Foolish Forecast: Blackboard Bounces Back

For four straight quarters now, educational software maker Blackboard (Nasdaq: BBBB) has flummoxed the experts, beating analyst estimates like erasers upon a ... chalkboard. Who gets detention this quarter -- the company or its analysts? We'll find out after the last class is dismissed on Wall Street Thursday, when Blackboard reports its Q3 2007 results.

What analysts say:

• Buy, sell, or waffle? Nine analysts follow this educational software maker. Twice as many rate it a buy as do a hold. Solve.
• Revenue. On average, the analysts expect to see sales rise 21% to $61 million.
• Earnings. Profits are predicted to reach $0.22 per share.

What management says:
Uh, $0.22 pro forma, that is. Unused to the once-again GAAP-profitable Blackboard, Wall Street's TAs are still grading this one with the help of "new math." As for what Blackboard will accomplish under more generally accepted accounting principles, as we discussed last quarter, management's thoughts on this score frightened investors, and cost Blackboard some 14% of its market cap, in late July. The stock has since made up that loss, and then some, but I can't tell you why. According to its website, guidance hasn't been lifted since the earnings release in July. And analysts seem likely to insist that Blackboard hit the high end of its estimates -- 21% sales growth, $0.22 per share pro forma, and (presumably) $0.11 per share, GAAP. 

What management does:
Helping Blackboard on this score will be its unassailable margins. I've said it before and I'll say it again: Being a monopoly is a wonderful thing. Think of IBM (NYSE: IBM) pre-Apple (Nasdaq: AAPL), Microsoft (Nasdaq: MSFT) pre-Linux, or eBay (Nasdaq: EBAY) pre... um, nothing, actually. Like those firms, Blackboard is rolling in the margins, and making hay while the competition sleeps. Its gross keeps rising, and the company's once more back in black for both operating and net margins.

Margins	3/06	6/06	9/06	12/06	3/07	6/07
Gross	70.7%	69.7%	69.0%	69.6%	70.2%	71.6%
Operating	13.5%	3.4%	(3.1%)	(4.6%)	(2.3%)	4.3%
Net	25.7%	15.8%	7.3%	(5.9%)	(4.5%)	0.4%

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:
So let's review: Investors sold Blackboard shares off based on its Q3 guidance. And why did they come back and buy these same shares hand over fist in the subsequent three months? Counterintuitively, "guidance" may be the answer to that question, too.

As Fool analyst Andy Cross pointed out to Motley Fool Hidden Gems members in the wake of the last sell-off, Blackboard "increased its guidance for full-year revenue and adjusted earnings (adjusted for amortization expenses from acquisitions). So the outlook for the third quarter is a bit lower than expected, but the remainder of the year and the start of the next looks mostly positive." Could it be that Mr. Market is finally taking a long-term view on this stock? If so, then the phrase "better late than never" comes to mind ...

... but better earlier than late. Since Hidden Gems co-lead analyst Tom Gardner tapped this stock for our portfolio a little more than two years ago, it's already more than doubled. As the saying goes: "The early bird catches the two-bagger." Catch yours when you enroll in a free trial of Hidden Gems, and check out Professor Gardner's latest discovery.