Blackboard Breaks Through

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These are trying times for a Fool.

See, I was really hoping for a shot at some more cheap shares of Blackboard (Nasdaq: BBBB). Yesterday, I thought I might get the chance, what with the big pre-earnings fall. News leak? Market makers knocking out stocks? Naked short attack?

Bah, no such luck. The stock is up 15% or so today on the strength of yesterday's earnings release, which showed an impressive decline. Profits per share came in at a single penny, against last year's $0.20. So why is the street celebrating? Well, part of it is the old "underpromise, overdeliver" game. That positive penny actually beat, by a couple of pennies, the earnings guidance that the company put out back in March, when it expected a small loss of $0.01 to $0.02. Revenues came in a bit higher than Mr. Market's bar.

So, while the other newsies out there go with the "earnings fall" type headline, I'm going to go with "looks good to me." On top of beating expectations, Blackboard upped its guidance modestly, but I still don't think that's enough to explain the reaction today. I think it's more of a collective sigh of relief.

See, over the past several quarters, Blackboard has been a big fish trying to swallow another big fish. Back when it decided to buy and integrate competitor WebCT, many of us shareholders knew it would take a lot of hard swallowing to get the acquisition through the pipes. Although we heard that systems built on shared technologies from Inside Value pick Microsoft (Nasdaq: MSFT), Oracle (Nasdaq: ORCL), and Sun Microsystems (Nasdaq: SUNW) would make the process run smoothly, it doesn't always work out so well. (I'm reminded of a certain prehistoric fish-inside-a-fish fossil in our local museum of natural history.)

In fact, even when it ends OK, it can still look ugly. That, in large part, explains the drop in GAAP earnings. Accounting issues, coupled with real integration costs, will continue to mess up the income statement for 2006. In this quarter alone, Blackboard management estimated that non-recurring integration costs totaled $2.6 million -- an amount equal to roughly half of last year's first-quarter operating income. (For the full year, they expect the tab to come to $16 million.)

That's why this investor is nodding his head at metrics like renewals (still at the 90% mark) and a continued trend of moving clients from lower-level services to higher-level licenses. I like the increased foothold in foreign markets as well, and I think the entire education space is good one -- for the right companies. So, while some investors are looking at the continued schooling boom to fuel stocks like StrayerEducation (Nasdaq: STRA), Apollo Group (Nasdaq: APOL), or Corinthian Colleges (Nasdaq: COCO), I'd rather throw in with the folks selling shovels to all those miners.

Personally, I'll still be hoping that Blackboard shares drop back into tasty-cheap land, but I'm not counting on it. Now that Blackboard seems to be getting through WebCT without falling apart, it looks more and more like a growing mini-monopoly -- in the right place at the right time. The market tends to pay a premium for companies like that, and for good reason.

Blackboard is a Motley Fool Hidden Gems recommendation. A free trial will let you find out why the stock is up more than 61% since it was first recommended.

At the time of publication, Seth Jayson had shares of Blackboard and Microsoft, but no position in any other firm mentioned. View his stock holdings and Fool profile here. Fool rules are here.