As most of the firms on Wall Street queue up to report their Q1 numbers, semiconductor-design software maker Synopsys (NASDAQ:SNPS) is once again a step ahead of the pack. The company's fiscal Q2 2007 will be discussed this Wednesday afternoon.

What analysts say:

  • Buy, sell, or waffle? A dozen analysts give Synopsys five buy ratings and seven holds.
  • Revenues. On average, they're looking for sales growth of 6% to $292.1 million.
  • Earnings. Pro forma earnings are predicted to grow 65% to $0.28 per share.

What management says:
After summarizing his firm's fiscal 2006 ("very successful") and fiscal Q1 2007 (alternately "strong" and "excellent") results, CEO Aart de Geus turned his eye to the rest of this fiscal year back in February. The news was good.

Based on the trends seen earlier, de Geus felt comfortable inching his revenue estimates a bit higher to $1.185 billion to $1.205 billion for the full year. And it looks like he's expecting a lot of the extra revenues to fall straight to the bottom line. That 0.4% in additional sales is expected to yield an extra four pennies in per-share profits -- $0.64 to $0.77, or about 6% more than de Geus was predicting just three months earlier. One thing that remained unchanged, though, was operating cash flow. Synopsys still expects to rake in about $275 million. No official word on how much of that will flow into capital spending, but as I explained in March, if history is any guide, we're probably looking at upwards of $225 million in free cash flow by year end.

What management does:
Reviewing the firm's margin trends, we see an unbroken string of quarterly improvements in the rolling gross and operating margins at Synopsys. With the notable exception of the quarter ended in July 2006 (which compared unfavorably with a July 2005 quarter in which the firm benefited from a $33 million legal settlement), those improvements have been reflected on the bottom line as well.

Margins

10/05

1/06

4/06

7/06

10/06

1/07

Gross

82.6%

82.7%

82.7%

82.8%

83.0%

83.2%

Operating

(4.8%)

(1.0%)

3.0%

6.0%

8.5%

9.7%

Net

(1.7%)

(0.1%)

0.9%

(0.0%)

2.3%

4.1%
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:
Back in March, I argued that Synopsys' plan to buy back as much as $500 million in stock was foolhardy, because of the stock's apparent overvaluation. When Synopsys reports its numbers Wednesday, I expect to see the firm both beat estimates and raise per-share earnings guidance as the buyback gains steam, the share count falls, and firmwide earnings are concentrated among fewer shares.

If that does happen, will it mean the stock is not overpriced after all? I don't think so, and not just because the firm sells for pricier multiples than either of its rivals, Cadence Design (NASDAQ:CDNS) or Mentor Graphics (NASDAQ:MENT). Which is to say, I'm sticking with my original analysis: The firm's growth rate didn't justify the share price back in February, and today, with the shares selling for 6% more, the stock just looks 6% more overpriced than it did then.

Past synopses on Synopsys available at:

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