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Rosetta Stone’s CEO steps down at a time of bumpy transition

Most U.S. consumers recognize Rosetta Stone by the bright yellow boxes of software at shopping mall kiosks that help you master such languages as Arabic, Italian and Tagalog — for a hefty price.

That reputation once helped propel the Arlington-based firm. Now it may be eroding its business.

The company finds itself in the midst of a bumpy transition as shoppers cut back on expensive purchases in a sluggish economy and opt for software that’s delivered online rather than by disk.

The upheaval has contributed to a string of leadership changes at the company, including the news on Thursday that chief executive Tom Adams will step down after nine years at the helm. When Adams’s successor is named, he’ll become non-executive chairman.

“It felt like, at this time, if we bring on a very strong executive, that executive can take ownership over this next phase of life with the company,” Adams said in an interview.

Tom Adams, president and chief executive officer of Rosetta Stone Inc., speaks during the 2010 Ernst & Young Strategic Growth Forum in Palm Springs, California, in 2010. Adams will step down after nine years of leading the company. Once his successor is named, he’ll become a non-executive chairman. (Francis Specker/BLOOMBERG)

But analysts worry about what that next phase holds. Many said in interviews or written notes to investors that the caliber of the products remains high. But a price that can range from $179 to $399 per box might scare off cost-conscious customers.

“Demand for Rosetta’s language software has lagged in recent quarters with sharp declines in U.S. consumer unit volumes due to mounting consumer resistance to the company’s premium price points,” Piper Jaffray analyst Peter Appert wrote Thursday.

The company’s second-quarter earnings, released in August, showed that U.S. consumer bookings slipped 5 percent. Total revenue was up 10 percent for the quarter compared with a year ago. However, the company reported a loss of nearly $4.6 million (22 cents per share) after posting a profit of ­$3.7 million (17 cents) for the period a year earlier.

International sales have been more upbeat as the company puts greater emphasis on overseas markets. Adams said the next chief executive will need to understand sales in areas such as Asia and South America.

Robert Mahowald, vice president for cloud services at research firm IDC, said companies like Rosetta Stone that are transitioning from boxed software to online services face accounting hurdles that may complicate quarter-to-quarter comparisons. When a company sells its software outright, the customer pays the entire cost upfront. When the software is sold online as a service, customers become subscribers who usually pay in installments.

“You start to look at a totally different set of metrics,” he said.

And that’s the way more customers choose to buy software, analysts say. Adams said the company has expanded its products in recent years to include online, mobile and social tools.

“The problem is one of communication. People really associate us with the physical box and so what we’re working on now is how to shift . . . toward a future that will be in line with what users are doing,” Adams said. “We actually have what people want to use today, they just have to understand it.”

Steven Overly is a national reporter covering federal technology and energy policy with a focus on Capitol Hill. He previously covered the business of technology, biotechnology and venture capital.



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