Rosetta Stone 2012 Annual Report Download - page 62

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Table of Contents
Marines Corps contracts, partially offset by a $4.5 million increase in education bookings and a $2.9 million increase in corporate and non-profit
bookings in 2011 compared to the prior year period.

We categorize and report our revenue in two categories—product revenue and subscription and service revenue. Product revenue includes
revenues allocated to the software product from sales of Rosetta Stone Version 4  and revenues from the sale of audio practice products.
Subscription and service revenue includes revenues allocated to time-based subscription licenses of our web-based  services, as well as
revenues from training and professional services.
We began bundling time-based subscription licenses of our web-based  services with product licenses of our Rosetta Stone Version 3
language-learning solutions in the U.S. consumer market during the third quarter of 2010, in Japan during the first quarter of 2011, in the United
Kingdom during the second quarter of 2011, and in Korea during the third quarter of 2011, with the launch of Rosetta Stone Version 4 . As a
result, we typically defer 10%-35% of the revenue of each of these bundled sales. We will recognize the deferred revenue over the term of the
subscription license in accordance with Accounting Standards Codification subtopic 985-605, 

Product revenue decreased $20.2 million, to $195.4 million during the year ended December 31, 2011 from $215.6 million during the year ended
December 31, 2010. Consumer product revenue decreased $16.8 million, primarily as a result of the allocation of revenue to the online services
component of our software from the launch of Rosetta Stone Version 4  in the U.S. consumer market during the third quarter of 2010 and
ROW consumer markets throughout 2011, as described above. Rosetta Stone Version 4  bundles time-based subscription licenses of our web-
based  services with perpetual licenses of , the product feature which previously comprised our
Rosetta Stone Version 3 language-learning solutions. Approximately 10%-25% of each of these bundled sales is allocated to online services.
Institutional product revenue decreased $3.4 million as a result of a shift from sales of perpetual licenses to sales of renewing online subscriptions.

Subscription and service revenue increased approximately 69%, or $29.8 million, to $73.1 million for the year ended December 31, 2011, from
$43.3 million during the year ended December 31, 2010. The increase in subscription and service revenues was due to a $20.6 million increase in online
service revenue related to Version 4  and a $9.2 million increase in Institutional subscription and service revenue related to growth in the
institutional customer base with renewing online subscriptions.
There was a $4.7 million increase in deferred revenue during the year ended December 31, 2011 related to the launch of Rosetta Stone V4
 and increased sales of exclusively online subscriptions.
59
   
       
    
Product revenue $ 195,382 72.8%$ 215,590 83.3%$ (20,208) (9.4)%
Subscription and service
revenue 73,067 27.2% 43,278 16.7% 29,789 68.8%
Total revenue 268,449 100.0% 258,868 100.0% 9,581 3.7%