Magma Reports Second-Quarter Revenue of $42.0 Million

SANTA CLARA, Calif.—(BUSINESS WIRE)—October 26, 2006— Magma Design Automation Inc. (Nasdaq: LAVA), a provider of semiconductor design software, today reported revenue of $42.0 million for its fiscal 2007 second quarter, ended Oct. 1, 2006. This represented an increase of 5.2 percent over the year-ago second-quarter revenue of $39.9 million.

GAAP Results

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.

Non-GAAP Results

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."

GAAP Reconciliation

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

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