Database software-master and online banking software-dabbler Sybase (NYSE:SY) reports Q2 2006 earnings bright and 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? Four analysts return to Sybase every quarter. Two of them to rate it a buy; two others to rate it a hold.
  • Revenues. Wall Street should be easy to impress tomorrow. Analysts expect to see just 4% sales growth to $212.5 million.
  • Earnings. Or not. On the profits front, Wall Street wants to see 15% year-over-year growth, and $0.31 per share in net earnings.

What management says:
In its last quarterly earnings report, in April, CEO John Chen pronounced himself "pleased" with the performance of Sybase's mobile and wireless business, noting that license revenues there increased 49% year over year. (What he didn't mention was that overall, licensing revenues rose just 7% year over year, and services revenues declined by 1%. Also going without mention -- as usual -- was any word on the company's Financial Fusion division. Read into that what you will.)

Even so, Chen said he was "confident" that Sybase will be able to hit its targets for revenue, profits, and cash flow for the year. Speaking of which, these targets call for sales growth of 6% (so about $868 million in revenues), GAAP net income of $1.07 per share, and about $170 million in operating cash flow. Nearer term, Chen said he expects tomorrow's results to show about $210 million to $215 million in sales and about $0.24 per share in profits.

What management does:
Hand it to Sybase -- as modest as its targets, and particularly its revenue growth target, appear on the surface, the company has performed admirably in boosting the profitability of those revenues. Over the past 18 months, rolling gross margins have grown 350 basis points, and the firm has dropped two-thirds of that improved gross profitability all the way to the bottom line.

Margins %

12/04

3/05

6/05

9/05

12/05

3/06

Gross

71.7

72.1

73.4

74.2

74.6

75.2

Op.

13.5

13.9

15.6

15.7

15.0

15.3

Net

8.6

8.5

8.7

10.0

10.5

10.9
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:
Thanks to Sybase's projecting of operating cash flow last quarter, we can work a rough valuation on the company today and use it to determine whether however the market reacts to tomorrow's news offers a buying opportunity or otherwise. Chen projected $170 million in operating cash flow for the year. Last year, the company spent $16 million on capital expenditures -- but historically, that's a low number. The average over the past five years has been closer to $32 million.

Subtract that last number from the $170 million in projected operating cash flow, and you're looking at a company valued today at roughly 10 times free cash flow. With Sybase itself projected to grow its profits at about 8% per annum over the next five years, this might make you think the company is a bit pricey. However, if you note that the average growth rate projected for Sybase's industry is 13%, and that companies tend over time to "revert to the mean" growth rate for their industry, I suspect that long-term investors will find Sybase a rewarding investment at today's price.

Competitors:

  • BEA Systems (NASDAQ:BEAS)
  • Borland Software (NASDAQ:BORL)
  • CA (NYSE:CA)
  • IBM (NYSE:IBM)
  • Microsoft (NASDAQ:MSFT)
  • Oracle (NASDAQ:ORCL)

Curious about why I call Sybase just a "dabbler" in the market for online banking software? Find out why in "Sybase's Switcheroo."

Want to know who the real players are in this market? Read "Rob Banks the Easy Way."

Microsoft is a Motley Fool Inside Valuepick.Are you looking for irresistible values? Check out Philip Durell's latest value picks by taking a 30-day free trialtoMotley Fool Inside Value.

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