Rosetta Stone Inc shares lost more than a quarter of their value on Monday after the language training software maker cut its third-quarter earnings outlook and scrapped a proposed stock offering a week after announcing it.

The company, which went public in April in what had been the most successful U.S. IPO this year, cited higher-than-expected operating expenses as the reason for the cut in its outlook.

The move shocked investors as the company had raised its full-year estimates when reporting second-quarter results only last month.

Arlington, Virginia-based Rosetta Stone faulted higher than expected sales, marketing and product development costs.

In the current quarter, we experimented with a significant amount of Internet and television test marketing programs and we did not expeditiously terminate certain of those programs that were not yielding acceptable results, Chief Financial Officer Brian Helman said in a statement.

He also blamed an acceleration in product development ahead of the 2009 holiday season for the cost problem.


The sudden change in outlook and the cancellation of a follow-on stock issue is likely to harm the company's ability to attract investors for a long time, an analyst said.

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.

A spokesman for Rosetta Stone directed inquiries to an investor relations representative, who said that a series of questions that Reuters had sent the company required legal review before the company could respond.

Rosetta Stone, which provides instructional courses in 31 languages, 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, however, maintained its third-quarter revenue forecast of $64.5 million to $66.5 million.

Analysts had expected the company, which more than doubled in size between 2006 and 2008 and has grown nearly eightfold since 2004, to earn 32 cents a share, before items, on revenue of $65.7 million, according to Reuters Estimates.

On Aug 10, Rosetta Stone had said certain stockholders, including ABS Capital Partners and Norwest Equity Partners, would be selling about 4 million shares in a public offering.

In its IPO, the company sold 6.25 million shares for $18 each, reducing ABS' stake to 28 percent from 44 percent and Norwest's to 18 percent from 29 percent.

Rosetta shares had risen to $32.84 as recently as July 31, or 82 percent over the IPO price, making a follow-on share sale inviting for investors seeking a profitable exit.

Its shares ended Monday at $20.63 on the New York Stock Exchange, down 27.23 percent, but still 14.6 percent above the IPO price.


Renaissance Capital's Killian said one of the challenges with IPOs is that many investors have only recently put money into the shares.

When things go awry, IPO investors are more inclined to jump ship rather than ride out the storm, she 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.

After the announcement, 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.

(Editing by Saumyadeb Chakrabarty, Bernard Orr)