Rosetta Stone 2015 Annual Report Download - page 30

Table of Contents
For additional information regarding our segments, see Note 17 of Item 8, . For additional information
regarding fluctuations in segment revenue, see Results of Operations, below. Prior periods have been reclassified to reflect our current operating segments
presentation and definition of segment contribution.
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We derive revenue from sales of language-learning, literacy, and brain fitness solutions. Revenue is presented as product revenue or subscription and
service revenue in our consolidated financial statements. Product revenue primarily consists of revenue from our perpetual language-learning product
software, our audio practice products, and certain mobile applications. Our audio practice products are often combined with our language-learning software
and sold as a solution. Subscription and service revenue consists of sales from web-based software subscriptions, online services, professional services, and
certain mobile applications. Our online services are typically sold in short-term service periods and include dedicated online conversational coaching
services and access to online communities of language learners. Our professional services include training and implementation services.
In the Consumer market, our perpetual product software is often bundled with our short-term online conversational coaching and online community
services and sold as a package. Approximately $25 to $39 in revenue per unit is derived from these short-term online services. As a result, we typically defer
10% to 35% of the revenue of each of these bundled sales to be recognized over the term of the service period. The content of our perpetual product software
and our web-based language-learning subscription offerings are the same. We offer our customers the ability to choose which format they prefer without
differentiating the learning experience.
We sell our solutions directly and indirectly to individuals, educational institutions, corporations, and governmental agencies. We sell to enterprise
and education organizations primarily through our direct Enterprise & Education sales force as well as through our network of resellers and organizations
who typically gain access to our solutions under a web-based subscription service. We distribute our Consumer products predominantly through our direct
sales channels, primarily our websites and call centers, which we refer to as our direct-to-consumer channel. We also distribute our Consumer products
through select third-party retailers and distributors. For purposes of explaining variances in our revenue, we separately discuss changes in our Enterprise &
Education and our Consumer sales channels because the customers and revenue drivers of these channels are different.
Within our Enterprise & Education segment, revenue in our education, government, and corporate sales channels are seasonally stronger in the second
half of the calendar year due to purchasing and budgeting cycles. Our Consumer revenue is affected by seasonal trends associated with the holiday shopping
season. We expect these trends to continue.
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Cost of product revenue consists of the direct and indirect materials and labor costs to produce and distribute our products. Such costs include
packaging materials, computer headsets, freight, inventory receiving, personnel costs associated with product assembly, third-party royalty fees and
inventory storage, obsolescence and shrinkage. The cost of subscription and service revenue primarily represents costs associated with supporting our web-
based subscription services and online language-learning services, which includes online language conversation coaching, hosting costs, and depreciation.
We also include the cost of credit card processing and customer technical support in both cost of product revenue and cost of subscription and service
revenue.
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We classify our operating expenses into the following categories: sales and marketing, research and development, and general and administrative.
When certain events occur, we also recognize operating expenses related to asset impairment and operating lease terminations.
Our operating expenses primarily consist of personnel costs, direct advertising and marketing expenses, and professional fees associated with contract
product development, legal, accounting and consulting. Personnel costs for each category of operating expenses include salaries, bonuses, stock-based
compensation and employee benefit costs. Included within our operating expenses are restructuring costs that consist primarily of employee severance and
related benefit costs, contract termination costs, and other related costs associated with our restructuring activities.
 Our sales and marketing expenses consist primarily of direct advertising expenses related to television, print, radio, online and
other direct marketing activities, personnel costs for our sales and marketing staff, and commissions earned by our sales personnel. Sales commissions are
generally paid at the time the customer is invoiced. However, sales commissions are deferred and recognized as expense in proportion to when the related
revenue is recognized.
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