Rosetta Stone: Speaking Wall Street’s Language

Rosetta Stone: Speaking Wall Streets Language

ÉpicÉ. Caliente. Hot. In any tongue, stock in Rosetta Stone, the popular
language-learning software company that just went public — yes, IPOs still
exist — is blazing. On the evening of April 15, the company was able to
price its IPO at $18 per share, above the estimated range of $15-17. It was
the first IPO to price above its range in nearly a year. The next day,
shares shot up 40%, the best one-day IPO rise in the last year .

Why are investors rushing to Rosetta First off, the company’s growth has
exploded over the past four years. Rosetta Stone generated $209 million in
revenue in 2008, compared to $25.4 million in 2004 — that’s a 723% increase.
Net income grew 632%, to $13.9 million, over the same period. Some 95% of
Rosetta Stone’s revenues come from the U.S. market, so there’s a huge growth
opportunity overseas. Plus, institutional customers like schools,
corporations and government agencies account for some 20% of the company’s
sales. Rosetta Stone recently created a customized Arabic program for the
U.S. Army, which includes military-specific vocabulary, and the Defense
Intelligence Agency is a client. “These institutional revenue streams tend
to be pretty steady,” says Brady Lemos, equity research analyst at
Morningstar. “The terms are often locked in over a period of time, which
protects the company a bit from consumer spending swings.”

Thanks to relentless marketing — Rosetta Stone commercials, some of which
featured Michael Phelps after the Olympics, are ubiquitous — and a strong
retail distribution network that includes Amazon, Apple, Barnes & Noble and
mall kiosks throughout the country, Rosetta Stone is the most recognized
brand in the $5 billion U.S. language learning market . Also, a second language enhances your resume; job searchers need
every advantage they can get these days. “In this era of unemployment,
language skills are very much in vogue,” says Scott Sweet, senior managing
partner at IPO Boutique, a research firm. “It can open up so many more
doors.” Though Rosetta Stone software is expensive — the typical three-level
program costs about $500 — it’s still more cost-effective than the
classroom, or extensive one-on-one tutoring.

In a challenging consumer spending environment, however, that $500 could be
used for more essential purchases. A second language is nice, but it doesn’t
pay the rent. Another challenge for Rosetta Stone: the barrier to entering
the language learning market is small. “While we think its unique self-study
program is scalable, niche software developers like this rarely enjoy
success over the long-term,” Lemos wrote in an April research note. “There
are many larger software companies with much greater financial, research and
development, and marketing resources, and Rosetta Stone’s recent success
could draw these firms into the market.” It probably wouldn’t cost a
Microsoft or Google all that much to teach a foreign language. If these
companies joined the translation trade, arrevederci to Rosetta Stone’s