Riddle me this: Which came first, the chipmaker or the chip-making equipment maker?
Answer: Neither one. First came the company that made the software that let the chip-making equipment maker's equipment make chips. One such company, Synopsys (NASDAQ:SNPS), reports fiscal Q2 2006 earnings after close of market tomorrow.
What analysts say:
- Buy, sell, or waffle? Eleven analysts boil Synopsys down to four buy ratings and seven holds.
- Revenues. They expect the company to grow sales 9% to $266 million ...
- Earnings. . and earnings 67% to $0.15 per share.
What management says:
What would we ever do without management? (Not much, likely.) Wall Street analysts, whose function is supposedly to help enlighten investors, often achieve the opposite with their ponderings. Case in point: The earnings estimate you see above is based on the pro forma -- also known as "non- GAAP" -- predictions that Synopsys revealed back in its February earnings report, but from the estimates you see on such sites as Yahoo! Finance, there's no way to know that.
That's why it's necessary to read company earnings reports themselves, rather than accept at face value the numbers you get from analysts. Synopsys management made clear in its last report that it expects only non-GAAP earnings to range from $0.13 to $0.17 per share for the quarter. Once you factor in the costs of stock options, goodwill expensing, "amortization of ... 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," the actual profit under generally accepted accounting principles is probably going to look close to breakeven.
What management does:
Up until last quarter, when it finally reported a quarterly operating profit, Synopsys had posted operating losses for five straight quarters. The rolling numbers, which I use to help smooth out the results over a longer period of time and give a better picture of where the company is trending, still show Synopsys to be operating at a loss -- under GAAP, of course. Back out all of the costs, and I'm sure the company will be rolling in funny money.
|
Margins % |
10/04 |
1/05 |
4/05 |
7/05 |
10/05 |
1/06 |
|---|---|---|---|---|---|---|
|
Gross |
85.9 |
84.7 |
83.7 |
82.8 |
82.6 |
82.5 |
|
Op. |
10.9 |
5.3 |
(1.4) |
(7.0) |
(4.8) |
(2.6) |
|
Net |
6.8 |
2.7 |
(0.6) |
(3.1) |
(1.6) |
0.1 |
One Fool says:
Had it up to here with pro forma accounting, and the analysts who won't tell you when they're using it? Then give Synopsys management another round of applause, for being one of the all-too-few companies that provides clear cash flow statements in its earnings releases -- recently, against its better PR interests. With this invaluable document in hand, you can quickly get a handle on how much cash Synopsys is generating, and let the suits up on the Street fiddle around with "accounting earnings" to their hearts' content.
According to Synopsys, free cash flow for the fiscal first quarter declined from $135.1 million in 2005 to $11.5 million in 2006, as accounts payable sucked out a lot of cash and deferred revenue declined. This isn't doing the company's balance sheet any favors, but on the bright side, Synopsys ended last quarter with well in excess of a half billion dollars -- and it's using this cash stash to buy back its stock in volume. When things finish turning around at Synopsys, expect there to be quite a bit fewer shares among which the profits get divvied.
Competitors:
- Virage Logic (NASDAQ:VIRL)
- Synplicity (NASDAQ:SYNP)
- Rambus (NASDAQ:RMBS)
- Mentor Graphics (NASDAQ:MENT)
- KLA-Tencor (NASDAQ:KLAC)
- Cadence Design (NASDAQ:CDNS)
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Fool contributorRich Smithdoes not own shares of any company named above.
