Thomas Kelly, a contributor to Seeking Alpha wrote an interesting analysis on Rosetta Stone and why he would suggest to buy shares.
Though their shares have dropped by 67% over the past year and Rosetta Stone is currently trading below book value, Kelly sees enough potential in the company for a turn-around.
At the moment, Rosetta Stone has $111 million in cash plus $60 million in accounts receivable and notably no debt, enough money to enable them to continue to operate at current levels for several years. Compared to Livemocha’s $14 million investments that’s more than 10 times the runway.
Livemocha’s tactic seems to go more and more towards grabbing market share from Rosetta Stone. In an interview with GeekWire Livemocha’s CEO Michael Schutzler points out that the sale of the learning course books at Barnes & Noble and Amazon are going well.
“(The) bulk of Rosetta Stone’s sales that generate actual margin are in retail. Berlitz has been there for decades,” said Schutzler. “Our partners are Merriam Webster … and therefore we think we have a shot at winning in this arena as well.”
Earlier this year, Schutzler took another shot at Rosetta Stone and its ability to deliver Internet based courses, saying
Rosetta Stone would have a “long mountain to climb” in order to compete with Livemocha in online language learning.
As a side note: it still blows my mind that Rosetta Stone isn’t being more aggressive about the fact that the TOTALe product is available on the Internet for over two years now. You can watch my interview with Duane Sider we had back in October 2009 in which we discuss the advantages of the new product that ties in sessions with language tutors and interaction with other learners around the globe, just like Livemocha, busuu, Babbel etc.
Still to this day, everyone is talking about CD-Roms and yellow boxes which is of course great for Livemocha’s strategy.
But back to Thomas Kelly. The major problem for Rosetta Stone was the “screetching halt” of revenue growth as main buyers like the U.S. army and government cut back purchases of the premium products which is also true for consumers who are not willing to spend $500 or more for language learning in a down economy.
Here lies another chance for Livemocha, of course and the startup is pushing into the government and institutional sector as well for quite a while now.
Kelly still believes that Rosetta Stone will be able to streamline the product as the branding is very strong, the product still the best on the market. He suggests to cut back on the sales force which did not perform that well anyway.
I think, Rosetta Stone needs to come out with smaller and therefore more affordable products that can give learners a taste that makes them want to upgrade to the full price $500 version. The high price of the product and the cost of their sales team and marketing efforts pushes them into a niche of the learning market as people who are willing to spent this much on a learning product are a rare species. Having several products would open them new market segments.
Mobile learning applications might be an interesting market segment as the smaller competitors busuu and Babbel seem to get about 50% of their growth from learning apps for smartphones.