Foolish Forecast: Blackboard's Positive Equation

Tomorrow looks to be a happy day for investors in educational software maker Blackboard (Nasdaq: BBBB). For the first time in a year, Wall Street's analysts are predicting the firm will earn a profit. Not that you should necessarily give these estimates credence -- twice in the last year, Blackboard defied expectations and was profitable. But just for kicks, let's see what the analysts are predicting this time around.

What analysts say:

•  Buy, sell, or waffle? Eleven analysts now follow Blackboard, giving the firm nine buy ratings and a pair of holds.

•  Revenues. On average, expect to see 42% sales growth to $53.6 million.

•  Earnings. Profits are predicted to quintuple to $0.05 per share.

What management says:
Think a nickel's worth of profit is good news? It gets better (hypothetically, of course.) As fellow Fool Tom Taulli mentioned in his write-up of Blackboard's earnings last quarter, the firm expects to earn as much as $0.40 per share this year on revenues that may reach as high as $235 million. If you've got a pencil and a spare envelope handy, it shouldn't take much doing to figure out that management expects to slowly increase revenues over the course of the year, yet rapidly ramp up the rate at which it transforms these revenues into profits. $235 million is just 10% higher than the run-rate on revenue ($53.6 million times four), while $0.40 is double the run-rate on profits ($0.05 times four.) 

What management does:
How can Blackboard accomplish this feat? By improving the margins it earns on those revenues. For better or for worse, there's plenty of room for improvement, as gross margins have been stagnant for some time and its operating and net margins trending sharply downwards. While the prevailing wisdom holds that this is all due to the buyout of WebCT back in 2005, however, a closer look at the numbers shows a few other trends at work -- stock options expensing, for one. Selling, general, and administrative spending that outpaces sales growth for another. And a 77% increase in R&D spending in the second half of 2006 for a third.

Margins	9/05	12/05	3/06	6/06	9/06	12/06
Gross	70.5%	70.6%	70.8%	70%	69.5%	70.1%
Operating	16.9%	18%	13.4%	6.8%	1.4%	(0.2%)
Net	18.1%	30.9%	25.7%	15.8%	7.3%	(5.9%)

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
And yet, as my Foolish colleague Bill Barker observed in a Hidden Gems Weekly report on Q4 earnings report back in February: "Blackboard has extremely good visibility on what its revenues and earnings are going to be for the full school year, and seems to have a pretty good gauge about how fast it can grow its sales through signing on new partners [such as Google (Nasdaq: GOOG) and Discovery Holding (Nasdaq: DISC-A)] and cross-selling, its guidance should be taken as pretty high probability. ... Blackboard also has a pretty consistent record of under-promising and over-delivering, so analysts were already predicting earnings for next year at the very top of the range that Blackboard gave for next year. Look for Blackboard to slowly raise its guidance as the year goes along."

Let's hope so. Fools have waited patiently for over a year to see Blackboard's GAAP numbers finally begin to reflect the success of the business. It would be a real shame if the firm lets uncontrolled growth in costs derail the long-anticipated reemergence into profitability.

Blackboard is a Motley Fool Hidden Gems pick.

Fool contributor Rich Smith does not own shares of any company named above.