In accordance with generally accepted accounting principles (GAAP), Magma reported a net loss of $(12.4) million, or $(0.34) per share (basic and diluted), for the second quarter, compared to a net loss of $(6.6) million, or $(0.19) per share (basic and diluted), for the year-ago second quarter.
Magma's non-GAAP net income was $2.3 million for the quarter, or $0.06 per share (diluted), which compares to non-GAAP net income of $3.9 million, or $0.10 per share (diluted), for the year-ago second quarter.
Non-GAAP net income for the second quarter of fiscal 2007 excludes the effects of amortization of developed technology, amortization of intangible assets, stock-based compensation, acquisition-related expenses, charges associated with losses in equity investments and the tax effects of these adjustments. A reconciliation of our non-GAAP results to GAAP results is included in this press release.
The costs of Magma's patent litigation with Synopsys continued to have an impact on profitability in the second quarter. Litigation expenses in the second quarter were $1.2 million, or $0.02 per share (diluted), net of tax effect.
"We met or exceeded all our key financial targets for the second quarter," said Rajeev Madhavan, chairman and CEO of Magma. "Our new offerings have been well received and we saw strong performance among all businesses and all regions."
Magma provides non-GAAP financial information to assist investors in assessing its 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 effects 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, 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 25 percent for the second quarter of fiscal 2007) 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, services; (3) total cost of revenue; (4) gross profit; (5) operating expenses, research and development; (6) operating expenses, sales and marketing; (7) operating expenses, general and administrative; (8) operating expenses, amortization of intangible asset; (9) total operating expenses; (10) operating income (loss); (11) other income (expense), net; (12) total interest and other income (expense), net; (13) net income (loss) before income taxes; (14) benefit from (provision for) income taxes; (15) net income (loss) before cumulative effect of change in accounting principle; (16) cumulative effect of change in accounting principle; (17) net income (loss); and (18) 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.
Reconciliation of Second-Quarter GAAP and Non-GAAP Financial Results Statement of Operations Reconciliation Three Months Ended Six Months Ended (in thousands) October October October October 1, 2006 2, 2005 1, 2006 2, 2005 GAAP net loss $(12,421) $(6,620) $(23,134) $(6,643) Amortization of developed technology 7,570 6,264 14,735 10,428 Amortization of intangible assets 2,922 2,882 5,812 6,470 Stock-based compensation 4,119 1,320 9,013 2,992 Acquisition related expenses 751 550 1,603 766 Legal settlement expenses -- 750 -- 750 Net gain on repurchase of convertible notes and loss on sale of marketable securities in conjunction with the repurchase -- -- (4,809) (8,120) Loss on equity investments 153 121 309 511 Cumulative effect of change in accounting principle -- -- (321) -- Tax effect (841) (1,334) (224) 281 ------------------------------------- Non-GAAP net income $ 2,253 $ 3,933 $ 2,984 $ 7,435 ===================================== Earnings/(Loss) Per Share Reconciliation Three Months Ended Six Months Ended October October October October 1, 2006 2, 2005 1, 2006 2, 2005 GAAP net loss per share $ (0.34) $ (0.19) $ (0.64) $ (0.19) Amortization of developed technology 0.21 0.18 0.41 0.31 Amortization of intangible assets 0.08 0.09 0.16 0.19 Stock-based compensation 0.11 0.04 0.25 0.09 Acquisition related expenses 0.02 0.02 0.04 0.02 Legal settlement expenses -- 0.02 -- 0.02 Net gain on repurchase of convertible notes and loss on sale of marketable securities in conjunction with the repurchase -- -- (0.13) (0.24) Loss on equity investments -- -- 0.01 0.01 Cumulative effect of change in accounting principle -- -- (0.01) -- Tax effect (0.02) (0.04) (0.01) 0.01 ------------------------------------- Non-GAAP net income per share (basic) $ 0.06 $ 0.12 $ 0.08 $ 0.22 ===================================== Non-GAAP net income per share (diluted) $ 0.06 $ 0.10 $ 0.07 $ 0.19 ===================================== Basic shares used in calculation 36,140 34,098 35,900 34,115 Diluted shares used in calculation 40,350 39,442 40,474 39,315