Riddle me this: Which came first, the chipmaker, or the chip-making equipment maker?

Answer: Neither. First came the company that made the software that let the chip-making equipment maker's equipment make chips. Synopsys (NASDAQ:SNPS) -- just such a company -- reports fiscal Q4 and full-year 2006 earnings on Wednesday.

What analysts say:

  • Buy, sell, or waffle? Eleven analysts boil Synopsys down to four buy ratings and seven holds.
  • Revenues. On average, they think the company grew its Q4 sales 10% to $279.8 million.
  • Earnings. They also expect to see 90% earnings growth to $0.19 per share.

What management says:
When last we heard from Synopsys on the subject of earnings, the firm had shifted its guidance for the year's profits from the old range of $0.08 to $0.17, to a new range of $0.11 to $0.15. On the one hand, the lowering of the guidance ceiling caused the firm's shares to slide a bit last quarter; on the other hand, the raising of the floor gave investors cause for hope that we'll at least find no nasty surprises in Wednesday's news.

Thanks to the new guidance, Synopsys can no longer count its annual earnings as "in the bag" -- but given that it has $0.10 in earnings already this year, and only needs to earn a penny to make its lower-end guidance, things are definitely looking pretty good.

Speaking of which, if you're wondering why Wall Street is looking for 19 pennies tomorrow, rather than somewhere between a penny and a nickel (the GAAP estimates), remember that the analysts are using "pro forma" numbers for their estimates. Synopsys itself prefers the pro forma metric, and describes its pro forma numbers as excluding stock options expensing and "amortization of intangible assets, in-process research and development charges, integration and other acquisition-related expenses, facilities and workforce realignment charges and other significant infrequent items." (In other words, all the stuff that makes its numbers look bad.)

What management does:
The gap between Synopsys' GAAP and pro forma numbers, while large now, appears destined to dwindle as the firm's amortization of intangibles abates. Over the last six months, for example, amortization has taken less than half the bite out of earnings that it took one year ago. This, combined with the selling, general, and administrative expenses holding steady even as sales rise, has helped the firm finally pull its operating and net margins out of the red.

Margins %

4/05

7/05

10/05

1/06

4/06

7/06

Gross

83.7

82.8

82.6

82.5

82.7

82.8

Op.

(1.3)

(7.1)

(4.8)

(2.6)

3.2

5.8

Net

(0.6)

(3.1)

(1.6)

0.1

1.0

0.1
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:
In the last quarterly earnings report, CEO Aart de Geus reiterated his past prediction that Synopsys would generate $175 million in operating cash flow for the year. Right now, it's not looking likely to hit this number. With just $106.1 million in free cash flow generated in the first three quarters of this fiscal year, it's still 40% short of its mark. That said, a review of the firm's past cash flow production shows there's no real seasonality to the business, and no single quarter that generally puts the firm "over the top." Instead, cash arrives in lumps, and whether the company will get the $69-million lump necessary to prove de Geus right on Wednesday is anybody's guess.

Competitors:

  • Virage Logic (NASDAQ:VIRL)
  • Synplicity (NASDAQ:SYNP)
  • Rambus (NASDAQ:RMBS)
  • Mentor Graphics (NASDAQ:MENT)
  • Magma Design (NASDAQ:LAVA)
  • Cadence Design (NASDAQ:CDNS)

What did we expect to see at Synopsys last quarter, and how did we summarize the results? Find out in:

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