Ole, ole, ole, ole . ole, OLED. Sorry, I couldn't resist chanting along with crowd, in anticipation of the Q4 and full-year 2005 earnings report due out from cutting-edge display maker Cambridge Display (NASDAQ:OLED) on Monday. But really, will there anything to cheer about? Let's take a look.

Wall Street Wisdom:

  • General consensus. Wall Street doesn't think so. According to Capital IQ, three analysts cover this stock, and two of them only rate it a hold. Of course, the third thinks it's a buy.
  • Revenues. Sales are believed to have fallen year over year in the fourth quarter, down 10% to about $7 million.
  • Earnings. Yet profits are expected to appear out of thin air. Whereas the company lost $2.01 per share a year ago, the average estimate for Q4 2005 is $0.54 per share in profits.

Margin watch:
Not exactly the result you'd expect from margin trends like those shown below. Cambridge's rolling gross margin fell 19.3 percentage points over the last 18 months. And although its operating and net margins are improving, they're both still firmly mired in negative territory, with the company losing more money than it makes in sales.

Margins%

9/04

12/04

3/05

6/05

9/05

Gross

80.6

85.0

83.5

80.7

69.9

Op.

NM

(193.9)

(210.1)

(224.4)

(167.7)

Net

NM

(261.8)

(190.3)

(209.8)

(159.9)


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.

Foolish forensics:
So here we have Cambridge, with negative operating and net margins across the board, expected to record a huge profit in Q4. What gives? The answer, as we can see by delving into the SEC filings, is that for Q4 2005, Cambridge will report booking about a $15 million profit from selling its 50% interest in inkjet technology company Litrex, and an additional $1.5 million in "profits" from research and development tax credits.

Foolish lookout:
Profits are nice to have -- even paper profits like those described above. But as my fellow Fool, Nathan Parmelee, pointed out back in May, what's more important for "new technology" companies like Cambridge are the rates of revenue growth and cash burn. And on those fronts, the news is mixed. Year-over-year sales improvement has been 96% year to date. Meanwhile, cash burn accelerated from $11.5 million in the first nine months of 2004 to $18.4 million through Q3 2005 -- a 60% increase. So it looks like Cambridge's business is still a ways from reaching critical mass. It's still in the "the more we sell, the more money we lose" stage of the start-up's life cycle.

Monday's move from generally accepted accounting principles-red to GAAP-black won't change that.

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