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Thursday, Rosetta Stone announced the acquisition of Lexia Learning Systems, which has more than 14,000 schools and 1 million students using its online software to learn to read. In addition to expanding Rosetta Stone's presence in education technology, the acquisition buys access to Lexia's adaptive learning technology. Rosetta Stone will pay $22.5 million in cash and expects to complete the acquisition in early August. Earlier this year, Rosetta Stone purchased Livemocha, a cloud-based language-learning service, for $8.5 million in cash.
Rosetta Stone is well known for its multimedia language-learning software for both children and adults, traditionally sold at retail in bright yellow boxes containing DVDs, but also delivered under enterprise contracts and, increasingly, online.
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The Wall Street Journal characterizes Rosetta Stone as being in a turnaround mode, with shares that once traded in the $30 range now at about $16. The company seemed to stumble following a 2009 initial public offering. CEO Steve Swad took office in February 2012 as part of a new executive team and has focused on bringing products to the cloud, mobile devices and social media, while also promising to broaden the company's focus with a greater variety of products for K-12 schools.
With the addition of Lexia, enterprise sales to schools will account for about 30% of the company's business, Swad said in an interview. "The kids market is a strong market, and one that needs our products and embraces technology naturally." The Rosetta Stone brand is strong enough that parents and educators will trust it to deliver adjacent products, he said. With more than $100 million in cash on hand, the company may make additional acquisitions if they will help accelerate its strategy, he said.
Meanwhile, Rosetta Stone now has an additional product to offer the more than 20,000 K-12 school systems around the world who are its customers, Swad said.
Boston-based Lexia recently introduced Lexia Reading Core5, a program to prepare pre-K to grade 5 students for the Common Core State Standards. Last month, Lexia Reading Core5 was selected for multi-year, multi-million dollar statewide implementation in Kansas, providing tens of thousands of students with access to the program. In addition, Lexia says dozens of schools in districts across the country have already made Lexia Reading Core5 their reading program of choice for the 2013–2014 school year.
Even in language learning, one of Rosetta Stone's most popular languages is English, used by people whose native language is something else, Swad said. A natural combination of the Rosetta Stone and Lexia products would be English reading lessons for English-as-a-second-language (ESL) students in the U.S. Another would be students in Korea, Japan and other countries who need to learn reading comprehension in English, as well as learning to speak the language, he said. "We know mothers in Korea spend an awful lot of money making sure their children learn English," he said.
Lexia will also advance Rosetta Stone's ability to deliver adaptive learning, which means that the teaching software analyzes student responses to identify strengths and weaknesses and adapts its instruction to deliver better results for each student, Swad said. The language-learning product "does that in a reasonable way," he said, "speeding up when you're doing really well and slowing down when you're not. The Lexia product is further ahead than our product in that regard, using predictive capabilities to determine where the student is heading."
One of Lexia's claims is to support "assessment without testing," meaning that students are assessed on an ongoing basis as they work with the software, without the need to stop and take a quiz. "So much time in schools is used for testing where you are ... with this, the data allows the software to predict where you are without testing," he said. Lexia has a patent pending on its approach, he added.
Applications like ESL learning could probably benefit from a combined product that would be "the best of Rosetta Stone with the best of Lexia," Swad said. He also sees the potential for direct-to-consumer sales of Lexia, which is currently sold to school systems.