We're finished with 2005, and we're quickly approaching the end of Wall Street's series of fiscal final exams as well. Next up, test-prep company Princeton Review (NASDAQ:REVU), which reports its Q4 and full-year 2005 numbers before the market opens tomorrow. So sharpen your pencils and power on your calculators, Fools. This will be an open-book test.

Wall Street Wisdom:

  • General consensus. Exactly one analyst follows Princeton, and that person gives the company a lukewarm hold rating.
  • Revenues. This analyst expects quarterly sales to climb nearly 19% to $33 million ...
  • Earnings. ... and for last year's losses to turn into a $0.03-per-share profit in Q4 2005.

Margin watch:
Ugh. Princeton investors had better hope the analyst got it right this time, after overestimating the company's profits in three of the past four quarters. Because judging from the company's margins, things are not going well at Princeton. The rolling gross margin is down nearly 400 basis points over the past 18 months, and both operating and net margins have turned firmly negative.

Margins %

6/04

9/04

12/04

3/05

6/05

9/05

Gross

67.7

65.3

64.3

64.2

63.1

63.8

Op.

6.9

1.6

(4.6)

(3.3)

(4.4)

(3.2)

Net

4.3

1.3

(26.7)

(25)

(25.5)

(22.9)
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

Foolish forensics:
I've got good news and bad news for Princeton owners. The good news is that these "rolling" margins hide the fact that most of Princeton's bad news over the past year came out in a single quarter: Q4 2004. That's when an operating loss, a goodwill impairment charge, and a huge provision for income taxes combined to plunge the company deeply into the red. Since that horrible quarter, things haven't been as bad at Princeton.

The bad news is that, on a cash-profits basis, the company still looks like a pretty lousy business. Over the past 12 months -- months that, with all the changes in standardized testing going on, probably should have been wonderful for a company whose business is training kids to take those tests -- Princeton utterly failed to generate positive free cash flow. Instead, it burned through $9.1 million. Whatever Princeton's GAAP numbers turn out to be tomorrow, keep an eye on that cash flow situation. It's got to reverse course if this company is to survive.

Competitors:
Princeton's primary competitors are units of much larger companies: Kaplan is a unit of Washington Post (NYSE:WPO) and Harcourt a part of Reed Elsevier (NYSE:ENL).

Fool contributorRich Smithdoes not own shares of any company named above.