Rosetta Stone drops on consumer business worries

NEW YORK (AP) — Shares of Rosetta Stone Inc. on Friday plunged to a new low after the language learning software company signaled slowing growth in its U.S. consumer business.

"We feel that the current economic environment is having an effect on our U.S. consumer business, resulting in greater variability in our operating results as we head into the holiday season," said CEO Tom Adams in a statement Thursday.

Shares sank $2.16, or 10.5 percent, to $18.35 in morning trading Friday. The shares earlier traded as low as $17.71, their cheapest price since their April debut. Their previous bottom of $19.34 was set Wednesday.

Late Thursday, Rosetta Stone reported net income of $5.3 million, or 25 cents per share, down 12 percent from $6 million, or 36 cents per share, in the same quarter last year. Excluding special charges for stock-based compensation, fees for a canceled stock offering and other expenses, the company earned 29 cents per share.

Sales rose 12 percent to $67.2 million in the latest quarter.

Analysts polled by Thomson Reuters had expected profit of 24 cents per share on sales of $65.6 million.

Rosetta Stone's results came as consumers were more reluctant to spend on nonessential items amid high unemployment and constricted bank lending. On Friday, the government said the unemployment rate rose to 10.2 percent in October, a 26-year high.

Jefferies analyst Ross MacMillan downgraded Rosetta Stone to "Hold" from "Buy," observing that the company's U.S. consumer sales growth is decelerating, while marketing costs are high at 48 percent of sales. He noted the company's sales from kiosks dropped 3 percent while direct-to-consumer sales grew 7 percent, a slowdown from 21 percent growth in the year to date.

"With unit volumes decelerating, it is not clear what sort of unit growth we might see next year," wrote MacMillan in a note to clients.

Rosetta Stone said its institutional and international segments did well, but MacMillan noted that those divisions aren't big enough to offset the effect of a weaker U.S. consumer.

For the current quarter, Rosetta Stone said it expects sales between $72 million and $76 million, and adjusted earnings per share between 39 cents and 44 cents.

Wall Street projects per-share profit of 41 cents and revenue of $74.5 million.

Shares of Rosetta Stone, based in Arlington, Va., began trading after an initial public offering in April. In August, the company canceled a secondary stock offering. Shares are off about 28 percent since then.