Magma Design Automation, Inc. (LAVA)

F1Q09 Earnings Call

August 28, 2008 5:00 pm ET

Executives

Milan G. Lazich - Vice President & Corporate Marketing

Rajeev Madhavan - 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

Raj Seth – Cowen and Company

Robert Burleson - Canaccord Adams

Richard Valera - Needham & Company

Sterling Auty - J.P. Morgan

Presentation

Operator

Welcome to the Magma first quarter fiscal 2009 earnings call. (Operator Instructions) Now I want to introduce Magma’s Vice President of Corporate Marketing, Milan Lazich.

Milan G. Lazich

Welcome to magma’s first quarter fiscal 2009 earnings call hosted by Chairman and CEO, Rajeev Madhavan; 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 in our website 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 that 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-K for the period ended April 6, 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

As we announced in today’s earnings release first quarter revenue came in at $45.7 million below our original guidance range of $50 million to $51.5 million. Non-GAAP EPS was $0.02 which was below our original guidance range of $0.07 to $0.09. Today we also announced revised guidance for the year and now we expect revenue for fiscal 2009 to be in the range of $158 million to $160 million. This range is a departure from our prior outlook but is the correct one given our perspective on the balance of the year. It will gear us to near term revenue targets by going after a model where 90% or more of revenue comes from backlog and it’ll enable us to build greater backlog.

This quarter’s shortfall and our revised outlook will account in part by some factors such as region weakness in the semiconductor segment but also by the need for additional salespeople. In addition to our revenue model shift other operational changes we are making include an expansion of our sales force. As we mentioned on our previous call Bruce Eastman joined us last quarter to lead the field’s organization and this expansion effort is just one of the positive moves he’s making. Other reason, personal additions have - included already delivered property results. This month we announced that [Stuart Harrington] joined us as the new President for Magma KK to lead our operation in Japan. Stuart has many years of experience in that market and a significant EDS background. Also this month [Kevin Monahan] joined us as General Manager for our Brazilian combination products. Kevin brings an impressive background in semiconductors and EDA.

Despite below target results in the first quarter we continue to see strong performance by our products and technologies which gives us confidence in our long term prospects. One of our new products, the Titan analog mixed signal platform is already performing well. Titan enjoyed a lot of attention at the Design Automation Conference in June where it was voted one of the most interesting products at the show. Monday we announced an additional piece for the Titan platform, Titan’s analog migration. Titan name solves the analog mixed signal circuit design and coding problems, [Rambus] on of our early customers for Titan AM used it to take apart analog circuits for their HPR memory and plex IO processor plus architectures. Titan’s early results are promising and one of the reasons we are confident in our long term growth.

The outlook we announced today entails a significant reduction in this year’s revenue and profitability but it positions us for revenue growth on the order of 15% to 18% annually and for improved profitability and predictability as we enter fiscal 2009. The performance of our technology gives us long term optimism.

Now let me turn the call over to Pete.

Peter S. Teshima

After we cover quarter one results I’ll review our updated guidance which is the financial data supplement on our website. Unless otherwise noted all references to expenses, margins and other financials are on a non-GAAP basis. Revenue for quarter one was $45.7 million below our guidance range of $50 million to $51.5 million. This was down 10% from the year ago quarter and down from quarter four’s revenue of $55 million. In quarter one 91% of revenue came from backlog related transactions and 9% was up front revenue. This compares to quarter four’s mix of 82% of revenue from backlog related transactions and 18% from up front revenue.

Quarter one spending for R&D, sales and marketing and J&A totaled $38.5 million or 84% of revenue. Operating income for quarter one was $1.2 million or 3% of revenue below our guidance range of 9% to 10% and compared to $9.4 million or 17% of revenue in quarter four. Tax expense for quarter one was $200,000 or 25% of pre-tax income. This compared to $1.3 million or 14% of pre-tax income in quarter four. Quarter one’s diluted non-GAAP EPS was $0.02 per share below our guidance range of $0.07 to $0.09 per share and a decrease from quarter four’s $0.17 per share.

On a GAAP basis EPS was a loss of $0.34 per share, better than our guidance of a loss in the range of $0.38 to $0.36. Non-GAAP to GAAP adjustments accounted for approximately $0.36 per share on a diluted basis.

We ended quarter one with total cash and investments including restricted cash of $48.2 million a decrease from $67.5 million at the end of quarter four. Accounts receivable was $36.4 million for quarter one compared to $38.3 million for quarter four. DSO for quarter was 73 days compared to 63 days in quarter four and we do not factor our receivables. Headcount at the end of quarter one was 1,011 down from 1,030 at the end of quarter four.

Now I will provide our guidance for the second quarter, third quarter and full year of fiscal 2009 and full year guidance for fiscal 2010. Note that this guidance is consistent with our migration to a model where 90% or more of revenue comes from backlog. First for the second quarter ending November 2^nd, revenue in quarter two is expected to be in the range of $34 million to $35 million, non-GAAP operating margin is expected to be in the range of minus 23% to 22% for quarter two. Non-GAAP taxes are expected to be $300,000 to $400,000. Non-GAAP EPS is expected to be a loss in the range of $0.20 to $0.18 per share. Basic shares outstanding are expected to be in the range of 44 million to 45 million shares for quarter two.

For the third quarter ending February 2, 2009 we are offering the following initial guidance. Revenue in quarter three is expected to be approximately $1 million above second quarter revenue. Non-GAAP operating margin in quarter three is expected to be in the range of minus 7% to minus 6%. For fiscal 2009 ending May 3^rd, 2009 here is our updated full year guidance. Revenue for fiscal 2009 is expected to be in the range of $158 million to $160 million. This is a decrease from our previous guidance range of $225 million to $230 million. Non-GAAP operating margin for fiscal 2009 is expected to be in the range of minus 5% to minus 3%. This compares to our previous guidance range of 14% to 16%. Non-GAAP EPS for fiscal 2009 is expected to be a loss in the range of $0.19 to $0.15 per share. This compares to our previous guidance range of $0.50 to $0.55 per share. Taxes for the full year on a non-GAAP basis are expected to be in the range of $2 million to $3 million.

Finally today we are offering initial full year guidance for fiscal 2010 which will end May 2^nd, 2010. Revenue growth for fiscal 2010 is expected to be in the range of 16% to 18% over fiscal 2009 or in the range of $182 million to $189 million. Non-GAAP operating margin for fiscal 2010 is expected to be in the range of 14% to 16%. Non-GAAP EPS for fiscal 2010 is expected to be in the range of $0.45 to $0.50 per share. Tax rate is expected to be in the range of 20% to 23% of non-GAAP pre-tax income. Guidance for the second quarter and fiscal 2009 is in the financial data supplement on our website.

Now let me turn the call over to Roy.

Roy E. Jewell

Recent performance has not met the standards we set for Magma. The economic environment played a part in that but not as significant a role as other companies claim. Improved execution will drive our recovery. To summarize we are putting operational focus on four specific areas. They are implementing a new financial plan that de-risks revenue immediately, build strong ratable backlog, re-establishes meaningful near term revenue growth and returns Magma to target profitability in fiscal 2010. Number two, reaffirming clear market leadership for our flagship implementation products especially Talus. Number three achieving deployment momentum for our newer products and custom designs especially Titan. Rajeev spoke earlier about the recent successes we’ve seen with Titan and Titan AM and this is only the beginning. Improving our world class sales channel is also one of our focuses in operations this quarter. We’re working on the sales channel so we have the capacity and process necessary to support the objectives of a company our size. We’ve mentioned this effort in the past two calls and Rajeev provided an update of significant progress being made especially in attracting new management.

Let me now speak in more detail to the first two of these points, the revised guidance Pete laid out and implementation product performance. First the guidance, the revised revenue range for fiscal 2009 gives us good visibility and enables us to operate on a highly ratable basis on the order of a 90/10 mix of backlog based revenue to current deals revenue. As Rajeev mentioned it de-risks near term revenue targets and has become a well regarded model in our industry as synopsis has shown for several year and as cadence recent shift indicates. The sustainability and predictability it offers is the right direction for our company and improves our growth and profitability beyond fiscal 2009.

Second, our products. Our technology continues to differentiate us from the competition. On our last call we discussed the transition our customers are making from black implementation platform to the next generation Talus platform and the transition is proceeding well. This morning we announced that Infineon has standardized on Talus for nanometer ICs, citing Talus’ ability to concurrently address power, performance and area and to provide a convergent design flow for faster turnaround time. Infineon is one of about a dozen Magma customers, most of them among the top 20 semiconductor companies in the world that have completed take offs using Talus. Talus’ 45 nanometer production flow is deployed for five major foundries worldwide and our most recent statistics say it was used for 18 45 nanometer take offs through July and we expect more than 25 additional 45 nanometer take offs by the end of the calendar year.

In fact our entire digital implementation product line continues to deliver. Beceem Communications, a leading supplier of WiMAX chips used our integrated implementation flow and sign off products to take up a 65 nanometer chip set. Beceem used quartz RC, quartz time and quartz rail for sign off and faster turnaround time. Last week we announced that IBM now uses our QuickCap NX parasitic capacitant extraction product for 45 nanometer and 65 nanometer processes. IBM is using QuickCap NX for extraction qualification to deliver silicon accurate parasitic data for chips manufactured in common platform foundries.

We are also moving into new markets. We announced Tuesday that we are developing a product to enhance yield in fabs that manufacture solar cells. One factor that has held back the deployment of solar energy is the cost of solar cells which stems in part from the low manufacturing yield of solar wafers. Increasing that efficiency is a huge opportunity for us. We are clearly not satisfied with recent results but we see growth opportunities fueled by the success of new products and entry into untapped markets. We will put the company on a solid long term footing by moving to a highly ratable business model and meeting our financial objectives and we will continue to deliver new technology and be a key provider to semiconductor and systems companies around the world.

Now let’s take your questions.

Question-And-Answer Session

Operator

(Operator Instructions) We’ll go first to Raj Seth - Cowen and Company.

Raj Seth – Cowen and Company

Roy, can you help me look through this model transition and think about what it is that’s happening to bookings here? You guys have pretty consistently said starting from when Cadence started describing issues in the environment that it’s not that bad, some have over played how bad the environment is etc., etc., and then recently Rajeev I think I spoke with you after Cadence’s last reset and you suggested you weren’t seeing – while you couldn’t comment on the quarter, any material change or big change in the environment yet. You’ve talked about seeing deals come in smaller than expected on a broad scale basis, you’re making this very shift in your model, etc., one, how do I reconcile these comments about the environment weakening because it certainly sounds like it has and two, what’s happening with bookings here because it’s very hard to model this thing given the shift.

Roy E. Jewell

The first thing I’ll say is we have talked a number of times, most of our customers remain relatively healthy. But, we’ve also talked about they’ve also become much more deliberate in placing orders and I think that was also the position that Synopsis had when they had their recent call. What that actually does is it puts more risk in to the current period revenues that you recognize as a company and I think that’s why everybody in this segment besides one large vendor is looking to go back to a 90/10 model so that the predictability of the revenues is much higher, it’s de-risking from current period bookings and we don’t end up having to depend as much on near term deals to get our revenue numbers. I think that’s what we’re doing, I think it’s consistent with what other people have done either four years ago at Synopsis or more recently with Cadence.

Raj Seth - Cowen and Company

And how should I think about Pete sort of what’s going on with bookings? How should we think about this? Is there anything incremental you can give us about the model what’s happening there through this transition?

Peter S. Teshima

Yes, I’ll bring up a couple points. First, though we stated that we had this goal of 85% to 90% out of the backlog model, I’d save over last year our natural split is closer to 80% out of backlog and I’d say 20% up front so we’re not there and the quarter one results are the exception rather than the normal. If you couple that with bookings that haven’t been what we expected and that has put pressure on our model. So, with the deal delay comes a drop off in backlog and on top of that the backlog can and is lumpy given the composition, the makeup of it in terms of [rateable], cash receipts and [inaudible] type transactions.

Raj Seth - Cowen and Company

Last question I guess for Rajeev, Rajeev is the products and the technology are fundamentally good and you’re having issues in your channel, I mean my read is your business got, and maybe it’s wrong, but your business got dramatically more complex as you’ve introduced new products, sort of expanded the fronts you’re fighting, you’ve got analog, you’ve got the transition in Talus, etc. Does that not argue for perhaps maybe you guys going out and looking for a strategic partner, any comments on that would be appreciated.

Rajeev Medhavan

I didn’t mention during the last quarterly call that it will take us two years to get to the point where Talus can be deployed without our involvement in any shape or form. Today, there’s a lot more of our engineers helping customers migrate. We need to reach that point, we told you that there will be a release in June, there will be a release in September and at that point all features, all aspects of everything required is in the product and all that remains for us [inaudible] is to make the ease of use of the [inaudible] to automatic that we can get a reduction in support costs at our customers, and we expect to achieve all that in this calendar year to get to a point where the biggest value that Magma used to have is essentially that the number of engineers required to use our tools is much lower than the others. We think we can get back to that same shape with Talus in this calendar year and that is required for us to free resources to go and sell our new tools like Titan and other new tools. And we are on that threshold of achieving that. We believe we can achieve that and we think with this model it gives us a lot more predictability to come out of it with more stability as we come out of it in the latter half of 2010.

Raj Seth - Cowen and Company

And with regard to my question about I guess I understand perhaps a reluctance to answer but the [inaudible] strategic partner. I mean it seems like channels always been the problem with a lot of the smaller ADA companies. It seems like the core technology is really good but this issue that I think Peter, Roy or whoever it was brought up about around the service requirement and digital implementation seems to be once hit will be difficult to make go away. It seems like a feature of this particular product segment. Maybe I’m wrong.

Rajeev Medhavan

This is what I said. Basically the flow produces results much more automatically than the amount of support requirement goes down quite a bit. We as you’ll recall in the early days of Magna used to say that is the advantage of fusion, we think we’ll be there back again on palace by the end of this calendar year, absolutely will be there. So that frees up the resources needed, Bruce has to add sales people required and as we add the sales people required we have a speed up to be able to engage the Titan and make the [inaudible] happen.

Raj Seth - Cowen and Company

Let me try one more time on bookings. How do bookings look this year relative to last year now? I mean you gave some commentary a quarter ago. What’s it look like now?

Rajeev Madhavan

What I’d say Raj is we’re flat to up 10% for the year so that implies a range of $185 million to $200 million. Obviously a book to build greater than one.

Raj Seth - Cowen and Company

I don’t know Peter if it’s possible to do this and forgive me because it’s tough to model, but if I you weren’t making the model shifts and bookings came in as you expected, what would the numbers look like without the model shift? Is there a way to normalize for the model shift so I can have some idea how this looks relative to the previous expectations without the shift?

Peter S. Teshima

What I think is it’d look like our original plan.

Operator

Our next question comes from Robert Burleson - Canaccord Adams.

Robert Burleson - Canaccord Adams

I just wanted to ask about what you’re seeing just generally in the demand environment? I mean, we’ve heard vaguely that there are macro concerns and it seems like a lot of the stuff we’re hearing is fairly vague but when you drill down into the specifics that you’re seeing with some of your customers without mentioning names, when does it look like say actual and selection point could? And I understand that no one has a crystal ball, but if you’d just kind of throw a timeframe out there? Is it six months, three months, what’s your feeling there?

Roy E. Jewell

I’m not in the customer base lot but the one thing I come back to comments and this is going to sound a little vague but if you look at the way most of our customers are reporting their earnings, they’re doing reasonably well. There are cases which we all know about where they’re not. Where we have seen the biggest shift is most customers used to be willing to invest in product ahead of demand. Most of them aren’t doing that right now. I think they feel like, it may be psychological, it may be what they’re seeing in terms of longer term orders, but they’re much more deliberate in acquiring tools almost behind demand. And I think that’s going to change when they have a lot more visibility of where their business is going and I have to expect it’ll get better with the overall economy later in the year or early next year.

Robert Burleson - Canaccord Adams

So is it your customers’ visibility with their own budgets basically?

Roy E. Jewell

It’s more budget related I think than actually the business. One of our larger customers in Southern California, their top line’s growing very well but their investors are pushing them very hard for margin expansion. So with that being said, they don’t place orders ahead of demand.

Robert Burleson - Canaccord Adams

Is there some, in your opinion, pent up demand as a result in terms of more forward-looking investments that need to be done?

Roy E. Jewell

As you said, we don’t have crystal balls but if the market returns to traditional behavior, yes there is.

Operator

Our next question comes from Richard Valera - Needham & Company.

Richard Valera - Needham & Company

Pete, I just wanted to follow up on Raj’s question with respect to how much of the cut in revenue was due to the model shift? It seems to be that it’s roughly a 10% shift if you say you were sort of running at 20% up front and you’re going to 10% up front, so 10% of $220 million is give or take $20 million. And you’re cutting revenue guidance by $60 plus million so is it fair to say sort of the $20 million is due to the model shift and $40 plus million is due to the weaker-than-expected bookings?

Peter S. Teshima

I’d say that that’s in the range of what we’re looking at.

Richard Valera - Needham & Company

I just wanted to try to understand your thoughts on expenses as you look out into fiscal 2010. You’re looking at revenue for 10 that’s in the mid $180s and looking for EPS which is quite close to where you were in fiscal 09 with your original guidance, sort of in that $0.50 range, but you’re doing it on $40 million roughly less revenue which to me implies sort of at least $35 million of op ex cuts if not more. So I guess the first question is where should we think of those cuts being made? I think historically Magma has had a fairly support intensive model. You guys have sort of spent to grow and how does that fundamentally change anything because $35 million is not an insignificant amount in your total expense base?

Roy E. Jewell

You’re right. $35 million is not an insignificant total. I think what we’re going to do as a company is we’re looking at rationalizing across all product areas and making sure that we are investing proportionately with the return on investment. There’ve always been a few products that we’ve worked on that had never really achieved what our overall investment objectives were. So it’s not going to be in one area. We will continue to be a very service-oriented company. At the same time Rajeev and I are both pushing the R&D teams to provide products that are less support intensive because frankly I think historically implementation has not been a scalable business long term and I think it’s probably a challenge that’s going on in all of our competitors’ houses today also, how to make that product area more profitable and throw off more cash. And it is our flagship product area. I guess it’s not a simple answer but we’re going to be looking at basically rationalizing the expenses versus returns across every product segment we have.

Rajeev Madhavan

Besides the products I mentioned, we’re looking at all kinds of expense controls in the company with respect to travel, all areas and in the product areas and specifically as Roy’s alluding to, the usability of the amount of engineers needed to deploy our product. If that comes down RAEs come down measurably in terms of overhead for adding new accounts for the company. So we are doing a lot of things in the product to handle that to be able to achieve that result very quickly and we’ve been doing that and we expect to bear fruit on that quickly.

Roy E. Jewell

Rich let me give you some examples of how we know we can cut costs as a company by just changing the way we perform. Magma’s a company that when there is an issue on a customer’s side, by God they would see our people on site instantly and there are probably a lot more technologies that we can leverage as a company. I won’t give you specific numbers but we spend over $10 million a year in travel. We’re looking at how we use products like Web-X like a lot of our customers are doing today and it’s just we need to become more efficient in how we operate the business overall. So Rajeev’s right. It’s beyond just the product segment. It’s across the board.

Richard Valera - Needham & Company

It sounds like some good initiatives that you’re thinking about. I guess my concern is the risk that you’re counting on even though it’s down from where you were looking, it’s still looking for big revenue growth in fiscal 2010 with potentially a pretty significantly different operating dynamic in the company. I think your customers probably have gotten used to a very high level of support and I’m just wondering if you thought about how they could or will respond if potentially they perceive a lower level of support. I know there’s no simple answer there but I guess that’s just sort of the issue I’m talking about.

Rajeev Madhavan

Rich, the answer to that is at least part of the reason why the customer has had to have the support is when the tool is not as automated as it should be. If it was as automated as it should be, nobody wants to see our engineers just for the sake of having them there. So we clearly know what we can do but bottom line is very simple. Management is 100% committed to getting this operating margin down to get the op ex to the level we’re talking about. We’re all committed to doing that and we know that we can do that. We can get the efficiency from the product stabilization of palace that is happening. We have had for a while now two x products that we have been supporting, you had Fusion and Talus. So now there is almost two x the number of engineers needed that we’ve had for a little while over the last two years. That is ending .

Roy E. Jewell

And we anticipate the stability of palace is improving measurably. As you mentioned, there’s a release in September, there’s one in November and there’s one in May. And that has got to be one of the areas that we can leverage going forward. But let’s not confuse things. There’s no way we’re going to allow our customers to fail and that’s something that’s built ingrained in this company.

Operator

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

Sterling Auty - J.P. Morgan

Let me start with a couple and I’ll jump back in the queue. Just out of curiosity, why do you think the 90/10 mix is the right mix for the industry?

Roy E. Jewell

It’s very simple. The way we try to do business is [rateable]. [Rateable] business tends to come out of backlogs so it’ll allow us to be able to do deals that are in the best interest of our shareholders and our company while still basically addressing the requirements of our customer. What that means is we want to have the majority of our revenues coming out of backlog and there’s always going to be a small mix there based upon due and payable or whatever it happens to be that comes out of current period deals. It just feels like a more natural and we watched empirically what’s gone on with Synopsis and its sure proven to me that they did the right thing four years ago.

Rajeev Madhavan

The second benefit is the lower-than-current quarter deals, the lesser the negotiating leverage for customers. The higher it is, the larger the negotiating leverage for the customer because we have to do it one year deals which gives them the negotiating leverage was giving us any control. So having a larger number at the need of the quarter which is coming from back order revenue means more negotiating leverage for the customer and less for the supplier.

Roy E. Jewell

No matter what anybody says, to get people to pay in the current period or structure a deal that generates revenue in the current period you give away something.

Sterling Auty - J.P. Morgan

I get that but I follow a number of companies with subscription models. I was just curious. Why 90/10? Why not maybe just say we only offer subscription and do it 100% and take away any of the leeway because that can become a negotiating point, or maybe the other way, why not buck the trends and move towards more of an upfront as a differentiating factor now that everybody’s going towards this 90/10 split?

Rajeev Madhavan

I think up front as a differentiation is not going to happen. It just means you’re giving complete control to the customer as a negotiation. And we absolutely do not believe in that model. We believe that if you have to do the least amount you have in a given quarter, you have much more negotiating leverage with the customer. And we do not have to do what Roy is saying, essentially giving something away to artificially hit the other numbers. We just are in a better negotiating leverage the lower the number. Now there is a particular number of about 90% because some customers do like to make it payable at the time of it because of their budgets. We are just doing those deals when they want to do it; not us wanting to structure it in that particular fashion.

Sterling Auty - J.P. Morgan

Based on the guidance I think you end up with a bit of a revenue jump in the fourth quarter but what I’m wondering is, based on that jump does that indicate that you expect significant improvement in bookings sometime over the next two quarters or could that be a one quarter where maybe it’s not exactly 90/10 and you get a little bit more upfront?

Roy E. Jewell

What it is is our backlog is comprised of a number of different types of revenue transactions and what we’re seeing and what we know is in that particular quarter we’ve got a higher uptick of due in payables hitting. So it’s a combination of what you’re talking about. It’s prior stuff that’s scheduled to hit and then our bookings expectations this quarter going forward.

Sterling Auty - J.P. Morgan

Two more and I’ll jump back in the queue. The first is on the expense side. I hear the comments about looking at all the different areas but it would seem given the magnitude of the cuts necessary that there has to be a substantial portion of it at headcount given headcount is the biggest part of the expense base. Can you give us either a target as to where you think headcount will head or should we look for a near-term restructuring? What should we be thinking about there?

Rajeev Madhavan

I think at this juncture it’s fair to say all aspects, headcount and Roy’s [inaudible] that we have our slash that, we’re going to slash a combination of different things we’ll get in there and all we can say is that we are committed to achieving that. Yes there will be some reductions in headcount. We haven’t given that number right now but we’re giving you the operating numbers.

Operator

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

Sterling Auty - J.P. Morgan

In terms of Talus, I’m kind of curious. At this point you think you’ve got Talus as a product technology in features set at the level that you want it. You think you’ve got all the feature set technologies to put you guys back on kind of a thought of being at the leading edge provider of place and route as well as any quality issues. Do you think you’re there or is there another step that’s kind of necessary to bolster that platform?

Rajeev Madhavan

Let me give you the competent scenario, we actually are there today. Any accounts of ours nobody has been able to make any penetration. We absolutely can maintain and defend it. Where we are as a status is very simple, we require a lot of people to defend the [inaudible] ability, that naturalization is where we are today and given the resources we can win any engagement. Given the comparable sources, what our competition can afford to grow, we end up winning the engagement. What we are trying to do, which is our inherent advantage of the fact that we are a totally integrated tool is that we can provide a level of automation and the flow where the amount of resources required to run the Magma tool used to be much lower. They’re not yet there in that and they’re not yet there in what I would consider stability and maturities to [inaudible] are helping the customers through them. Besides that in terms of features, in terms of beating anybody in any of the metrics, we’re there today.

Sterling Auty - J.P. Morgan

On the analog side, on the Titan adoption, are there any metrics that you’re going to give us that we can kind of track the progress, whether it be pilots or anything else, just so we can see? This has been such an entrenched area for Cadence but there is such an interest out of the customers to look at yourselves and Synopsis’ Orion platform. Is there something that we could use to measure the progress?

Raj Madhavan

I think almost very similar to our digital platform, one of our first customers was [inaudible] so here we see one big analog with a single customer issuing a press release with Magma that heralds we are at the stage where we can go and replace and we can actually penetrate an existing market with significant differentiation. I think once we reach that level you can pretty much read into it saying we are at a stage where we can now deploy it to a large number of customers. We believe we’ll get there pretty soon and I think you will just have to look at those [inaudible].

Sterling Auty - J.P. Morgan

In talking about the structuring of sales, are you going to manage the customer facing organization a little tighter in terms of the number of application engineers to sales guys or is it going to be on a revenue to expense ratio? Just talk to us about how you’re going to manage more profitably the go to market function?

Roy E. Jewell

I’d say it’s going to be more on a contribution from an individual deal with an individual customer, so it will be on a profitability model relative to the customers. We’ve got to get it out and put return on the investment we’re making and I think Bruce is trying to put a lot more discipline in how we manage our business.

Sterling Auty - J.P. Morgan

And Pete, you talked a little bit about the bookings that they were 10%. Any interest in actually stating where you think the backlog at the end of the year will look?

Peter S. Teshima

No.

Sterling Auty - J.P. Morgan

Just thought I’d ask. And last one, given the guidance and the further model shift here as we look at the earnings you’re going to go through and do the restructuring. Is there at least a period of time where we should be thinking about the inflection in the earnings happening?

Peter S. Teshima

What we’re talking about is getting back to a level of profitability by quarter four of this year and then driving it forward next year. So to answer your question is it’s by the end of this year, this fiscal year.

Operator

And that concludes our question and answer session.

Rajeev Madhavan

Thank you for joining us today. On September 10 we’ll be at the Deutsche Bank 2008 Tech Conference in San Francisco. We hope to see some of you there or at other upcoming conferences. And we’ll speak with you at our next quarterly call. Good afternoon.

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