Magma Reports Record Revenue of $50.2 Million for First Quarter - Raises Targets for Full-Year Revenue and EPS

CIMdata PLM Industry Summary Online Archive

26 July 2007

Financial News

Magma Reports Record Revenue of $50.2 Million for First Quarter - Raises Targets for Full-Year Revenue and EPS

Magma Design Automation Inc. reported record revenue of $50.2 million for its fiscal 2008 first quarter ended July 1, 2007, an increase of 22 percent over the $41.0 million reported for the year-ago first quarter, ended July 2, 2006. The company also announced it is raising its full-year targets for revenue and earnings per share.

"We delivered strong revenue growth and profitability in the first quarter," said Rajeev Madhavan, chairman and CEO of Magma. "Customers are using our products for an increasingly wide range of applications - you can find chips designed with Magma software in just about every popular variety of electronic products made today. We expect this to continue as our new products continue to gain traction, and today we are announcing increases in our guidance for both revenue and EPS."

GAAP Results

In accordance with generally accepted accounting principles (GAAP), Magma reported a net loss of $(11.3) million, or $(0.29) per share (basic and diluted), for the first quarter, compared to a net loss of $(10.7) million, or $(0.30) per share (basic and diluted), for the year-ago first quarter.

Non-GAAP Results

Magma's non-GAAP net income was $4.6 million for the quarter, or $0.10 per share (diluted), which compares to non-GAAP net income of $0.7 million, or $0.02 per share (diluted), for the year-ago first quarter.

Non-GAAP net income for the first quarter of fiscal 2008 excludes the effects of amortization of developed technology, amortization of intangible assets, stock-based compensation, legal settlement and other expenses, interest expense and amortization of debt issuance cost, debt discount accretion, charges associated with losses in equity investments, acquisition-related and other expenses, restructuring costs and the tax effects of these adjustments. Non-GAAP net income for the first quarter of fiscal 2007 excludes the effects of amortization of developed technology, amortization of intangible assets, amortization of deferred stock-based compensation, acquisition-related expenses, net gain on repurchase of convertible notes, charges associated with losses in equity investments and the tax effects of these adjustments. A reconciliation of our non-GAAP results to GAAP results and more detailed financial are available at http://www.magma-da.com/articles/Earnings/PR_1QFY08_Earnings_FINAL.pdf

In the first quarter Magma used cash from operations of approximately $(23.4) million, primarily for cash payments on the litigation settlement with Synopsys and the annual employee bonuses.

Business Outlook

For Magma's fiscal 2008 second quarter, ending Sept. 30, 2007, the company expects total revenue in the range of $50 million to $52 million. GAAP net loss per share is expected to be in the range of $(0.28) to $(0.26) and non-GAAP earnings per share (EPS) is expected to be in the range of $0.10 to $0.12. A schedule showing a reconciliation of the projected non-GAAP EPS to GAAP EPS results is included in this release. For Magma's fiscal year 2008, ending April 6, 2008, the company increased its expected revenue growth rate over fiscal 2007 to between 17 percent and 20 percent, with revenue range of $208 million to $214 million. For Magma's fiscal year 2008, the company also increased its expected GAAP

EPS to a range of $(1.10) to $(1.08) and its expected non-GAAP EPS to a range of $0.50 to $0.52. A Financial Data Supplement containing detailed financial information intended to provide guidance and further insight into our business is available online at http://investor.magma-da.com/supplement.cfm in the Investor Relations section of the Magma website.

GAAP Reconciliation

Magma provides non-GAAP financial information to assist investors in assessing its current and future operations in the way that Magma's management evaluates those operations. Magma believes that this non-GAAP information provides useful information to investors by excluding the effect of some expenses that are required to be recorded under GAAP but that Magma believes are not indicative of Magma's core operating results, or that are expected to be incurred over a limited period of time. Magma's management evaluates and makes operating decisions about its business operations primarily based on bookings, revenue and the core costs of those business operations. Management believes that the amortization of developed technology and intangible assets, stock-based compensation, in-process research and development charges, litigation settlement and related legal expenses, integration and other acquisition-related expenses, workforce realignment restructuring charges, expenses associated with lease amendment and related headquarters office relocation, net gain on exchange of convertible notes, debt discount accretion, and the tax effects of its non-GAAP adjustments (yielding a non-GAAP effective tax rate of 25.0 percent for fiscal 2008) and other significant unusual items are not operating costs of its core software and service business operations.

Therefore, management presents non-GAAP financial measures, along with GAAP measures, in this earnings release by excluding these items from the period expenses. The income statement line items affected are as follows: (1) cost of revenue, licenses; (2) cost of revenue, bundled licenses and services; (3) cost of revenue, services; (4) total cost of revenue; (5) gross profit; (6) operating expenses, research and development; (7) operating expenses, in-process research and development; (8) operating expenses, sales and marketing; (9) operating expenses, general and administrative; (10) operating expenses, amortization of intangible asset; (11) total operating expenses; (12) operating income (loss); (13) other income (expense), net; (14) total other income (expense), net; (15) net income (loss) before income taxes; (16) provision for income taxes; (17) net income (loss) before cumulative effect of change in accounting principle; (18) cumulative effect of change in accounting principle; (19) net income (loss); and (20) net income (loss) per share. To determine its non- GAAP provision for income taxes, Magma recalculates tax based on non-GAAP income before income taxes and adjusts accordingly. For each such non-GAAP financial measure, the adjustment provides management with information about Magma's underlying operating performance that enables a more meaningful comparison of its financial results in different reporting periods. For example, since Magma does not undertake significant restructuring or realignments on a predictable cycle, management would have difficulty evaluating Magma's profitability as measured by gross profit, operating profit, income before taxes and net income on a period-to-period basis unless it excluded these charges. Similarly, since Magma does not acquire businesses on a predictable cycle, management excludes acquisition-related charges, such as in-process research and development charges, in order to make more consistent and meaningful evaluations of Magma's operating expenses. Management also uses these measures to help it make budgeting decisions between those expenses that affect operating expenses and operating margin (such as research and development, sales and marketing, and general and administrative expenses), and those expenses that affect cost of revenue and gross margin (such as product development expenses).

Further, the availability of non-GAAP financial information helps management track actual performance relative to financial targets, including both internal targets and publicly announced targets. Making this non-GAAP financial information available also helps investors compare Magma's performance with the announced operating results of its principal competitors, which regularly provide similar non-GAAP financial information. Management recognizes that the use of these non-GAAP measures has limitations, including the fact that management must exercise judgment in determining whether some types of charges, such as those relating to workforce reductions executed in the ordinary course of business, should be excluded from non-GAAP financial measures. Management believes, however, that providing this non-GAAP financial information facilitates consistent comparison of Magma's financial performance over time. Magma has historically provided non-GAAP results to the investment community, not as an alternative but as a supplement to GAAP information, to enable investors to evaluate Magma's core operating performance in the way that management does.

Conference Call

Magma will discuss the financial results for the recently completed quarter, including forward-looking guidance, during a live earnings call today at 1:30 p.m. PDT.

Following completion of the call, a webcast replay of the call will be available at http://investor.magmada. com/medialist.cfm through August 2, 2007. Those without Internet access may listen to a replay of the call by telephone until 11:59 p.m. PDT on August 2 by calling: U.S. & Canada: (719) 457-0820, code #4774559 Elsewhere: (888) 203-1112, code #4774559

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