Magma Design Automation Inc. reported revenue of $31.0 million for its fiscal 2010 third quarter ended Jan. 31, 2010, above the company’s guidance range of $29.5 million to $30.0 million. Third-quarter revenue increased 1 percent from the $30.7 million reported for the year-ago third quarter ended Feb. 1, 2009.

During the conference call Rajeev delivered the following remarks. I’m happy to report a strong third quarter as we finished with revenue of $31 million, non-GAAP EPS of $0.04 and non-GAAP operating margin of 12 percent, all of which exceeded our guidance ranges. Once again, more than 90 percent of revenue came from backlog in our highly ratable revenue model. At the beginning of fiscal 2010 we said we expected bookings would exceed $120 million, and we now believe bookings will exceed $130 million.

Our MUSIC users conference will be held in San Jose in less than 2 weeks. We use that forum to address how we see the world of chip design changing. To that end I will say here that we foresee a day when our customers face a very different set of design challenges. We all know that for some time it has been insufficient to think of digital design and analog design in isolation. But today it’s clear that even the concept of “mixed signal” has become horse- and- buggy thinking. Digital SoCs are evolving into Mixed Signal SoCs. Providing productivity in such a complex environment was a challenge we took up.

Whereas analog at one time was of limited concern to digital designers, in today’s real world of wireless mobile devices and similar advanced systems, its increasing presence creates a new range of problems that confront designers. A description I read recently painted this real world as one where cell phones, widespread computing and home networks have created a true “electronic ocean” where the line between analog and digital design is rapidly disappearing and design reuse is still in its infancy. Leaving aside the challenges of designing these chips, simulation and verification of these complex systems can absorb a large percentage of the design cycle. Needless to say, costs
are growing rapidly and it is encumbent on our industry to provide automated solutions that address this new reality of chip design.

This is what is driving our product direction and development. Over the past few years our investments in both our analog/custom and digital platforms have enabled us to complete the transition to being a full mixed-signal solution provider. In addition to our R&D group’s industry-best work in digital design, we have had major deployments in
growth markets of analog design, simulation and physical verification. A few highlights.
In our core area of digital technology, the Talus 1.1 release last May proved to solve a lot of problems designers are wrestling with. Talus is Plan of Record for three fabless IC companies working on designs at the 28-nm process node. Among them is one of the world’s largest providers of wireless ICs, which uses Talus as its primary place &
route solution and has used it to complete 15 tapeouts already.

We continue to invest heavily in our Talus digital implementation product line and will be delivering major productivity improvements in the first half of 2010 that will help design teams complete complex designs with even shorter turnaround times. In addition, we are continuously improving Talus’ ability to deliver high-performance designs, reduce silicon area and optimize for low power. It is worth noting that designing for low power is now a requirement for almost all chip designs and this is an area where we have demonstrated leadership and continue to expand our capabilities.

In analog/mixed-signal, our Titan platform enables analog designers to operate as highly skilled analog designers. Titan ADX makes it possible to reduce design time by 30 percent and enables reuse of commonly used analog building blocks. The Titan Shape-Based Router delivers better QOR than any other mixed-signal router on the market and better automation than hand routing. Titan is gaining market momentum. So across our product line we are seeing a payoff from recent development efforts. And we expect to release new productivity-enabling products at MUSIC, followed by an across-the-board product update for DAC. Stay tuned.

I’d like to mention two changes to our board of directors. Tim Ng is leaving the board after nearly seven years of service, and we thank him for providing invaluable counsel over that period. As Tim departs we are fortunate to welcome a new member to the board. As we announced today, Govind Kizhepat of Qlogic joins Magma’s board of directors, and we look forward to benefiting from his perspective.

The Numbers

Pete Teshima presented the details of the financial results and the updated guidance for the fourth quarter and the fiscal year. His statement follows.

After we cover Q3 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 Q3 was $31 million, above our guidance range of $29.5 to $30.0 million. This compares to revenue in the year-ago quarter of $30.7 million and to Q2’s revenue of $29.7 million. In Q3 the percentage of revenue from backlog-related transactions was again greater than 90 percent.

Q3 spending for R&D, Sales & Marketing, and G&A totaled $23.4 million, or 75 percent of revenue. Operating income for Q3 was $3.7 million, or 12 percent of revenue. This exceeded our guidance range of 10 percent to 11 percent of revenue and compared to Q2’s operating income of $3.1 million, or 11 percent of revenue.
Tax expense for Q3 was approximately $700 thousand, compared to a tax expense of $500 thousand in Q2. Q3’s diluted Non-GAAP EPS was $0.04 per share, exceeding our guidance range of $0.02 to $0.03 per share, and compared to Q2’s EPS of $0.03 per share.

We were cash flow positive on both an operating and free-cash-flow basis and generated $4 million in cash from operations. Over the trailing 4 quarters Magma has generated a total of $19.1 million in cash from operations. We ended Q3 with total cash and investments, including restricted cash, of $67.3 million, compared to $64.3 million at
the end of Q2.

Accounts receivable was $19.4 million for Q3, compared to $13.4 million for Q2. DSO for Q3 was 56 days, compared to 42 days in Q2. We do not factor our receivables.
We finished Q3 with 673 employees compared to 671 at the end of Q2.

Here is our guidance for the fourth quarter, ending May 2, 2010:

• Revenue in Q4 is expected to be in the range of $32.5 million to $33.0 million.
• Non-GAAP Operating Margin is expected to be in the range of 11 percent to 12 percent.
• Non-GAAP taxes are expected to be $500 thousand to $600 thousand.
• Non-GAAP EPS is expected to be in the range of $0.03 to $0.04.
• Diluted shares outstanding are expected to be in the range of 54.5 million to 55.2 million shares, or 69.3 million to 70.0 million shares including the as-if-converted shares of the outstanding 2014 convertible bonds.

We are also updating fiscal 2010 full-year guidance as follows:

• Revenue for fiscal 2010 is expected to be in the range of $122.0 million to $122.5 million, compared to the prior range of $120 million to $125 million.
• Non-GAAP EPS for fiscal 2010 is expected to be in the range of $0.13 to $0.14, compared to the prior range of $0.11 to $0.13.
• With regard to bookings, at the beginning of fiscal 2010 I said we expected current-year bookings to be in excess of $120 million for the year. Today we are increasing that forecast and now expect current-year bookings to be in excess of $130 million for fiscal 2010.