Rosetta Stone 2014 Annual Report Download - page 8

Table of Contents
 These customers include government agencies and organizations developing
workforces to serve non-native speaking populations, offering literacy programs and preparing members for overseas missions.
 We promote interest in this market with onsite visits, trade show and seminar attendance, speaking engagements and direct mailings.
We utilize third-party resellers to provide our language-learning solutions to businesses, schools, and public-sector organizations
in emerging markets predominantly outside the U.S.
Our Global Enterprise & Education literacy distribution channel utilizes relationships with third-party resellers focused on the sale of Lexia Learning
solutions to K-12 schools.
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Our strategy is to maintain a flexible, diversified and low-cost manufacturing base for our prepackaged products. We use third-party contract
manufacturers and suppliers to obtain substantially all of our product and packaging components and to manufacture finished products. We believe that we
have good relationships with our manufacturers and suppliers and that there are alternative sources in the event that one or more of these manufacturers or
suppliers is not available. We continually review our manufacturing and supply needs against the capacity of our contract manufacturers and suppliers with a
view to ensuring that we are able to meet our production goals, reduce costs and operate more efficiently.
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Rosetta Stone competes in several categories within the technology-based learning industry, including consumer, enterprise and educational language
learning, literacy and brain fitness.
The language-learning market is highly fragmented globally and consists of a variety of instructional and learning modes: classroom instruction
utilizing the traditional approach of memorization, grammar and translation; immersion-based classroom instruction; self-study books, audio recordings and
software that rely primarily on grammar and translation; and free online and mobile offerings that provide content and opportunities to practice writing and
speaking. Within consumer-focused language learning, our competitors include Berlitz (Benesse Holdings), Pimsleur (Simon & Schuster, part of CBS
Corporation), Living Language (Penguin Random House, a joint venture of Pearson and Bertelsmann), McGraw-Hill Education, Duolingo, Inc., Fluenz,
Busuu Ltd., Babbel (operated by Lesson Nine GmbH) and many other small and regionally-focused participants. In the enterprise and education-focused
language market, we compete with EF Englishtown, Global English (Pearson), Wall Street English (Pearson), inlingua, Imagine Learning, Transparent
Language, as well as many private language schools and other classroom-based courses.
In the literacy category, we compete primarily in the K-12 Digital Reading space in the U.S. with Scholastic, Inc., Imagine Learning, Achieve3000,
Scientific Learning, Odyssey (Compass Learning), Waterford Early Reading (Pearson), Renaissance, and Istation.
In the brain fitness category, the market is new and highly fragmented. We compete with Lumosity, Elevate and Posit Science as well as many online and
digital app providers.
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Our business is affected by variations in seasonal trends. 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, due to the timing of when these organizations receive annual funding. In particular, we generate a significant portion of our consumer sales in the
fourth quarter during the period from Black Friday through Cyber Monday. 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 and generally are highest in the third and fourth quarters. These seasonal trends create a situation in which we
typically expend cash in the first and second quarters of the year and generate cash in the third and fourth quarters of the year.
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Our intellectual property is critical to our success. We rely on a combination of measures to protect our intellectual property, including patents, trade
secrets, trademarks, trade dress, copyrights and non-disclosure and other contractual arrangements.
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