This Thursday night, information-technology behemoth International Business Machines (NYSE:IBM) reports earnings for the fourth quarter and full fiscal year of 2006. Let's have a look behind the curtain to see what we can expect.

What analysts say:

  • Buy, sell, or waffle? Twenty-five Wall Street analysts follow Big Blue these days. Fifteen of them have a "buy" rating on the stock, nine are holding, and one recommends that you sell. In our Motley Fool CAPS database, it's a two-star stock, with more than 700 investors sharing their opinions.
  • Revenues. The average forecast calls for $25.7 billion in sales, up about 5% from the $24.4 billion produced a year ago.
  • Earnings. The bottom line should show $2.19 per share, according to the analysts. That's 3.8% more than the year-ago take.

What management says:
Last quarter's earnings were not too shabby in their own right, but management had expected even better results. CFO Mark Loughridge noted that several major contracts weren't completed before the end of that quarter, slipping into the next one. "We fully expected to grow our signings more," he said. "We just didn't get the deals closed." That should mean juicier sales in this quarter.

What management does:
When IBM dropped out of the market for personal computers, spinning that segment off to Lenovo in the spring of 2005, revenues took a hit, but margins improved considerably. The result is a bottom line with some spring in its step, and free cash flow to match. It's a testament to the power of quality revenues over plain bulk sales.

Margins %

Jun-05

Sep-05

Dec-05

Mar-06

Jun-06

Sep-06

Gross

37.9%

38.9%

40.1%

40.9%

41.3%

41.6%

Oper.

12.5%

13.4%

13.3%

13.6%

13.7%

13.9%

Net

7.9%

8.0%

8.7%

9.3%

9.5%

10.2%

FCF/Revenue

18.4%

19.2%

20.5%

20.5%

21.8%

21.5%


YOY Growth Rates

Jun-05

Sep-05

Dec-05

Mar-06

Jun-06

Sep-06

Revenues

3.8%

-0.2%

-5.4%

-5.4%

-8.0%

-5.1%

Earnings

0.7%

3.3%

6.6%

6.6%

10.6%

20.4%
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:
This is a tough comparison for IBM, since last year's fourth quarter was by far the most profitable three months in the company's history. But IBM has made a habit of overdelivering on expectations lately, and it hasn't missed an analyst target since its first quarter of 2005.

The delayed action on deals expected to close in the previous quarter should add to IBM's top line, and there's no reason why the margin trends outlined above shouldn't continue. After all, nary a day passes without a handful of press releases from IBM detailing new contracts with the U.S. government, the German army, or HDFC Bank (NYSE:HDB) of India. IBM has become a global growth story, at a time when many of the biggest business opportunities appear to lie outside the United States.

Competitors:

  • Hewlett-Packard (NYSE:HPQ)
  • Microsoft (NASDAQ:MSFT)
  • Oracle (NASDAQ:ORCL)
  • Cisco (NASDAQ:CSCO)
  • Intel (NASDAQ:INTC)

Both Intel and Microsoft are active Motley Fool Inside Value recommendations. To see why Philip Durell and his band of Fools think the tech giants are cheap today, grab a free 30-day trial.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. You can check out Anders' holdings if you like. Foolish disclosure is both bigger and bluer.