So far this year, Blackboard (NASDAQ:BBBB) has treated analyst estimates like a nun with a ruler treats a naughty pupil -- rapping first-half estimates sharply 'cross the knuckles. But can Blackboard maintain discipline when it reports its Q3 numbers on Wednesday afternoon?

What analysts say:

  • Buy, sell, or waffle? 11 analysts give Blackboard nearly a clean sweep -- nine buy ratings versus just two holds.
  • Revenues. On average, they expect to see sales rise 35% to $83.1 million.
  • Earnings. Yet profits are predicted to fall 9% to $0.22 per share (pro forma).

What management says:
On top of a generally stellar earnings report, Blackboard sketched out some very nice guidance last quarter. We're told to look for $83 million in revenue -- the same number that the analysts have cribbed. Pro forma-wise, Blackboard is only promising $0.19 per share for profits, which raises the possibility of an "earnings miss" if Wall Street doesn't get what it wants tomorrow.

What management does:
As I described last quarter, Blackboard's done a remarkable job navigating the economic downturn. Clients that include DeVry (NYSE:DV) and Strayer (NASDAQ:STRA) seem to be sticking with Blackboard's suite of sweet software, and so do partners Google (NASDAQ:GOOG) and Discovery (NASDAQ:DISCA). And Blackboard continues to sign up new K-12 and college customers across the nation and around the globe.

Margins

3/07

6/07

9/07

12/07

3/08

6/08

Gross

70.2%

71.6%

72.7%

73.1%

72.4%

71.4%

Operating

(2.3%)

4.3%

7.2%

8.3%

4.7%

1.4%

Net

(4.5%)

0.4%

3.9%

5.4%

3.0%

1.9%

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:
Now, the margins table above seems to suggest that for all its sales success, Blackboard isn't doing so hot in the profit-earning department. Gross, operating, net -- profit margins are falling across the, er, board, and are a far cry from the margins that software giants (and tangential Blackboard rivals) like Microsoft (NASDAQ:MSFT) and Oracle (NASDAQ:ORCL) routinely pull down.

But the key here is to remember the big disconnect between Blackboard's GAAP numbers and its underlying pro forma performance. To illustrate how big the divide is, Blackboard expects to earn $0.75 per share this year pro forma … but only $0.03 under GAAP. Obviously, there's something funny with the accounting, and in this situation, I urge you to keep an eye on something a bit more solid: cash profits.

Blackboard is free cash flow-negative through the first half of this year but predicts it will generate between $75 million and $80 million in greenbacks by year-end. Tomorrow, let Wall Street fret all it wants over the income statement. Meanwhile, we'll focus on making sure the cash is pouring in as promised.

But does the Motley Fool Hidden Gems team agree? They recommended the stock in the first place, after all. Find out if they still consider this one the teacher's pet by taking a free trial.

Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool has a disclosure policy.

Blackboard is a Motley Fool Hidden Gems selection. Microsoft is a Motley Fool Inside Value pick. Google is a Motley Fool Rule Breakers recommendation.