Rosetta Stone 2013 Annual Report Download - page 17

Table of Contents
dissatisfaction from perpetual license customers, difficulty setting optimal pricing that could negatively affect sales and/or earnings, revenues that decline over
the short or long term, confusion among our customers, resellers and investors and higher than forecasted costs.
If we move our consumer business substantially online and sell our solutions pursuant to a monthly, quarterly or other subscription fee, rather
than an upfront fee, our revenue, results of operations and cash flow will be negatively impacted in the short term.
Historically, we have predominantly sold our packaged software programs for a single upfront fee and recorded 65-90% of the revenue at the time of
sale. During the year-ended December 31, 2013 consumer revenue from paid online learners increased to $24.6 million or 12% of consumer revenue compared
to $15.0 million or 7% of consumer revenue for the year-ended December 31, 2012. We are delivering more of our solutions online pursuant to different
duration subscription fees. Selling in this manner will result in substantially less cash and revenue from the initial sale to the customer and could have a
substantially negative impact on our revenue, results of operations and cash flow in the short term.
Our revenue is subject to seasonal and quarterly variations, which could cause our financial results to fluctuate significantly.
We have experienced, and we believe we will continue to experience, substantial seasonal and quarterly variations in our revenue and net income. These
variations are primarily related to increased sales of our products and services to consumers in the fourth quarter during the holiday selling season as well as
higher sales to governmental and educational institutions in the second and third quarters. We sell to a significant number of our retailers, distributors and
enterprise and education customers on a purchase order basis and we receive orders when these customers need products and services. As a result, their orders
are typically not evenly distributed throughout the year. Our quarterly results of operations also may fluctuate significantly as a result of a variety of other
factors, including the timing of holidays and advertising initiatives, changes in our products, services and advertising initiatives and changes in those of our
competitors. Budgetary constraints of our enterprise and education customers may also cause our quarterly results to fluctuate.
As a result of these seasonal and quarterly fluctuations, we believe that comparisons of our results of operations between different quarters are not
necessarily meaningful and that these comparisons are not reliable as indicators of our future performance. In addition, these fluctuations could result in
volatility and adversely affect our cash flows. As our business grows, these seasonal fluctuations may become more pronounced. Any seasonal or quarterly
fluctuations that we report in the future may differ from the expectations of market analysts and investors. This could cause the price of our common stock to
fluctuate significantly.
Our introduction of Rosetta Stone Version 4 TOTALe increased our costs as a percentage of revenue, and these and future product introductions
may not succeed and may harm our business, financial results and reputation.
Rosetta Stone Version 4  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. We offer Rosetta Stone Version 4 
primarily by bundling the web-based services of  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 have decreased our margins. Rosetta Stone Version 4  sells at
a higher price per unit than our Version 3 software solutions and customers may choose to not engage with conversation coaches or be willing to pay higher
prices to do so. Rosetta Stone Version 4  has also presented new management and marketing challenges that differ from the challenges we faced in our
previous business. In addition, we are now required to defer recognition of a portion of each sale of Version 4 in connection with the subscription
terms of our online socialization services. We cannot assure you that Rosetta Stone Version 4 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  is not successful, our business, financial results and reputation
may be harmed. We anticipate having to make investments in new products in the future and we may incur significant expenses without achieving the
anticipated benefits of our investment or preserving our brand and reputation. Investments in new products and technology are speculative, the development
cycle for products may exceed planned estimates and commercial success depends on many factors, including innovativeness, developer support, and
effective distribution and marketing. Customers may not perceive our latest offerings as providing significant new value and may reduce their purchases of
our offerings, unfavorably impacting revenue. We may not achieve significant revenue from new product and service investments for a number of years, if at
all.
During 2013, we discontinued sales of new subscriptions; however we will continue to incur costs to fulfill existing subscriptions.
Substantially all of our inventory is located in one warehouse facility. Any damage or disruption at this facility could cause significant financial
loss, including loss of revenue and harm to our reputation.
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