Magma Design Automation Inc. reported revenue of $29.7 million for its fiscal 2010 second quarter ended Nov. 1, 2009. In accordance with generally accepted accounting principles (GAAP), Magma reported net income of $4.3 million, or $0.09 per share (basic and diluted), for the second quarter, compared to a net loss of $(26.3) million, or $(0.60) per share (basic and diluted), for the year-ago second quarter. Magma’s non-GAAP net income was $1.7 million for the second quarter, or $0.03 per share (basic and diluted), which compares to a non-GAAP net loss of $(6.3) million, or $(0.14) per share (basic and diluted), for the year-ago second quarter.

For Magma’s fiscal 2010 third quarter, ending Jan. 31, 2010, the company expects total revenue in the range of $29.5 million to $30.0 million. GAAP net loss per share is expected to be in the range of $(0.14) to $(0.13) and non-GAAP earnings per share (EPS) are expected to be in the range of $0.02 to $0.03.

Prepared Remarks by Rajeev Madhavan, Chairman and CEO

I’m happy to report a strong second quarter as we turned in another solid financial performance. We finished Q2 with revenue of $29.7 million and non-GAAP EPS of $0.03, both of which beat our guidance ranges. We had GAAP net income of $0.09 per share thanks to an unanticipated tax benefit. And we continued a string of quarters with strong cash flow as we generated $3.9 million in cash in Q2.

I’d like to give you a product update in the context of two key problems our customers wrestle with implementation of complex designs and physical verification. Time to market is a key driver across both of these, requiring automation to handle larger, more complex design problems and still deliver results fast. This requirement
drives the growing adoption of our Talus 1.1 digital implementation system, and the latest Talus news is in logic synthesis.

With yesterday’s announcement of the latest releases of Talus Design and Talus RTL synthesis products, we continue the emphasis on out-of-the-box results that began with the Talus Vortex 1.1 release last May. We’ve made a focused investment in the Talus synthesis solution so users could be productive immediately, achieving the best quality of results out of the box.

Two of the first companies to use these newest products are Xelerated and Adapteva. Xelerated, a leading provider of high-performance network processors, took advantage of the tight integration between Talus Design and Talus Vortex to complete high-performance chips quickly and efficiently. And Adapteva completed their most recent
multimillion-gate 65-nm design in just six 6 weeks. As I said, time to market is critical for our customers.

One new Talus Vortex feature worth noting is our multi-corner low-power clock tree synthesis, a key feature added only recently but one that is already displacing competitors. The need to optimize across multiple design corners is critical at 65nm and below and Talus Vortex concurrently balances circuit delays across corners during clock tree implementation. Talus eliminates timing surprises that often plague traditional flows.

Staying with implementation, planning for large chip projects is a critical part of the design process. Last month we announced Hydra 1.1, the latest version of our advanced chip planning solution. Hydra is a highly automated hierarchical design planner and this latest version offers out-of-the-box reference flows and advanced technology to deliver better floorplans faster.

During our recent series of TechTalk seminars, a key hierarchical design issue that attendees identified is time budgeting. Hydra 1.1 addresses this. It creates timing budgets automatically through continuous refinement based on physical topology and timing criticality. Legacy tools offer approaches that are primarily manual, very time consuming and often inaccurate. Hydra automates this process so designers can apply their expertise to other critical issues.

I mentioned physical verification issues as a major problem designers face, a big challenge as they move to 65nm and smaller process nodes. Customers tell us the incumbent physical verification solutions cause a lot of pain, especially at 45/40nm. In the last 6 months our Quartz DRC/LVS products won all competitive benchmarks using
leading foundry process nodes for 45nm, 40nm, 32nm and 28nm, with a throughput advantage of 3-7 times.

Now an update on our analog progress. In circuit simulation, FineSim’s footprint continues to grow. We added more than 10 new customers last quarter and continue to gain share in the memory and FPGA markets with FineSim Pro consistently delivering accurate results with 3 to 4 times better performance than competitive products. Analog
mixed-signal designers are simulating large top-level designs with FineSim SPICE, which lets them completely validate large designs with a SPICE simulator for the first time. FineSim SPICE and FineSim Pro continue to gain momentum as several customers recently placed additional orders.

In analog/mixed-signal, Titan is having great success. We added five new top mixed-signal customers, four of which also adopted the Titan ADX analog design acceleration solution. Titan ADX takes the guesswork out of analog design and enables circuit optimization and porting in a fraction of the time required by traditional simulation-based
approaches. It shortens the analog design process from weeks to days and cuts power and area by half. And the Titan shape-based router is now being used by two customers to tape out designs at advanced process nodes. So in Q2 we beat our key financial targets and our product adoption continued to spread.

Prepared Remarks by Roy Jewell, President and COO

Let me highlight our expanding product presence in key design segments. In digital
implementation, Talus 1.1’s competitive advantages continue to drive adoption. The latest to select Talus is Wintegra, which selected the platform, Talus Vortex, Talus Design and Talus Power Pro, because it incorporated more functionality in a single chip while reducing power consumption, area and cost. Their transition to the Magma
flow took less than 6 weeks.

Intrinsity implemented the world’s fastest ARM Cortex A8 processor core using Talus Vortex and Talus Power Pro. The core was implemented in Samsung's 45-nm low-power, low-leakage process technology and is being used in the development of standard mobile SoC products. Talus’ placement-aware restructuring and physical optimization
were key to achieving the 1-GHz operating speed on this design.

OK, one more Talus story: Mellanox is a long-time Magma customer. Over the past several years they used Magma to complete multiple complex chips that support high-speed InfiniBand and Ethernet interconnects. Mellanox chose Talus 1.1 for its 40-nm TSMC design flow after extensive evaluation proved it can deliver optimum power and
performance on multimillion-gate designs.

As Rajeev mentioned, Quartz DRC and Quartz LVS are taking share in physical verification. Three of the world’s Top 10 semiconductor companies became Quartz DRC/LVS users in Q2, and last week we announced that Toshiba is deploying the Quartz products for flash memory designs. Toshiba has been using Quartz DRC and Quartz LVS on system LSI designs for over 2 years and confirmed they provide high-capacity, high-speed and highly reliable physical verification. Toshiba standardized on Quartz DRC/LVS after validating their accuracy on 32-nm designs and is now using the products for both static and dynamic physical verification to increase product reliability and
shorten design time on 32-nm flash memory.

In another memory market success, Hynix adopted and deployed FineSim Pro and FineSim SPICE. Hynix standardized on Magma's advanced circuit simulators after an extensive evaluation against a number of commercially available products. The evaluation demonstrated FineSim Pro's ability to deliver performance 3 to 4
times faster than competitive products while increasing accuracy. FineSim SPICE's linear scalability over multiple CPUs produced SPICE-accurate results for large memories. And FineSim Pro is easier to use than other products and achieves excellent out-of-the-box results. As we said last quarter, FineSim is in use at13 of the Top 20 semiconductor companies and adoption is increasing at those accounts.

And finally, as we announced today, Exar adopted the Titan ADX analog migration and optimization software. Exar chose Titan ADX to enable circuit optimization for a given process technology and shorten migration time to different nodes. Titan ADX’s ability to shorten the analog design process and reduce power and area requirements let Exar improve design performance. So use of Magma products continues to grow in our traditional digital as well as analog mixed-signal markets.

Prepared Remarks by Pete Teshima, Magma's CFO

After we cover Q2 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 Q2 was $29.7 million, above our guidance range of $28.5 to $29.0 million. This compares to revenue in the year-ago quarter of $36.5 million and to Q1’s revenue of $28.8 million. In Q2 the percentage of revenue from backlog-related transactions was again greater than 90 percent. Q2 spending for R&D, Sales & Marketing, and G&A totaled $22.9 million, or 77 percent of revenue.

Operating income for Q2 was $3.1 million, or 11 percent of revenue. This was better than our guidance range of 8 percent to 9 percent of revenue and compared to Q1’s operating income of $3.0 million, or 10 percent of revenue. Tax expense for Q2 was $500 thousand, compared to a tax expense of $400 thousand in Q1. Q2’s diluted Non-GAAP EPS was $0.03 per share, better than our guidance range of $0.01 to $0.02 per share and
compared to Q1’s EPS of $0.03 per share. Q2’s result would ordinarily have shown improvement over the prior quarter, but Q1’s non-GAAP EPS was favorably affected by several one-time reductions to cost.

On a GAAP basis, EPS was a profit of $0.09 per share, better than our guidance of a loss in the range of $(0.18) to $(0.17). Although we are pleased with achieving GAAP profitability in Q2 we should point out that this was the result of a one-time benefit related to foreign withholding tax treatment. Non-GAAP-to-GAAP adjustments for Q2
accounted for approximately $0.05 per share on a diluted basis.

We were cash flow positive on both an operating and free-cash-flow basis and generated $3.9 million in cash. This follows the $5.7 million generated in Q1. We ended Q2 with total cash and investments, including restricted cash, of $64.3 million, compared to $62.7 million at the end of Q1.

Accounts receivable was $13.4 million for Q2, compared to $11.3 million for Q1. DSO for Q2 was 42 days, compared to 35 days in Q1. We do not factor our receivables. We finished Q2 with 671 employees compared to 683 at the end of Q1.

Here is our guidance for the third quarter, ending January 31, 2010:

• Revenue in Q3 is expected to be in the range of $29.5 million to $30.0 million.
• Non-GAAP Operating Margin is expected to be in the range of 10 percent to 11 percent.
• Non-GAAP taxes are expected to be $400 thousand to $500 thousand.
• Non-GAAP EPS is expected to be in the range of $0.02 to $0.03.
• Diluted shares outstanding are expected to be in the range of 52.5 million to 53.5 million shares.

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

• Non-GAAP Operating Margin is expected to be in the range of 10 percent to 11 percent, compared to our prior range of 8.5 percent to 9.5 percent.
• Non-GAAP EPS is expected to be in the range of $0.11 to $0.13, compared to our prior range of $0.08 to $0.11.

My Observations

Magma is continuing to recover from its setback of a year ago, but the road to achieve the revenue level of the past remains demanding. The poor worldwide financial conditions, and the stagnant EDA market are not facilitating the job.

The company is in better financial condition then it found itself six months ago, at the beginning of its fiscal year. During this fiscal year time, although the value of its assets has declined by approximately $14 million, Magma has decreased its liabilities by $19 million improving its stockholders equity by almost $5 million.

Magma's fiscal year starts on May 1. The fact that this is Labor Day throughout the world (excluding of course the United States) is probably of no significance. Yet the date has significant impact on the revenue profile of the company. This accounting convention puts Magma in the position of having a better second half of its fiscal year. In fact, Magma's third quarter includes the end of the calendar year, and also the end of the fiscal year for most companies. This means that a significant portion of term licenses will renew during the third quarter. Many more are likely to renew during its fiscal fourth quarter, since March is the traditional start of the fiscal year for Japanese companies. The fact that the company forecasts revenue for the third quarter to be practically equal to those of the second quarter is surprising.

There is no doubt that Magma is managing expenses well, and is investing heavily in R&D. In the first half of its fiscal year, Magma spent 39.19% of its revenue on R&D and this investment level has remained quite consistent for the entire six months. The figure is even more relevant when seen within the overall operating results that show its operating loss declining from $35 to $4.6 million while its revenue declined by $24 million compared with the same six months of the 2008 fiscal year.

With the introduction and acceptance of FineSim, Magma is now a participant in the Verification market segment. This market is growing, and the analog portion of the segment is growing even faster.

During the questions and answers period the company stated that many of its term license agreements are moving from two to three years in duration. This not only has the effect of making future revenue levels more predictable, but also shows that customers have renewed trust in the staying power of the company.