PDF Solutions Inc (PDFS) 2002 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the PDF Solutions, Incorporated conference call to discuss its financial results for the third quarter ended September 30, 2002. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session for which instructions will be given at that time. If you need assistance during the conference, please press star, then zero on your touchtone telephone. As a reminder, this conference is being recorded. At this time, I will turn the conference over to Rochelle Krause, Director of Investor Relations for PDF Solutions for introductory remarks.

Thank you, and welcome to our third quarter 2002 financial results conference call. By now, you should have each received a copy of the corresponding press release. If you do not have a copy of the release and would like one, please refer to our website at www.pdf.com where the release has been posted. Some of the statements that will be made in the course of this conference are forward-looking including statements regarding our future financial results and performance, growth rate, demand for our solutions, and the success of any business objectives or model, products and services, features and introductions. PDF's actual results could differ materially. You should refer to the section entitled 'factors which may affect future results' on pages 20 to 28 of PDF's Annual Report on Form 10-K for the fiscal year ended December 31, 2001. And similar disclosures and subsequent SEC filings. The forward-looking statements and risks stated in this conference call are based on the information available to PDF today. PDF is in no obligation to update them. Now, I would like to introduce John Kibarian, PDF's President and Chief Executive Officer.

Thank you, Rochelle. Thank you and welcome everyone. For the third quarter of 2002, we are reporting total revenue of 11 million dollars and pro forma earnings per share of 4 cents. Both total revenue and pro forma earnings per share are in line with the guidance we gave last quarter. In a difficult environment, PDF has been able to make noteworthy progress towards its business objective. Since our last conference call, we have begun selling our 90-nanometer solution to strategic industry leaders, expanded our infrastructure to include in our electrical [Inaudible] system, which has proven to be a major breakthrough for our customers, the accuracy of our DBY yield simulation technology with high initial yields from a significant application and extended our executive management team with key strategic hires. I'll talk more about each of these accomplishments in a minute. First, as everyone is aware, the IT industry has not recovered from this downturn. For PDF, this means that our clients volumes are deep [Inaudible] micron notes have not picked up dramatically. This creates them with pressure on gain share revenues and lengthens customer's purchasing cycle. Eventually, the third quarter continued to delay some of our infrastructure implementation revenue as we anticipated in our last conference call.

For the fourth quarter, we expect client volumes to be low and limited to strategic investments. This continues to affect projected revenues especially because some of the gain share revenue from all the notes are starting to drop off as those contracts naturally expire.

As Steve will discuss in more detail, our guidance for the fourth quarter of 2002 reflects the industry factors that it have not significantly changed since our last quarter. This leads to my comments about progresses made in the quarter selling our 90-nanometer solution to strategic industry leaders. The technical challenges associated with deep sub-micron manufacturing continue to escalate with every generation, which makes the need for our solution greater at 90 nanometers. This was resulting broader, earlier, and faster adoption of PDF process designed integration solutions at 90 nanometers than we have ever seen before. Specifically because of first contract for 90-nanometer production in the quarter, and serious negotiations for the next two which we expect to close by the end of the fourth quarter. The widespread news about the difficulties many companies have experienced with 0.13 micron have made our customers more aware of the challenges with deep sub-micron technologies and new materials. PDF process-design integration solution becomes even more important and even more effective when compared with historical yield earning methods as IT continues to shrink.

We will see more IT companies more quickly realize that PDF technology is the most effective way to identify yield problems before production and avoid painful and expensive ramps. Since consumer demand isn't projected to stimulate 0.13 volume production until mid 2003, at the earliest, we believe that is important for PDF to be engaged with 90 nanometers. In fact some early adaptors are indicating significant volumes at 90 nanometers. Around the same time, the 0.13 volumes are projected to pick up. Because PDF technology are being adopted some of the first movers in the world, the value and benefits of PDF solutions will be proven and realized earlier. Regarding our new electrical wafer testing system that we recently announced, we believe that it is a very valuable edition to our process-design integration solution. We call this testing system our pdFasTest System specifically to work with our proprietary characterization vehicle tester. The pdFasTest System improves the results we have previously been able to achieve using our CV tester in two ways. First, it significantly reduces the amount of time required to test wafers, which is a primary delay in your ramp. And second, it enables more accurate process characterization, which amplifies the yield increase that is ultimately possible. Because the pdFasTest System is tuned to our CV tester and does not have to work with a broad range of testers, the pdFasTest System is able to reduce the amount of time required to test wafers by up to 95 percent. Test structures, they characterize deep sub-micron manufacturing processes. Must be highly sensitive. If they are able to detect ppb (Inaudible) and they must also be very small if they are able to localize [Inaudible] impairment check variability. Thus all deep sub-micron tester including PDF Solutions' proprietary CV tester require millions of measurements to be per wafer to enable effective yield learning from these test structures. PDF Solutions' pdFasTest System can test a typical short-flow CV test chip in as little as one hour. Compared that to a standard parametric tester on a similar detail test chip, which could take almost twenty hours. The pdFasTest System is able to do this because it measures a broad range of electrical characteristics of hundreds of structures on a CV test wafer simultaneously. Our announcement of the pdFasTest System follows our first installation. This system has proven easy to install and is already up and running in leading IC company [Inaudible] where they are using Copper Process Technologies at the 130 and 90 nanometer nodes. Initial response to pdFasTest System has been fantastic. Our customers can't wait to get it. And potential customers are even more interested in now our and more powerful and faster total Process-Design Integration solution. Earlier this year, we announced the release of our DBYI technology. As we have said before by changing the customer's design our DBYI technology is capable of improving yields 5 to 50% on top of what's achievable through factory improvements. One of the early adopters of DBYI, for one of the earlier adopters of DBYI, the initial yield for 130-nanometer product reflects these yield improvements and are in line with our simulation. This speaks volumes about the accuracy of our simulations and the improvements made possible by DBYI. In other words increased yields at deep sub-micron nodes is predictable and repeatable and improvable.

The last development that I will talk briefly about is the recent announcement of our expanded executive management team, which now includes Doug Raymond as our Executive Vice President of Client Services, Cees Hartgring as our Vice President Sales, and Mark Redford as the Senior Engagement Director. Doug's arrival at PDF is important. He has valuable experience building a strong Agilent client services business and a thorough understanding of semiconductor engineering service. Experience that he gained in part as a General Manager of the Knowledge Services Division of Agilent. Cees has a unique combination of technical depth and as a CEO of [Inaudible] Company. Before coming to PDF Mark was Vice President of Process Integration and a member of the Board of Directors at Chartered Semiconductor. Mark will head up our transistor activities. We believe that Doug, Cees, and Mark will help position PDF to increase the depths of our offering and deliver results to our broader customer base around the globe.

In summary, based on my meetings with CEOs, product line managers of leading Integrated Device Manufacturers and [Inaudible] Semiconductor companies as well as foundries, I can tell you that PDF Solutions is meeting with success after success as our customers apply our proprietary solutions to quickly identify your loss of mechanisms, develop success, and as a result greatly improve yield. Now I will turn the call over to Steve who will discuss our financial results for the third quarter and provide our projections for the fourth quarter of 2002. Steve?

Thank you, John, and good afternoon to everyone. For the third quarter ending September 30th, 2002, revenues and pro forma earnings per share were in a range we provided in July. Although disappointed that our run of 17 consecutive quarters of revenue growth has ended, we are pleased to report revenue of 11 million dollars an increase of 16 percent compared to last year's third quarter, although, as expected, a 10 percent decline from last quarter. Pro forma EPS for the quarter was 4 cents versus 3 cents for the comparable period last year, well below the 6 cents reported last quarter primarily due to the decrease in revenue. Design to silicon yield solutions revenue for the third quarter totaled 8.2 million, a 14 percent increase over the comparable period last year and a decrease of 14 percent from last quarter. This sequential decrease is the result of the continued slowdown in semiconductor companies' investment in newer technologies.

We first spoke of the likelihood for slowing investment during our Q2 conference call, when we said that depth and duration of the industry slowdown along with very limited visibility at a realistic timeframe for recovery was finally forcing semiconductor companies to cut or delay roll-outs of newer technologies.

Gain share revenue for the third quarter generated from three customers and five engagements totaled 2.8 million, a 20 percent increase over the comparable period last year and up a modest 3 percent from last quarter. Volumes remain anemic at the newer technology notes and we expect them to remain that way for the foreseeable future. Although gain share contract have, for the most part, now run of course in new contracts, particularly at 0.13 micron are contributing only minimal gains here. As a result, we expect a drop and gain share revenues over the next one to two quarters. The good news, as John already mentioned, we are booking new business to offset declining gains share and these new contracts regularly contain gain share components, prove that our financial model has gained broad acceptance by our customers. We expect contracts we're now entering into, to begin generating gains share when volume levels from newer technologies improve currently forecast for the middle of 2003. Gross margin for third quarter was 67 percent of total revenues up 2 percent from the third quarter last year and one percent from the 66 percent reported for the second quarter of 2002. The increase is primarly due to both the impact of increased gain share and higher margin infrastructure implementations. Total operating expenses before stock-base compensation were 6.7 million for the quarter up approximately 400,000 dollars or 7 percent from the third quarter of 2001, while increasing only 1 percent sequentially from the second quarter of 2002.

The increase from the last year was primarily the result of higher research and development expenses. Research and development expenses in the third quarter increased approximately 800,000 dollars or 24 percent from 3.2 million in the third quarter of 2001 while sequentially remaining flat from the second quarter of 2002. The increase from last year was primarily the result of non-recurring engineering expenses in excess of 350,000 dollars for development of joint products with a large semiconductor manufacturer and the increases in personal related expenses. We had previously mentioned that we anticipated non-recurring engineering cost to increase more dramatically in the third quarter, thereby driving a potential overall increase in total R&D expenses. But we now expect such an increase to occur in fourth quarter. So, in general and administrative expenses were 2.7 million in the third quarter of 2002 down 12 percent from the third quarter of 2001 by increasing less then 100,000 dollars sequentially from the second quarter. We anticipate SGNA expenses to increase during the fourth quarter as we initially more aggressive sales in marketing efforts. Performa net income for the quarter excluding amortization or stock base compensation in intangibles totaled 853,000 or 4 cents per share. This compares with proforma net income of 605,000 or 3 cents per share for third quarter of 2001. This quarters results represent our six consecutive quarter of Proforma net income and our fourth consecutive quarter of net income on a GAAP basis. We have a proven track record of being a fiscally responsible company and have shown that we enjoyed good visibility into our business. As a result we have and will continue to watch our cost during these difficult times and plan to remain profitable. Looking at the balance sheet as of September 30th we continue to strengthen our financial position. Cash increased 6.6 million during the third quarter to 73 million. Accounts receivables decreased to 6.8 million, we have no bank debt and our current ratio is over 8 to 1. Additionally 41 percent of outstanding accounts receivable at September 30th has already been collected. And lastly in support of full disclosure included in our accounts receivable balance is unbilled accounts receivable of 1.6 million flat with last quarter and again reflecting nothing more than the inconsistency between contractual payment schedules and percentage of completion accounting. Before I turn to guidance I would state again that some of the statements made in the course of this conference call including the ones that we are about to make with respect to Q4 2002 are forward looking. These statements include expectations about future financing results and performance, growth rates, the success of any business objectives, product and service features and introductions; client products and demand for PDF designed silicon yield solutions. PDF actual results could differ materially. You should refer to our current SEC Filings and understand that the forward-looking statements under estimate during this conference call are based upon information available to PDF today. We assume no obligation to upgrade it, to update that. Now for the fourth quarter of 2002 we are providing guidance for flat results versus the third quarter of 2002. Translation, a 11 million in revenue and pro forma earnings per share of four cents. Upon achieving these results, we will close fiscal 2002 with revenue of approximately 46 million and pro forma earnings per share of 20 cents, up approximately 25 percent and a 150 percent respectively from 2001. Considering the dramatic negative affect of current semiconductor industry downturn has had on many, many companies. We are satisfied with the continued growth underlying these results. Lastly, we will provide guidance for fiscal 2003, when we have better visibility as to when business conditions might consistently improve, until then we will continue to provide guidance one quarter at a time. With that I would like to turn the call back over to the operator to open the floor for questions.

Thank you Mr. Melman. Ladies and gentlemen, if you have a question at this time, please press star, then the number one on your telephone keypad. If you are using a speakerphone, please lift the handset before asking a question. Please hold one moment for our first question. Your first question comes from Garo Toomajanian with RBC Capital Markets.

Hi guys. You mentioned a couple of new engagements that involves some of the new products like pdFasTest System and also the DBY [Inaudible] , how many new engagements where there altogether in the quarter?

Yes. Hi Garo, this is Steve. There were two new engagements during the quarter.

And was that at new customers or at existing customers?

They were both our existing customers. We did not open a new engagement with a new legal entity, new customer this quarter.

Okay and you said that there were five engagements generating gain share at three customers, was this the same engagements that were generating gain share in the last quarter?

It was a combination of existing engagements and the new engagements.

Okay. Can you give us a sense of, from your discussion, it sounds like those are still primarily at 0.15 and maybe at 0.18 micron and there wasn't a whole lot of 0.13 generating gain share? Is that right?

Hi Garo. This is John; I'll take that one. We are actually generating gain share revenues on 0.13 products. The amount of revenues is really insignificant. So, they are contributing, but, you know, they are not anywhere near majority of polarity or anything close...

Okay. It sounds like that you're expecting gain share to drop off next quarter, which you mentioned and then, maybe it continued to stay weak until the second half of 2003 when you are anticipating a pickup in 0.13 and 90 nanometer?

Yeah that's, basically if you read, as I said in the last conference call, the thing that I actually got excited about when I look at the stimulations and we look at, you know, the improvements that we see our customers making, we anticipate that for some customers, they are on in fourth quarter and into first quarter. These customers are going to start getting to point where they yield 0.13 are reasonable enough that they are, you know, cost advantage over a 0.15 micron product. Those customers are the same customers that are telling us, they anticipate sometime in the first half of 2003 to begin what are more substantial 0.13 and in some cases 90-nanometer production.

Having been around the block a few time, I know that these things are often a quarter late. So, that's why we are saying, we anticipate towards the second half of 2003 because when you look at what they, you know, what they anticipate and what had been happening, they are often a bit late. So, you know, what we are seeing with Steve's guidance reflexes, we anticipate, you know, some of the contracts at 0.15 and 0.13 to come to the 0.18 and 0.15, especially 0.18 to have gone through their life and we don't anticipate significant 0.13 volumes until into 2003 and we actually think that because some of the customers are moving relatively rapidly to 90 nanometer. Their forecast for those technologies are almost and same with their volume forecast at 0.13.

Okay, it is actually great to hear you say that the yields are improving and as a point to be reasonable altogether and cost advantage, so that's I would say a positive sign...

Well, I think this is a positive sign.

Yeah, I mean that's a part that I get jazzed up about...

And could you give a sense of how much of the yield are actually improving by over what they would have been without your solutions, is that something that you can talk about?

Well, that's the Robert Frost, you know, 'the road not taken', right, because with some of these customers, they are engaged with us on the technology as they transported in. We do benchmark them against historical learning rates and we target to and have seen these customers learning at twice the rates they typically have achieved in the past and that's still pretty consistent. So, their learning rates are about, you know, as they are around 2X. What you saw at 1:30 and effectively what we have be going back and pointing out to customers is, a lot of the issues have been on the instabilities of the materials and the instabilities of the equipment, which are traditionally, I think that are dealt with at the R&D level that have propagated themselves into the transfer and I think, going forward, the industry is going to be solving that at a more systematic way because what's happened at 1:30, it certainly has been a painful loss for the industry and a good lesson for them to learn as far as PDF is concerned.

Okay. All right. Thanks very much guys.

Okay.

Your next question comes from Bill Frerichs with D A Davidson & Company.

John, just a follow up on that rather fascinating comment. At times you said that the yield issues have all been in the fab and of late they have been primarily the result of design and where are you seeing yield issues, kind of, coming in. Is it a balance now between problems with designs versus problems with stability in the process of the material?

Yeah. That's a really good question Bill. So, kind of the traditional things that, you know, yield was about defects and contaminants, so how could you be predicted, you need to wait, you get in the factor and see what defects and contaminants fall on the wafers. What we see at 130 nanometer is it is about design, sometime it's about the process design or the equipment design, and sometimes it is about circuit design. But generally speaking it is about the design of the technology. And as you work out those design issues then you are left with the remaining defects and contaminants issues that the factor typically sees. And I think your question is leading to what is starting to happen as you deal with the major things, you are getting left with more and more factory defectively issues and that's part of reason why we had some joint development activities ongoing with some of the equipment vendors and on both products severely targeted that activity as that activity becomes important. Today in the industry it's really about design capability, the circuit design of the process technology and to some extent, design of the equipment.

Just one follow up then. You know, there has been some articles in places like Electronic News that maybe 90 nanometer, that is going to be very long incoming but are you trying to imply that solving yield problems at a 130 nanometer is giving everyone a permanent ground in the deep sub-micron issues in general and 90 nanometer will be used there as a result?

No, I don't think it is going to be easier. I think the industry is getting, at least a part of the industry is getting a lot smarter about how to tackle it. So, we say we have a couple of customers that were picking up 90 nanometer contracts, one of them is, you know, for us a new name and you know one of the engineers met me in the meeting and said, well we don't know it happen in 130 nanometer, but we definitely got to do something different at 90, and that's what you know our contract at PDF is about. So, I do think that is becoming a broader understanding about the issues and people are looking at different approaches. The press, for a couple of manufacturers, has been that they are making significant inroads into moving towards 90 nanometer. One customer said to me, hey the way we see it we don't have a significant demand at 130, might have focus on 90 and by the time the demand picks up, we will probably have 90 in good shape. So, and I think specially in Japan that attitude is clearly prevalent and I think also Intel seems to have that attitude to some extent, just looking at their press announcements.

Okay. You might be interested to know that I heard someone I was visiting in the Valley, referred to solving a problem by just turning PDF at it, just it was a standard solution. So, that's a good sign.

That a good sign. We appreciate that. [Laughter] .

Your next question comes from Joan Tong with Sidoti & Company

Hi, I have got a question. Actually is this with respect to the competitive environment out there with HPL Technology (Inaudible) and maybe KLA-Tencor, can you give me more color on that?

Okay, this is John. I guess I will take that. You know, I think there are two ways to look at competitive environment, from the actual product offering, we believe our product is pretty unique and customers have told us that. So, we don't necessarily have, in fact we haven't really seen ourselves in a bake off with the competitor. Fundamentally the question usually is the customer saying do we need this technology, we have not send money here in the past. I think where there is competition, is its always substitutional. Well I could, you know there is more than one way to [Inaudible] , I could take the highway, I could take the backroad and fundamentally I eventually get to production. So, people do spend money on yield improvement in the factory and allow that expense spend with KLA. You know in the past, the inspection of equipment vendors have said hey you don't need test vehicles, and you don't need to look at these issues kind of a upfront, that is an issue with better inspection, that gives you better understanding and recently I think KLA has announced the product, which has sent around the test chip that they call microloop. I think fundamentally that's a recognition of the fact that you do need to characterize these kinds of issues and they sell that [Inaudible] equipment, which is roughly you know a 6 to 10 million dollar total package. So, I think it sets an interesting price [Inaudible] and fundamentally when you look at the kinds of issues that people have as these technology note, they are often related to parametrics of soft failures, which with these types of inspection technologies are near impossible to find. With respect to HPLA, I do know there is a lot of pressure especially when with HPLA as if a few months ago, coming out and saying that they felt they were competitive to the PDF. As we were going through our selling environment, you know frankly we have had customers [Inaudible] that HPLA has made the claim and the customers did not feel that way. You know with their recent legal issues it's questionable, if I were running you know a 2 billion dollar factory, would I want to trust the software or my test vehicles to be from the vendor with the kind of legal exposure they have. You know, I think every company is going to make their own decision, but frankly if I have got a 2 billion dollar fab, I think I would be thinking hard about the legal exposure that my suppliers are opened up to in this environment.

Okay.

Couple of other points Joan about the competitive environment. One clearly, you know internal groups and PDF being able to you know turn the oil tanker is clearly the biggest competition that we have had in the past and we continue to have in the present. Relative to HPL and customers coming to us because they no longer would go to HPL, I mean principally our response to that type of question is money maybe freed up to spend on yield improvement efforts and maybe that money is heading in our direction, but it is not necessarily going to be a situation of you know PDF replacing HPL with you know comparable technologies. Its just available money that you know may come our way.

Okay. Turning over to another question regarding I believe there was an OEM agreement signed with supply material back in the second quarter. Can you just tell us a little bit more about that and how did, how it has been coming along in that past two quarters?

Great, yeah, I will pass this over to John relative to the (Inaudible) we have made. I just wanted to make the point clear, you know that we announced on OEM agreement with an equipment manufacturer. We have not in fact announced who that was although there have been some folks who have been suggesting supply materials. Relative to the progress on that I will get that back over to John.

It's a great question. You know our new pdFasTest System what application of that may actually be coupled with another company's equipment as a way of developing a solutions center around the combination of [Inaudible] test and other yield improvement activities. We are also using that, we only did that development, we saw double duty (Inaudible) one is during production control and then we would probably, you know we anticipated and we actually based on the OEM agreement expect to have distributed through another third party, a large equipment vendor. And the second is as part of process, integrational ramp activity and we have already start leaving that product out. So, that of course its a great for us because we are getting double duty on same R&D dollar and we have been making great progress both in terms of the joint development activity and the release of that work as well as the part thats coming to our major or standard offering.

Okay. Thank you.

At this time I would like to remind everyone in order to ask a question please press star then the number one on your telephone key pad. Your next question comes from Dennis Wassung with Adams, Harkness & Hill.

Yes, thank you. And I did missed the first couple of minutes. So, I apologize if I repeat here. If you could just talk a little bit more about the DBYI side of the business, you mentioned with, I guess your business is becoming more and more design related, is that being reflected on the DBYI side of your business and I guess, if you have a quantitative measure there, is out of percent of sales at this point and I will come back with another question.

Your percent of sales, I don't know the numbers up top of my head, Dennis, I don't know. Steve was talking about that way. Some of our customers we actually they get both things and the contract may be one for both; I don't know that we've split that out recently. I haven't been able to. With respect to the amount of yield improvement, you know, we tell customers that you can typically see for any given technology an improvement of the product yield by 5 to 15% and what we are seeing with(Inaudible) and everything seen from customers as well as our simulations is that is and is actually relaying possible. Its important to remember when I say design, I look at the design [Inaudible] included for that the process design. In the window that the process affords the design. So, those are all design issues, [Inaudible] factories are running to set process. However, when I say the 5 to 10 percent 5 to 15 percent improvement that's of just the lay out design or it is the product design itself that you can achieve roughly in that range of improvement we are seeing that. We see really good traction with customers, because I think for our customers that our integration ramps one of the ways that these kinds of problem shows off is what we call a systematic yield loss for a design. And we showed customers that the 0.13 node all the systematic yield loss is really dominating overall yield of their product and how much of that is just really flat out, design lay out dependent and can be removed and we actually have a kind of reactive DBYI for those customers as well as the proactive one for those who are just beginning a design.

Okay, is the DBYI solution, a kind of being offered as part of your total package at this point or is it still, I guess is it being offered as a separate entity at this point?

Its being offered both ways; there are some customers that we have that are just buying, starting up by just buying DBYI sometimes there is a fables companies for whom, over all process improvement activity is not in their daily (Inaudible) of responsibilities. Some of them are IBMs, we have an IBM company. Lets start of with DBYI activities as well as some others and often that [Inaudible] there is a great synergy in terms of selling these two offerings that has created the opportunity for us to go back in and also the production control and product ramp as well.

Okay. And another question, just on kind of - - sort of the Macro environment, and you might have touched in this in your opening remarks, but what would you say as changed over the last quarter in terms of the customer attitude, just the environment out there?

Yeah, good question Dennis. You know, I think as I said on the, we had our Q1 conference call in April. Steve and I basically say we didn't see volumes picking up when we just look at the yields, I couldn't see how anybody could deal, profitable product of those numbers and as we frankly I think the rest of the industry was anticipated and that we had an upturn income, but in our Q2 conference call, we saw a fair number of customers that were pretty shaken up by customers -- potential customers that the volume did materialize and I think on some of the fabulous companies that I talked to you in particular were probably pretty exposed.

Our anticipation was as things got through Q3 folks will start on rationalizing what things they wanted to do, what things they didn't wanted to do, by the end of Q2 people are pretty much locked up and we did see some of that and in 3Q and did close some new engagements, I will be at the process during that quarter was longer than you would like. We do see that the strategic things are picking up in Q4. Things that people know they need to do [Inaudible] strategies centered around, bring out 90 nanometer comparatively in a very short amount of time. We are seeing those focuses make investment. We still believe that investments for volume or capacity expansion or production into new product lines of technology. This is still on hold from rest the customers. I think what you are seeing now is pretty much strategic in things they need to do for their business. Business survival one reason or the other.

You talked a lot about, that's how I guessed it, some customers are moving aggressively with 90-nanometer capability at this point. How would you characterize that, may be half of the customers are dealing with it today or at least the leading customers, how can you put a flavor on that for me?

Sure, as I said, we signed one 90-nanometer production contract in Q3 and anticipated a couple more in Q4. Ratiowise I don't think that's half, but I think there is a pretty substantial number when you consider, we are focused on where the 90-nanometer technology is in its life relative to our same penetration at a 130, I think that's a much faster penetration rate. One of the customers, a new name for us basically saying `hey we know this stuff we know each of this stuff we need to use technology like this to make sure this stuff hits the ground running. So I am seeing a better understanding in the market place, that you need to do this. If you use these kinds of technologies, you need to look at yield proactively before you get into the factory. It is all about process design integration. So I think percentage wise, I don't know percentage of the contracts that is probably a pretty small percentage still right now, but if you look at that in the same time horizon, one-third, I think it's really significant.

Okay, thank you very much.

Your next question comes from Gary Schinero with JP Morgan Fleming.

Hi John, hi Steve.

Hi Gary.

When you were mentioning the R&D, some non-recurring thing, can you just quickly go over that for me?

Okay. We incurred non-recurring engineering cost associated with the development of new product for our collaborative OEM agreement. We incurred, you know, an excess of half million dollars in the second quarter and we anticipated a fairly dramatic drop in those expenses in the third quarter. As it turns out, we had made a greater investment in the protocizing of these products and have incurred a little bit north of 350,000 in the third quarter. In the fourth quarter, we see that dropping off as we made substantial progress and we don't anticipate, you know, significant further investment in the form of non-recurring expenses in the fourth quarter.

And in terms of, you said 11 million in revenue, but the mix is different and the flat 4 cent in the EPS, I am guessing because, since the mix is different, your gross margin is going to be lower, it is just the R&D that's allowing you to be just profitable or is there something else?

I think, we are going to see a combination of efficiencies, you know, allow us to maintain a pretty good gross profit, and we are going to see expense control across the Board, you know, that will allow us to maintain that rate of profitability.

Okay, and in terms of the three new hires, continuing the complexity of your products in your solution, how long do you think it takes these people to ramp up, understand, and be able to sell to customers?

Thanks Gary. That is a great question. You know, I think it is difficult to know right now. I would say it indicates Mark Radford for example, you know, he was a customer, but he would be a, wont be a potential customer at some other place like Chartered Semiconductors, I think, he understands the customer's perspective very well. He happens to actually, you know, he was a customer of PDF software in the early 1990s, when he was at national semiconductor and he has a Ph.D. in design for manufacturability. So, I think for him, you know, to be honest with you, I don't think it's going to be very hard for case and for that we have hired them primarily because we are trying to expand the amount of general management experience and I think there will be a longer ramp up time for them. I think in the case of market, I think it is pretty easy, nothing new for him.

Okay, great. Thank you.

Your next question comes from Greg Weaver with Current Capital.

Good afternoon gentlemen.

Hi Greg.

Hi, Greg.

Just a follow-up on the new hires, where any of those were all the positions new or was anyone replaced on that?

Well that's a good question. I was the acting DPA client services and so I guess I was replaced in that roll (Inaudible) it say quite happily. In the case of no [Inaudible] Dave Joseph was running sales and marketing and business development. So David pealed off that responsibility and given that to (Inaudible). In the case of Mark, you know, transistor is something where we always had [Inaudible] substantial part of our business and that's really a new management responsibility, what we trying to do is correct all the things that we been doing in the transit area and make that a bigger part of our business going forward as we hear more and more from customers; then a lot of the issues on 90 and below and of course in the communication [Inaudible] of silicon-germanium are truly transistors. He is now looking for more intellectual property from PDF and Mark is going to lead that activity.

Okay and on your Electrical Wafer test system, what's the average selling price on that?

We actually don't sell it as a standalone system so it's packaged with the characterization vehicle discussed by the infrastructure of the customer gets and so it's license to be used with those characterization vehicles and it's licensed only to be used with our characterization vehicles then only evolve as part of our overall in contract with the customer. So it's not broken out fundamentally.

Okay and lastly I guess a kind of a hypothetical business model question; on the gain share side, the things you (Inaudible) see in these guys at a 130 nanometers are producing much volume, so say they do a new spin on their chip you know, whatever 6 months down the road, if they keep at the same 0.13 micron node, what happens then, do you get any revenue?

Oh sure, revenue is tide to the process technology, performance are building at a 130 nanometer we would still get revenue and in fact a lot of that, the clock on this things start when mass production starts and all of these companies are not in mass production and maybe shipping samples and working out designing process issues. So, the clock may not have started with some of these customers.

Okay thank you.

Sure.

At this time there are no more question. I will turn the call back over to Mr. Kibarian for remarks.

Thank you. Again we are excited to see more significant interest from customers early adoption cycles new technology. As we continue to experience valuable successes at customer's side, we are also clearly see the long-term opportunity for PDF, the Process Design Integration Company. Thank you for your participation in our Third Quarter 2002 Conference Call, good bye.

Ladies and gentlemen, this concludes the program, thank you.