8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT PURSUANT

TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported): August 3 , 2006

MAGMA DESIGN AUTOMATION, INC.

(Exact name of Registrant as Specified in Its Charter)

Delaware

(State or other jurisdiction of incorporation)

000-33213	77-0454924
(Commission File Number)	(I.R.S. Employer Identification Number)

5460 Bayfront Plaza, Santa Clara, California	95054
(Address of principal executive offices)	(Zip Code)

(408) 565-7500

(Registrant’s telephone number, including area code)

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02. Results of Operations and Financial Condition.

On August 3, 2006, Magma Design Automation, Inc. (“Magma”) issued a press release reporting its financial results for the quarter ended July 2, 2006. The press release includes Magma’s balance sheet as of July 2, 2006, presentations of Magma’s historical statements of operations prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), and presentations prepared on a non-GAAP basis. It also includes Magma’s projected net income and net income per share on a GAAP and non-GAAP basis for the quarter to end on October 1, 2006. Magma’s adjustments to GAAP in calculating non-GAAP results and projections are described in the press release, which is furnished as Exhibit 99.1 and incorporated herein by reference. In addition, the impact of these adjustments is quantified in the reconciliation tables included with the press release.

Item 9.01. Financial Statements and Exhibits.

(d) Exhibits.

The following exhibit is furnished herewith:

Exhibit No.	Description
99.1	Press Release issued August 3, 2006.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

		MAGMA DESIGN AUTOMATION, INC.
Dated: August 3, 2006	By:	/s/ Peter S. Teshima
		Peter S. Teshima
		Corporate Vice President- Finance and
		Chief Financial Officer

EXHIBIT INDEX

Exhibit No.	Description
99.1	Press Release issued August 3, 2006.

EX-99.1

Exhibit 99.1

News Release

CONTACTS:

Magma Design Automation Inc.:
Monica Marmie Director, Marketing Communications (408) 565-7689 monical@magma-da.com	Milan G. Lazich Vice President, Corporate Marketing (408) 565-7706 milan.lazich@magma-da.com

Magma Reports First-Quarter Revenue of $41.0 Million

Fiscal 2007 Q1 revenue is 5.5 percent higher than prior year

SANTA CLARA, Calif., August 3, 2006 — Magma Design Automation Inc. (Nasdaq: LAVA), a provider of semiconductor design software, today reported revenue of $41.0 million for its fiscal 2007 first quarter, ended July 2, 2006. This represented an increase of 5.5 percent over the year-ago first-quarter revenue of $38.8 million.

GAAP Results

In accordance with generally accepted accounting principles (GAAP), Magma reported a net loss of $(10.7) million, or $(0.30) per share (basic and diluted), for the first quarter, compared to a net loss of $(23,000), or $(0.00) per share (basic and diluted), for the year-ago first quarter.

Non-GAAP Results

Magma’s non-GAAP net income was $0.7 million for the quarter, or $0.02 per share (diluted), which compares to non-GAAP net income of $3.5 million, or $0.09 per share (diluted), for the year-ago first quarter.

Non-GAAP net income for the first 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, gain on repurchase of convertible notes and loss on sale of marketable securities in conjunction with the convertible notes repurchase, cumulative effect of change in accounting principle 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 first quarter. Litigation expenses in the first quarter were $4.4 million, or $0.08 per share (diluted), net of tax effect.

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“We performed according to our goals and completed a very successful first quarter,” said Rajeev Madhavan, chairman and CEO of Magma. “We met all our key financial targets and executed on our plan to invest in R&D.”

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 first 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) total operating expenses; (9) operating income (loss); (10) other income (expense), net; (11) total interest and other income (expense), net; (12) net income (loss) before income taxes; (13) benefit from (provision for) income taxes; (14) net income (loss) before cumulative effect of change in accounting principle; (15) cumulative effect of change in accounting principle; (16) net income (loss); and (17) 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).

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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.

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Reconciliation of First-Quarter GAAP and Non-GAAP Financial Results

	Three Months Ended
Statement of Operations Reconciliation (in thousands)	July 2, 2006			July 3, 2005
GAAP net loss	$	(10,713	)	$	(23	)
Amortization of developed technology		7,165			4,164
Amortization of intangible assets		2,890			3,588
Stock-based compensation		4,893			1,672
Acquisition related expenses		852			216
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		156			390
Cumulative effect of change in accounting principle		(321	)		—
Tax effect		618			1,615
Non-GAAP net income	$	731		$	3,502
	Three Months Ended
Earnings/(Loss) Per Share Reconciliation	July 2, 2006			July 3, 2005
GAAP net loss per share	$	(0.30	)	$	—
Amortization of developed technology		0.20			0.12
Amortization of intangible assets		0.08			0.10
Stock-based compensation		0.14			0.05
Acquisition related expenses		0.02			0.01
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
Cumulative effect of change in accounting principle		(0.01	)		—
Tax effect		0.02			0.05
Non-GAAP net income per share (basic)	$	0.02		$	0.10
Non-GAAP net income per share (diluted)	$	0.02		$	0.09
Basic shares used in calculation		35,654			34,132
Diluted shares used in calculation		40,856			39,185

Business Outlook

For Magma’s fiscal 2007 second quarter, ending Oct. 1, 2006, the company expects total revenue in the range of $40 million to $44 million. GAAP net loss per share is expected to be in the range of $(0.44) to $(0.40) and non-GAAP earnings per share (EPS) is expected to be in the range of $0.01 to $0.05. A schedule showing a reconciliation of the projected GAAP EPS to non-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.

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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/medialist.cfm. To listen live via telephone call either of the numbers below:

U.S. & Canada:	(800) 661-8947, conference ID #2332296
Elsewhere:	(706) 634-2358, conference ID #2332296

Following completion of the call, a webcast replay of the call will be available at http://investor.magma-da.com/medialist.cfm through Aug. 10, 2006. Those without Internet access may listen to a replay of the call by telephone through Aug. 10 by calling:

U.S. & Canada:	(800) 642-1687, conference ID #2332296
Elsewhere:	(706) 645-9291, conference ID #2332296

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 and in quotations from Magma’s management. 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’s software for integrated circuit (IC) design is recognized as embodying the best in semiconductor technology. The world’s top chip companies use Magma’s EDA software to design and verify complex, high-performance ICs for communications, computing, consumer electronics and networking applications, while at the same time reducing design time and costs. Magma provides software for IC implementation, analysis, physical verification, characterization and programmable logic design, and the company’s integrated RTL-to-GDSII design flow offers “The Fastest Path from RTL to

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Silicon”™. Magma is headquartered in Santa Clara, Calif. with offices around the world. Magma’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.

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MAGMA DESIGN AUTOMATION, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)

	July 2, 2006			April 2, 2006
ASSETS
Current assets:
Cash and cash equivalents	$	36,304		$	58,550
Restricted cash		3,793			58
Short-term investments		13,956			38,608
Accounts receivable, net		33,641			33,849
Prepaid expenses and other current assets		6,455			4,096
Total current assets		94,149			135,161
Property and equipment, net		19,582			20,062
Intangibles, net		72,983			75,735
Goodwill		43,469			43,985
Restricted cash		150			3,841
Other assets		5,249			5,280
Total assets	$	235,582		$	284,064
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	6,483		$	2,479
Accrued expenses		27,111			31,833
Deferred revenue, current		22,617			24,622
Total current liabilities		56,211			58,934
Convertible subordinated notes		65,155			105,500
Other long-term liabilities		2,692			5,727
Total non-current liabilities		67,847			111,227
Total liabilities		124,058			170,161
Stockholders’ equity:
Common stock		4			4
Additional paid-in capital		292,789			286,336
Deferred stock-based compensation		—			(2,020	)
Accumulated deficit		(147,294	)		(136,581	)
Treasury stock at cost		(32,650	)		(32,650	)
Accumulated other comprehensive loss		(1,325	)		(1,186	)
Total stockholders’ equity		111,524			113,903
Total liabilities and stockholders’ equity	$	235,582		$	284,064

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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)

	For the Quarter Ended July 2, 2006									For the Quarter Ended July 3, 2005
(Unaudited)	GAAP Basis			Adjust- ments			Non-GAAP Basis			GAAP Basis			Adjust- ments			Non-GAAP Basis
Revenue:
Licenses	$	34,540		$	—		$	34,540		$	33,910		$	—		$	33,910
Services		6,419			—			6,419			4,922			—			4,922
Total revenue		40,959			—			40,959			38,832			—			38,832
Cost of revenue:
Licenses		7,408			(7,165	)		243			4,414			(4,164	)		250
Services		5,158			(342	)		4,816			3,857			—			3,857
Total cost of revenue		12,566			(7,507	)		5,059			8,271			(4,164	)		4,107
Gross profit		28,393			7,507			35,900			30,561			4,164			34,725
Operating expenses:
Research and development		15,449			(2,865	)		12,584			10,975			(216	)		10,759
Sales and marketing		13,847			(1,271	)		12,576			11,202			—			11,202
General and administrative		11,795			(1,267	)		10,528			8,613			—			8,613
Amortization of intangible assets		2,890			(2,890	)		—			3,588			(3,588	)		—
Amortization of stock-based compensation		—			—			—			1,672			(1,672	)		—
Total operating expenses		43,981			(8,293	)		35,688			36,050			(5,476	)		30,574
Operating income (loss)		(15,588	)		15,800			212			(5,489	)		9,640			4,151
Interest and other income (expense):
Interest income		887			—			887			660			—			660
Interest expense		(175	)		—			(175	)		(208	)		—			(208	)
Other income (expense), net		4,703			(4,653	)		50			7,450			(7,730	)		(280	)
Total interest and other income (expense), net		5,415			(4,653	)		762			7,902			(7,730	)		172
Net income (loss) before income taxes		(10,173	)		11,147			974			2,413			1,910			4,323
Benefit from (provision for) income taxes		(861	)		618			(243	)		(2,436	)		1,615			(821	)
Net income (loss) before cumulative effect of change in accounting principle		(11,034	)		11,765			731			(23	)		3,525			3,502
Cumulative effect of change in accounting principle		321			(321	)		—			—			—			—
Net income (loss)	$	(10,713	)	$	11,444		$	731		$	(23	)	$	3,525		$	3,502
Net income (loss) per share – basic	$	(0.30	)				$	0.02		$	(0.00	)				$	0.10
Net income (loss) per share – diluted	$	(0.30	)				$	0.02		$	(0.00	)				$	0.09
Shares used in calculation:
Basic		35,654						35,654			34,132						34,132
Diluted		35,654						40,856			34,132						39,185

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MAGMA DESIGN AUTOMATION, INC.

AS OF JULY 2, 2006

IMPACT OF KNOWN NON-GAAP ADJUSTMENTS ON FORWARD-LOOKING DILUTED NET INCOME PER SHARE AND NET INCOME

(Unaudited)

	Quarter Ending October 1, 2006
GAAP net loss per share	$ (0.44) to $ (0.40)
Amortization of developed technology and intangibles	$0.29
Stock-based compensation	$0.14
Acquisition related expenses	$0.02
Non-GAAP diluted net income per share	$0.01 to $0.05
(in millions)	Quarter Ending October 1, 2006
GAAP net loss	$ (16) to $ (14)
Amortization of developed technology and intangibles	$10
Stock-based compensation	$5
Acquisition related expenses	$1
Non-GAAP net income	$0 to $2

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