When we last checked in on chip-design software maker Synopsys (NASDAQ:SNPS) back in May, I tried to make sense of the company's GAAP numbers. Really, I did. But then I gave up.
The company, you see, has shifted its rules for recognizing licensing revenue, so that software licensed in the past for an upfront fee now generates revenue not in one lump sum, but periodically over the course of the license's term. As a result, there's no easy way to accurately compare Synopsys' revenue numbers this year with those reported last year, no way to say with any certainty that X is better than Y.
Faced with that conundrum three months ago, I opted to suspend judgment on the GAAP numbers and focus instead on Synopsys' free cash flow. "Accounting earnings" may change over time, according to the demands of the regulators and the whims of management. Cash, on the other hand, is either in the bank or it isn't. Therefore, at least until Synopsys has a full year of its new method of revenue recognition under its belt, so that we can compare accounting apples to accounting apples once more, I'll be skipping the GAAP punditry and instead watching the cash.
Year to date, Synopsys has generated $158 million in FCF, excluding cash paid for business acquisitions; by this time last year, Synopsys had generated $193 million. That's quite a change from what we saw three months ago -- not so much in relation to the rate of cash generation this year as to the company's performance one year ago. For although Synopsys generated $49 million in Q3 2005, and that's roughly proportional to its average FCF generation this fiscal year, it's also less than half of the $117 million the company generated in fiscal Q3 2004.
It also appears that this is about as good as things are going to get for Synopsys this fiscal year. According to its earnings projections as outlined in the press release, the company expects to generate a total of about $200 million in cash from operations through the end of fiscal 2005 -- a number that should prove to be accurate, given that there's only one more quarter left. With Synopsys having already generated $195 million in cash from operations year to date, this suggests that, at least in terms of FCF, fiscal Q4 2005 is going to be looking mighty lean. Even if no additional capital expenditures are incurred in the next three months, the company will probably max out at about $163 million in FCF for the year.
For more views on Synopsys, read:
Fool contributor Rich Smith does not own shares of Synopsys.
