Foolish Forecast: Superior Synopsys

As most of the firms on Wall Street queue up to report their end-of-year numbers, Synopsys (Nasdaq: SNPS  ) -- which makes the software that controls the equipment that makes semiconductors -- is once again a step ahead of the pack. It's set to report earnings news for fiscal Q1 2007 on Wednesday.

What analysts say:

• Buy, sell, or waffle? A dozen analysts render Synopsys five buy ratings and seven holds.
• Revenues. On average, they think the company grew its sales 13.6% to $295.5 million.
• Earnings. They expect to see 50% earnings growth, to $0.27 per share.

What management says:
Regarding tomorrow's results, CEO Aart de Geus predicted last quarter that $0.10 to $0.15 per share in GAAP profits would fall to the bottom line from top-line revenue of $292 million to $300 million. Which reminds me: Once more (with feeling), Wall Street's estimates for Synopsys are of the pro forma variety, not GAAP.

De Geus foresees even better news going forward, arguing that in fiscal 2007, he expects "increased momentum in customer adoptions and new products." He committed the firm "to reaching a 20 percent-plus operating margin by the second half of the year" and an "operating margin in the mid to high 20s" in years yet to come.

What management does:
"Twenty percent-plus" margins might seem an awful long way off to investors who saw this company earn less than 9% operating profits last year. But look how much progress Synopsys has made! Just one year ago, the firm was operating at a loss. Today, it's pulling in 265% of the operating profits it earned just two quarters ago. The bottom line has turned from red to black, and gross margins, too, have been improving for more than a year. I don't know about you, but I'm impressed.

Margins	7/05	10/05	1/06	4/06	7/06	10/06
Gross	82.8%	82.6%	82.7%	82.7%	82.8%	83.0%
Operating	(7.1%)	(4.8%)	(0.7%)	3.2%	5.8%	8.5%
Net	(3.1%)	(1.7%)	0.1%	1.0%	0.1%	2.3%

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:
Also impressive: de Geus said all last year that Synopsys would generate $175 million or more in cash from operations. But when Q4's earnings report rolled around, the company exceeded that target, generating $206 million in operating cash flow. Granted, this number lagged 2005's result by 24%, and increased spending on property and equipment made the year-over-year free cash flow comparison even uglier. Still, de Geus made a commitment, and he delivered.

That should give investors some confidence that Synopsys will deliver once again on this year's targets:

• $1.18 billion to $1.2 billion in revenue,
• $0.60 to $0.73 per share in GAAP profits, and
• $275 million in operating cash flow -- about 33% more than last year, and back above the levels generated in fiscal 2005.

Customers:

• Agere (NYSE: AGR  )
• ARM Holdings (Nasdaq: ARMHY  )
• Cypress Semiconductor (NYSE: CY  )
• NVIDIA (Nasdaq: NVDA  )
• Sun Microsystems (Nasdaq: SUNW  )
• Sony (NYSE: SNE  )

Past Synopsys synopses available at:

• Synopsis on Synopsys: Fool by Numbers
• Synopsys Slides
• Foolish Forecast: Synopsys

ARM Holdings and NVIDIA are Motley Fool Stock Advisor newsletter recommendations. Discover Tom and David Gardner's full list of superior stock selections with a free 30-day trial subscription.

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