School's back in session, and test-prep company Princeton Review (NASDAQ:REVU) is, too. Grades for the third quarter of 2006 will be posted outside the classroom tomorrow.

What analysts say:

  • Buy, sell, or waffle? Exactly one analyst follows Princeton and rates the company a hold.

  • Revenues and earnings. Despite keeping his sales numbers secret, this analyst feels confident enough to predict a $0.08-per-share profit tomorrow, twice last year's result.

What management says:
The big news at Princeton this quarter was the company's decision to restate its financial results for 2004, 2005, and the first half of 2006 -- for reasons too arcane for me to bore you with. The upshot of the restatement, though, might interest you: The company will reduce the amount of its net loss for 2004, increase the size of its 2005 loss, and reduce the amount of losses recorded so far this year -- giving Princeton a much-needed boost toward its goal of reporting a profit by year's end.

What management does:
Why much-needed? Because despite CEO John Katzman's assertion (which is correct) that Princeton is "making strides in streamlining the company and cutting G&A, as evidenced by our restructuring charge," the hard truth of the matter is that Princeton's gross margin continues to fall, and the company hasn't reported either an operating or a net profit in more than a year and a half.

Margins %

3/05

6/05

9/05

12/05

3/06

6/06

Gross

64.5

63.6

64.3

62.0

60.9

59.6

Op.

(3.3)

(4.4)

(3.2)

(3.3)

(4.8)

(4.2)

Net

(25.0)

(25.5)

(22.9)

(2.7)

(4.0)

(4.5)
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:
The blame, as we described last quarter, continues to lie in the costs of providing Princeton's services. So far this year, growth in the cost of services has outpaced sales growth 24% to 9%, and even though sales grew above trend last quarter, so too did the cost of services. In contrast, the company has made real progress in reining in its operating costs. While I fear that Katzman doth protest too much when he refers to "cutting G&A," he certainly has succeeded in slowing down the growth in those general and administrative costs. So far this year, selling, general, and administrative (SG&A) costs have grown only 7% versus 9% sales growth, and the disparity yawned even wider (in a good way) last quarter, with sales growth coming in at 14%, even as SG&A decelerated to 6%.

Even so, with all of the progress in controlling its operating costs, Princeton can hope for an "incomplete" grade at best tomorrow -- unless or until it either gets a better handle on its cost of providing services or finds a way to get sales growing faster than those costs. If Princeton wants to earn its stock a little extra credit tomorrow, those will be the ways to do it.

Competitors:

  • WashingtonPost (NYSE:WPO)
  • Reed Elsevier (NASDAQ:ENL)
  • McGraw-Hill (NYSE:MHP)
  • Educate (NASDAQ:EEEE)

Customers:

  • Plato Learning (NASDAQ:TUTR)

What did we expect out of Princeton last quarter, and what did it produce? Find out in:

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