PLATO Learning F4Q08 (Qtr End 10/31/08) Earnings Call Transcript

PLATO Learning, Inc. (TUTR)

F4Q08 Earnings Call

December 3, 2008 5:00 pm ET

Executives

Vincent Riera - President, Chief Executive Officer, Director

Robert J. Rueckl - Chief Financial Officer, Vice President

Analysts

Bob Evans - Craig-Hallum Capital

Ali Mohamed - Robeco Boston Partners

Jeff Brunswick - RBC Capital Markets

Phil Glasic - Crow Holdings

Presentation

Operator

Welcome to the fourth quarter and year-end 2008 financial results conference call for PLATO Learning Incorporated. PLATO Learning reminds you that statements made in their press release and on this call that are not related to historical information are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on the company’s current expectations about future events. While the company believes that the assumptions made in connection with the forward-looking statements are reasonable, they can provide no assurance that these assumptions and expectations will prove to have been correct and actual results may materially differ from these expectations. The company’s forward-looking statements are subject to risks and uncertainties, such as those described in the company’s most recent filings with the Securities and Exchange Commission, including those on Form 10-K and 10-Q. The content of this call contains time-sensitive information that is accurate only as of today, December 3, 2008. PLATO Learning undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events, or otherwise.

I will now turn the call over to your host, Vin Riera, President and CEO of PLATO Learning.

Vincent Riera

Thank you, Operator. Good morning, everyone. Thank you for joining us. On the call with me today is Rob Rueckl, our Vice President and CFO. While we began the fourth quarter tracking to expectations, we experienced delays in buying decisions mid-way through the quarter, reflecting the overall economy and the state budgetary constraints. These delays resulted in order performance during the quarter that was below our expectations.

While orders softened during the quarter, we continued to see many positive trends in our business that give us reason to remain confident about growth prospects for our subscription business. For the full fiscal year, we grew subscription revenue by 46% and generated 20% growth in subscription orders. We also increased our PLE customer base by 65% and ended the year with a larger renewable base that will help drive subscription revenue in fiscal 2009.

We believe these positive metrics demonstrate the strength of the foundation of our SAS business model and we are very excited about the strategic opportunities this platform provides us as we further execute our strategy.

We continue to gain significant traction in our transition from perpetual license sales to subscription sales. We believe we have successfully completed the first phase of this transition, which involved building our product and platform and forming our business model. We now have an industry leading platform and are receiving a tremendous amount of positive feedback in the market. We are excited to note that we are now a SAS company and our PLE platform is currently serving over 1,200 school districts and continues to gain momentum.

I transitioned into the CEO role at PLATO on November 1st, succeeding Mike Morash. Mike successfully led PLATO through the first phase of our transition by building the PLE platform product, processes, and back-office capabilities. My experience leading the PLATO sales and services organization for the past year-and-a-half has given me insight into the education market and the role technology will play in education moving forward. Leveraging our new SAS platform, I have many ideas on how to build upon our existing growth strategy and I am excited about the long-term opportunities our platform and curriculum provide to expand and grow our business.

While we cannot predict what will happen with the macroeconomic environment, we are confident in the overall strength of our business and believe that the effects of our current economic uncertainties will be relatively less severe on our companies for a number of important reasons. K12 education should continue to be well-funded by the states and federal government. A large portion of the funding streams school districts use to purchase our products comes from the federal level.

Our innovative and proven learning solutions address core instructional programs needed by the K12 educational system. There will always be children in schools who need our solutions to catch up. Our solutions align very closely to education priorities, such as graduation rate improvement, credit recovery, helping under-educated students prepare for college level work, and increasing instructional capacity for schools that face teacher shortages.

Our competitive position is very solid. We have the leading technology brand in the remedial learning market and strongly believe that the products we deliver on PLE represent the most effective technology based solution in this market.

In a tough economic environment, these strengths provide potential opportunities to take market share from weaker competitors. In addition, our post-secondary solutions for the community college and adult education markets position us for increased opportunities as displaced workers seek further education to improve their skills in a difficult job market.

We begin the new fiscal year with an increased base of renewable business. Our PLE renewal opportunities in fiscal 2009 exceeded $25 million, an increase of $14 million over fiscal 2008 and the renewal opportunity for all renewable products and services we sell exceeds $46 million, representing a 21% increase over fiscal 2008.

School budget uncertainty is likely to continue for the near future, making it difficult to predict near-term economic trends. However, we are confident in the strength of our SAS subscription platform and prospects for continued progress in fiscal 2009 toward building a growing profitable business.

Next, Rob will review our fourth quarter and year-end financial performance in more detail. I will follow his comments with a report on the key metrics we use to monitor our strategic progress, as well as provide fiscal 2009 guidance and closing comments. Rob.

Robert J. Rueckl

Thank you, Vin. Good morning, everyone. Total orders for the quarter were $20.7 million, a decrease of 20% from the fourth quarter last year. Subscription orders totaled $13 million, a 5% decrease from fiscal Q4 of ’07. Orders for products delivered on PLE grew more than 3% to $9.9 million but were offset by declines in legacy subscription product orders.

As Vin mentioned in his opening remarks, we experienced a slowing of orders in the second half of the quarter as economic news worsened and school districts put spending decisions on hold to evaluate the effect on their budgets.

While we cannot predict what will happen at this time, we believe schools will gain more clarity on their budgets in the coming months as we head into the primary K12 buying season in the spring.

For the year, total orders declined 7% to $72.1 million. However, subscription orders were up 20%, underscoring the traction we are gaining with our PLE platform. The continued growth of PLE orders we experienced in fiscal ’08 has created significant opportunities for renewals and up-selling in fiscal 2009. These renewal opportunities and our successful track record of attracting new customers, migrating legacy customers, and expanding existing PLE installations create an environment for continued PLE order growth in 2009.

Orders for perpetual license products declined 68% in the quarter to $1.5 million and now largely consist of add-on licenses to existing customers, as we continue to work with these customers on a migration path to PLE.

Services orders declines 19% to $6.2 million in the fourth quarter, due primarily to a decline in orders for software maintenance services on our legacy perpetual products. The weakness in orders experienced in the last half of the quarter was most evident in the number of large orders closed in the quarter. We closed 20 deals over $100,000 in the fourth quarter this year compared to 31 in the same period last year. The average value of the large orders in the quarter was $268,000, down from $298,000 last year.

During the fourth quarter of 2008, we changed our policy with respect to reporting deferred revenues on long-term subscription contracts. Under our previous policy, amounts due but not yet billed under these non-cancelable contracts we report as unbilled receivables and deferred revenue on our balance sheet. Under the new policy, these unbilled amounts are not recorded on our balance sheet but will be disclosed in the notes to our financial statements similar to the way in which a manufacturer might disclose committed backlog or a leasing company might report amounts due under non-cancelable operating leases. This change affects our balance sheet reporting only and has no effect on reported earnings.

At the end of the quarter, total deferred revenue excluding these un-billed commitments was $44.9 million, up from $44.6 million at the end of ’07. Un-billed commitments at October of ’08 were $8.9 million compared to $4.5 million in October of ’07, so in total billed and un-billed deferred revenue was $53.9 million at October 2008, a 10% increase over the comparable amount of $49.1 million as of October 2007.

Before I review operating results for the quarter, I would like to remind you of the statement in our press release that our operating results are provided on a preliminary basis and do not reflect the impact, if any, of an evaluation we are conducting on the value of good will recorded on our balance sheet. This good will reflects the excess of the purchase price over the book value of identified assets from acquisitions made between 2000 and 2003 prior to our strategic shift to the SAS business model.

The non-cash impairment charge, if any, that might result from this evaluation would have no impact on our day-to-day business operations, liquidity, or long-term success strategy. We expect to complete this evaluation prior to filing our Form 10-K in January.

Total revenue in the fourth quarter was $17.4 million, a decrease of about 4% from the fourth quarter of last year. Subscription revenues, however, continued to show strong growth, coming in at $9.5 million for the quarter, resulting in a year-over-year quarterly growth of 34%.

License fee revenues declined to $1.3 million in the quarter from $4.1 million in the fourth quarter 2007 on lower orders for these legacy products and services revenues declined $500,000 due to a decline in software maintenance revenues on those legacy products.

Non-GAAP total cost of revenue, which excludes impairment charges of $5.1 million in Q4 of ’08 and $0.5 million in Q4 of ’07, declined approximately 7% to $9.2 million. The decline reflects continued efficiencies gained in our subscription model and moderating product development amortization as investment levels have come down over the past several quarters. These lower investment levels, together with the effect of the impairments recorded in the quarter, will result in a decrease in product amortization starting in fiscal 2009.

The non-GAAP total gross margin percentage in the fourth quarter improved to 47.2% from 45.8% in the fourth quarter of last year on continued improvements and subscription margins. Subscription margins in the fourth quarter increased 14 percentage points to 52% as subscription revenues continue to grow much faster than subscription costs. We expect this upward trend in subscription margins to continue into fiscal ’09.

License fee margins declined to 10% in the quarter from 46% in the same quarter of ’07 due to the lower license fee revenues on a base of largely fixed costs related to distribution and product amortization.

Service gross margins declined to 49%.

Non-GAAP operating expenses, which exclude the impact of impairments, restructuring, and one-time charges related to our CEO transition declined more than $1.5 million, or 13%, to $10 million in the quarter, reflecting our ongoing emphasis on achieving efficiencies afforded by the subscription business model.

Sales and marketing expenses declined $700,000 in the quarter on better management of indirect sales and marketing costs. None of the decline was due to a reduction in the number of field account managers, which remained about the same relative to the fourth quarter of 2007.

G&A costs declined more than 21% to $2.5 million on lower headcount and declines in the cost of compliance activities and internal business system support.

Product maintenance and development expenses in the fourth quarter decreased to $750,00 from $920,000 in the fourth quarter of last year. We’ve been very pleased with the increasing stability of our PLE platform and the quality of new releases. These improvements have resulted in a reduction of our product maintenance costs and we expect these efficiencies, along with lower support costs of legacy platforms, to result in lower product maintenance costs in fiscal ’09.

During the quarter, we recorded impairment restructuring and other charges totaling $9.4 million. Non-cash impairment charges totaled $6.5 million, reflecting weaker-than-expected sales of our straight curve math product and write-downs of product and customer intangible assets acquired in legacy acquisitions.

Restructuring and other costs totaled $2.9 million, related to implementation of operating efficiencies afforded by the SAS business model, moderation of our product investment requirements and the company’s CEO transition. These restructuring charges and impairments are expected to result in approximately $8 million in cash and non-cash expense savings in fiscal 2009.

Wrapping up our P&L results for the quarter, while total revenues declined strong growth in subscription revenues and improved subscription margins, together with continued aggressive management of our cost structure, led to an improvement in our non-GAAP net loss to $1.7 million, or $0.07 per share, compared to $3.2 million or $0.13 per share in Q4 of fiscal ’07. On a GAAP basis, net loss including the effect of restructuring activities increased to $11.1 million, or $0.46 a share, compared to $4 million, or $0.17 a share in the same quarter of ’07.

Our cash balanced ended the quarter at a little over $20 million on strong operating cash flow of $10 million in the quarter and free cash flow of over $8 million.

This concludes my formal remarks. I will now turn the call back over to Vin for his additional comments. Vin.

Vincent Riera

Thanks, Rob. As we’ve done in prior calls, I would like to discuss some of the key metrics we use to monitor the progress we are making in our core subscription business. As we discussed earlier, the softness in the market we experienced in the second half of the quarter resulted in a small decline in subscription orders. While we are not pleased with this outcome in the quarter, we are confident it is the result of market conditions and not specific to the execution of our core business strategy.

During the quarter, we added a total of 145 school districts and community colleges to or PLE customer base, 71 of which were existing PLATO customers that migrated all or a portion of their legacy products. Since launching PLE, we have migrated 934 out of approximately 4,000 customers.

Of the 145 districts added to PLE in the quarter, 74 were districts new to PLATO Learning, bringing the total number of these new districts to 454 since launching PLE. In addition to tracking new and legacy customers, we monitor expansions and renewals of existing PLE subscriptions. PLE renewal orders in the quarter were approximately $4.7 million, or 79% of the subscriptions up for renewal in the quarter. These renewal rates are below our long-term target of 90% and we expect to make progress on this metric as we implement new customer focused programs in fiscal 2009.

While our renewal rate in the quarter was below our long-term target rate, up-sells on customers that do renew continue to be strong. Our renewal attach rate was 39% in the quarter and 41% on a trailing four quarter basis.

The number of registered PLE users represents the number of students and teachers our customers have registered to use PLE. We are pleased to report that this number exceeded the 1 million mark in the fourth quarter. PLE registered users grew 43% during the quarter to $1.2 million. These users, mainly students and teachers, are represented by 1200 school districts, community colleges, and other educational institutions across the United States, a 6% increase during the quarter. Expressed differently, students enrolled in 3,240 individual schools and campuses are taking instruction using PLE.

Subscription margins continue to improve as subscription revenue growth significantly outpaces increases in product amortization. Subscription gross margins improved 14% to 52%. Total subscription margins are expected to continue to improve in fiscal 2009.

We continue to achieve the operating leverage enabled by the software as a service business model. In 2008, we removed more than $5 million out of our cost structure compared to 2007 and are on track to achieve more than $8 million in savings in fiscal 2009 over fiscal 2008.

In addition to these savings, our product development requirements will moderate in fiscal 2009 resulting in a reduction in product development costs. These are some of the metrics we use to measure progress in our core SAS business and strategy. We will continue to refine these and other important measures of progress and share them with you.

Before I wrap up our prepared comments and take your questions, we would like to provide you with some general guidance for fiscal 2009. While our current view of 2009 has been complicated by the effect of economic conditions on school budgets, we believe we can achieve high-single-digit subscription order and revenue growth in fiscal 2009 and continued improvement in subscription margins.

As I mentioned earlier, we expect total costs and expenses in our P&L to decline by nearly $8 million, and our capitalized product investment to moderate between $5 million and $6 million.

We are beginning 2009 with a healthy cash balance of over $20 million and expect free cash flow in fiscal 2009 to be flat to positive. Our ability to execute to this plan has become less certain in light of recent economic conditions but reductions we’ve made in expenses and product investment have significantly reduced our cash requirements for fiscal 2009.

As has been the case historically, we expect our cash balances will decline in the first two quarters of the year and then build again as we move through the primary K12 buying season in the back half of the fiscal year. Our ability to predict the effect of the current economic conditions on the buying season that begins in late spring is very limited; however, we are very confident our current cash balances can take us through even the most difficult economic conditions.

While our fourth quarter order growth did not meet our expectations, our narrowing loss and key metrics confirm to us that our core subscription business, built on our PLE platform, is healthy, growing, and positions PLATO Learning for long-term sustainable growth in revenues, earnings, and cash flow.

We are in a time of economic uncertainties so we do not have a clear barometer on how the next few quarters will play out. However, we have aligned our expenses and product investment to match our current level of business and believe that we are well-positioned to see a rebound in orders once this period of budget uncertainty ends.

We feel great about where we are with our subscription model and look forward to executing and building upon our growth strategy.

That concludes our formal remarks. We will now take any questions that you may have. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) The first question today comes from Bob Evans of Craig-Hallum Capital. Please go ahead with your question.

Bob Evans - Craig-Hallum Capital

First can you explain a little bit more on that $8 million of cost reduction, where will that come out of and how much has already been done?

Vincent Riera

Well, it’s all been done so it starts in Q1 and it’s going to be -- I think it’s about half -- it’s about half cash and half non-cash and about half in cost of revenue and half in operating expenses.

Bob Evans - Craig-Hallum Capital

In terms of impact, you’re saying $8 million though on the P&L?

Vincent Riera

On the P&L, plus we are guiding our cash flow product investment to between $5 million and $6 million, which is also down significantly from ’08.

Bob Evans - Craig-Hallum Capital

Right, and how about CapEx for ’09?

Vincent Riera

It’s going to be under $1 million.

Bob Evans - Craig-Hallum Capital

Okay.

Vincent Riera

Let me just be clear -- you’re talking about the non-product investment, right, Bob?

Bob Evans - Craig-Hallum Capital

Yeah, non-product investment, right. Okay, so if it’s five to six, that’s six to seven all in in terms of expenditures. So that means -- I think in the press release -- so you should be nicely free cash flow positive, given the reduction in spending, shouldn’t you?

Vincent Riera

Well, you know, it comes down to orders and as you know, we are very dependent on the back-half of the year. That’s when the K12 buying season happens, so we don’t have a lot of clarity on that. That’s why we are guiding to flat free cash flow, it may be a little positive.

Bob Evans - Craig-Hallum Capital

Okay. If we look at fiscal ’09 in total, can you give us some greater sense as to how we should look at revenue and at one time I think the thinking was that your revenue could be [of the company] [inaudible] to maybe even slightly up. What are you thinking now?

Vincent Riera

Well, the challenge we have is understanding the decline in some of the other parts of our business and we’ve got perpetual revenue. Some of those products are tied to supplementary programs, our PSP, so we are more concerned about the funding levels on supplemental programs than we are on our core platform, so we don’t see -- revenue growth next year is probably going to be a bit challenging. Maybe a little bit of revenue growth but we are on that edge to where it can go either way.

Bob Evans - Craig-Hallum Capital

Okay, but I mean do you view that you are somewhat as flattish to down a little, up a little -- is that the right way to think about it?

Vincent Riera

That’s about the right way to think about it.

Bob Evans - Craig-Hallum Capital

Okay. How about the [goal] as it relates to potential profitability, given the cost reductions and maybe slightly lower revenue outlook?

Vincent Riera

We don’t -- profitability is probably a very stretch goal for us next year, so we don’t -- we’re not guiding to profitability but we are going to make significant improvement over the $11 million or $12 million this year. But we’ll be in low-single-digit losses, low- to mid-single-digit losses, something like that, depending on the perpetual revenue.

Bob Evans - Craig-Hallum Capital

Okay, and the -- let’s see -- the change in accounting, can you just -- because you all of a sudden had changed things where you have I think unbilled on revenue, can you elaborate on why the change?

Vincent Riera

We’ve been looking at this with our auditors all year long and understanding we have customers who commit to us for very long periods of time under subscription contracts. We’ve talked about this before and they are beginning to prefer to pay for those subscriptions annually, even though they are committing to us for three, four, or five years. So the full amount of the contract we used to call deferred revenue and we would record as an asset but as we looked at it -- I think the biggest, easiest way to think about this is like an operating lease. There are companies that either have an operating lease or they are leasers and those are committed leases but they don’t report them as liabilities and assets on their balance sheet.

So it was a question that we were talking with our auditors throughout the year but there will be plenty disclosure on the unbilled portion.

Bob Evans - Craig-Hallum Capital

Okay, and of your backlog of deferred revenue, can you break it out in terms of perhaps how much was PLE versus non-PLE, or just trying to get a sense of what’s kind of in that deferred revenue.

Robert J. Rueckl

Sure. In the release, there is a schedule that shows how much is subscriptions and I don’t have how much of that subscription is PLE but substantially all of it is PLE. If you look in the release, there is a schedule that gives you deferred revenue and we give you the gross amount of deferred revenue and then the amount that is unbilled that nets down to the amount that is on the balance sheet.

Bob Evans - Craig-Hallum Capital

Okay, and your gross margins have improved nicely on the subscription side -- what can that continue to go to as kind of in that [coming year]?

Robert J. Rueckl

Next year, the subscription margins will be in the mid-50s.

Bob Evans - Craig-Hallum Capital

Okay. All right, okay. Thank you very much.

Operator

Thank you, sir. The next question comes from Ali Mohamed from Robeco Boston Partners.

Ali Mohamed - Robeco Boston Partners

I was wondering, looking at the deferred revenue in the subscription business and then the subsequent year’s revenues, in 2006 you did 20 in deferred going in and you put up $24 million in subscription revenue in 2007. Then in 2008 this last year you had 32 going in and you did 35 in revenue, and now looking at your subscription deferred revenue, it’s 41.7 and if you use any kind of similar trends, that would imply about a $44 million subscription revenue for the year. Can you help me understand how that correlates with what you are saying?

Robert J. Rueckl

I didn’t follow all of your numbers. I have a little different numbers going, like last year our deferred revenue, deferred subscription revenue you said was -- you have as what?

Ali Mohamed - Robeco Boston Partners

I have at October 31, 2007, at 32.938 from your K and you put up 35, so you beat it by like let’s say you did a multiple of let’s say 1.07 times. Then the year before it was 20.2 and you did about 24, so you were higher again. And now this year, deferred revenue on the subscription side is up 27%, so 41.7, which -- why would that -- what would that imply? I mean, so single digit -- that would imply -- how does that not correlate?

Robert J. Rueckl

Due to the 10% subscription revenue growth? I think it’s pretty close.

Ali Mohamed - Robeco Boston Partners

I mean, that would be a lot higher, no?

Robert J. Rueckl

It could be.

Ali Mohamed - Robeco Boston Partners

I mean, you are looking at one -- one would imply 35. One is, you know, so 35 growing 10% gets you to 38, 39. The other one gets you to like 43. I mean, is there -- can you help me understand what would be different, especially when the deferred revenues are continuing to be pretty strong?

Robert J. Rueckl

I think what we are thinking through is the impact in the near-term on schools and their buying decisions. Obviously if we have strong first half of the year, that contributes more to revenue in the current year, so if we look at how we are thinking about the year, there’s a little more risk in the first half of the year, a little less visibility in the back half but that is going to give us less subscription revenue in the back half of the year if our first half orders are not as strong as we think they could be.

Ali Mohamed - Robeco Boston Partners

Okay.

Robert J. Rueckl

So it’s really a timing of subscription orders. That might be a little different than it has been in the past.

Ali Mohamed - Robeco Boston Partners

And so what was the -- you know, as we were looking at that deferred revenue, what was the duration of the deferred revenue typically?

Robert J. Rueckl

The duration of the deferred revenue on the balance sheet? Well historically it’s been 18%, 19% -- 18, 19 months --

Ali Mohamed - Robeco Boston Partners

Okay.

Robert J. Rueckl

-- how to amortize it. That’s another factor. Our Q4 weighted average subscription period was longer, was above 20, so that also takes that deferred revenue a little bit longer to amortize out.

Ali Mohamed - Robeco Boston Partners

Okay. Thank you.

Operator

And the next question comes from Jeff [Brunswick] from RBC. Please go ahead with your question.

Jeff Brunswick - RBC Capital Markets

How does the -- thanks for this call, by the way. When you look at the cash flow positive or neutral for the year, how does that -- is the first half going to be negative and then you expect traditionally to make it up in the back half and that’s the positive?

Vincent Riera

That’s correct. We always drop in the first half and we could -- we could go through half that cash balance in the first half of the year and then grow it in the second half, and we had $8 million of free cash flow in the fourth quarter of this year alone and so that’s how we see it working its way. It’s always kind of worked out over the course of the year.

Jeff Brunswick - RBC Capital Markets

And as far as just maybe a little more color on geographically, are you seeing people putting -- where are you seeing people putting on hold? Is it across the board, is it taking a smaller order than the bigger order? Is it delaying entire -- maybe a little more feedback.

Jeff Brunswick - RBC Capital Markets

I think it’s a little bit of all three. So first of all, it is across the board -- there’s not one geographic area that is anymore uncertain than other areas. We still see school districts placing orders and the districts that they are -- or the orders that they are placing just are a little bit smaller. It’s what -- they are under-committing at this point, which means that we have I view it as opportunity to up-sell on those accounts moving forward.

And then from a product and what they are buying, the focus of what school districts are purchasing right now, it happens to be PLE because that’s the programs that are absolutely critical to the success of the students in the district versus the supplemental products that we sell.

Jeff Brunswick - RBC Capital Markets

And how do these concepts relate to new sales versus renewals? In other words, the renewal customers are doing the exact same thing, they are pushing out the renewal or they are renewing less --

Vincent Riera

No, that’s actually a good question -- customers that are using our products are renewing the product. So if they have programs underway, they are renewing. We have seen customers that renew expand because they know the program works. We are also seeing interest -- we continue to see interest from new customers that have a need to address -- they have credit recovery needs that they need to address and our programs work very effectively for that so we continue to win new customers.

Jeff Brunswick - RBC Capital Markets

Thank you.

Operator

Thank you, sir. We have a follow-up question from Bob Evans. Please go ahead, sir.

Bob Evans - Craig-Hallum Capital

Hello, again. To follow-up on the previous question as it relates to renewals, I believe you did say the renewal rates that you were expecting this quarter were 79% -- you were hoping kind of for a target of 90. I’m sure you would agree that there was a difference -- would you say that was purely on the economic environment or what other reasons might there be?

Vincent Riera

I would attribute that to one large deal that we had that didn’t renew. The deal was -- the district was in economic turmoil and programs that they had going, not just PLATO programs but teachers, buildings, literally hit the floor.

Bob Evans - Craig-Hallum Capital

Okay. Was that like a seven-figure renewal or how big?

Vincent Riera

High six-figures.

Bob Evans - Craig-Hallum Capital

Okay.

Vincent Riera

High six-figures -- and the conversations with the district haven’t ceased. There’s just no money for -- there’s no money to move forward on it.

Bob Evans - Craig-Hallum Capital

Okay, so it’s not that they don’t want to use the product -- it’s just a matter of trying to fund it differently?

Vincent Riera

Yeah, they ran thousands of students through their summer school program, so it’s a program that has worked effectively for them for years.

Bob Evans - Craig-Hallum Capital

Okay, and then you had given an up-sell statistic and I didn’t quite catch it, but it was something around 39% -- can you just -- I want to make sure I understand what that statistic means.

Robert J. Rueckl

Sure. We call that our attach rate. It’s 39% in the quarter. It’s around 40%. It’s been fairly consistent at that level. That represents the -- when a customer renews, how much more stuff do they buy. So if they had a $100 subscription, when they renew on average our customers will come back, renew the $100 and add another $40.

Bob Evans - Craig-Hallum Capital

Okay.

Robert J. Rueckl

That can be a combination of additional licenses -- it could be a longer period of time. We don’t really break that 40% down into -- don’t have it broken down into what’s driving it, whether it’s licenses or subscription period but it’s still a pretty significant and fairly consistent metric.

Bob Evans - Craig-Hallum Capital

Okay, okay -- and to Ali’s comment or question earlier as it relates to the deferred revenue growth, basic -- just to make sure I understand the guidance, but if we go off of normal patterns, we should be able to see if we are starting the year at 41 or a little bit more, in a typical year you would see a modest amount higher, say 5% to 10% higher and basically your guidance reflects just more conservatism on your part, given kind of the lack of visibility -- is that a fair way to assess it?

Robert J. Rueckl

That’s a very accurate way of assessing it.

Bob Evans - Craig-Hallum Capital

Okay, so there’s no structural change in it, in the business, more just conservatism on your part?

Robert J. Rueckl

No, it’s just really being cautious about it, understanding the near-term and the impact in the back-half of the year subscription periods and you know, I think that there will be more clarity as we go into buying season. There’s a risk that the buying season gets back-end loaded relative to a lot of funding starts to flow in in April and May. Some of that funding could push into June. The July funding could push a little bit into August, so there’s -- you know, there’s just some risk that this is some timing that pushes out and in a subscription model, that revenue is just going to get pushed out into 2010.

Bob Evans - Craig-Hallum Capital

Okay. All right, thank you and Rob, I’ll try to follow-up with you.

Operator

Thank you. The next question comes from Phil [Glasic] from Crow Holdings.

Phil Glasic - Crow Holdings

Can you describe the existing business, that your existing business that comes from post-secondary and vocational schools and how big that opportunity is for you going forward?

Vincent Riera

Our post-secondary business focuses on community colleges, adult ed centers, and corrections facilities. That is a market that we sell developmental ed product into. We also sell workforce readiness into. Given the state of the economy, we feel that there is opportunity, more opportunity in that market because more people will be going back to school -- that’s the trend that we’ve seen in the past. So we view that as a market that has good opportunity in 2009. Also, if you look at some of President Elect Obama’s initiatives, there’s a lot of focus on adult education, college readiness, so it’s a -- it’s an opportunity for us this year and beyond.

Robert J. Rueckl

We do about $10 million or so of our business is in that market, just to kind of give you a perspective on the size of it.

Phil Glasic - Crow Holdings

And so with that market potentially growing significantly over the next year or two with all the unemployment and lay-offs, what are you guys doing to capitalize on that opportunity?

Vincent Riera

We have a sales force in place. We have positioned the sales force, sales organization to be focused on the community college and college readiness programs in 2009. That’s already begun.

Phil Glasic - Crow Holdings

And is any of that baked into your guidance, or do you think that you can have an upside surprise there?

Vincent Riera

There’s probably some upside there. We think we can certainly maintain that level of business next year. Not all of that product is on PLE. Our development ed product is on PLE, so we have legacy product in that market and we are certainly giving consideration to making some modest investments and moving that to PLE, refreshing it and moving it to PLE. Those are decisions we are going through right now but there’s -- you know, clearly people are talking about the opportunity there, given the economic environment and we’ve got great product. It’s just that in the past we hadn’t moved it to PLE. We were focusing more on the K12 market when we were prioritizing content to PLE. That said, it still sells. We still sell it into that market, even though it’s not PLE but that would be our preferred way to take the product and address the market.

Phil Glasic - Crow Holdings

Thank you.

Operator

We have a follow-up question from Ali Mohamed from Robeco Boston Partners. Please go ahead, sir.

Ali Mohamed - Robeco Boston Partners

So the attach rate -- you said that was 39%, so basically if you take a customer from last year and they renew, you should sell them 39% more product this year?

Vincent Riera

That’s right. On average, that’s what we do.

Ali Mohamed - Robeco Boston Partners

I mean, taking that and your 79 renewal rate, which is low, and multiplying 1.39 times 0.79, clears double-digit growth without even signing up new customers.

Vincent Riera

If that attach rate stays, that’s right.

Ali Mohamed - Robeco Boston Partners

Okay.

Vincent Riera

Those expansions going into next year, we’ll have to see if that holds up.

Ali Mohamed - Robeco Boston Partners

And now what’s the trend been the past few quarters?

Vincent Riera

It’s been fairly flat. It’s been down a little bit on the attach rate. It was a little higher in the beginning of the year, down a little bit in the back-half of the year.

Ali Mohamed - Robeco Boston Partners

Right. Can you talk a little bit about the competitive environment, anything new you are seeing, anything different overall?

Vincent Riera

I would say the competitive environment is relatively consistent. As we go into this year, one of the areas that I see an opportunity on as many of our competitors are smaller regional players, where they tend to focus on specific states or specific geographic areas. I see those competitors having challenges competing with us with a more comprehensive product than they have this year.

Ali Mohamed - Robeco Boston Partners

Okay. Thank you.

Operator

(Operator Instructions) Thank you, sir. There appear to be no further questions. Are there any other points you wish to raise?

Vincent Riera

No, just a final statement -- thank you again for joining us today. We appreciate your continued support and look forward to updating you next quarter. Thank you and goodbye.

Operator

Ladies and gentlemen, this concludes the PLATO Learning fourth quarter 2008 year-end conference call. Thank you for participating. You may now disconnect.

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