PLATO Learning Reports Third Quarter 2007 Results

PLATO Learning, Inc. (NASDAQ:TUTR), a leading provider of K–adult computer-based e-learning solutions, today announced revenues of $19.2 million for its third quarter ended July 31, 2007, compared to $23.5 million for the third quarter of fiscal 2006. Subscription revenues grew 49% in the quarter to $6.5 million. The decline in total revenues was due to a decline in license fees from legacy perpetual products as the Company continues its transition from a perpetual software licensing model, for which revenue is recognized upon delivery, to a software-as-a-service model in which revenue is recognized over a subscription period. The Company’s net loss for the third quarter declined to $1.0 million, or $0.04 per share, in 2007 from a net loss of $1.8 million, or $0.08 per share in 2006, as operating costs and expenses declined by $5.2 million. Third quarter 2007 results include a one-time benefit of $0.8 million, or $0.04 per share, related to the early termination of a lease for the Company’s former U.K. office facility. Cash balances increased to $22.4 million at the end of the third quarter compared to $21.0 million at the end of the second quarter. Orders for the Company’s online subscription courseware products grew 59% to $11.1 million for the quarter while orders for the Company’s legacy perpetual license products declined by $7.7 million. Total orders for the third quarter were $26.3 million compared to $34.4 million in 2006. Mike Morache, PLATO Learning President and CEO said, "The key metrics we monitor to gauge the progress of our strategy reflect ongoing positive trends. Orders for our subscription courseware products continue to experience significant growth and are up 91% year-to-date compared to the first nine months of fiscal 2006. During the quarter we added 207 school districts and community colleges as subscribers to our new PLATO Learning Environment™ (PLE™), an increase of 160% over the third quarter of last year. At the end of the quarter, 260,000 users in 602 school districts, community colleges and other learning institutions across the U.S. were registered to use PLE. Subscription revenues now represent more than one-third of total revenues, up from 19% in the third quarter of 2006, and grew 49% over the same period last year and 22% over the second quarter of this year.” Mr. Morache continued, "Although we experienced strong growth in orders for our subscription courseware products, total orders declined 24% from the third quarter of last year as we continue managing through the transition from our legacy perpetual license products to our new subscription-based products delivered on PLE. The third quarter of 2007 was the first full quarter under the leadership of our new K-12 sales executive and we are very encouraged by the progress already made during this period.” Gross margins in the third quarter of 2007 were 49% compared to 58% in the same period last year, reflecting a decline in higher margin perpetual license fees, which have a relatively fixed cost base, and a decline in subscription margins from 65% in 2006 to 37% in 2007. Third quarter 2006 subscription margins reflect a one-time benefit related to third-party royalties under a renegotiated agreement completed during that quarter. Excluding this benefit, third quarter 2006 subscription margins would have been 47%. The remaining decline reflects straight-line amortization of new products released in the second half of 2006 relative to the gradual growth of related subscription revenues. Services gross margins improved to 48% in the third quarter of 2007 from 44% in the third quarter of 2006. Operating expenses in the quarter declined $5.1 million, and included a one-time benefit of $0.8 million related to the early termination of a U.K. lease commitment. This represents a 33% decline from the third quarter of 2006 and reflects the Company’s cost reduction and restructuring activities in fiscal year 2006 and early 2007. Conference Call A conference call to discuss this announcement is scheduled for today, September 6, 2007, at 3:45 p.m. CDT (Central Daylight Time). The dial-in number for this call is 1.888.276.0007 in the U.S. and Canada, and 1.612.332.0107 internationally. Attendees should call 10 minutes prior to the start of the call and inform the operator they are participating in PLATO Learning’s call. A recording of the call will be available from 8:15 p.m. CDT on September 6, 2007, until midnight on September 13, 2007. To access the recording, call 1.800.475.6701 in the U.S. and Canada and 1.320.365.3844 internationally. At the prompt, enter pass code number 855098. Additionally, investors have the opportunity to listen to the conference call over the Internet through PLATO Learning’s web site at http://www.plato.com/Investor-Relations/Conference-Calls.aspx. About PLATO Learning PLATO Learning is a leading provider of computer-based and e-learning instruction for kindergarten through adult learners, offering curricula in reading, writing, math, science, social studies, and life and job skills. The Company also offers innovative online assessment and accountability solutions and standards-based professional development services. With over 6,000 hours of objective-based, problem-solving courseware, plus assessment, alignment and curriculum management tools, we create standards-based curricula that facilitate learning and school improvement. PLATO Learning is a publicly held company traded as TUTR on the Nasdaq market. PLATO Learning educational software is delivered via the Internet, CD-ROM, and private intranets, and is primarily marketed to K–12 schools and colleges. The Company also sells to job training programs, correctional institutions, military education programs, corporations, and individuals. PLATO Learning is headquartered at 10801 Nesbitt Avenue South, Bloomington, Minnesota 55437, 952.832.1000 or 800.869.2000. The Company has offices throughout North America and Puerto Rico, as well as international distributors in the United Kingdom and South Africa. For more information, please visit http://www.plato.com. This announcement includes forward-looking statements. PLATO Learning has based these forward-looking statements on its current expectations and projections about future events. Although PLATO Learning believes that its assumptions made in connection with the forward-looking statements are reasonable, no assurances can be given that its assumptions and expectations will prove to have been correct. These forward-looking statements are subject to various risks, uncertainties and assumptions. 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. Any forward looking statements made are subject to the risks and uncertainties as those described in the Company's most recent filings with the Securities and Exchange Commission on Forms 10-K and 10-Q. Actual results may differ materially from anticipated results. PLATO® and Academic Systems® are registered trademarks of PLATO Learning, Inc. PLATO Learning and Straight Curve are trademarks of PLATO Learning, Inc. PLATO Learning, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (Unaudited) (In thousands, except per share amounts)               Three Months Ended Nine Months Ended July 31, July 31, 2007 2006 2007 2006 REVENUES Subscriptions $ 6,532 $ 4,373 $ 17,045 $ 12,783 License fees 5,940 11,689 13,652 27,658 Services   6,731     7,394     20,745     26,476   Total revenues   19,203     23,456     51,442     66,917     COST OF REVENUES Subscriptions 4,140 1,539 11,075 6,436 License fees 2,066 4,051 6,212 9,705 Services   3,496     4,174     9,837     13,436   Total cost of revenues   9,702     9,764     27,124     29,577     GROSS PROFIT   9,501     13,692     24,318     37,340     OPERATING EXPENSES Sales and marketing 7,579 9,539 22,682 28,849 General and administrative 2,865 4,064 8,983 13,026 Product maintenance and development 499 1,210 3,412 3,974 Amortization of intangibles 438 904 1,352 2,806 Restructuring   (766 )   21     (766 )   360   Total operating expenses   10,615     15,738     35,663     49,015     OPERATING LOSS (1,114 ) (2,046 ) (11,345 ) (11,675 )   Other income, net   218     405     917     1,238     LOSS BEFORE INCOME TAXES (896 ) (1,641 ) (10,428 ) (10,437 )   Income tax expense   150     150     450     450     NET LOSS $ (1,046 ) $ (1,791 ) $ (10,878 ) $ (10,887 )   LOSS PER SHARE Basic and diluted $ (0.04 ) $ (0.08 ) $ (0.46 ) $ (0.46 )   WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic and diluted   23,762     23,701     23,747     23,668   PLATO Learning, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (Unaudited) (In thousands, except per share amounts)           July 31, October 31, 2007 2006   ASSETS   Current assets: Cash and cash equivalents $ 22,351 $ 33,094 Accounts receivable, net 15,173 18,529 Inventories 970 1,832 Other current assets   5,567     6,346   Total current assets 44,061 59,801   Equipment and leasehold improvements, net 5,971 6,308 Product development costs, net 29,304 25,363 Goodwill 71,865 71,865 Identified intangible assets, net 8,576 10,545 Other long-term assets   3,491     2,348   Total assets $ 163,268   $ 176,230     LIABILITIES AND STOCKHOLDERS' EQUITY   Current liabilities: Accounts payable $ 4,258 $ 4,685 Accrued compensation 6,324 5,990 Other accrued liabilities 3,595 6,622 Deferred revenue   33,640     33,736   Total current liabilities 47,817 51,033   Long-term deferred revenue 8,013 8,110 Deferred income taxes 2,981 2,531 Other long-term liabilities   -     106   Total liabilities   58,811     61,780     Stockholders' equity: Common stock 238 237 Additional paid-in capital 169,612 168,597 Treasury stock at cost (205 ) (205 ) Accumulated deficit (63,896 ) (53,017 ) Accumulated other comprehensive loss   (1,292 )   (1,162 ) Total stockholders' equity   104,457     114,450   Total liabilities and stockholders' equity $ 163,268   $ 176,230   PLATO Learning, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands)               Nine Months Ended July 31, 2007 2006 OPERATING ACTIVITIES: Net loss $ (10,878 ) $ (10,887 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Deferred income taxes 450 450 Depreciation and amortization 11,860 11,252 Provision for doubtful accounts (539 ) 164 Stock-based compensation 888 1,038 Other adjustments (26 ) 24 Changes in operating assets and liabilities: Accounts receivable 3,895 1,201 Inventories 862 2,001 Other current and long-term assets (120 ) 790 Accounts payable (428 ) (1,065 ) Other current and long-term liabilities (2,793 ) (4,238 ) Deferred revenue   (193 )   (1,313 ) Total adjustments   13,856     10,304   Net cash provided by (used in) operating activities   2,978     (583 )   INVESTING ACTIVITIES: Capitalized internal product development costs (11,718 ) (10,665 ) Purchased product development - (3,000 ) Purchases of equipment and leasehold improvements (1,471 ) (1,682 ) Purchases of marketable securities - (4,250 ) Sales of marketable securities - 229 Maturities of marketable securities   -     2,750   Net cash used in investing activities   (13,189 )   (16,618 )   FINANCING ACTIVITIES: Net proceeds from issuance of common stock 155 670 Payment of debt financing fees (523 ) - Repayments of capital lease obligations   (34 )   (84 ) Net cash (used in) provided by financing activities   (402 )   586     EFFECT OF CURRENCY EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS   (130 )   (63 )   Net decrease in cash and cash equivalents (10,743 ) (16,678 )   Cash and cash equivalents at beginning of period 33,094 46,901     CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 22,351   $ 30,223   PLATO Learning, Inc. Supplemental Financial Information (Unaudited)             Order Information ($000s)     Three Months EndedJuly 31, Nine Months EndedJuly 31, 2007 2006(a) %Change 2007 2006(a) %Change Order Value: Subscriptions Courseware $ 11,118 $ 7,005 59 % $ 19,692 $ 10,320 91 % Assessment and other   1,396     4,397   (68 %)   3,017     7,075   (57 %) Total subscriptions 12,514 11,402 10 % 22,709 17,395 31 %   License fees 5,503 13,216 (58 %) 12,306 28,417 (57 %)   Services   8,276     9,759   (15 %)   16,722     20,896   (20 %) $ 26,293   $ 34,377   (24 %) $ 51,737   $ 66,708   (22 %)   Percent of Total Order Value: Subscriptions Courseware 42 % 20 % 38 % 15 % Assessment and other   5 %   13 %   6 %   11 % Total subscriptions 47 % 33 % 44 % 26 %   License fees 21 % 39 % 24 % 43 %   Services   32 %   28 %   32 %   31 %   100 %   100 %   100 %   100 %   (a) Certain 2006 amounts previously reported as services orders have been reclassified to subscriptions orders to conform to the current period presentation.   Deferred Revenue Balances ($000s)         As of July 31, 2007 2006 % Change   Subscriptions $ 26,134 $ 16,643 57 % License fees 928 2,825 (67 %) Services   14,591   19,650 (26 %) $ 41,653 $ 39,118 6 %