Rosetta Stone – posting lacklustre quarter

Rosetta Stone (NYSE: RST) posted their second quarter results today and they were below analyst estimates by a fair chunk.

Investors should keep in mind the company is still in the middle of a turnaround process to get costs down and restore some semblance of profitability while keeping their main product line viable in the world of freely offered software. The current CEO is new to the position, but has been with the company as their CFO prior to being promoted to CEO. They are trying to optimize the revenue stream and milk it for what it is worth, and this is going to be a lumpy process as they figure out what is and what is not working – keep in mind that sales and marketing has crept up from 45.5% of revenues in 2009 to 50.6% in 2010 and 60.2% in 2011; assuming you can ratchet down this ratio without adversely affecting the top line, you will be adding significant incremental profit to the bottom line. It just isn’t going to be done in a quarter.

The stock will probably get hammered about 15% in Thursday’s trading and I will consider adding to my position if it goes to the single digits.

Keep in mind that the company does have $120 million cash on the balance sheet and at Wednesday’s closing price of $13.13/share, this does make an enterprise value of $156 million. This is sure to go lower on Thursday. When you consider this is a software company with a quarter billion in sales a year, this seems to be relatively cheap, albeit in a business that is not going to grow like a weed.

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