Rosetta Stone 2013 Annual Report Download - page 47

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Table of Contents
Revenue by Product Revenue and Subscription and Service Revenue
We categorize and report our revenue in two categories—product revenue and subscription and service revenue. Product revenue includes revenues
allocated to our software products, revenues from the sale of audio practice products and mobile applications. 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 bundle time-based subscription licenses of our web-based  services with product licenses of our language-learning solutions. As a result, we
typically defer 10%-35% of the revenue of each of these bundled sales. We recognize the deferred revenue over the term of the subscription license in accordance
with Accounting Standards Codification subtopic 985-605, In the fourth quarter in 2013, we reduced the stand alone prices
of renewals of our  services. Accordingly, the amount we defer related to each bundled sale has decreased.
The following table sets forth revenue for products and subscription and services for the years ended December 31, 2013 and 2012:







Product revenue
$156,792
59.2%
$180,919
66.2%
$(24,127)
(13.3)%
Subscription and service revenue
107,853
40.8%
92,322
33.8%
15,531
16.8 %
Total revenue
$264,645
100.0%
$273,241
100.0%
$(8,596)
(3.1)%
Product Revenue
Product revenue decreased $24.1 million, or 13%, to $156.8 million during the year ended December 31, 2013 from $180.9 million during the year
ended December 31, 2012. Consumer product revenue decreased $19.7 million driven by lower prices on our Rosetta Stone Version 4  product
software bundle driven by promotional pricing in our North America Consumer segment, increased levels of daily deals and a shift in our sales channel mix.
$2.9 million of the decrease in Global Enterprise & Education product revenues is a result of a shift from sales of product licenses to sales associated with the
renewal of online subscriptions.
Subscription and Service Revenue
Subscription and service revenue increased $15.5 million, or 17%, to $107.9 million for the year ended December 31, 2013. The increase in
subscription and service revenues was due to an $11.1 million increase in consumer online service revenue related to Version 4  as well as a growing
base of exclusively online subscription sales. Enterprise and education subscription and service revenues also increased $4.5 million related to growth in the
enterprise and education customer base with renewing online subscriptions. $1.2 million of the increase in the enterprise & education revenue is attributable to
Lexia.
Deferred revenue increased $15.4 million during the year ended December 31, 2013, primarily related to acquired deferred revenue of $2.0 million, an
increase of $7.1 million in Lexia deferred revenue and the increase in our base of paid subscribers.
We are currently evaluating changes to our existing solutions as well as the introduction of new solutions, including additional solutions for kids. If we
implement additional subscription-based solutions, it could result in lower revenues over the next twelve months as revenues would be spread over the
subscription period.

The following table sets forth cost of product revenue and subscription and service revenue, as well as gross profit for the years ended December 31,
2013 and 2012:
44