Revenues and Earnings.
Mentor Graphics reported materially better than expected revenues for 3QFY11 (ending October 2010), based on stronger than expected bookings. Revenues of $238.9 million compared with my $219.8 million estimate, and non-GAAP earnings of $0.22 a share compared with the $0.15 a share estimate. Mentor’s non-GAAP operating margin of 13.9% compared with less than 1% in 1QFY11 and 2.4% in 2QFY11; for the year to date therefore the non-GAAP margin was 6.4%, vs. 5.2%.
The margin improvement is welcome, but Mentor has hardly reached its full potential; it has been invariably the case over many years that Mentor has considerable margin leverage, most especially when it has bookings and revenue upside, coupled with what seems to be a more ingrained focus now on cost & expense management. This “should be” a business with double-digit margins, and based on updated estimates for 4QFY11, the FY11 margin should be around 12%, vs. 8.7% last year, and only 3.2% in FY09.
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