Say it with me now, all together: "Underpromise. Overdeliver."
That's the key to keeping investors happy, to preserving management credibility, and yes, to 5% one-day stock price rises such as the one Synopsys (NASDAQ:SNPS) is currently enjoying. As you may recall, the company suffered for sticking to this principle last quarter. Despite turning in a strong earnings report for the fiscal second quarter, its stock got hammered when management refused to give Wall Street the numbers it was looking for, and instead promised to earn just $0.13 to $0.20 per share in GAAP profits (and $0.28 to $0.31 per share, pro forma) on about $300 million in revenue in Q3.
Well, Q3 has come and gone, and it sure looks like management made the right call in underpromising three months ago. By diminishing expectations back then, it set itself up to overdeliver on its promises on Wednesday, when it reported:
- $304 million in sales, 10% better than in fiscal Q3 2006
- $0.17 per share in profits as calculated under GAAP (more than triple the amount from the previous year's third quarter)
- $0.32 per share, pro forma -- a 52% increase
And so Synopsys has once again exceeded expectations, after itself savvily setting them low. Enjoy your reward now, guys -- that was just beautiful.
Free cash flow
But of course, you're not here to discuss Synopsys' PR strategy. You want to know how the business did free cash flow-wise, right? Well, there's good news to report there as well. With three fiscal quarters under its belt, and just one left to go, Synopsys is less than $15 million away from its goal of achieving at least $275 million in operating cash flow this year. Matter of fact, now that we're three weeks into the quarter, I'd bet good money that it has already exceeded that goal.
Subtract out its expenses for capital requirements and capitalized software development costs, and Synopsys has already generated $221.8 million in free cash flow this year (more than triple its take at this point last year). It also seems on track to finish out the year with nearly $300 million in cash profits.
I'm still not yet ready to call the stock a buy, however. Selling for about 13 times this year's likely free cash flow, but with profits predicted to grow at just 10% per year over the next five years, it already looks pretty close to reasonably priced to me, but it's not yet a bargain.
But it's getting there. It's getting there.
Find our synopses on Synopsys' last quarter at:
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Fool contributor Rich Smith does not own shares of any company named above. The Fool's disclosure policy never resorts to Cliffs Notes.
