Shares of payments facilitator and online banking software provider Online Resources (NASDAQ:ORCC) took a tumble Tuesday, on no news that this Fool could discern. After all, the company doesn't report its third-quarter 2006 earnings until Thursday afternoon. Does someone know something we don't know? Heck, I don't know. Remind me -- what do we know?

What analysts say:

  • Buy, sell, or waffle? We know that six analysts follow Online Resources. Of these, four rate it a buy and two a hold.
  • Revenues. We know that, on average, these analysts think Online Resources grew its sales 84% for the quarter, to $28.1 million.
  • Earnings. But they think profits were more than halved, down to just $0.04 per share.

What management says:
In an SEC filing made in August, Online Resources updated investors on what to expect Thursday: sales of $27 million to $28.5 million, a GAAP loss of $0.08 to $0.05 per share, and "core" net income of $0.01 to $0.04 per share. The difference between the loss under generally accepted accounting principles and the "core" profit can be explained in large part by the fact that the firm recently bought Princeton eCom, and is now digesting its prize. Incidentally, that acquisition explains the 84% projected growth in revenues that analysts will be looking for (the company predicts 81%).

What management does:
Before acquiring eCom, Online Resources was having mixed success in the margins department. As you can see in the table below, margins were generally weakening for most of 2005 before leaping in the fourth quarter, only to begin sagging again in 2006. Thanks to the self-predicted GAAP loss for Thursday's results, you can expect rolling margins to continue weakening over the next several quarters. (As for the big bump in the net in the last three quarters, pay it no mind; it's due to a one-time tax credit taken in the December 2005 quarter. Thursday's results will be the last quarter in which this credit inflates results.)

Margins %




























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:
Seeing numbers like "81%" and "84%," although they're common in the quarters following a big acquisition, can't help but throw off a Fool's valuation calculations when looking for a number to divide into a firm's P/E or enterprise value-to-free cash flow ratios. If you'd like to get a better handle on the firm's likely future growth, excluding acquisitions, take a gander at what we told you three months ago. To wit, Online Resources proper has been targeting 21% sales growth, whereas eCom was growing its revenues a bit faster at 28%.

When investing, though, we ordinarily focus more on profits than mere sales. So when estimating how fast the new and improved Online Resources might grow its profits, feel free to use, say, 25% revenue growth as a baseline -- but make sure to consider not just revenue growth, but changes in profitability as well. When margins are increasing, you can generally expect profits to grow faster than sales; and when decreasing, slower.

Finally, don't forget to account for stock dilution. Part of the funding Online Resources tapped to make its eCom acquisition took the form of $75 million worth of convertible preferred stock. Between those "potential common" shares, and the firm's stock options program, Online Resources projects a 19% increase in its diluted share count Thursday. Every additional share added to that count subtracts some of the profits accruing to outside shareholders.


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Fool contributor Rich Smith owns shares of Corillian. The Fool has a disclosure policy.