Online IT educator SkillSoft (NASDAQ:SKIL) reports its fiscal Q3 2007 earnings results early tomorrow morning. Want to know what Wall Street expects to see? Read on. Want to know what really matters? Read on a bit more.

What analysts say:

  • Buy, sell, or waffle? Three analysts follow little SkillSoft. One rates it a buy, and two say hold.
  • Revenues. On average, they expect sales to rise 4% year over year, to $55.8 million.
  • Earnings. They're looking for profits to fall a penny to $0.05 per share.

What management says:
Back in the March earnings report, CEO Chuck Moran made it clear that his firm was aiming to make acquisitions in the education space. In October, the company made a big one, agreeing to spend half its own market cap, $285 million, to purchase NETg from Canada's The Thomson Corporation (NYSE:TOC). Payment will take the form of approximately 11.1 million SkillSoft ADSs and $216 million in cash. However, seeing as SkillSoft had less than $100 million in cash on hand at last report, expect to see the firm take on some debt to finance this deal. According to the press release, Credit Suisse (NYSE:CS) stands ready to provide up to $180 million in financing.

What management does:
SkillSoft's long-term margin trends look pretty attractive on the whole. Although gross margins have been shrinking slowly, operating improvements are more than taking up the slack. Pay little attention to the net margin line, however, as one-time items are rendering it useless as a guide.

Margins %




























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:
Moran's description of the NETg purchase sounds like the new unit will fit right into SkillSoft's business model (and incidentally, free up Thomson to continue its quest to focus on the provision of electronic information). The new business works on the same "annual recurring subscription-based licensing model" that SkillSoft prefers to use, and signs its customers to multi-year contracts, making it easy for SkillSoft to predict its revenues going forward.

Speaking of revenues, SkillSoft noted that NETg brought Thomson $160 million worth of revenues last year, suggesting that SkillSoft got itself quite a bargain in paying just 1.8 times sales for its prize (SkillSoft proper gets more than three times sales for its own shares). However, only about three-quarters of NETg's revenues come from high-margin e-learning lines. SkillSoft plans to evaluate NETg's other business lines, which include "instructor-led training, custom consulting services, print-based content and third-party content products," for possible elimination in favor of the higher-margin business.

For a variety of reasons -- including these potential spinoffs, the possibility of SkillSoft offering volume discounts to customers currently patronizing both SkillSoft and NETg, and a change in how it will book NETg's revenues -- SkillSoft expects it will retain only 65% to 75% of NETg's 2005 revenue stream going forward. Even so, at the price it's paying, that translates into a purchase price of no more than 2.3 times sales -- still quite a discount to SkillSoft's own valuation, making this look like a pretty smart buy.

By its own admission, SkillSoft is a small fish in a big pond -- and it's swimming with some pretty big sharks. Here are a few of SkillSoft's self-described competitors:

  • Cisco
  • Microsoft (NASDAQ:MSFT)
  • Oracle (NASDAQ:ORCL)

For related Foolishness, read:

Microsoft is an Inside Value recommendation. For more great stocks trading at deep discounts, take a 30-day free trial of the newsletter.

Fool contributor Rich Smith does not own shares of any company named above. The Fool's disclosure policy has mad skills.