PLATO Learning F2Q09 (Qtr End 4/30/09) Earnings Call Transcript

PLATO Learning, Inc. (TUTR)

F2Q09 Earnings Call

June 1, 2009 5:00 pm ET

Executives

Charles Messman - The MKR Group

Vincent P. Riera - President, Chief Executive Officer, Director

Robert J. Rueckl - Chief Financial Officer, Vice President

Analysts

Bob Evans - Craig Hallum Capital

Presentation

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the Plato Learning fiscal 2009 second quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to Charles Messman of the MKR Group. Please go ahead, sir.

Charles Messman

Welcome to the fiscal 2009 second quarter financial results conference call for Plato Learning Incorporated. Plato Learning reminds you that statements made in the press release and on this call and 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 expectation 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 differ materially 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 contents of this call contains time-sensitive information that is accurate only as of today, June 1, 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.

With that said, I would now like to turn the call over to your host, Vin Riera, President and CEO of Plato Learning. Vin.

Vincent P. Riera

Thank you, Charles and good afternoon, everyone. On the call with me today is Rob Rueckl, our Vice President and CFO. We are pleased with the financial results we delivered in Q2. The achievement of our second consecutive quarter of profitability, as well as continued strong increases in subscription orders, revenue, and margins indicate the strong progress we are making in the marketplace and the benefits of our software as a service business model.

Order activity in the quarter continued to demonstrate the strength of our product offering and the value it delivers to our customers. Total subscription orders for the quarter grew 55% and orders for PLE, our flagship SAS platform, grew 74%. Total orders grew 22%, our strongest second quarter in three years.

During the quarter, we added 78 school districts on PLE. Of these 78 districts, 51 were new customers and 27 were existing Plato customers. As of the end of the quarter, nearly 1,300 K through post-secondary institutions were using PLE to deliver online instruction to their students, a 37% increase since this time last year.

Our ability to deliver consecutive quarters of profitability during the seasonally slow period in the education market is an indication of the stability and predictability of our business model. Subscription revenue grew 15% in the quarter, making this our 11th consecutive quarter of double-digit growth in subscription revenue. Subscription margins improved 14 percentage points to over 57%, improving total margins to 55%.

In addition to growing subscription revenue and improving margins, operating expenses excluding restructuring charges in 2008 declined 28%, reflecting the actions taken last year to streamline our cost structure.

Together these accomplishments again led to a profitable quarter and achievement of significant EBITDA. Rob will provide more details on our financial performance for the quarter in his remarks.

During the quarter, we also experienced strong growth in subscription renewals and expansions of existing installations. This growth highlights the success we are having with the set of new features and enhancements added to our PLE platform, as well as our efforts to continuously improve customer experience.

We were very pleased with the growth in subscription orders and total orders in the quarter. We experienced many school districts resume spending and evaluate new solutions such as ours aimed at addressing important instructional needs. However, we believe it’s premature to declare a full recovery on our market. General economic conditions remain uncertain at best and despite the passage of the American Recovery and Reinvestment Act, our experience is that educational institutions remain very cautious about their funding environment.

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 provides you with more detail on our second quarter financial performance. Rob.

Robert J. Rueckl

Thank you, Vin and good afternoon, everyone. Before getting into the details of our quarterly results, I want to start off by noting that we provided additional information in the order and revenue schedules attached to our press release. These schedules provide additional visibility to services, orders, and revenues which include amounts associated with software maintenance services on our legacy perpetual products. We believe this additional detail provides greater transparency of the trends in our business relative to our subscription products and services versus our legacy products and services.

We continue to deliver solid financial improvements in our SAS business in the quarter. As Vin mentioned, subscription orders grew 55% to $11.2 million. Orders for SAS products delivered on PLE grew 74% to $9.8 million. Orders from new PLE customers and expansions of existing customer installations, or total new PLE business, increased 22% to $5.6 million. PLE renewal orders increased in the quarter to $4.2 million from $1 million in the second quarter of last year. The PLE renewal rate in the second quarter, measured on a dollar basis, exceeded 90% and we experienced a number of customers who renewed expiring subscriptions early or extended existing subscription periods.

The weighted average PLE subscription term in the quarter was approximately 27 months, up from about 21 months in Q2 2008. We view the strong renewal rate, early renewals, extensions of existing subscription, and the increase in the average subscription term, all as strong indicators of the market success of our solutions and their long-term value to our customers.

The strong growth in subscription orders drove total orders to $15.9 million, up 22% compared to last year. Orders for legacy products and services, which consist of perpetual licenses and software maintenance, totaled $2 million, down from $4 million in the second quarter of last year.

Professional services orders, which consists primarily of product training and project management services related to subscription installations, grew 70% to $1.9 million on the strong growth in subscription orders.

We closed 25 deals over $100,000 in the second quarter this year compared to 15 in the same period last year. The average value of these orders was $232,000, up from $208,000 last year.

Deferred revenue backlog, which includes deferred revenue plus amounts owed but not yet billed under non-cancellable, multi-year contracts, was $48.7 million at the end of the second quarter, up 17% from $41.7 million at this time last year.

Total revenue for the second quarter was $15.5 million, down 4.5% from $16.2 million last year. Subscription revenues continued to show solid growth, coming in at $9.7 million for the quarter, resulting in year-over-year quarterly growth of 15%.

Revenues in the quarter from legacy perpetual products and related software maintenance declined a total of $1.4 million, or 30%, as sales of these non-strategic products and services continued to naturally decline.

Professional services revenues in the quarter declined $579,000 to $1.8 million. This decline didn’t track with the strong growth in professional services orders in the quarter because many of these orders are scheduled for delivery closer to the start of the fall school season, or in out years of long-term subscription contracts.

Subscription gross margins for the quarter improved significantly to 57%, an increase of 14 percentage points compared to Q2 of last year. About half of the percentage increase was due to the increase in subscription revenues and half to a decline in subscription costs of revenue. The decline of subscription costs of revenue reflects lower product amortization due to product impairment and lower capitalized software spending in fiscal 2008.

Second quarter subscription margin declined slightly from the first quarter of 2009 on an increase of product amortization from Q1 to Q2, attributable to a major PLE platform release that we did late in the first quarter.

The subscription margin improvement drove an increase in total gross margins for the quarter to 55%, compared to 43% in Q2 of last year. License fee margins also improved from 27% last year to 58% in Q2 of this year, due to lower product amortization and cost reduction initiatives completed in fiscal 2008.

Services margins also improved 4% to 51% in the quarter on lower services costs, which were also the result of operating efficiencies gained in the second half of last year.

In addition to achieving significant margin improvement in the quarter, the year-over-year reduction in operating expenses that we realized in the first quarter continued into the second quarter. Total operating expenses in the quarter declined to $8.4 million, a 28% reduction from $11.7 million, excluding restructuring charges, in Q2 of last year. These declines reflect the benefit of our 2008 restructuring activities and continued operating leverage of our business model.

Sales and marketing expenses declined 25% in the quarter to $5.6 million on reduced indirect sales, travel, and marketing costs. None of the decline was due to a reduction in our field sales force, which has remained at about the same level over the past six quarters.

G&A costs declined 31% in the quarter to $1.9 million, due to reductions in head count and in compliance in the professional services costs, and to improve collections resulting in a reduction of the bad debt expense.

Software maintenance and development expenses in the second quarter declined by 36% to $708,000, reflecting improvements in the stability of our PLE platform and the quality of new releases.

Going forward, we expect year-over-year declines in total operating expenses to moderate as most of the benefits of our 2008 cost reduction initiatives that affected operating expenses were in place by the middle of the third quarter of last year.

With regard to income taxes, the full impairment of goodwill in the fourth quarter of last year resulted in the elimination of income tax expense associated with the tax deductible portion of goodwill. As a result, we reported no income tax expense in the quarter compared to $152,000 in Q2 of last year.

Wrapping up our P&L results for the quarter, strong growth in both subscription revenues and margins in our core SAS business, together with continued operating cost reductions, resulted in net earnings for the quarter of $123,000, or $0.01 per share, compared to a non-GAAP net loss excluding restructuring charges of $4.8 million, or $0.20 per share in Q2 of last year. EBITDA for the quarter improved to $3.3 million, compared to adjusted EBITDA of negative $416,000 in the second quarter of last year.

Cash balances ended the quarter at $10.2 million, slightly above the range of $9 million to $10 million we provided in our first quarter call. The decline reflects the normal seasonality of the education market. Going forward, cash is expected to build for the remainder of fiscal 2009 as we move through the primary K-12 buying season.

In summary, our management team is very pleased to have again delivered a profitable quarter and strong year-over-year improvement in overall financial results. These results, and our proximity to the primary K-12 buying season, allow us to provide an improved full-year outlook for subscription orders and reaffirm our guidance on subscription revenues and year-end cash balances. Vin will provide further details in his comments.

This concludes my formal remarks. I will now turn the call back to Vin.

Vincent P. Riera

Thanks, Rob. While we saw some stabilization in the second quarter as school district spending improved, we continue to operate in difficult economic times. Public education is not immune to the economic environment. The challenging budget conditions are changing the way that our customers buy our product. Their due diligence and review process is longer and we continue to experience long sale cycles. Our customers are challenged to stretch their limited dollars across all budget categories but they continue to engage in the selling process with us. The need for our solutions in the market has helped school districts prioritize their spending and ultimately resulted in them buying our product in the second quarter.

While we remain cautious in this difficult economic environment, we see increased opportunity for continued strong growth in our subscription business as we enter the peak buying season in the back half of our fiscal year. The American Recovery and Reinvestment Act of 2009 has increased the amount of federal education funding available to our customers and has provided stabilization funds to states to alleviate some of the budget pressures that could affect education spending at the state level. We believe the difficult budget environment, coupled with stimulus funding, is driving school districts to look for new and alternative ways to provide instruction to their students.

Programs that provide districts the ability to measure and report effectiveness are having success and districts that normally would not have looked at our type of online solution are now evaluating our product. Ultimately we believe this effect will expand our long-term market opportunity and drive further adoption of solutions like ours.

In summary, we are confident in our industry-leading solutions and the benefits our SAS subscription model and believe we will continue to make good progress in fiscal 2009 toward building and growing a profitable business.

As Rob mentioned, our solid first half performance and the time of year when we are entering our customers’ primary buying season allows us to provide an improved full-year outlook for subscription orders. Subscription orders in the first half of the year grew 39%. At this time, it’s not clear to us whether this growth represents a going-forward trend or some portion of pent-up demand from the effects of the economic uncertainty during our fourth quarter of fiscal 2008. However, we do believe subscription order growth for the year will exceed the high-single-digit growth we previously expected. As a result, we now expect the percentage growth in full-year subscription orders to be in the mid-teens.

At this time, our expectation for subscription revenue growth remains unchanged, given the nature of subscription revenue recognition, the timing of orders, and subscription start dates and the portion of order growth attributable to longer subscription periods. We continue to expect subscription revenue growth in the low double-digit range for the year.

With regard to cash balances, we continue to expect to end the year at or slightly above $20 million.

With regard to earnings guidance, we are obviously very pleased that we have achieved profitability in each of the past two quarters, reflecting very significant improvements over fiscal 2008. Profitability for fiscal year 2009 continues to remain our goal; however, we are not providing specific earnings guidance at this time.

While we are in a difficult economic environment, we are pleased and encouraged by our solid start to the year. Our ability to achieve growth in subscription orders and revenue and deliver improved margins and profitability in these challenging times gives us further confidence that our products and business model position us for long-term and sustainable growth in revenue, earnings, and cash flow.

That concludes our formal remarks. We’ll now take any questions that you have. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Bob Evans with Craig Hallum Capital. Please go ahead.

Bob Evans - Craig Hallum Capital

Good afternoon, everyone and congratulations on a nice quarter. First, I’m sorry if I missed this but could you give the large deal breakdown? I think you typically give greater than $100,000.

Robert J. Rueckl

Yeah, we do. Let me just grab it here -- we did 25 deals in Q2 of this year versus 15 in Q2 of last year.

Bob Evans - Craig Hallum Capital

Greater than $100,000?

Robert J. Rueckl

Over $100,000 -- the average value this year was $232,000. The average value in Q2 of last year was $208,000.

Bob Evans - Craig Hallum Capital

Okay, great. And I think you said the term on your average term right now is 27 months, is that correct?

Robert J. Rueckl

It went up to 27 months in the quarter. We saw a larger number of longer term deals this quarter than --

Bob Evans - Craig Hallum Capital

That seems like a pretty significant increase in one quarter. Is that -- I mean, can you give us more color as to why the increase? I mean, it’s good news but I’m just wondering -- you know, a little more color.

Robert J. Rueckl

Increase in the number of deals or the --

Bob Evans - Craig Hallum Capital

Well, no, the term.

Robert J. Rueckl

The term.

Bob Evans - Craig Hallum Capital

Increase in the term from 21 to 27 months.

Vincent P. Riera

I actually think it was a reaction to schools not spending in the first half of the year. While we’re on our second quarter, they are still in their same budget year, so one of the trends that we saw was school districts taking longer in their buying cycle when they made the decision to move forward with our product, they committed to a longer amount of time.

Bob Evans - Craig Hallum Capital

Okay. Okay, and can you comment more a little bit on the budget environment? My understanding is the title one funding is nearly double. I know special ed is higher. Can you give us a little bit more color on what the numbers are and what’s that done to kind of administrator attitudes in terms of buying your product?

Vincent P. Riera

The stimulus package has infused a lot more money into the education system. It’s still really unclear on exactly where this money is going and how it is going to be spent. Also, what -- if it’s offsetting any shortfalls on some other areas where they were, where school districts might have been receiving funds.

What I will say about the stimulus package is that there seems to be a sense of -- maybe relief is a good word from school district administrators that there is funding on its way and available for programs. The other piece on the funding that’s worth mentioning is there seems to be a trend to look at alternative ways to spend money, so how school districts spent money in the past may not be the way that they are going to spend money in the future, which I feel is a good sign for solutions like Plato’s.

With that though comes more due diligence and more time evaluating products as they define what they want to do with the money.

Bob Evans - Craig Hallum Capital

Okay. Is there a way for you to quantify or give us a general idea of kind of pipeline today versus pipeline a year ago in terms of order volume or value? I’m just trying to get a sense of how things have maybe changed over the past year, if there’s a way to quantify that.

Vincent P. Riera

You know, I would say that I haven’t seen a direct correlation between stimulus money and pipeline but as I look at the pipeline, I am very confident in the pipeline and all of our pipeline is tied to funding sources, which come from either the stimulus package or existing funding sources that the stimulus package added to.

Bob Evans - Craig Hallum Capital

Okay.

Vincent P. Riera

I wouldn’t say that there has been a drastic increase in pipeline due to the stimulus package.

Robert J. Rueckl

-- the back half, the subscription order outlook that we are getting, we’re supplying in our guidance.

Bob Evans - Craig Hallum Capital

Pardon me? I’m sorry?

Robert J. Rueckl

I just said it clearly supports the subscription order guidance -- the back-half subscription orders that are implied in our guidance.

Bob Evans - Craig Hallum Capital

Right. I think you said, was it teens growth on orders?

Robert J. Rueckl

[Mid-teens] for the full year, right.

Bob Evans - Craig Hallum Capital

Okay. And that would -- you know, averaging in the first half, and I know the second half, those orders are larger than the first half but that would appear conservative, given that you are up 39% for the first half.

Robert J. Rueckl

Yeah, it probably is on the conservative side. We just -- we are just getting into the third quarter and the busy time of the year. We’ll have better visibility as we head into June and July when the new funding starts in July.

Bob Evans - Craig Hallum Capital

Okay. And how many sales people do you have right now?

Vincent P. Riera

Sales people are consistent -- we have 65 field sales people and we have 28 inside sales people.

Bob Evans - Craig Hallum Capital

Okay. Are you looking to expand that at all, or -- give us your sense.

Vincent P. Riera

Yeah, we are continuing to evaluate that. We feel that with some of the -- there may be opportunities to expand in territories that have greater need than other territories, that have greater market opportunity and really focusing on those. We’re in the process of evaluating that now.

Bob Evans - Craig Hallum Capital

Okay, and then on the margin side, you’ve obviously had nice year-over-year growth, down a little sequentially -- can you give us a sense of the subscription margins, where can you bring that too?

Robert J. Rueckl

Subscription margins should stay or improve a little bit from where they were in Q2. I see us not quite getting to 60% for the full year but we’ll -- we will get near that for the full year. They’ll go up from here. I don’t see -- you know, we had the Q1 to Q2 bump in costs because of the PLE release but I think that cost should remain relatively comparable to Q2 and then we should continue to see, as we have seen, consecutive quarter growth in subscription revenues which will bring the margin up.

Bob Evans - Craig Hallum Capital

Okay, and I noticed D&A is about -- call it $3.2 million for the quarter. Is that the kind of right run-rate going forward?

Robert J. Rueckl

Yes.

Bob Evans - Craig Hallum Capital

All right. Margins longer term though -- let’s say not this year but let’s say we’re looking out a couple of years -- where can you drive that with some size and scale, where could you drive the subscription margins?

Vincent P. Riera

We’ve talked about our business model before. Our subscription margins get above 70% -- there’s no reason that they really shouldn’t exceed what we would have experienced in the perpetual business because some of the support costs and other costs are lower but we’re above 70% in subscription margins. On blended margins, we are probably 65% to upper 60s. I mean, we’ll continue to have a component of professional services, which are lower margins.

Bob Evans - Craig Hallum Capital

Okay. All right. Thank you.

Operator

(Operator Instructions) We have a follow-up coming from the line of Bob Evans. Please go ahead, sir.

Bob Evans - Craig Hallum Capital

If there’s no one else, I’ve got a couple more questions. CapEx for this year -- what do you expect?

Robert J. Rueckl

We had a little bit larger than normal CapEx in Q2. We had some equipment replacement that we did.

Bob Evans - Craig Hallum Capital

How much was that?

Robert J. Rueckl

It was $369,000 in the quarter.

Bob Evans - Craig Hallum Capital

Okay.

Robert J. Rueckl

So I expect it -- roughly another $0.5 million, a little more maybe for the balance of the year.

Bob Evans - Craig Hallum Capital

Okay, so maybe 1.1, 1.2 for the year.

Robert J. Rueckl

Yeah.

Bob Evans - Craig Hallum Capital

Okay, and how about product development expense?

Robert J. Rueckl

No big changes there -- nothing that we are seeing in terms of that run-rate.

Bob Evans - Craig Hallum Capital

And what was that annual number?

Robert J. Rueckl

Yeah, in the quarter it was -- I’ll just make sure I have the right number here -- CapEx product development in the quarter was $700,000, so that’s probably about the right run-rate. We were higher than that in Q1 as we were winding down our development following Q4. We should be in around that range for the balance of the year.

Bob Evans - Craig Hallum Capital

$700,000 or so per quarter?

Robert J. Rueckl

Yes.

Bob Evans - Craig Hallum Capital

Okay. And anything from a new product standpoint that’s coming out that we should -- you know, that you are excited about or that we should be looking for?

Vincent P. Riera

I would say the biggest thing on -- the next big release we are planning on doing is a platform release that gives additional functionality for teachers and administrators and reporting capabilities.

Bob Evans - Craig Hallum Capital

Okay.

Vincent P. Riera

That’s going to come out in 2010.

Bob Evans - Craig Hallum Capital

Okay. And in calendar 2010 or --

Vincent P. Riera

In our fiscal year 2010, yes.

Bob Evans - Craig Hallum Capital

Okay. And of your new orders this quarter, could you give us some sense of mix of where they are coming from -- you know, high schools versus middle schools versus adult education?

Vincent P. Riera

Of large orders?

Bob Evans - Craig Hallum Capital

In general -- in general, so of the -- let’s say, I think what was overall $16 million of orders, roughly 11 from subscription -- I care mainly on the subscription of professional services side.

Robert J. Rueckl

Well, historically, it was -- our post-secondary business is in the range of 15% or so of our total business, somewhere in that range. So if you break it down that way, that’s been pretty consistent -- maybe a little bit long, or smaller this quarter because really the stronger growth was in K-12 for the quarter as opposed to kind of across what post-secondary and K-12.

Vincent P. Riera

And within K-12, I would say the majority of the orders came from middle school/high school implementations.

Bob Evans - Craig Hallum Capital

Okay. And would the majority of that order value come from your existing customers? Or what would you say the mix was, new versus existing?

Vincent P. Riera

Well, in our --

Robert J. Rueckl

Well, in terms of PLE, it was 55 customers were -- of the 78 new PLE customers, 51 of them were new customers which was real consistent with what we saw before, so actually we saw a heavier mix of new customers moving to PLE relative to the total, versus our legacy customers moving on to PLE.

Vincent P. Riera

And I would say one of the reasons that we saw a smaller number of legacy customers transitioning is in the beginning of the school year, customers -- there was so much budget uncertainty that customers stopped with the implementations that they had and weren’t looking to spend anything on it that they didn’t need to because their environment was -- their financial environment was so tight. The new customers, part of that is from the pent-up demand on orders that we didn’t see in the first half of the year that came in.

Bob Evans - Craig Hallum Capital

Sure.

Robert J. Rueckl

Those new customer implementations also tend to be -- many of them are programs that were not digital programs before. They are moving from other kinds of programs into digital -- the digital programs, so that’s actually some market share that’s coming away from non-digital markets.

Bob Evans - Craig Hallum Capital

Okay, thank you. And the overall number of customers right now using PLE?

Robert J. Rueckl

About 1,300 -- I think it’s 1,295.

Bob Evans - Craig Hallum Capital

Okay -- 1,300 but I’m wondering, I think that’s number of schools. I’m wondering actually registered users.

Robert J. Rueckl

Oh, number of actual registered users?

Bob Evans - Craig Hallum Capital

Yeah. I know you’ve given that in the past.

Robert J. Rueckl

Yes, we have -- I want to say -- it’s not right in front of me. It’s about -- just under 1.4 million.

Bob Evans - Craig Hallum Capital

Okay. Thank you very much.

Operator

(Operator Instructions) Management, it looks like there are no further questions. I will turn the call back over to you for any closing comments you might have.

Vincent P. Riera

Well, thank you again for joining us today. We appreciate your continued support and look forward to updating you on the next quarter. Thanks and have a great evening.

Operator

Thank you. Ladies and gentlemen, that will conclude today’s teleconference. If you would like to listen to a replay of today’s conference, please dial into 303-590-3030 or 1-800-406-7325 and enter the access code of 4086959 followed by the pound sign. We thank you again for your participation and at this time, you may disconnect. Have a nice day.

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Comments

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Jul 10 04:20 PM