Magma Design Automation, Inc. F1Q10 (Qtr End 08/02/09) Earnings Call Transcript

Magma Design Automation, Inc. (LAVA)

F1Q10 Earnings Call

August 27, 2009 5:00 pm ET

Executives

Milan G. Lazich – Vice President Corporate Marketing

Rajeev Madhaven – Chairman of the Board & Chief Executive Officer

Roy E. Jewell – President, Chief Operating Officer & Director

Peter S. Teshima – Chief Financial Officer & Corporate Vice President Finance

Analysts

Richard Valera - Needham & Company

Presentation

Operator

Welcome to Magna’s first quarter fiscal 2010 earnings call. All lines have been placed on mute and we ask that all participants turn off wireless communication devices to prevent background noise. After the speaker’s remarks there will be a question and answer session. (Operator Instructions) Here is Magma’s Vice President of Corporate Marketing Milan Lazich.

Milan G. Lazich

Welcome to Magma’s fiscal 2010 first quarter earnings call hosted by Chairman and CEO Rajeev Madhaven; President and Chief Operating Officer Roy Jewell; and CFO Pete Teshima. Our Q1 earnings release is on Magma’s website and includes a reconciliation of non-GAAP results to GAAP results. The financial data supplement at our website’s investor relations section also includes a reconciliation of non-GAAP results to GAAP results as well as updated financial guidance. Unless otherwise noted, during this call all references to expenses, margins and other financials are on a non-GAAP basis.

Please note that 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 and that actual results may differ materially from expectation. For information on factors that could cause a difference in our results, please refer to our Form 10K for the fiscal year ended May 3, 2009 to Magma’s subsequent and future filings with the Securities & Exchange Commission and to the cautionary statements related to the forward-looking statements in today’s earnings press release. Magma undertakes no additional obligation to update these forward-looking statements.

With that, let me turn the call over to Rajeev Madhaven.

Rajeev Madhaven

In the first quarter Magma generated revenue of $28.8 million, above our guidance range and we again exceeded our 90/10 revenue mix target. EPS and operating margins finished better than our guidance and we generated $5.7 million in cash. As for our customers and their business, this week Gartner announced the semiconductor market has performed better than expected and so they increased their 2009 revenues estimate. At Magma we see an increase in the number of chip starts particularly [inaudible] that had been put on hold during the economic down turn. Those projects are being restarted now.

Our customers remain focused on reducing manufacturing costs and continue to shrink their designs. This creates an opportunity for Magma and work that our R&D teams completed in the last 18 months positions us to take advantage. Let me update you on some of that work and the business prospects it created. In digital implementation Talus’ 1.1 losers provide that it is better suited for big chips and advanced geometries than our competitive tool.

On Monday we announced that we are now past the 50 day point part, actually we are well past it for designs as a 45 and 40 nanometer node. Nearly all the first 50 chips completed with Magna were take out by companies in the top 20 semiconductor companies worldwide. The world’s technology leaders use Magma for technology design of these advanced nodes and are already preparing for 32/28 nanometer geometry.

In physical verification demand for demand for ports is increasingly dramatically as we see customers transition to 40 nanometer nodes where legacy tools [struggles] more than capacity and turnaround time. We took the initial step of allowing prospecting users to try the products free for 60 days and that generated significant interest. In fact, one of our competitors from Oregon tried to download it to try it out for themselves. We declined that particular unusual request but in a minute Roy will describe how we turned interest from others in to business for the reasons such as of course we’re very confident in physical verification a $235 million market in 2008.

[Inaudible] continues to roll it’s [inaudible] simulation and it’s used at 13 of the top 20 semiconductor companies. We have expanded our presence in the memory market as several of the top DRAM, [inaudible] providers have now adopted and deployed points FineSlim SPICE. In July, we released a new version of the FineSlim Pro, our fast SPICE engine which can now scale on multiple CPUs. FineSlim Pro gives the fast SPICE market the same advantages we already provided with SPICE market with FineSlim. FineSlim SPICE and FineSlim Pro makes us the clear technology leader in the $325 million market of circuit simulation.

Finally, analog implementation; [inaudible] back I saw an article that said we sure have a lot of companies trying [defeat] Cadence in the $200 plus million market, analog design market and the writer wondered if anyone would succeed. I can tell you that Magma is succeeding. It’s Titan mixed signal platform now includes a state of art analog simulation environment and schematic driven layout capabilities. The Titan layout platform has been adopted by leading semiconductor companies including our first replacement of Cadence in the first quarter.

So, in the first quarter we beat our key financial markets and our product development team effort and continued to build on our technology leadership. Now, here’s Roy.

Roy E. Jewell

On our last call I mentioned three key performance indicators for the year. That was: deployment, momentum with FineSlim and Quartz and further adoption of the Titan platform. Let me touch on how we faired against each of these during Q1. First, Talus successes in Q1, there were many. Toshiba is deploying Talus to its design centers worldwide for designing high speed at 90, 65 and 40 nanometer. Toshiba first deployed Magma’s design implementation software in Toshiba’s Apex flows in 2001 and now has finished multiple designs including 40 nanometer tape outs using Talus.

These silicons selected Talus to implement designs with as many as 400 million gates because of Talus’ capacity and their need to minimize deployment time and shorten the implementation cycle. XMOS’ taped out its new XCore processor chip using Talus 1.1. XMOS had upgraded to the latest version of Talus to take advantage of Talus Core, our proprietary current optimization routing engine in Talus 1.1. Furthermore, Talus is being adopted or endorsed by key members o the semiconductor community.

During DAC Magma and TSMC announced Talus’ inclusion in TSMC’s Reference Flow 10.0 offering mutual customers differentiated design and process technologies that improve power, performance and design for manufacture ability of 28 nanometer ICs. Talus is also part of a lower power reference flow by UMC for 40 nanometer processes and STARC the influential Japanese semiconductor consortium selected Talus after a multivendor evaluation on a complex 45 nanometer design that required optimizing for 15 multi mode, multi corner scenarios. As a result STARC will present Talus Vortex and Magma’s Hydra to its member companies as the recommended hieratical flow.

Now, let’s look at the successes of FineSlim and Quartz . We recently announced that FineSlim SPICE had been chosen by consumer electronics provider TLI as the standard for verification of large analog IP design and the world’s largest wireless communication company used FineSlim Pro on a very large CPU design and increased its adoption. Q1 was very strong for Quarters physical verification product in fact, exceeding internal orders target.

This week NVIDIA announced it deployed Quartz as its primary design rule checker for chips at 40 nanometer and smaller. After using Quartz on multiple 65 nanometer designs, they found that it delivered significantly faster turnaround time than existing physical verification tools. A leading flash memory company also adopted Quartz DRC and LVS for an upcoming process node. Joint work with this customer validated these products to 32 nanometer.

When we close the second deal in a year with one of the major common platform companies with Quartz performing up to seven times faster than the incumbent product, this is at a trend we see at the 45/50 nanometer process node, legacy verification tools are indeed program. We’ve also worked closely with foundries on the Quartz products. Quartz DRC and LVS now support TSMC’s interoperable DRC and LVS function. With the two unified format and Quartz’s scalability, Magma and TSMC helped our mutual customers adopt TSMC’s 40 nanometer process technology faster, easier and cheaper. We are also conducting advance work with foundries on 22 nanometer with deployment work ongoing at 32/28 nanometer.

On the third indicator, analog mixed signal design; Titan made significant progress in Q1. I am pleased to announce that a leading FPEA company used Titan on a recent reduction tape out of an industry leading flash technology design. Titan continues to receive industry endorsement as TSMC qualified it to support their 65 nanometer interoperable process design kit.

I’d like to touch briefly on two other segments also: parasitic extraction; yield management. With QuickCap NX has been long considered the gold standard in parasitic extraction and in Q1 it was certified to support TSMC’s IRCX format for 40 nanometer process. In yield management the Semicon West show in June was an opportunity to unveil Magma’s new YieldManager solar product and its partnership with Orion Metrology. We’ll integrate YieldManager solar, a product developed to reduce solar fab inefficiencies with Orion inline inspection technologies to improve yield for solar panel manufacturing.

In summary, in Q1 we saw our technology development manifest itself in new business opportunities. Now, let me turn the call over to Pete.

Peter S. Teshima

After we cover quarter one 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 from quarter one was $28.8 million above our guidance range of $27.5 to $28.5 million. This compares to revenue in the year ago quarter of $45.7 million and quarter four’s revenue of $34.1 million.

In quarter one, the percentage of revenue from backlog related transactions was again greater than 90%. Quarter one spending for R&D, sales and marketing and G&A totaled $22.5 million or 78% of revenue. Operating income for quarter one was $3 million or 10% of revenue. This was better than our guidance range of 3% to 5% of revenue due in part to one time cost reduction actions during the quarter and compared to quarter four’s operating income of $2.9 million or 8% of revenue.

Tax expense for quarter one was $400,000 compared to a tax benefit of $1.3 million in Q4. Quarter one’s diluted non-GAAP EPS was $0.03 better than our guidance range of zero to $0.01 per share again, due in part to the onetime cost reduction actions and compared to quarter four EPS of $0.07 per share. On a GAAP basis EPS was a loss of $0.09 per share better than our guidance of a loss in the range of $0.20 to $0.19. Non-GAAP to GAAP adjustments for quarter one counted for approximately $0.12 per share on a diluted basis.

We were cash flow positive on both an operating and a free cash flow basis and generated $5.7 million in cash. This follows the $5.5 million generated in quarter four. We ended quarter one with total cash and investments including restricted cash of $62.7 million compared to $60 million at the end of quarter four. Accounts receivable was $11.3 million for quarter one compared to $26.6 million for quarter four. DSO for quarter one was 35 days compared to 70 days in quarter four and we do not factor our receivables. We finish quarter one with 683 employees, a decline from 732 at the end of quarter four resulted in part as we completed restructuring steps undertaken in prior quarters.

Before I cover our guidance, let me update you on our tender offer to exchange our outstanding 2% convertible notes due in May of 2010 for convertible notes due in 2014. On Monday, we amended the tender offer and we now expect it to end September 4^th, one week from tomorrow. Here’s our guidance for the second quarter ending November 1, 2009. Revenue in quarter two is expected to be in the range of $28.5 million to $29 million; non-GAAP operating margin is expected to be in the range of 8% to 9%; non-GAAP taxes are expected to be $400,000 to $500,000; non-GAAP EPS is expected to be in the range of $0.01 to $0.02; and diluted shares outstanding are expected to be in the range of 49.5 million to 50.5 million shares.

We are updating fiscal 2010 guidance for non-GAAP operating margin and EPS. For the year, non-GAAP operating margin is expected to be in the range of 8.5% to 9.5%, an increase from the prior range of 3% to 5%. Non-GAAP EPS is expected to be in the range of $0.08 to $0.11 per share, an increase from our previous range of $0.01 to $0.03. Guidance for the second quarter and fiscal 2010 is in the financial data supplement on our website.

Now, I’ll take your questions.

Question-and-Answer Session

Operator

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

Richard Valera - Needham & Company

Rajeev or Roy, I was just wondering if you could comment on the overall business environment relative to a quarter ago? And, does that change your thoughts at all about bookings guidance for the year? I think last quarter you talked about $120 millionish for the year.

Roy E. Jewell

Number one, we don’t generally give guidance on bookings so I won’t comment on that unless Pete wants to say something. But, what I will say is we continue to see the overall semiconductor environment and the environment we’re selling in to strengthen. As I told you over the past couple of quarters we saw probably the low point in the October/January period, April is starting to look a lot more normal and this last quarter in fact we were able to achieve the internal targets that we had for bookings in the company to meet our financial plan.

So, I would say things continued to strengthen and our customers tend to be engaging much more with us on products all the way from our traditional area of digital implementation but, we’re seeing also a lot of very strong interest in our new products in the analog mix signal area especially verification simulation.

Richard Valera - Needham & Company

I saw the NVIDIA deal, congratulations on that release you got there for Quartz. I’m just wondering a couple of things one, was there an actual benchmark of Quartz versus your competitor there and did that transaction or that deployment they’re going to do result in any change in your business level with them i.e. an increase in your run rate of Quartz with them?

Rajeev Madhaven

You know I can’t specifically give you what the benchmark would be, we’re only allowed to document what’s in the press release but I can tell you there have been in the last quarter somewhere in the vicinity of eight benchmarks. Some of them are already converted in to business with Quartz. We expect to actually close the rest this quarter. We have won each and every one of them on average, I mean our numbers are like 4x faster. Our low range is between three and five. We are faster than anything from the competition today. That’s on single CPU, a low number of computers. On a larger number of computers [inaudible] we can scale much more than anybody can.

So, at this juncture where we have now got the directory capability we are trying to make sure when we have trained all of the Talus engineers to be able to sell and deploy our DRC/LVS tools. We are trying to gather as many benchmarks as we can get to.

Richard Valera - Needham & Company

Then with respect to the analog design displacement of Cadence, any other color you can give there? That’s an interesting development there.

Rajeev Madhaven

I think it was a good shootout of all the capabilities. Very specifically there were shoot out and tape out requirements for completing a chip including the shape based router. So, it’s been an activity that has been going on for six months. We have been targeting one customer in the FPGA, one customer in the analog and one customer in the memory. I’m glad to say one of them is done and the other two will be done by the end of this year is our target. At this point I think Titan reaches the point where it has been adopted in all of the key segments where our competition is at play and will be fully ready.

So, by the end of the year, every segment Titan can attack and Titan is much more faster, completion rates on the shape based router is very, very excellent compared to our competition and quality is very good. Titan ADX is seeing some increase in engagements, we expect to see good closure of those deals also next quarter. As Roy pointed out, our confidence on the guidance and everything will increase as these increase but until then we are sort of staying to make sure that that happens right now.

Roy E. Jewell

Just remember, when we talked about coming in to this fiscal year we were looking at Titan not to be a major driver of bookings and revenue for fiscal 2010. We were looking at it as a year to establish the product as a viable alternative in the analog mix signal space. So, I’ll be candid with you, because of these tape outs and because of the business we closed, we’re ahead of schedule on the financial side.

Richard Valera - Needham & Company

A quick one with respect to duration, last quarter you noted that you were seeing pressure on duration, I think some deals were heading towards two years versus the traditional three. Any changes there?

Peter S. Teshima

Rich, what we continue to see is the durations in between two and three years. Like I said on the last call, we’re not seeing anything different from that. What we are seeing however is an uptick in the order run rates on our deals so that’s promising.

Richard Valera - Needham & Company

Relative to the prior say three year ago renewal? You’re seeing increases on the run rates on the deals that you’re renewing from say three years ago?

Peter S. Teshima

On an annualized basis over say the last year to 18 months.

Richard Valera - Needham & Company

I’m a little confused. Are you seeing an increase in run rates on renewals or relative to deals, unrelated deals from a year ago? I guess I’m a little confused on that?

Peter S. Teshima

Actually both types.

Richard Valera - Needham & Company

Pete, with respect to the increase in the EPS guidance, I thought when you last gave your guidance that you were sort of done with the major cost reduction initiatives at least with respect to layoffs yet obviously, your new guidance on unchanged revenue implies some significantly better expense levels. What’s going on there and sort of where did that savings come from?

Peter S. Teshima

Well, we’re seeing flow through the P&L some of the actions we took towards the end and they were related to things like facilities and those kinds of things that take us longer to consummate in terms of reworking contracts with landlords and things like that. So, we’re seeing some expense reduction there and then like I said before Rich, our model was based upon a flat market and we took the actions that we did based on the foreseeable future being a flat market. Anything that would increase from there would be gravy for us in terms of the possibility of increased profitability so we’re seeing some of that too.

Rajeev Madhaven

I just want to reiterate, there were no employee restructurings or anything last quarter, these are all just a combination of things that had happened before and we do not expect any restructuring of the employee force or anything this quarter or the next quarter. This is all just the landlords and lease and things we changed around and some of the people we had terminated in early quarters, it takes time in some of the countries for them to go off the payroll and that is what caused the delay in those things.

Richard Valera - Needham & Company

Pete, with respect to the exchange offer, I would presume when you updated it you had some level of dialog with the holders because you made some fairly specific amendments to the exchange which I presume wasn’t done in a vacuum. Is there any feedback you can give on your sense that you’ll reach the, I believe it was 70%, threshold that you wanted to achieve in order to go forward with the exchange?

Peter S. Teshima

Actually, you know how these things are done Rich, we actually won’t know in terms of the amount of people that actually exchange until it actually gets done. But, if you look at the amended tender offer, we do not have a minimum condition anymore, it’s not in there.

Richard Valera - Needham & Company

Then just final one for me, Pete the share counts that you have in your guidance, did they include the $3.3 million equivalent shares from the old convert, is that correct?

Peter S. Teshima

Actually, the basic does not and the diluted does not at this point. It’s about 3 million additional shares if it did.

Richard Valera - Needham & Company

So say the 50 millionish for next quarter –

Peter S. Teshima

I’m sorry Rich, the 50 million does include the convert of 3 million.

Operator

I do show that we have no further questions at this time. I would now like to turn the call back over to Rajeev Madhaven for any additional comments or closing statements.

Rajeev Madhaven

Before we end the call let me recap our first quarter’s major achievements. Talus deployment ramped up and we saw increase of the 40 nanometer particularly now that Talus 1.1 is in the hands of more users. Quartz tightened and fine tuned its position that [inaudible] new segments, expanding our total available market by more than $750 million. We beat key financial targets, continued generating cash and raised full year guidance for non-GAAP operating margin and EPS. Thank you for joining us today, we look forward to speaking with you on our next quarterly call.

Operator

That does conclude today’s conference. We thank you for participating.

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