PDF Solutions Inc (PDFS) 2003 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the PDF Solutions Inc. Conference Call to discuss its financial results for the Fourth Fiscal Quarter ended December 31, 2003. 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 "*" then "0" on your touchtone telephone. As a reminder, this conference is being recorded.

If you have not yet received a copy of the corresponding press releases, they have been posted to PDF's website at www.pdf.com. 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, and demand for its solutions. 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 10-K for the fiscal year ended December 31, 2002, and similar disclosures and subsequent SEC filings. 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.

Now, I would like to introduce John Kibarian, PDF's President and Chief Executive Officer and Steve Melman, PDF's Vice President of Finance and Administration and Chief Financial Officer. Mr. Kibarian, please go ahead.

Thank you and welcome everyone. For the fourth quarter of 2003, PDF is reporting total revenue of $12.1m and pro forma net loss of 1 cent per share. Our fourth quarter results are within the projected range as we previously provided. For the year ending 2003, PDF is reporting total annual revenue of $42.5m and pro forma net loss of 4 cents per share. This loss was primarily due to our increased investment in research and development in sales activities. We chose to maintain our product development in sales investment plans during the extended semiconductor downturn because we believed and continue to believe that having a strong competitive position at the beginning of an upturn is key to our success. Throughout 2003, PDF continued to expand its product portfolio by developing new characterization vehicles in software to address the demands of the most advanced technology nodes. In the fourth quarter of 2003, we continued to see the benefits of our investments, specifically, first; PDF added another customer of our 90-nanometer ramp solution bringing the total to five. This adoption rate is faster than we saw at 130 nanometer and 180 nanometer process nodes. We anticipate more adoption of our 90-nanometer solution for additional fabs within our existing customers as well as with new customers during 2004.

Second, driven by demand for consumer products as well as cost advantages over both 130 nanometer node and 200mm wafers we see continued -- we see semiconductor companies rapidly moving to the 90 nanometer node on 300mm wafers. We believe this transfer to our advantage because our 90-nanometer yield ramp solution is field proven.

Third, we see our solution becoming an integral part of our customers' business process for advanced technology nodes and fabs. For example, in the fourth quarter a customer expanded their business with PDF to span 130 nanometer, 90 nanometer, and 65 nanometer production at both their 200mm facilities as well as their 300mm facility. Our customers tell us that PDF delivers accurate yield prediction and quantification of yield loss via our proprietary test vehicles, tester, and our analysis and yield simulation software. Four, our offering became more comprehensive. Through the integration of acquired products, our solution now addresses more of our customers' yield ramp needs. These four benefits are reflected in the growth of our design-to-silicon-yield solutions' revenue quarter-over-quarter and year-over-year. Although, gain share results for the fourth quarter were as expected, our current guidance for the first quarter of 2004 reflects the risks associated with early ramps at advanced technology node.

Let me explain this effect. As older contracts expired, gain share has become primarily comprised of revenue from ramps in the early stages of volume production. Early in the ramp, as you know, there are more variables affecting our ramp, total yield than later in the ramp. This with is confounded by new equipment purchases during the ramp of a new process which we see occurring now possibly because spending with delayed during the downturn. As we have discussed many times our gain share model is based upon PDF sharing in our customers gain. Their gain is a result of their total operational success. In the first quarter of a volume ramp, operational effectiveness is the most volatile. Specifically in two leading edge volume ramp engagements, the risks associated with equipment start-up and process sensitivities caused the yield to deviate from their trajectory. For both of these engagements the end of 2003 was the beginning of volume production for these ramps. As a result of the four anticipated contributors to PDF's first quarter 2004 gain share, two are expected to contribute much less than previously anticipated. In both of these cases, improvement plans are already in place, which is expected to mitigate the impact of -- on gain share over the next couple of quarters.

Going forward, although from time-to-time there will be other ramps with similar volatility on their first quarter volume production with a growing base of contracts contributing to gain share, we expect the affect of any single ramp's volatility to have less impact on our results. We are pleased that even during this time of volatility the same customers enter into new contracts with PDF during the quarter. We believe this is indicative of the strength of our partnership with our customers, and further evidence of our products becoming key to our customers' success.

An objective measure of the success of PDF's yield ramp business is that in 2003 PDF doubled its penetration of the top 15 semiconductor companies going from 3-6. In addition, we also gained three new customers in top 15 through our acquisitions. Now, we'll turn the call over to Steve, who will discuss in detail our financial results for the fourth quarter, a summary of 2003; and our guidance going forward. Steve.

Okay 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.

Revenue for the fourth quarter-ending December 31, 2003, totaled 12.1m, an increase of 34% compared to the fourth quarter last year and an increase of 7% sequentially from last quarter. These results were within the range provided in October during our last conference call. The increase from last year's fourth quarter was due to the increase in both design-to-silicon-yield solution and gain share. The increase from Q3 to Q4 of 2003 was a result of an increase in design-to-silicon-yield solutions more than offsetting a decrease in gain share. Design-to-silicon-yield solution's revenue totaled 10.5m for the fourth quarter, a 38% increase from the comparable period last year and an increase of 16% from last quarter. The increases from last year and last quarter were the result of greater demand for PDF's products and services. As the industry continues to be optimistic, we are entering a recovery and continues to increase investments in new process technology. We continue deeper penetration into existing customers and look back on a year where we continue to broaden our customer base. Gain share revenue for the fourth quarter generated from three customers and three engagements totaled $1.6m, a 15% increase versus the comparable period last year, but a decrease of 29% from last quarter. Gross margin for the fourth quarter excluding amortization of core technology was 69.5% of total revenue, an increase of 7% from the fourth quarter of last year and an increase of 3% from the third quarter of 2003. Improved margins on design-to-silicon-yield solutions offset the impact of the dropping gain share from last quarter, while both improved margins on design-to-silicon-yield solutions and the increase in gain share contributed to the improved margins compared to last year. Total operating expenses before amortization of stock-based compensation and acquired intangible assets were 9.1m for the quarter, up approximately 2.5m or 38% from the fourth quarter of 2002 while increasing approximately 1.5m or 20% from last quarter.

Generally, across the board expenses are up primarily due to the acquisition of IDS Software Systems, which closed late in September 2003. Research and development expenses for the fourth quarter increased approximately $1.2m or 30% from 4.1m in the fourth quarter of 2002 due to increases in personnel related expenses, primarily as the result of our acquisition of IDS. Research and development expenses increased sequentially from the third quarter of 2003 by approximately $897,000 or 20% again primarily the result of the acquisition of IDS. Selling, general, and administrative expenses were 3.7m in the fourth quarter of 2003, up approximately 1.3m or 51% from the fourth quarter of 2002. Increases in personnel costs and sales and marketing functions which included employee sales commissions on strong new bookings as well as additional headcount from the IDS acquisition and outside sales commissions contributed to the increase. SG&A expenses increased approximately 633,000 or 20% sequentially from the third quarter due to the aforementioned increases in employee sales commissions and additional personnel resulting from the IDS acquisition. Pro forma net loss for the quarter excluding amortization of stock-based compensation and acquired intangible assets totaled approximately $135,000 or 1 cent per share. This compares with the pro forma net loss of $264,000 or 1 cent per share for the fourth quarter of 2002 and pro forma net income of approximately 332,000 or 1 cent per share in the third quarter of 2003. These fourth quarter results were in the middle of the range provided in October. On a GAAP basis including all acquisition related expenses and amortization of deferred stock compensation, reported net loss for the quarter was 1.3m or 5 cents per share.

Our balance sheet at December 31 remained healthy despite using approximately $6m in cash to finalize the IDS acquisition and spending approximately 800,000 on new fixed assets. Total cash declined 7.5m to 39.1m during the quarter as a result of these investments coupled with an increase in accounts receivable. Accounts receivable increased 2.2m to 11.9m during the quarter; however, less than $1m is older than 30 days and in excess of 45% of the outstanding billed accounts receivable at December 31 has already been collected.

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 Q1 and Q2, 2004 are forward looking. These statements include expectations about our future financial results and performance, growth rates, the success of any business objectives, product and service features and introduction, client products, and demand for PDF design-to-silicon-yield solutions. PDF's actual results could differ materially. You should refer to our current SEC filings and understand that the forward-looking statements made during this conference call are based upon information available to PDF today. We assume no obligation to update them.

Now, for the first quarter of 2004, we reiterate the guidance we've provided in our outlook press release earlier today. Guidance is for revenue in the range of 12.5-13.0m, a revision to prior first quarter guidance due to an expected decrease in first quarter gain share. We are also providing guidance for pro forma EPS in a range from a loss of 1 cent to a profit of 1 cent primarily the result of the decrease in revenue. As John already mentioned, we have good visibility with regard to our customers' production levels. We see wafer starts and we track yields as we move through production quarters. Gain share is a highly leveragable component of our revenue model; however, with the rewards we also accept the risks.

Looking ahead over the next two quarters, as expected we would see design-to-silicon-yield solutions continue to grow and gain share after a weaker first quarter is projected to increase sequentially. This afternoon we also reiterate the second quarter guidance we provided earlier today in our outlook press release for the revenue in the range of 14.4-15.1m and pro forma EPS of 3-5 cents. This represents continuing adoption of PDF technology, our customers' success utilizing our technology and of course our execution. 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 "*" "1" on your touchtone phone. If you are using a speakerphone, please lift the handset before asking a question. Please wait one moment for our first question.

Our first question comes from Garo Toomajanian with RBC Capital Markets.

Hi guys, just wanted to make sure that I'm clear on the gain share issue since I was a little late coming on the call, -- it sounds like what you are saying is that there is a couple designs that are transitioning out of gain share and a couple of new designs that are transitioning in, and as these new designs are at the beginning of their ramp gain share is going to be less until as to the yields improve, is that right?

Hi, Garo, this is John. What we've said is really, actually to leading us -- tow leading-edge technology ramps, so it is somewhat -- you know it happens to be juts in each case there is one product. In both cases, the first quarter's production was weak, or that occurred at the end of 2003 was lower than our original target from a yield standpoint and as a result, yes those two did not contribute as much or were not as expected to contribute as much in Q1's gain share as we anticipated.

Okay do you have a sense of how many designs you expect to contribute to gain share in total in Q1?

The number of designs is more than -- when we record you know, the number of engagements, I think we -- as we said in the -- as I've said we anticipated four engagements, in each engagements that is, you know, an entire production node, so actually there should be 130 nanometer at this 200 millimeter facility. In some cases there may be only one design in that node and in some cases there may be 4 or 5 designs or more in that node.

Okay.

You know, I don't know the exact number of designs that that would represent, but it is certainly more than the number of engagements on substantially. And also technology nodes have multiple products.

The -- I guess better than expected DYS revenue at least in my model, do you think that some of that came from the new contract, and maybe an other way to look at the question is the sequential increase in DYS revenue was a lot of that due to the new contract that was signed?

I think that some of the fifth 90-nanometer ramp contract?

Yes.

Or the -- so I think that contract contributed some I think as our contracts tend to be percent completion if something finds in the quarter the D2SY revenue is typically seen over 12 months or more. And you are only going to see 1-3 months in that quarter. So the -- of the total design-to-silicon yield solution portion of the contract it's you know, may be 10 of percents but not much more than that.

Okay and regarding the IDS, I remember before that acquisition closed they had announced that the world wide with Motorola, can you give us a sense of what the status is of those deployments and if you have been able to up-sell any other PDF products of those type?

I believe that, you know I am not sure with exact specifics on Datacom but primarily though I believe it is minusing, is that we are still on target on the deployment. We are across IDS customers and PDF customers, we are cross selling combined solutions and we have started making traction with customers taking products, -- the combined products to both places as far as the specific economy you are mentioning Motorola. I am not aware of -- us up-selling a combination solutions at this time.

Okay. Thank you very much.

Our next question comes from Wills Frerichs with D.A. Davidson.

Good afternoon John and Steve, I don't know many have asked this because I was pulled away for a second. But referring to the large sales commissions on bookings how was the business for those firms?

Those larger commissions were on integration yield ramps.

So how [inaudible] is going to be larger on those.

So, essentially it is going to work its way through as solutions business?

Correct.

Right, we will go to a similar cycle on those where we have, you know, 9-12 implementation period and then we have you know gain share components at the backend.

Great and the second question is how is your initiative with the foundries? Is there any traction there, has your technology been pushed down to the foundry customers, and sort of that ditto question with the EDA companies with the pDfx product line?

Thanks Bill. With the foundries, we've spend tracking through 2003 adoption of our solutions that we announced earlier in the year test and series of customer and we have been working quite closely with them and they are adopting our solution in their factories. The technology node is a new node for them, and I don’t know whether there is all that many designs we are in discussions with them in other foundries for bringing out pDfx solution out to their customers. I think it is a bit premature in the foundry space on that when you look at where we are, working on the technical side on that. With respect the second part of your question if you could refresh my memory.

pDfx [inaudible]?

On EDA -- I am sorry the EDA companies.

What's the uptake by the EDA companies? What's their status? You told me at one point that Magma seemed to be better -- architecturally better ready to accept the solution, what are the others doing [inside]?

Yeah, so I think what I was referring to in that case was tighter integration, so in the case of some of our integrations with EDA companies we fundamentally use a file based method to integrate our solution with their SP&R systems. In the case of Magma, they are ways to integrate more tightly through their API and then creating interoperability on the TFX software and their SP&R system. In the -- and actually in a couple of cases we've had ongoing discussions with the EDA vendors and I think they are probably further along with one of them, but at this point we are still not announcing who and when would there be an interoperable product.

Fine. Thank you very much.

Our next question is from Auguste Richard with First Albany Corporation.

Good afternoon guys. Could you just give us the IDS revenue in the quarter? Was that a contributor?

Hi, Auguste this is Steve. You know, generally we don’t disclose the individual, you know, components of design-silicon-yield solutions but I can, you know, provide a little more color if you will on some things that we said in the past. One, we were looking to prioritize the integration a) of the people and b) of both the IDS in dataPOWER Technology and the WAMA technology into our core technologies. We also were looking to leverage our complimentary customer bases in order to make progress to broaden the relationships that we had with the customers that we thought could utilize both of our technologies. And we also mentioned that it was going to take a couple of quarters to replenish what was somewhat of a depleted pipeline. So, you know, and those three issues, I think, I can say that we are, you know, ahead of schedule in all three of those cases. We have, as we mentioned on the last call, we moved the people into our facilities very quickly. We have rapidly moved along with the integration of our technologies. We are cross selling and you know, we believe we are ahead of our, you know, couple of quarter time line in terms of breaking the membrane and building up the pipeline.

So, in summary, and we are not going to disclose what the individual components are, but we can say that we are on or ahead of schedule in each of the three areas that we wanted to address.

Okay. Long answer to a short question, just from modeling purposes was it, you know, less than $1m from IDS in the quarter?

Well, you know, I think, we are just not going to disclose -- we had suggested earlier on what the rollout of the contribution might be, but at this juncture we made a decision that we are not going to breakdown the components within design-to-silicon-yield solutions.

Okay and then secondly, how many new contracts? There was one new customer in the quarter, how many new contracts did you sign for yield ramp?

Yeah, there were actually three new contracts, but I need to explain that a little bit, it was one from a new customer and two from an existing customer, but quite frankly the two new ones, you know, were replacing other contracts that had run their course. Now I can say that the new contracts, you know, were in quite favorably aligned with our longer-term business model and we feel that these new contracts will allow us to plan our resources and project our revenue quite nicely.

Rich, I'll add a little bit of color to that. In one case, customer added a new production facility, a 300mm facility, our original contract was only for the 200mm facility and so the old contract was removed and then a new contract was put in place to cover both 200 and 300mm production. So the overall wafer volume of the combined production went up.

Yes. Got it. And then just to go back to the issues with the gain share, you know, it sounded like your customers' in the fourth quarter had some yield issues, was that related to or lower volumes of wafers coming at the door, was that related to new products -- new equipment coming in and you know increases in this activity are lower than expected demand for the product, you know, can you add a little bit more color?

So. You know, what we saw happen is the installment and bring up of the equipment was pretty late relative to the volumes. The factory is actually are loading up volumes, it's not the case that volumes are unloading up; and the yields dipped on volume ramp up. I think if you look at, you know, we are still going back and trying to understand, is it from our standpoint, is it because time from installed to volume load was shorter than what we've seen. I think folks have been picking up capacity relatively quickly in the last half of 2003 and I think when you look at that there was seen not enough time between when the equipment was brought in and stabilized the volume load happened and what that did is bring down -- fundamentally bring down yields. But it is not a lack of demand on the product or a lack of volume capacity increasing in the factory.

Right, so that's okay. I understand and then just the last question, you have now fixed customers that you are working with yield ramp contracts, up from 3 last year and then there are 3 additional top 15 customers that IDS brings into your revenue base. Is that correct?

Yeah it is little bit. Yes, it is correct, except that there is more than -- there were more than three customer customers that have yield ramps and more than 6. Last year it was more than 3 and this year it is more than 6, but the qualified was top 15.

Right, I'm sorry.

So, there are more than that outside of top 15.

But right --

What we've been seeing frankly during the downturn was the -- you know we gained adoption by the most leading customers for the must leading technology node as we saw them invest the most aggressively.

Okay got it, alright thank you very much.

Our next question is from Dennis Wassung with Adams, Harkness & Hill.

Thank you. A few quick questions; I was curious if you, -- I think you might have said this early on the call, I apologize, but were there any pDfx revenue in the quarter, and what's the status on sort of rollout of that tool at this point?

In terms of status of rollout we've completed I think in the fourth quarter we've completed a data prove out, added customer that silicon diode demonstrated a yield improvement on that silicon, and I think at this point we've up down but taking that back to our customers as well as other customers and generating revenue. I don't know specifically if there was any significant revenue in the quarter for pDfx other than evaluations.

Okay let say though, I guess in general that evaluations are going well with other plans and [inaudible] --?

Real hard to hear you, Dennis but yes the evaluations are going well, and we do see significant yield improvement and we see the futures of the pDfx being a significant contributor to that improvement.

Okay [inaudible].

I am sorry Dennis it was very difficult to hear you just then.

Dennis has withdrawn the question. Again, I would like to remind everyone, if you have a question please press "*", "1" on your touchtone phone. Our next question comes from Erach Desai with American Technology Research.

Hi gentlemen my company specific questions have been answered. Perhaps say a broader question for you John. If -- and tell me if you don't agree with my assessment on the premise. If the challenges of ramping 130-nanometer production wise were a lot more yield related than say design and design tools related, then it appears 90-nanometer for at least from the engagements that you are involved in are going off pretty well. Can you speak a little bit to perhaps both as an adoption of your technology and perhaps the readiness of the EDA tools that 90-nanometer appears to be going smoother?

Thank you for the question Erach. As far as EDA tools being more ready for a 90-nanometer than they were for -- let us say for 130-nanometer, I don’t know that I would equipped to just to answer that question. I mean frankly we still -- we track what we call product systematic yield loss on product say each of the technology nodes. I don’t know that we see that there is less product specific sensitivities, in fact how do we see on at least as much if not more, you know 90-nanometer we have only seen a few products in the node. So it is hard to say if in general it is more or less than it was at 130-nanometer node. As far as -- you are quite right on the 130-nanometer ramp up was a very delayed ramp up in the industry as a whole. We had some customers who used our technology and we saw them ramp actually quite aggressively. Overall, I think there was a wide variety of performance. On the 90-nanometer node, I think a lot of folks have thought that because 130 was so hard, 90 would also be protracted and delayed. I think what we are seeing is when you look at the economic benefits if you can be effective at 90 there is lot of reasons to be there especially given that the 300 mm tools that is really targeted around the 90-nanometer node. So, we are seeing customers for business reasons wanting to go there fast, and as a result looking for newer solutions and newer technologies to get there with less variability. You know, our solution, our technology is a great way to do that and I think that is why we have seen the adoption there. We have as we've looked at the defect densities at 90-nanometer in the fourth quarter on production silicon as well as on test wafer silicon, I think it is actually improving at relatively reasonable case rate and notably the excursions that we talked about earlier in the call. But in general I don’t think it is going to be the protracted situation that you saw at 130, I think you will see them come up throughout '04 -- yields come up throughout '04 very strongly.

Thank you. And could I ask also again sort of unrelated, what are you seeing in terms of the 90 nanometer processes that you are working with respect to SOI, is that -- would you be able to characterize if that's ramping better?

So, I do believe we are seeing our customers make use of SOI. We saw a very little about, I mean, in the previous notes and anticipate significant volumes on SOI. So, I think that is a technology that you will see ramp reasonable volumes in the 90-nanometer node. As far as the yield delta between a bulk wafer and SOI wafer that's still to be seen. I wouldn't anticipate it being -- yielding better, obviously, the performance should be better, but there are obviously a lot of functional yields [basis] you have in terms of material uniformities and consistencies. So I think that's still an open question in terms of what is the yield impact on SOI as it's still very early on.

Thanks.

Our next question come Dennis Wassung.

Thanks, can you guys hear me better now.

Much better, Den.

Sorry about that, I apologize for the connection. A couple of more quick questions here, I am just curious as to your visibility level into the Q2 and Q1 guidance at this point. I am curious if it's higher than normal or pretty much as it normally would be just given some of the changes that you have here?

Dennis this is Steve. I would feel that, you know, the projection that we've, you know, provided today have the same visibility level as we had last quarter. We are comfortable giving out a couple of quarters. You know, we do look -- as I said earlier on the call, we do look at wafer starts, we do look at yields throughout the relative production quarters and we do have good visibility. Unfortunately, you know, sometimes the results aren't as good as we would like.

Fair enough. And one last follow-up question, more on one of the new engagements you signed. You'd mentioned earlier on the call about an expanded relationship with the customer between 130, 90, and 65 nanometer and 200 and 300mm, I just -- I missed a part of that, I was just wondering if you give a little more detail on that? And did you mean the customer were as domestic, international, if you give any information that would be helpful? Thanks.

Yeah thanks. As we haven't announced [who it is] at this time, but as we provide a little bit more color on the call, this was the customer that had 200mm productions expanding at 300mm productions; and despite of that they will either have our yield ramp infrastructure for both the 200 and 300mm production facilities, enhance the expansion of the relationship, and inclusion of more wafers in the total contract effectively as well as incremental fixed fees for installation of our infrastructure on the 300mm facility and to bring that facility as well.

Okay. Now when you look at in terms of that the three new contracts that were signed in the quarter, two of them from existing customers, would this engagement, I guess, this new relationship sort of cancel one of those new contracts, or this be multiple engagements with that same customer?

I assume that represents two engagements, one for each facility how they retract.

Okay, great. Thank you very much.

At this time, there are no further questions.

Thank you. In summary, 2003 was a year-end in which the [NFA] increased adoption of PDF Solutions especially at the 90-nanometer process nodes and 300mm wafer production. We are particularly pleased that we now count as customers nine of the top 15 semiconductor companies in the world and that our gross margins have improved from 2002 levels. PDF Solutions enters 2004 stronger and better positioned to continue to gain market share. Thank you for joining our fourth quarter 2003 conference call. Goodbye.

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