PLATO Learning, Inc. Q1 2009 Earnings Call Transcript

March 03, 2009 | about: TUTR

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PLATO Learning, Inc. (TUTR)

Q1 2009 Earnings Call Transcript

March 03, 2009 at 4:45 pm ET

Executives

Vincent Riera - President, Chief Executive Officer, Director

Robert J. Rueckl - Chief Financial Officer, Vice President

Analysts

Bob Evans - Craig-Hallum Capital

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the fiscal 2009 first quarter 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 and 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, March 3, 2009. 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. Please go ahead, sir.

Vincent Riera

Thank you, David and good afternoon everybody. On the call with me today is Rob Rueckl, our Vice President and CFO. We are pleased with the financial results we delivered in Q1. The achievement and profitability as well as solid increases in subscription orders, revenue and gross margins are strong indicators of the progress we are making in the market place and in execution of our software to service business model.

Order activity in the quarter continued to demonstrate the strength of our SaaS solutions in the market with our existing customers as well as new PLATO customers. Total subscription orders for the quarter grew 18% and orders for PLE which is our flagship SaaS platform grew 38%. During the quarter, we add 71 school districts on PLE. Of these 71 districts, 41 new customers and 31 were existing PLATO customers.

As of the end of the quarter, over 1240 [K12] and post secondary institutions were using PLE to deliver online instruction to their students, a 49% increase since this time last year. Delivering profitability in the quarter was a significant milestone in our SaaS business and a rewarding accomplishment for our management team and employees who have worked so hard to get us to this point.

Subscription revenue grew 24% in the quarter making this our 8th consecutive quarter of 20%+ growth in subscription revenue. Subscription margins improved 19 percentage points over 60% improving total margins to 58% and our allowance efforts to continuously drive efficiencies in our business led to a 20% decline in operating expenses. Together, these accomplishments led to the Company's first profitable quarter since the fourth quarter of 2004 and achievement of significant EBITDA.

Rob will provide more details of our financial performance for the quarter in his remarks. In addition to delivering solid financial performance, we completed several other critical actions in the quarter. We made important changes in key parts of our organization. These changes involve leadership, process and resources changes that will allow us to continuously improve our customer experience, add greater market focus to our product development efforts, build on success of our sales execution and create an environment for continuous innovation that is critical to our long-term growth strategy.

We are energized by these changes and opportunity they provide us to take our business to the next level of success. In December, we launched one of the largest sets of new features and enhancements to our PLE platform introduction. Our PLE customers now have access to improve course customization tools, more flexible licensing options, student-teacher communication tools, streamline student enrolment and seamless access to these port materials. This release also involved a number of important architectural changes to PLE that paved the way for exciting future platform capabilities.

In addition to PLE platform enhancements, we completed development work on four new course offerings. These courses will have a positive impact on all of our customers either by addressing their needs and meeting their state's graduation requirements or being used as popular course electives. We outlined that this course have expand our product offering but they were developed using new tools and design methodologies that dramatically lowered course development cost and time to market. While maintaining the high standards for rigorous, rich and engaging content, our customers have come to expect from PLATO course ware.

External factors have also changed dramatically during the quarter. Economic conditions are the most difficult this country has experienced in decades and education institutions that we sell to are not immune from the impact. We have a new administration in Washington which has passed the historical fiscal stimulus package and proposed a bold federal budget to respond to many of the challenges we face in this country which include improving our education system.

I will discuss our view of the near term and longer term opportunities and challenges of the current market environment for our business after Rob provide you with more detail on the first quarter financial performance. Rob?

Robert J. Rueckl

Thank you, Vin and good afternoon, everyone. We continued to deliver solid financial gains in our SaaS business in the quarter. Subscription orders grew 18% to $6.7 million. Orders per Saas products delivered on PLE grew 38% to $5.6 million with about half of that growth coming from an increase in license volume and half from the longer subscription period.

The average PLE subscription term in the quarter was about 21 months compared to 15 months in Q1 of 2008. Longer subscription terms indicate customers’ confidence in our solutions and lower the renewal risk of shorter subscription terms. The PLE renewal rate in the quarter was approximately 88% on a dollar value basis and renewal orders were approximately 40% of total PLE orders in the quarter, consistent with the first quarter of last year.

Total orders for the quarter were $10.8 million, up 2.2% compared to Q1 of last year. Orders for perpetual license products were $1 million, down $452,000 from Q1 of 2008. Services orders declined $345,000 in the first quarter and a decline in orders for software maintenance services on perpetual products partially offset by an increase in professional services orders driven by the growth in subscriptions.

We closed 14 deals over $100,000 in the first quarter of this year compared to 12 in the same period last year. The average value of these orders increased significantly to $215,000 compared to $163,000 last year driven primarily by the longer subscription terms. Deferred revenue backlog, which includes amount owed but not yet billed under non-cancelable multiyear contracts, was $48.5 million at the end of Q1 of this year, up $4.2 million from Q1 of last year.

Total revenue for the quarter was $16 million, down just slightly from $16.1 million last year. Subscription revenues continue to show strong growth coming in at $9.9 million for the quarter resulting in year-over-year quarterly growth of 24%. License fee revenue has declined $1.2 million in the quarter to $1 million lower orders for perpetual license products and service revenue has declined $750,000 and a decline in software maintenance revenue on those legacy products.

Subscription gross margins for the quarter improved significantly coming in at just over 60%, an increase of 19 percentage points compared to Q1 of last year. While 11 points of the margin increase was due to the increase in subscription revenues with the remainder of the improvement due to a decline in product amortization that resulted from lower capitalize software costs and product impairments in fiscal 2008.

The subscription margin improvements drove an increase in total gross margins in the quarter to 58% from 46% in Q1 of last year. License fee margins also improved in the quarter from 37% last year to 56% this year due to lower product amortization and cost reduction initiatives we completed in fiscal 2008. Services margins declined 3.3% to 53% in the quarter on a lower mix of higher margin software maintenance revenues.

In addition to achieving significant margin improvement in the quarter, we continue to drive reductions in operating expenses. Total operating expenses declined to $9.1 million, a 20% reduction from Q1 of last year. These declines reflect the benefit of our restructuring activities in the second half of last year and the continued operating efficiencies of our business model. Sales and marketing expenses declined 16% to $5.9 million on reduced indirect sales, travel and marketing costs. None of the decline was due to reduction in our field selling force which remained about the same relative to the first quarter of last year.

G&A cost declined 18% to $2.4 million and lower headcount, legal and under professional services costs. The product maintenance and development expenses declined by nearly 50% to $567,000 reflecting continued improvement in the stability of our PLE platform and the quality of new releases. The full impairment of goodwill in the fourth quarter last year resulted in the elimination of income tax expense associated with the tax deductible portion of that goodwill. As a result, we reported no income tax expense in the quarter compared to $152,000 in Q1 of last year.

Wrapping up our P&L results for the quarter, strong growth in both subscription revenues and margins in our core SaaS business together with continued operating cost reductions resulted in net earning for the quarter of $259,000 or $0.01 per share compared to a net loss of $3.9 million or $0.16 per share in Q1 of 2008. EBITDA for the quarter improved to $3 million compared to $400,000 in the first quarter last year.

Cash balance ended the quarter at $12.3 million, a little better than we expected, down from $20 million at yearend. The decline reflects the normal seasonality of the education market and approximately $3 million of nonrecurring cash payments in the quarter including $1.7 million to terminated employees and $1.3 million in nonrecurring payments under our royalty agreement we renegotiate in Q4 of last year.

Our first quarter also typically includes larger payments we make annually for things like yearend incentive and annual insurance renewals. Going forward, cash is expected to decline modestly in Q2, historically our seasonal low point, to between $9 million and $10 million and then build for the remainder of the fiscal year as we move to the primary K12 buying season in the back half of the year. We continue to expect to end fiscal 2009 with cash balances at or a little above $20 million.

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

Vincent Riera

Thanks, Rob. As I mentioned in my opening remarks, we are operating our business in unprecedented market conditions. Our customers are not immune from a difficult economic environment and it has continued to create uncertainty in our market. The challenging budget environment is changing the way that our customers buy our product. Their due diligence and review process is longer and in turn, we are experiencing longer sales cycles.

While our customers are challenged in stretching their available dollars needed to spend on everything from building improvement to school buses, our customers continued to engage in the selling process with us. The need for our solutions in the market helps school districts prioritize their spending and ultimately buy our product in the first quarter. In this new environment, our ability to maintain our total level of business relative to last year is encouraging. However, we continue to remain watchful as we move closure to our peak buying season in the third and fourth quarter of our fiscal year.

While remaining cautious, we have reasons to believe we can continue to grow our business in this environment. First, our innovative improvement learning solutions address core instructional programs needed by the K12 educational system. There will be children in schools who need our solutions to catch up and our solutions aligned closely to important education priorities such as graduation rate improvement, credit recovery, helping undereducated students prepare for college level work and increasing instructional capacity for schools that face teacher shortages.

Second, our competitive position is very solid. PLATO is the leading technology brand in the remedial learning market and we strongly believe that the products we deliver on PLE represent the most effective technology based solution in this market. In a difficult economic environment, these strengths provide 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.

The American Recovery and Reinvestment Act of 2009 increased the amount of federal education funding available to our customers and provide stabilization funds to states to alleviate some of the budget pressures that could affect the education spending at the state level. While we are encouraged by the potential that this additional funding could have on our market, we must be mindful that education institutions are still unclear on exactly when and how much funding they will receive. Our employees and our customers are working to understand the mechanisms and other requirement needed to secure the additional funding.

While this influx of funding into the market that we sell to create optimism, it could also be viewed as a short-term risk because our customers are distracted as they work to define what it means for them and how they will rank their competing priorities. As a result, it is unclear with the present time what effect, if any, this will have in our business in 2009. President Obama’s proposed budget seeks to increase the federal role and funding for education in the country. It is too early to determine if there will be an impact in our business as the result of the changes in the federal education budget but we believe our solutions align well with many of the president's education priorities for our public school system.

American Recovery and Reinvestment Act will not displace school budget uncertainty in the near future making it difficult to predict near-term economic trends. However, we are confident in the strength of our SaaS subscription solutions and believe we can continue to make good progress in fiscal 2009 toward building and growing of profitable business.

Before I wrap up our prepared comments and take your questions, we would like to provide you with some general guidance for the remainder of fiscal 2009. Although we achieved strong double digit subscription order and revenue growth in the first quarter, we continue to remain cautious regarding outlook for the remainder of fiscal 2009 due to the general economic environment and unclear outlook for education spending. Given this cautious outlook, we are reaffirming our previously provided guidance that we expect high single digit subscription order growth and low double digit subscription revenue growth in fiscal 2009.

While profitability remains our goal in 2009 and we are obviously pleased to achieve profitability in the first quarter, we are not providing any guidance at this time. As Rob mentioned earlier, we expect our cash balances to decline in the second quarter to a seasonal low point of between $9 million and $10 million 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 confident our current cash balances are sufficient to take us through these economic conditions. We continue to expect free cash flow in fiscal 2009 to be flat to positive and end the year with the cash balances of at least $20 million. While we are in a time of economic uncertainty and therefore unclear how the next few quarters will play out, we are pleased and encouraged by our solid start to the year. Our ability to achieve growth and subscription orders in revenue and deliver improved margins and profitability in these challenging times gives us further confidence that our products and business model positions us for long term and sustainable growth in revenue, earnings and cash flow.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Bob Evans - Craig-Hallum Capital.