PDF Solutions Inc (PDFS) 2004 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 fiscal quarter ended March 31st, 2004. 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 zero on your touch-tone 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 web site 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, future growth rates, and demand for its solutions. PDF actual results could differ materially. You should refer to the section entitled ‘factors which may affect future results,’ on pages 25 through 31 on PDF’s Annual Report on Form 10-K for the fiscal year ended December 31st, 2003, and similar disclosures in 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 Finance and Administration, and Chief Financial Officer.

Mr. Kibarian, please go ahead.

Thank you. And welcome, everyone.

For the second quarter of 2004 we are reporting record total revenue of $15.2m and non-GAAP earnings of 4 cents per share. This non-GAAP number excludes stock based compensation and the monetization of acquired intangibles. Compared to the guidance we provided in April our revenue came in just slightly above the top end of the range and our non-GAAP earnings per share is in the middle of the range. As Steve will explain in more detail in a few minutes, our [gain] [ph] share results for the quarter were also in line with expectations.

Before I turn the call over to Steve for more detail on our financial results, I have a few comments to make on our general business. During the second quarter of 2004 PDF Solutions continued to close new deals and gain further momentum with our core yield ramp products and services, which was evidenced in the quarter by three new engagements. Two of these new engagements, both of which are with new customers to PDF, one another leading U.S. IBM, and a second another leading Asia-Pacific foundry, are pursuant to preliminary business terms agreed to in letters of agreement. The engagements began in the second quarter and definitive agreements are in their final stages.

Let me differentiate these two engagements from the prove-out type of engagements that we’ve closed from time to time in the past with other new customers. These two new engagements are full-yield rev engagements with gain share components. These customers determined that our track record spoke for itself. They were comfortable that PDF was capable and that our technologies and solutions were sufficiently effective to fulfill their process integration and manufacturing needs. Examples like these of rapid adoption of PDF solutions at top tier accounts sets the stage for PDF’s long-term success.

We believe that customers continue to look to PDF solutions as a critical partner for their yield improvement at leading edge technologies because of two reasons. First, we have a proven record in the field. As we’ve mentioned on past calls we successfully convert, prove-out engagements to full yield ramps, time and time again. Further, current customers tell potential customers that our solutions are effective and valuable. With increasing number of development partnerships for next generation process technologies these customer references are an important selling tool. Second, our solution is comprehensive and includes the following: Our integrated yield ramp infrastructure, which includes our CD test chips and PDC analysis software, a PDF test parallel tester, [wire rest] [ph], our yield ramp simulator, and services to identify and resolve yield loss factors on leading process technologies.

Our DFM solution which includes our PDFX products and design based services to make IT designs more manufacturable, and our product engineering solution which includes our data power yield management software system to efficiently monitor and rapidly improve volume production.

The three engagements we entered into during the quarter evidenced another significant trend, PDF Solutions’ penetration and pervasiveness at leading edge nodes. With these engagements we are now implementing our solutions at three more factories running 90 manometer process technologies. Running our proprietary test vehicles at such a large number of leading edge facilities means that PDF significantly and efficiently improves its yield rev infrastructure. As a result, all PDF customers receive greater value with lower risks when investing hundreds of millions of dollars in next generation processes and fabs.

On our last call we said that we expect positive financial impact from recovering yields at a couple of key gain share accounts to surface in the second quarter and to start a period of continued growth in gain share. Today our gain share results for the second quarter and our gain share guidance for the third quarter, which Steve will provide, reflect those yield improvements. We expect this trend to continue in subsequent quarters.

In the second quarter we announced developments related to our design for manufacturability solutions. In particular, at the Design Automation Conference in San Diego, Magma demonstrated PDFX software integrated with [blast] [ph] fusion. Also demonstrated at DAC was PDFX interoperable with a physical compiler from Synopsys and first encounter global physical synthesis from Cadence. Evidence to date suggests that PDFX will enable designers to develop more manufacturable IP designs when PDFX is integrated into the synthesis tool. We believe this is a compelling reason for EDA tool vendors to fully integrate PDFX with their synthesis place and [route] [ph] tools.

Our wireless yield simulator was also used at DAC to demonstrate the manufacturability of [X] [ph] architectural layouts generated by Cadence. When the industry wants to demonstrate manufacturability of any layout they can and are turning to PDF as the provider of proven yield simulator. Given the large amount of CD generated data which we use to make our proprietary yield models more accurate, our yield simulator becomes more valuable for our customers and partners.

Also with respect to our yield management system software, we’ve faced head-to-head competition with [Data Power] [ph] twice and beat out the alternative supplier each time during this past quarter. Once in a fab wide deal and once in a corporate wide deal, with one of the two customers being a new customer to PDF. Such success shows that both existing and new customers are moving quickly to adopt Data Power and benefit from the ever tightening integration of this YMS platform with PDF’s other products.

Lastly, I’d like to comment that despite the general industry rumors of another slowdown our experience during the second quarter continues to be positive. In fact, during my recent visits to customers car production volumes and future plans remain relatively steady, and we believe that PDF remains well positioned to benefit from this overall growth.

Now, I’ll turn the call over to Steve who will discuss the details of our financial results for the second quarter, and provide updated projections for the third quarter of 2004, and guidance for the fourth 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 web site located at www.pdf.com.

Revenue for the second quarter ending June 30th, 2004 totaled 15.2m, a record for PDF and our sixth quarter of sequential revenue increases. This represents an increase of 50 percent compared to the second quarter of last year, and an increase of 20 percent sequentially from last quarter. These results were slightly above the range provided in April during our last conference call. An increase from the second quarter of last year was due to an increase in design-for-silicon-yield solutions that more than offset a decline in gain share. The increase sequentially from the first quarter of 2004 was the result of increases in both design-for-silicon-yield solutions and gain share.

Design-for-silicon-yield solutions revenue totaled 13.5m for the second quarter, a 68 percent increase from the comparable period last year, and an increase of 16 percent from last quarter. The increases from last year and last quarter were the result of greater demand for PDF’s products and services as 16 engagements, from 12 customers, in 5 countries each contributed over 250,000 in revenue during the quarter.

As John mentioned, we started three new yield improvement engagements during the quarters. Two of the three engagements are from new customers, one of which is in the U.S., and one of which is in Asia. One being an IBM, and one being a foundry, and two of the three have sizable future gain share opportunity.

Gain share revenue for the second quarter generated from 4 customers and 5 contracts totaled approximately 1.7m, a 19 percent decrease versus the comparable period last year, but an increase of 69 percent from last quarter. Gain share for the second quarter was within the range provided in April, and included one new customer contract that entered its gain share phase during the period. We anticipate additional contracts moving into gain share mode in Q3, with such movement supporting our expectation of a continuing upward trend in gain share.

Gross margin for the second quarter excluding amortization of core technology was 65 percent of total revenue, flat with the second quarter of last year, and a decrease of one percent for the first quarter of 2004. Lower margins on design-for-silicon-yield solutions offset the sequential increase in gain share revenue. When compared to the second quarter of 2003 improved margins on design-for-silicon-yield solutions offset the decline in period-to-period gain share. We expect gross margins to rise as gain share becomes a larger component of our overall revenue.

Total operating expenses before amortization of stock based compensation and acquired intangible assets were 8.4m for the quarter, up approximately 1.1m or 15 percent from the second quarter of 2003, while decreasing approximately 572,000 or 6 percent from last quarter. Research and development expenses for the second quarter increased approximately $450,000 or 10 percent from 4.4m in the second quarter of 2003 due to increases in personnel related expenses in a larger development organization, primarily the result of our acquisition of IDS.

The sequential decrease in research and development expenses of approximately 400,000 or eight percent from the first quarter of 2004 was expected, and was primarily the result of shifting resources from engineering to client services to accommodate the increase in business activity.

Selling, general, and administrative expenses were 3.6m in the second quarter of 2004, up approximately 670,000 or 23 percent from the second quarter of 2003. This increase was primarily due to increases in outside sales commissions and legal expenses, both of which were the result of new business activities. SG&A expenses decreased approximately 175,000 or 5 percent from the first quarter of 2004, primarily the result of a reduction in our allowance for doubtful accounts.

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 income for the second quarter ending June 30th 2004 totaled approximately $1m or 4 cents per share. This compares with the non-GAAP net loss of approximately $265,000 or 1 cent per share for the comparable period last year, and a non-GAAP net loss of approximately $373,000 or 1 cent per share during the first quarter of 2004.

These second quarter results were in the middle of the range we provided in April. On a GAAP basis including amortization and stock based compensation and acquired intangible assets we reported a net loss for the quarter which was approximately $460,000 or 2 cents per share.

Turning to our balance sheet at June 30th, total cash decreased approximately $275,000 to 42.5m. Operating activities generated 1.7m in cash during the quarter, while capital expenditures totaled approximately $500,000, and repurchases under our stock buyback program used 2.9m of the 10m authorized to repurchase an initial 307,300 shares. Accounts receivable increased approximately 570,000 to 11.7m, but with a 2.5m increase in revenue during the period obviously our collection efforts have been strong.

Our aging remains excellent with only approximately 300,000 outside the current category, and in addition, approximately 40 percent of outstanding billed accounts receivable at June 30th have 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 the third quarter and the fourth quarter of 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’s design-for-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 third quarter of 2004 we reiterate the guidance we provided in our outlook press release earlier today. Revenue is expected in a range of 16.1m to 16.6m, simply a bit tighter range and still consistent with the guidance we provided in April.

Non-GAAP earnings per share is expected in a range of 4 cents to 6 cents, also no change from our guidance provided in April. And we are also providing guidance of third quarter gain share in a range of 2.2m to 2.6m, an approximate 30% to 50% increase from the second quarter of 2004.

Reiterating the fourth quarter guidance we provided earlier today in our outlook press release, revenue is projected in the range of 17.7m to 18.5m, with non-GAAP earnings per share in the range of 8 cents to 10 cents.

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

(Caller instructions.) Our first question comes from Garo Toomajanian, with RBC Capital Markets.

Thanks. John, I think you said there five designs contributing to gain share in Q2 and I think there were four of them in Q1. That is like the average gain share per design increase on a sequential basis. Is that something that you would expect to continue as we move forward or is that sort of a one-time thing?

Hi Garo, this is John. Actually, I think Steve gave out the statistic. We track engagements, which would be a process node in a fab. So when we said four to five engagements, well that’s really going from four nodes in four fabs, to five nodes typically in five fabs, I believe. But some customers have multiple fabs or multiple nodes per fab that contribute gain share.

So inside each process node there may be a number of designs that are running. We don’t necessarily track all of them. We just know the total number wafer volume that goes through.

But perhaps just a clarification. To answer your question, we do expect the number of engagements, I think as Steve might have said on that – in his script, to increase in the subsequent quarters as more of the leading edge nodes move in and gain share mode.

And it also sounds like then the average gain share per node has increased as well.

Yes, we do expect that.

Okay great. You mentioned also, I think this time it was you, John, you talked about the partnerships that you guys demonstrated at DAC. Are those really partnership agreements or are any of those agreements really beyond that to something where money might have changed hands or there was some kind of license agreement that went into place as well?

Yes, so our primary goal for PDFX is to get the software embedded in the SP&R tools. The software requires our yield characterization to fully optimize the design to particular manufacturing technology. And that characterization is available for factories that ramp with us.

So our primary motive for these agreements or partnerships, is driving up wafer fees and the value of our yield ramps into our yield ramp accounts and driving up wafer fees off those accounts. That doesn’t mean that money does not exchange hands with these agreements, but frankly, it’s a relatively small amount of money relative to what we’re trying to drive to.

Okay and presumably this will help with PDFX sales as well?

Yes, that’s exactly right.

And has there been, I guess and increase in evaluation activity? Are these people calling you up on the phone and asking about it?

Yes, as a result of Design Automation Conference we do see customers interested in evaluating and have been evaluating the technology, as part of the integration that we’re doing with the SP&R systems. And it’s a really big part of our strategy is to get the design community to really want to optimize for manufacturing yields and any designer who’d want to do that based on characterization data. And that’s really what pulls the fabs into increased acceptance of our CB infrastructure.

Okay. And lastly, John, I think you mentioned that sort of the response that you’re seeing from some of your customers is that production is still pretty gung-ho. When things start to peak or when they start to view sort of things slowing down, how would you expect that to impact your business? I would expect maybe that gain share continues to do okay as we see the strong nodes come on line or stay on line. What would happen to the [DYS] revenue and I guess, what would be the impact on both revenue lines?

That’s a good question. We have a little bit of history from the last down turn. I gained some insight into that. We did see the gain share line continue for quite a while after the downturn occurred. In this coming down – every downturn tends to be a little bit different.

And so, I’m sure there will be another downturn. I don't think it’s as imminent as folks think it is. And how it directly impacts us, we know that people cut back in their R&D to some extent, but you really can’t cut back on next generation process technology, because that’s really the way you create innovation. However, we do know that pricing terms become more difficult when you’re in the middle of a downturn. So I would expect the D2 SY revenue maybe will be muted. Although I still think that we’ll see a demand from the customers.

With respect to the gain share component, I think you do see it maintain – of course, if the downturn goes on for an extended period of time it can have an adverse effect, I think as it did on the last downturn. That went, I think considerably longer than most of the industry had expected.

Hey Garo, I’d also like to add a thought to that, more from the financial side maybe. Obviously our adoption is up amongst a much broader customer base than it had been in the past. In fact, our percentage of customers is flattening quite nicely, to the point that we have eight customers over 5%, and a flattening of the large number and the high percent that we had above 10%.

So what we’re seeing is a breadth of customer adoption, a customer diversification and even a flattening of our geographic diversification. And we still see strength in the consumer segment that has been driving a lot of our business.

Your next question comes from Bill Frerichs, with DA Davidson.

Hi John and Steve. Just to clarify, you had three new engagements in the quarter, two of whom were new and was the other one a follow-on from a prove-out contract?

No actually, the other one was the startup of a new factory from one of our existing customers. I think the follow up for prove-out contract happened the last quarter.

Last quarter, but there wasn’t one like --?

We were in the middle of – I think that we were in the middle of a prove-out at the end of Q4 that I think converted in Q1.

Right. Do you have anymore prove-outs going now?

Frankly, in this environment it’s difficult for us to do prove-outs, because we do have customers that will sign up for our complete ramps and given the alternative, we will do a full ramp at this point.

So essentially you’re turning down prove-outs because you’re capacity constrained in that sense.

I wouldn’t call it so much, Bill, capacity constrained. I think the comment that we made about our performance speaking for itself in our capabilities and our technology. Customers are accepting the fact that we don't have to prove ourselves relative to or abilities and there are needs and there are aggressive plans still out there and we can accommodate those needs.

So has anyone come to you for a prove-out and you said no dice, you’ve gotta go full boat?

Certainly and I think that speaks throughout the contracts that we signed in the quarter.

Your next question comes from Gus Richard, with First Albany Capital.

Hi, good afternoon. A couple of questions. First of all, the reserve reversal for [Dowfull] accounts, was that about a couple of hundred thousand?

Yes.

And then just to be absolutely clear on the two new customers, those are – those contracts are signed and you’re now engaged with them, or are you in the process of signing those contracts?

We have letters of agreement on both of those engagements. We have begun work full steam ahead and we’re in the final stages of contract generation. These are large customers, large contracts, there’s a lot of I’s to dot and T’s to cross.

Would one expect an increase in SG&A as the sales guys get paid out on the bookings in the next quarter? So in other words, SG&A would increase as those bookings are completed, if you will?

No, I – yes, we have had another strong bookings quarter and we anticipate – we have gone into a new plan year, with new quotas and a new model, so I don’t expect that to have a significant impact on our SG&A expenses.

Okay. So those contracts were recognized in SG&A in the current quarter?

Right.

Your next question comes from Dennis Wassung, with Adams, Harkness & Hill.

Thank you. A couple of more questions on the new engagements. John, I believe you – I guess clarify, did you say that all three of those were 90-nanometer?

Yes, that’s correct.

Okay, so that brings the total up to about eight, is that an accurate number?

I believe that’s correct.

Okay. And let’s see, you talked about five contracts and gain share among five different customers.

Four customers.

I’m sorry, four customers. And with the expectation that several more contracts could hit the gain share bucket in Q3?

Well, I’m not going to put a number on it, but we expect that there will be more moving into the gain share phase of the contract. I don’t know how to define several and I’d rather not put a number on it.

Okay sure. I thought that was the word you had used. Looking forward, do you see the pipeline of sort of processes that are ready do get, I guess are in specific completion percentages, if you will, of some of your D2 SY engagements that will sort of feed a few – or some multiple number of new contracts into that bucket for the next couple of quarters?

Yes, with 16 engagements contributing to our revenues, yes, you can make that assumption.

And that 16 number, what is that up from or how does that change from last quarter?

Last quarter it was actually 11.

Okay and that’s just 11 over 250, correct?

Correct.

How about the other two metrics, or I guess the other metric, how many customers was that?

It was 12 this quarter and actually 7 last quarter.

Okay. Looking at the new engagements, I guess the new customers, John, do any of these have some of the newer components from the data power side of that business or the PDFX side of the business or are these purely the traditional yield ramps? I’m just curious if you’re starting to get the cross selling into these engagements from these newer products?

Well actually in John’s script he spoke of winning two head to head battles with data power customers and he mentioned that one of the two was a new customer. Therefore, the second was an existing customer.

Okay fair enough. And I’m also just curious, if you’ve added to that number of top-ten, or I guess the number of top worldwide chip companies that you have as customers now?

It depends on whose top-ten list you use. But I think actually these two companies, while being, I think very high visibility, may be outside of the top-ten at least of the most recent list that I saw today. They’ve both, I think, high profile companies.

Your next question comes from Erach Desai, with American Technology Research.

Hi gentlemen. First for you, John, I guess quite selfishly, just to sort of – because you made some comments about the macro environment and about the worries about the semiconductor downturn or not. I guess if I were to phrase it a different way, you’re at the leading edge, you’re selling it to new fab ramps. Would it be fair to say, in general, you would not be the first to see it or you just feel that from the breadth of customers that you’ve gone and visited you just don’t hear of volumes coming down?

Yes, I guess I really don't want to be in your business of predicting upturns and downturns. So I think I was speaking specifically for how – what we saw out there with our customers. I think you’re right, we do work with customers who are adopting leading edge technology nodes and tend to work with some of the larger customers – larger companies.

When I looked at that top ten list that was put out on [Sunny] Business News today, I recognized a number of the names of clients and I noticed their growth rates were pretty substantial. So at least for those customers that I know are adapting the nanometer technologies, they seem to be pretty robustly moving to those nodes.

What does that mean for their overall business when you look at their products that tackle other segments of the industry, we clearly don’t have enough visibility to know that.

Okay fair. During the quarter Synopsis made a sort of minority equity investment in HPLA. Which, I guess, is that the data power competitor that you were referring to? And have you historically had any interest in the assets of HPLA?

Yes, I guess that’s for me. Data power major competition head to head, I don't think we’ve seen HPL significantly out there against data power in the two head to heads that we were referring to certainly wasn’t them. With respect to the assets of HPLA, it’s not clear to us what assets are there. As you know, they’ve been going through a substantial mingle situation that’s recently resolved itself, I guess mostly.

And we are always looking at lots of technology. We don’t believe we’re the only place that can invent technology. Lots of folks can invent really good things and we’ll always look at stuff. But I don't know that we’ve specifically put any focus on what’s going on there.

Okay, fair enough. Steve, I have two for you. One is simply, looks like the last couple of quarters you’ve had 5, 10%, maybe a couple of them close to 20% customers. Can you, for a second quarter, give me a rough range on the 10% customers, how many?

I can try to answer this. We reported in our 10-Q – I’d rather not try to answer it relative to selective disclosure on this call Erach. But I think the public will see in our disclosures in our 10-Q that the diversification has flattened away from the – pointing to improved customer concentration statistics.

Okay. And I apologize, I was distracted when you were giving Dennis the statistics for design to silicon, the 16 engagements, 12 customers in Q2. How did that compare in Q1?

I said 11 and 7.

11 engagements and 7 customers, just to be clear?

Right.

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

Thank you. As you can hear, we believe that PDF is increasingly selected as the solution for yield ramps at the world’s leading IDMs, [fablers] and foundries. Our goal hasn’t changed. We are positioning PDF so that our yield rep infrastructure, including our proprietary test vehicles and yield management platform will be implemented at every nanometer IP factory in the world.

Thank you for taking your time to participate in our second quarter 2004 conference call. Goodbye.

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