PLATO Learning Reports Second Quarter 2007 Results

PLATO Learning, Inc. (NASDAQ:TUTR), a leading provider of K–adult computer-based and e-learning solutions, today announced revenues of $15.2 million for its second quarter ended April 30, 2007, compared to $20.0 million for the second quarter of fiscal 2006. A revenue decline was anticipated as the Company continued the transition of its software licensing model from perpetual licenses, 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 second quarter improved to ($5.3) million, or ($0.22) per share in 2007 from ($5.9) million, or ($0.25) per share in 2006, as operating costs and expenses declined by $5.5 million. Operating cash flow in the second quarter improved to positive $0.5 million in 2007 from negative $5.0 million in 2006. Orders for the Company’s online subscription-based courseware products - the foundation of the Company’s growth strategy - grew 157% for the quarter, but were not sufficient to offset a $5.1 million decline in orders for the Company’s legacy perpetual license products. Total orders for the second quarter were $12.6 million compared to $16.0 million in 2006. Mike Morache, PLATO Learning President and CEO said, "Many of the key metrics we monitor to gauge the progress of our strategy are showing strong positive trends. For the second consecutive quarter, orders for our subscription courseware products increased more than 150% over the same period last year, and both the quantity and average value of these orders continued to grow. Subscription revenues now represent over 35% of total revenues, up from 20% in the second quarter of 2006 and 30% in the first quarter of 2007. At the end of May, the PLATO Learning Environment™ (PLE™), our new subscription platform, was serving more than 230,000 users, an 18% increase since the end of the first quarter.” Mr. Morache continued, "Although we experienced strong growth in orders for our subscription courseware products, total orders declined at a rate greater than we expected going into the quarter, and this is expected to have a related effect on our financial results for the full year. In April, we announced the appointment of a seasoned sales executive to lead our K-12 sales organization, and our confidence and excitement is growing that this leadership change will result in improved sales execution over time. In May, we announced the release of Academic Systems® Algebra, a full-course developmental mathematics solution for the post-secondary market delivered on PLE™, and we expect this new product offering to drive order growth in this market going forward. These developments and other positive trends reaffirm our belief that our strategy is sound and will result in long-term returns to our shareholders.” Gross margins in the second quarter of 2007 were 42% compared to 51% 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 34% in 2006 to 30% in 2007. The subscription margin decline reflects the straight-line amortization of new products released in the second half of 2006 relative to the gradual growth of related subscription revenues. Over time subscription margins are expected to increase as subscription revenues grow while costs remain relatively fixed. Services margins improved from 50% in the second quarter of 2006 to 53% in the second quarter of 2007. Operating expenses in the quarter declined $4.4 million, or 27%, from the second quarter of 2006 reflecting the Company’s cost reduction activities in fiscal year 2006 and early 2007. Rob Rueckl, the Company’s CFO stated, "While the transition to a software-as-a-service business model continues to have an unfavorable near-term effect on our revenues, the adjustments we’ve made to support this lower-cost business model have resulted in a reduction in our net loss in the quarter compared to the second quarter of last year. In addition, cash balances at the end of the quarter remained healthy at over $21.0 million, and for the first time in five years, we generated positive cash flow from operations in what has historically been one of the Company’s seasonally slowest quarters.” Conference Call A conference call to discuss this announcement is scheduled for today, June 5, 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 June 5, 2007, until midnight on June 12, 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 855097. 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. Straight Curve and PLATO Learning are trademarks of PLATO Learning, Inc. PLATO, Inc. is a PLATO Learning, Inc. company. PLATO Learning, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (Unaudited) (In thousands, except per share amounts)   Three Months Ended Six Months Ended April 30, April 30, 2007 2006 2007 2006 REVENUES Subscriptions $ 5,360  $ 4,054  $ 10,513  $ 8,410  License fees 3,070  6,920  7,712  15,969  Services 6,783  9,001  14,014  19,082  Total revenues 15,213  19,975  32,239  43,461    COST OF REVENUES Subscriptions 3,737  2,656  6,935  4,897  License fees 1,864  2,681  4,146  5,654  Services 3,159  4,480  6,341  9,262  Total cost of revenues 8,760  9,817  17,422  19,813    GROSS PROFIT 6,453  10,158  14,817  23,648    OPERATING EXPENSES Sales and marketing 7,382  9,576  15,103  19,310  General and administrative 2,904  4,314  6,118  8,962  Product maintenance and development 1,145  1,225  2,913  2,764  Amortization of intangibles 457  933  914  1,902  Restructuring and other charges -  259  -  339  Total operating expenses 11,888  16,307  25,048  33,277    OPERATING LOSS (5,435) (6,149) (10,231) (9,629)   Other income, net 279  400  699  833    LOSS BEFORE INCOME TAXES (5,156) (5,749) (9,532) (8,796)   Income tax expense 150  150  300  300    NET LOSS $ (5,306) $ (5,899) $ (9,832) $ (9,096)   LOSS PER SHARE Basic and diluted $ (0.22) $ (0.25) $ (0.41) $ (0.38)   WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic and diluted 23,747  23,674  23,739  23,652  PLATO Learning, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (Unaudited) (In thousands, except per share amounts)   April 30, October 31, 2007 2006   ASSETS   Current assets: Cash and cash equivalents $ 21,048  $ 33,094  Accounts receivable, net 10,502  18,529  Inventories 1,376  1,832  Other current assets 5,468  6,346  Total current assets 38,394  59,801    Equipment and leasehold improvements, net 6,326  6,308  Product development costs, net 27,777  25,363  Goodwill 71,865  71,865  Identified intangible assets, net 9,220  10,545  Other long-term assets 2,477  2,348  Total assets $ 156,059  $ 176,230    LIABILITIES AND STOCKHOLDERS' EQUITY   Current liabilities: Accounts payable $ 3,736  $ 4,685  Accrued compensation 4,614  5,990  Other accrued liabilities 4,823  6,622  Deferred revenue 27,139  33,736  Total current liabilities 40,312  51,033    Long-term deferred revenue 7,773  8,110  Deferred income taxes 2,831  2,531  Other long-term liabilities -  106  Total liabilities 50,916  61,780    Stockholders' equity: Common stock 238  237  Additional paid-in capital 169,232  168,597  Treasury stock at cost (205) (205) Accumulated deficit (62,849) (53,017) Accumulated other comprehensive loss (1,273) (1,162) Total stockholders' equity 105,143  114,450  Total liabilities and stockholders' equity $ 156,059  $ 176,230  PLATO Learning, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands)   Six Months Ended April 30, 2007 2006 OPERATING ACTIVITIES: Net loss $ (9,832) $ (9,096) Adjustments to reconcile net loss to net cash used in operating activities: Deferred income taxes 300  300  Amortization of capitalized product development costs 5,005  3,526  Amortization of identified intangible and other long-term assets 1,492  2,672  Depreciation and amortization of equipment and leasehold improvements 1,214  1,288  Provision for doubtful accounts (174) 335  Stock-based compensation 541  803  Loss on disposal of equipment 5  83  Changes in assets and liabilities: Accounts receivable 8,202  8,649  Inventories 456  696  Other current and long-term assets 583  1,529  Accounts payable (949) (1,439) Other current and long-term liabilities (3,286) (5,453) Deferred revenue (6,934) (11,466) Total adjustments 6,455  1,523  Net cash used in operating activities (3,377) (7,573)   INVESTING ACTIVITIES: Capitalized internal product development costs (7,419) (6,160) Purchased product development -  (2,000) Purchases of equipment and leasehold improvements (1,237) (828) Net cash used in investing activities (8,656) (8,988)   FINANCING ACTIVITIES: Net proceeds from issuance of common stock 116  587  Repayments of capital lease obligations (21) (58) Net cash provided by financing activities 95  529    EFFECT OF CURRENCY EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (108) (75)   Net decrease in cash and cash equivalents (12,046) (16,107)   Cash and cash equivalents at beginning of period 33,094  46,901      CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 21,048  $ 30,794  PLATO Learning, Inc. Supplemental Financial Information (Unaudited)   Order Information ($000s)   Three Months Ended April 30, Six Months Ended April 30, 2007 2006 %Change 2007 2006 %Change Order Value: Subscriptions Courseware $ 5,016  $ 1,953  157% $ 8,574  $ 3,315  159% Assessment and other 903  1,458  (38%) 1,621  2,684  (40%) Total subscriptions 5,919  3,411  74% 10,195  5,999  70%   License fees 2,563  7,649  (66%) 6,803  15,201  (55%)   Services 4,164  4,974  (16%) 8,446  11,137  (24%) $ 12,646  $ 16,034  (21%) $ 25,444  $ 32,337  (21%)   Percent of Total Order Value: Subscriptions Courseware 40% 12% 34% 10% Assessment and other 7% 9% 6% 8% Total subscriptions 47% 21% 40% 18%   License fees 20% 48% 27% 47%   Services 33% 31% 33% 35% 100% 100% 100% 100%                               Deferred Revenue Balances ($000s)   As of April 30, 2007 2006 % Change   Subscriptions $ 19,951  $ 10,237  95% License fees 1,469  2,219  (34%) Services 13,492  16,509  (18%) $ 34,912  $ 28,965  21%