PDF Solutions Inc (PDFS) 2005 Q2 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 second fiscal quarter ended Thursday, June 30th, 2005. [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 solution. PDF's actual results could differ materially. You should refer to the section entitled, "Factors which may Affect Future Results" on pages 26 through 34 of PDF's Annual Report on Form 10-K for the fiscal year ended December 31st, 2004, 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'd like to introduce John Kibarian, PDF's President and Chief Executive Officer and Steve Melman, PDF's Vice President, Finance & Administration and Chief Financial Officer. Mr. Kibarian, please go ahead.

Thank you and welcome everyone. For the second quarter of 2005, PDF Solutions is reporting total revenue of $18.4 million and non-GAAP net profit of $0.11 per share. The revenue results are slightly below the range we provided in April, while the earning results are at the high end of the range. Steve will discuss the results in detail and provide guidance for this quarter and the next.

Before I turn the call over to him, I would like to summarize the progress PDF Solutions made during the second quarter as well as provide our general outlook for the remainder of the year. In the second quarter, we continued to make progress in every segment of our business. However, we experienced some delays in signing 65 nanometer yield ramp engagements, which impacted our Q2 revenue and will impact our Q3 revenue outlook. While we signed fewer engagements in the quarter then we had expected, we began to demonstrate the value of our DFM strategy. We saw significant year-over year growth in the dataPOWER business and we exceeded expectations with our gain share model, demonstrating leverage from our customers’ earlier investments in PDF Yield Ramp solution.

Our DFM strategy is to partner with design automation, IP and equipment makers to increase the number of applications that use the data made available by our CV test chips. As DFM has become a more, has become more important to our customers, yield models, including the characterization data that supports them, are required across a variety of design flows.

In the second quarter, we started an engagement with a new customer to deploy pDfx infrastructure at 90 nanometer. The integration with multiple leading design automation platforms was a key factor in this customer's decision to choose PDF.

We continue to make progress with our partners, Cadence, Magma, and Synopsys have all announced implementations of pDfx enabled design flows. Furthermore, Cadence and Magma demonstrated their pDfx integrated products at the Design Automation Conference in June. We are clearly seeing PDF CV test chips and yield models becoming critical to customers and partner's DFM success.

As we discussed in the last quarter's call, we have been investing in dataPOWER, building new data analysis algorithms based on PDF's Yield Ramp knowledge and feedback from the extensive user community. This continued innovation has been the driver of seed penetration in dataPOWER accounts, resulting in revenue growth despite the lack of new fabs starting this year.

Today, we announced the release of dataPOWER 7.0, our enterprise-wide data and yield management system. dataPOWER 7.0 is designed to provide comprehensive product characterization from fab through final test, speeding designs, new designs and processes to yield.

Now let me move on to gain share. As we have discussed before, gain share is the portion of our Yield Ramp engagement that is based on our customer's success in applying our solutions to their technology ramp. In the second quarter, gain share exceeded expectations due to higher than expected growth in customer's wafer volumes as well as yields achieved at the higher end of our expectations. In particular, we saw the greatest growth in these areas among our 90 nanometer ramps.

Looking forward to the second half of the year, we see positive indicators across the business. We saw growing customer traction as the second quarter progressed and expect to see increased adoption of our Yield Ramp solutions as a result. In particular, we expect an increase in the number of 65 nanometer yield ramp engagements. In fact, subsequent to the close of the quarter, we signed an LOA for a 65 nanometer yield ramp engagement. For gain share, our increased guidance for the second half of the year reflects the confidence in our customers’ yields and volumes.

Now I'll turn the call over to Steve who will discuss in detail our financial results for the second quarter and our guidance going forward. 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's section of our website located at www.pdf.com.

Revenue for the second quarter ended June 30th, 2005, totaled $18.4 million, a record for PDF and our 10th quarter of sequential revenue increases. This represents an increase in revenue of 21% compared to the second quarter of last year and a slight increase sequentially from last quarter. Although as John mentioned, it is just below the guidance we provided in April.

The increase from the second quarter of last year was due to increases in both Design to Silicon yield solutions and gain share while the increase from last quarter was due to increases in gain share, more than offsetting a small decline in Design to Silicon yield solutions. While we are pleased to report gain share above expectations, we are disappointed that delayed bookings in both new IYR projects and dataPOWER projects contributed to small sequential declines in integrated solutions and software licenses.

Design to Silicon yield solutions revenue totaled $15.5 million for the second quarter, a 14% increase from the comparable period last year but a decrease of 3% from last quarter. As mentioned earlier, delayed bookings for new integrated solutions caused a $1.1 million or 8% decrease in revenue from last year's comparable period and a $290,000 or 2% decrease from last quarter. We do expect bookings and subsequent revenue recognition to bounce back in Q3, but for the second quarter only 14 engagements from 11 customers, each contributed approximately $200,000 or greater in revenue during the quarter, down one as new bookings did not replenish contracts where fixed fees had finished.

As John mentioned, we kicked off one new DFM engagement with a new customer during the quarter, but did not close other new integrated yield ramp engagements. As such, we are slightly behind our typical pace for IYR bookings so far in 2005.

Software license revenue rose $3 million from $161,000 in second quarter of last year but was 7% below last quarter. The delayed bookings of IYR engagements coupled with the expected variability of per quarterly dataPOWER software sales, especially in an environment of constrained capital equipment budgets, would drive a smaller contribution by Design to Silicon yield solutions to our overall revenue growth for the third quarter.

Gain share revenue for the second quarter totaled approximately $2.9 million, a 75% increase versus the comparable period last year, a 39% increase from last quarter and meaningfully above the range we've provided in April. Gain share revenue was generated from 7 customers and 8 engagements, the result of an older contract expiring at a customer where two contracts contributed previously and adding one contract from a new customer.

We previously projected a more modest increase in gain share, but we're pleased to see our efforts to drive higher yields and wafer volumes under gain share contracts contributing more significantly to the increase. We believe gain share is very simply, a meaningful reflection of the value we are bringing to our customers as technologies move to more advanced process nodes.

Gross margin for the second quarter excluding amortization of core technology was 68% of total revenue, an increase from 65% during the second quarter of last year and an increase from 67% in the first quarter of 2005. The increase from last year and last quarter were primarily the result of a more favorable mix of Design to Silicon yield solutions elements and higher gain share.

Total operating expenses before amortization and stock-based compensation and acquired intangible assets were $9.9 million for the quarter, up approximately $1.5 million or 18% from the second quarter of 2004, while increasing approximately $694,000 or 8% from last quarter.

Research and development expenses totaled $5.7 million for the second quarter, an increase of approximately $833,000 or 17% from the second quarter of 2004, primarily the result of increased personnel related costs which includes accrued variable compensation and subcontractor costs. Research and development expenses increased sequentially by approximately $319,000 or 6% from the first quarter of 2005, primarily the result of increased personnel costs.

Selling, general, and administrative expenses were $4.3 million in the second quarter of 2005, up approximately $667,000 or 18% from the second quarter of 2004. This increase was primarily due to increases in personnel-related costs, accounting and tax advisory services, and the negative effect of comparison to the prior year's reduction in our allowance for doubtful accounts. These increases were only partially offset by decreases in legal fees and outside sales commissions. SG&A expenses compared to the first quarter of 2005 increased approximately $375,000 or 10%, primarily the result of personnel-related costs and increases in accounting and tax advisory services.

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, which excludes amortization of stock-based compensation and acquired intangible assets. Non-GAAP net income for the second quarter ending June 30th totaled approximately $2.9 million or $0.11 per share at the top of the range provided in April, despite the small shortfall in revenue. This compares with non-GAAP net income of approximately $1 million or $.04 per share for the comparable period last year and non-GAAP net income of approximately $2.7 million or $0.10 during the first quarter of 2005.

During our second quarter, we completed the work we began in Q1 with regards to certain state tax credits and recalibrated our estimated tax rate for the full 2005 calendar year. As a result of this effort, which included additional one-time state credits, our effective tax rate declined further for the first half of 2005. The result drove additional earnings per share during the quarter of approximately $0.01. Without such an effort, our non-GAAP earnings per share would have been $0.10 in the middle of the range provided in April.

For the remainder of 2005, we forecast our tax rate in the 22% to 24% range. On a GAAP basis, including amortization of stock-based compensation and acquired intangible assets, I'm pleased to report net income for the first-- for the fourth sequential quarter of approximately $1.3 million or $0.05 per share.

Turning to our balance sheet at June 30th, total cash increased to $51.9 million, an increase of approximately $3.5 million during the quarter and $6.2 million for the first half. Operating activities generated positive cash flow of $3.1 million while employee stock option exercises and [ESPP] purchases contributed $1.3 million.

Capital expenditures total approximately $917,000, partially offsetting the cash generated from operating and financing activities, while there were no additional repurchases under our stock buyback program.

Our accounts receivable increased approximately $482,000 to $18.9 million while our aging of receivables remains healthy. Lastly, as of this morning, approximately 30% of outstanding billed accounts receivables at June 30th has already been collected.

Turning to guidance, I will state again that some of the statements made in the course of this conference call, including the ones that we are about to make with respect to Q3 and Q4 2005, are forward-looking. These statements include expectations about our future financial results and performance, growth rates, the success of any business objective, product and service features and introductions, client products, and demand for PDF Design to Silicon yield solution. 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 2005, we reiterate the guidance we provided in our outlook press release earlier today. Revenue is expected in the range of $18.7 to $19.5 million, a $700,000 decrease from the range provided in April, primarily the result of the delayed bookings from Q2 negatively impacting Q3 revenue recognition. Guidance for the third quarter gain share is in the range of $2.8 to $3.2 million as we expect wafer volumes under contract to contribute at or modestly above Q2 levels. Non-GAAP earnings per share is expected in the range of $.10 to $.12, no change from the guidance provided in April despite the small reduction in revenue as gain share's contribution remains at higher levels in Q3.

Reiterating guidance for the fourth quarter of 2005, which was also provided earlier today in our outlook press release, revenues projected in the range of $19.8 to $20.8 with non-GAAP earnings per share in the range of $0.11 to $0.13. Given the guidance we've provided today, PDF expects to report 2005 total year revenue in the range of $75 to $76.8 million and expect a 20% to 23% increase over the $62.4 million reported for 2004. Total year non-GAAP net income in the range of $11.2 to $12.4 million and expected increase of 93 to 114% over non-GAAP net income of $5.8 million reported in 2004 and total year non-GAAP earnings per share in the range of $0.42 to $0.46 and expected 91% to 109% increase over the $0.22 reported in 2004.

We believe this increase in earnings and earnings per share relative to the revenue increase is indicative of significant leverage inherent in our business model. Additionally, PDF expects to report GAAP net income for 2005 of $5.6 to $6.8 million or $0.21 to $0.25 per share versus a net loss of $614,000 or $0.02 reported in 2004.

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

Thank you Mr. Melman. [OPERATOR INSTRUCTIONS] Our first question comes from Garo Toomajanian.

Hi thanks a lot. I just wanted to first clarify the number of gain share customers. Did you say that there was one new gain share customer and one customer that dropped off the list?

No I said there was one contract that dropped off the list and one contract that added to the list, which was from a new customer. So the customers went up one and the contracts remained flat.

Got you so, so about seven customers and eight contracts then?

That’s right.

Okay, good. It sounds like you’re expecting gain share to stay up in Q3 and from what I’m hearing foundry sort of utilization levels are expected to tick up again in Q4. Do you think that we could see another gain share increase in Q4?

Yes. Yes we certainly can but we’re not going to provide guidance in Q4 for gain share.

Okay and maybe a question for John. You mentioned 90 nanometer as one of the things that was helping the gain share number. I’m wondering what your customers are telling you about the rate at which they’re moving to 90 nanometer or where they are in the 90 nanometer curve and what that might tell us for the upcoming ramp for 65?

Yes, so I think what we see on the 90 nanometer ramp today, we see a lot more activity and most of the customers or the volume drivers still primarily, besides the processor the cell phones and gaming systems driving most of the volume for as we see it. We are seeing a lot more tape out activity and some more broad at 90 today then we did obviously awhile ago. You know I’d say six months ago. But that hasn’t necessarily materially contributed at this point.

Okay and does that tell you anything about the timing of when 65 could hit. Is that still a couple years out there?

Yes that’s a good question, Garo. So I think going into the year we believed 65 would take off in the second half of ’06 and towards the end of ’06. In the March/April timeframe, we had some customers tell us this in May tell us they thought it was a little bit later then that. However, I think with some of the announcements that other IC companies made in end of Q1 beginning of Q2, people seemingly are reevaluating that. And I believe it’s going to be more likely be Q4 of ’06 that you start seeing more meaningful 65 nanometer ramp and, and as opposed to an ’07, you know two years out kind of like timeframe.

Great. And lastly, you I guess you, about two and a half years ago you guys signed a 90 nanometer engagement at a major foundry. I’m wondering if you’re seeing any gain share from that yet and has there been any follow-on engagements with that customer?

Yes I think well we continue to receive revenues from that customer. But, Garo, quite honestly we haven’t regularly announced who we do or who we do not get gain share from. But we continued to receive revenues from that customer.

Okay. Thanks a lot.

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

Thank you. A few questions. First on the, what you sort of characterized as delayed in signing new 65 nanometer engagements. I’m question-- I guess my question is what do you think is causing that? Is that more customers just delaying their efforts at 65 nanometer or is it something else driving those delays?

Yes, Dennis, Garo’s questions kind of, my answer to Garo’s question kind of indicated as we were in the first half of this year, we had a number of discussions with customers about when they thought their volume ramp was going to start. And at least with a couple of customers kind of sits and starts about when the timing is. We are starting to see as, you know in Q1 we signed up one new 65 nanometer engagement. I think as some of the people that are making their move to 65 started making announcements, as we got through the end of the second quarter, we saw increased activity from the other accounts as I think they started realizing that the 65 nanometer ramp has really begun.

Hence we, as we said, we anticipate third and fourth quarter signing up more 65 nanometer engagements. So I think primarily it was geared around people’s questioning on the timing of the 65 nanometer ramp. I think that is starting to clear up in people’s minds.

Got there’s more from the customer perspective in terms of when they think they want to ramp and then back off 12 to 18 months.

Right.

When they need to get engaged with you guys.

Right.

Okay so I guess another question on the engagement you did sign in the quarter on the DFM side, what else can you say about that? I think that just if you could repeat what you did say in your prepared comments, it sounded like it was a customer. It was sort of driven by some of the work they were doing on the EDA side as well. Is this a brand new customer for you?

Yes. So--

I just want to verify you can give us that.

Yes, so two things. In the past when we’ve-- in gotten into an account, one of the ways we got in a while ago was at 130 nanometer with one of our European accounts was to provide them with DFM solutions. And then of course as a result, you need to characterize, you need CVs for characterization. And that then later on created a yield ramp for us.

As our partnership strategy, we decided to try to instantiate that in a more formal way. So this is a company that wanted to use one of the design automation companies pDfx flows and, of course, they get that software from the design automation vendors. However, to be able to have models for that and read the model data they need to run characterization vehicles. Since they weren’t a Yield Ramp customer for ours, we provided them an infrastructure that is, has both FXV and a variable C on the back end proportional to a license for that factory proportional to the results they get. And as a result, they can go off and begin or do pDfx flow with a major design automation vendors.

Now from our standpoint, of course, we have now got them to use characterization vehicles and we’d like to be able to demonstrate to them how many other ways they could get value out of that. And in the past, we’ve been able to convert that into a ramp and over some time, we may be able to do that in this case as well.

So I guess just to follow-on that, this is the 90 nanometer contract and this is a customer with an existing 90 nanometer process. And you’re going in to characterize the process with the CVs?

Right.

To be able to generate this PDFM file? Is that fair?

Yes. That’s correct.

Okay and—

But actually still a significant contract for us.

Right. So you mentioned it’s a fixed fee plus variable fee. So in structure it sounds similar to what your traditional contracts are?

Right. But the benefit you can get is small then you could get if you did a full Yield Ramp. So, of course the dollars are not as great, but they’re still substantial.

Okay so it’s not straight volume based. There is a yield component as well?

The yield and I think it’s a factory license on the size of the factory.

Okay.

But IDMs usually their factories run pretty full.

Right.

So you can do something which is factory dependent.

Okay and I guess one more quick question on the gain share side of things. Obviously you’re seeing some strengths here. The contract that fell out of the mix, I’m assuming was a larger geometry. What do you see in terms of the profile of your gain share mix today? Is it more weighted toward 90 nanometer? Obviously it is today then it was a while ago but are you seeing a majority of your gain shares coming from a specific technology node at this point?

It’s more weighted towards 90 obviously then it was in the past. In terms of percentages, it’s probably a larger percentage. The one that fell off was a 200 millimeter, more mature technology in idle. So an older factory—

Okay.

Older engagement, quite old engagement actually.

Okay. And when you look at the age of your engagements in that mix, you’ve got eight engagements in there. Are those, are the older engagements mostly gone at this point or do you have pretty long tails with the eight contracts in there?

For the most part, I think there may be one or two in the remainder of the year that may fall off, but, but I think—

Okay.

That’s part of-- and there’s probably some they’re going to add.

So along those lines too, do you expect to continue to add contracts into that mix throughout the second half?

In general, yes.

Okay.

And we have more contracts out there that have not gotten into gain share mode yet. The exact timing will depend on how our infrastructure implementations move along.

Okay. Fair enough, thank you.

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

Hey, just a couple quick questions on them. What customer that delayed bookings, you expect to close that in the next couple quarters?

Yes, expect to close that in the next couple of quarters.

And then of the 90 nanometer customers you have, how many have signed contracts at 65?

Probably over 35% at this point.

35-- okay and so you would expect that these folks as they, they get ready to think about 65 that conversion rate, you expect to get the guys that you have at 90 at 65 over in the next 12 months? Is that a reasonable assumption?

Yes that’s probably pretty reasonable Gus.

Okay and then most of the gain share that you’re, you talked about has been the ramp and your 90 nanometer customers?

Yes that’s correct.

And, and then in the first half of next year, you would expect some of your initial 65 customers to start to ramp?

Yes I think we still expect most of the growth as we got out into the first half of ’06 gain share growth to be coming off 90 nanometer accounts. There may be some early 65 but I think that would be one or two of the contracts. I think most of the growth would still be off the 90 at that point.

Okay and then just so I’m sure I’m clear in my model, you’re expecting tax rate going forward to be in the 23% range? Is that--?

Yes.

Did I get it correct?

Yes last quarter we had projected it at around 30% and based on our recalibration having, you now have half-year actuals, we’re forecasting 22 to 24%.

For the next two quarters into the year it’ll be something south of, of 23%?

Right.

Near 20%.

Of course of the first half impact and the state tax credits.

Got it. Okay, I may have some more but I’ll let the line go. Thank you.

Your next question comes from Tim Fox with Deutsche Bank.

One question on the, you talked before about addressing the opportunity in memory. Just wondering if there’s any, any update there on that front?

Yes we still have memory IYRs ongoing, one that’s contributing gain share and one that’s in implementation now. We do expect, as we get through some of the gain share from that first contract, to look back and understand more about how to better tune our model to fit in that, in that business environment. And then as we get an understanding of what that means, we’re going to go out to more customers. We do believe we add value there. But the volume ramp, it’s very different than the logic ramp. And I think for us to maximize the gain share potential, we would like to do things a little bit differently then we did in the previous contract, the one that’s in gain share now.

Ok and the second question I had was on, on the new release of the dataPOWER product. Under your software license, how will customers access that dataPOWER 7.0? Will that be under maintenance or would that be a new software license?

So, Tim, for the base estimates under maintenance for all the customers. Some customers actually have licenses for modules already. For example, if you looked at the press releases, there’s a new bit map module as well as a number of spatial analysis and mining analyses. Some customers have licenses for those. But, by and large, most of our customers don’t have licenses for those products yet. And those modules are sold as add-on modules to the product. So if there’s been a license—

So okay and you say the majority of the customers don’t have the incremental module. So that’s a upside potential next year?

Right.

You have a follow-up question from Dennis Wassung with Adams, Harkness & Hill.

One more quick one on the engagements. You mentioned you signed after the, after June 30th, you signed an LOA with a customer for 65 nanometer engagement. Is this one of the ones that was slipping, I’m assuming? And I guess is there a multiple? Is when you, you talk about the number of contracts that are sort of been delayed or customers kind of delaying their--?

Yes so we’ve had discussions with a lot of our existing accounts at 65-- for 65 nanometer. I mean a good, a good chunk of them. And they tend to come in spurts. If you look at last year, as we got into the second quarter, third quarter, just a whole spurt of, flurry of 90 nanometer contracts started up. And we, we kind of expect that again. I think as everyone-- everyone’s trying to guess when they want to make their investment in a, in a new technology and everyone’s start going. The one that signed on the beginning of this quarter was one of those handful that have been in discussion now in the second quarter. And we expect over the next couple of quarters that more of those will sign up.

Okay. And is this an existing customer, I’m assuming?

That would be correct.

Okay. Thank you.

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

Thank you. We remain focused on providing excellent value to our customers and believe that, as a result, PDF Solutions will continue to build momentum. Thank you for joining our Second Quarter 2005 Conference Call. Goodbye.

Ladies and gentlemen this concludes the program. Thank you.