Education software vendor Blackboard (NASDAQ:BBBB) seems to be at the head of its class. It's acquiring its major competitor, a move that will broaden its product offering. It has partnered with Microsoft (NASDAQ:MSFT) to make that company's Office product suite integrate closely with Blackboard's core product. And with its latest results, the company has decided to raise its earnings guidance for 2005.

In the third quarter, revenue increased a strong 21% year over year. Net income increased a whopping 109% to $7.3 million.

Though the stock was up slightly more than 4% in Wednesday trading, some may find it troubling that the company's fourth-quarter revenue projections fell below the average analyst estimate. Nonetheless, earnings are projected at $0.25 to $0.26 a share -- nicely above the $0.24 analysts were expecting.

Those looking ahead to 2006 are in for a surprise. Though analysts expect revenue to increase a robust 18%, they also anticipate earnings of $0.79 a share. That's down mightily from this year's $0.91 to $0.92 a share. In 2006, the company's tax-loss carry-forwards will expire, and Uncle Sam will be taking a much larger tax bite than the 4% to 7% the company expects to pay in the coming quarter.

Remember that price-to-earnings ratios (P/E) are computed with net income. Blackboard's P/E looks expensive at 33 times this year's earnings, but it looks really expensive at 36.8 times 2006 earnings.

Analysts expect Blackboard to compound earnings at 25% annually for the next five years -- impressively rapid growth. The company is also cash-rich. That's a nice combination. Peer eCollege (NASDAQ:ECLG) is growing more slowly, and VCampus' (NASDAQ:VCMP) money-losing ways have sent its shares into penny-stock territory.

Add it up. Blackboard is a rapidly growing company acquiring a strong peer, with lots of cash and less-than-formidable competition. That may be why the stock is up more than 50% in less than six months since it was recommended to Motley Fool Hidden Gems readers, while the S&P 500 hasn't even managed a 2% gain.

Further Foolishness that makes the grade:

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Fool contributor W.D. Crotty does not own any of the stocks mentioned. He's crying alligator tears (that's what they do in Florida) for not following the newsletter's advice on Blackboard. Click hereto see the Motley Fool's disclosure policy.