How often do you hear a news story like this? "Stock X reports a 17% decline in revenues and a reversal of its year-ago profits for the quarter just ended. Stock X further reports that its CFO will resign. Stock X's price remains unchanged."
In a world where "missing earnings by a penny" can knock 10% off of a company's market cap within a few hours, and where news of a high-level resignation can have similar effects, you don't hear of many stories like that. Yet it's precisely what happened at chip design/software maker Synopsys (NASDAQ:SNPS) last week.
Synopsys' revenues for the second quarter of 2005 are lower than those posted a year ago. The company also reported $0.18 in profits in Q2 2004, vs. the $0.03 loss announced last week. And yes, the company also advised that its chief financial officer is soon to depart. But the stock closed Friday at about the same price it held just before the company announced earnings Wednesday evening.
Of course, the story isn't quite that simple. For one thing, Synopsys eliminated some of the uncertainty that can hurt a stock's price by assuring analysts that it will not lose more than $0.06 in fiscal 2005 -- considerably less than it had previously feared might happen.
You also need to know that comparing last year's results with this year's is like comparing antelopes to orangutans. A year ago, Synopsys was still counting much of its license revenue "up front," upon shipment; today, the company books the vast majority of its revenue over a longer period of time. The result of a shift like this is that post-shift sales appear to be depressed in comparison with previous quarters. But in the future, the delayed recognition will tend to smooth out earnings and make them a bit more predictable.
In the meantime, it might be best to continue focusing not on revenues and earnings according to generally accepted accounting principles (GAAP), but on the company's free cash flow (FCF). And in this regard, Synopsis reported that it generated $109.2 million in FCF in the first half of fiscal 2005, vs. the $77.6 million collected in 1H 2004. That's better than a 40% FCF increase year-to-date. If the company can maintain that kind of cash generation through the second half of the year, it will generate at least as much cash this year as last -- despite the fact that this year will end in a GAAP loss and last year ended in a GAAP profit.
For more views on Synopsys, read:
- Tech Stock on Sale
- Flush Five to Survive
- Subscription Software Is Sweet
- The MoSys Synopsys: A Rip-Off
Fool contributor Rich Smith does not own shares of Synopsys.
