Is Rosetta Stone Inc (RST) a Buy?

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Technology has, so far, failed to allow us to upload new languages into our brains. The closest we can get is by using the highly recognizable, kiosk mainstay Rosetta Stone Inc (NYSE:RST). The computer-based language learning company had a rough few years on the market after a high-profile, richly valued IPO followed by skyrocketing marketing expenses and competition. Though the stock recovered, it just recently received a fresh haircut, courtesy of a lackluster earnings report. Is Rosetta Stone a value tech play for the opportunistic investor? Let’s take a closer look.

Rosetta Stone Inc (NYSE:RST)

Earnings recap
Rosetta Stone Inc (NYSE:RST) disappointed investors and analysts this week with both a top- and a bottom-line miss. Revenues came in at $63.9 million, about $1 million shy of analyst expectations and an 8% drop from the year-ago quarter. For net income, things went into the red as the company posted a loss of $0.22 per share. Last year, the company posted a $0.09 loss. The Street was expected a profit of $0.08 for this quarter.

There was some positive news, though, for the company. Gross margins improved 330 basis points (we’ll touch on this in a moment), though both operating and net margins dropped 310 and 470 basis points, respectively.

What investors need to understand is that Rosetta Stone Inc (NYSE:RST) is in a product cycle transition. The days of airport and mall kiosks selling German language packs are pretty much over. Management is committed to investing in mobile platforms and social elements to keep the company relevant.

The plan
Rosetta Stone Inc (NYSE:RST) launched a mobile app for Android last month. With no marketing (very important given its tremendous marketing spend for traditional products), the app had 50,000 downloads within three weeks. Management believes that the app, which gives users some sample products and encourages them to visit the website, will help alleviate one of the company’s biggest issues — advertising and marketing spend. By generating leads via the low-cost app, the company will be less reliant on television and print ads.

The new plan for Rosetta Stone Inc (NYSE:RST) is online learning (with user count up by nearly triple digits year over year) and digital distribution with a mobile focus. This is a much leaner, more efficient machine than the bloated kiosk model that got the company in trouble to begin with.

Foolish bottom line
Rosetta Stone is steering back toward growth, investing heavily in R&D. Moreover, adjusted EBITDA is growing very quickly — showing the first signs of a successful turnaround strategy. This quarter, the company brought in $2.4 million — a 39% gain over the prior year’s number.

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