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Am I a jinx?
Earlier this week, I previewed the earnings reports due out for three big names in tech: JDS Uniphase (Nasdaq: JDSU ) , salesforce.com (NYSE: CRM ) , and Synopsys (Nasdaq: SNPS ) . As of this writing, all three have reported ... and all three are down double digits in reaction.
I'll be posting my own reactions to the news on all three shortly, but here's a summary: I agree with investors on one of the three stocks -- but Synopsys ain't it. Here's why:
Synopsys, which provides chip design software to the likes of Intel (Nasdaq: INTC ) and IBM (NYSE: IBM ) , grew fiscal Q3 sales 13% to $344.1 million. Profits more than doubled to $0.39 per share, albeit inflated by a sizeable "tax benefit associated with the settlement of an IRS tax issue for fiscal years 2000 and 2001." Even without the benefit, though, operating margins year-to-date are trending upwards to 15.6%, which beats Magma Design, Mentor Graphics (Nasdaq: MENT ) , and even Cadence Design (Nasdaq: CDNS ) handily.
Next stop, the future
And Synopsys has no intention of slowing down. According to CEO Aart de Geus, the company's: "technology and product pipeline are strong ... and we are seeing good competitive momentum."
Updating guidance for the full year (and you can probably take these numbers to the bank. We're well into the final fourth fiscal quarter of this "year"), Synopsys predicts sales growth of 10% to about $1.333 billion. Earnings should grow 41% to about $1.23 per share. The only thing declining is free cash flow, which should range between $260 million and $285 million.
What's wrong with that?
Not much, but I suspect Mr. Market is more upset over Synopsys' predictions for next year. Bearing in mind that it's still working on these numbers, management guided us toward revenue growth of about 6% or 7%, with earnings growing even slower. Management framed its guidance in pro forma-speak, but it looks to me like they're calling for about 5% growth in fiscal 2009.
So cash generation is slowing this year, and most everything else will slow next year -- no wonder the Street's throwing a hissy fit. Still, consider the long-term big picture. At the midpoint of guidance, we're looking for about $273 million in FCF this year. That gives us a price-to-free cash flow ratio of 11, based on Synopsys's new and improved share price, versus 10% projected long-term growth -- hardly unreasonable.
Throw in the fact that Synopsys is sitting on $877 million in cash, equivalents, and short-term investments, and the stock looks downright cheap.
For more on Synopsys, read: