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(Reuters) - Language training software maker Rosetta Stone Inc (RST.N) cut its third-quarter earnings outlook and scrapped a proposed stock offering barely a week after announcing it, sending shares down as much as 29 percent.
The company, which went public in April in one of the most successful IPOs this year, cited higher-than-expected operating expenses as the reason for the cut in outlook.
The move took Wall Street by surprise as the company had raised its full-year estimates when reporting second-quarter results last month.
"To come in just two weeks later with different guidance raises questions over how much control management has over operations — shouldn't have management known?" said Linda Killian, principal with Greenwich, Connecticut-based Renaissance Capital.
On Aug 10, the Rosetta Stone had said certain stockholders, including ABS Capital and Northwest Equity, would be selling about 4 million shares in a public offering — representing a fifth of the company's public float, and comparable to the size of its IPO when it sold 6.25 million shares for $18 each.
Shares of the company fell as much as 29 percent Monday to their lowest since listing in April, making them the top loser on the New York Stock Exchange.
They pared some losses to trade down $7 at $21.35 in afternoon trade - still about 20 percent more than its IPO price of $18.
Following its IPO, shares jumped 39 percent. By late July, shares were up 82 percent over the IPO price, making a follow on inviting for ABS Capital and Northwest Equity seeking a profitable exit from their Rosetta Stone investment.
The company cancelled the follow on offering but did not provide any specific reason for the move. It was not immediately available for comments.
Rosetta Stone now expects third-quarter adjusted net income of 25 cents to 27 cents a share, compared with its previous forecast of 33 cents to 35 cents.
The company said it incurred high sales and marketing and product development expenses during the current quarter as it looks to launch advanced level packs for four languages before the holiday season.
The company, however, maintained its third-quarter revenue forecast of $64.5 million to $66.5 million, indicating that demand for its products would remain strong.
Analysts expect the company to earn 32 cents a share, before items, on revenue of $65.7 million, according to Reuters Estimates.
JUMPING SHIP?
Renaissance Capital's Killian said one of the issues with IPO stocks is the lack of commitment from investors when they have not been involved with a stock for a long period.
"When things go awry, IPO investors are more inclined to jump ship rather than ride out the storm," she said.
Rosetta Stone 's 6.25 million share IPO in April was one of the smallest floats of any IPO this year, making it more volatile.
But ultimately, Rosetta Stone's stock is getting hammered because of the uncertainty its outlook changes have caused.
"Certainly the small number of shares hurts, but investors don't like bad surprises," Killian said.
"They'll have to work hard to build investor confidence all over again; they'll have a big task of wooing an entire new group of investors."
Killian also wondered whether investors were getting nervous about the company's prospects given the downturn in overseas travel by U.S. consumers.
Rosetta Stone's main shareholders include ABS Capital Partners, whose shares prior to the IPO gave it 44 percent of votes, and Norwest Equity Partners with a stake of 29 percent of votes, according to a regulatory filing. Following the IPO, those stakes fell to 28 percent and 18 percent, respectively.
Brokerage Robert W. Baird cut its price target on the stock to $29 from $36, but maintained an "outperform" rating on the stock on expectations of continued growth both domestically and internationally.
The company, which provides instructional courses in 31 languages, more than doubled in size between 2006 and 2008, posting revenue of $209 million in 2008. It has grown nearly eightfold since 2004.
By Manasi Phadke and Phil Wahba
(Editing by Saumyadeb Chakrabarty)
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