Shareholders have good reason to expel online education software provider Plato Learning (Nasdaq: TUTR ) , after its stock plunged from $10 in May to about $4.80 now. Despite efforts to improve its operations, the company is still flunking.
The first-quarter results Plato announced Tuesday reflect its problems. The company's sales decreased from $23.5 million to $17 million year over year. At $4.5 million, or $0.19 per share, Plato's net loss improved by $1.3 million from its year-ago figure.
Plato builds web-based learning tools for K-12 educators. That's a big market, but it's plagued by budgetary constraints, and Plato's software is not a "must have." The company also faces intense competition from players like Pearson plc (NYSE: PSO ) and Houghton Mifflin Riverdeep.
A major change in Plato's business model may help to explain its top-line drop. Instead of charging large up-front licenses and ongoing maintenance fees, the company now focuses on quarterly or annual subscriptions, which are rapidly becoming the norm in the software industry.
Strong results from companies like RightNow (Nasdaq: RNOW ) suggest that Wall Street likes the subscription approach, which provides a predictable, recurring revenue stream. In some cases, investors have placed nosebleed valuations on subscription-based companies; for example, Salesforce.com (NYSE: CRM ) and WebEx Communications (Nasdaq: WEBX ) sell at 9 and 5 times revenues, respectively.
So why is Wall Street dissing Plato? Weak performance from the company's sales force has become a critical problem. First-quarter orders totaled $12.8 million, compared to $16.3 million in the same period in 2006.
On its conference call, management indicated that it was not satisfied with the productivity" of its sales team. Its displeasure may explain why Plato's vice president of K-12 sales resigned roughly one month ago.
Fortunately, management is taking action, in part by implementing automation from Salesforce.com. Until now, Plato used spreadsheets to manage its sales process, which seems a scarily precarious method for a tech company.
Unfortunately, the second and third quarters are Plato's key selling season. It's hard to believe that the company can reform its sales team fast enough, especially since it's been trying to accomplish this feat for the past several years. It appears to me that investors are smart to drop out of Plato's stock for now.
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Fool contributor Tom Taulli, author of The Complete M&A Handbook, does not own shares mentioned in this article. He is currently ranked 1,474 out of 23,901 in CAPS.
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