Rosetta Stone 2011 Annual Report Download - page 23

Table of Contents
to reduce their sales of our products. In addition, if one or more these bookstores or other retailers or distributors are unable to meet their obligations with
respect to accounts payable to us, we could be forced to write off such accounts. Any bankruptcy, liquidation, insolvency or other failure of any of these
retailers or distributors could result in significant financial loss and cause us to lose revenue in future periods.
Product returns and pricing concessions could exceed our estimates, which would diminish our reported revenue.
We offer consumers who purchase our packaged software and audio practice products directly from us six-month unconditional full money-back. We
also permit some of our retailers and distributors to return packaged products, subject to certain limitations. We establish revenue reserves for packaged
product returns based on historical experience, estimated channel inventory levels, the timing of new product introductions and other factors. If packaged
product returns exceed our reserve estimates, the excess would offset reported revenue, which could hurt our reported financial results.
We are in the process of testing changes to the pricing and delivery methods of our products. If we reduce our prices or our method of delivery as a result
of successful tests in an effort to increase sales volume and overall market penetration, we may provide our retailers and distributors with price protection on
existing inventories, which would allow these retailers and distributors a credit against amounts owed with respect to unsold packaged product under certain
conditions. These price protection reserves could be material in future periods.
Intense competition in our industry may hinder our ability to generate revenue and may diminish our margins.
The market for foreign language-learning solutions is rapidly evolving, highly fragmented and intensely competitive, and we expect both product and
pricing competition to persist and intensify. Increased competition could cause reduced revenue, price reductions, reduced gross margins and loss of market
share. Many of our current and potential competitors have longer operating histories and substantially greater financial, technical, sales, marketing and other
resources than we do, as well as greater name recognition worldwide. The resources of these competitors also may enable them to respond more rapidly to
new or emerging technologies and changes in customer requirements, reduce prices to win new customers and offer free language-learning software or online
services. We may not be able to compete successfully against current or future competitors.
As the market for foreign language solutions continues to develop, a number of other companies with greater resources than ours could attempt to enter
the market or increase their presence by acquiring or forming strategic alliances with our competitors or our distributors or by introducing their own
competing products. These companies and their products may be superior to any of our current competition. We have seen increased competition from
imitation products which are lower priced lower quality products that attempt to capitalize on the popularity of our products by utilizing similar packaging and
marketing materials. In addition, we see increased competition from community practice providers which provide low priced entry points for consumers
interested in learning languages. We may not have the financial resources, technical expertise, marketing, distribution or support capabilities to compete
effectively with any of these new entrants to the market.
We have seen an increase of language-learning applications on mobile platforms, such as iPhones and iPads, that are offered at extremely low prices and,
while they are currently limited in scope and ability to teach languages, they may present a threat as they develop.
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