PDF Solutions Inc (PDFS) 2005 Q3 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 third fiscal quarter ended Friday, September 30, 2005. [OPERATOR INSTRUCTIONS]. As a reminder, this conference is being recorded. If you have not yet received a copy of the corresponding press releases, they have been posted to PDF’s website at www.pdf.com. Some of the statements that will be made in the course of the 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 26 through 34 of your PDF Annual Report on Form 10-K for 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 CEO and Steve Melman, PDF’s Vice President, Finance & Administration and CFO. Mr. Kibarian, please go ahead.

Thank you and welcome everyone. For the third quarter of 2005, PDF Solutions is reporting total revenue of $18.5 million and non-GAAP net profit of $0.11 per share. Gain share was $3.1 million. While software revenue came in lighter than projected and thus total revenue was slightly below the range we provided on our call in July, new integrated yield ramp business and gain share results are encouraging.

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 will provide prospective on our business during the past quarter, including insights about the current business environment and implications for the business looking forward.

As I said on our call in July, in the third quarter, we were seeing increased momentum at 65 nanometers and at that time we had already signed one LOA for a 65 nanometer ramp. Since then, we converted that LOA into a definitive agreement and signed another LOA for 65 nanometer ramp. Both of these agreements are with existing customers that are expanding their application of our technology to address the increasingly complex yield issues. We believe that our customer success in applying PDF’s technology at one process node is our strongest selling point for the next ramp. We are honored that customers continue to trust and to look to PDF as their technology and business partner.

During the third quarter, Charter Semiconductor featured its application of our Yield Ramp infrastructure for their 90 nanometer ramp at its technology forum in Silicon Valley. This forum is attended by approximately 1,000 Charter customers. Charter applied our technology and identified potential yield issues and improved their manufacturing process before mass production began. In the past, manufacturers believed that you needed to have product wafers to begin the ramp. This so called yield learning on the design team silicon, resulted in product volume delays. Charter is demonstrating that they can use PDF’s Yield Ramp Infrastructure in a foundry environment to provide superior manufacturing to their clients. The market advantage of demonstrating higher initial yields is particularly meaningful for the pure foundry segment of the semiconductor business.

Another advantage of applying PDF’s integrated yield ramp technology in the foundry market is the ability to provide process aware DFM. For effective design for manufacturing building, yield models need to be independent design tools especially in the foundry market where customers use many different flows. Gain share results for the third quarter were a new record for us. Increased yields and volumes at 90 nanometer are driving the improvement in gain share. As we have said many times before, gain share results are dependent on our customer’s success at applying our technology to their ramp and also on their general business success. We are pleased to see this growth in gain share but remind you that we continue to expect quarter over quarter variability.

Our software business, primarily driven by dataPOWER license revenue, trended down from the previous quarter. As you may have seen from our recent press release regarding increased adoption at Alpeda, our new modules are gaining user acceptance and we continue to expect long term success with dataPOWER. Overall adoption of new modules and incremental seeds in the third quarter however did not keep pace with our performance in the first half of the year. This impacted our revenue in the third quarter and we expect it to impact our dataPOWER license revenue over the next couple of quarters, generally improving during the first half of 2006.

Overall, we continue to see interest in our technology from a broadening customer base. Our guidance for the fourth quarter of 2005 and first quarter of 2006 is based on our assumption about a general improvement in gain share and continued interest in our core yield ramp solutions. Because of our positive expectations of gain share and general business conditions and despite our guided expectations on dataPOWER licenses, we expect our earnings to grow at the rate we had previously forecast. This growth in earnings speaks volumes to the leverage in our business model. Now I'll turn the call over to Steve who will discuss in detail our financial results for the third 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 third quarter ending September 30, 2005 totaled $18.5 million, a record for PDF and our 11th quarter of sequential revenue increase. This represents an increase in revenue of 12% compared to the third quarter of last year and a slight increase sequentially from last quarter, although just below the guidance we provided in July. The increase from the third 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 slight decline in Design to Silicon Yield Solutions.

We are pleased to report a rebound in Integrated Solutions, our core business, and gain share revenue that surpassed our old record set in the first quarter of 2002. Design to Silicon Yield Solutions revenue totaled $15.4 million for the third quarter, a 9% increase from the comparable period last year, but a decrease of just over .5% from last quarter. Lower bookings for dataPOWER resulted in a $1.7 million sequential decline inr software license revenue from last quarter, but an 89% increase from last year. We again reiterate that software licensing is not a core business for PDF and we expect variability. There will be ups and downs and in this environment where few fabs are being built and capital budgets are being constrained, we expect continued weakness in the new dataPOWER bookings through the end of this fiscal year.

This quarter, 16 Integrated Solution engagements from 11 customers each contributed approximately $200,000 or greater in revenue, up 2 as we kicked off 2 new 65 nanometer integrated yield ramping engagements, both with existing customers. As such, we picked up ground after the delay we mentioned on our call in July. Gain Share revenue for the third quarter totaled a record $3.1 million, a 28% increase versus the comparable period last year, a 7% increase from the last quarter, and in the upper end of the range we provided in July. Gain share revenue was generated from 6 customers and 7 engagements, down one, the result of one customer missing volume thresholds during the quarter. We stress again that we believe gain share is, very simply, a meaningful reflection of the value we are bringing to our customers as technology is moved to more and more advanced process nodes. We’re pleased to report this same growth in our total gain share.

Gross margin for the third quarter excluding amortization of core technology was 65% of total revenue, an increase from 64% during the third quarter of last year but a decrease from 68% in the second quarter of 2005. The increase from last year and the decline from last quarter was primarily the result of the change in mix of the Design to Silicon yield solutions revenue elements.

Total operating expenses before amortization and stock-based compensation and acquired intangible assets were $9.4 million for the quarter, up approximately $704,000 or 8% from the third quarter of 2004, while decreasing approximately $499,000 or 5% from last quarter.

Research and development expenses totaled $5.5 million for the third quarter, an increase of approximately $534,000 or 11% from the third quarter of 2004, primarily the result of increased personnel related costs which includes accrued variable compensation and subcontractor costs. Research and development expenses decreased to approximately $181,000 or 3% from the second quarter of 2005, primarily the result of a temporary shift in engineering resources from development projects to engagement teams.

Selling, general, and administrative expenses were $4 million in the third quarter of 2005, up approximately $170,000 or 4% from the third quarter of 2004. This increase was primarily due to increases in personnel-related costs, legal and accounting and tax services, only partially offset by decreases in outside sales commissions. SG&A expenses compared to the second quarter of 2005 decreased approximately $318,000 or 7%, primarily as the result of decreases in outside sales commissions and general marketing expenses partially offset by increases in legal and accounting and tax 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 and beginning in 2006, the effects of FAS123R. Non-GAAP net income for the third quarter ending September 30, 2005 totaled approximately $3 million or $0.11 per share in the middle of the range provided in July, despite the small shortfall in revenue. This compares with non-GAAP net income of approximately $1.5 million or $.06 per share for the comparable period last year and non-GAAP net income of approximately $2.9 million or $0.11 per share during the second quarter of 2005.

During our third quarter, we again recalibrated our estimated tax rate for the full 2005 calendar year as we gained visibility into our disqualifying dispositions for the quarter. As a result of this exercise, our effective tax rate declined further for the first 9 months of 2005. The result drove additional earnings per share during the quarter. However, our operating expenses also included an equivalent one time write off of legal, accounting and tax advisory services related to an acquisition opportunity that we chose to terminate. Therefore, net net, including all one time events, our business truly earned $0.11 per share during the quarter.

For the remainder of 2005, we forecast our tax rate in the 18% to 20% range, down from the 22 to 24% range previously provided. On a GAAP basis, including amortization of stock-based compensation and acquired intangible assets, I'm pleased to report net income for the fifth sequential quarter of approximately $1.5 million or $0.06 per share.

Turning to our balance sheet at September 30th, total cash increased to $59.3 million, an increase of approximately $7.5 million during the quarter and $13.7 million for the first 9 months of 2005. Operating activities generated positive cash flow of $5.4 million while employee stock option exercises contributed $2.5 million and as mentioned earlier, a meaningful increase in our disqualifying dispositions. Capital expenditures totaled approximately $451,000, partially offsetting the cash generated from operating and financing activities.

Our accounts receivable decreased approximately $1.2 million to $17.6 million while our aging of receivables remains healthy. Lastly, as of this morning, over 30% of outstanding billed accounts receivables at September 30th have 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 Q4 2005 and Q1 2006, 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 Design to Silicon Yield Solutions. PDF's actual results could differ materially. You should refer to our current SEC filings and understand that the forward-looking statements made during this conference call are based upon information available to PDF today. We assume no obligation to update them.

Now for the fourth quarter of 2005, we reiterate the guidance we provided in our outlook press release earlier today. Revenue is expected in the range of $18.8 to $19.6 million, a decrease of approximately $1 million from the range provided in July, primarily the result of the aforementioned projected lower bookings for dataPOWER software products. However, with gain share expected in the range of $3.1 to $3.5 million, we are holding the guidance we provided in July for non-GAAP earnings per share in the range of $0.11 to $0.13.

Reiterating guidance for the first quarter of 2006, which was also provided earlier today in our outlook press release, revenue is projected in the range of $20.5 to $21.5 million with non-GAAP earnings per share in the range of $0.12 to $0.14. The guidance for Q1 2006 reflects our confidence that Q4 2005 IYR bookings and continued growth in gain share, will keep us on track for another record year in 2006. Given the guidance we provided today, PDF expects to report 2005 total year revenue in the range of $73.7 to $74.5 million, total year non-GAAP net income in the range of $11.6 to $12.2 million and total year non-GAAP earnings per share in the range of $0.42 to $0.44. Echoing John’s comments and repeating myself, we believe this increase in earnings and earnings per share relative to the revenue increase is indicative of the significant leverage inherent in our business model and the value we create for our customers.

Additionally, PDF expects to report GAAP net income for 2005 of $6.1 to $6.6 million or $0.22 to $0.24 per share versus the net loss reported in 2004. And lastly, we expect positive cash flow to have generated over $15 million before the year is out. With that, I would like to turn the call back over to the operator to open the floor for questions.

Thank you, Mr. Melman. Ladies and gentlemen, [Operator Instructions]. Your first question comes from Garo Toomajanian with RBC Capital Markets.

Thanks. Just wanted to confirm that you guys said that there were 2 new yield ramps in the quarter?

Yes, that’s correct.

And one of them was a conversion from 90 to 65?

No, they’re both 65 nanometer ramps, both customers that are still doing the 90 nanometer ramps with us.

Okay, good. And it looks like the average, I guess, gain share per contributor went up in the quarter even though you lost one contract it looks like. Is that based on just better volumes at customers?

Well, as you know, our gain share contracts have a number of variables to measure the value we deliver. So I think it’s a combination of volumes and the execution of our teams in creating value that we measure for our customers.

Okay. Steve, you gave us an updated tax rate for Q4. Do you have a sense of what things might look like for next year?

Yeah, I think on last quarter’s call I said 30 to 35% for next year. We’re still projecting in the 30-35% range, probably closer to 30 than 35 as we look at things today.

Okay. And can you repeat what you expected the cash flows from operations to be for the year?

It will be over $15 million is our expectation. We were at $13.7 million through the 9 months and I don’t see any reason why we won’t have another positive cash flow quarter in Q4.

Okay and lastly, just wondering what the pending acquisition of HPL by Synopsys might mean for you guys. You’ve had a relationship with Synopsys I guess similar to the one that you have with Cadence and Magma in that they’re pDfx enabled. So just wondering if you’re anticipating any changes in your relationship there.

No, we don’t, Garo. We actually continue to believe we’ll be working with them on pDfx and they also OEM an [inaudible] product with us.

Okay great, thank you.

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

Hi, guys. Can you talk about - - can you break down revenue by process node? How much revenue you’re getting for 90, 65, etc.?

Gus, that’s information that we haven’t previously given out. I think that would provide an awful lot of competitive data and information that we would probably not want to give out. So I would like to refrain from answering that question.

Even aggregating it up, gain share and DYI together, and foundry versus memory. I would imagine that would be enough complexity it would be hard for anybody to figure out exactly what was going on.

Well I think we have said, Gus, that the majority of our business today is with launching semiconductor both IPMs and foundries, and it is a relatively small number of significant customers out there. So we did look at this a couple of times and felt that if you squinted, if you looked at the breakout that way, you look at the breakout by geography and you looked at the breakout a couple of other ways that we have, we do provide in our government filings, competitively people might be able to put 2 and 2 together. And our customers are pretty concerned. I’ve had customers tell me a number of time where they felt that there were questions baiting if they were a customer of ours and we refrain to answer unless they had made a press announcement about it. And they always thanked us about it. So we’re probably going to refrain from doing that.

Okay, and then let me try another one. When - - in looking at your technology, is it possible to abstract the information that you get from process to helping your customers with layout and clock SKU and that sort of thing?

That’s a good question, Gus. In respect to layout, certainly, and our pDfx technology does address a lot of that. With respect to clock SKU and parametrics, as we look at the 65 and 45 nanometer nodes, we believe that within die parametric variability, systematically related within die parametric variability, and even the random component, will be growing. We’ve had in R&D for a number of years now, new technologies to address that. And we are starting to roll these out. When I said that we had broadening relationship at 65 nanometers with our customers, it’s because of technology we’re providing them actually does address a number of things you need to do characterizing within die variability. And we’ll talk more about that as we get that out across more customers.

And final question is, can you just talk a little bit about your sales pipeline? Any potential new customers or things that look promising going forward?

Yeah, that’s a good question. We actually, as I said in my notes, we see a broadening interest in customers. That meaning not just existing customers, but also new customers. And over the next couple of quarters, we expect to see the list of customers to increase from the discussions we’re having now.

Primarily in Logic once again?

Primarily, but we actually outsource - - as you know, we have had some business in the flash marketplace and some of the other technologies like that where we see some general applicability of our solutions and are talking with those customers as well.

Okay, thanks a lot.

Your next question comes from Dennis Wassung with Adams Harkness.

Thanks. A few more questions here on some of the contracts here. So the 2 new engagements in the quarter - - both 65 and both with existing customers. Does that bring you to about 5 customers or contracts at this point with 65 nanometer?

Yeah probably. It’s on that order of magnitude.

Yeah, I think we were 3 prior, so adding those 2.

Okay. And is it safe to assume that all 5 of those were existing 90 nanometer customers?

I believe so.

Okay. So your - - it seems like you’re more bullish about the 65 nanometer opportunity and I guess sort of the timing of that, of these new contracts coming. Obviously with about roughly ten 90 nanometer engagements signed to date, what’s your confidence that a lot of these contracts, or those customers, are going to translate into 65 nanometer contracts over the next 2 to 3 quarters? I guess what’s your outlook for these 65 nanometer contracts in the next few quarters?

That’s a good question, Dennis. In fact, we try to track that and we’ve tracked at what rate we acquired 90 nanometer customers within the 90 nanometer in terms of relative to when you would look at the 90 nanometer ramp starting. And where we are at 65 nanometer. We believe we’re actually ahead of the pace we were at at 90 at this time on 65. And in fact in just the last couple of weeks did that analysis, some people here did that analysis. We expect over the next few quarters to additionally pick up more customers. Whether that’s 2 or 3 or a little longer time period, we do believe, because I think the timing on 65 nanometer for different customers is changing, right? We do expect over the next 3 or 4 quarters to see all, us pick up significantly more market share and it clips what we had at 90.

Okay, so you’re saying more logos, new logos adding to the mix over the next few quarters is your expectation?

We expect to get our existing logos that were with us at 90 that are still in the business and we do expect to pick up new logos over time.

Great.

Dennis, a couple of other things - - the more experience we gain and the broader our reputation is, the ROI to justify ramps for new engagements is easier and easier to work through with a customer, justifying their initial investment in new fab. We are also continuing to see us be engaged closer and closer to engineering so that we can deliver more value sooner which we believe will help increase the traction to 65.

Okay, that’s very helpful. On the gain share side of the equation, obviously you guys have put up pretty good numbers here the last couple of quarters. And you mentioned that one quarter missed the volume threshold this quarter. Is that an older contract, like a 130 or 180 nanometer contract?

It’s an older contract and it’s also one that we expect to be delivering gain share next quarter. It was more of a specific circumstance of a particular criteria and a particular contract that wasn’t achieved, and as a result, we didn’t receive gain share.

We tried to keep it so that we don’t - - when we have a fixed number of quarters, we’re not getting quarters where the volumes are low, the result of that would be advantageous for us. So if the volume in a quarter is below a certain threshold level, then that quarter is past and we get that in the future.

Oh okay, so it sort of extends the life of that contract?

That’s right.

Okay, perfect. So you expect that contract to get back in the next year. And on top of that, I guess, when you look at the mix of the gain share revenue at this point, I know you didn’t want to quantify, but it sounds like 90 nanometers is taking a bigger piece of that puzzle. It is safe to assume that’s where a lot of the growth is happening that you’ve seen the last couple of quarters in that mix?

Yeah, I think - - Garo’s question was whether it was volumes or yields and I think Steve said it was a combination. In my part of the talk I did say that the increase in gain share was primarily driven from 90 nanometer ramp.

And one last question on that. You talked about Charter did a tech forum and whatnot. In some of the commentary they had at that event, they were basically saying that their yields, or defect densities at least, were much better than the industry average at 90 nanometer. Is it your experience at this point that the success or yield levels, I guess, or performance in general at the 90 nanometer node is better than you guys saw at 130 and even 180?

I think it would be difficult to say better than the 180 ramp. In general, better than the 130 ramp, although the 130 ramp had a lot of mitigating circumstances, not the least which was it went into a pretty serious downturn. The industry as a whole was in a downturn, so the products weren’t there. So does 90 look better than 130, I think you could probably, you could definitely make that conclusion. Better than 180 I think would be - - there are a lot more complicating yield factors at 90 than at 180 and I don’t think we see anybody at the defect densities that people achieved maturity at 180 yet.

Okay, I guess in terms of 90 nanometer, it sounds like customers, mainly specifically Charter at their event, it seems like customers are pretty happy with the way yields are progressing at 90 nanometer. Is that a fair assumption?

Yeah, I think I did see that as well. And what they showed was their learning rate was significantly faster than the industry average and that’s a claim that when we provide our technology to customers, we say you should be able to achieve a learning rate that’s faster than the industry average. So we were very proud to see them demonstrate that they are achieving a learning rate faster than the industry average. It’s a very strong marketing for them and also good for us. Overall, they also show defect densities that are very impressive as well and we were very happy to see that.

Great, thanks. I’ll let someone else get in.

Your next question comes from Tim Fox with Deutsche Bank.

Hi. Thank you, good afternoon. First question, if you could just talk a little bit about the dataPOWER weakness and maybe just walk us through a little bit about the dynamics around that business. Steve, I think, eluded to the fact that fab fell down and cap ex are constrained right now. Can you just walk us through what drives that business and why that may be weakening factor?

Sure, Tim. DataPOWER sells both to fabless companies as well as people with fabs, both IDMs and foundries. For the fabless business, we see that generally that business is, the number of seeds that they buy are typically in the 10s. And they usually buy initially on the order of 10 seeds and the deal sizes are in the hundreds of thousands of dollars. For the factories and eventually the enterprise wide management systems that you can sell into the larger multiple factory IDMs, generally you sell initially when their first chance to buy is when they’re building out a new fab because they usually have a capital budget for a yield management system. Once you’ve established that beachhead, then you can drive more incremental modules. We have a lot of modules that are now available. We announced those earlier this year, as well as incremental seeds as more of their engineers get trained up on the system. During 2005, we have seen a lot of that happening as you might have seen from our press announcement. And as we got into this quarter, we saw good traction with accounts that already were dataPOWER accounts that were evaluating new modules and incremental seeds. And in the quarter some of those customers said, hey look, we like the new modules, we need the incremental seeds, but we need to hold off some number of quarters, one or two quarters, because of budget, etc., etc. And that’s I think what Steve was referring to.

Okay, so temporary downturn there picking up in the first half of ’06?

Yeah.

Okay, a question was - - I don’t know if you want to comment on this or not, but IBM eluded on their call the other day about their gaming chips were yielding much better than they had expected. I was wondering if you had picked up on that point and if you’d care to comment on whether that was due to your technology being involved.

Yeah, unfortunately we’re not really in a position to comment unless customers make specific references as Charter did to our technology. So at this point we really can’t comment whether IBM is a customer or not. And what might be the root cause of that. I did notice it though.

Very good. Thank you.

And we have a follow up question from Dennis Wassung with Adams Harkness.

Thanks. Another quick question on the DFM side of the equation. You had talked about some of the fabless and sort of foundry opportunities you’ve had driving more capability on the DFM side. Are you seeing any additional traction on that with the pDfx tool or progress with the EDA vendors at this point?

Yes, Dennis, in Q2 we did mention that we signed up customers on pDfx, a customer on pDfx engagement, and we did actually also say that we’ve been in Q3 - - I actually didn’t say it, but I will say it now. In Q3 we did see a lot of interest in demos with customers on pDfx technology, both customers that have yield ramps and so assess to the modeling information is readily available and customers that are not yield ramp customers today that are starting to see the value in it. And we expect over the next few quarters to see more of those companies adopt pDfx, especially the ones for whom they’re generating the modeling data they need every day in their factories.

Okay, fair enough, and on the engagements that you signed in Q3, were both of those revenue events in Q3 as well? You mentioned it was an LOA for both of those.

Yes, there were both revenue events and they’re included in the count that I gave out.

Okay and last question, on the foundry side of the business again, you made some efforts to describe that you’re getting some good results here obviously and would you characterize that the opportunity that you have with other foundry customers - - are people taking notice of what you’ve done with Charter and what they’ve talked about? How is that translating into your outlook and your opportunities going forward?

Well certainly we’re very focused on continuing to make Charter successful and help Charter be successful and that is, of course, a very big priority for us. As we’ve said many times, the customers that we have today are always the most important customers to us. We do believe in the foundry market, we’ve heard from many, many fabless customers, I don’t like them learning on my silicon, I expect them to be at mature yields when I get there. And I think that what Charter is doing is going to be very powerful for the industry overall. And to the extent that our technology is core to that, and helps that to be possible, I think that does raise the interest of the other companies and we see rumblings of that.

Okay, thank you.

Our next question comes from Wendell Ladley with RS Investments.

Yeah, thanks, can you hear me? So we’ve been waiting for this gain share ramp and for the first time I guess there is more confidence in terms of sequential growth profile. And to the extent that you peel back the onion that’s subsidizing the Design to Silicon Yield part of the business, does it make sense just to assume that for some period of time that’s just a flat business so that rather that creating expectations that then end up backfiring, you’re just more conservatively guiding on that part of the business while we enjoy the gain share ramp? I’m pulling my hair out trying to understand how this business can become more predictable over a period of time.

Yeah, so Wendell, this is John. Certainly we are very pleased with the sequential increases in gain share and the forecast going forward. And as far as the Design to Silicon Yield Solutions, we do have a number of elements to that or at least 2 major ones. The implementation of our yield ramp solutions as well as the dataPOWER software revenue line item. And they do have different cadences to them necessarily. We don’t believe, we do believe that there’s a growing business for new IYRs, and so to forecast that that is going to be flat, I don’t know that that would be representative of what’s out there from a business standpoint. As far as the dataPOWER business, it is a newer business for us and we are certainly still learning some of its cadences. But generally we see a growing market for that as well. But for the Design to Silicon Yield Solution business, we do believe it’s generally a growing business and still will be growing. You know, - -

So John, is the dataPOWER business just too new for you to have applied the same kind of degree of predictability to it as you have over time now on the gain share and in the integrated yield ramp part of the business?

This is Steve, Wendell, I think - - you know, we acquired dataPOWER primarily as a technology that we wanted to provide our internal teams as a platform for rolling out our technology. And it was a technology that we felt we needed to make or we needed to buy or we needed to partner. The fact that we acquired it, we thought it would be a more solid foundation for us under the PDF umbrella rather than as a standalone company and we chose to partner with it. So now we’re looking more and more at the standalone sales contributing to the company’s earnings per share. But that rather minor side of the business is proving to be more cyclical in nature similar to the equipment business in the capital budgets, whereas our core business that’s 85% of our revenue and driving much of our profitability, is more geared towards industry trends as they move from 90 to 65. So these are different dynamics and ones that we have to manage as we provide guidance to where our financial growth is coming from. But certainly our core business is our major area of focus, our largest opportunity for growth. But we will continue to manage dataPOWER as a standalone product in compliment to our use internally as a platform for rolling out our technologies.

Okay, so look we’ve had a couple of false starts in terms of expectations on the gain share side. There seems to be more confidence around that. The yield ramp part of the business, ditto. Do you feel like now with this adjustment to dataPOWER that all 3 line items, you have equal amounts of confidence that your assumed contribution from those pieces of business has a conservative bias?

Well, you know that sounds a bit like a loaded question as to whether our guidance is conservative We believe we are learning more and more about the dynamics of each of the businesses and how they relate to one another and how they perform on a standalone business. And we’ll continue to provide realistic guidance understanding that we are looking at things as we learn more so than optimistically or conservatively.

I’m just trying to understand when we’ll get to the day where getting nicked by dataPOWER weakness near term will be overshadowed by the amazing profitability of the gain share business continuing its outperformance.

Well I think the example to look at is the early part this year we had a gain share pick up and we said, oh, it’s one of 4, one of 5. We have a difficult time overcoming that and we have to announce that we missed on gain share. This particular quarter, we didn’t have this one customer planning to miss the volume threshold, but they did miss the volume threshold. And we’re able to talk through it more so than have it be a blip on the gain share radar. So I think as we grow more substance around all the components of our business, we can ride through the hiccups or the idiosyncrasies of any particular line or any particular business cycle with more and more ease. And I think we need some more time to grow into that relative to dataPOWER.

Okay and just one last question. Beyond the 90 nanometer volume ramp that’s expected to come from X-Box and at some point the PS3, do you have more visibility on the other sources of 90 nanometer ramps going into the first half of ’06 than you would have said 90 days ago? I’m wondering the degree to which the visibility into those revenue streams have changed outside of the next generation gaming part.

This is John. I think we know that the other drivers for 90 nanometers, of course the cell phone and communications drive a lot of the volume and affect some of our customers as well as other consumers electronic products besides the systems that you mentioned. Game systems do drive an awful lot of silicon because the chip sizes tend to be a lot bigger than die sizes in a cell phone for example. So each of them contribute differently based on the number of wafers they represent. But in general, besides products that you mentioned, other products that drive overall 90 nanometer wafer volume, and we tend to also be affected by, are the cell phone products as well as other consumer electronics related products like DVD systems, like chip - - digital camera, chips for digital cameras and some of the other technologies that go into digital consumer products.

As far as visibility into all of those, we get what our customers tell us. In some products they’re so visible besides what our customers tell us, you hear lots in the press and you’re able to kind of ferret out a lot of things. Some products are not so high visibility so the customer gives you a volume forecast 2, 3, 4 quarters out and you don’t have really any other ways to validate it. So you know, with our portfolio and our customers that are driving gain share, it’s a mix of all those things.

Okay, great. Thanks.

Our next question is a follow up from Gus Richard with First Albany Capital.

Yes, can you just give a rough estimate as to what your total revenue was for say .18, then .13 and then so you can kind of take a look at how much your revenue is growing from one process node to the next?.

Yeah, Gus, actually haven’t done that. We haven’t done that. We’ve looked on customer by customer what are we generating per node and generally it’s up. And the number of customers is up, so I think overall the revenue we’ve generated at 180 versus 130 versus 90, it’s obviously gone up substantially both because of a broadening number of customers as well as the revenue per customer has generally trended up. But I don’t know that we actually - - I know we haven’t rolled it out.

No, we don’t.

That’s an interesting idea to roll it out.

And then just a second question. Steve, could you clarify for me - - you said there was an offset to the lower than expected taxes. Could you just walk me through that please?

All right. So on the lower tax rate it created a credit to the P&L, goodness to the P&L that might normally have discounted as being a one time favorable to the company. The offset was with regards to an acquisition candidate that we were considering that we were incurring costs on the legal, the tax advisory services and on the accounting side, and what I was suggesting this quarter was that the one time benefit of the lower tax rate was offset by an equivalent one time expense associated with an acquisition that we chose to terminate. So we incurred costs moving down the path that was a one time expense while the tax adjustment was a one time equivalent benefit.

Okay, and so I would assume that’s all in SG&A?

Yes.

And can you just give me that figure?

It’s an equivalent $200,000 to $300,000.

Got it. Okay, thanks a lot.

Our next question is a follow up from Dennis Wassung with Adams Harkness.

Hi, thanks guys. One last question for me here. I think you sort of talked about it a little bit here. I’m just wondering on the 55 nanometer deals that you’re signing, I think over the last couple of generations, the length of these contracts, or the length of the I guess implementation part of the engagements has lengthened. And I’m wondering what the dollar value of, maybe not absolute dollars, but how it’s changing from 90 to 65, do you see the integrated yield solution revenue going up at the 65 nanometer contract level versus where it was at 90?

Yeah, so we are very focused on - - we recognize that the ramp lengths are going up and generally the 60 periods are increasing. They’ve gone from a year to a year and a half and now they’re generally longer than a year and a half. At 65 nanometers, we certainly recommend to the customer that they are. And we’re generally seeing that. We are careful and mindful about the price increase per quarter basis and trying not to have that go up too much because I believe that we need to make sure that we can provide a good value to the customer. But the total dollar amount is going up. And the price per quarter is going up a little bit. When I say the total dollar is going up it’s because now it’s maybe 7 quarters of implementation instead of 6, and so hence the price will go up a little bit just because it will go up by one sixth just because you’ve got a seventh quarter. And the price per quarter is also going up a little bit.

We certainly understand the leverage in our contracts and we understand that if we negotiate one side of the contract, then the gain share side of it is negotiated as well. So we maintain a strategy for the overall opportunity per node per factory and licensing our technology and rolling out the infrastructure.

Great, that’s very helpful. Thank you guys.

Our next question comes from Tom Cruteau with Pacific Asset Markers.

My question relates generally to your relationship with the EDA companies. It seems to vary from a Magma for instance that says they’re integrating your product into theirs, to other degrees. And I often find myself asking, are these guys friends of yours or are they potential foes of yours? And a related question is, if they are friends, could you see them in the near term being a significant source of revenue?

Sure, I’ll take that question. Actually we have implemented pDfx now with Magma. Magma was first, Cadence and Synopsys as well in their placement of our systems have implemented. So actually all of them are implemented. We generally consider them to be friends. Our goal, and we also generally aren’t looking at them as a revenue source. Our goal is to get customers to adopt our infrastructure in the fabs and we know that our infrastructure can provide very useful yield model information that can be used in the design systems. We want all the design systems to be able to support the yield models that come from our yield ramp infrastructure. And actually work with all the design automation vendors so that we’ve got a good tie in so they can use our modeling. So when we go to a customer we can say to that customer, and if you use our infrastructure, then your designers, irrespective of which of the design systems they use, are able to get the most accurate, most complete modeling of their process they can design to. And that’s good for a foundry because that means they can give a customer better yields. It’s good for the customer obviously because they can get a better match to the factory. And good for the design automation vendors because they can make sure the design tools to provide for the customer superior silicon. And of course good for us because that drives adoption of our infrastructure into the factories. So we’re actually not trying to charge the design automation folks. We are trying to partner with them and have been successful at partnering with all of them. And we do see that as creating pull for our infrastructure at the IDMs and the foundries.

Okay, and Magma specifically, where they seem to be the most linked to you, have you seen pull from them yet?

Yes we have. Certainly, and we talked earlier in the year, one of their customers upon seeing what you can do with pDfx, purchased technology from us to implement pDfx, so it’s generated revenue for us.

I remember that, but any others?

We do see others and some things that we can’t talk about yet.

Okay. All right, thank you.

At this time, there are no more questions. I will 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 third quarter 2005 conference call. Good bye.

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