Magma Reports Record Revenue of $39.9 Million in Second-Quarter Financial Results

SANTA CLARA, Calif.—(BUSINESS WIRE)—Oct. 27, 2005— Magma Design Automation Inc. (Nasdaq: LAVA), a provider of semiconductor design software, today announced it achieved record revenue of $39.9 million for its 2006 fiscal second quarter, ended Oct. 2, 2005, an increase of 8 percent over the $36.9 million reported for the year-ago second quarter ended Sept. 30, 2004.

GAAP Results

In accordance with generally accepted accounting principles (GAAP), Magma reported a net loss of $6.6 million, or $(0.19) per share (basic and diluted), for the quarter, compared to net income of $0.3 million, or $0.01 per share (basic and diluted), for the year-ago second quarter.

Non-GAAP Results

Magma reported non-GAAP net income of $3.9 million for its fiscal 2006 second quarter, or $0.10 per share (diluted). This compares to a non-GAAP net income of $7.7 million, or $0.18 per share (diluted), for the year-ago second quarter.

Non-GAAP net income for the second quarter of fiscal 2006 excludes the effects of amortization of developed technology, amortization of intangible assets, amortization of deferred stock-based compensation, charges associated with losses in equity investments, legal settlement reserves, acquisition-related expenses, and tax effects of non-GAAP adjustments. Non-GAAP net income for the second quarter of fiscal 2005 excludes the effects of amortization of developed technology, amortization of intangible assets, amortization of deferred stock-based compensation, acquisition related expenses, miscellaneous restructuring and marketing expenses, charges associated with losses in equity investments and tax effects of non-GAAP adjustments. A reconciliation of our non-GAAP results to GAAP results is included in this press release.

"It was another good quarter for Magma -- we again achieved record revenue and all key financial metrics finished within our target ranges," said Rajeev Madhavan, chairman and CEO of Magma. "Our most recently announced products continue to be well received, and customers who presented at our MUSIC users conference in Silicon Valley last month described their use of Magma on very impressive designs -- complex, 65-nanometer chips with high gate counts. These are precisely the kind of designs our products are best suited for."

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, amortization of deferred stock-based compensation, in-process research and development charges, integration and other acquisition-related expenses, workforce realignment restructuring charges, and the tax effects of its non-GAAP adjustments (yielding a non-GAAP effective tax rate of 17 percent for the second quarter of fiscal 2006) and other significant unusual items are not operating costs of its core software and service business operations. Therefore, management adjusts the GAAP financial measures included in this earnings release by excluding the period expenses for these items. The income statement line items affected are as follows: (1) cost of revenue, licenses; (2) cost of revenue, services; (3) total cost of revenue; (4) gross profit; (5) operating expenses, research and development; (6) operating expenses, general and administrative; (7) total operating expenses; (8) operating income (loss); (9) other income (expense), net; (10) total interest and other income (expense), net; (11) net income (loss) before income taxes; (12) benefit from (provision for) income taxes; (13) net income (loss); and (14) 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, excluding these costs 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 to 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.

Reconciliation of Second Quarter GAAP and Non-GAAP Financial Results

Income Statement             Three Months Ended     Six Months Ended
 Reconciliation
(in thousands)               October   September   October   September
                             2, 2005    30, 2004   2, 2005    30, 2004

GAAP net income (loss)     $  (6,620) $     287  $  (6,643) $  (2,248)
Amortization of developed
 technology                    6,264      1,439     10,428      2,738
Amortization of intangible
 assets                        2,882      4,093      6,470      8,568
Amortization of stock-
 based compensation            1,320        118      2,992        580
Acquisition related
 expenses                        550      1,008        766      1,682
Legal settlement reserve         750          -        750          -
Miscellaneous marketing
 expenses                          -        344          -        344
In-process research and
 development                       -          -          -      4,009
Restructuring charge               -        (63)         -        439
Net gain on repurchase of
 convertible notes and
 loss on sale of
 marketable securities in
 conjunction with the
 repurchase                        -          -     (8,120)         -
Loss on equity investments       121          333                511                664
Tax  effect                                        (1,334)                92                281          (1,434)
                                                      ---------------------  ---------------------
Non-GAAP  net  income                $      3,933    $      7,651    $      7,435    $    15,342
                                                      =====================  =====================


Earnings  Per  Share                      Three  Months  Ended          Six  Months  Ended
  Reconciliation
                                                          October      September      October      September
                                                          2,  2005        30,  2004      2,  2005        30,  2004

GAAP  net  income  (loss)          $      (0.19)  $        0.01    $      (0.19)  $      (0.07)
Amortization  of  developed
  technology                                          0.18              0.05              0.31              0.08
Amortization  of  intangible
  assets                                                  0.09              0.12              0.19              0.26
Amortization  of  stock-
  based  compensation                          0.04                    -              0.09              0.02
Acquisition  related
  expenses                                              0.02              0.03              0.02              0.05
Legal  settlement  reserve                0.02                    -              0.02                    -
Miscellaneous  marketing
  expenses                                                    -              0.01                    -              0.01
In-process  research  and
  development                                              -                    -                    -              0.12
Restructuring  charge                              -                    -                    -              0.01
Net  gain  on  repurchase  of
  convertible  notes  and
  loss  on  sale  of
  marketable  securities  in
  conjunction  with  the
  repurchase                                                -                    -            (0.24)                  -
Loss  on  equity  investments                  -              0.01              0.01              0.02
Tax  effect                                          (0.04)                  -              0.01            (0.04)
                                                      ---------------------  ---------------------
Non-GAAP  net  income
  (basic)                                      $        0.12    $        0.23    $        0.22    $        0.46
                                                      ---------------------  ---------------------
Non-GAAP  net  income
  (diluted)                                  $        0.10    $        0.18    $        0.19    $        0.36
                                                      =====================  =====================

Basic  shares  used  in
  calculation                                    34,098          33,734          34,115          33,702
Diluted  shares  used  in
  calculation                                    39,442          42,333          39,315          42,638
 


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