Plato Reports Modest Surprise

Plato Learning (TUTR - Snapshot Report), a leading provider of computer-based and e-learning instruction for kindergarten, reported results for the third quarter with earnings of 1 cent per share. Earnings were better than the Zacks Consensus Estimate of a net loss of 1 cent, and a net loss of 9 cents per share in the prior-year quarter.

The positive earnings surprise in the quarter was primarily driven by strong subscription revenue growth and lower operating costs.

Despite a 16.5% increase in subscription revenues, net revenues declined 10.2% year-over-year to $16.7 million. The decline was due to the continuing decrease in license fees from legacy perpetual products. Further, the transition to recurring revenue subscription products also led to the contraction of the top-line.

The gross margin expanded to 57.4% versus 50.0% in the comparable prior-year period attributable to the increase in subscription margins.

The third quarter period is usually the primary buying season in the education market in the U.S. Therefore, the company has reported strong subscription orders and revenues, both of which grew at double-digit rates.

Moreover, during the quarter Plato Learning added 176 school districts and community colleges as first-time subscribers to PLE™ system. The company recoded almost a 50% increase in orders to $21.3 million, compared to the third quarter of 2008.

About two-thirds of PLE orders came from new customers, with the balance coming from the increasing base of renewing customers. Renewal rate in the quarter was approximately 90%.

Based on the performance of the company in the third quarter, management has raised its guidance. It now expects fiscal 2009 subscription order growth in the range of 25% to 30% compared to a growth in the mid-teens stated previously.

Further, cash balances are expected to increase from $14.2 million at the end of the third quarter, to a range of $25 million to $27 million at the year end. The previous expectation was approximately $20 million.

However, the company reiterates its expectations for fiscal 2009 subscription revenues at low double-digit growth. The unchanged expectation is due to the nature of subscription revenue recognition, the timing of orders and the effect of longer subscription contracts on near-term revenue.