"Rosetta Stone was the first IPO to price above its expected range in almost a year. The appetite for the company's shares was attributed to the fact it is a strong company with an established business model that people could understand.

"The company describes itself as a provider of technology-based language learning solutions. It develops, markets, and sells language programs that consist of software, online services, and audio practice tools primarily under the Rosetta Stone brand. It currently offers self-study courses in 31 languages.

"The company says that approximately 83% of its revenue in 2008 was generated through its direct sales channels, which includes call centers, websites, an institutional sales force and kiosks that have become ubiquitous at airports. It also distributes through select retailers such as Amazon.com, Apple retail stores, Barnes & Noble, and Borders.

"Rosetta Stone grew from $25.4 million in annual sales in 2004, when the company was known as Fairfield Language Technologies, to $209.4 million in 2008, representing a 69% compound annual growth rate.

"The growth was entirely organic, the company said. According to the IPO prospectus, Rosetta Stone earned $13.9 million in 2008, or 82 cents per share.

"While the company is seeking to enlarge its market share in the U.S. through increased advertising and more advanced product offerings, it also views targeting customers outside of the U.S. to be a critical growth objective, since 90% of the $83 billion in worldwide spending on language trading was spent outside of the U.S.

"Investors didn't have to wait long for update results from Rosetta Stone as the company reported its Q1 results on May 11th. Unfortunately, it forecast a loss in the second quarter as a result of stock option expense charges, news that sent the shares tumbling.

"The company's first-quarter results, however, were quite robust as it reported increases in market share, expanded margins, and strong revenue gains. Rosetta Stone said it earned $3.2 million, or 19 cents per share, compared to a year-ago net loss of $432,000, or 23 cents per share, in the year-ago quarter.

"Total sales grew by 41% to $50.3 million, compared to $35.6 million in the prior-year period. As a recent IPO, no Wall Street analysts had established an outlook for the company.

"Looking ahead, management said on earnings conference call that the company would report a loss of between 42 cents to 44 cents a share in the second quarter.

"The loss would be the result of non-cash charges to cover stock option grants to key employees. Excluding the charge, the company expected to earn14-16 cents a share. Revenue was expected to grow sequentially to between $53 million to $55 million.

"The anticipated earnings loss for Q2 aside, which is driven by non-cash items, Rosetta Stone is intriguing as it is a solidly profitable young company.

"Gross margins are huge with over $50 million in revenue offset by only $6.4 million in direct costs; the biggest variable impacting operating income, which was $5.5 million in Q1, is how much management spends on sales and marketing.

"Those expenses rose from $18 million a year ago to $23.6 million in the most-recent quarter. R&D and SG&A costs rose modestly in comparison. Rosetta Stone is still in a growth phase and given it is targeting consumers for the bulk of its revenue, we would expect marketings costs to keep rising, though hopefully on a manageable level.

"The fact the company principally targets consumers represents the greatest risk to its business given consumer caution at present. That said, the desire, not to mention need, to learn other languages in a global economy means the company is looking at a potentially huge market.

"Already profitable from focusing only on the U.S. means Rosetta Stone has a lot of opportunity to enlarge the business. A challenge will be whether it can translate its domestic success overseas.

"Time will tell. Based on recent financial statements, Rosetta Stone is trading at a rich valuation of 29.5x trailing earnings. We've seen not Wall Street estimates as yet for the current year, but we like Rosetta Stone's prospects."

Steven Halpern's TheStockAdvisors.com offers a free daily overview of the favorite stock picks and investment ideas from the nation's leading financial newsletter advisors.