Magma Design Automation, Inc. F2Q09 (Qtr End 11/02/08) Earnings Call Transcript

Magma Design Automation, Inc. (LAVA)

F2Q09 Earnings Call

December 4, 2008 5:00 pm ET

Executives

Milan G. Lazich - Vice President , Corporate Marketing

Rajeev Madhavan - Chief Executive Officer

Roy E. Jewell – President and Chief Operating Officer

Peter S. Teshima - Chief Financial Officer

Analysts

Richard Valera - Needham & Company

Tim Fox – Deutsche Bank

Raj Seth – Cowen and Company

Sterling Auty - J.P. Morgan

Jay Vleeschhouwer - Merrill Lynch

Presentation

Operator

Welcome to Magma’s second quarter fiscal 2009 earnings call. (Operator Instructions) And now I would like to turn the call over to Magma’s Vice President of Corporate Marketing, Milan Lazich.

Milan G. Lazich

Welcome to Magma’s second quarter fiscal 2009 earnings call, hosted by Chairman and CEO, Rajeev Madhavan; President and Chief Operating Officer, Roy Jewell; and CFO, Pete Teshima. Our Q2 earnings release is on Magma’s website and includes a reconciliation of non-GAAP results to GAAP results. The financial data supplement in our website’s Investor Relations section also includes a reconciliation of non-GAAP results to GAAP results, as well as updated financial guidance.

During our call, including the question-and-answer period, we make forward-looking statements within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995, including statements about our expected financial results, current and future products and plans, market share and competition, customer spending trends, market trends and sources of future revenue. These forward-looking statements represent our current judgment of business and operating conditions but are subject to risks and uncertainties that could cause actual results to differ materially from current expectations. In addition to any risks we highlight during this call, other potential risk factors are discussed in today’s earnings press release and in our Form 10-Q for the period ended August 3, 2008. Magma undertakes no additional obligation to update these forward-looking statements.

With that let me turn the call over to Rajeev Madhavan.

Rajeev Madhavan

Good afternoon. By now you’re probably accustomed to earnings calls where management talks about the difficult economy. As all of you know, the semi industry is in a tough environment and it is affecting the EDA industry. But in Q2 Magma put up good numbers, with revenue of $36.5 million and non-GAAP EPS of a loss of $(0.14), both better than our guidance. These results are consistent with the transition we’re making to a highly ratable 90:10 revenue model.

Despite our success in the second quarter, we believe it is prudent for us to adapt our outlook to the realities of the current environment, and we announced today a reduction in our expected revenue for fiscal 2009 to a range of $144.0 million to $146.0 million.

The effects of the economic downturn have been significant for semiconductor companies, which are wrestling with slower growth and reduced capacity utilization. During this uncertainty customers are demonstrating greater conservatism in their forecasts and extreme caution in their spending.

The market’s unpredictability has led us to be conservative and hence the change to our guidance. Pete will provide details on our revised guidance, but it is important to note that we will still expect to reestablish non-GAAP profitability in the fourth quarter, and exit fiscal 2009 on a path towards growth in both revenue and profitability for 2010.

Magma technology continues to prove superiority, and it’s easy to find the products built with a chip designed with Magma. For instance, we know from the recent teardown reports of the Blackberry Bold smart phone that five of the six chip suppliers for the phone are Magma customers and that at least three of the chips in the phone were designed with Magma products. This success, combined with our presence in Apple’s iPhone, Nokia, and HTC phones gives Magma a large percentage of the wireless low-power market.

Other important positive factors for us are our backlog and renewal activity. We entered the fiscal year with a backlog of $390.0 million, an asset that provides an ongoing revenue stream during periods of weakness such as this. Despite our customers’ understandable caution, they recognize the value of Magma technology and continue to renew their agreements. Existing and new customers rely on Magma for their business-critical designs.

We all know the semiconductor industry is dealing with extraordinary challenges. At Magma we are focused on maintaining a strong company until our customers’ business recovers.

Although this isn’t easy, there is no magic remedy. We are taking steps to manage company resources in such a way that we can aggressively develop products that significantly improve our customers’ productivity, so we and they can take advantage of the next business upturn.

We are committed to continue aggressively controlling costs consistent with new bookings and revenue from backlog to achieve our profitability goals. That is how Magma succeeded in our early days and it is how we will succeed in the long term.

Now let me turn the call over to Roy.

Roy E. Jewell

Those of us who spend a lot of time in the field talking to customers know they are not cutting back significantly on their design activity. But they are nonetheless more cautious about spending, even though many have very strong cash positions.

We can’t change the macroeconomic environment, but we are making the necessary management decisions to make sure we can take advantage of the recovery when it comes. On last quarter’s call I outlined four areas of operational focus. Let me update you on our progress.

First, in Q2 we began executing on a new financial plan, including cost reduction and guidance adjustments intended to de-risk revenue and profitability. Further weakness in the environment has prompted us to reassess guidance, but our expectation remains that we will return Magma to meaningful revenue growth and target profitability beginning in Q4.

Second, we set out to reaffirm clear market leadership for Talus and our other key products in digital implementation. Magma is focused on dramatically improving the productivity of Talus, which helps us reduce support cost and also increases design efficiency for our customers.

And recent benchmarks have shown Talus’ superiority over competing solutions. We are happy to say that all our major customers have now adopted Talus. To offer some perspective on market share, we reviewed place and route installations at the largest semiconductor companies in the world and found Magma to be the leading P&R supplier for most of the Top 10. We continue to be the vendor of choice in leading-edge physical design.

Two recent adopters are Impinj, a leading provider of RFID solutions, and Avnera, a fabless developer of chips for wireless audio. Impinj standardized on Magma because we enabled them to significantly reduce turnaround time, area, and power consumption. Avnera selected Magma for our ability to shorten total turnaround time and get finished chips to market faster.

Third, we set out to continue the momentum of our custom design products, especially Titan. The competitive advantages of our Titan and FineSim platforms have been clearly demonstrated. A clear testimony to this is TSMC’s recent purchase of Titan Analog Migration, allowing them to quickly move analog designs from one process node to another. By using Titan AM to design and port analog IP building blocks to new process nodes, TSMC enables its customers and partners to quickly implement designs in TSMC's advanced technologies.

I want to point out that our customers have now taped out production designs using Titan’s chip finishing and routing capabilities.

TSMC also selected FineSim Pro for 65- and 40-nanometer IP development, citing the high degree of confidence FineSim Pro gives to predicting analog IP performance.

And we continue to make progress in physical verification as well, working with Samsung. DFM is the next generation of DRC, and Magma and Samsung have partnered and jointly demonstrated Quartz DFM for automatic detection and repair of manufacturing hotspots. This technology is extremely valuable for high-end designs at 45- and 32-nanometer.

And fourth, we set out to expand our sales channel’s capability and capacity, and we have attracted new members to the Sales organization who have begun to contribute already.

Now let me turn the call over to Pete.

Peter S. Teshima

After we cover second quarter results I will review our updated guidance, which is in the financial data supplement on our website. Unless otherwise noted, during this call all references to expenses, margins, and other financials are on a non-GAAP basis.

Revenue for the second quarter was $36.5 million, above our guidance range of $34.0 million to $35.0 million. This was down 32% from the year-ago quarter and down from the first quarter’s revenue of $45.7 million. In the second quarter, the percentage of revenue from backlog-related transactions was in the high 80s. This compares to the first quarter’s mix of 91% of revenue from backlog-related transactions.

Second quarter spending for R&D, sales & marketing, and G&A totaled $36.8 million, or 101% of revenue.

Operating income for the second quarter was a loss of $(6.1) million or minus 16.8% of revenue. These results were better than our guidance range of minus 23% to minus 22% of revenue, and compared to first quarter operating income of $1.2 million, or 3% of revenue.

Tax expense for the first quarter was $700,000, or 13% of pre-tax income. This compared to $243,000, or 25% of pre-tax income, in the first quarter.

Second quarter’s diluted non-GAAP EPS was a loss of $(0.14) per share, better than our guidance range of a loss between $(0.20) and $(0.18) per share, and as expected was a decrease from first quarter’s $0.02 per share profit.

On a GAAP basis, EPS was a loss of $(0.59) per share, better than our guidance of a loss in the range of $(0.70) to $(0.68). Non-GAAP to GAAP adjustments accounted for approximately $0.45 per share on a diluted basis.

We ended the second quarter with total cash and investments, including restricted cash, of $58.3 million, an increase from $48.2 million at the end of the first quarter. In this environment we are paying considerable attention to the use of cash, just as our customers are, and we are comfortable that our cash levels and financing options available to us are more than sufficient to execute on our near- and longer-term operating plan.

Accounts receivable was $28.3 million for the second quarter, compared to $36.4 million for the first quarter. DSO for the second quarter was 70 days, compared to 73 days in the first quarter, and we do not factor our receivables.

Headcount at the end of the second quarter was 926, down from 1,010 at the end of the first quarter.

And finally, here is our revised guidance for the third quarter, ending February 1, 2009, and revised full-year guidance for fiscal 2009: revenue in the third quarter is expected to be in the range of $28.0 million to $29.0 million; non-GAAP operating margin is expected to be in the range of minus 20% to minus 18%; non-GAAP taxes are expected to be $700,000 to $725,000; non-GAAP EPS is expected to be a loss in the range of minus $0.17 to minus $0.15 per share; and basic shares outstanding are expected to be in the range of 45.0 million to 46.0 million shares.

Our revised guidance for fiscal 2009 is as follows: revenue in fiscal 2009 is expected to be in the range of $144.0 million to $146.0 million, a decrease from the prior range of $158.0 million to $160.0 million; non-GAAP operating margin is expected to be in the range of minus 8% to minus 6%, as compared to the prior range of minus 5% to minus 3%; non-GAAP EPS is expected to be a loss in the range of $(0.29) to $(0.25) per share, as compared to the prior range of $(0.19) to $(0.15) per share; basic shares outstanding are expected to be in the range of 45.0 million to 47.0 million shares, no different from our prior guidance.

Guidance for the third quarter and fiscal 2009 is in the financial data supplement on our website.

Now we would like to open the call for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Richard Valera - Needham & Company.

Richard Valera - Needham & Company

You obviously made the quarter but you reduced the outlook. Can you comment on your bookings expectations for both the quarter and for the year? I think you had been looking for bookings in the $185.0 million to $200.0 million range for fiscal 2009. Have you updated that target?

Peter S. Teshima

We actually have not. I made that comment during the last call. You know, we traditionally, or historically, don’t comment on the current quarter bookings and we are not going to start that today. But rest assured that we will be focused on controlling the costs commensurate with these revenue streams, supplemented with what the current market will give us.

Richard Valera - Needham & Company

And how about your fiscal 2010 guidance, which you had issued last quarter? Understanding long way out, but any update on that or are we differing on that at this point?

Peter S. Teshima

We are. Just given the lack of visibility, we thought it prudent to remove the 2010 to prior-2010 guidance and then give you 2010 guidance during the first quarter as we customarily do. So that’s the path that we are going down.

Richard Valera - Needham & Company

And I see your third quarter guidance implies a very sequential drop in opex. Is that all already done through the RIF you announced mid-quarter or are there more cuts planned?

Peter S. Teshima

The bulk of it is done, from the actions that we did take during the second quarter. So the bulk of it is. There are some actions, also, that we put into place this quarter, which we are embarking on now, but the bulk is done.

Richard Valera - Needham & Company

And with respect to cash and liquidity, can you say what your cash from operations was for the quarter and do you have a projection of cash from operations for all of fiscal 2009?

Peter S. Teshima

What we ended up doing was we ended up using about $1.0 million in cash from a cash flow perspective. That was considerably better. Initially we thought we would use anywhere from $5.0 million to $6.0 million so we did a lot better than we anticipated. I am still expecting to use cash this quarter, in the third quarter, then return to positive cash flow in the fourth quarter. That remains the same.

Richard Valera - Needham & Company

Can you give a more specific number there for the balance of the year?

Peter S. Teshima

Well, I am expecting significant cash usage in the area of $7.0 million to $8.0 million in the third quarter, and then I am expecting to be cash flow positive in the fourth quarter to about $2.0 million to $3.0 million.

Richard Valera - Needham & Company

What is the restricted on your balance sheet? Is that a payment due for an acquisition, or what exactly is that?

Peter S. Teshima

I want to say about 20% of it is due to escrow related to acquisitions and the other $6.0 million or $7.0 million is used to back up our line of credit.

Richard Valera - Needham & Company

And how about the auction rate stuff on your balance sheet? How liquid are those and what is the status of them?

Peter S. Teshima

What we were able to do in the most recent quarter is we were able to free up about 75% of it via a no-cost loan. So we have about $12.5 million in our cash account from it.

Richard Valera - Needham & Company

So that was the secured credit line that showed up on your liabilities section?

Peter S. Teshima

No, we have a line of credit which we also were able to consummate to a firm $15.0 million. So that is separate.

Richard Valera - Needham & Company

There was a new secured credit line for $12.5 million, is that related to the auction rate?

Peter S. Teshima

Yes. What is going on there is that we had about $18.4 million in auction rate securities that were on our books. In order to free up that 75% of that we had to take out effectively a margin account, which is the $12.5 million.

Richard Valera - Needham & Company

So that is against the auction rate securities. And on the competitive front, you seem pretty confident but can you talk about any recent renew history in terms of your run rate? Have you been able to maintain and/or increase run rate in recent renewals. Your sort of trajectory of revenue and bookings would suggest maybe not, but I am eager to hear what you have to say about that.

Roy E. Jewell

Our overall market share with the customers we have today, we see no diminishment with respect to those customers, so when they have renewed we have been able to pretty effectively either gain more receipts or at least maintain our position. In fact, one of our customers who had gone out of the physical implementation and IC design business has come back in so we have actually been able to restore one of the customers that moved out. And they didn’t move to a competitor, they just got out of that part of their business.

So from a competitive point of view we feel quite bullish right now relative to the implementation space and on our analog mixed signal products we are starting to see traction. If you remember, I had mentioned that we have seen production shifts now taped out with the Titan chip finishing product, and that is a major step forward in the analog space, so we are pretty bullish on the product side and we don’t see any reason to believe that our current customers are going to make any switches to other vendors. We are able to get them to renew at least to levels we have been at historically.

Operator

Your next question comes from Tim Fox – Deutsche Bank.

Tim Fox – Deutsche Bank

Just to follow up on the cash question in your commentary earlier about your liquidity. In looking out in 2010, what is your thinking around the convertible notes at this point? Are you intending to try to build up enough cash to pay them down? Obviously you have taken your year fiscal 2010 guidance off so we really don’t have a good sense of cash flow, but what, looking out at this point, might your plans be for that?

Peter S. Teshima

A little background on this for everybody. The converts are about $49.0 million currently and which we have already paid down from about $150.0 million, and it’s due in May 2010 so it’s about 18 months away.

We have been able to handle this pay down opportunistically through significant discounts and we intended to attempt to try to continue to do that, so some of our options are to extend the maturity similar to what we have done previously in 2007. Now, admittedly, the marketyou intending to try to build up enough cash to pay them down? obviously t this point? are retty bullish on the product side and needs to stabilize before we do this, but it is an option for us.

We have looked at secondaries, at term loans, which would be other options. A key point here is taking advantage of the discounts to market is something we are looking at very hard and I think that is the key point.

Tim Fox – Deutsche Bank

So your level of comfort to handle those is still fairly positive at this point?

Peter S. Teshima

Yes.

Tim Fox – Deutsche Bank

Rich mentioned the drop in opex. So you are still planning on exiting the fourth quarter non-GAAP positive. Will that require any additional cost action activity at this point or are you with the activity in the third quarter, will that be sufficient to get you to that profitability?

Peter S. Teshima

No, what it does is it implies a further reduction of expenses in 2009 and we have a plan and we are working the details of that plan now.

Tim Fox – Deutsche Bank

In lowering your guidance, just to be clear, was this an ability to give you better visibility over the next few quarters, given the tough market, or was this in light of some deal push-outs? Can we just get some extra color around the reduced guidance?

Peter S. Teshima

I think the case was just the current business climate in general. Our visibility in the last 45 days, let alone in the last 90, has deteriorated. Until we work through these turbulent economic times, I think it is prudent for us to be conservative and that is the tone that we have taken.

Rajeev Madhavan

Just adding to that, basically there are two or three big deals which under normal circumstances we would have closed and they have not gone away, they may happen in this quarter or in the fourth quarter. Some of them, the products are being used or they actually need to renew it this fiscal year. They may not have to do it this quarter, but they actually have to do it this year.

Tim Fox – Deutsche Bank

And looking at the geographical, it looks like Japan was quite strong in the quarter. Was that just a timing perspective or was there anything there competitively that is going on that might allow you to continue you to show nice share in that region?

Peter S. Teshima

Quarters two and four traditionally for us are stronger in Japan, especially. It is tied to their budgeting cycles more than anything else, so there is some seasonality.

Operator

Your next question comes from Raj Seth – Cowen and Company.

Raj Seth – Cowen and Company

Your revenue guidance suggests a pretty sharp sequential increase in April versus January. What drives that? You have given us a fiscal 2009 revenue estimate for the year. We know two quarters. You have guided January so April is implied. Maybe I did my math wrong but it looks like April needs to be 20% up sequentially. I’m just curious, what drives that.

Peter S. Teshima

The revenue from backlog, out of our backlog component, what it has in it, it’s not linear, let’s put it that way. So we do have some dips in the quarters and the third quarter happens to be lower than the fourth quarter. The fourth quarter, based on the mix of the revenue out of backlog, is higher. And that’s the principle reason for it.

Raj Seth – Cowen and Company

So it’s like due and payable bills are something that are different, right?

Peter S. Teshima

Right.

Raj Seth – Cowen and Company

And what kind of pressure are you seeing right now on terms and maybe you can talk a little bit about what customers are asking for, if anything has changed with regard to the terms they are asking for. Are you seeing people ask for shorter duration deals rather than the three-year traditional deals?

Roy E. Jewell

We are seeing some customers test the water on their options relative to shorter-term deals. I think it is tied directly to their lack of visibility in their own business. That’s the main difference we have seen in the demographics of our negotiations.

Raj Seth – Cowen and Company

And on payment terms, are you granting payment terms, extended payment terms to customers at this point, or is it as it has been?

Roy E. Jewell

I don’t believe that is an issue at all. You have to realize that Magma, as a company, is focused primarily on the larger semiconductor companies and these guys have very strong balance sheets.

Raj Seth – Cowen and Company

What do you expect opex to look like exiting the year? In the April quarter how do I think opex? And maybe you could also just comment on how I think about taxes and other income in the second half of the year. How do I model that?

Peter S. Teshima

You’ve got the full-year number guidance that we have given. I’m expecting operating expenses to be down in the second half about 9%.

Tax levels we are expecting to see about $700,000 per quarter. And under I&E, our best guess at this point is about $300,000 per quarter. That can move around a lot based on FX rate changes, of course.

Operator

Your next question comes from Sterling Auty - J.P. Morgan.

Sterling Auty - J.P. Morgan

I think it was last quarter that you talked about changing up the model in terms of the way that you are dealing with customers, the number of application engineers that are actually on site. Can you give us an update as to are all those changes now complete?

Roy E. Jewell

The quick answer is no. But we are in the process, especially with some of our larger customers, they aren’t looking to have a bunch of Magma guys living on site, so what we are trying to do is build a more efficient, more profitable business model and we have got to do two things. We have got to make our application engineers more efficient and we have got to make our customers’ designers more efficient. So that process continues as we mature our business model.

Rajeev Madhavan

And just to add to that, one of the key things we are doing, especially as [inaudible] has matured over the last six to nine months, is to make the tools much more useable out of the box and we have one or more releases specifically targeted at that. By the January time frame we reach a point where we are in a very good position, which in turn will produce the amount of resources we need to put and our customers need to put in terms of getting their chips out of the door.

Sterling Auty - J.P. Morgan

I think you had also mentioned attracting some new sales people. Can you give us an update on the status of the sales and channel management group? Are you happy with where it is? Are there further changes that need to be made there as well?

Roy E. Jewell

I think you are familiar that Bruce Eastman joined us about six months ago and he has been working to develop more capacity and capability in the channel. We have been able to recruit on the order of, there is about a 20% increase in our sales staff, about 10 people. And those people are coming on.

As I mentioned during my presentation, we have already had some results from the efforts of the new people. Will we continue to build the channel? Yes. And one of the motivations for us to make our application engineers more efficient in each account is because we need to have more engagements with more customers. And this will be an ongoing process and I frankly don’t ever see it ending, going forward.

Sterling Auty - J.P. Morgan

On the product side, you had the comments on TSMC in terms of Titan and analog. Can you give us more detail in terms of either how many customers now have bought Titan or maybe some color as to are the customers that are buying Titan, are they already FineSim customers or is the Titan purchase position separate of that?

Rajeev Madhavan

FineSim, obviously we have been selling for a while and there is a lot customers who are picking it up. At Titan, not all the customers are tied to FineSim and sometimes the clients [inaudible] their relationship on that, but actually the Titan router that Roy talked about, that we have actually taped out the design with a customer who could not route their design using existing [inaudible] in this particular case, and tape out and we actually could do that and there was a tape out that has happened in that.

There is a major fabless company which has used Titan chip finishing for tape out and at least one more fabless company which has used that, so there are a couple of tape outs that have happened. These are customers who [inaudible] what I would consider the first few copies but are really getting to the point where we may lead up to some bigger sales in Titan.

So we are in that stage where it has gone from being an LE product to being used for tape out. Now they need a lot more licenses than what was initially bought and so that is where we are in that product. So we have at least two or three customers in each field of Titan.

The analog migration, we have a huge account in Japan where they use it [inaudible]. The design not only for designing the chip and optimizing the analog logs, but actually even porting it back to order processing, in which they use it for power reduction. So there we have systematic tape outs now. So every piece of the chord has now seen some tape out or the other. And the [inaudible] space is putting it all together where the number of customers who are trying to look at it from a full solutions perspective and it is going very well in terms of that engagement.

So it is not necessarily tied to Titan because Titan only gives it some sort of an account knowledge to go in and sell, but most of the engagements will come in with mixed signal companies, tier-1 and tier -2 mixing or the line houses, which are doing chips.

Roy E. Jewell

My most recent data is we have about 20 major engagements going on with the Titan product and I don’t think any of those were a direct result of using FineSim. They are choosing these two different products on their own merit.

Sterling Auty - J.P. Morgan

It has been a consistent question, or discussion, with the other vendors in terms of when customers are renewing relative to when the contracts are up for expiration and we are getting a variation in terms of what the vendors are approaching it. Can you give us an idea, in terms of the customers where you have got contracts that are up for renewal, are they waiting until the quarter of expiration, are they doing it one or two quarters early? What are you seeing in terms of your dealings with customers?

Roy E. Jewell

I have never seen one of our contracts go to term, ever. Most of them get renewed within one to two years of termination. Usually it’s part of an expansion of the overall installation and that is not changing right now.

Operator

Your next question comes from Jay Vleeschhouwer - Merrill Lynch.

Jay Vleeschhouwer - Merrill Lynch

Could you comment on the resources you are able to bring to bear, specifically for the new custom IC and physical verification businesses, both in terms of R&D and support, and how those resources today might compare to where you were six months or more ago for those new areas.

Rajeev Madhavan

One of the things I have to actually point out is Roy was talking about the digital where we are improving the productivity of the customers. In the mixing world, our tools can actually fit within an existing cadence environment, literally in days. We can port a design which is being driven in either cadence database, EDBA, or open access into our tools in very, very [inaudible] and this is one of the unique things we have done, where our R&D has delivered a product which actually just fits in with the environment. Existing data doesn’t have to be thrown away, completely useable, and it helps in our deployment.

So the amount of R&D has increased in that area, but the productivity there providing the way they are working the software is very unique in that if you are the customer you can migrate or you can do any value. In fact, the earlier design that I talked about was halfway through the engagement or towards the end of it, the tape out where they were having issues and they could actually go in and tape out with us and go back. So it is actually very unique that our technology is in that shape.

So our ratios in terms of application engineering in that area has been [inaudible] in the few quarters before last, but we have not added resources because the product has been driven in such a fashion that it fits within the current environment very beautifully.

Jay Vleeschhouwer - Merrill Lynch

Just to clarify, can you comment on the scale of R&D for the physical verification or DFM area? If that has changed significantly at all.

Rajeev Madhavan

It hasn’t changed significantly. The DFM currently hasn’t changed specifically.

Jay Vleeschhouwer - Merrill Lynch

Once upon a time you had some very specific objectives for IC implementation market share. I am wondering if now for that business, or for any of the new businesses, again specifically custom or DFM, if you still think in terms of some specific market share objectives or not.

Rajeev Madhavan

Given the economic environment it is very difficult to give the exact percentage of these markets but what we have done over the last six to nine, especially in the last nine months to twelve months, is as Talus came along, our expectations on how robust Talus was, clearly we were off on that, our earlier expectations. It took us six months to make sure, more than what we powdered in. But it has now come along. And over the next six months it reaches a point where Talus [inaudible] effects and everything we will be uniquely advantaged by the fact that it is much more easily deployable by the company.

So given that and given the early customer adoptions of analog, it is too early for us to be giving you a traction number but we expect next year to be very good for us in terms of gaining market share, both in the digital front and in the mixed signal design front.

Operator

Your next question is a follow-up from Raj Seth – Cowen and Company.

Raj Seth – Cowen and Company

Can you comment on pricing in this environment? Any material change you see.

Roy E. Jewell

No, the hardest part of this environment is for the customer to have visibility and actually place the orders. So I have not had people being very aggressive in terms of pricing. More they’re just trying to justify why they need tools right now until they know what their design equities are going to be.

Raj Seth – Cowen and Company

To Rajeev’s assertions about market share gain, particularly next year, where do you expect those to come from primarily? Synopsis, Cadence, both? Where do you think your biggest opportunity is?

Rajeev Madhavan

On the analog mixed signal there is only one place, because it is from Cadence. On the digital it is going to be a lot of customers in digital but Magma is so far not being able to [inaudible] the mixing and designers. They buy predominantly analog tools and they have a few places our tools actually do some of the control of the plots in the mixing and design.

To date, Magma has not really been able to sell to that because the amount of digital [inaudible]. The availability of our custom tools and the victory that we are having in these custom tools opens a set of customers that were not really accessible for Magma until that product really reaches maturation.

So we have a large number of engagements which are driven from a different perspective today and that is where the gain is going to come from.

Operator

Your next question is a follow-up from Tim Fox – Deutsche Bank.

Tim Fox – Deutsche Bank

One of your competitors has been talking up the multi-corner, multi-mode capabilities of their implementation tool. Just wondering whether you have been able to cross that chasm at this point, have you been able to close the competitive gap there, what you are seeing from that particular offering out there in the field.

Rajeev Madhavan

Actually, at this juncture, no one has any superiority over Magma and I want to repeat that. No one has any level of superiority over Magma on multi-corner, multi-mode. We are better on time than anybody today on multi-mode, multi-corner. We actually have one customer where it was Magma, used in conjunction with somebody else who did not know multi-mode, multi-corner which had been replaced today with an [inaudible] Magma flow and we expect the second one to be completely replacing all three either this quarter or next quarter.

But there are no advantages in design today by anybody.

Operator

There appear to be no further questions.

Rajeev Madhavan

Thank you for joining us today. On January 7 we will be in New York for Needham’s Growth Stock Conference and hope to see you there. And we will speak with you again at our next quarterly call.

Operator

This concludes today’s conference call.

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