After four straight money-losing quarters, Wall Street expects test-prep company Princeton Review (NASDAQ:REVU) to turn things around at last when it reports Q4 and full-year 2006 results on Wednesday. Could it be that the educator has finally learned how to earn a profit? Perhaps. As it turns out, that's the least interesting story Princeton has to tell, but before we get to the good stuff, let's get the routine elements out of the way:

What analysts say:

  • Buy, sell, or waffle? Exactly one analyst follows Princeton, rating the company a hold.
  • Revenues. This analyst expects to see 16% quarterly sales growth to $37.4 million...
  • Earnings. ... and $0.04 per share in profits.

What management says:
The press releases came fast and furious out of Princeton this quarter, but basically, the news broke down into two themes: executives jumping ship, and management throwing a division overboard.

Executives first. In January, CFO Andrew Bonanni resigned his post, effective Jan. 26, 2007. When next we hear from Princeton, its official "numbers guy" will be former CFO Stephen Melvin, now CFO once more. The other notable departure was that of Steve Quattrociocchi, erstwhile head of the firm's flagship Test Prep division. Quattrociocchi will be leaving March 24, to be replaced by current COO Mark Chernis as interim head of the division while a permanent replacement is sought.

Moving the spotlight from Princeton's biggest division to its smallest, the firm announced last month that it has sold off "certain assets of the Company's Admissions Services Division to Embark Corp., a Delaware corporation" for $7 million plus up to an additional $1.25 million based on how well the division serves Embark. Interesting bit of trivia: Until Princeton bought it in 2001, the admissions services division was an independent company by the name of "Embark.com."

What management does:
The song remains the same with Princeton's profits. Whether gross, operating, or net margins are your flavor of choice, they're all getting smaller, and have been for some time. (Note: The apparent "leap" in profitability in the December 2005 quarter is but an illusion, caused by the hefty charges of the December 2004 quarter finally rolling off the back end of the trailing-12-months results.)

Margin

6/05

9/05

12/05

3/06

6/06

9/06

Gross

63.6%

64.3%

62.0%

60.9%

59.6%

57.5%

Operating

(4.4%)

(3.2%)

(3.3%)

(4.8%)

(4.2%)

(6.3%)

Net

(25.5%)

(22.9%)

(2.7%)

(4.0%)

(4.5%)

(7.2%)
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 love a good spinoff story. Whether it's First Data (NYSE:FDC) setting free its famed Western Union (NYSE:WU) subsidiary, Tyco (NYSE:TYC) doing the same thing with CIT (NYSE:CIT), or Ford (NYSE:F) alternately buying and selling Hertz (NYSE:HTZ), a spinoff often provides insight into what famed value investor Martin Whitman calls "conversion events." Deconstructing the actions to find the motives behind them, these stories help us to understand the real meaning of the concept of a "corporation" and the many ways these legal fictions can be used to "convert" hard assets into monies, and vice versa.

Of course, big as these companies are, it's not always easy to figure out the mechanics of what's going on. It's much easier to visualize a small company, spinning off a smaller division. Happily, that's precisely what Princeton gives us. Speaking of which, Princeton's SEC filing on the sale of its admissions division was, shall we say, laconic, providing little information on the rationale for the sale, or the identity of the purchaser. In fact, the filing made no reference whatsoever to the history of Embark.com. Curiosity piqued, I dug into this a bit, and here's what I didn't find:

  • Any press release on the subject at Yahoo!
  • Or any hosted on Princeton Review's own website.
  • Or any mention that the admissions division was for sale, in last quarter's earnings release.

What I did find, however, is that Embark has set up a website (or perhaps revived a dormant website it used to run), which gives some details on the matter. Specifically, that:

  • "Embark was founded in 1995 by Young Shin, who just happened to study business AND rocket science at MIT ... By the end of 2000, Embark was recognized as a leading provider of web-based admissions systems to post-secondary institutions."
  • "In 2001, Embark was acquired by The Princeton Review."
  • "In February 2007, with the help of outside funding, the senior management team of Embark acquired the business from The Princeton Review and created Embark Corporation."

So in essence, what we have here is a firm that was private, was subsequently bought out, and whose management took out a loan to buy itself back from Princeton. Final bit of trivia: Princeton paid those founders "875,000 newly issued shares of the Company's common stock valued at approximately $5.2 million, approximately $3.4 million in assumed indebtedness and approximately $2.1 million in other assumed liabilities of Embark" back in 2001. At the latest named sales price, Princeton has lost roughly 35% of its investment since buying Embark.

What did we expect out of Princeton Review last quarter, and what did it produce? Find out in:

And for further Foolish findings on the subject of conversion events, read:

And if you've got some change burning a hole in your pocket, you might want to pick up a copy of Marty Whitman's Value Investing while you're at it. It's a purchase you won't regret.

First Data, Tyco, and Western Union are Motley Fool Inside Value picks. You can find out why with a 30-day free trial of the newsletter.

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