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Blackboard's Green

By Tom Taulli – Updated Nov 16, 2016 at 12:47PM

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Blackboard is building a standard for education software solutions.

Over the past few weeks, I've been preparing an online course on investments for UCLA using a friendly but powerful system called Blackboard (NASDAQ:BBBB), a Motley Fool Hidden Gems recommendation.

I'm not the only one. In fact, Blackboard's business is getting an "A." In the second quarter, revenues increased 25% to $33 million. During this period, net income surged to $6.1 million, or $0.21 cents a share, compared to a loss of $2.7 million, or $0.37 cents a share, in the year-ago period. In fairness, last year's results were hurt by a $3.75 million dividend because of Blackboard's initial public offering; net income came in at $1.05 million with the dividend factored out.

The company currently has tax-loss carryforwards, which means it's able to net prior tax losses against its tax bill, limiting the company's effective tax rate to 4% in the recent past. In time, these will run out, resulting in an accordingly higher tax bill and perhaps slowing the company's growth.

In the meantime, Blackboard continues to get new U.S. business from clients such as Clark College, Colorado Mountain College, Southern Methodist University, and University of Evansville, among others.

What's more, Blackboard's international efforts are gaining traction. Clients include Bond University, Bridgwater College, Dundee College, The University of Melbourne, University of Paisley, and others. Blackboard has launched a new data center in Europe to provide more capacity. In addition, the company's new multi-language system lets schools easily customize their courses for eight languages, enabling Blackboard to reach more customers than ever.

In light of the increased activity, Blackboard increased its full-year guidance to between $0.84 and $0.86, up from a range of $0.78 to $0.81. The company expects revenues between $134 million and $135 million, up from the prior estimate of $132.5 million to $134 million.

A few months ago, I wrote about Blackboard's simple growth strategy. First, the company strives to grow its subscriber base. Next, it focuses on retaining its existing customers and selling them upgrades or additional products.

So far, it's a winning strategy. More importantly, the company believes there is much more growth left in both the U.S. and international markets. Expect Blackboard to continue scoring high marks on future quarterly report cards.

For more small-cap stocks at the head of their class, try a free 30-day subscription to Motley Fool Hidden Gems .

Fool contributor Tom Taulli does not own shares mentioned in this article.

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