Magma Design Automation continued its march out of its financial difficulties. For the six straight quarter in a row it beat guidance. This quarter it posted revenue of $32.6 million, with a non-GAAP operating margin of 13% and a non-GAAP earnings per share of $0.05. During the quarter it generated $1.4 million cash from operations.

Although its balance sheet still need further strengthening, Magma has made significant positive steps toward that goal. During the quarter it retired convertible notes due 2010 on schedule in May. It also repaid 10% of convertible notes due 2014 (ahead of schedule). And it also used some of its cash to repurchase stock. Remarks prepared for the earnings call of August 26th follow.

Rajeev Madhavan

I am happy to report that we exceeded all guidance targets for Q1. Revenue was $32.6 million, and we delivered non-GAAP earnings per share of $0.05 and non-GAAP operating margin of 13 percent. We also generated $1.4 million in cash from operations, our sixth straight quarter with positive cash flow. And today we are raising full-year guidance targets.

Magma’s focus is on increasing revenue and improving profitability. Chip makers report improved visibility into their future business and most observers foresee growth this year on the order of 25 percent or more. Current semiconductor capacity is fully utilized.

A contributing factor especially helpful to Magma is the current technology transition semiconductor companies are making. From our company’s inception, Magma has focused on delivering design solutions for the prevailing leading-edge technology of the day. The current movement by major semiconductor companies to the 28-nm process node is creating opportunity across Magma’s product line as our most advanced customers gear up for these transitions.

This summer’s Design Automation Conference gave us a chance to assess customer reaction to our latest technology developments. Among the announcements we made in conjunction with the show were reference flows with MIPS, UMC, Global Foundries and TSMC, giving wide opportunity to see Magma products in action.

In our digital implementation products, including the Talus RTL-to-GDSII solution, and Hydra, our floorplanning solution for advanced low-power designs, interest at DAC was very strong. Perhaps the biggest draw we had was our new static timing analysis product, Tekton. Tekton was listed at No. 1 on John Cooley’s annual “Must See at DAC” list and it clearly did not disappoint. Reaction included survey comments as simple and direct as “Impressive product!”

Customer feedback was what we hoped and expected to hear. Comments in our post-show survey of attendees included, “I was very impressed with Magma's solutions, especially Tekton.” Designers continue to confirm the competitive advantages our product line has across the key technology segments where we compete. In analog technology, our Titan platform is delivering. Customer engagements indicate Titan is a significant breakthrough for analog/mixed-signal IP design, optimization and porting. We are very pleased with our progress thus far in custom design and believe our new approach and technology gives users true value and will lead to Titan’s future success. Thus far, we are definitely encouraged.

In physical verification, Quartz adoption benefits from the pressure on design teams just to maintain their level of productivity, which requires that physical verification get faster. That’s very difficult as designs get smaller, and their problem will only intensify. We all know the adoption rate of advanced process nodes is accelerating, and many wireless, networking, graphics and other high-volume semiconductor companies have already migrated to 65-nm and smaller process technologies. This transition continues to accelerate as evidenced by TSMC’s recent report that 43 percent of its revenue comes from its 65- and 40-nm process nodes, and the number of 40-nm wafer shipments increased by 30 percent over the previous quarter. Time-to-market pressures on verification are going to get worse.

This creates great opportunity for Quartz. It’s the only set of verification products that is fully scalable, so it’s the best verification option as design geometries shrink. This week we announced the Quartz iPOP program, designed to help engineers who haven’t tried Quartz see the superior productivity and performance that Quartz DRC, Quartz LVS and Talus qDRC deliver. Once they try Quartz they’ll want to continue using it. You can see why I continue to be excited about the prospects for our company.

Roy Jewell

In Q1 we added 8 new customer logos across North America, Europe and Asia-Pac, and as we entered Q2 our sales pipeline was larger than at any time in the company’s past. Overall, Magma continues to demonstrate significant footprint among the household names of semiconductor companies. A few examples deserve special mention.

Magma technology is used in the OMAP 3 technology platform from Texas Instruments, which is found in some of the hottest smart phones on the market today, including the Droid 2 and Droid X. This follows on the heels of the use of Talus to design a high-performance, low-power processor in the recent releases of both a popular smartphone and a tablet computing device released during our fourth quarter.

In Japan, Renesas Electronics, the company that emerged from the consolidation of NEC Electronics and Renesas Technology, engaged in a multi-year contract for a wide range of leading-edge Magma products, including Talus. We expect to continue our relationship with Renesas, one of the world's leading semiconductor system solutions providers.

Another Talus success was at a company that’s somewhat less known, GN Resound of Copenhagen. They are one of the world's largest manufacturers of hearing instruments. These devices are battery operated, so power management is critical and they needed help in implementing a very low-power design. They were struggling with the incumbent flow, but with the standard Talus flow Magma was able to deliver on the low-power requirement as well as meet chip performance goals. As a result, GN Resound purchased Talus to replace their legacy design and implementation platform.

So evidence of the Talus edge continues to pile up. In Q1 we closed Talus business with the fifth customer in the last 6 months who have purchased Talus for use on current or upcoming 28-nm designs.
But we are also continuing to take share in other technology segments. The Quartz products are generating a lot of interest. Wintegra selected Quartz DRC and Quartz LVS for physical verification of a low-power, high-performance 65-nm chip, pointing specifically to Quartz’s ability to handle their large, complex designs. Then earlier this month we announced that Quartz was used by TSMC on a complex 28-nm test chip.

In Library Characterization, SiliconSmart ACE is seeing wider adoption. During Q1, DongBu selected SiliconSmart ACE Memory Characterization, released in May, after an extensive competitive benchmark.
In analog/mixed-signal Titan continues to stake out new turf. During Q1 we expanded Titan deployment by 25 percent and have 15 logos so far, with at least a dozen active engagements. In June we announced Titan and FineSim validation for TSMC's first analog/mixed-signal reference flow for 28 nm. Just this week we announced Titan has been qualified for TowerJazz’s reference flow. Increased availability of Titan foundry reference flows and associated PDK support ensures that Titan is the choice for analog/mixed-signal implementation.

And in circuit simulation, FineSim adoption rolls on. We closed several deals with new customers, as well as repeat or expansion orders during the quarter. A particularly gratifying case is the adoption of FineSim by Tezzaron Semiconductor. Tezzaron, an industry leader in cutting-edge memory and 3D ICs, told us that FineSim’s multi-CPU
technology significantly increased their ability to simulate critical circuits and has had an extensive impact on their ability to provide exceptional results to their customers. FineSim provided what they called “a revolutionary jump in simulation speed and capacity over other industry solutions.”

Pete Teshima

After we cover Q1 results I’ll review our updated guidance, which is in the Financial Data Supplement on our website. Unless otherwise noted, all references to expenses, margins and other financials are on a non-GAAP basis.

Revenue for Q1 was $32.6 million, better than our guidance range of $31.0 to $31.5 million. This compares to revenue in the year-ago quarter of $28.8 million and to Q4’s revenue of $33.6 million. In Q1 the percentage of revenue from backlog-related transactions was again greater than 90 percent. Q1 spending for R&D, Sales & Marketing, and G&A totaled $24.8 million, or 76 percent of revenue. Operating income for Q1 was $4.1 million, or 13 percent of revenue. This exceeded our guidance range of 9.5 percent to 10.5 percent of revenue and compared to Q4’s operating income of $4.3 million, or 13 percent of revenue.

We had a tax expense for Q1 of approximately $320 thousand, compared to a tax benefit of $316 thousand in Q4. Q1’s diluted Non-GAAP EPS was $0.05 per share, exceeding our guidance range of $0.02 to $0.03 per share, and compared to Q4’s EPS of $0.06 per share. In Q1 we were cash flow positive on both an operating and free-cash-flow basis and generated $1.4 million in cash from operations. Over the trailing 4 quarters Magma generated a total of $11.7 million in cash from operations, and have generated cash in each of the last 6 quarters. We ended Q1 with total cash and investments, including restricted cash, of $33.3 million, compared to $74.6 million at the end of Q4. This decline was anticipated, and resulted from
the retirement of convertible notes, and the opportunistic repurchase of stock and repayment of other debt.

Accounts receivable was $12.4 million for Q1, compared to $17.4 million for Q4. DSO for Q1 was 34 days, compared to 47 days in Q4. We do not factor our receivables. Wrapping up discussion on the balance sheet, let me update you on our convertible debt. During Q1 we retired $23 million of convertible notes that were due in May 2010 on schedule. We then retired an additional $2.75 million of convertible notes due in 2014. Thus at the end of Q1, Magma had total convertible debt of $23.9 million, all due in May 2014.

During Q2, some note holders expressed an interest in converting their notes. Thus far, notes totaling
$10.7 million in face value have been converted, in exchange for which Magma paid the note holders a portion of the future interest. This reduced both our total debt and our future interest obligations. The total remaining balance of Magma’s convertible notes is now just $13.2 million, all of which is due in May 2014. We finished Q1 with 661 employees compared to 677 at the end of Q4.
Now here is our guidance for fiscal 2011’s second quarter, ending October 31, 2010:

• Revenue in Q2 is expected to be in the range of $33 million to $33.5 million.
• Non-GAAP Operating Margin is expected to be in the range of 13.5 percent to 14 percent.
• Non-GAAP taxes are expected to be $400 thousand to $500 thousand.
• Non-GAAP EPS is expected to be in the range of $0.05 to $0.06.
• Diluted shares outstanding are expected to be in the range of 69.5 million to 70 million shares including the as-if-converted shares of the outstanding 2014 convertible bonds.

Also at this time we are making the following adjustments to full-year guidance for fiscal 2011, ending May 1, 2011:

• Revenue in fiscal 2011 is now expected to be in the range of $132 million to $135 million, an increase from the prior range of $130 million to $133 million.
• Non-GAAP Operating Margin is expected to be in the range of 14 percent to 15 percent, an increase from the prior range of 12.5 percent to 13.5 percent.
• Non-GAAP EPS is expected to be in the range of $0.24 to $0.25 per share, an increase from the prior range of $0.18 to $0.20 per share.
• Diluted shares outstanding are expected to be in the range of 70.5 million to 71.5 million, including the asif-converted shares of the outstanding 2014 convertible bonds, lower than the prior range of 73.0 million to 74.0 million shares.