The annual reports of most companies are of modest interest to their shareholders and to a handful of analysts, but IBM’s annual report is pored over and interpreted line by line within an hour or two of the first advance copies hitting the Street – Wall Street of course. That happened on Tuesday, and the capsule conclusion is that while performance in the market was just as bad as everyone deduced from the year-end figures, the company’s underlying strength is better than anyone expected – if only it could get back onto even a modest growth tack. The two pieces of good news tucked away in the report are that hardware margins in the fourth quarter were 54.4%, up from 51.7% in the third quarter and 52.3% in the 1986 fourth quarter: while way below the 58.4% recorded in 1984, that was a whole percentage point better than analysts had expected, and was good for $1.375 on the share price at $109.125, halting a trickling decline that had started the day after IBM announced its massive reorganisation. The other piece of – related – good news was that selling, general and administrative expenses were 29.9% of turnover, down from 30.2% a year earlier, and in the fourth quarter improved further to 28.7% from 30.6% – those early retirements are really feeding through to the bottom line now. But there the good news ends. Even on the software front, margins fell a shade, although they were still an extortionate 71.4%: software sales rose 23% to $6,840m but what few seem to appreciate in the US is that the agreement under which Fujitsu will get a privileged view of IBM’s operating software code can only be of interest to the Japanese company if it plans to compete with IBM by offering compatible but faster operating software at a lower price. If Fujitsu is able to compete on price, those software margins will start eroding rapidly. US turnover actually fell 1.7% to $24,940m, which means that from where it now stands, IBM is in a strong position to weather a recession without too much damage, but will not show any progress on the profits front unless it can start growing again. Even 5% to 6% growth would be enough to see margins start widening from their present encouraging position – apart from a bubbling Japan, in none of IBM’s major markets is there much sign of upturn.