Foolish Forecast: Synopsys of Risks and Rewards

Synopsys (Nasdaq: SNPS  ) reports its fiscal third-quarter 2008 earnings Wednesday. Want to know what Wall Street expects to see? Read on. Want to know what really matters? Read on a bit more.

What analysts say:

  • Buy, sell, or waffle? With nine analysts rating it, Synopsys gets twice as many buy ratings as holds. Solve.
  • Revenues. On average, they expect to see sales grow 12% to $339.6 million.
  • Earnings. Profits are predicted to rise 22% to $0.39 per share.

What management says:
Three months ago, CEO Aart de Geus boasted that Synopsys was delivering "predictable revenue growth and solid earnings expansion." But hold up a sec -- while revenues did indeed grow 11%, didn't Synopsys' GAAP profits drop a penny?

What management does:
Indeed they did. And as the table below shows, Synopsys' net margin slipped in consequence. Yet look a little closer at the table, and you'll find a clue why; in the 2007 quarters that ended in July and October, Synopsys was netting more than its own operating margin!

The reason: Synopsys booked $12.5 million in a settlement with Magma Design (Nasdaq: LAVA  ) in the quarter ended July 2007, and that figure inflated its net. Back that out, and profits grow year over year -- as the near-doubling in operating margins reflects. Synopsys now boasts an operating margin superior not only to Magma but to Cadence Design (Nasdaq: CDNS  ) and Mentor Graphics (Nasdaq: MENT  ) as well.

(Read more about these latter two companies' pale imitation of the Microsoft (Nasdaq: MSFT  ) / Yahoo! (Nasdaq: YHOO  ) merger saga.)

Margins

1/07

4/07

7/07

10/07

1/08

4/08

Gross

82.4%

82.6%

82.7%

82.6%

82.5%

82.3%

Operating

4.4%

7.1%

7.9%

10.0%

12.6%

13.3%

Net

4.1%

7.1%

8.4%

10.8%

12.5%

12.0%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

One Fool says:
So that's the backstory, but what should Fools be looking for going forward?

A few months back, I discussed Synopsys' purchase of Synplicity and the rewards and risks arising from it. Basically, Synplicity promises to boost Synopsys' rate of sales growth substantially -- but as a much less profitable operation, it also threatens to torpedo margins at the semiconductor design software maker.

Going forward, we'll want to make sure that the promised sales growth is fulfilled. Ideally, we'd also like to see Synopsys extend its own profitable margins into its new Synplicity business -- or at least not get itself dragged down by Synplicity's less profitable operations. Fingers crossed.

For more on Synopsys, read:

Fool contributor Rich Smith owns no shares of any company named above. Microsoft is a Motley Fool Inside Value pick. The Motley Fool has a disclosure policy.


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