PDF Solutions Inc (PDFS) 2003 Q2 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 second quarter ended June 30, 2003. By now, you should have each received a copy of the corresponding press releases. Please be advised that the press releases and some of the statements that will be made today reference certain non-GAAP financial measures. The press releases contain a reconciliation of such measures to the most directly comparable GAAP measures. If you do not have a copy of the releases and would like one, please refer to the PDF’s website at www.pdf.com where the press releases and the reconciliations have been posted. Also, pleased be advised that some of the statements that will be made in the course of this conference are forward-looking, including statements regarding PDF’s future financial results and performance, growth rates, whether and when the announced acquisition of IDS will occur, and demand for solution.

PDF’s actual results could differ materially. You should refer to the section entitled “Factors which may affect future results on pages 21 through 29 of PDF’s annual report on form 10K for the fiscal year ended December 31, 2002, and [indiscernible] alert disclosures and subsequent SEC filing. The forward-looking statements and risks stated in this conference call are based on information available to PDF today. PDF assumes no obligation to update them.

At this time, all participants are in 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 0 on your touchtone telephone. As a reminder, this conference is being recorded.

Now, I will turn the call over to John Kibarian, PDF’s president and CEO and Steve Melman, PDF’s vice president of finance and administration and CFO. Mr. Kibarian, please go ahead, sir.

Thank you and welcome everyone. For the second quarter of 2003, PDF is reporting total revenue of $10.1 million and a pro forma net loss of $0.01 per share excluding stock-based compensation and intangibles. This is in line with the financial outlook we provided on April 24, 2003.

Before Steve provides more details on these financial results, I’ll give you some details on the quarter by addressing four major points: continued execution to our business plan, expansion of PDF’s product offering, technology trends in the industry, and market trends.

First, PDF continued to execute on its business plan. We were awarded three new engagements with existing customers during the quarter. Our customers’ decision to further their adoption of PDF Solutions technology at additional process nodes is for us, an affirmation of the value of both our R&D investments and our service delivery model that helps customers assure leverage from our technology.

The recent announcement of industry leader TSMC’s adoption of infrastructure for its 90-nm product and [indiscernible] ramp is an affirmation of the industry as a whole also recognizes this value. This TSMC contract brought into PDF’s customer base among the leading semi-conductor manufacturers and continues the industry adoption of PDF’s 90-nm solution.

My second point, expansion of PDF’s product offering is evident in our purchase of the WAMA technology from [indiscernible] yield and by the signing of a definitive agreement to acquire IDF software systems. Both of these strategic acquisitions will enable PDF to provide semi-conductor product engineers additional capability to maximize yields.

When the IDF transaction closes, the data power yield management system with over 1,000 seats installed at over 30 semi-conductor companies worldwide will give PDF’s customers a common database. The common database will provide a conduit for us to deliver our sophisticated applications into our customer’s hands providing them with faster and greater capabilities for managing product yields.

Applications drive database acceptance by the engineering community. For example, by combining data power with the holistic approach to wafer shop map design taken by the WAMA products, PDF one hands engineer’s ability to improve wafer level design yields while also optimizing test cycle times.

Both of these strategic acquisitions are proceeding as planned. The WAMA team has been fully integrated into PDF and joint selling has begun. Likewise, we are on track to complete the acquisition of IDS in the third quarter of this year as planned.

Third, with respect to current technology trends, in PDF’s engagements with top 20 semi-conductor companies, we are seeing the progression of low K dielectrics into mainstream 90-nm products. Products using 90-nm low K processes have completed qualification and are projected to begin shipping in volume by the year end. This is an important milestone. Production release of low K processes further emphasize the need for process design integration infrastructure to ensure timely ramps of 90-nm products into production.

This is consistent with our comments made on past calls that each new nm node will require the introduction of at least one new process step or material resulting in historically unforeseen process design interactions. Looking forward, we anticipate that the industry will face numerous challenges achieving [indiscernible] performance and yields across design styles at the 65-nm node. Companies that address these new complexities during the design cycle will [indiscernible] ramp to yields faster than companies that don’t.

My final point relates to PDF’s position in the industry which provides a broad view of process technology adoption in manufacturing yield trends. Semi-conductor companies transitions to leading edge technologies appear to be accelerating. We see this from two perspectives. First, production efficiencies at 130-nm and 90-nm are improving. Our customer’s leading edge capacity is filling up, yields at 130-nm are improving, and 300 millimeter production is becoming cost effective. These terms are reflected in our gain share revenues for the quarter which Steve will discuss in more detail.

Second, increased customer interest and inquiry during the quarter, in particular for our solutions at leading edge nodes which is 130 and 90-nm, appears to indicate that customers are more confident. While it appears that this confidence is shared by a broader cross section of the industry than the past, it is still not pervasive. By such, we will continue to be conservative in our near term outlook.

Now I’ll turn the call over to Steve who will discuss in more detail our financial results for the second quarter and provide projections for the third quarter of 2003. Steve.

Thank you, John, and good afternoon to everyone. First, let me again state that this presentation and our press releases issued earlier today include reference to certain non-GAAP financial measures. The press releases contain a reconciliation of such measures to the most directly comparable GAAP measures and you may access the press releases and reconciliations in the investor section of our website located at www.pdf.com.

As John already stated for the second quarter ending June 30, 2003, revenues and pro forma loss per share were in the range we provided in April. Revenue for the second quarter total 10.1 million versus prior guidance of 10 to 10.5 million. Pro forma loss per share was $0.01 versus prior guidance of pro forma loss per share of breakeven to $0.02 or reported net loss per share was $0.03.

Revenue for the second quarter represented a decrease of 18 percent compared to last year’s second quarter, but an increase of 11 percent sequentially from last quarter. The decrease from last year’s second quarter was due to decreases in both design [indiscernible] solutions and gain share. The increase from Q1 to Q2 of 2003 was the result of the increase in gain share. Design [indiscernible] Solutions revenue for the second quarter totaled $8 million, a 15 percent decrease from the comparable period last year and a slight decrease to 1 percent from last quarter. The decreases from last year and last quarter were the result of the general weakness in the semi-conductor industry that has manifested itself in delayed purchases in connection with the introduction of new process technology. While our customer base over the past year has continued to broaden with new customers in Taiwan, Japan, and the U.S., we are just now starting to see some evidence of a return to a semi-conductor environment where customers are more actively considering investments in new technology. This past quarter, PDF closed three new engagements from two existing customers.

Gain share revenue for the second quarter generated from three customers and four engagements total 2.1 million, a 25 percent decrease versus the comparable period last year, but an increase of 114 percent from last quarter. During our last conference call, we suggested that Q1 was going to be the bottom of the trough with regards to the drop in gain share revenues from Q4 of last year to the first quarter of 2003. We continue to feel that Q1 was the bottom and are pleased that gain share revenue this quarter was even stronger than we had anticipated. However, we feel that despite the industry’s recent optimism for recovery in the second half, we may still see some variability in gain share revenues. In other words, while we are confident that a modest recovery at leading edge process nodes should lead to gain share revenues consistently above the first quarter of this year, a prospective chart of gain share revenues over the next few quarters may not be as analysts often say consistently up and to the right.

Our new engagements regularly include gain share components. However, it is unclear how the dynamics of volumes of the 130-nm versus 90-nm will play out and dovetail with the expiration of our older contracts and the ramp of our newer contracts.

Gross margin for the second quarter was 65 percent of total revenue, a decrease of 1 percent from the second quarter of last year, but an increase of 3 percent from the first quarter of 2003. We continue to hold margins on design [indiscernible] solutions. The drop in gain share from the comparable quarter last year contributed to the decline in gross margin while the increase in gain share from last quarter drove the increase in gross margin. Obviously, gain share continues to be the highly leverage component of our revenue stream.

One thing to note for next quarter with regard to gross margins. Generally accepted accounting principles dictate that amortization of acquired intangibles for intangibles that generate revenue be booked into cost of goods sold. Therefore, should we close the IDS transaction as expected in the latter part of Q3, amortization of IDS acquired technology will be booked to cost goods sold rather than to research and engineering. This will likely have a negative result on reported gross margin. We will identify such amortization during our next conference call allowing analysts and investors to normalize our gross margin for the quarter. Additionally, and as typical for PDF, this amortization will be excluded in our pro forma EPS calculation.

Total operating expenses before amortization of stock based compensation and acquired intangibles were 7.3 million for the quarter, up approximately $785,000 or 12 percent from the second quarter of 2002, while increasing approximately $329,000 or 5 percent from last quarter.

Research and development expenses for the second quarter increased approximately 489,000 or 12 percent from 4 million in the second quarter of 2002, primarily due to increases in personnel related expenses and expansion of development activities in Europe. Research and development expenses increased sequentially from the first quarter of 2003 by approximately $121,000 or 3 percent primarily due to increased amortization of intangibles, their result of the acid purchase from wafer yields.

Selling, general, and administrative expenses were $3 million in the second quarter of 2003, up approximately 379,000 or 15 percent from the second quarter of 2002 and increasing approximately $291,000 or 11 percent sequentially from the first quarter. Increases in personnel costs, particularly in sales and marketing functions and relocation expenses for executives still in senior management positions in the U.S. and Japan contributed to the increases.

Pro forma net loss for the quarter, excluding amortization of stock-based compensation and acquired intangibles totaled approximately $265,000 or $0.01 per share. This compares with pro forma net income of 1.4 million or $0.06 per share for the second quarter of 2002 and a pro forma net loss of approximately 658,000 or $0.03 per share for the first quarter. These results were as expected given current revenue levels.

During the quarter, we made a number of significant announcements to the public, all of which John has already spoken about. With regards to the TSMC announcement, I would like to take a second and reiterate the revenue recognition policy with regards to this contract. The announcement has no effect on the revenue recognition policy announced previously, which was to amortize revenue radically over a multiple year period. During the second quarter, we did take our first full quarter of pro rata revenue on this contract. The revenue, which contributed less than 5 percent of total revenue in the quarter, will continue radically over the next couple of years.

The other announcements with regards to the purchase of WAMA technology from wafer yield and the pending acquisition of IDS software systems show our willingness to invest in our future and stay the course with regard to our longer-term business objectives. While neither of these transactions will contribute meaningfully to Q3 revenue, we believe both once the IDS transaction is completed, will contribute to the long-term growth of PDF’s top line and its future profitability.

Looking at the balance sheet as of June 30, 2003, we continue to maintain our excellent financial position, but use some of our cash during the quarter for strategic initiatives. Total cash declined 4.4 million primarily the result of investing activities, including the asset purchase from wafer yield and typical software and equipment purchases and regular operating activities.

However, cash balances at quarter end remained a healthy 67 million, while accounts receivable totaled 6.6 million, down from 7.5 million last quarter. Our current ratio also improved to over 8 to 1. Additionally, 2.6 million or 39 percent of outstanding accounts receivable at June 30th have already been collected.

And lastly, you’ll notice a sizeable increase in intangible assets and a new other liabilities account on our balance sheet. Both are related to the purchase of WAMA technology, the increase in tangible assets resulting from the valuation of the assets purchased and the other liability account being a contingent liability which represents a portion of an earn-out provision included in that asset purchase agreement.

Before I turn to guidance, I will 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 Q3 2003 are forward-looking. These statements include expectations about our future financial results and performance, growth rates, the success of any business objectives, prior [indiscernible] features and introductions, client products, and demand for PDF design [indiscernible] solutions. PDF’s actual results could differ materially. You should refer to our current SEC filings and understand that the forward-looking statements and the risks made during this conference call are based upon information available to PDF today. We assume no obligation to update them.

Now, for the third quarter of 2003, we reiterate the guidance we provided in our outlook press release earlier today. Revenue guidance is for revenue in the range of 10.8 to 11.3 million, the result of continuing traction with infrastructure implementations and gain share levels comparable to the second quarter. We are also providing guidance for our pro forma EPS in a range from a loss of $0.01 to a profit of $0.01, the result of higher expenses partially or completely offsetting the benefit of increased revenue. This guidance excludes any potential revenue from the acquisition of IDS software systems. We presently do not expect the transaction to close much before the end of Q3. And after purchase accounting adjustments, we expect any potential revenue contribution to be less than $1 million.

With that, I’d 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 to ask at this time, please press star then the number 1 on your telephone keypad. If you’re using a speaker phone, please lift your headset before asking a question. We’ll wait one moment for our first question.

Your first question is from Garo Toomajanian.

Thanks very much. Is it safe to say that the increase in gain share was mainly from having one additional design contributing to gain share, or were volumes up at those contributing designs as well?

The gain share, Gary -- this is Steve -- which was from three customers and four engagements, was not focused in any one particular engagement. It was spread out across all four engagements.

But there was one additional engagement contributing from last quarter; wasn’t there?

Yeah. I think that may be the case. I believe you’re right. But, I think what Steve is saying is basically, I think the answer to your question, volumes were up and one of the new contracts -- at least one initial engagement did contribute this quarter.

Okay, great. There was a -- last quarter you talked about a six-month assessment at a U.S. based top 10 semi. I’m just wondering how that is going and if there was revenue from that contract in the quarter.

There was revenue from that contract in the quarter and I think that engagement is tracking as we expect and that’s moving along pretty nicely.

Are there any signals as to whether or not there could be [indiscernible] business there or is it too soon to tell?

I think it’s too soon to tell.

Okay. Steve, one thing that I notice on the balance sheet was that deferred revenue was about half of the Q1 figure and also about half of the second half of ’02 levels. Can you explain why that went down and also give us a sense of whether or not we should expect that to go back up in Q3.

Yes. Principally, we had four particular contracts that were contributing deferred revenue into that account that were relieved of deferred revenue during the quarter and we did not book any additional deferred revenue during the quarter, although we had anticipated booking some more.

Looking ahead, we will see that increase in the latter part of the year as we invoice against some additional engagements which will be partially offset by the normal amortization going out of the year. And then if we renew some of our annual contracts during the first of the year, we should see that pop again as we enter 2004.

Okay, great. And, Steve, do you have handy the cash flow from operations number?

Actually, I did have -- let’s see, cash flow from operations was off -- I think it was about -- I don’t have it with me, but I think it was off about a million and a half as a result of the deferred revenue dropping.

Okay. And you didn’t do any share repurchasing; right?

No, we did not.

Okay. Terrific. Thank you.

Your next question is from Bill Frerichs.

Wow, who needs to ask questions with Garo there. My main question was on the deferreds, which I think you answered pretty well, Steve. I take it you have contracts for which portions may not yet have been invoiced and there’s a lag there in invoicing; is that correct?

Yes, that’s correct. We had one particular contract when we wrote the contract, we had incorrectly assigned a payment schedule to a second quarter deliverable that was pushed out into latter periods. Hence, we weren’t able to invoice during the second quarter and offset some of that erosion in the deferred revenue account.

Okay. And I take it your -- this has -- will there be a subsequent slump in revenue as the result of a lack of deferreds that you can roll up to revenue?

Oh, no, we don’t anticipate that.

So it’s essentially a sequencing of -- it’s when you’re allowed to build is the issue here.

Right. You know, that -- you know, between percentage of completion accounting which accounts for the efforts applied to each engagement on, as I said, a percentage of completion method, the deferred revenue is dependent upon invoicing the customer.

Okay. And IDS, do they have any cash on the balance sheet?

Do they have any what on the balance sheet?

Cash on the balance --

Oh, cash. I don’t know that I can answer that, but in no --

I think relative to 70 million, probably not. I don’t know that we’re allowed to do that because under our NDA’s [ph] we sign them until [indiscernible].

Yeah, I would make the assumption that we’re not planning to acquire the company for any other assets other than the technology.

Okay. And do they have deferred revenue that might disappear as a result of purchase accounting?

Yes, they do. They have a fair amount of deferred revenue. I really can’t get into specifics. But, as a result of purchase accounting, we will in fact, lose much of that.

Okay. And are you going to provide guidance upon closing or do we have to wait until the next conference call, or when do we get a [indiscernible] combined business?

Of which business?

The combined business.

Oh, the combined business. Well, I think we provide upcoming guidance, historically we’ve never broken out individual product lines and I don’t think we will do that going forward. But, we will announce when we close the business and if our results are materially affected as a result of the closure in the third quarter, we would probably make a reference to that in our subsequent conference call.

Okay. And finally, the $1 million you mentioned, is that something that if they close this quarter you would probably see $1 million in the current quarter, or is that the current quarter’s revenue impact for a full quarter?

No, it’s anticipating closing the transaction in the latter part of the third quarter and some assumptions related to how their business will roll out from July 1st through the closing point and what might be left in backlog as a result of either new bookings or services that would be delivered after the close of the transaction. And it will most definitely be less than a $1 million.

All right. So the 10.8 to 11.3, that’s what it’s going to be pretty much regardless of what you close; right?

Yes.

Okay. Thanks, Steve.

Your next question is from Gus Richard.

Good afternoon. Can you talk a little bit more about the three new engagements as far as, you know, you say they -- are they flash, logic, B ram, any color there?

Primarily all in the logic families, maybe with some embedded. Some other things we are seeing at 90-nm is the process technologies people are bringing up first. [indiscernible] was kind of your [indiscernible] logic first followed by your [indiscernible] followed by some of your embeddeds. We are seeing on some of the embeddeds come up relatively quickly. I think, by and large, still focused on the [indiscernible] based technologies. We have done some small amount of assessments in the memory area and believe that our technology is very appropriate for memory and has some customer affirmation of our conclusions from a technical standpoint, from a small assessment.

And on the going forward-basis, you make this expand into more [indiscernible] memory areas. But, for these three primarily on the bulk of the revenue being the logic area.

Okay. And I think, John, early in your comments you talked about yields coming up at 130.

Uh-huh.

Is that -- are you seeing this across the board or are you seeing this specific to your customers? In IBM’s results, for example, they alluded to low yields as an issue.

I think, of course, from our perspective, we’d like to believe that our customers have some of the better yields in the industry. And, in fact, as we go [indiscernible] benchmark, we do see that our customers generally are doing pretty favorably.

I think the point you’re bringing out, the defect densities are [indiscernible] of inverting the yields, are still all over the map. But, there are some manufacturers that are getting down into what would be very competitive defect densities. So if you were to look, you know, a good [indiscernible] technology may be running on a [indiscernible] yield model of .3 defects per CM squared or less. And a year ago, there were very few .13’s that we saw, even sub .7 or .8. And now we see many -- not many, but at least a few manufacturers running sub .5, enhanced from a [indiscernible] standpoint, it’s pretty competitive. But, we do still see manufacturers that are well over one defect per CM squared at .13 as well. So the range is a factor of 3 or 4 still. But, there are folks that are down there pretty decent numbers.

Got it. Okay. That’s it for me. Thanks.

Your next question is from Dennis Wassung.

A couple of quick questions. First off, on the gain share. Four engagements to three customers. Are these all -- obviously, one of them is a new gain share engagement, I guess. But, are the rest of those still early on in the process or will any of those be winding down or are we still pretty much in the early innings there?

One’s probably still lying down and the other ones are probably all newer.

All right. So one’s winding down.

Yes.

On the TSMC contract, I think you put in your press release that you reached your first milestone and you had planned on completing, I guess, the final milestones by the end of the year. I guess, is it fair to assume that you should start to see volume revenue early in ’04 from that?

I think that milestones and anything that [indiscernible] with volume revenue are really pretty disconnected since the milestones in these cases are adoption of our technology and validation that our technology is working as part of their overall ramp. Now, you would need to talk to them about how their adoption of their 90-nm solution is going on with their customers and when they would anticipate going into the higher volumes.

Okay. But, I guess they’re still in the process of developing the line at this point and it’s fair to say that they wouldn’t be in production until the final milestones are completed?

That I really couldn’t answer that.

Okay.

I think that’s really they’re -- they would know that a lot better than we do.

Okay. I guess a bigger picture question. You talked about broader, but not quite pervasive strength that you’re seeing out there. Could you talk a little bit more about that? Are you seeing strength in specific end markets or geographies? I guess, which areas are getting better in, I guess, a just a little more commentary would be helpful.

Sure. I think throughout the course, we’ve seen Japan be relatively robust and we continue to see that. More broadly in Japan than it was, let’s say, six months ago. So I think six months ago, the consumer electronics folks were probably the most -- the kind of non-traditional Japanese companies where the non-traditional semi-conductor companies so that ones in the consumer electronics companies that also had some IC production. I think early on they were the ones we saw that were the most [indiscernible] the most [indiscernible] confident. As we’ve gotten into this year, we’ve seen it more broadly within Japan [indiscernible] supplier based seem to be a little bit more confident than they were, let’s say a year ago.

Within outside of Japan, the IC’s related to cell phones and handsets. Customers in those market segments seem to be relatively more confident in at least requesting to look at proposals for [indiscernible] technology for products in production ramps in these [indiscernible] nodes. We, you know, what would be traditional IT infrastructure or stuff related to communications infrastructure IC’s, we still don’t -- those customers in those segments don’t seem to be either at reasonable volumes getting effectively into the -- seeing our -- we’re not seeing them contribute to gain share materially and we’re not seeing them being as aggressive on requesting new proposals and new technology ramps, et cetera.

So is that more color?

That’s some good color. You also talked about in your comments about customers being more willing, I guess, to engage PDF or look more at PDF’s technology -- or more willing to use your -- or at least about think about it. Is there a structural change in the attitude of the major customers out there that’s sort of happening or are you just getting enough credibility now or have enough experience and enough publicity that they’re starting to pay more attention?

Well, there’s probably two parts to my answer on that one, Dennis. So when we first brought out this technology, the customers adopted it in a fire-fighting mode. And when we did -- we [indiscernible] at one customer’s [indiscernible], it was maybe six or nine months after the ramp was done and everything was over [indiscernible] go up. Now, we have, you know, because it was well, gee, is applying this kind of infrastructure an indication that your yields aren’t good? Now we consistently see customers -- we have a couple of customers at the 90-nm node, one particular who’s gone, and when they’ve made proposals to their [indiscernible] customers and foundry customers, I said we use PDF technology as a way of ramping, and this is our performance over the past few generations. And in terms of improvements on introduction of processes, introducing at lower defect densities and ramping to mature yields faster.

And to me, I think there’s two components as to why that’s happening. Number one, the industry’s understanding that process design integration is a dominant driver on yields. And therefore, it’s something that you need to address proactively.

And number two, I think that for some of our customers, they find that by showing that our technology is part of their solution -- or a critical part of their solution, they are building confidence. And I’ve talked to [indiscernible] customers after those companies have gone in and talked to those customers and said yeah, we heard about you from a supplier and they said the attributed your technology as being part of the reason why they’ve had effective ramps and we’re very impressed with their ramp rates.

So I think that that’s a really good thing for PDF in general. And the press release this past quarter, I think what you’re seeing is leaders saying process design integration is a major issue. I know that TSMC’s [indiscernible] form, they told customers that at 90-nm yield is a designer’s issue. It’s not just a fab issue. And I think that’s again winding the understanding that process design integration is important.

So yeah, generally, good and I think part of it’s just because [indiscernible] is the same all around the world and so these things matter. And number two, I think more customers are getting an appreciation for what our technology can do.

That’s great. And I guess one last question. Back when you talked about winning the big foundry order, TSMC, one of the potential benefits was gaining more mind share with the fabless customers, short of leveraging TSMC’s customer base. Any progress there? Are you starting to get any more momentum there or just any more comments there would be helpful?

Yeah. It’s a good question, Dennis. I think the press announcement just went out. I think it’s -- we’ve noticed that with a number of customers have recognized that press announcement. We’re appreciative of the fact that we were able to put that announcement out there. And I think it broadly crossed the IDM space and the [indiscernible] space having customers take a look at PDF technology for that and a number of other reasons. There have been a number of other customers who at least when they’ve made customer presentations said very favorable things about our technology to fabless companies.

So in general, I think all that’s contributing to the momentum. I don’t think we should point to business that’s been created as a result of that specific contract and maybe early for that to occur.

Okay, great. Thank you very much.

You have a follow up from Bill Frerichs.

You may have said this, but I had to -- I was distracted for a second. But, Steve, did you give any geographic breakdown -- delineate 10 percent customers either on orders and revenue and can you tell us if backlog has grown?

What the -- from the 10 percent customers, I’ll say at this juncture that we had four during the quarter. I think I will wait for our SEC disclosures of that in our 10Q before we go into any particular details. From a geographic concentration perspective, our revenue broke down 75 percent in Asia and 23 percent in the U.S. and that leaves about 2 percent for Europe.

Let’s see I mention customers geographic. What was the other area you had asked, Bill?

Backlog direct.

Well, backlog has not been a statistic that we’d ever issued or spoke to from the perspective of it’s pretty difficult to realistically and fairly quantify gain share. And we felt that it would always be misleading to speak to a backlog number and have to make some assumptions about how much gain share we would achieve on a contract.

How about [indiscernible] backlog?

I don’t have that statistic readily available.

I think it’s safe to say that we’ve said we see about right at 75 percent of the quarter going into the quarter and about 50 percent looking -- greater than 50 percent looking out a couple of quarters, and I don’t think that’s materially changed.

Okay. Thanks, John.

[indiscernible] the basis for how we look at a guidance perspective.

Very good. Thanks.

Your next question is from Joan Tong:

Hi. I have a question here. I just wondered are you actually have been talking to any EDA companies right now [indiscernible] manufacturability area is gaining a lot of focus or interest recently. I just wonder what role PDF Solutions is playing in this particular area and what benefit PDF would get from this. Would that be in terms of partnership, opportunities, or business opportunities?

Thank you, Joan. I think I’ll take. The design automation [indiscernible] in the second quarter. I made a couple of press releases, one about [indiscernible] and one about a relationship with [indiscernible] providers as well as with Artisan [ph]. We, of course, also recognize the same trend that you’re seeing which is, and I think as I mentioned at TSMC is also seeing, which is that yield is becoming a designer’s issue. But, I’ve created a number of opportunities for us to talk with EEA [ph] companies related to ways that we could partner.

As you know, I remember talking on the calls in the past [indiscernible] about trying to make our investments with partnerships that look like they will result in revenue for us and for our partner in the reasonable short term. So we do have discussions like that going on. We also are talking quite a bit to our customers as we look at our design based yield improvement technology and look at how we would best integrate that in design [indiscernible]. We are taking the queues from our customers about where they see that, which tools and what systems they think that would be valuable to be integrated with. And we will work with those [indiscernible] for whom we believe there’s a revenue opportunity for us and them with their key customers and ours.

So we expect later on this year to make another announcement related to our design based yield improvement technologies. And when that comes out, I think you’ll see increased relationships with design automation vendors.

All right. Thank you.

Your next question is from Erach Desai.

Hello, Erach. Are you there?

Hello. I am here. I think the questions have been exhausted, so let me ask more in terms of looking at -- if I look at what the consensus numbers are for the year -- 44 million in revenues -- that would imply north of 13 million for the fourth quarter, and I assume that that’s without whatchmacallit -- the idea is acquisition built into the fourth quarter. Is that sequential ran from something like 11 to 13 million plus, something that is given the [indiscernible] of 50 percent visibility into that quarter feasible?

We haven’t provided guidance for Q4 at this time. But what I will say, if you look at Q2 2002, we, I think, achieved around $12 million in revenue on a smaller infrastructure in terms of technology, and in folks, and in company. So I think we’ve looked at that -- been looking at what is our potential as a business in terms of revenues and we -- although, we’re not providing guidance for Q4, that number’s not out of the realm of possibilities to achieve in that quarter.

That’s a fair [indiscernible]. Thanks, John.

Sure.

Again, if you’d like to ask a question, please press star then the number 1 on your telephone key pad.

Your next question is from Greg Weaver.

Hi. Just on the TSMC, I can’t remember how it shook out, but do they have the ability to force the fabless guys to use you guys?

[indiscernible] such a great -- I wish they did. I think, Greg, they -- the reality is that TSMC characterizes their process with our infrastructure. Part of what that will enable is they will have the ability to run our yield simulator on a customer’s layout. I think as a customer may recognize that there’s an opportunity to improve their yields from a design perspective by changing their design. It’s not just a fact of your process issue. The designer’s going to have an interest in being able to make those improvements and make those changes.

So since -- as part of this contract and we’ve talked about this a couple of quarters ago before we could say it was TSMC. Part of this contract was the delivery of our yield ramp simulator calibrated to their silicon. That gives the ability for the foundries to identify how a designer could make improvements in their silicon yields as well. And I think that will create a mutual benefit for the designer to go back and look at those things as well.

So whereas it might not be as forced to use, I think they can demonstrate to their customers how it will be good to use and great value for both parties. And so from that perspective, I don’t think it will be a force, but I think it can have a very positive impact.

Well, if they get better yields, couldn’t theoretically they get better utilization of their own equipment and, you know --

Actually, yeah, it’s an interesting thing. I’ve looked into a bunch of folks who were [indiscernible] to high utilizations in the leading edge nodes versus the trending edge nodes. And you really kind of need to back out what that company’s defect density is that they’re running at to understand if that utilization is high because there’s inefficiencies in the silicon or that utilization is high because there’s actual real product demand. And I think with some of the foundries and companies you’re seeing, it’s because of actual real product demand. And in some cases, it’s because of inefficiencies in production. So they may all report 90 percent utilizations, but the root cause of the reason for high utilization at 130, maybe that’s way different.

So now if they can identify -- a foundry can identify a way for a designer to make an improvement in their design to improve their yield, then they get a better overall utilization out of -- true utilization out of their silicon and can forestall having to order more capacity to serve those customers. That drives up their profitability, drives up their customers’ profitability, and that’s good for the echo system.

Okay. And Steve, on -- you’ve mentioned about one-time charges or expenses in this quarter. Was relocation any sense of the magnitude of that?

Well, it -- it’s probably -- these are -- we were particularly talking with regards to two relocations, one within the United States, one within international relocation of some senior positions. You know, these are fairly typical for such positions not astronomical, but reasonable business decisions to move these people to more efficient locations. It’s not -- I don’t want to quote a number, but in the aggregate, it will probably be ultimately roll out to be less than the half million dollars over multiple years.

And on the IDS, now, when you’re talking about [indiscernible] going up, despite the revenue increase, your EPS is about the same. That only reflects a small slice of IDS’s outbacks for the quarter, so it will be go up again in the December quarter; is that correct?

So, Greg, I think your question is hey, in this quarter, you’re saying your operating expenses would go up if you were to close in the quarter because you need to find some of the costs associated [indiscernible] above the costs of goods; is that correct?

It’s only a partial basically. Let’s say you close at the beginning of September one month and then the December quarter is going to be even higher because you’ve got the other two months; right?

Right. Right.

But, the [indiscernible] revenue would also be different than they would be in Q3.

Greg Weaver. Right. Do we have a sense of what the run rate of the IDS is?

We haven’t provided that information. I think that’s their still confidential information until it closes. When we do provide guidance for Q4, I think you’ll get some indication of what that means for our overall business.

Do you plan on putting on an 8K with pro formas in there?

Yes, we --

Yes. We’ll file an 8K within 75 days of closing the transaction.

Okay. Thanks.

At this time, there are no more questions. I’ll now turn the call back over to Mr. Kibarian for closing remarks.

Thank you. In summary, the second quarter PDF continue to execute on our business plan and make strategic acquisitions to explain the PDF product offering. These efforts position PDF for long-term growth by providing broader solutions to help our customers as they move towards WAMA meter processes and products.

Thank you for joining our second quarter 2003 conference call. Good-bye.

Ladies and gentlemen, this concludes today’s program. Thank you. You may now disconnect.