let's put Lexia at the center of that same 90-minute literacy block. Lexia can be used to provide personalized data-driven instruction in activities that transform how students learn and educators teach. A group of children can start the reading block, working for 30 minutes in our comprehensive reading instruction program, Core5 at an appropriate level matched to their needs and in a learning path that adapts to their progress, providing structured support when and where appropriate.

And it is important to note that if there are English language learners learning to read English, the directions and instructions in Core5 can be provided in six additional languages to match the native language of the child.

Next, that group of children moves to work directly with the teacher for 30 minutes where they use teacher-led lessons provided by Core5 based on each student's needs. The teacher is empowered to help the children by using the data captured in Core5 and shared with them through their data dashboard; My Lexia. And My Lexia portal helps teachers group students with similar needs and provides links to lesson plans, targeting specific skills that that group of students are struggling with in their online activities.

For the last 30 minutes those children can practice what they are learning by reading a book or other material. Either way we are not in this part of the reading block today. With this approach, children are empowered because they are working and engaging software that guides them along a journey developed from decades of research to support their progress.

The teacher is able to optimize his or her most valuable resource, time, to provide targeted guidance using tools and information to clearly show them what is needed and how to provide it. This is an important and fundamental change in the approach to learning. And we have to better as not only has U.S. literacy education been a persistent problem, it is a large one.

Turning to slide 15, there are approximately 100,000 public schools in the United States and another 30,000 private and parochial schools. The good news is we are already making an impact as Lexia is now in about 12,000 U.S. schools. But why Lexia? A few things clearly set us apart.

Turning to slide 16, first, Lexia's history and focus. Lexia has been solely focused on using technology to address literacy needs since its founding 34 years ago. Even then, Lexia's founder recognized the power of technology to drive individual assessment, personalized learning, and optimized teaching strategies at scale.

Second, Lexia is also unique in the depth and quality of its research and how this informs its approach to instruction. Lexia was would started in part for a grant from the National Institute of Child Health and Human Development and has maintained its focus on research throughout its history.

This research is unrivaled in depth and quality with more peer-reviewed published studies than anyone else in this space. The covers of a few of these studies are represented here. The results of one study are shown on the left of the slide. In this study, published in computers in schools, English language learning students using Core5 almost entirely closed the reading gap with a controlled group of native English speaking learners. The proven ability to repeatedly drive outcomes like this is what makes our offering so compelling.

And while Lexia's focused on research has existed for decades, its literacy portfolio shown on slide 17 as we have discussed on prior calls is new and more comprehensive than other alternatives in the marketplace.

From Core5 and PowerUp in curriculum to RAPID and Assessment, to the data analytics available through My Lexia, we have the tools to improve outcomes for all students. And we also have high quality implementation services to drive successful implementations and achieve school and district-specific goals.

So, even though we are smaller than the biggest general education players in the K-12 space, Lexia delivers unmatched experience, expertise, and capability in literacy education. Our ambitions for our literacy business are substantial. The societal needs that we are addressing is huge. Ultimately, we will not be satisfied until new worlds are open to literacy for every child in the United States regardless of circumstance.

Timeline, I want to let you know in slide 18 that we will be holding our Annual Investor Day on November 6th in New York City. This year, we will focus on the products we are using to change lives in our language and literacy businesses and the way we see our business evolving in the U.S. and internationally.

We will walk you through the innovation we're bringing to the marketplace and previewing some of the exciting products and investment opportunities coming next as we leverage our growing leadership in K-12 literacy and our iconic Rosetta Stone language brand.

Among other things, we will preview the work we have begun to bring the brand new product to build the language proficiency for English language learners to the K-12 marketplace. The product which will be the fulfillment of one of the opportunities that originally brought Rosetta Stone and Lexia together. I hope all of you can join us.

With that operator, could you please open the line for questions?

Question-and-Answer Session

Operator

Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions]

Our first question comes from Alex Paris with Barrington Research. Please proceed with your question.

Alex Paris

Afternoon guys. Congratulations on a strong quarter.

John Hass

Thank you.

Alex Paris

I have a couple of questions. I guess I'll start first with guidance. I don't know if I got that exactly, John. The only real difference versus your previous guidance was a reduction in sales expectations for consumer language. Is that correct?

John Hass

That's correct. Yes, we -- because of the shortfall in retail year-to-date, we had to reduce that a bit. Everything else we are holding tight with and feel good about.

Alex Paris

So, you reduced consumer language from what to what?

John Hass

We reduced consumer language from $66 million to $62 million.

Alex Paris

Okay. That's more reduction there and there and that's the $4 million reduction on full year sales. Okay. And then--

Thomas Pierno

To $66 million.

John Hass

I'm sorry. Alex, yes, it was from $70 million to $66 million. Sorry about that.

Alex Paris

$70 million to $66 million, got you.

John Hass

Spoke too soon.

Alex Paris

Okay. And then no change to adjusted EBITDA, no change to expected capital expenditures and then you said cash will be around $45 million as opposed to your original projection of $48 million?

Thomas Pierno

That's correct.

John Hass

Yes, and again, that's tied to the consumer retail sales.

Alex Paris

Got you. Okay. So, thank you for the deep-dive into Lexia, I appreciate it. I just had one follow-up question there. So, with Core5, RAPID, PowerUp, question is I see the power of the package as you noted in California and so on. But can you buy these products -- or do your customers buy these products separately or is PowerUp selling independently of Core5 or is it usually sold more as a package?

John Hass

Yes. No, it's a really good question. You can absolutely buy them independently. But one of the things we've done which I believe has been very good for the marketplace, very good to get PowerUp off to a great start is to give customers license flexibility.

Now, let me give you a bit of an example as to what that means. So, Core5 is pre-KG through fifth grade, PowerUp is sixth grade through 12th grade. But if you were a school where the kids in your building are fifth through ninth, for example, you would span both of those products. What we are allowing schools to do is purchase a single full school license and then take whatever licenses within that whole school sale that they need for fifth through sixth grade -- I'm sorry for fifth grade, they can -- they'll take their Core5 licenses and then six through nine, they would take PowerUp.

And so, really very elegantly bridges the gap in a lot of school buildings which span those grades. But there are certainly a lot of cases were PowerUp now is being sold itself into a building and that's always been the case for Core5.

Alex Paris

Got you. And as I recall a site license for Core5 was $10,000, am I right on that?

John Hass

Yes, the software license is about $8,500. If you purchase a standard implementation service package with that, it adds about $1,400, so that -- to that's about $9,900 in total. The same would be true for PowerUp.

Alex Paris

So, in other words, if I took PowerUp and Core5, I'd be looking at $20,000 or is it -- or does that $1,400 implementation cover both products?

John Hass

Yes. If you are district and you have a grade school and a junior high, those would be two separate whole school licenses. So that would total -- it would be the sum of both. If you happen to have a building where you have some fifth graders who need Core5 and some sixth graders who need PowerUp, it would be a single site license and so would just be $9,900. But it really eases the sale and eases the implementation for schools. It's the right thing for students and it's been really successful.

And the nice thing that we're seeing with PowerUp, which is brand new to the market, we introduced it in January. So, we look at July sales, which is really when we're beginning to book new sales for the coming school year in a large way. PowerUp is more than 20% of our new sales in the month of July, which is terrific for a brand new product.

John Hass

Without a doubt, that's great. And did you say that you're accomplishing this growth in 2010 without significant or material additions to headcount? And as I recall, the sales headcount is in the neighborhood of 45.

John Hass

Yes, we've, not in any meaningful way, added to the direct sales representative headcount. We have tried to add around the edges to make them more productive through sales support and other areas. But we've been able to pretty meaningfully, as we expected to, improve sales rep productivity this year. I mean our two goals that we've been talking about for the last year or so were to improve productivity in the business through sales rep productivity and through the power of the literacy product portfolio. And we feel very good about how we're seeing both of those play out right now.

Alex Paris

Great. And then I just got a couple on consumer language before I get back in the queue. So, just to be clear subscriptions of one year or less are now 41% of the total and up from 29% year ago, I think I saw in the press release. So, what are the 59%, are those lifetime subscriptions?

Alex Paris

No, actually subscriptions of one or less are in fact 58% in the second quarter, Alex. The 39% are two-year subscriptions. So, we continue to have a significant interest, if you want kind of both and of that spectrum, it's kind of a bit of a barbell. So, we have a lot of people who are very interested in the kind of lowest upfront commitment while they try products. So, for us today, that would principally be a three-month product. But a lot of people want the lowest monthly cost and lowest monthly cost would be a two-year subscription. So, we see substantial two-year interest still. But we've decidedly moved certainly relative to a year ago or two years ago to a lot more people kind of at the shorter end of that spectrum, which we really didn't offer until 18 months ago or so.

Alex Paris

And do you know a matriculation -- material matriculation from the sort of three-month subscribers to two-year subscribers or are the majority to your two-year subscribers initial subscribers?

John Hass

Yes, the majority of the two-year are initial subscriber. The majority of our three months of subscribers or six months would tend to renew at a like term.

Alex Paris

Got you. And then I know it's early, but do you have a comment on renewal rates on these short-term subscriptions?

John Hass

Yes, I mean, I think what we've talked about -- because as you would expect, renewal rates are very different for a three-month, they are much higher than they are for a two-year. And I think we believe to look at that -- the whole spectrum of renewal rates isn't necessarily that helpful for you.

What we really manage for is the portfolio. We're trying to drive the highest number of unit sales at the highest LTV that we can manage across the portfolio. So, we have subscription -- initial subscription terms which have very low renewal rates as you would expect. A two-year sub is not likely to renew at a very high rate.

Short-term subscription though have a pretty healthy renewal rate and we're able to maintain what I believe certainly relative to the rest of the industry is a very high and is net expected long-term value from a customer with that mix including an awful lot of short-term. So, we're well above -- we're above $160 of expected revenue from a subscriber today and that includes now approaching 60% of those being short-term subscribers.

Alex Paris

That's great. And then what's the price for a two-year subscription, somewhere in the neighborhood of $200 I would imagine?

John Hass

Yes, it can range depending on the promotional calendar from $150 to $200 to even more than that when it's at going into full MSRP.

Alex Paris

just my observation there, at least you got a shot at renewal. The CDs had no shot at renewal, right?

John Hass

Too bad.

Alex Paris

Okay. Last question and then I'll turn it over to somebody else'. And I don't know how can -- if you're comfortable commenting this on a public line, but what are you seeing from free competition? Is free competition starting to charge for their product. Or they have to get a revenue model at some point I would think.

John Hass

Yes, yes. No, they do. And obviously the biggest player in the free space, really the dominant player in the "free space" is Duolingo, who has clearly moved to a deciding that it won't be pro bono forever and they will have a revenue model. And it's principally -- I don't -- I'm not inside of that revenue model, but the two ways they've attempted to do that are through advertising or if you turn off the advertisement -- you can turn off the advertising through the purchase of a subscription.

So, that's the way that we've approached it. We have tried to approach it by offering what we think is the best language solution to help you -- to help get you speaking. We believe people find value in that. We believe we can continue to improve the product and people will find increasing value in that and feel very good about what we're doing and even more excited about what we're going to do.

Alex Paris

Good. Well, again, congrats on the quarter. Thanks very much. I'll get back in the queue.

John Hass

Thanks Alex.

Operator

Thank you. Our next question comes from Steven Frankel with Dougherty. Please proceed with your question.

Steven Frankel

Hi, good afternoon. I apologize if you covered this, but I did hop on late. I'd like to start with the success of the E&E business which to me seems kind of a little bit like the forgotten stepchild. What do you think contributed to your ability to strike this large corporate deal? And is that process repeatable? Maybe what kind of pipeline do you have of other large deals for between now and the end of the year?

John Hass

Yes. Thank you, Steve. So, two things. I think there were two things we had to do fundamentally. First, we had to fix the product. And we believe we did that. As I again mentioned in the call, we actually competed for this very same client five years ago and lost to one of the biggest competitors in space and a good one.

We competed again this year with a new product, new -- relatively new to us in Catalyst, which provides a comprehensive suite of content as well as access to tutors. And the one thing that differentiates us in this case and in a lot of cases is access to software content and tutors in other languages in addition to English.

So, those world language -- because we can offer those and a lot -- not a lot of people do, a lot of people focus on what -- if you're going to pick one thing, you focus on English, but because of the comprehensive suite we have in both tutors and software and fact that we can offer multiple languages, that's a real positive for us in cases like this where we're serving a global client who has multiple needs.

And frankly, the other thing we had to do is we had to set our sights a little bit higher and have the right team in place to go after complicated multinational corporate deals. These are not easy. The lead-times tend to be a bit longer, but they're very, very satisfying when you can get them. And I think it's a clear demonstration of what we can do, not just in E&E, but ultimately, I think what we can do in our consumer business as well.

We are absolutely working more. This is the largest field in our history. We won't often be having deals that are this large, but we feel really good about the fact that we were able to bring it in and we look forward to being with this partner for some time to come.

Steven Frankel

Would you say how long this contract was for? Is this a multi-year deal and how long does it run?

John Hass

I did not. It is a multi-year deal. That's probably all I should say.

Steven Frankel

Okay. And then switching to Lexia, I see -- you always disclosed the renewal rate which you do on kind of a school basis, but given your move to multiple products, could you just give us a sense in general on how deal sizes are rolling year-over-year?

Steven Frankel

Yes, I mean we -- the way we really think about it -- and you're right to ask that question, is one of our goals is to increase the lifetime value of our customer and increasingly those customers are district level customers. And we're looking to do that through increasing penetration of schools in the district, right. And so typically, we're not -- at least today, typically, we're not selling multiple products into the same school. But we are able to penetrate more school buildings as Core5 has proven to be successful in more grade schools and with PowerUp, we have now an easy transition into middle school, certainly -- and in some cases, higher than that. But really that middle school is the next step for us and so that opens up a whole group of potential needs -- use cases for us that we haven't been able to really access before.

And frankly, it's a market that is underserved. And as the non-proficient eighth grader, I talked about the fact that two-thirds of eighth grader are struggling readers, non-proficient readers, that's not a market that is well served. And we believe there's a great opportunity and a great need to serve that with PowerUp.

We haven't talked about it publicly. I would tell you the goal is to improve the lifetime value of each of the districts we're in and we're doing that. And feel very good about the direction in that, feel very good about the addition of PowerUp to the portfolio partially powering the ability to do that.

Steven Frankel

Okay. And then on the consumer business side, I heard you talk about reducing expectations due to the retail portion but if you look at the business that really matters where you're really focused the App Store mobile focused business. So, how did that perform relative to your expectations and what's the next step to fine-tune that business?

John Hass

Yes. Really good question. That business as an ecosystem, if you look at mobile and web together as your question stated performed absolutely in line with our expectations. I would say there was maybe a little more of a mix towards mobile than we expected, again that's where customers are moving. And so we're happy to move there with them and there was a little more of a mix towards shorter term subscriptions than we might have initially expected as well.

And to some degree those two things those two things go hand-in-hand. Mobile tends to have shorter term subscriptions. But the unit growth we feel very good about in that we were able to maintain solid LTVs in that. And we did that against the backdrop where and talked about this in the past, they didn't really go into too much detail here.

We did that against a backdrop where we're still -- on a net basis, we're still running off a lot of three-year subscriptions that were originally purchased in 2015. And that was really the only subscription term we had. That was the primary one we were selling and two-year subscriptions from 2016 and that was really the primary subscription term we had. Those are running off this year. And so we're fighting against that and still growing units and I feel good about that.

Going forward, the keys are continuing to optimize the funnel, allowing customers to have a better experience when they onboard. So that they want to stay with us and we know that they use the product or stay with us until we're trying to ease that onboarding experience and the initial experience they have.

We're working on some really fun stuff, which we're looking forward to sharing with you in November at our Investor Day. And then over time, we like to look for ways to improve the LTV at least for some customers, if not for everyone. And then I think we'll have more to talk about that in the future as well, but not today.

Steven Frankel

Okay, great. Congratulations, especially, in achieving positive EBITDA. It's not easy given that the headwinds you have in the consumer business.

John Hass

Thanks Steven. And thank you for joining us. We really appreciate that you've picked up coverage and we're happy to have you -- I believe on your first call. So, welcome.

Operator

Thank you. Our next question comes from Kevin Manthie with Lake Street Capital. Please proceed with your question.

Kevin Manthie

Hey guys. A lot of my questions have been answered. But if you just go back to literacy for a second, and kind of maybe just briefly touch on -- you think the sales cycle or the seasonality of the sales are changing from Q2 into Q3.

Kevin Manthie

Sure. Yes. Thank you, Kevin. Yes, it's been a -- three and a half years I've been here, it's been a pretty decided change. It was -- Q3 was always the largest quarter. But Q2 was material and still is, especially June. But it's really become a Q3-focused business, we believe driven by a couple of things.

One, schools have learned that what they're buying is a software license and that software licenses tend to be annually renewable and you renew -- you purchase -- you might purchase it, for example, in June, the end of your fiscal year, but when you go to renew it, you're really going to renew it as part of your operating budget, which frees up on July 1st for most schools as they begin the new school fiscal year.

And so it moves into that operating budget purchase cycle until we see very large Julys now -- and very large Augusts and Septembers as well. Interesting fact as they said, July this year was 40% larger than July of last year which was our largest previous month in the history of the company.

If you looked at July of this year, it was just about a $1 million short of the first six months of this year tells you -- gives you a sense of how decidedly the business is moving into the third quarter. So, it's substantial shift in the timing of the business, which has a lot of other applications, already moved cash flow later in the year and things like that too, which is fine. But we're feeling really good about the pipeline and the direction of the business that we see right now.

Kevin Manthie

Okay, that's great. I mean could it be a little bit you're dealing with bigger kind of districts or bigger animals, too? I mean is that some of it? Are you approaching these bigger guys like California example as one in different way? Or are you going to have to throw more seasoned salespeople at it? Or how are you kind of going about that as the doors to these bigger opportunities are open to you guys?

John Hass

Yes -- no, good question. So, later in the year last year, we brought on a couple of very senior folks to help us with national accounts and they are beginning to create kind of a national account sales structure.

We already have a structure where our account executives focus on the largest districts and largest opportunities in the country and we have account managers who focus on smaller districts, both are incredibly important to us.

But we are -- we -- because of the portfolio we now have and the opportunity we see, we are clearly focused on bigger opportunities than we have been in the past. But I think we see even in smaller districts this kind of move -- because we're becoming more central to curriculum, we're not supplemental anymore in many, if not most cases, we -- Core5 is central to the curriculum of the classroom. It is how kids are learning to read with the teacher.

We're moving into the operating budget as opposed to the supplemental purchase at some other point in the school year. And those -- again, those operating budgets free up in July and tend to get and those purchases tend to be made in kind of July, August, September timeframe.

Kevin Manthie

Okay, awesome. And then last one for me that -- I know it's a ways out, but that 2020 cash number, that 2020 targeted cash number of $100 million, what of the kind of initial thoughts there for use of that? Or what are you guys toying around with?

John Hass

Yes, I mean, I think we've always said that if we kind of roll up the models as we had them to begin this year when we shared that, that's where we would be. Whether that ever actually goes on the balance sheet or not, who knows, I wouldn't.

I would love for us to find opportunities to invest in this business, the business we believe in so much and believe in the leadership of this business. But if we cannot find those opportunities, either internally, as we did for example with the introduction of PowerUp and the literacy business, which are additional products in K-12 or additional products in our language business, we will certainly remember who our owners are and do what's right by shareholders in terms of looking at smart returns of capital as well.

But what -- my first goal is to look for opportunities to invest in this business in smart ways that will accelerate the topline and improve the net present value in the business overall, which is ultimately what we're trying to create.

Kevin Manthie

Good. I appreciate it. Thanks guys. Take care.

John Hass

Thank you, Kevin.

Operator

Thank you. Our next question comes from John Lewis with Osmium. Please proceed with your question.

John Lewis

Hey guys. Good morning. Great work and I appreciate all the color you've given today.

John Hass

Thanks Joh. Good to talk to you.

John Lewis

Yes, I mean, it's really -- so I guess first off, over the next basically 30 months, you're guiding to put $80 million in cash on the balance sheet. And I think just looking deeper into the underlying value of these assets, we think they're radically undervalued. I mean -- I think we've looked at the peer group and for annual recurring revenue with businesses of better than 80% gross margins and 90% renewals traded 10 times annual recurring revenue and Rosetta was at about two and a half, and it certainly Lexia has an industry-leading growth rate.

I think if you peel back the onion a little bit deeper, for 100% SaaS-based companies, they're four to five times sales, we're one and a half. And if you look at 12 public and privately disclosed transactions, they're all in the four to eight times -- four to eight multiple of revenue.

And so I think obviously, the space is weight hot late with KKR Vista, Google Capital, Union Square Ventures in the space. And I guess, my question here is, why not both aggressively repurchase stock. I mean, all of these metrics basically gets you to an $800 million to $1 billion valuation and we've got around $300 million market cap?

So, we feel wild discount between private market values and where you are in the public markets. And I think you and the team at Rosetta have just done absolutely incredible job getting us to this spot. But we'd love to see capital return through buybacks and hopefully some attractive reinvestment bets. So, I'm just curious, your thoughts there.

John Hass

Yes, look, I think you have clearly highlighted the two opportunities that we have. To-date, we have afforded ourselves the opportunity to invest significantly in our literacy business and I believe that's why we've been able to grow that business 350% in the five years it's been part of the company.

And I think there will be opportunities to continue to invest in our K-12 business. I alluded to one in the call, which we'll talk about more at our Investor Day, which is this huge need to help English language learners in schools in the U.S., where -- which we serve. But I think there's some really neat things we can do and we're going to talk to you about that when we come together on November 6.

I think with Matt's leadership and the team we now have in place language side, I think there's some really exciting investment opportunities as well to take advantage of the fact that we have 80% aided brand recognition in the U.S. How many companies can say that, let alone loan language learning companies?

We talk a lot about some of our competitors in space, and we should, but there's nobody that can touch 80% aided brand recognition in the U.S. and we have pretty good brand recognition outside the U.S. as well.

And so I view it as my job to have a dialogue with you as investors and will be a part of this at the Investor Day and talk about some of the investment opportunities we see on the business. But I also view it as our job to the extent that we are not able to fully invest that money in a way that will create value for all of us to over time return that capital to shareholders.

Like, we are in a seasonal business, right? We're at $20 million in cash. At the end of June, that's going to start to grow. That $80 million you mentioned, hopefully, $25 million of that's going to come in the next five months. And so we have to be sensitive to that. But I'm a believer in this business and believer in where this -- what we can do with this. And again, my first goal is reinvestment, but if that opportunity doesn't start there, it is reinvest in the stock.

John Lewis

I appreciate that. I think just to put a little finer line on it. I mean, I'm just going through my comp list. Renaissance went out -- Renaissance Learning went out at 4.2 times sales. Archipelago go at 4.2 times sales. Renaissance was resold to second at 5.3 times sales. Vista bought Powerschool for three and a half times sales, and let's see, Vista also merged Powerschool and Onex and its seven and a half times sales earlier this year. They disclosed that publicly, had a $3 billion valuation on $400 million in revenue and so. And Duolingo just did around, I guess, 20 times revenue, right? They disclosed $40 million in revenue, $800 million--

John Hass

As far as I know, it could be an infinite multiple of revenue. Not sure you really--

John Lewis

Yes, I'm not complaining. I'm just really observing about just -- it's a wild discount to literally everything in existence. If you look in annual recurring revenue from public companies, M&A and especially recently M&A, I mean, it's just like six ZIP codes out of -- and like you said, you have Lexia is blowing off the doors and the best consumer brand in the business. So, I know you guys are doing a good job, I'll get off the soapbox, but I--

John Hass

So, here's the thing I would add, because I -- and I'm passionately agreeing with you. And which is why I'm really excited about investment opportunities when we have them, because if I can smartly invest, for example, in a K-12 that creates revenues, which can over time be capitalized not just at our multiple, but where our multiple should be over time, you have the -- that arbitrage, if you will, just to spend some product investment dollars to then feed into a terrific sales force with a growing footprint around the country and this is specific to K-12. I will love -- I would love to advantage of those opportunities, and we'll talk to you about some of those.

And same whole story on the language side. I think we're in a much better position now than we have been in the past to begin to grow that business again with a smart, capable management team to I could think take it to much better places where we will be afforded those -- a much more appropriate multiple. We don't value ourselves, we appreciate you doing that, but we certainly believe there is a more appropriate multiple than where we are today.

John Lewis

You guys are doing a great job. Thanks again. And go get them.

John Hass

Thanks for your support.

Operator

Thank you. At this time, I would like to turn the conference back over to Mr. John Hass for closing comments.

John Hass

Thank you, everybody and thank you for questions. I do hope many of you are able to join us for the Investor Day either in New York City or virtually. We're really excited about the vision we want to share with you on the literacy business, a business that as we've said, sits in the sweet spot of K-12 curriculum. It's really where literacy sits as well as some of the opportunities that we're seeing in K-12 generally.

As I mentioned, if we achieve our 2018 sales goals, Lexia would have grown 350% in the five years since it's been part of Rosetta Stone. We're getting momentum back in the language business. It took a little bit longer as we had to go through and change the entire business model and the product portfolio, but I feel the momentum building there as well. It as transitional, so tends to temporally hide some of the progress, but it's coming.

And behind all of that, we have a market-leading products and a brand which is unmatched. And overall, a company with $190 million in sales this year, almost all of which are subscription-based and which is beginning to grow. And then if we can take that through a business with 80% gross margins, we'll turn that growth into cash flow going forward.

So, thank you all for joining us. and we look forward to seeing you in a few short months with some exciting things to talk about.

Operator

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. And thank you for your participation.