Pricing the IPO; Rosetta Stone

Basics
Proprietary computer assisted language learning software whose name derives from stone inscribed with multiple languages and was the key to deciphering ancient Egyptian hieroglyphics Uses a combination of images, text, and sound to teach vocabulary terms and grammatical functions to users Currently offers 31 languages to customers in more than 150 countries

Brief History
1992- Harrisonburg Technologies is formed and Rosetta Stone product is released shortly after 2002- Tom Adams is hired as CEO 2006- Harrisonburg Technologies is sold to ABS Capital Partners and Norwest Equity Partners and renamed Rosetta Stone 2009- Rosetta Stone is the most recognized language learning software brand in the world

Going Public
Why now?
Strong demand for shares

Market Conditions?
20% market rally in recent weeks

Competitors going public?

Changyou.com Bridgeport Education

Pricing Component
Competitors Beta MVE MVD weight d weight e

K12 Inc New Oriental Ed &Tech Group Other for profit education (median) Activision Blizzard Inc. Electronic Arts Inc Amazon Google Yahoo Microsoft

1.2 0.6 0.9 1.1 0.9 1 0.8

$441.27 $7,508.73 $71.64 $13,630.77 $6,169.52 $32,050.59 $119,637.38 $19,534.77 $167,417.53

13.7 0 1.7 0 0 74 0 0 0

3.01% 0.00% 2.32% 0.00% 0.00% 0.23% 0.00% 0.00% 0.00%

96.99% 100.00% 97.68% 100.00% 100.00% 99.77% 100.00% 100.00% 100.00%

Discount Rate Factors

Risk Free Rate 3.15%
Simple average of recent 30 year US Treasuries Less .5% for term premium on securities

Market Risk Premium 6.5% Cost of debt 7.5%

Firm estimate

Valuation
Assumptions
Shares Offered: Total Shares Post Offering:
COST OF CAPITAL

6,250,000 20,314,500 38.00% 6.50% 3.1500% 2.5000% 14.1981% 7.5000% 13.6981% 0.4878%

Tax rate
Market Risk Premium Risk-Free Rate Inflation Rate Unlevered Discount Rate Cost of Debt Tax Shield Discount Rate

Long-Term Growth Rate

Valuation
Growth Rates
Firm estimates were primarily used, though they were held at the lower bounds of the estimates due to market uncertainty Terminal value was calculated after from 2019 with long term growth held at .48% in real terms to prevent over-estimation

Comparable Firm Estimates for ua

Comparison across firms
For-profit education firms Internet firms Various software industries

Comparable firms were weighted based using

Similar growth estimates Industry relevance Relatable operating characteristics

Company Valuation
Projections (in millions)
PV Tax Shield: Total Enterprise Value: Value of Debt: Value of Equity: Indicated PPS: Total Money Raised: EPS

$6.08 $510.65 $11.88 $498.77 $24.55 $153.45 $0.68 9.91 36.15 0.48

EV/EBITDA: Price/EPS: Price/EBITDA:

PPS and Sensitivity Analysis

PPS was estimated using unlevered value and the present value of debt tax shield Sensitivity analysis of this estimate focused primarily on the estimate for unlevered beta and long term growth rates

Sensitivity Graph
$140.00 $120.00

$100.00

Indicated PPS

$80.00 0% Long Term Growth

$60.00

2.5% Long Term Growth

5% Long Term Growth

$40.00

$20.00

$0.00 0 0.5 1 1.5 Beta [ua] 2 2.5 3

PPS Estimate
Comparable firm ratios used to estimate firm value
Price/EPS EV/EBITDA

These ratios were averages and them multiplied by Rosetta Stone results