All through fiscal 2006, and all through fiscal 2007 so far, Synopsys' (NASDAQ:SNPS) earnings have exceeded expectations. Will the "experts" prove to have had more than a CliffsNotes understanding of the company in Q3? We'll find out when the maker of semiconductor design software reports Wednesday afternoon.

What analysts say:

  • Buy, sell, or waffle? Eleven analysts give Synopsys four buy ratings and seven holds.
  • Revenues. On average, they're looking for sales growth of 8.5% to $300.6 million.
  • Earnings. Pro forma earnings are predicted to grow 43% to $0.30 per share.

What management says:
In boardroom news, there's an awful lot of cross-pollination buzzing around Synopsys' board these days. Chairman (and CEO) Aart de Geus recently joined the board at Applied Materials (NASDAQ:AMAT). And moving in the other direction, Synopsys brought two tech vets onto its own board in May, as independent directors: Autodesk (NASDAQ:ADSK) CFO and Virage (NASDAQ:VIRL) alumnus Al Castino, and Business Objects (NASDAQ:BOBJ) CEO and Symantec (NASDAQ:SYMC) alum John Schwarz.

Meanwhile, back at the business, de Geus credited "strong revenue and earnings growth and solid cash flow" in the second quarter with enabling Synopsys to "finish the year stronger than initially planned." That said, de Geus also predicted weaker results than analysts had hoped to see in Wednesday's news -- revenues of about $300 million, but only $0.13 to $0.20 per share in GAAP profits (and $0.28 to $0.31 per share, pro forma). Analysts quickly updated their own estimates to mimic those of the CEO, but that didn't save the company's shares from a 10% drop back when the news was still fresh. (And the shares today are lower still.)

What management does:
Meanwhile, Synopsys continues to excel at improving its margins. At every level -- gross, operating, and net -- they've been improving for more than a year.

Margins

1/06

4/06

7/06

10/06

1/07

4/07

Gross

82.7%

82.7%

82.8%

83.0%

83.2%

83.4%

Operating

(1.0%)

2.7%

5.7%

8.5%

9.7%

12.4%

Net

(0.1%)

0.9%

0.0%

2.3%

4.1%

7.1%
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:
One of the problems with analyzing a stock like Synopsys is the wide divergence of GAAP figures from their pro forma counterparts, which both analysts and management emphasize. Pro forma may have its uses, but personally, I get a little queasy at the thought of relying too much on results measured by a yardstick that management cut itself.

One solution -- and the one I practice myself -- is to avoid both GAAP and pro forma numbers and focus instead on free cash flow. And as I mentioned last quarter, by this yardstick, Synopsis is also improving: "It's now on track to both pass its stated goal of $275 million or more in annual cash from operations, and also beat my projected free cash flow estimate, by generating $236 million or so in cash profits." On Wednesday, we'll get the next installment of the cash flow information, and with any luck be able to up the projections a bit more, and find this stock approaching a fairer valuation than it's sported in the past.

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Fool contributor Rich Smith does not own shares of any company named above. The Fool has a disclosure policy.