WebSideStory is dead. Long live Visual Sciences (NASDAQ:VSCN)!

The marketing data analyzer reported Q1 2007 earnings Wednesday evening. By Thursday morning, two things had changed: First, the firm's name -- as it adopted the moniker of its recent acquisition. Second, the stock price -- which surged 30% higher on unexpectedly strong revenue and profits growth. Year over year, sales rose 42% as the firm added new clients such as Amnesty International, AMD (NYSE:AMD), and Men's Wearhouse (NYSE:MW), and pro forma profits grew 46%. On a GAAP basis, the firm's net loss contracted from $0.09 per share last year to $0.02 per share.

Further good news came in the form of earnings guidance. According to management, Visual Sciences expects to earn as much as $0.02 per share on $21.9 million in revenue during the current quarter, and finish out the year netting perhaps $0.14 per share on $92.2 million in revenue. As stories go, that's a pretty good way for the new Visual Sciences to begin its own book. Unfortunately, it's not the entire story. Reading between the lines, there are a few sinister subplots worth looking into. Notably:

Free cash flow
While Wall Street went ga-ga over Visual Sciences' Q1 pro forma profits, Fools should be aware that from a free cash flow perspective, things don't read as nicely. In contrast to the 46% improvement boasted of in the prose portion of the press release, the numbers revealed in the cash flow statement show us that actual cash profits grew only 15%, to $0.3 million.

Share dilution
According to the balance sheet, shares outstanding stood at 19.2 million at the end of 2006. Visual Sciences says it will have 21.8 million shares outstanding by the end of the year -- 13.5% dilution in just 12 months' time.

Mind you, I'm all in favor of companies booking more revenues, and earning more profits -- be they GAAP, pro forma, or cash. It's just that when all is said and done, I prefer the cash variety of profits above the other flavors. And I prefer to see these profits flow evenly to ordinary outside shareholders, and not be diverted to corporate insiders through stock dilution. In the end, both must happen for this story to end happily for investors.

What did we expect to read about WebSideStory last quarter, and what did we get? Find out in:

Fool contributor Rich Smith does not own shares of any company named above. The Fool has a disclosure policy that's faster than a jet.