October 11, 2005
VIA FEDERAL EXPRESS AND EDGAR
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Attention: Brad Skinner
| Re: | Magma Design Automation, Inc. |
Form 8-K filed July 28, 2005
File No. 0-33213
Dear Mr. Skinner:
Please refer to your letter, dated September 28, 2005, conveying comments of the staff of the Securities and Exchange Commission (“Commission”) regarding the above-referenced filing of Magma Design Automation, Inc. (“Company”). On behalf of the Company, responses to each of your numbered comments are provided below. Please note that the headings and numbers of the responses set forth below correspond to the headings and numbers of the comments contained in your letter.
Form 8-K Filed July 28, 2005
| 1. | In your press release dated July 28, 2005, the condensed consolidated statements of operations presented includes a number of measures, including non-GAAP cost of revenues, non-GAAP gross profit, non-GAAP income from operations, non-GAAP income before taxes and non-GAAP net income for which you do not appear to have provided the disclosures required by Items 10(e)(1)(C) and 10(e)(1)(D) of Regulation S-K. In this regard, please note that each line item, sub-total, total or other item that has been adjusted represents a separate non-GAAP measure for which clear, specific disclosure is required. Additionally, as your adjustments appear to eliminate recurring items, the following additional disclosure appear necessary: |
| • | the manner in which you use the non-GAAP measure to conduct or evaluate its business; |
| • | the economic substance behind your decision to use such a measure; |
| • | the material limitations associated with use of the non-GAAP financial measure; |
Securities and Exchange Commission
October 11, 2005
Page 2
| • | the manner in which you compensate for these limitations when using the non-GAAP financial measure; and |
| • | the substantive reasons why you believe the non-GAAP financial measure provides useful information to investors. |
The Company has reviewed the requirements of Items 10(e)(1)(C) and 10(e)(1)(D) of Regulation S-K and proposes to provide revised disclosure to address this comment in future filings where applicable. The Company expects that its next filing to include non-GAAP financial measures will be an Item 2.02 Form 8-K for the fiscal quarter ended October 2, 2005, which the Company expects to file on or about October 27, 2005. As requested in comment 2, the Company has provided the form of its proposed new disclosure, revised to take account of this comment, with this response letter for the staff’s review. Please refer toAttachment A, which is a version of the July 28 press release revised to show how the Company proposes to respond to this comment in the future.
| 2. | For further guidance, refer to Question 8, of Frequently Asked Questions Regarding the Use of Non-GAAP Financial Measures. Tell us in specific detail how you intend to address these matters in future filings. As part of your response, consider providing us with example disclosure. |
The Company has reviewed the FAQ and proposes to make the additional disclosure included inAttachment A under the caption “GAAP Reconciliation.”
| 3. | You also disclose non-GAAP financial information which is reconciled to GAAP historical results on a per share basis only. These reconciliations should be expanded to include operating income (loss) and net income (loss). |
As discussed with the staff telephonically, the Company believes this staff comment to be a reference to the table formerly titled “Impact of Known Non-GAAP Adjustments on Forward-Looking Diluted Net Income Per Share.” This table is intended to provide a forward-looking, not a historical, disclosure. The Company has revised this presentation by changing the title of the table to be “Impact of Known Non-GAAP Adjustments on Forward-Looking Diluted Net Income and Earnings per Share” and adding another table under this caption that expresses the information in terms of non-GAAP net income, reconciled to diluted net loss. The Company believes that historical non-GAAP net income per share, non-GAAP net income (loss) and non-GAAP operating income (loss) are reconciled to their GAAP equivalents in the table that presents the historical results for the quarter, earlier in the press release. Please refer to the draft disclosure atAttachment A.
* * *
Securities and Exchange Commission
October 11, 2005
Page 3
As requested, please be advised that the Company acknowledges the following:
| • | the Company is responsible for the adequacy and accuracy of the disclosure in the filing; |
| • | staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filing; and |
| • | the Company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States. |
Should the staff have additional questions or comments regarding the foregoing, please do not hesitate to contact the undersigned at (650) 335-7934, or, in my absence, Lara Mataac of this office at (650) 335-7644.
Very truly yours,
Horace Nash
Enclosures
| cc | Greg Walker, Magma Design Automation, Inc. |
Beth Roemer, Magma Design Automation, Inc.
Lara Mataac, Fenwick & West LLP
| Magma Reports Financial Results for First Quarter Fiscal Year 2006 | Page 1 |
News Release
| CONTACTS: | ||
| Magma Design Automation Inc.: | ||
| Monica Marmie | Milan G. Lazich | |
| Marketing Communications Manager | Vice President, Corporate Marketing | |
| (408) 565-7689 | (408) 565-7706 | |
| monical@magma-da.com | milan.lazich@magma-da.com | |
Magma Reports Financial Results for First Quarter – Record Revenue of $38.8 Million
SANTA CLARA, Calif., July 28, 2005 — Magma Design Automation Inc. (Nasdaq: LAVA), a provider of semiconductor design software, today announced it achieved record revenue of $38.8 million for its 2006 fiscal first quarter, ended July 3, 2005, an increase of 8 percent over the $36.0 million reported for the year-ago first quarter ended June 30, 2004.
GAAP Results
In accordance with generally accepted accounting principles (GAAP), Magma reported a net loss of $(23,000), or $(0.00) per share (basic and diluted), for the quarter, compared to a net loss of $(2.5) million, or $(0.08) per share (basic and diluted), for the year-ago first quarter.
Non-GAAP Results
Magma reported non-GAAP net income of $3.5 million for fiscal 2006’s first quarter, or $0.09 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 first quarter. Non-GAAP net income for the first quarter of fiscal 2006 reflects reported net income excluding the effects of amortization of developed technology, amortization of intangible assets, amortization of stock-based compensation, charges associated with losses in equity investments, gain on repurchase of convertible notes and loss on sale of marketable securities in conjunction with the convertible notes repurchase and tax effect of non-GAAP adjustments. Non-GAAP net income for the first quarter of fiscal 2005 excludes the effects of amortization of developed technology, amortization of intangibles, amortization of deferred stock-based compensation, in-process research and development, restructuring charges, charges associated with losses in equity investments and the tax effect of non-GAAP adjustments. A reconciliation of our non-GAAP results to GAAP results is included in this press release.
“It was a good quarter for Magma – all key financial metrics finished in the high end of our target ranges and we completed the rollout of the new products developed as part of our Cobra initiative,” said Rajeev Madhavan, chairman and CEO of Magma. “Early feedback from users of our latest products has been very positive. I’m very pleased with our execution in the first quarter in terms of both financial performance and product delivery.”
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 certain 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, restructuring charges, and the tax effects of its non-GAAP adjustments (yielding a non-GAAP effective tax rate of 19% for the first quarter of 2006) and other significant unusual items are not operating costs of its core software and service business operations. Therefore, management adjusts the following GAAP financial measures included in this earnings release by excluding those costs, to the extent incurred in a particular quarter: cost of revenue (licenses), cost of revenue (services), total cost of revenue, gross profit, operating expenses (research and development), total operating expenses, operating income (loss), other income (expense), net, total interest and other income (expense), net, net income (loss) before income taxes, provision for income taxes, net income (loss), and 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 First Quarter GAAP and Non-GAAP Financial Results
Income Statement Reconciliation
| Three Months Ended | ||||||||
(in thousands) | July 3, 2005 | June 30, 2004 | ||||||
GAAP net loss | $ | (23 | ) | $ | (2,535 | ) | ||
Amortization of developed technology | 4,164 | 1,299 | ||||||
Amortization of intangible assets | 3,588 | 4,475 | ||||||
Amortization of stock based compensation | 1,672 | 462 | ||||||
Acquisition related expenses | 216 | 674 | ||||||
In-process research and development | — | 4,009 | ||||||
Restructuring charge | — | 502 | ||||||
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 | 390 | 331 | ||||||
Tax effect | 1,615 | (1,526 | ) | |||||
Non-GAAP net income | $ | 3,502 | $ | 7,691 | ||||
| Earnings Per Share Reconciliation | ||||||||
| Three Months Ended | ||||||||
| July 3, 2005 | June 30, 2004 | |||||||
GAAP net loss | $ | — | $ | (0.06 | ) | |||
Amortization of developed technology | 0.11 | 0.03 | ||||||
Amortization of intangible assets | 0.09 | 0.10 | ||||||
Amortization of stock based compensation | 0.04 | 0.01 | ||||||
Acquisition related expenses | 0.01 | 0.02 | ||||||
In-process research and development | — | 0.09 | ||||||
Restructuring charge | — | 0.01 | ||||||
Net gain on repurchase of convertible notes and loss on sale of marketable securities in conjunction with the repurchase | (0.21 | ) | — | |||||
Loss on equity investments | 0.01 | 0.01 | ||||||
Tax effect | 0.04 | (0.03 | ) | |||||
Non-GAAP net income | $ | 0.09 | $ | 0.18 | ||||
Basic shares used in calculation | 34,132 | 33,671 | ||||||
Diluted shares used in calculation | 39,185 | 43,286 | ||||||
Business Outlook
For Magma’s fiscal 2006 second quarter, ending Oct. 2, 2005, the company expects total revenue in the range of $37 million to $41 million. Non-GAAP earnings per share (EPS) is expected to be in the range of $0.08 to $0.12, and GAAP net loss per share is expected to be in the range of $(0.13) to $(0.17). A schedule showing a reconciliation of the projected non-GAAP EPS to GAAP projections is included in this release. A Financial Data Supplement containing detailed financial information intended to provide guidance and further insight into our business is available online at http://investor.magma-da.com/supplement.cfm in the Investor Relations section of the Magma website.
Conference Call
Magma will discuss the financial results for the recently completed quarter, including guidance going forward, during a live webcast and earnings call today at 1:30 p.m. PDT. The call will be available live by
both webcast and telephone. To listen live via webcast, visit the Investor Relations section of Magma’s website at http://investor.magma-da.com/home.cfm. To listen live via telephone call either of the numbers below:
U.S. & Canada: (800) 661-8947, conference ID #7608129
Elsewhere: (706) 634-2358, conference ID #7608129
Following completion of the call, a webcast replay of the call will be available at http://investor.magma-da.com/home.cfm through Aug. 4, 2005. Those without Internet access may listen to a replay of the call by telephone through Aug. 4 by calling:
U.S. & Canada: (800) 642-1687, conference ID #7608129
Elsewhere: (706) 645-9291, conference ID #7608129
Forward-Looking Statements
This press release contains forward-looking statements within the meaning of the “safe harbor” provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements in the “Business Outlook” section. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from Magma’s current expectations. Factors that could cause or contribute to such differences include, but are not limited to: competition in the EDA market; Magma’s ability to integrate acquired businesses and technologies; potentially higher-than-anticipated costs of litigation; potentially higher-than-anticipated costs of compliance with regulatory requirements, including those relating to internal control over financial reporting; any delay of customer orders or failure of customers to renew licenses; weaker-than-anticipated sales of Magma’s products and services; weakness in the semiconductor or electronic systems industries; the ability to manage expanding operations; the ability to attract and retain the key management and technical personnel needed to operate Magma successfully; the ability to continue to deliver competitive products to customers; and changes in accounting rules. Further discussion of these and other potential risk factors may be found in Magma’s public filings with the Securities and Exchange Commission (www.sec.gov). Magma undertakes no additional obligation to update these forward-looking statements.
About Magma
Magma provides leading software for designing highly complex integrated circuits while maximizing Quality of Results with respect to area, timing and power, and at the same time reducing overall design cycles and costs. Magma provides a complete RTL-to-GDSII design flow that includes prototyping, synthesis, place & route, and signal and power integrity chip design capabilities, capacitance extraction, design for test (DFT), physical verification (DRC/LVS), static and statistical timing analysis and characterization and modeling in a single executable, offering “The Fastest Path from RTL to Silicon”™. Magma’s software also includes products for advanced logical, physical synthesis and architecture development tools for programmable logic devices (PLDs), FPGAs and Structured ASICs; capacitance extraction; and characterization and modeling. The company’s stock trades on Nasdaq under the ticker symbol LAVA. Visit Magma Design Automation on the Web at www.magma-da.com.
Magma is a registered trademark and “The Fastest Path from RTL to Silicon” is a trademark of Magma Design Automation. All other product and company names are trademarks and registered trademarks of their respective companies.
MAGMA DESIGN AUTOMATION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
| July 3, 2005 | March 31, 2005 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 38,545 | $ | 20,622 | ||||
Restricted cash | 274 | 2,950 | ||||||
Short-term investments | 43,696 | 114,896 | ||||||
Accounts receivable, net | 35,052 | 33,851 | ||||||
Prepaid expenses and other current assets | 6,347 | 7,088 | ||||||
Total current assets | 123,914 | 179,407 | ||||||
Property and equipment, net | 22,004 | 21,309 | ||||||
Intangibles, net | 91,260 | 69,573 | ||||||
Goodwill | 43,012 | 43,194 | ||||||
Restricted cash | 3,543 | — | ||||||
Other assets | 4,535 | 5,741 | ||||||
Total assets | $ | 288,268 | $ | 319,224 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 2,201 | $ | 3,010 | ||||
Accrued expenses | 29,724 | 22,321 | ||||||
Deferred revenue, current | 21,267 | 20,745 | ||||||
Total current liabilities | 53,192 | 46,076 | ||||||
Convertible subordinated notes | 105,500 | 150,000 | ||||||
Other long-term liabilities | 5,852 | 1,749 | ||||||
Total non-current liabilities | 111,352 | 151,749 | ||||||
Total liabilities | 164,544 | 197,825 | ||||||
Stockholders’ equity: | ||||||||
Common stock | 4 | 4 | ||||||
Additional paid-in capital | 278,333 | 261,627 | ||||||
Deferred stock-based compensation | (4,984 | ) | (5,749 | ) | ||||
Accumulated deficit | (115,667 | ) | (115,644 | ) | ||||
Treasury stock at cost | (32,651 | ) | (16,606 | ) | ||||
Accumulated other comprehensive loss | (1,311 | ) | (2,233 | ) | ||||
Total stockholders’ equity | 123,724 | 121,399 | ||||||
Total liabilities and stockholders’ equity | $ | 288,268 | $ | 319,224 | ||||
MAGMA DESIGN AUTOMATION, INC.
NON-GAAP CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
IMPACT OF NON-GAAP ADJUSTMENTS ON REPORTED NET LOSS
(in thousands, except per share data)
(Unaudited)
For the Quarter Ended July 3, 2005 | For the Quarter Ended June 30, 2004 | |||||||||||||||||||||||
| GAAP Basis | Adjust- ments | Non-GAAP Basis | GAAP Basis | Adjust- ments | Non-GAAP Basis | |||||||||||||||||||
Revenue: | ||||||||||||||||||||||||
Licenses | $ | 33,910 | $ | — | $ | 33,910 | $ | 30,892 | $ | — | $ | 30,892 | ||||||||||||
Services | 4,922 | — | 4,922 | 5,137 | — | 5,137 | ||||||||||||||||||
Total revenue | 38,832 | 38,832 | 36,029 | — | 36,029 | |||||||||||||||||||
Cost of revenue: | ||||||||||||||||||||||||
Licenses | 4,414 | (4,164 | ) | 250 | 1,308 | (1,299 | ) | 9 | ||||||||||||||||
Services | 3,857 | — | 3,857 | 3,734 | (4 | ) | 3,730 | |||||||||||||||||
Total cost of revenue | 8,271 | (4,164 | ) | 4,107 | 5,042 | (1,303 | ) | 3,739 | ||||||||||||||||
Gross profit | 30,561 | 4,164 | 34,725 | 30,987 | 1,303 | 32,290 | ||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Research and development | 10,975 | (216 | ) | 10,759 | 9,569 | (674 | ) | 8,895 | ||||||||||||||||
In-process research and development | — | — | — | 4,009 | (4,009 | ) | — | |||||||||||||||||
Sales and marketing | 11,202 | — | 11,202 | 11,267 | — | 11,267 | ||||||||||||||||||
General and administrative | 8,613 | — | 8,613 | 3,625 | — | 3,625 | ||||||||||||||||||
Amortization of intangible assets | 3,588 | (3,588 | ) | — | 4,475 | (4,475 | ) | — | ||||||||||||||||
Amortization of stock-based compensation | 1,672 | (1,672 | ) | — | 458 | (458 | ) | — | ||||||||||||||||
Restructuring charge | — | — | — | 502 | (502 | ) | — | |||||||||||||||||
Total operating expenses | 36,050 | (5,476 | ) | 30,574 | 33,905 | (10,118 | ) | 23,787 | ||||||||||||||||
Operating income (loss) | (5,489 | ) | 9,640 | 4,151 | (2,918 | ) | 11,421 | 8,503 | ||||||||||||||||
Interest and other income (expense): | ||||||||||||||||||||||||
Interest income | 660 | — | 660 | 553 | — | 553 | ||||||||||||||||||
Interest expense | (208 | ) | — | (208 | ) | (246 | ) | — | (246 | ) | ||||||||||||||
Other income (expense), net | 7,450 | (8,120 | ) | (280 | ) | (562 | ) | 331 | (231 | ) | ||||||||||||||
| 390 | ||||||||||||||||||||||||
Total interest and other income (expense), net | 7,902 | (7,730 | ) | 172 | (255 | ) | 331 | 76 | ||||||||||||||||
Net income (loss) before income taxes | 2,413 | 1,910 | 4,323 | (3,173 | ) | 11,752 | 8,579 | |||||||||||||||||
Provision for income taxes | (2,436 | ) | 1,615 | (821 | ) | 638 | (1,526 | ) | (888 | ) | ||||||||||||||
Net income (loss) | $ | (23 | ) | $ | 3,525 | $ | 3,502 | $ | (2,535 | ) | $ | 10,226 | $ | 7,691 | ||||||||||
Net income (loss) per share – basic | $ | (0.00 | ) | $ | 0.10 | $ | (0.08 | ) | $ | 0.23 | ||||||||||||||
Net income (loss) per share – diluted* | $ | (0.00 | ) | $ | 0.09 | $ | (0.08 | ) | $ | 0.18 | ||||||||||||||
Shares used in calculation: | ||||||||||||||||||||||||
Basic | 34,132 | 34,132 | 33,671 | 33,671 | ||||||||||||||||||||
Diluted* | 34,132 | 39,185 | 33,671 | 43,286 | ||||||||||||||||||||
| * | Gives effect to the potential issuance of common stock upon conversion of convertible subordinated notes and to the effect of all dilutive potential common shares outstanding during the period, including stock options, using the treasury stock method |
| Magma Reports Financial Results for First Quarter Fiscal Year 2006 | Page 10 |
MAGMA DESIGN AUTOMATION, INC.
AS OF JULY 3, 2005
IMPACT OF KNOWN NON-GAAP ADJUSTMENTS ON FORWARD-LOOKING DILUTED NET
INCOME AND EARNINGS PER SHARE
(Unaudited)
| Quarter Ending Oct. 2, 2005 | ||
GAAP diluted net loss per share | $(0.20) to $ (0.16) | |
Amortization of developed technology and intangibles | $0.23 | |
Amortization of deferred stock-based compensation | $0.02 | |
Tax effect | $0.03 | |
Non-GAAP diluted net income per share | $0.08 to $0.12 | |
(in millions) | Quarter Ending Oct. 2, 2005 | |
GAAP diluted net loss | $ (8) to $ (6) | |
Amortization of developed technology and intangibles | $9 | |
Amortization of deferred stock-based compensation | $1 | |
Tax effect | $1 | |
Non-GAAP diluted net income | $3 to $5 | |
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