After four long quarters wandering in income statement desert, somewhere between a penny in profits and a loss, Blackboard (NASDAQ:BBBB) emerged into the Promised Land last quarter -- and an $0.18 per-share profit. On Tuesday we learn: Will the company get to stay there?

What analysts say:

•  Buy, sell, or waffle? Nine analysts follow this educational software maker. Twice as many rate it a buy as do a hold. Solve.

•  Revenues. On average, the analysts expect to see Q2 sales rise 35% to $58.7 million.

•  Earnings. Profits are predicted to reach $0.20 per share.

What management says:
Was it really only five months ago that (as fellow Fool Tom Taulli told us) Blackboard was predicting $0.40 per share in profits this year? Why, if the analysts are right, it will have earned 90% of that number by Tuesday afternoon, nearly six months ahead of schedule!  But hold your horses there, Tex. Things aren't quite as good as all that. As we've come to understand, the analysts who follow Blackboard apparently got a little too used to the firm being incapable of reporting significant GAAP profits, and decided to predict pro forma profits instead. What the analysts are actually projecting for Tuesday are $0.20 per share in pro forma profits -- right in line with what Blackboard itself predicted back in May (imagine the coincidence!). Under GAAP accounting standards, management -- and presumably the copycat analysts -- roughly $0.09 per share is the more likely number.  

What management does:
Don't be surprised, though, if the GAAP results actually do hit double digits on Tuesday. Judging from the superb Q1 results we saw back in May, Blackboard is taking on more and more of the aspects of a virtual monopoly like Microsoft (NASDAQ:MSFT) or eBay (NASDAQ:EBAY). That means pricing power -- and profits. Gross and operating margins have begun to turn upwards, and even the GAAP net profit margin could turn positive in the near future.

Margins

12/05

3/06

6/06

9/06

12/06

3/07

Gross

70.6%

70.8%

70%

69.5%

70.1%

70.7%

Operating

18%

14%

6.8%

1.4%

(0.2%)

2%

Net

30.9%

25.7%

15.8%

7.3%

(5.9%)

(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:
I'm as impressed as anyone by Blackboard's rapid return to GAAP profitability, but that doesn't mean I'd buy the stock today. You see, I'm a bit concerned by two recent 8-K filings it has made. First, the June 7 announcement that it intends to up its stock options program for company insiders by 1.2 million shares (that's 4% dilution). Second, the June 20 news that it has issued $165 million in convertible debt.

With WebCT already brought in-house, I don't see any major contenders for buyout by Blackboard. Nor does it seem likely that the firm is just refinancing debt -- its balance sheet is net-debt-free. More likely to me, it seems, is that management has taken on debt in anticipation of buying back exercised stock options, and perhaps making share buybacks of a stock that has risen 60% in price over the last year. I'm not at all certain this is a prudent use of funds, or one calculated to advance the long-term interests of shareholders.

Outside shareholders, that is.

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Blackboard is a Motley Fool Hidden Gems recommendation. To see what the team has to say about the company's prospects, simply sign up for a free, 30-day trial to the service, and you can read the latest updates for free.

Fool contributor Rich Smith does not own shares of any company named above.