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Rosetta Stone Speaks the Market's Language

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Software firm's IPO isn't lost in translation.

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In one of the greatest ads in recent memory, Rosetta Stone (RST) -- the interactive self-study language software -- shows a dewy-eyed teenager wearing a baseball cap and holding the Rosetta Stone in one hand, a pair of work gloves in the other.

The copy: "He was a hardworking farm boy. She was an Italian supermodel. He knew he would have just one chance to impress her."

If he really wanted to impress her, he'd have bought stock in Rosetta Stone on Thursday. (And I hope the company rewarded that kid with some stock options.) The company's IPO was priced at $18 at the open and closed near $25. It had projected in papers filed with the SEC that its stock would open in the $15 to $17 range. The offering raised $112.5 million.

So why the initial fervor for Rosetta Stone? For one thing, it's been an unbelievably slow period for IPOs; its early strength may be a reflection of slightly improved confidence in the stock market as a whole, and general relief that a solid company would consider going public at this time. Only 3 other companies have gone public on a US exchange this year: higher-education provider Bridgepoint Education (BPI), Chinese video-game developer Changyou.com (CYOU), and baby-formula maker Mead Johnson Nutrition (MJN).

And 2 other companies may soon follow Rosetta Stone into the desert-like IPO space: OpenTable, an online restaurant reservation website (its CEO is former eBay (EBAY) executive Jeff Jordan), and FriendFinder Networks, whose business is adult entertainment (Penthouse is its flagship). This assortment of IPOs doesn't seem so odd when you consider the times we're living in now.

Founded in 1992 as Fairfield Language Technologies, Rosetta Stone now offers instruction in 31 languages, from Arabic to Welsh. Much like the trend toward online higher education, people are attempting to teach themselves a language at home.

Rosetta launched a new version of its software in 2007, and that "really took things to the next level," said Tom Adams, its chief executive. Revenue increased from $137.3 million to $209.4 million last year, and profit increased from $2.58 million to $13.9 million.

Rosetta is known for being intuitive and easy to use. The programs don't coddle the user: English isn't used at all to help you translate, thus forcing you to learn the grammar and rules on the fly.

While retail sales -- those made by individuals -- shot up 63% last year, Rosetta Stone still brings in a ton of cash from business clients. Its main customers are a stone's throw away from its Arlington, Virginia headquarters: the US Army, the Department of Homeland Security and the State Department's Foreign Service Institute. And they aren't going to quit using the software any time soon.

Rosetta still gains 90% of its sales from the US, so the proceeds from its IPO will allow it to expand internationally and tap into the $83 billion post-college language-training market.

It's enough to imagine a billboard in South America reading: "El era un granjero joven chileno. Ella era una top model brasilena..."
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No positions in stocks mentioned.

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