Rosetta Stone 2011 Annual Report Download - page 20

Table of Contents
Risks Related to Our Business
Our introduction of Rosetta Stone Version 4 TOTALe and ReFLEX has increased our costs as a percentage of revenue, may not succeed and may harm
our business, financial results and reputation.
We released Rosetta Stone Version 4 TOTALe in the United States in the third quarter of 2010 and in Japan, the United Kingdom and South Korea in
2011. We introduced ReFLEX in South Korea in July 2011. Rosetta Stone Version 4 TOTALe integrates our existing language-learning software solutions
with web-based services, which provide opportunities for practice with dedicated language conversation coaches and other language learners to increase
language socialization. ReFLEX integrates online language-learning software solutions to improve the listening and speaking skills of English learners with
web-based services, which provide opportunities for practice with dedicated language conversation coaches and other language learners. These web-based
services have a much higher cost as a percentage of revenue than our software solutions. We offer Rosetta Stone Version 4 TOTALe primarily by bundling the
web-based services of TOTALe with our software and audio offerings. At the same time, we expect to provide augmented, free peer-to-peer language practice.
The services associated with Rosetta Stone Version 4 TOTALe and ReFLEX have decreased our margins. Rosetta Stone Version 4 TOTALe sells at a higher
price per unit than our Version 3 software solutions and customers may not choose to engage with conversation coaches or pay higher prices to do so. Rosetta
Stone Version 4 TOTALe and ReFLEX have also presented new management and marketing challenges that differ from the challenges we face in our existing
business. In addition, we are now required to defer recognition of a portion of each sale of Version 4 TOTALe and ReFLEX in connection with the
subscription terms of our online socialization services. Consumer demand for Rosetta Stone Version 4 TOTALe has not been as high as we projected and
overall, our unit sales contracted in 2011 compared to 2010. We cannot assure you that Rosetta Stone Version 4 TOTALe and ReFLEX will be successful or
profitable, or if it is profitable, that it will provide an adequate return on capital expended. If Rosetta Stone Version 4 TOTALe and/or ReFLEX are not
successful, our business, financial results and reputation may be harmed.
Our introduction of an English remediation solution targeting intermediate learners in Asia may not succeed and may harm our business, financial
results and reputation.
In July 2011, we introduced our English remediation solution, ReFLEX, in South Korea. We intend to introduce ReFLEX in Japan during 2012. This
solution targets advanced English learners in Asia, and will provide learners with foundational phonetic skills needed to properly hear and produce
distinctions that are present in English, but absent in Asian languages. This online solution will carry lower price points than our full Rosetta Stone Version 4
TOTALe language-learning solution and may cannibalize sales of our Version 4 solution in Asia. We have devoted significant capital, personnel and
management attention to develop and launch the English remediation offering, including related research and development expenses, and incurring marketing
expenses relating to the launch. This new product presents new management and marketing challenges that differ from the challenges we face in our existing
business. Consumer demand for ReFLEX in South Korea has not been as high as we projected. We cannot assure you that the English remediation solution
will be successful or profitable, or if it is profitable, that it will provide an adequate return on capital expended. If we are not successful in our launch of the
English remediation solution, our business, financial results and reputation may be harmed.
Because we generate all of our revenue from language-learning solutions, a decline in demand for our language-learning solutions or for language-
learning solutions in general could cause our revenue to decline.
We generate substantially all of our revenue from our language-learning solutions, and we expect that we will continue to depend upon language-
learning solutions for substantially all of our revenue in the foreseeable future. Because we are dependent on our language-learning solutions, factors such as
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