Craig-Hallum Capital chimes on on PLATO Learning (NASDAQ:TUTR) following earnings saying Q3 EPS of ($0.08) was well ahead of their ($0.18) estimate due to better gross margins on licensing revenue and lower operating costs, especially product development.

Deferred revenue of $41.7 million bounced back sharply from last quarter, up 6% yr/yr and 19% sequentially in the seasonally stronger Q3. However, overall orders for the quarter were down 24% as orders for license fees were down 58%, which is expected given the transition by PLATO to a subscription-based business model.

As expected, cash flow was positive in the seasonally strong Q3.

Management continues to not provide forward guidance given its low visibility on the rate of transition from a license to a subscription model. However, Q4 should be a roughly comparable quarter to Q3, which allows the firm to raise their Q4 and full year estimates. This is their first positive revenue and EPS revision for PLATO in at least two years, so they are encouraged that expectations may have bottomed.

For now, they are maintaining their Neutral rating, but they do see some reasons for optimism. PLATO's revenue continues to decline, but it appears there is a bottom in sight, likely sometime during FY08 and they are modeling a slight increase in revenue for the full year. The firm is encouraged by the company's cost reduction efforts and the potential to improve margins further. If they were to get comfortable that PLATO would be able to generate positive free cash flow on an annual basis, it would also give them more confidence regarding the company's fundamentals and its stock performance.

Notablecalls: Looks like Craig-Hallum is seeing things the way I am. I love the comments of this being the first positive revenue and EPS revision for PLATO in at least two years. It really gives this story a "bottomish" feel :).