PLATO Learning, Inc. F3Q09 (Qtr End 07/31/09) Earnings Call Transcript

PLATO Learning, Inc. (TUTR)

F3Q09 Earnings Call

September 1, 2009 10:00 am ET

Executives

Charles Messman - The MKR Group

Vincent P. Riera – President and Chief Executive Officer

Robert J. Rueckl - Chief Financial Officer

Analysts

Robert Evans - Craig-Hallum Capital

Tom Claugus – Graham Partners

Michael Needleman - Preservation Asset Management

Tom Paolozzi - Alexander Capital Advisors

Presentation

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the Plato Learning fiscal 2009 third 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 third quarter financial results conference call for Plato Learning Incorporated.

Plato Learning reminds you that statements made in the 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 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 assurances 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 contain time-sensitive information that is accurate only as of today, September 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.

Vincent P. Riera

Good morning everyone. On the call with me today is Rob Rueckl, our vice president and CFO.

We are very pleased with the strong financial results we achieved in Q3, which occurs during the primary buying season in the education market. Compared to our third quarter last year, subscription orders and revenues grew at double-digit rates, gross margins improved, operating expenses declined, cash balances grew, and we achieved our third consecutive quarter of profitability.

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 33% and orders for our solutions delivered on PLE, our flagship SaaS [Software-as-a-Service] platform grew 49%. Total orders for the quarter grew 13% year-over-year to $31.2 million.

During the quarter we added 176 school districts and community colleges as first-time subscribers to PLE. Of these first-time PLE subscribers, 70 were new customers to Plato and 106 were existing customers who switched from one of our legacy products to our new platform.

As of the end of the quarter approximately 1,350 elementary through post-secondary institutions were using PLE to deliver online instruction to over 1.4 million students, a 72% increase since this time last year.

Subscription revenue grew 17% in the quarter, making this our twelfth consecutive quarter of double-digit year-over-year growth in subscription revenue.

Subscription margins improved 12% to 62%, improving total margins to 57%.

In addition to growing subscription revenue and improving margins, operating expenses, excluding restructuring charges in 2008, declined 10%, reflecting the actions taken last year to continue to drive operating leverage into our business.

Together, these accomplishments led to our third consecutive profitable quarter, including EBITDA of $3.4 million and $3.9 million increase in our cash balance during the quarter. Our ability to deliver consistent profitability in this difficult economic environment is an indication of the stability and predictability of our business model.

While it would be premature to declare a full recovery from the funding crisis that occurred late last year and the first part of this year, we have been encouraged by the level of engagement we have experienced with our customers during the past two quarters.

Federal stimulus funding is beginning to flow to school districts. Schools have many competing priorities for this funding, but they continue to evaluate new solutions such as ours aimed at addressing important instructional needs.

I will expand on our view of the opportunities and challenges in the current market environment after Rob provides you with more detail on our third quarter financial performance.

Robert J. Rueckl

We continued to deliver solid year-over-year improvements in our SaaS business in the quarter. Total subscription orders grew 33% at $23.5 million and orders for SaaS products delivered on PLE grew 49% to $21.3 million.

As Vin mentioned, we added 176 school districts and community colleges as first-time subscribers to PLE in the quarter. This is down from 208 first-time subscribers in the third quarter of last year. The lower number of first-time subscribers this buying season was primarily a function of the challenges we faced during the funding crisis late last year and the first part of this year, when many of our pipeline activities for the buying season occur.

Despite the challenges and a budget environment that remains difficult for our customers, we continue to experience strong, new, and recurring demand in the quarter for PLE solutions.

About two-thirds of the $21.3 million in PLE orders in the quarter came from first-time PLE customers or expansions of existing customer installations, with the remainder coming from our increasing base of renewing customers.

Our PLE dollar-basis renewal rate in the quarter was approximately 90% and our weighted average subscription term increased to 18.5 months from 13.9 months in the third quarter of 2008.

We view both of these measures as strong indicators of the effectiveness and long-term value of our solutions to our customers.

For those who monitor our weighted average subscription term metric, we have modified how we calculate this metric, starting this quarter, and have adjusted prior-quarter comparisons. Although the modification results in a lower weighted average term than reported in the past, the trend of increasing average subscription terms in 2009 versus 2008 remains unchanged. We believe this trend reflects customer preferences for ensuring their programs are funded for as long as possible, particularly in an environment where budgets are uncertain and stimulus funding is available for use on these programs.

The strong in subscription orders drove total orders in the quarter to $31.2 million, up 13% compared to Q3 last year.

Orders for legacy products and services, which consist of perpetual licenses and related software maintenance, totaled $3.1 million, down about 50% from $6.1 million in the third quarter of 2008.

Professional services orders, which consist primarily of product training and product management services related to subscription installations, grew 22% to $3.9 million on the strong growth and subscription orders.

We closed 49 deals over $100,000 in the third quarter this year compared to 40 in the same period last year. The average value of these orders was $257,000, up from $205,000 last year. The increase in the number and average size of large deals primarily reflects customers' preference for securing long-term subscription contracts, as mentioned earlier.

Deferred revenue backlog, which includes balance sheet deferred revenue, plus amounts owed by not yet billed, under non-cancellable, multi-year contracts, was $62.7 million at the end of the quarter, representing 24% growth over the third quarter of last year, and 29% growth from the beginning of the quarter.

Total revenue for the quarter was $16.7 million, which was down 10% from $18.6 million last year. Subscription revenues continued to show solid growth, coming in at $10.8 million for the quarter, resulting in year-over-year quarterly growth of 17%.

Revenues in the quarter from legacy perpetual products and software maintenance declined a total of $2.9 million, or 46%, to $3.5 million, as sales of these non-strategic products and services continue their natural decline.

Professional services revenue in the quarter declined $472,000 to $1.8 million. This decline did not 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 62%, an increase of 12% compared to Q3 of last year. Approximately 700 basis points of the 1200 basis point increase was due to the increase in subscription revenues, with the remaining increase due to a decline in subscription cost of revenue.

The decline in subscription cost of revenue reflects lower product amortization due to product impairments and lower capitalized software spending in fiscal 2008.

The subscription margin improvement drove an increase in total gross margins for the quarter to 57% compared to 50% in Q3 of last year. License fee margins and services margins in the quarter were 54% and 48% respectively and in line with last year's margins.

In addition to achieving significant margin improvement in the quarter, the year-over-year reduction in operating expenses we realized in the first half of the year continued into the third quarter. Total operating expenses in the quarter declined to $9.4 million, a 10% reduction from $10.4 million, excluding restructuring charges in Q3 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 were down 10% in the quarter to $6.0 million on reduced indirect sales, travel, and marketing costs relative to last year. None of the decline was due to a reduction in our field sales force, which has remained at about the same level throughout fiscal 2008 and fiscal 2009.

G&A costs in the quarter were $2.2 million, down about 2% from third quarter of 2008 levels.

Software maintenance and development expenses in the quarter declined by 13% to $976,000, reflecting improved stability in our PLE platform relative to fiscal 2008.

Compared to the second quarter of 2009, operating expenses increased about $1.0 million, due primarily to increased selling costs during the third quarter of peak buying season, a non-recurring benefit related to improved collections that reduced bad debt expense in the second quarter and a one-time third quarter charge related to the departure of our former chief technology officer.

With regard to income taxes, the federal impairment of goodwill in the fourth quarter of 2008 resulted in elimination of income tax expense that was associated with the tax deductible portion of goodwill. As a result, we reported no income tax expense in the third quarter of 2009 compared to $152,000 in Q3 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 earnings for the quarter of $184,000, or $0.01 per share, compared to a non-GAAP net loss, excluding restructuring charges of $1.3 million, or $0.05 per share in Q3 of last year.

EBITDA for the quarter improved to $3.4 million compared to adjusted EBITDA of $3.1 million in the third quarter of 2008.

Cash balances ended the quarter at $14.2 million, up from $10.2 million at the beginning of the quarter, and $2.3 million above Q3 2008 levels. The third quarter of 2009 marks the first time cash balances have increased on a year-over-year basis since we began our SaaS business model transition in the first quarter of fiscal 2005.

In summary, our management team is very pleased to have delivered a third consecutive profitable quarter and a strong year-over-year improvement in overall financial results. These results allow us to provide an improved four-year outlook for subscription orders and year-end cash balances and reaffirm our guidance for subscription revenues. Vin will provide further details in his comments.

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

Vincent P. Riera

We continued to see further stabilization in school district spending in the third quarter as federal stimulus funding became available to our customers. That said, we remain in difficult economic times and public education is not immune to the economic environment.

We believe the difficult budget environment, coupled with the 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 in districts that normally would not have looked to online solutions like ours are now evaluating our product.

Their due diligence and review process continues to be long but they are engaged in the selling process with us. Ultimately, we believe that this will have the effect of expanding our long-term market opportunity and driving further adoption of solutions like ours.

While we remain cautious in this difficult economic environment we are encouraged by the strong and reoccurring demand for our solutions that we've experienced over the past two quarters. Stimulus funding has eased some of the budget pressures our customers are faced with and provided them incentives to look for creative new ways to improve how they educate their students. We believe our solutions align well these objectives.

Stimulus funding is being used by our customers to address a wide range of budget issues. To the extent they chose to invest stimulus funding in the types of solutions that we offer, we expect to continue to receive our fair share of this investment.

During the quarter we also filled two important positions on our senior management team. First, we consolidated our sales organization under the leadership of Tom Tuttle. Since joining Plato Learning about a year ago, Tom has successfully led our post-secondary sales organization and brings to his new position over 25 years of sales experience that includes leadership of large, direct, and indirect national sales organizations.

Secondly, Mark Allen has joined Plato Learning as our new chief technology officer. Mark brings to Plato more than 20 years experience leading customer-facing technology organizations in the healthcare and wireless communications industries, including his most recent position as senior vice president and CIO at Midwest Wireless.

I am very excited to have both Tom and Mark as key members of our leadership team.

In summary, we have a great deal of confidence in our industry-leading solutions, management team, and SaaS business model and believe we will continue to make solid progress toward building a growing and profitable business for the remainder of fiscal 2009 and beyond.

Given our strong performance through the first nine months of the year, we are providing an improved full-year outlook for subscription orders and our ending cash balance. We believe subscription order growth for the full year will exceed the mid-teen growth we guided to last quarter. We now expect full-year subscription order growth to be in the range of 25% to 30%.

With regard to our cash balance, we had previously expected to end the fiscal year at or slightly above $20.0 million. We now expect cash balances to end the year in a range of $25.0 million to $27.0 million, resulting in fiscal 2009 free cash flow between $5.0 million and $7.0 million.

Our expectation for subscription revenue growth remains unchanged at the low, double-digit growth given the nature of subscription revenue recognition, the timing of orders, and the effect of longer subscription contracts on near-term revenue.

With regards to earnings guidance, we are obviously very pleased that we have achieved profitability in each of the past three 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.

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

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Robert Evans - Craig-Hallum Capital.

Robert Evans - Craig-Hallum Capital

I want to clarify some of the detail at the beginning. The PLE orders, I think you said you now have 1,350, is that correct?

Vincent P. Riera

That's right.

Robert Evans - Craig-Hallum Capital

And that's up what, year-over-year?

Robert J. Rueckl

Compared to this time last year, this time last year we had about 1,100.

Robert Evans - Craig-Hallum Capital

And the new customers of the new school districts, you said 106 of them are new?

Robert J. Rueckl

106 of them were transition, or the legacy. 70 were new.

Robert Evans - Craig-Hallum Capital

And for your orders that are new this quarter, what is the average term of those orders? I think you gave a weighted average for all orders. I'm just curious what it was for this quarter. For the new subscriptions.

Robert J. Rueckl

It's going to be very comparable to the total. Our total new business, which I call the first-time customers and then expansions from existing customers, right around 20 months, versus 18.5 overall.

Robert Evans - Craig-Hallum Capital

Also a question on the operating expenses. Your R&D bumped up a little bit sequentially. Is that going to be a volatile number or is that a number that we should use kind of as a run rate going forward? I should say the product development side, is that something that you can explain, are you doing more work there or give us a sense of what's going on in product development and what we should for a run rate going forward.

Robert J. Rueckl

We had about $250,000 to $300,000 in the charge related to the departure of our former CTO included in that line so that's a one-time piece of that number.

Robert Evans - Craig-Hallum Capital

So next quarter it should bump back down.

Robert J. Rueckl

It should, yes.

Robert Evans - Craig-Hallum Capital

And from a margin standpoint, continued strong margin growth on the subscription side. As you continue to scale there, where can subscription margins go?

Robert J. Rueckl

We still think subscription margins, longer term, upper 60s to low 70s. So we should see those start to—they will remain in the lower 60s for the balance of the year. And we should be able to continue to grow those as subscription revenue grows, because it's very leveraged. As you know, with the subscription revenue growth, out pace in the increase in the amortization, the biggest piece of the subscription cost of revenue is the amortization of the product costs. As we've lowered that investment over the last couple of years, the amortization in coming down.

Robert Evans - Craig-Hallum Capital

Vin, can you give us a sense of your view or what you're anecdotally hearing in terms of the spending environment? How tough is it or how would you characterize it from the past and do you view it as stabilized, getting better, getting worse? How do you view the spending environment from what you're hearing.

Vincent P. Riera

Spending is definitely better now than it was last year. Stimulus has helped infuse some money in the school districts, however, it's competing priorities for where that stimulus money goes to the extent that our customers are evaluating online curriculum or instructional technology solutions and they've allocated a portion of those stimulus dollars to spend on those types of solutions, we're able to compete and benefit from those moneys.

Robert Evans - Craig-Hallum Capital

Would you say, the stimulus dollars, are they being viewed as incremental or are they being viewed more as there was a hole and they're filling that hole?

Vincent P. Riera

It's being viewed as there is a hole and they're filling that hole. But there is also this underlying trend that school districts are looking at better ways and more most effective ways to educate students. So there is also an underlying shift that's taking place as well.

Robert Evans - Craig-Hallum Capital

Which is away from the spending side of the things.

Vincent P. Riera

Yes.

Robert Evans - Craig-Hallum Capital

Are you being viewed with that? I know you've shown your presentation, the ROI slide where you're basically saving the school district a fair amount of money because drop-out rates are lower. Is that starting to resonate?

Vincent P. Riera

It depends on the school district. That's really individual to the school district. So some school districts will look at the return on the investment. Our platform allows reporting features that show product efficacy. Some school districts are continuing to use the product that delivers results but aren't tracking the results.

Robert Evans - Craig-Hallum Capital

You're looking for much greater cash balance at the end of the year. Can you give a little more granularity in terms of why the bump-up in cash? Is this from orders you're already seeing for the quarter or give us a little more color in terms of the increase in cash by year end.

Robert J. Rueckl

We expected longer-term subscriptions as we entered the buying season, because that was the trend that we were seeing and customers like to lock in long term. Especially when they have the funding available. We had, initially our assumption about how much of those orders would be paid up front versus how much would be paid over time, you know has shifted. So with the stimulus money available, customers are electing to pay more of those upfront than we had anticipated in our earlier projections.

Operator

Your next question comes from Tom Claugus – Graham Partners.

Tom Claugus – Graham Partners

What was the overall order rate, you said it was up 13%, did I get that right?

Robert J. Rueckl

That's right.

Tom Claugus – Graham Partners

And that is just because the legacy stuff is down?

Robert J. Rueckl

That's right. The legacy stuff was down almost 60%.

Tom Claugus – Graham Partners

Do you have a fear of your solution versus online curriculum? Can you summarize that?

Vincent P. Riera

Our solution is online curriculum.

Tom Claugus – Graham Partners

The PLE is, right?

Vincent P. Riera

Correct. So the PLE is the platform and then curriculum sits on top of the platform.

Operator

Your next question comes from Michael Needleman - Preservation Asset Management.

Michael Needleman - Preservation Asset Management

Coming back on what was just stated, do you break out the legacy revenues versus your subscription revenues, do you break that out? I'm not sure because you went through so many numbers and I don't have the full press release.

Robert J. Rueckl

If you do look at the full press release there are schedules attached to that and there are schedules that show the license revenue and then the software maintenance revenue line items and the detail of the revenue and orders. So when we talked about our legacy business, we talked about those two line items in both revenues and orders.

Michael Needleman - Preservation Asset Management

And the overall margins, a question was asked earlier that you thought it would stay in the low 60s and then as you build the license growth, that will accelerate. Wouldn't also as your legacy business continues to decline and as we go forward, that your margins will also show improvement, just by the basis of the business mix changing?

Robert J. Rueckl

Yes. Just to clarify, the low 60s margin was subscription margins only. Our legacy business, the maintenance and the license are both still relatively higher margin business. Those margins are in the 50s and higher yet, of although they make up a smaller mix of our business.

The professional services part of our business is lower margins. Those margins are around 20%, 25%. So there is a mix change, but we're also growing in professional services part of the business which is tied to subscription, which have lower margins.

Michael Needleman - Preservation Asset Management

And the professional service business, clearly you have a clear understanding of what that business will be on a quarterly basis, is that a fair statement?

Robert J. Rueckl

Yes, that is fairly predictable and it's seasonal. We deliver it when installations are starting at the beginning of the school year or the beginning of the semester.

Michael Needleman - Preservation Asset Management

Current headcount is what?

Robert J. Rueckl

We are around 325 to 330.

Michael Needleman - Preservation Asset Management

And just in terms of sales people, what's the current sales person count?

Vincent P. Riera

Sixty-five field sales people. Fifty-five in K-12 and post-secondary.

Michael Needleman - Preservation Asset Management

And did you add any?

Vincent P. Riera

No.

Michael Needleman - Preservation Asset Management

I was interested in what you see as far as the federal money, and clearly they have their discretion on where it's spent. And maybe this is my thought, that each district is going to be a little different on where they actually apply the money. Is there any type of standard that the government is giving this money or are they just saying to the school districts in the state, here's the money, you go spend as you might?

Vincent P. Riera

There are guidelines but they're very, very broad.

Michael Needleman - Preservation Asset Management

So it's really more up to the school district as far as where the money is spent.

Vincent P. Riera

For the most extent, yes.

Michael Needleman - Preservation Asset Management

And if we looked at order patterns, again for my clarification, what's the season? So we're just beginning the school year, so do you typically see a bump of orders during what quarter, or what type of linearity during the year do you expect as far as orders are concerned?

Robert J. Rueckl

Q3 is always our peak. Q4 is our second strongest quarter but it's lower than Q3. And then our Q1 and Q2, Q1 is our lowest quarter, which is November through January.

Michael Needleman - Preservation Asset Management

Was there any capex in the quarter?

Robert J. Rueckl

Broadly, we have two types of capex. We have our basic you buy computers and other things like that in the business. The other larger piece, though, is we do capitalize software development. So we did have about $1.0 million in the quarter of capitalized product development.

Operator

Your next question is a follow-up from Robert Evans – Craig-Hallum Capital.

Robert Evans – Craig-Hallum Capital

What was the product development number?

Robert J. Rueckl

It was $1.0 million.

Robert Evans – Craig-Hallum Capital

And is that the right run rate to use going forward?

Robert J. Rueckl

Yes, more or less. We were at $700,000 in Q2. It just depends. It shifts a little bit between expense and capital, but we're settled into an investment level on a quarterly basis.

Robert Evans – Craig-Hallum Capital

And from a new product standpoint, is there anything that you would point to that's a bigger deal—I'm trying to get a sense of is there anything that you're excited about from an upcoming product standpoint.

Vincent P. Riera

Yes, there are a lot of things that we're looking forward to next year. We're going to continue to invest in the curriculum and the content that we have on the platform. We're going to continue to invest in the platform itself. And increase the offering that we offer to the K-12 and post-secondary school districts.

Robert Evans – Craig-Hallum Capital

Is there a particular subject are where you would say we're looking at, for example, middle school math, or I'm just trying to get a sense of where the focus might be.

Vincent P. Riera

The trend toward online instruction is increasing beyond credit recovery. And you're seeing more in online courses and having a more robust course offering for school districts to have a broader range of choices for the different types of students using products. It is a market that we can easily expand into.

Robert J. Rueckl

The other thing is that curriculum is a very important part of it but there are a lot of platform features that we are looking at. Vin talked about reporting and other features on the platform that are really high value to the school districts, that can drive expansions, and new installations at existing customers and even new customers.

So it's really a combination of curriculum and platform features that we're focused on.

Robert Evans – Craig-Hallum Capital

And in terms of this quarter, the new orders that were written, can you give us a sense of was there a particular focus area that you did well in? Was is more middle school based, more high school, what subject area? Just trying to get a sense of where the demand is coming from for specific subject areas or grades.

Vincent P. Riera

The majority of the business as to the K-12 market is our secondary library, which is middle school and high school courses.

Robert Evans – Craig-Hallum Capital

And I understand that but I'm just trying to get a little farther down than just generally middle school, high school. Is there a particular product suite that is really drawing attention?

Vincent P. Riera

It's actually the full set of courses. We're not finding customers going out and just buying our math collections, or just buying our science collections. They're buying the full suite of courses that we have and assessments associated with those.

Robert Evans – Craig-Hallum Capital

So they're buying across the high school so they're getting it for 9-12.

Robert J. Rueckl

Our most popular product has been this way for at least a couple of years, and that's the full courses from basically 7^th grade all the way through 12^th grade, and customers just buy the whole thing because they're addressing a broad range of students and they don't always know exactly which subject areas those students may be struggling with. It gives them the most flexibility so they tend to buy the whole bundle.

Operator

Your next question comes from Tom Paolozzi - Alexander Capital Advisors.

Tom Paolozzi - Alexander Capital Advisors

I think you mentioned earlier in the call the new contracts that were won in the quarter averaged around $250,000. Is that correct?

Robert J. Rueckl

That's right.

Tom Paolozzi - Alexander Capital Advisors

So just in PLE. The new schools that you added, what is the approximate number of users in the new 50. You had a new 170 total, 100 transition and 70 new, so what was the new average user per PLE account that you won.

Robert J. Rueckl

That would be the number of licenses, right?

Tom Paolozzi - Alexander Capital Advisors

Yes, I guess that's probably the closest.

Robert J. Rueckl

It varies. I don't have a specific average number of licenses per new user.

Tom Paolozzi - Alexander Capital Advisors

Do you know what it is PLE-wide, all 1,400 or 1,350 schools?

Robert J. Rueckl

At a district level? It's probably, I don't have this, it's probably in the neighborhood of 90 to 150 licenses or something like that. Multiple locations. School districts typically do this in sort of, they think of a computer lab, they think of 30 seats, and they have multiple labs through their district, so they tend to sort of think about it in those chunks.

We're at 1.4 million registered users on the system at the end of the quarter.

Tom Paolozzi - Alexander Capital Advisors

So I can figure the average. So the new 170, would you say that averages a little higher or a little lower?

Robert J. Rueckl

I think it's a little higher, particularly in the third quarter. The third quarter is where we get our larger deals and larger implementations are sold.

Vincent P. Riera

And to clarify, you're talking about students using the license?

Tom Paolozzi - Alexander Capital Advisors

Right. Like Rob said, you have 1.4 million as of the end of the quarter, right?

Vincent P. Riera

Yes. Typically what we find, as well as when a school district buys the product, they will take a subset of students and put them on the product and then as they are very successful in using the product, they increase that and then they expand it on a product they buy from us.

Tom Paolozzi - Alexander Capital Advisors

Because that number is getting significant and it's a nice exposure you have. A lot of people, a whole sect of people, not just students.

Operator

There are no further questions in the queue.

Vincent P. Riera

Thank you again for joining us today. We appreciate your continued support and look forward to updating you on our next quarter.

Operator

This concludes today’s conference call. If you would like to listen to a replay of today's conference, you may dial 800-406-7325 or 303-590-3030 with the passcode 4145401.

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