PDF Solutions Inc (PDFS) 2004 Q1 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 first fiscal quarter ended March 31st, 2004. At this time, all participants are in listen-only mode. [Operator Instructions]

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 25 through 31 of PDF's annual report on form 10K for the fiscal year ended December 31st, 2003, similar disclosures and the subsequent SEC filings. The forward-looking statements and the risks stated in this conference call are based on information available to PDF today. PDF assumes no obligation to update them. Now, I'd like to introduce John Kibarian, PDF's President and CEO, and Steve Melman, PDF's VP of Finance and Administration and CFO. Mr. Kibarian, please go ahead.

[joined in progress] --net loss of one cent per share. This non-GAAP number excludes stock-based compensation and intangibles. These results are in line with the financial outlook we provided on January 27th, 2004. As Steve will explain in more detail in a few minutes, while our revenues came in the middle of the range, our non-GAAP earnings per share came in at the bottom of the range, due in part to higher commissions on strong bookings in the quarter. Before Steve provides more details on our financial results, I'm going to update you on PDF's continued execution to our business plan during the first quarter of 2004.

We started 2004 by entering into four new engagements during the quarter. These four engagements spanned technology nodes from 180 to 45 nanometers, process technologies from CMOS to silicon germanium by CMOS. From a customer perspective, let me recount two examples of successful customer penetration. Out, at a leading U.S. IDM, and the other at a leading Japanese IDM. You may recall that early last year, we first had a chance to improve our technologies and services at a leading U.S. IDM. And, when we successfully did so, we then followed up by entering in a full ramp at that customer in the fourth quarter of last year. In Q3 of 2003, I mentioned we had entered into a similar prove out opportunity with a leading Japanese IDM. Notably, one of our four new engagements during this past quarter is the follow-on full ramp for that new customer. Early success and repeat penetration of top accounts like these are key to PDF's success. With this contract, three of the world's top five semiconductor companies are now ramping leading-edge processes with PDF solutions.

For those of you who may be new to PDF Solutions, I'll take a brief moment to explain the products and services we provide and the markets we serve. We provide solutions that fall into three categories -- manufacturing process solutions, design for manufacturability solutions, and product engineering solutions. Manufacturing process solutions such as our Integrated Yield Ramp are targeted for the development and ramp of new processes. DSM solutions are targeted to optimize yields within the design flow and include our PDFX environment, as we well as circuit [surface] statistical design environment.

Product engineering solutions are targeted to optimize the yield of high-volume IC products during wafer production. These solutions include our data POWER yield management software systems. We provide these solutions to IDMs, fabless and foundries alike. Our customers apply our technology to solve yield issues everywhere they occur, both in technology development at advance nodes and volume production at older nodes. With this in mind, we are particularly pleased that the new contracts in the quarter also include our biggest design for manufacturability contract to date. Contributing to the size of this contract is a significant Gain Share component. Beyond demonstrating further adoption of our DSM technology, we believe that this silicon germanium based engagement is indicative of a broad-based recovery for the semiconductor industry from two perspectives.

First, DSM engagement dollars typically come from design R&D budgets, which spending usually lags the initial recovery. Second, silicon germanium technology is more typically found in the communications IC products, a segment of the industry that was relatively hard-hit in the downturn.

Another one of our new engagements is the first 45 nanometer engagement for PDF Solutions. This engagement preceeds any planned volume production at 45 nanometers by at least two years. Early adoption like this at advanced nodes clearly supports our belief that customers' perception of PDF has shifted. Leading semiconductor companies are integrating PDF solutions into the flow early to avoid yield issues later. As you can hear, the broader and earlier adoption of our field-proven process design integration solutions at nanometer nodes is exciting for PDF. We continue to see interest in PDF solutions in the adoption rate at each node and believe that PDF will increasingly be selected as the solution for yield ramps in the world's leading IDM's fabless and foundries.

Our goal hasn't changed -- we are positioning PDF so that our yields ramp infrastructure, including our proprietary test vehicles, will be implemented at every nanometer IC factory in the world.

A quick update about our software products. During the first quarter of 2004, we held the 7th Annual data POWER Users Forum. This forum enables our data POWER customers, as well as potential customers, to provide feedback about the products, share and discuss user experiences, and hear about best practices. Our engineers use this information to continually improve our development efforts. The Users Forum was very successful, with 68 total attendees representing 18 customers and 11 potential customers. By the end of the first quarter, one of these potential customers had already become a new data POWER licensee.

On the last conference call, we said that we expected Gain Share in the first quarter to be soft, due to yields issues associated with equipment start-up and process sensitivities at two leading-edge yield ramps. Gain Share for this quarter came in at approximately $1m, which is in line with our expectations due to the yield performance. In that call, we also said that we expected yields at those ramps to begin to recover in the first quarter, with positive financial impact starting in the second quarter and continuing over subsequent quarters. Today our guidance for second quarter Gain Share, which Steve will provide, reflects those yield improvements. We anticipate improving yields and volumes over subsequent quarters.

Now, I'll turn the call over to Steve, who will discuss the details of our financial results for the first quarter and provide updated projections for the second quarter of 2004 and guidance for the third quarter of 2004. 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.

Revenue for the first quarter ending March 31, 2004, totaled $12.7m, a record for PDF, and an increase of 40% compared to the first quarter last year, and an increase of 5% sequentially from last quarter. These results were within the range provided in January during our last conference call. The increase from last year's first quarter was due to the increase in design for silicon yield solutions while Gain Share remained flat. The increase sequentially from Q4, 2003, was the result of an increase in design for silicon yield solutions, more than offsetting the expected weakness in Gain Share. Design to silicon yield solutions revenue totaled $11.7m for the first quarter, a 44% increase from the comparable period last year, and an increase of 12% 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 in this stage of recovery. As John mentioned, we closed four new yield improvement contracts during the quarter, all with sizable Gain Share opportunity.

Gain Share revenue for the first quarter generated from four customers in four contracts, totaled approximately $1m, a 2% increase versus the comparable period last year, but a decrease of 39% from last quarter. The first quarter's absolute dollar decline was as expected. More importantly, however, the results included one new customer contract, beginning to contribute to Gain Share during the quarter. We anticipate additional contracts moving into Gain Share mode in Q2, with such movement supporting our expectation of the beginning of an upward trend in Gain Share.

Gross margin for the first quarter, excluding amortization of core technology, was 66% of total revenue, an increase of 4% from the first quarter of last year and a decrease of 4% from the fourth quarter of 2003. Improved margins under design for silicon yield solutions only partially offset the sequential drop in Gain Share revenue. When compared to the first quarter of 2003, where period to period Gain Share is flat, improved margins on design for silicon yield solutions contributed to the improved overall margins.

Total operating expenses before amortization of stock-based compensation and acquired intangible assets were $9m for the quarter, up approximately $2m or 29% from the first quarter of 2003, while decreasing slightly from last quarter. Across the board, operating expenses are up from last year's first quarter, primarily due to the expenses of a larger company following the acquisition of Idea Software Systems in September, 2003. We are pleased that operating expenses dropped somewhat in Q1, and plan to keep tight control over expenses in the upcoming quarters.

Research and development expenses for the first quarter increased approximately $900,000, or 20%, from $4.3m in the first quarter of 2003, due to increases in personnel-related expenses, primarily the result of our acquisition of IDS. Research and development expenses decreased sequentially from the fourth quarter of 2003 by approximately $100,000 or 2%.

Selling, general, and administrative expenses were $3.8m in the first quarter of 2004, up approximately $1.1m or 43% from the first quarter of 2003. Increases in personnel costs and sales and marketing functions, primarily the result of additional headcount from the IDS acquisition, and higher employee sales commissions, and higher expenses for legal and accounting services, contributed to the increase. Legal and accounting services rose primarily as a result of activities to understand the legal and revenue recognition issues associated with our new software products and the impact of implementing the requirements of Sarbanes-Oxley, which went into effect in January, 2004. SG&A expenses were sequentially flat from the fourth quarter.

Reiterating the statement made in our press release, in addition to using GAAP results in evaluating PDF's business, management also believes it useful to measure results using a non-GAAP measure of net income or loss, which excludes amortization of stock-based compensation and acquired intangible assets. Non-GAAP net loss for the first quarter ending March 31st, 2004, totaled approximately $370,000, or one cent per share. This compares with a non-GAAP net loss of $658,000, or three cents per share, for the comparable period last year, and a non-GAAP net loss of approximately $136,000, or one cent per share, during our last quarter. These first quarter results were in the low end of the range provided in January, and as John mentioned earlier, was in part the result of higher expenses on sales commissions.

On GAAP basis, including amortization of stock-based compensation and acquired intangible assets, reported net loss for the quarter was $1.8m, or seven cents per share.

Turning to our balance sheet at March 31st, total cash increased $3.6m to $42.7m, while accounts receivable decreased approximately $700,000, to $11.2m. Our aging remains strong, with less than $300,000 older than 60 days and approximately 20% of outstanding billed accounts receivable at March 31st having already been collected.

Before I turn to guidance, I will say it 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 Q2 and Q3, 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 introductions, client products and demand for PDF-designed 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 second quarter of 2004, we reiterate the guidance we provided in our outlook press release earlier today. Guidance is for revenue in the range of $14.6m to $15.1m, simply a bit tighter range and still consistent with the guidance we've provided in January. Gain Share for the quarter is expected in the range of $1.7m to $1.9m. We maintain good visibility with regard to our customers' wafer starts, increasing production levels, and yields. Volumes are picking up and yields are improving. We plan to see the benefit of such dynamics reflected in the beginning of a trend of higher Gain Share revenue.

We are also providing guidance for non-GAAP earnings per share in a range of thee cents to five cents, no change from our guidance provided in January.

Reiterating the third quarter guidance we've provided earlier today in our outlook press release, revenue is projected in the range of $16.0m to $16.8m, with non-GAAP earnings per share from four cents to six cents.

With that I would like to return the call over to the operator and open the floor for questions.

[Operator Instructions] Your first question comes from Dennis Wassung with Adams Harkness.

Thank you. A couple of quick questions, and I apologize, I got on the call a couple minutes late, but on the Gain Share contracts, you talked about one new contract falling into the Q1 revenue mix. I was just curious, what geometry that, I guess, technology node that was manufactured at?

Dennis, I think Steve said there was four contacts that contributed in Q1.

Correct.

So what's the additional one?

No, I might have misunderstood -- I thought there was four customers and four contracts in Q1, and one of those was a new Gain Share contract, is that correct?

Yeah-- yeah, I'm not sure we have that actually. We're trying to look through-- yeah, I'm not sure which one it was.

OK, fair enough, but I mean, is it fair to say it's--

It's one of the leading-edge nodes, I'm sure.

OK. And sort of early volumes, I'm assuming, so pretty low--

Yes, very small dollar amounts.

OK. And I guess on sort of following on to that, you mentioned that you're expecting some new, or other engagements or contracts, starting to fall into that Gain Share pool in the coming quarters. I'm curious as to how quickly you might expect to see additional contracts falling in, and if you see that number, that four contract number turning into you know, is it five, six, seven, or eight contracts in the next couple of quarters. How does that change?

Yeah, so looking at-- we've been looking at the forecast out over the next few quarters, and I think we expect it to continue to increase on the order of a couple per quarter, but you know, the start up is always-- you can always miss a quarter. You know, once they start, they usually stay in there for a while. So you know, I think on average, it's probably a couple of- incremental per quarter. Is that lumpy? Probably, but I don't think we're going to put a guess out there right now.

Sure. OK. Is it fair to say that you're seeing a lot-- I guess a lot more of your engagements or contracts that you've signed in the last couple of years are getting to be in that volume or ramp stage, where there's a likelihood you'll start to see, I guess, just a bigger chunk of these newer contracts falling into that pool? I know you've had a situation in the last few quarters where you've older contracts ramping off and newer ones coming on. Is that phenomena sort of accelerating here?

Yes.

OK. And lastly, on the Gain Share stuff, last quarter we talked about a specific yield issue or a ramp issue with one of your customers. That sort of dominated some of the lower expectations there.

We've actually had a couple, but yeah.

A couple. Is that-- are those problems basically history now and we're seeing volume and yield at those places?

Yeah so I think in part of my script, I did talk about the fact that we-- you know, when we said-- on the last conference call, we said we expect to see improvements in Q1, and that would be reflected in Q2, and further improvements in the out quarters, and hence reflected in further changes in the outlook on Gain Share in the out quarters as well. So that, in part, is a part of the reason why the Gain Share estimate Steve gain on this quarter reflects an increase over-- for Q2, increases-- an increase over Q1, because of the improvements in the yields and those ramps.

OK, fair enough.

And I guess last question for you, in terms of the IDS business, we're seeing revenue ramp here fairly strongly in the next couple of quarters, looking out at your guidance. Any comments on how much of contribution you're seeing from IDS? Is it better than expected? Sort of as planned? I don't know if you want to quantify anything like that. I know you've been reluctant to in the past, but any commentary, even if it's qualitative, that would be helpful.

Yeah, so I think we have an expectation about the number-- you know, the penetration of the IDSC accounts and business outlook then for Create. We do expect IDS and have started to see IDS win data power seats in accounts and recently won at one of kind of a historic PDF customer. And do expect, over the next couple of quarters, to see that trend continue. I think it's about in line with where we expected the business to be. I think we expect that the revenue ramp, if you just look at the Q2 guidance over Q1, a substantial fraction of that comes from Gain Share improvement. And then some fraction of that comes from incremental design for silicon yield solutions business. I suspect that proportional to the business, that's proportionally more in-- due to the integrated yield ramps than it is to upticks in the software business between Q2 over Q1.

OK. Great. Thank you.

Your next question comes from Garo Toomajanian with RBC Capital Markets.

Thanks. In looking at the four engagements, first of all, that's a big jump, so congratulations on that. Were those at new customers or were they from existing customers?

Yeah, Garo, this is Steve. Those, you know, in fact, were from existing customers, although I would want to repeat what John said before. One of the customers, you know, was an introductory engagement in previous periods, which has now turned into a full ramp.

So was it actually four new customers, or was it fewer than that?

No, what I'm saying it was four existing customers, but one of the contracts was a customer previously but for an introductory engagement.

OK. Do you know how many DYS contracts are active right now?

Well, in the quarter, we had 11 contributing over $200,000 of revenue in the period.

OK. And these four new ones probably wasn't a huge contribution in Q1. Those would be contributing to DYS revenue over the next probably three, four, maybe more quarters, is that right?

Yes. You know, one, obviously, I'm repeating percentage of completion accounting, so depending on when the contracts actually closed in the quarter would you know, dictate the contribution that they have, and you know, to your- the latter part of your statement, yes, you know, these contracts will contribute for quite a period going forward.

Great. You mentioned one sort of sale into a-- actually, one data POWER sale into an historical PDF customer. Anything going around the other way?

Trying to think about that.

Just trying to gauge what kind of, you know, cross-selling benefit you're seeing so far, is there more of that to come?

We-- as we close data POWER we did expand into some customers that were historically data POWER customers that weren't historically our customers. Around the same time, and I think the data POWER relationship helped that, but I don't know that it was solely that. I think in the case of the other way around, because of our presence in Asia is-- had been much larger than data POWER's presence in Asia, particularly in Japan, I think we were able to probably create a bigger shadow for data POWER in Asia than data POWER was able to create for PDF, let's say, in the U.S. or Europe, where they probably had most of their penetration, although I think it did help in at least one account.

OK. And last year-- actually, it was actually in Q4, I think, of '02, you signed a deal with a foundry customer. I'm trying to get a-- can you give us a sense of where that stands right now. Is that actually contributing to DYS revenue and have there been any designs that have gone through that might be starting to contribute to Gain Share there?

That's a good question. That is contributing to DYS revenue and we do-- that factory, we believe, will cross over our size limits and also contribute to Gain Share as well.

Great. OK. Thanks very much.

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

Hi. Steve, you said you'd tightened up guidance for revenue in the current quarter. What was the prior guidance? Could you please remind me?

The prior guidance, off the top of my head, was 14.4 to 15.2, so we moved it to 14.6 to 15.1. You know, uplifting the bottom and bringing the top down a little bit.

OK, so if-- we're at 15.2 already- is that impossible?

No. I think we just-- we revised it, based on the Gain Share estimates and based on the DTSY numbers and timing of when we think contracts will close.

OK. And in terms of the fabless or the foundry-level initiatives kind of getting pushed down on to their fabless customers, and also in terms of the various ventures with EDA companies to perhaps help inform their design tools, what's going on in those areas?

Well, I think in terms of the relationships with the design automation folks, as you know, we're coming into [DAC] season. Probably you know that as well as I, and probably just-- I think we're going to hold of until we get closer to [DAC], until we make any announcements there, though we do anticipate making some announcements there.

As far as the foundry and fabless activity, we've been, of course, expanding on our relationships with some of the foundries and some of the fabless, both inherited from data POWER -- that is one place where we have been leveraging data POWER relationships, as well as our initial contracts into the foundries, both in Taiwan and elsewhere. We do expect to see that-- that part of the business increase over the next couple of quarters, as they also start expanding their use of-- more than expand their use of nanometer technologies, like 130 and 90. But I don't think we have a specific thing to announce today about that.

OK, but you did get revenue from one foundry?

Oh, yeah. Actually, a couple.

A couple?

Yeah, yeah.

Very good. Thank you.

[Operator Instructions] Your next question comes from Gus Richard.

Yes, on the silicon germanium contract you guys signed, is that a U.S. customer, and can you talk about what process node that might be?

So it's not a U.S. customer, it's overseas, and I believe it's .18.

OK, thanks.

Sure.

Your next question comes from Dennis Wassung.

Thanks. I guess a couple of quick follow-ups. Sort of following on from that last question, the- of the four engagements that you did sign in the quarter, one was the [IC] customer here at .18. What were some of the other geometries? Where there any additional 90 nanometer geometries signed here, or any other details you have?

I think it was 145. I don't know if it was not 90. I think the others were 130 and maybe 150, or maybe it was two 130s. What-- certainly a 130. The 180 was by CMOS, which is why I think you see it lagging the other-- the CMOS nodes.

Right.

And then I think 45 and 150 or 130?

150.

150.

Do you have any 65 nanometer deals at this point?

We have two 65 nanometer deals at this point. Last quarter, one of them turned into-- both of them were R&D engagements in the 2003 timeframe. In Q4, one of them turned into a ramp engagement, and we expect that sometime in '04, if we have successful completion of that other 65 nanometer; that will turn into a production ramp as well.

OK. And the Japanese IDM that you talked about, that turned into a full ramp, what geometry are we talking about there?

So I don't know that we can give that out, actually.

OK.

But--

Fair enough. And last question, sort of on the DFM side, with the PDFX product, you talked about, you know, a reasonably sized-- or your largest, one of your largest deals yet in that side of the business this quarter. Are you seeing in general more activity on that side? I guess can you talk a little bit more about the progress there? Obviously some of this ties into what Bill was asking, as you get towards [DAC], but anything just maybe anecdotally on the activity levels there?

Yeah, I think a couple of things. We've got silicon got back from PDFX prove out, silicon AB comparisons, and we see a very favorable comparisons. We've also got activity going on, selling activity, going on, DFM in general, both on the [parametric side], which would be Circuit Surfer related, and functional yield side, which would be PDFX related, in a number of accounts.

In the PDFX area, as I alluded to, we expect to make some announcements at [DAC] about expanding on the partnerships that we started last year, I think, in a pretty substantial way. But at this point, I don't know that I'm allowed to say anything, so we'll hold off 'till we get to [DAC].

OK, how many customers would you say-- or if you want to mention it, but is it a few at this point, or is it a handful, getting more to 10 customers using the PDFX products at this point?

I think we're in, you know, a couple [leave outs] at this point and some that are converting, but I don't know that I've got the specific number there. You know, we sell them on a per technology node basis, much the way we sell the process ramps, because we believe that it really comes down to the way you characterize the silicon, both for the physical design work, where circuits [inaudible] and the functional stuff, PDFX. So when one of those gets sold, it represents a fair number of designs. And it's paid for on the wafers, just like the IYRs. So the specific number of designs is almost immaterial to us. The wafers end up being important.

OK. And you said, I think earlier in your remarks, that the deal that you did sign in the PDFX product, is it Gain Share-bearing?

Yes, that's correct.

OK. Very good. Thank you.

Your next question comes from [Gary Chenero] with JP Morgan Fleming.

Hi, John. Hi, Steve.

Hi, Gary.

Hi, Gary.

You said that three of the top five semi companies are using PDF. What's the number of the top 20?

I don't know that I know the number in the top 20. I think in the top 15, it was six of the top 15 are ramping with us, and nine of the 15 are either, you know, have large software deals with us or are ramping with us, so I can get you as far as 15. Of the top 20, I don't know.

OK, that's fine. And I know in the past, you know, part of your struggle of getting in to these guys was just you were less well-known. But I assume the guys that you're not in yet know you. What-- is there a consistent barrier to you not getting in? I mean, what-- can you just talk about the customers that you don't have today, and your thoughts on that?

Yeah, I guess, you know, you always end up knowing the customers you do have more intimately than the ones you don't, so it's a bit harder to quantify. You know, I think there's always been a couple of questions, and part of the reason why I wanted to point out that it was three of the top five was I think [focus] and perspective was, ``Oh, yeah, there's the things that you do if you make a mistake or things don't go well.'' And the reality is, that's often how we do get into accounts, and we still see that, when they are struggling. It makes it easier to enter into discussions about, you know, buying technology -- is this someplace where people never spent money on the outside? And so that's a huge barrier to get over, that you're going to spend money on the outside and that this is a technology spend.

So the problem-- if a customer has a problem, that always open up a discussion about getting the technology, and we've often seen that. Last year, we did those-- little prove outs, as a way of, you know, three months of letting them see what the technology can do, and we're able to-- you know, we tried that twice. You know, we did that with top five companies. We want to do that with significant companies and we're able to convert them. So we are trying to find ways that we can give customers a good understanding of what our technology really does, so that they can see the benefits. And you know, I think some of the delay comes around they're not having spent money here in the past. Some of it comes around, you know, trying to get their hands around what our technology really does and how it's differentiated. And it's very hard to put that on a spec sheet and we found these prove outs definitely seem to help, and we do do that when appropriate.

And all your prove outs have converted to contracts?

Yep, and we've done that twice in 2003 and those have both converted. So those-- when we say ``prove outs,'' they're still, you know, small, on the order of $1m to $2m prove outs, and then we'll convert those.

OK.

Right, so yeah, the prove outs are revenue-generating engagements and those have consistently led to follow-on business.

OK. And you mentioned the new contract was your largest contract to date and it had a big Gain Share component.

That was the largest DFM contract to date.

OK.

So I think in the, you know, integrated yield ramp space, we still have contracts that are bigger than that contract and we have a number of those.

But when you say big Gain Share component, does that mean it's big because the contract is big or it's a bigger component, relative to the contract, compared to your other contracts in the past?

So I think in the DFM space, you know, the perception is-- or question had been, well, you know, can the Gain Share model work for DFM as it works for integrated yield ramp? And you know, we had done some prove outs where we proved out, or done some examples, of what DFM could do, or [AD reticals], and we are going through and trying to convert that into what we consider to be Gain Share contracts, and that would mean that there is a substantial dollar amount, and millions of dollar in the back end, tied to customer wafer volumes for applying our technology in the design of the circuit itself, rather than in the factory itself. And so what was notable about this contract is, it's a multi-million dollar contract. It's a relatively large contract, and it's got significant part of that, which is tied to the wafer volumes and the production volumes.

OK. And in terms of your Gain Share revenue being lower than expected, however far back, is that purely because of lack of customer ramp or is there a-- is a portion of it either not getting good data from a customer or a customer, for whatever reason, not wanting to pay-- not wanting to pay that?

Yeah, so as I highlighted on the last quarter conference call, as we got into the end of 2003, beginning of 2004, we were starting to see the beginning ramps on some of our very leading edge production. Relatively small volumes, still, obviously as leading edge nodes such as the 90 nanometer node are still relatively small numbers of wafers, on the order of, you know, 1,000 to 3,000 in a factory at these points. However-- or maybe three to five, in this quarter. However, the yields were below where we expected them to be, as we were bringing up new equipment and sensitivities and that were associated with them. And so the Q4 conference call, we did talk about what our original expectation was on Q1 Gain Share, what we then needed to expect it to be, primarily due to start up on a couple of those in comps. We also felt that based on the data that we had seen in the beginning of Q1, that those would be mitigated over the next couple of quarters. And now that we've got basically a complete quarter's worth of production, that then gave us the confidence to put out a Gain Share number for Q2 that was up over the Q1 number relatively significantly.

OK.

So that naturally, due to other contracts coming on line, some of that due to improvements in those contracts.

Right. But there's no-- there's been no problem matching up what you should be paid with what has been manufactured and getting that from a customer?

No. I mean, we've always sat down and had conversations with customers as we get into the Gain Share mode, and have generally found that we have alignment with them about where the yields are, where the lines are, et cetera.

OK. Great. Thank you very much.

Thank you, Gary.

We have a follow-up question from Bill Frerichs.

John, what products or activities are you counting in the DFM bucket versus the integrated yield ramp?

So we only count two things in the DFM bucket today -- Circuit Surfer and the characterization vehicles for statistical characterization and statistical design. And PDFX, which is the-- the characterization vehicles for that really are the same characterization vehicles that are in the IYRs, so we don't count those. PDFX primarily is the yield models and the software that integrates with the SPNR tools for functional yield improvement. So those are the only two products that we count in DFM. Although you could look at the process stuff as DFM as well, because you design the process, but we see that as a manufacturing process solution, simply because we sell to a different person.

OK, perhaps-- perhaps you can give me a tutorial offline, then, how you're thinking about your categories.

OK. I'd be happy to do that.

Thank you.

We also have a follow-up question from Gus Richard.

Yes, in the [inaudible] stab at Gain Share in the second quarter, any thoughts on what that would look like in the third quarter?

Well, I'm not surprised somebody asked that question, Gus. We are clearly, you know, looking at what's happening at our customer sites now for future quarters, but no, we don't feel we're ready to provide guidance out another quarter.

OK. And there's a couple of foundries, one in Taiwan, one in the U.S., that clearly are having issues with yield spill at the 130 and 90 nanometer nodes. Any progress in penetrating those customers?

I think I know which ones you're referring to. You know, we are, as I answered on the question with Gary, when customers see the difficulty in bringing up in a nanometer nodes and you start realizing that it's not [mostly] about they do but it is overall about these technologies in general, it does get them to look on the outside, and as a result, they have--- you know, customers are constantly talking to us about our technology. We- you know, we really, at this point, can't talk about anything that's going on at any of those places where we're selling, but we hope to be selling in all the places where folks are getting into the nanometer nodes. That's about all we can say.

And then, you know, one of the larger customers in the U.S. has had reasonable significant improvements in yield at 130. Is that, do you feel, attributable to you and is that one of the companies that you think will start driving your Gain Share growth?

You know, we generally can't comment on individual companies' yields. We'd like to believe that, and I think based on the repeat business that we get with customers, that our technology and services are a significant component to their yield ramps, but as we always tell customers, you know, our technology is a catalyst. The ingredients need to be there to make the whole ramp go faster. So generally if folks have good yields, it's for the activities that they've done with using our technology as well as other things. And we look at the repeat business as an indicator of whether-- and the Gain Share that comes from that existing business as an indicator of whether we've been successful at that account.

OK, thanks.

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

Thank you. To summarize, PDF Solution's momentum is building on three fronts. First, as evidenced by our two top five wins over the past four to five quarters, we have continued to win at leading-edge companies and expect that while the sales cycle is lengthy, wins will continue in the subsequent quarters at other new customers. Second, we expect yields improving at leading-edge nodes to have a positive impact on our Gain Share in the second quarter and we expect to see further improvement. Finally, both of these facts improve our projected operating margins.

With this backdrop, we are looking forward to reporting future developments over the next quarters. Thank you for taking the time to participate in our first quarter 2004 conference call. Good-bye.

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