Discuss about the Rosetta Stone for analysis of suitable tools .
Executive Summary of Rosetta Stone
The main purpose is to show the advantages and disadvantages of showing the IPO. The project shows the identification of the present problems of Rosetta Stone. The methods used shows the analysis of suitable tools solve the relevant issues to address the problems
Background of the company
Rosetta Stone, is a learning software company. The history of the company originates from the year 1980 by an economics professor Allen Stoltzfus. The seed of initiation of the company was due to the slow progress of the professor to learn the Russian language. It was found that the conventional classroom teaching of the Russian Language was becoming ineffective and the Mr. Allen Stoltzfus was looking for more natural way to learning language. Later on, the implementation of computer technology was implemented with pictures and sound. The company started the distribution of the software services was done with the CD ROM technology in the year 1990. This provided the users with an opportunity to learn the new languages effectively. The software used the combination of images, text to teach the children to make the children to make them learn their first language, the company named this method as Dynamic immersion method. “Dynamic”, because of the use of digital technology and immersion due to the convenience of the learning from anywhere.
Despite of the global economic crisis the company was keen on going public. This fourth quarter of the company showed an expansion of 53% despite of the degrading economic conditions and the company was able to expand 53% of its revenues. Tom Adams considered IPO as a crucial opportunity to establish business credibility.
Identification of issues
Speaker Note
The problem was related to the decision making of the company going public. The company had to decide between the advantages and the disadvantages of going public and the various other alternatives to the IPO. Moreover since Rosetta Stone was privately owned, then offer to the public to buy the shares was prohibited. It was facing several issues in obtaining loan, this shows the dependence of the company on negotiations between other parties.
Analysis of the problems/issues
Slide 6 Analysis of the problems/issues
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Exhibit 7 |
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ROSETTA STONE, INC.: PRICING THE 2009 IPO |
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Financial Forecast for Rosetta Stone (in millions of dollars except percentages) |
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|
2008A |
2009E |
2010E |
2011E |
2012E |
2013E |
2014E |
2015E |
2016E |
2017E |
2018E |
|
|
Revenue growth |
52.5% |
35.0% |
35.0% |
30.0% |
25.0% |
23.0% |
21.0% |
18.0% |
13.0% |
10.0% |
5.0% |
|
Gross margin |
86.3% |
86.0% |
86.0% |
85.0% |
84.0% |
83.0% |
82.0% |
81.0% |
80.0% |
79.0% |
78.0% |
|
SGA exp / Revenue |
63.5% |
63.5% |
63.5% |
63.0% |
63.0% |
62.5% |
62.5% |
62.5% |
62.5% |
62.5% |
62.5% |
|
R&D exp / Revenue |
8.8% |
9.0% |
9.0% |
8.5% |
8.5% |
8.5% |
8.5% |
8.0% |
8.0% |
8.0% |
8.0% |
|
Capital expenditures |
7.0 |
5.0 |
8.0 |
9.0 |
9.5 |
10.0 |
11.0 |
11.0 |
9.0 |
8.0 |
5.0 |
|
NPPE turnover |
13.5 |
15.0 |
15.2 |
15.4 |
15.6 |
15.8 |
16.0 |
16.2 |
16.4 |
16.8 |
17.3 |
|
NWC turnover |
8.9 |
9.0 |
9.0 |
9.0 |
8.5 |
8.5 |
8.0 |
8.0 |
8.0 |
8.0 |
8.0 |
|
Revenue |
209.4 |
282.7 |
381.6 |
496.1 |
620.1 |
762.7 |
922.9 |
1,089.0 |
1,230.6 |
1,353.6 |
1,421.3 |
|
Gross profit |
180.7 |
243.1 |
328.2 |
421.7 |
520.9 |
633.1 |
756.8 |
882.1 |
984.5 |
1,069.4 |
1,108.6 |
|
SGA expense |
133.0 |
179.5 |
242.3 |
312.5 |
390.7 |
476.7 |
576.8 |
680.6 |
769.1 |
846.0 |
888.3 |
|
R&D expense |
18.4 |
25.4 |
34.3 |
42.2 |
52.7 |
64.8 |
78.4 |
87.1 |
98.4 |
108.3 |
113.7 |
|
EBIT |
29.4 |
38.2 |
51.5 |
67.0 |
77.5 |
91.5 |
101.5 |
114.3 |
116.9 |
115.1 |
106.6 |
|
Net working capital |
23.4 |
31.4 |
42.4 |
55.1 |
73.0 |
89.7 |
115.4 |
136.1 |
153.8 |
169.2 |
177.7 |
|
Net PPE |
15.7 |
18.8 |
25.1 |
32.2 |
39.7 |
48.3 |
57.7 |
67.2 |
75.0 |
80.6 |
82.2 |
Speaker note for Slide 6
The forecasted revenue growth of is mainly declining from 2008 to 2018 indicating a slow growth prospects of the company. Although the net working capital, is expected to increase on a yearly basis the revenue growth is decreasing due to similar markets giving competition to Rosetta Stone.
Slide 7 Analysis of the revenue forecast
Speaker note for Slide 7
Analysis of the revenue forecast
The revenue forecast analysis clearly shows the declining trend of the revenue of the company. This is evident because in the year 2008 the forecasted revenue growth was 52%, while in the year 2018 the revenue growth percentage was expected to grow by 5%. Although the net working capital, is expected to increase on a yearly basis the revenue growth is decreasing due to similar markets giving competition to Rosetta Stone.
Slide 8 Advantages of going public
Speaker note for Slide 8
Advantages
The advantage of the company was seen in the form of issuing of 6.25 million shares to the public this represents 30% of the company’s total stake. This shows that the company already issued half of the share process and the next half of the share price issue was due. Based on the financial figures from the last five years it can be further stated that the company will be able to increase the revenue by 725% and 625% increase in the net income.
Slide 9 Disadvantages of going public
Speaker note for Slide 9
There are several issues related to the transfer of owner of the company. The public company may become fully owned by the Government and company rights may be completely lost in an IPO offering. The credit limit of an IPO company will further increase and the company will be entitled to more debt. In case, the company is not able to project the required amount of revenue, the Government may decide to dissolve shares to private companies.
Slide 10 Discount rate appropriate for the cash flow forecast
|
Beta |
|||||
|
9.03% |
0.69 |
0.79 |
0.89 |
0.99 |
1.09 |
|
5.5% |
7.1% |
7.6% |
8.2% |
8.7% |
9.3% |
|
6.0% |
7.4% |
8.0% |
8.6% |
9.2% |
9.8% |
|
6.5% |
7.7% |
8.4% |
9.0% |
9.7% |
10.3% |
|
7.0% |
8.1% |
8.8% |
9.5% |
10.2% |
10.9% |
|
7.5% |
8.4% |
9.2% |
9.9% |
10.7% |
11.4% |
Speaker note
The weighted average beta is mainly calculated from beta of the competitors companies. In addition, after the effective valuation, 9.03% is assumed a the overall discount rate, which could be used in cash flow forecast to determine the Present value of the forecasted cash flow.
Advantages of multiple market approach
Speaker note for Slide 11
The market multiples approach is useful for the valuation of the similar assets having similar prices. It is useful to determine the present position of Rosetta stone in terms of similar other companies. It also helps in determining the future growth of the company and assists the investors in making an adequate decision for investing in the company. It is also useful in evaluating the free cash flow after a particular financial period.
The net results clearly shows that the forecasted share value of the IPO is higher than the outstanding amount of the premoney shares.
Disadvantages of multiple market approach
Speaker note for Slide 12
The primary drawback of this model is non- consideration of economic crisis in which the liquidity of the position of a cannot be assessed by using this model. It also deals with projecting either the high or the low values of an organization which may incorrectly depict the performance of a company.
The disadvantage is seen in the non-inclusion of the corporate tax rate, which may directly affect then earning g of then revenue of the company.
Advantages of Discounted Cash flow method
Speaker note
It takes into consideration the intrinsic value of the stock. Unlike the price earning technique, the DCF is reliant on the availability of the free cash flow. This will help the investors to identify the source of cash flow. The rates are estimated in such a basis that the share prices won’t be affected from the inflationary pressure in the economy.
Disadvantages of Discounted Cash flow method
Speaker note for Slide 14
It is difficult to predict the sales and the cost trends with the certainty of the cash flows. The values are further sensitive to the assumptions of the perpetuity growth rates and the discount growth rates. The discount rate approach to the cash flow forecast is based on the approximations of the discount rates appropriate for the cash flow forecast
Evaluating the current price of Rosetta Stone
Multiple Market Approach
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Particulars |
Amount |
|
EBITDA |
$ 34.6m |
|
EBITDA Ratio |
13.4 times |
|
Enterprise Value |
$ 463.6m |
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Debt |
$9.9m |
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Equity Value |
$ 453.7m |
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Outstanding value of shares (Pre-money) |
17.2m |
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Implied share price |
$ 26.4 |
Speaker note for Slide 16
The company is facing issues to decide for the use of market- multiple approaches in the valuation method. It is important to understand the appropriate discount rate of the cash flow forecast and proper approach to calculate the terminal value to estimate the share price of the company. The multiple market approach mainly helps in depicting the highest and the lowest values of any company’s shares. Investors to evaluate the future growth of share price mainly use this valuation. Thus, $ 26.4 is evaluated as the highest figure, which could be used by Rosetta stone in depicting their share price during the IPO process.
Discounted Cash flow method
Terminal value calculation using discounted rate of the cash flow values
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Valuation |
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Terminal Growth rate |
3.00% |
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Discount rate |
9.03% |
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Shares Outstanding |
17.2 |
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Debt value |
9.9 |
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|
2008A |
2009E |
2010E |
2011E |
2012E |
2013E |
2014E |
2015E |
2016E |
2017E |
2018E |
CAGR 08/18 |
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|
NOPAT |
29.4 |
38.2 |
51.5 |
67.0 |
77.5 |
91.5 |
101.5 |
114.3 |
116.9 |
115.1 |
106.6 |
13.76% |
|
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Depreciation |
1.9 |
1.7 |
1.9 |
1.9 |
2 |
1.5 |
1.6 |
1.5 |
1.2 |
2.5 |
3.4 |
5.99% |
|
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Capex |
5 |
8 |
9 |
9.5 |
10 |
11 |
11 |
9 |
8 |
5 |
3.3 |
-4.07% |
|
|
Change in NWC |
8 |
11 |
12.7 |
17.8 |
16.8 |
25.6 |
20.8 |
17.7 |
15.4 |
8.5 |
7.1 |
-1.19% |
|
|
Free cash flow |
18.3 |
20.9 |
31.7 |
41.6 |
52.7 |
56.4 |
71.3 |
89.1 |
94.7 |
104.1 |
99.6 |
18.49% |
|
|
Terminal Value |
1701.26 |
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Implied EV /EBIT |
15.5 |
Speaker note
The discount cash flow method helps in evaluating the overall accurate share price of the company. In addition, $15.5 is estimated as the appropriate share value, which could be used as the base during the IPO process.
Price recommend to offer shares
Speaker note
The valuation of the current share price is with the help of the discounted cash flow and the market multiples has depicted with the discounted cash flow and with then multiple market models. In order to promote then shares in the economic crisis of the shares the company needs to keep a price range of $15.5 to $ 18.5.
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