When chip-design software maker Synopsys (NASDAQ:SNPS) reports its fiscal fourth-quarter 2005 earnings after Wednesday's close of trading, investors will be faced with a common quandary among companies whose "analysts" insist more on confusing investors than educating them.
You see, these analysts give their earnings projections as "pro forma" numbers -- which Yahoo! Finance dutifully regurgitates in electronic form, without informing investors of their import. That leaves it to us Foolish few to try to make sense of things for our fellow individual investors.
Analysts predict that Synopsys will report earning $0.10 per share tomorrow -- but not really. According to the company, that $0.10 in pro forma earnings doesn't include, "to the extent incurred in a particular quarter or period, amortization of intangible assets and deferred stock compensation, in-process research and development charges, integration and other acquisition-related expenses, facilities and workforce realignment charges, and other significant items which, in the opinion of management, are extraordinary."
Let's restate that chunk of verbiage in plain English: Synopsys' pro forma numbers include all the good stuff and exclude all the bad stuff. To illustrate the difference between GAAP profits and pro forma profits, look at the company's own projections back in August. Three months ago, Synopsys expected to earn GAAP profits of negative $0.02 to positive $0.01 per share in fiscal Q4, and pro forma profits of $0.07 to $0.11. In pinning a tail on their $0.10 number, therefore, analysts are predicting that Synopsys will hit near the top of its earnings projections tomorrow.
As for how that translates into actual GAAP profits, it's anyone's guess. But judging from the tone of the August press release, a profitable quarter looks likely. The company noted that its latest targets surpass any of its previous fiscal 2005 estimates, dropping a heavy hint that Q4 was looking very good indeed.
How good? To find out, I'd spend less time deciphering the GAAP-versus-non-GAAP skullduggery tomorrow and focus instead on cash -- specifically, free cash flow (FCF). As we pointed out last quarter, Synopsys was trending toward no more than $163 million in FCF for the full year and perhaps $5 million for Q4. The strength of Synopsys' actual FCF numbers tomorrow should be a good indicator of just how well its overall quarter went.
More Foolish summaries of Synopsys:
Fool contributor Rich Smith does not own shares of Synopsys.
