PDF Solutions Inc (PDFS) 2006 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 which ended Saturday, September 30, 2006. 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. [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 this conference are forward looking, including statements regarding PDF's future financial results and performance, growth rate and demand for its solutions. PDF's actual results could differ materially. You should refer to the section entitled "Risk Factors" on pages 10 through 18 of PDF's annual report on Form 10K for the fiscal year ended December 31, 2005, and similar disclosures and subsequent SEC filings. These 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 Keith Jones, PDF's Chief Financial Officer. Mr. Kibarian, please go ahead.

Thank you and welcome, everyone. For the third quarter of 2006, PDF Solutions is reporting total revenue of $19.4 million and non-GAAP net profit of $0.13 per share. Gain share was $4.4 million. Keith will talk more about the financial details behind these results and discuss our guidance going forward in a few minutes.

Before I hand the call over to Keith, I would like to comment on the following topics. The number and types of new engagements signed in the quarter, improvement in the dataPOWER traction, our gain share performance and outlook, the acquisition of SI Automation, which we announced earlier today, and the basis of our Q4 and 2007 guidance.

As we discussed in our Q1 and Q2 conference calls, during the last two quarters it was necessary to strengthen our pipeline of active yield ramp contracts. This entailed moving to an account team organizational structure which we implemented in Q1. During the third quarter, we continued to reap the benefits of these changes we made, and we expect these benefits to continue to grow. In Q3, we signed one new engagement for a 90-nanometer yield ramp with an existing dataPOWER customer, and we signed an LOA for a 65-nanometer yield ramp engagement with a new client. Additionally, we signed a 90- and 65-nanometer [yield to ware] statistical process control engagement with an existing client, which included a gain share component similar to our typical yield ramp engagements. This is the first engagement where we are using our CV infrastructure to model process variability and production excursions so our clients can improve their process control.

As a company, one of our strategic goals has been to increase the number of applications for our CV infrastructure and to increase its effectiveness in mature processes. This SPC application accomplishes both of these goals and is very synergistic with our acquisition of SI Automation, which I will talk about in a few more minutes.

Turning to gain share. In the third quarter, we realized $4.4 million in gain share revenue from 10 contracts. This gain share revenue was below our guidance of $5 million to $5.5 million due to lower-than-expected volumes at a few accounts. We had anticipated a decrease in gain share from Q2, but the decline was greater than we expected due to decreased end user demand and reduced output caused by production excursions at a couple of fabrication facilities.

Our Q4 guidance is based on our expectation of slightly improved production volumes. As I mentioned, the number of contracts contributing gain share increased from nine to 10, evidence of the breadth of contracts contributing to our foundation for gain share revenues. As we have stated in the past, gain share may fluctuate from quarter to quarter. However, year over year we expect gain share revenue to increase. After nine months, 2006 gain share is up substantially over the full 2005 fiscal year, and our overall guidance for 2007 is based upon our belief that gain share will improve over 2006.

Taking a look at dataPOWER. Similar to Q2, during the third quarter we demonstrated improved sales traction of our dataPOWER products. Total software license revenue was a record for PDF, as our investment in our new 7.3 release started to pay dividends. Again this quarter, we leveraged the synergies between our yield ramp solutions and our dataPOWER products. In Q3, a yield ramp customer chose to implement our dataPOWER across multiple fabs, placing a significant order. We believe the use of dataPOWER by our yield ramp engagement teams during the infrastructure implementations not only improves the product, but also demonstrates to our clients the advantage it offers over other YMS systems, especially when integrated with our technology platform.

While our license revenue has varied from quarter to quarter, our pipeline has consistently improved throughout the year. As a result, we are also anticipating continued upward trend for dataPOWER sales year over year.

Earlier today, we announced our acquisition of SI Automation, a privately held fault detection and classification software and service provider based in Montpellier, France. For IC manufacturing at 90 nanometers and beyond, cost of control software plays a critical role in enabling superior yields and equipment utilization. The advent of 300-millimeter fabrication facilities, with their associated higher capital costs, further exacerbates the risks and financial consequences of undesirable process variations and excursions. Fault detection and classification, FDC software, provides fabs with the data collection and analysis capabilities required to rapidly identify the sources of process variation and excursion by monitoring equipment parameters. With an installed base that includes a majority of the top 20 semiconductor manufacturers around the world, SI Automation is a technical and market leader in FDC software and provides PDF with an extremely complementary customer base.

SI Automations Maestria offering combines the best-in-class data collection, processing, and analysis capabilities that will allow PDF's ever-thickening layer of technology to reach further into the fabrication facility.

Together with SI Automation, PDF Solutions will expand from its current strengths and yields ramp and yield management software to address the sources of yield losses in volume production. The combination and integration of Maestria, dataPOWER, and PDF's characterization vehicle infrastructure will provide fabs with an unparalleled yield optimization system.

In the past, our customers have expressed their dream to use equipment data to identify and anticipate sources of yield loss. Until now, this dream has largely gone unfulfilled. Presently, hundreds of distinct FDC parameters are collected every millisecond from each tool in a fab. And while the engineers have believed for years that this data could be important for identifying excursion wafers and improving process controls, without CV data it has been nearly impossible to determine which parameters are most critical. By integrating FDC software with the yield resolution provided by PDF's characterization vehicles, we are creating a new out of process control software that will unleash the full power of using equipment data for variability reduction and excursion control.

As I mentioned earlier, in Q3 we began a client engagement focused in this area, and we will continue to work with SI Automation's experienced management and engineering teams to deliver the integrated solutions that are required to realize this vision. We will continue to sell the Maestria product stand alone as we have with dataPOWER since our acquisition of IDS in 2003. Like dataPOWER, the customer typically buys integration services as well as FDC software licenses. Unlike dataPOWER, these FDC software licenses are sold for each tool in the fab, rather than each engineering seat.

We are also developing a new practice for yield to ware statistical process control that leverages the combination of our CV infrastructure and FDC software. Like our yield ramps, these capabilities and services provide measurable benefits to the clients in terms of reduction in variability and excursions and improvements in overall equipment efficiency. Since we will deliver measurable value with such an offering, we believe we can continue to expand our gain share business model to encompass this solution.

Our guidance for Q4 reflects our belief that we can continue to enlist two to three new IYR engagements per quarter and continue to make progress in our dataPOWER business. We expect modest improvements in gain share. And, due to purchase accounting, our revenue expectations from our SI Automation acquisition are very modest. As a result, we have raised the top end of our previous revenue range for Q4 but left the bottom of the range the same. We are hoping the four quarters non-GAAP earnings per share guidance, despite the immediate dilutive effect of the SI Automation acquisition. It will take a few quarters for purchase accounting adjustments to run their course, but we expect the acquisition to be accretive for the full 2007 fiscal year.

Today we are also providing guidance for our total 2007 fiscal year. It reflects our belief in continued traction across all of our products and solutions, year-over-year improvements in gain share, and a more positive contribution from the acquisition of SI Automation in the latter quarters and clearer visibility towards future growth opportunities.

Now I'll turn the call over to Keith, who will discuss in detail our financial results for the second quarter--I'm sorry, for the third quarter--and our guidance going forward. Keith?

Thank you, John, and good afternoon to everyone. Let me again state that this presentation and our press releases issued earlier today include references to certain non-GAAP financial measures. The press releases contain a reconciliation of such measures to the most directly comparable GAAP measures, and you may access the press releases and reconciliations in the investor section of our Website located at www.pdf.com.

Revenue for the third quarter ending September 30, 2006, totaled $19.4 million, an increase of 5% and 8% compared to the third quarter of last year and last quarter, respectively. These results were in the range of guidance we provided in July. The increase from last year was due to increased gain share, more than offsetting a small decrease in design to silicon yield solutions. The increase from last quarter was a result of strengthened design to silicon yield solutions, more than offsetting the expected decline in gain share. We are very pleased to report that gain share revenue has surpassed $15 million year to date, already exceeding last year's record gain share of $11.9 million. Total design to silicon yield solutions revenue totaled $15 million for the third quarter, a 22% increase from last quarter, although a 3% decline from the comparable period last year.

Software license revenue grew 112% and 149% from last year and last quarter, respectively. Integrated solution revenue declined 19% from the comparable period last year, but rebounded with an increase of 6% from last quarter.

During the quarter, we kicked off two new yield ramp engagements, with two new yield ramp customers at 90 and 65 nanometers. We also began a new yield to ware statistical process control engagement with an existing customer, which is expected to dovetail nicely with the knowledge and technology gained through our acquisition of SI Automation. As expected and despite our strong bookings, the number of major integrated solution engagements contributing to revenue declined during the quarter. Ten integration solution engagements from 10 customers each contributed approximately $150,000 or greater in revenue.

Reiterating what we have said in our call in July, the third quarter will be the last quarter for some time to come where we will experience the conclusion of fixed-fee periods on multiple engagements during the same quarter.

Gain share revenue for the third quarter totaled $4.4 million, a 42% increase versus comparable period last year, but a 23% decrease from last quarter. The decrease was somewhat greater than the guidance provided in July, as customer wafer production volumes were below expectations. Gain share revenue was generated from seven customers and 10 engagements, up one engagement during the quarter.

Gross margin for the third quarter, excluding stock-based compensation and amortization of core technology, was 67% of total revenue, an increase from 65% and 66% during the third quarter of last year and last quarter, respectively. The increase from last year is the result of increased software licenses and gain share more than offsetting the decline in margins for integrated solutions. The increase from last quarter is a result of increased software licenses and a modest increase in integrated solution margins, more than offsetting the decline in gain share. Along with some continued upgrades to pdFasTest, we again incurred a meaningful amount of expenses and cost of sales as a result of temporary overcapacity in our service organization. We expect gross margins on integrated solutions to rebound to historical levels in upcoming quarters.

Total operating expenses, excluding stock-based compensation expense and amortization of acquired intangible assets, were $10.4 million for the quarter, up approximately $935,000, or 10% from the third quarter of 2005 and flat from last quarter. The increase from last year was due to increases in research and development and SG&A. Research and development expenses, excluding stock compensation, totaled $6 million for the third quarter, an increase of approximately $499,000, or 9%, from the third quarter of 2005, and as expected, an expected decrease of approximately $330,000, or 5% from last quarter. The increase from last year was partially the result of the cost of our new office in China, and the use of outside consultants on strategic development projects.

Selling and general and administrative expenses, excluding stock compensation, were $4.4 million during the third quarter of 2006, an increase of approximately $436,000, or 11% from the third quarter of 2005 and an increase of approximately $305,000, or 7%, from last quarter. Both increases were the result of higher legal, tax, and accounting services and increase in employee commissions resulting from higher bookings.

Reiterating the statement made in our press release, in addition to using GAAP results in evaluating PDF's business, management also believes it is useful to measure its results using a non-GAAP measure of net income, which includes stock-based compensation and expense and amortization of acquired intangible assets. Non-GAAP net income for the third quarter ending September 30, 2006, totaled approximately $3.6 million, or $0.13 per share, in the middle of the range provided in July. This compares with non-GAAP net income of approximately $3 million, or $0.11 per share for the comparable period last year, and non-GAAP net income of approximately $3.6 million, or $0.13 per share, during the second quarter of 2006.

For the third quarter of 2006 as expected, our base tax rate was below our projected annual rate. Additionally, we benefited from supplemental R&D tax credits and disqualifying dispositions. Without such a favorable impact, our non-GAAP earnings per share would have been at the lower end of the range. On a GAAP basis, including amortization of stock-based compensation and acquired intangible assets, we are pleased to report a return to profitability of approximately $570,000, or $0.02 per share. This net income included $1.5 million, or $0.05 per share, of stock compensation expense resulting from FASB 23R.

Turning to our balance sheet, at September 30, total cash increased to $69.9 million, an increase of approximately $814,000 during the quarter, and $9.4 million year to date. Operating activities again generating positive cash flow of approximately $772,000 during the quarter, while employee stock option exercises contributed approximately $613,000. Capital expenditures totaled approximately $652,000, partially offsetting the cash generated from operating and financing activities. Our accounts receivable increased approximately $2.8 million to $23.4 million, primarily due to the increase in revenue. Our aging and receivables remained relatively healthy.

Now turning to guidance. I will state again that some of the statements made in the course of this conference call, including the ones we are about to make with respect to Q4 2006 and fiscal year 2007, are forward looking. These statements and expectations about our future financial results and performance, growth rates, the success of any business objectives, product and service features and introductions, high-end products, and demand for PDF to design silicon yield solutions, PDF's actual results could differ materially. You should refer to our current SEC filings and understand that forward-looking statements made during this conference call are based upon information available to PDF today. We assume no obligation to update them. Additionally, I will preface my comments on our guidance by saying that both the fourth quarter 2006 and full year 2007 guidance includes the effect of the acquisition of SI Automation that was announced earlier today. The inclusion of SI Automation is dilutive in Q4 2006 due to the effects of purchase accounting adjustments. However , the acquisition is accretive in the guidance provided for the full year 2007.

One specific point should be noted. SI Automation is a private French company and has not needed to comply with U.S. GAAP software revenue recognition reporting requirements. As such, in our guidance for Q4 and 2007, which I will discuss in a moment, we have considered SI Automation's backlog for software and services to require ratable revenue recognition as long as several quarters. We will disclose SI Automation's historical financial performance under U.S. GAAP when we file our AK with such financial information within 75 from the date of acquisition.

Now for the fourth quarter of 2006. We reiterate the guidance we provided in our outlook press release earlier today. Revenue is expected in the range of $21 million to $22.5 million, a small increase from the range provided in July. Gain share in the fourth quarter is expected in the range of $4.5 million to $5.0 million, reflecting a modest increase in customer production volumes, and non-GAAP earnings per share is expected to be in the range of $0.13 to $0.15 per share, no change from the non-GAAP EPS guidance provided in July, despite the short-term dilutive effect of the SI Automation acquisition. For the fourth quarter, the dilutive effect of the SI Automation acquisition will contribute to lower expectations for consolidated profit before taxes. As a result, we will generate a tax benefit in the quarter, helping us to hold our previous guidance despite the dilutive effect of the acquisition.

Reiterating the guidance for the full year 2007 that was also provided earlier today in our outlook press release, revenues are projected in the range of $109 million to $115 million, with non-GAAP earnings per share expected to be in the range of $0.72 to $0.78 per share. We estimate our annual 2007 tax rate to be in the range of 25% to 30%. Of course, there could be variability from quarter to quarter to achieve this annual rate.

Looking ahead to the quarterly earnings result releases in the future, we plan to provide only one quarter of guidance, including a projection of gain share, and will update our outlook for the full year 2007 if and when necessary.

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

Hello, Operator?

Hello, can you hear me, sir?

Now we can, yes.

Okay. Your first question is online. It's Stuart Muter with RBC Capital Markets.

Yes, hello. Thank you. A couple of questions. I guess, first, in terms of SI Automation, how much operating expenses does it contribute to in Q4?

Well, we would actually pick up their operating expenses from our date of acquisition, so we'll have two months of operating expenses, Stuart, and the size and scope of the operations of SI Automation we'll disclose shortly when we file our 8K.

Okay, fair enough. And in terms of the shortfall in gain share in Q3, is this really just kind of the soft wafer start environment? Is that what you guys are seeing?

Primarily--this is John, Stuart. Primarily, yes, that's true. There were a couple of fabs where we saw them throw out a few wafers due to an excursion, which I think affected some of their liability factors, so their volumes were maybe depressed a little bit more than just the demand would have suggested. But in general, yes, the demand and the start for the outs seemed to be less than we expected, less than I think they expected.

Okay. And then maybe a quick question on the acquisition. You know, fault detection and classifications kind of struggled where the customers have decided they want to do it because it's very sensitive data there. Some of the equipment companies feel they want to do it, and then there's kind of third-party providers like you guys that see the opportunity, so could you talk a little bit about how you think you're going to be successful convincing the equipment companies as well as the semi manufacturers that it makes sense to do it with you guys?

Yes, that's a great question, Stuart. So I think you've laid out the landscape perfectly. All three of those parties participate. The issue, I mean, online we looked at it closely, has been application. And being able to make some sense out of the data. About two years ago, in 2004, one of our yield ramp clients, that was the first one running our Scribe vehicles, said, "Gee, we collect all this FDC data. We don't know how to make any sense out of it. Can you use your vehicles, because it gives great spatial coverage and has some other advantages to dissect this information?" And actually, when we started doing that analysis, we saw some great signals. We then went back and started using our full-flow vehicles--excuse me, our short-flow vehicles, which are full wafer coverage, to really go in and take out all the layout dependencies and the spatial effects more carefully, and in '05 we started off in R&D experimenting with this area. We realized that there was some great opportunity. I think it's one of the great advantages the clients get by working with PDF, because we've got vehicles running in so many fabs, and we're looking at so much data, we can make sense out of stuff that is difficult to do when you're running one or two fabs yourself, because you don't get that breadth.

And by the end of 2005, we identified this as a strategic direction for us. We started actually talking with our clients in the beginning of 2006 as this being a way that we thought we could take the CV application, and we got a tremendous amount of interest from the clients. And we realized that one of the critical things was being able to take those models and use them in real time on the equipment to set off signals for the engineers to do something. To set off inspection, to set off metrology, et cetera. And with that, we realized that an acquisition would be very advantageous. While we believed that the tools, specific tool control, the equipment vendors will continue to, FDC is kind of a catch-all for a lot of component CV solutions, we believe the components that are really tool specific will continue and increasingly be done by the equipment vendors. But tying that to product yield is something that, if we can provide a good system for the clients, we believe the clients will adopt. And our Q3 contract really demonstrated that and gave us more confidence that we were going in the right direction.

So, is it fair to say that you're kind of moving more towards the classification rather than the detection?

That is correct.

Yes, okay. So that--.

It's a great way to put it.

Okay. That's helpful. Thanks a lot. I'll pass it on to someone else, and maybe I'll circle back.

Sure.

[Operator Instructions]. One moment for your next question, please. Your next question is from Auguste Richard from First Albany Capital.

Hi, guys. Congratulations. This looks like a great acquisition for you all. Just so I can get this clear in my own mind, how the interaction between the characterization vehicles and the fault protection in the SI Automation. Effectively, as you are working with a customer to determine design rules and process flow, you also can layer on top of that data collection, variations in equipment parameters that will have a predictive effect on yields in high volume?

Yes.

Is that the way to think about it?

Yes, so, before, when the customers used our PDCV analysis software to analyze the test vehicle data, they looked primarily at the splits that they set in the process and the layout factors on the test vehicles. The experiments that are intrinsic in the design of the test vehicle. And what we've been doing is adding in that data, actually adding in the database the summary information from the FDC parameters as well, because we found the customers run a lot of our short-flow wafers at the beginning of a bring-up, just running the baseline process just to characterize their process windows. So if you look back over a month or two, they easily have 50 or 100 wafers, just one with baseline. So they can take the baseline process, their FDC data, and identify which FDC parameters control the center of the wafer, the edge of the wafer, different layout factors that, for example, vias with lots of metal on them, vias with not a lot of metal on them, et cetera, understand specifically what FDC parameters or tool parameters control each of the failure rates and have milestones for that. Then, when they're running product wafers, they'll be able to evaluate those models in real time on a system like Maestria and set up a flag for, "Okay, this seems to imply a failure rate of this type on this type of via at this part of the wafer."

Right. Yes. That's the easiest example to understand is if you were looking at the, an exposure, and if you were overexposed, you would expect to blow out some line with somewhere.

Exactly. And it would affect certain types, parts of the layout more than others.

Right. And you would note as the wafer was being run that, the case that the light bulb's too hot, if you will.

Exactly.

Got it. Okay. And then this contract that you have, the 90-nanometer one with SPC, could you just run through that real quickly as to exactly what you're doing with that customer, and that does have a gain share component, correct?

That is correct, and basically what we're doing is we're taking the CV data, running the CVs to build those models as I described, and then as the customer implements those models for different modules in the process, they pay wafer fees on the, as a proportion to the number of modules they implement the FDC models on. So if they implement it on five modules in the process, they pay about half of the maximum wafer fee. If they implement it on 10 modules in the process, they pay the maximum.

Okay, and then--.

And the advantage the customer was, the models are a little bit like if you buy a high-performance sports car, it's got traction control and interlocking brakes, et cetera, et cetera, and you could turn all those things off and drive your car, but you're not going to get maximum performance out of a really high-performance car turning all those things off. They've got a very high-performance fab. If you want to get maximum performance out of your fab, by running these models you're going to get better control of your fab. And if you run them, then you should pay us wafer fees.

Got it. Got it. And then is the new customer, the new of the LOA that you signed in the quarter [inaudible], is that logic or memory?

That's a logic customer, Gus.

Logic? Okay. All right. I won't ply 50 question. And then the impact on purchase accounting in the near term. Could you just walk me through that?

So Gus, as you know with most acquisitions, particularly with software companies, when you have deferred revenue, you typically lose that on a go-forward basis once you have a combined company. So just take a step back. What SI Automation had focused on doing was building their business. Getting customer traction, getting orders, that's real dollars, real revenue. It's just a matter that they had not been subject to the rigors of U.S. GAAP accounting, and as a result of that, they would have a fair amount of deferred revenue from their existing contracts that they enter into, and then also there's a lingering effect from commitments they had made to their customers that they planned on fulfilling in the short term.

So as a result, in Q4, we have to inherit that, and there's going to be, we anticipate, a very de minimis amount of revenue that we'll be able to recognize. Typically with the fact that how they structured their contracts, you would have a ratable revenue recognition that would stretch over several quarters. So over time, we see us building up that pipeline. The customer attraction is strong. Their pipeline is strong. And over the long term, we expect the acquisition of SI Automation to be accretive to our financial results.

Got it. Got it. And having done some poking around on this thing, is it reasonable to assume it's about $15 million in revenue? Is that a good guess?

So, Gus, we'll, we actually will wait to disclose any of the financial results until we file our 8K. But you'd be, the size of the company is somewhat similar to our IDS acquisition when IDS was a private company.

Okay, got it. I'll let somebody else have some questions. Thanks.

Your next question is from the line of Dennis Wassung with Canaccord Adams.

Thanks. A few questions. First off, this is still on the SIA topic here. You mentioned, John, that the customer list is pretty complementary here, and they've got a pretty good list here of over half the top 20 guys. Anything else you can tell us about that? Are they playing in a lot of your big-time customers at this point?

I think similar to the dataPOWER situation, when we acquired them in 2003, they are stronger in parts of the market. They have some penetration in the parts of the market where we're particularly strong, but they've been historically more focused on part of those markets. So, for example, in Japan, we probably have more penetration than they have. They have maybe more penetration in Europe and in Asia, some parts of Asia than we have. Yet, even in Europe we have some good overlap. We're just penetrating some of those accounts, and they've been established for a while, and the vice versa's true in Japan. And in Asia, I think, we will, it's a case by case on each of the accounts.

Okay, that's great. And another question on the SPC contract you signed in the quarter. Did you say that was 90 and 65.

Yes, that's correct. [inaudible].

I'm sorry?

It's on per fab. It's for the whole fab, and they're going to run those two notes there.

Okay, perfect. And you mentioned that this was an existing PDF customer?

An existing PDF customer.

dataPOWER side or on the yield ramp side?

On the yield.

Actually both.

Actually both.

Okay, perfect. So, when you, going in to sign this contract, was this sort of with the knowledge you already had SIA and the customer was, or at least you were in the process of doing that and the customer was buying into that strategy, or was this kind of irrespective of what you were doing with SIA?

It was irrespective of what we were doing with SIA, Dennis. I'll be honest with you, I, whether we did something with SIA or not, after our 2004 exploratory work and our 2005 R&D, we went into this year bound and determined that we were going to do something in this space. So we did this contract knowing that we were going to increase our investment in this area, and if we did the SI Automation, it would be even, it would make it go that much faster. Much like what we did when we decided we were going to expand our PDCV in 2003 and we chose to acquire. As we decided to expand that, we chose to acquire IDS.

We generally want to go in that area, then we're going to look to see a make versus buy, and we decided buy was more efficient for a lot of reasons.

Right. Quick question on the other two contracts you signed in the quarter. Did you say that both of those were brand-new customers to PDF?

One was a dataPOWER customer that became a yield ramp customer. The other is a totally new customer.

Dennis Wassung; Okay, great. And the 90-nanometer contract? Can you say anything else about that? I know you said logic on the 65. Any more details?

It's also logic as well.

Okay. Okay. Another quick question. You talked about sort of activity being pretty strong, reaping some of the benefits of the organizational changes that you've made. Could you talk a little bit more about that? How has your pipeline changed at this point? Do you still see a big backlog of new engagements kind of over the next several quarters? Any dynamics on that side?

Well, Dennis, we're actually quite pleased with the progress that we're making from our sales force, both from our yield ramp business as well as from our dataPOWER business. So to date we've had, I believe it's six customers that we signed year to date, and a year ago we had approximately four contracts. And we see the pipeline as being strong, and as John had mentioned during his speech is that we anticipate signing two or three customers for over the next several quarters, and the pipeline's very strong in the logic side of the business as well as some memory offerings as well.

And then in addition for our dataPOWER business, you saw that we posted a very strong license revenue, not for this quarter, and we would anticipate our license revenue to grow year over year, but you will see some fluctuations on a quarter-by-quarter basis, but we do anticipate a strong 2007.

If I can just, on top of that, Dennis, especially as we look at some of the memory markets, the integration of the FDC with the yield ramp is quite attractive for those accounts, because their issue really is around production control, and we see a lot of expansion opportunities in FDC and the new yield, new process control on the memory technologies as well as some of the mature technologies where FDC is still a very valuable way for them to improve the overall efficiency of their factory.

Great. That's good. Thanks. And I guess last one, just a quick one on the software license revenue, I would see a big quarter there. Was there something specific that drove that, or is it just broad demand, or was there kind of a big chunk of licenses that all went out at the same time here?

They represented several contracts, and actually just, we see a fair bit of strong, a lot of strong traction for our software business. So there were several customers, a couple sizable orders, but it's not a one-off, one-time issue. We'd actually do some seasons trends after discussing probably a year ago that we saw some softness in the YMS business and we do see some traction there now.

Great. Thanks, guys.

The next question is from the line of Matt Petkun with D.A. Davidson & Company.

Hi. Just a couple question left for me. First, looking to next year, could you be at all more specific maybe about what your expectations are for gain share? It's been actually surprisingly kind of fluid throughout the year, ranging anywhere from $5 million to $4.5 million, but no at seasonality or anything like that. When you look towards the next year, do you expect it to be kind of a linear year, or do you expect it to be more back-half weighted, front-half weighted? What are you seeing in terms of gain share and how much does that play into your overall guidance for next year?

Well, we see, for gain share contribution for 2007, we see it being up. We do see an increase. Typically, we don't give guidance beyond one particular quarter, one quarter, but we do see a growth in gain share in terms of absolute dollars and the number of customers contributing to gain share as well.

As far as the quarter-over-quarter fluctuations, Matt, we are still trying to understand that ourselves. We saw different customers have different softness at different parts of the year, actually. This year, in fact, if you listened to our Q2 conference call when we said it was up, we said it was up on some accounts and offsetting decrease in other accounts, and I think we said the same thing on Q1. And this quarter it was more broadly down. There were a couple that were up, but the ups didn't compensate for the ones that were down. And it was a very, there wasn't a rhyme or reason pattern to it. We've always said we thought it was going to be quarter over quarter difficult to predict, but year over year generally up. As we get more and more accounts contributing to gain share, we expect that there will be less and less overall volatility as they'll all kind of smooth out. But we're still not there yet.

Okay. And will you be recognizing revenue from SIA primarily, then, on the license line? Or, obviously, you'll integrate some of that into your IYR, but--.

It will be a fair mix that we'll be actually getting corporate in our design to silicon yield solutions revenue line item. So it will not be discretely within our license revenue line.

Okay, it would be solutions more in general.

That's a correct assumption.

Okay, but some of it might be like the Maestria specifically? Those activities will continue to be licensed?

That's true. And it actually depends on the customer, the configuration they order, and those good things, to the extent that we integrate their technology with ours and our service offerings, so it will be a mixed bag, so it will not be discretely that you can pick it out from one particular line item.

Okay. And then I know you're still waiting to file the K, 8K before you give exact specifics, but as you do provide guidance for '07, I'm just kind of wondering had you not made this deal, what sort of guidance would you have provided from just a pure top line perspective for next year?

Matt, this is John. It's really difficult for us to do, because we did anticipate our ability to sell some yield to ware SPC contracts in 2007. Now, we certainly feel a lot more confident doing that given this acquisition. Do we take those synergistic deals out, or do we assume that we would have sold those like we were able to in Q3, even though we didn’t have SI Automation at that time? So at this point, we didn't really do the exercise with and without. We kind of did the exercise with only, because we knew this was a pretty integral part to our strategy. I think what you'll be able to see when you look at the filing in 75 days, or roughly 75 days, is you'll understand what the historical numbers were. As I said, they're very similar to the dataPOWER historical numbers when we acquired them, and you can kind of put a growth line on that and then say, "Okay, the rest of it must be the original business," and that's your call, not ours.

Okay, great. And then maybe, John, just from a kind of broader perspective, this acquisition signals, and tell me if I'm correct in assuming this, that you guys are definitely pushing yourselves more deeply into the fab and into the process of semiconductor manufacturing. How do you see in the design side of "design for manufacturing," you guys moving going forward, and what can you do to maybe tap more into the designer side of the market and, or maybe is this a strategic decision to leave that portion of the overall opportunity more towards the EDA vendors?

That's a good question, Matt. We do partner with many EDA vendors, and we will continue to partner. Our goal overall is to drive up usage of our characterization vehicles, and design for manufacturability when it drives up usage of our characterization vehicles, it's an interest area of us. When it's incrementally only driving license revenue, software license revenue that doesn't have a pull for characterization, we don't see the direct synergy, and we tend to then not be as interested in the business.

And we've stayed more focused in the areas where we think we can provide unique value to the customer, and as a result, value price. And many of the designer side DFM areas, we see many players, and we feel that the pricing is going to come down to the lowest common denominator at some point. And I joked when I first was an undergrad and I went off and did a summer job. I really wanted to be a designer, and I found, "Wow, there's lots and lots of extra work of just validating your design," and everybody wanted to be a designer, and by the end of that summer I was doing product engineering, and I got in front of the customers, my employer's big customers, and was making presentations about how we're going to fix their yield, and I thought, "Well, it's a lot easier to create leverage on this side of the business."

And to some extent, when I look at the areas where we can create leverage and price on value, it's been in areas where it's tighter to where the customers can measure it, and that generally is in the manufacturing areas. But I don't think it's, we're not afraid of the design area or moving away from it. It's just when we look at each of those opportunities, we evaluate whether we can price on value. And if we don't think we can for a sustained period, then it's not an area of interest to us.

How do you see the absolute knowledge that's gained through your CV programs being? I mean, it seems empirically like there would be a lot of data there that would be useful to designers. Is that something that you'd rather not just give away? Is that what you're saying here?

Yes, if you look at it, when we do include with customers a tie into their design flows, we typically are able to see that has some benefit in the way we measure our wafer fees. Either by improved yields on those designs that tape out, or improved terms, the gain share terms because of the tie into design. So we tried to monotize it that way and not directly compete with our design automation partners. And as you know, we partner with many of those companies.

Okay. Thanks a lot. Nice quarter.

Thank you.

Your next question is from the line of Joan Tong with Sidoti and Company.

Hi. Good afternoon. I do have my questions being answered. I just have two here. Related to gain share, you said you have 10 contracts contributing gain share revenue. I just wanted to see, like what are these numbers going to increase or pretty much stay flat over the next two or three quarters given you have some delay in engagement signing in the second half of '05, early this year. And I understand, Keith, you mentioned about the number of contracts is going to increase over 2007 from '06, but maybe to us, the second half of '07, more likely?

Actually, Joan, we expect the number to increase sequentially throughout the year. We don't expect to see a dip in the number of gain share contracts in any particular period in Q4. So actually, we're at 10 right now. We see that just growing evenly throughout 2007. We don't see any blips in the number of customers contributing to gain share.

Okay, and then in terms of SI Automation, can you be able to disclose how many, or the head count of that particular company?

They have approximately about 60 employees.

Sixty employees. Okay. Any head count reduction you're looking at, like?

No, no head count reduction.

Okay. You said 60, am I correct? All right. Thank you.

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

Thank you. In summary, in Q3 we achieved our targets for new engagements, revenue, and earnings. By expanding our engagements into yield to ware statistical process control and planning our execution of the SI Automation acquisition, Q3 established the foundation for continued growth of PDF Solutions. Thank you for joining our third quarter 2006 conference call. Goodbye.

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