A brief dialogue about Plato

Benj Gallander and Ben Stadelmann
Friday, June 13, 2008

Many parents find the public school system somewhat lacking for their children. One company on our Stock Watch List that has been attempting to capitalize on the gap in the education market in North America is Plato Learning . Founded in 1963, this once very successful operation has fallen on hard times. It provides computer-based and e-learning instruction from kindergarten through college and university, and has also diversified into such areas as adult education and correctional centres.

The enterprise focuses not only on students, but on aiding organizations to meet their improvement plans. However, the slogging has been difficult, as revenues tumbled from almost $142 million (US) in 2004 to slightly less than half of that last year. The company has lost money through that entire period, with red ink in 2007 of $14.88 million.

Market share has been picked up by much larger, profitable majors that dominate the field, such as Pearson PLC and Renaissance Learning . Fortunately, Plato has some major positives that will give it breathing room to achieve a possible major turnaround.

First, there is virtually no debt. Second, losses are decreasing, which means that the $12 million cash on hand might be sufficient to get them through this rough patch, while putting off the need to seek a lender.

On the operational front, there have been some significant improvements. The renewal rate of schools using the company’s programs has skyrocketed, up from the low 70 percent range a few years ago to 91 percent today. Retained clients dramatically enhance the bottom line. Revenues are finally growing again, with new subscription fees growing more quickly than their associated costs; $19.1 million has also been ripped out of the cost structure, lowering the break-even level.

Currently trading in the $2.75 range, this stock trades well below the $3.79 book value, although goodwill, which we are always cynical about, does comprise about $3 of this figure. Earlier this decade, the stock market valuation was better than $35. Just over two years ago, it traded above $10.

It is not unreasonable to think that an improvement in the bottom line could rebound the share price to the double digits.