SAN FRANCISCOTroubled EDA vendor Magma Design Automation Inc.'s independent auditor has raised questions about the company's ongoing viability because of debt obligations due next year, Magma said Monday (July 27).
The accounting firm, Grant Thornton LLP, issued a "going concern" qualification, filed along with Magma's annual report for the period ended May 3, Magma
(Santa Clara, Calif.) said. A going concern qualification is a reflection of the auditor's concern about the company remaining in operation. They are typically issued when n auditor feels that a company doesn't have cash to last for 12 months.
Peter Teshima, Magma's chief financial officer, downplayed the significance of the qualification, saying it was issued because Magma does not currently have the funds needed to pay off about $49 million worth of convertible senior notes due in May 2010. Magma commenced a tender off Monday to exchange those notes for different notes due in 2014. The new notes offer a higher interest rate of 8 percent and a lower strike price of $2.55, Teshima said.
Teshima said that if the tender offer is successful it would eliminate the reason that the auditor issued the going concern qualification.
Veteran research analyst Jay Vleeschhouwer, most recently a managing director at Merrill Lynch, noted that Magma still needed to execute on the tender offer. "Sometimes announcements of this kind can be a formality and expected," Vleeschhouwer said.
Teshima said the financial community has been aware of the going concern qualification since July 17, when Magma filed its 10-K annual report with the U.S. Securities and Exchange Commission. A Magma spokesman noted that the company's stock was up roughly 25 percent last week in the wake of the filing.
Magma in May said its revenue for fiscal 2009 declined to $147 million, down 31 percent from fiscal 2008. Largely because of non-cash charges, he company reported an annual net loss in accordance with generally accepted accounting principles (GAAP) of $127.1 million, or $2.84 per share, more than four times its fiscal 2008 GAAP net loss.
Magma was at one time growing rapidly and threatening the break into EDA's top three firms in terms of revenue. But the company has fallen on hard time over the past two years. Chairman and CEO Rajeev Madhavan has spoken of re-focusing the company and pushing tools for analog/mixed-signal design to address inadequacies in the current EDA tool flow.
Sources within EDA, including analyst Gary Smith, say chipmakers are hesitant to do business with Magma because of concerns the company may go under. A Magma spokesperson acknowledged that customers were excercising due dilligence in exploring Magma's financial stability, but said he wouldn't describe them as hesitant.
Vleeschhouwer said Magma's current financial bind stems largely from a failure to capture more market share with core implementation products and diversification into too many areas. Even before the meltdown of the global economy last year, Magma was at a critical juncture and needed to choose between diversifying further into design-for-manufacturing (DFM) products or analog EDA, Vleeschhouwer said.
"It seemed to me well over a year ago that Magma was going to have to make some difficult decisions about where to put resources," Vleeschhouwer said.
Since then, Magma has clearly placed emphasis on analog products, Vleeschhouwer said, though the firm has not completely given up on DFM.
Smith, principal analyst at Gary Smith EDA, said Magma may stage a comeback, though it won't be easy.
"They've got their tools put together now," Smith said. "They just have to go out and regain their market share."