When you go to our site’s Rosetta Stone page you will see that Osmium Partners, Nierenberg Investment Management, and Roumell Asset Management were among the 3 biggest investors in Rosetta Stone Inc (RST). Osmium Partners and Nierenberg Investment Management already filed 13Ds on RST (which we covered in detail here) and today Roumell Asset Management joined the gang and sent the following letter to the board of directors:
Roumell Asset Management, LLC owns over 5% of Rosetta Stone’s (RST) outstanding shares. We are patient, long-term investors in well-capitalized out-of-favor, overlooked and misunderstood securities. We believe RST fits nicely in our portfolio and remains significantly undervalued. We understand why certain private equity firms would be reaching out to the company now given the company’s current market capitalization and recent operational challenges. However, we would only be supportive of a buyout that fairly represents the value of the company and we believe that amount is at a substantial premium to the current price.
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Recently we met with new interim CEO, John Hass, Chairman Patrick Gross and Global Enterprise & Education (E&E) President, Judy Verses. It is our view that these individuals make up an exceptionally strong company nucleus. They have a well-articulated, thoughtful and reasonable plan toward profitability with management incentives properly in place. Chairman Gross has impressed us an astute businessman with a long record of success and temperamentally fit to oversee what we believe is a very exciting new phase for the company.
Mr. Hass, with his Goldman Sachs and operational background, appears to us to be well-suited to take advantage of RST’s market opportunity, particularly with the assistance of experienced cost-rationalizer Al Angrisani. To wit, he is proceeding with laser-like focus on the company’s E&E business and combining three current technology platforms into one, which will result in significant cost savings. Mr. Hass understands that the company’s brand is a valuable asset and views Lexia as a likely homerun for the company. Lexia now has eight consecutive quarters of double-digit year-over-year revenue growth with mid-90% renewal rates. The company’s decision to combine Lexia Reading and K-12 language learning into Language Arts (LA), under the direction of proven education builder Mr. Nick Gaehde, makes great sense. Our field checks indicate that Lexia is being very well received in the marketplace and winning business as a result of its demonstrated efficacy through measureable results and consequently becoming more widely known among educators purchasing reading software. Lexia’s revenue has grown from $15 million at the time of purchase to today’s $25 million run rate. Through discussions with knowledgeable investors in the education space, we believe the LA segment itself, roughly $65 million in revenue, is worth more than the company’s current enterprise value. M&A transactions in the space are known to the board and don’t need to be reiterated here.