PDF Solutions Inc (PDFS) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PDF Solutions, Incorporated Conference Call to discuss its financial results for the fourth fiscal quarter ended Sunday, December 31, 2006. [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, and growth rates and demand for 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 10-K for the fiscal year ended December 31, 2005 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 Keith Jones, PDF's Chief Financial Officer. Mr. Kibarian, please go ahead, sir.

Thank you and welcome, everyone. For the fourth quarter of 2006, PDF Solutions is reporting total revenue of $19 million and non-GAAP net profit of $0.08 per share. Gain share was $4.9 million. All of these results are at or above the ranges provided in our revised guidance in the January 11 press release. For the year, PDF is reporting total annual revenue of $76.2 million, a modest increase over 2005. We also generated profits on a non-GAAP basis for the year with total non-GAAP net income for the fiscal year of $0.46 per share. Keith will talk more about these results and our guidance going forward in a few minutes.

Our Q4 in 2006 revenue and earnings growth did not meet our expectations. We reset our Q4 guidance due to three factors. First, a customer who signed an LOA for a 65-nanometer ramp in Q3, did not sign a full contract because they delayed their manufacturing due to a lost customer order. Second, we signed only one 45-nanometer IYR engagement and one 65-nanometer DFM assessment late in the quarter. And finally, our dataPOWER software revenue did not achieve our targets as customers delayed purchases.

Our gain share revenue did come in at the higher end of our guidance range, demonstrating that a solution drives real value to our customers. For the year, while we believe our execution could have been better, we had also overestimated the rate at which logic chip producers would adopt new processes at 65-nanometer and below. Furthermore, our investments to adjust the faster growing memory and image sensor markets had not yet begun to significantly impact our financial results.

While 2006 growth was disappointing to us, during 2006 we made many of the right investments to build PDF for the future. Here are some of the highlights. In 2006, we expanded our IYR solution and closed new business in the memory and image sensor market, allowing us to address a broader faster-growing customer base. We successfully executed our first DRAM and CMOS image sensor engagement. During the year, we also signed new IYR logic engagements, including 2x 45-nanometer.

In the first month of 2007, we signed an additional LOA for a 45-nanometer logic ramp as well as an additional agreement for an image sensor assessment, demonstrating that our investments in 45 nanometer and image sensor IYR are beginning to pay off.

In 2006, we significantly expanded our footprint in the fab through our acquisition of SI Automation, an industry leader in fault detection and classification software and solutions. Fault detection classification, or FDC software, provides fabs with the data collection and analysis capabilities required to rapidly identify the sources of process variations in excursions by monitoring equipment parameters. With this acquisition, PDF Solutions expands from its current strength in yield ramps and offline production data analysis to become an inner growth to our customers' online control during volume manufacturing.

In 2006, we launched a new solution, [YieldWare] FDC. This solution builds on the combination of our newly acquired Maestria FDC software product and our traditional CV infrastructure to allow customers to improve production control and better utilize their manufacturing equipment.

We signed one engagement in Q3 to prove out the solution, and then acquired SI Automation in Q4 to secure the technology necessary to position us in this emerging market. While this solution is important for our customers, it is also key for PDF as it lengthens the time period when we can sell an engagement to a fab, and improves the value we can deliver.

In 2006, gain share grew 68% over 2005. As we've discussed many times before, our gain share is a reflection of our clients' success in implementing our solutions. In 2006, strong yields resulting from our clients' use of our IYR infrastructure, combined with healthy chip volumes, translated to good gain share results.

Let me turn to our perspective on 2007. Our key priorities for 2007 are executing on our IYR solutions to deliver yield improvement results for our clients - our clients' success as measured by our gain share is key to our future success, expanding on our relationship with major semiconductor manufacturers by driving our solutions for image sensor and memory ramps, both large and fast growing markets, investing in our YieldWare FDC solution and delivering it to our customer base.

For the 300-millimeter fabs, equipment utilization and unnecessary downtime are as critical to the financial viability as yield improvement. By using models built from our CVs, clients are able to identify which product wafers are excursions and which are not. Hence, they can deploy their production inspection capacity more efficiently while driving higher yields.

This makes our infrastructure important to our clients, not just during the bring-up of a technology, but for the mass production, and extending our footprint in the fab through the integration of our dataPOWER and Maestria products and through partnerships with inspection and equipment vendors.

Now, I'll turn the call over to Keith, who will discuss in detail our financial results for the fourth 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 Investors section of our website located at www.pdf.com.

Revenue for the fourth quarter ending December 31, 2006, totaled $19 million, flat when compared to the fourth quarter of last year, and a 2% decline from last quarter. These results were at the top of the revised range of guidance we provided on January 11. Compared to both the fourth quarter of 2005 and the third quarter of 2006, increases in gain share were offset by a decline in design [of] silicone yield solutions revenue.

We are very pleased to report that gain share revenue surpassed $20 million in 2006, a 68% increase over 2005. We are equally disappointed that the other parts of our business did not contribute to the momentum generated by such growth in gain share. Total design of silicone yield solutions revenue totaled $14.1 million for the fourth quarter, a decline of 7% and 6% from the comparable period last year and last quarter, respectively.

Integrated solutions revenue declined 18% from the comparable period last year, and only increased a modest 3% from last quarter. Software license revenue grew 124% from last year, but declined 33% from last quarter and was below initial expectations for the fourth quarter. During the quarter for the first time ever, a letter of agreement received from a new customer during the third quarter of 2006 did not culminate in a longer term definitive agreement.

This action along with delays in new bookings for integrated solution engagement and new dataPOWER cells contributed to a need to reset our Q4 guidance in early January. During the quarter, we kicked off one new 45-nanometer yield ramp engagement and began a 65-nanometer DSM assessment that we believe will culminate in a longer-term, more valuable engagement than in first quarter of 2007. Both of these engagements are from existing customers in Asia.

Additionally, early in the first quarter, we received an LOA for a new 45-nanometer yield ramp and an agreement from an image sensor assessment. During the fourth quarter, 11 integrated solution engagements from 10 customers each contributed approximately 150,000 or more in revenue. This represented an increase of one engagement during the quarter. Gain share revenue for the fourth quarter totaled $4.9 million, a 28% increase versus the comparable period last year and a 21% increase from last quarter. Gain share revenue was generated from seven customers and 10 engagements. No change from last quarter.

Gross margin for the fourth quarter, excluding stock-based compensation and amortization of core technology, was 62% of total revenue, a decrease from 66% and 67% during the fourth quarter of last year and last quarter, respectively. The decrease from last year was the result of a more favorable mix of revenue elements more than offset by lower margin services, the result of a higher material cost, and underutilization of labor resources.

The decrease from last quarter was the result of a shift to less favorable revenue elements, coupled with a more modest decline in service margins, again, the result of higher material costs and underutilization of labor resources. We remain optimistic that overall gross margins will rebound to historical levels as we progress into 2007.

Total operating expenses, excluding stock-based compensation, amortization of acquired intangible assets, and the write-off of in process research and development were $11.7 million for the quarter, up approximately $2.1 million, or 22%, from the fourth quarter of 2005, and up approximately $1.4 million, or 13%, from last year. The increases from last year and last quarter were due to increases in research and development, primarily the result of our acquisition of SI Automation in October 2006.

Research and development expenses, excluding stock compensation, totaled $7.5 million for the fourth quarter, an increase of approximately $1.8 million, or 32%, from the fourth quarter of 2005, and an increase of approximately $1.5 million, or 25%, from last quarter. The increases from last year and last quarter were primarily the result of the acquisition of SI Automation and a full quarter of costs from our new office in China.

Selling, general, and administrative expenses, excluding stock compensation, were $4.3 million during the fourth quarter of 2006, an increase of approximately $306,000, or 8%, from the fourth quarter of 2005, and a decrease of approximately $138,000, or 3%, from last quarter. The increase from the comparable period last year was a result of increased expenses associated with our acquisition of SI Automation, partially offset by a decrease in tax and accounting services.

The decrease from last quarter was the result of increased expenses associated with our acquisition of SI Automation, more than offset by decreases in legal and tax services and outside sales commissions.

Reiterating the statement made in our press release, in addition to using GAAP results in evaluating PDF's business, management believes also it is useful to measure its results using a non-GAAP measure of net income, which excludes stock-based compensation, amortization of acquired intangible assets, and the write-off of in process research and development.

Non-GAAP net income for the fourth quarter ending December 31, 2006 totaled approximately $2.3 million, or $0.08 per share, $0.05 below the range provided in October 2006, primarily a result of the revenue shortfall, but $0.01 above the revised range provided in January 2007. This compares with non-GAAP net income of approximately $3.9 million, or $0.14 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 third quarter of 2006.

In the fourth quarter of 2006, our annual tax rate did benefit from the federal government's ratification of the 2006 R&D tax credit and the revised income levels for the total year. Additionally, we performed a study of prior year R&D tax credits, which generated significant benefit in the quarter.

On a GAAP basis, including amortization of stock-based compensation and acquired intangible assets and the write-off of in process research and development, we reported a loss for the quarter of approximately $560,000, or $0.02 per share. This net loss includes $1.9 million in stock-based compensation and an $800,000 write-off of acquired in process research and development, totaling $0.10 per basic share.

Turning to our balance sheet at December 31, total cash decreased to $52.9 million, a decrease of approximately $17.1 million during the quarter, and $7.7 million for the year. Operating activities used $2.4 million in cash during the fourth quarter, while generating $4.2 million for the year. Capital expenditures used approximately $362,000 during the quarter while employee stock-based plans generated $3.5 million of cash.

Overshadowing all of PDF's normal business activities was the use of $20.1 million related to our acquisition of SI Automation. Our accounts receivables increased $4.2 million to $27.6 million with more than 50% of the increase due to the acquisition of SI Automation, and the remainder due to the late in the quarter contract billing. The aging of our receivables remains 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 that we are about to make with respect to Q1 and fiscal year 2007, 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 the demand for PDF's design of 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. Additionally, we have made the appropriate a/k/a and S-3 filings with regard to our acquisition of SI Automation on January 16 and 26, respectively.

Now for the first quarter of 2007. We reiterate the guidance we provided in our outlook press release earlier today. Revenue is expected in the range of $21.5 to $22.5 million. Gain share in the first quarter is expected to be in the range of $4.7 to $5.2 million, and non-GAAP earnings per share is expected to be in the range of $0.13 to $0.15. Reiterating the guidance for the full 2007 fiscal year that was also provided earlier today in the outlook press release, revenue is projected in the range of $105 to $111 million with non-GAAP earnings per share expected to be in the range of $0.72 to $0.78.

The small decrease in the range of revenue is a result of the lost contract we discussed earlier, while controlled spending and better visibility with regards to our estimate annual tax rate will allow us to hold our non-GAAP earnings per share guidance. We've estimated our 2007 tax rate to be in the range of 15 to 25%. Of course, there could be variability from quarter to quarter to achieve this annual rate.

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

Thank you, sir. [Operator Instructions.] Our first question comes from the line of Tim Fox.

Hi. Thank you. Good afternoon. Keith, just a quick question on guidance. What is your full year operating--non-GAAP operating margin target implied in your guidance?

I think we're targeting about 15 to 20%, Tim.

15 to 20 for the full year?

Yes.

Okay. And that tax rate you were speaking about, does that--is that also in the first quarter?

So throughout the year we're going to see the tax rate we think is going to be 15 to 25%. So with the way you have to apply taxes, Tim, there's going to be a little bit of ups and downs in the tax rate. My expectation for Q1 is that it will be a relatively lower rate than that 15 to 25% range, and then in future quarters we'll see a little bit more of an up tick that gets it to 15 to 25% for the entire year.

Okay, great. And just in discussing a little bit about the LOA that was delayed, I guess just a couple of questions on that front. First, do you have any sense of whether that's something you'll see come back in '07? And is there any risk going forward, or have you come up with any ways to derisk that event happening again, given the fact you've got another LOA signed in the first quarter already?

Yes. Tim, this is John. I'll take that. The customer told us they expected and pushed out their need for 65-nanometer out into '08. So they thought it was a relatively long delay. And when I talked with some of the executives at the equipment vendors they had heard similar estimates and of '07 being the earliest for equipment ships, which were previously expected to be much earlier. So we fundamentally have taken that out of our estimates for '07 totally. It may surprise us, but I think at this point it's prudent to just take it out.

With respect to what to do about it otherwise in the future, we had a number of them--this is the first time it eve happened. We have--and the way we've structured the LOAs, for example, the ones we've done in this quarter, are giving the customer an incentive to get the contract done more quickly, convert from LOA to full contract. So we believe that we've done some things that in terms of giving them a little bit of advantage on the payment terms on the LOA.

So we believe we've done some things that give the customer some mutual incentive to get the thing done quickly. I don't know if that would have been enough in this case. Looking at what would have happened that last--you kind of go back and say, okay, simulate what would have happened for that last contract. Would that have been enough? It's tough to say, but certainly we are taking measures on a going forward basis.

Understood. And lastly, just on the SI Automation. You're continuing, obviously, to sell the product as a standalone. And you've talked about a combined product that you've rolled out. Just to nail that down, when do you expect that combined product to be commercially available?

So we've got--basically our generating revenue from the combined product is something that we've put together actually pretty quickly and brought out to the customers. It's modest and it's mostly [prove out] customers. In our '07 year, we do expect to--as we get into the second part of '07, be able to have that rolled out to more customers. Right now, we expect that to be at basically--they had a customer they were doing something similar with and we had a customer that in Q3, as we have said, we were doing something with.

And we are going to implement with those two customers and make them satisfied last quarter as well as this quarter. We get into Q2 we'll be bringing it out to more customers and expect to see that some in the second half of the year. Our revenue expectations, again, because that combined product, typically the implementation phase is percent completion, the revenue implications for '07 are actually quite modest.

Very good. Thank you.

Our next question comes from the line of Gus Ruschard.

Yes. Thanks. Just for modeling purposes, the R&D stepped up in the fourth quarter after your acquisition of SI Automation. Is it going to remain at that run rate roughly? Is that a reasonable assumption?

Two things though for--it's going to be a little bit of a wash, probably come down a little bit. We had SI Automation, which had basically two months worth of expenses, but we also talked about we had our China office. And we spent most of the quarter trying to train the folks and trying to get them up to speed. And we'll see a great deal of contribution from them, which will kind of roll into a different line item for cost of sales. And we'll expect some significant contribution from them.

But going forward, as we take a look into the quarter, I think for your modeling purposes and what we anticipate, the wash between those two are the shift of China and a full quarter's worth of SI automation would leave the R&D expense relatively flat quarter-over-quarter in absolute dollars.

And then, there would be some shifting of expense to the gross margin line after--.

--Yes, well--.

--Did I get that right?

That's correct.

Okay. And then, just in terms of the contracts you signed in the fourth quarter, there was a 45-nanometer IYR contract. And that was logic?

That is correct. That's logic.

Logic. And the DSM assessment, was that also logic?

Logic at 65-nanometer.

Right. And then, you signed an LOA at 45. Was that a new customer?

That was a repeat customer.

Repeat customer in logic.

Logic, okay. And then, the image sensor is obvious. And then, at this point you've got one DRAM customer that you've been working on.

That is correct.

And how is that--how is that contract coming along and what are the prospects for more DRAM customers at say 70 and 50--70, 80-nanometers?

Yes. So that was again, just like I described to Tim, the YieldWare is something we're implementing now and rolling it out in the second half of the year. The DRAM is something that we implemented starting in Q2 because it's much closer to our basic logic YieldWare technology. We got much further along, have gotten very favorable feedback from our initial client, and are now positioning ourselves to go out and discuss with more clients now. We expect as we get into the second half of this year to see DRAM contribute more significantly, partly because we anticipate that customer buying more from us, and partly because we anticipate other customers.

As you get into 70 and 80-nanometer and below, there are a number of manufacturability challenges that the DRAM vendors start hitting just like the logic vendors started seeing at 130. Primarily at 55, some of them make a transition to copper. A number of them, of course, are starting to head into the issues around power leakage, and the resulting yield implication. And the integration of the back end and the front end are relatively challenging.

When you look at the perimeter or periphery part of their chips, they now look a lot in terms of feature size like the 130-nanometer and below logic chips did. Because although they're at 70-nanometer, that's primarily in the cell area. The logic area is still a little bit behind in terms of feature size. Yet that's where, again, a lot of them do see some challenges.

So we expect that the customer base is starting to see a lot of the manufacturability challenges we saw on logic, let's say, a few years ago. And we do believe that we have a good solution for them. And as we get through this year, we expect repeat business with our existing customers as well as new business with other customers.

And then, I noticed yesterday KLA announced that they are purchasing Sensoray and OnWafer, which essentially monitors--process chamber activity is more of a--not a typical KLA move. Do you see those--is there any change in the competitive landscape between the two companies? Is KLA becoming more interested in predictive process control, if you will?

Yes, I did hear about that. I think it's best to ask them what their interests are. I mean, what OnWafer does, it's an offline tool, so it's difficult to get real-time measurement data off it. But it does give you the ability to map out in some way wafer information--wafer level position information.

I think what KLA sees from a manufacturability standpoint is the same that we see, is so much of the issues are within wafer variability and consistency for the accounts. So--and the ways they measured those types of things in the past by putting sensors directly into the [trucks] for the bake truck--for bake and develop. You really couldn't get the kinds of spatial resolution that you can get with a technology like that.

That is, again, I think all the same reason why we see so much interest in our CVs, so much interest in what we're doing with the YieldWare and FDC. The advantage of FDC is you can do it real-time, so you can do it while you are processing a product wafer and still get the same spatial resolution information that you need. I think on a going forward basis that's going to be really quite important. But I'm sure KLA sees the same need for spatial resolution that we see.

Okay, thanks. I'll let it go.

Our next question comes from the line of Dennis Wassung.

Thank you. A couple of questions. I guess first, John, on the deals you guys signed in January, were those deals that were kind of pushed out from Q4?

One of those deals was pushed out from Q4. One of those deals was really a Q1 deal.

So as you look at your expectations for 2007, you really made no change to your guidance for '07 business by the sound of it. You just pulled out the $4 million from the LOA contract that went away. I'm just curious if you've had any I guess--changed environment or anything that either positively or negatively gives you more confidence or less confidence here in that pipeline you had when you set that guidance a quarter ago. Obviously, that little push from Q4 there helps for '07. But any comments from that perspective?

This is John again. Yes. As we've gotten into Q4, I think we saw a number of things--I mean, got into Q1. On our yield ramp business we saw more interest on the image sensor and memory folks than we had expected. And we--as we saw the logic folks--I think you saw over the holiday season, Freescale and TI and Philips and ST's announcements. I think the logic folks are really rethinking how they're doing production quite a bit.

When we look into '07, we do--we had forecasted a lot of the logic business to really change, more of it in Asia, more of it--less of it in the U.S. We do see that the memory and the image sensor folks fundamentally are I think becoming a bigger part of our yield ramp business. We expected that in Q3--at the end of Q3. We still see that in Q4--and in fact--Q1 and in fact the first Q1 engagement to be done being an image sensor, to me, I think speaks to that trend.

With respect to the dataPOWER business, we had a range on dataPOWER as we started Q3--ended Q3 began Q4 for '07. And we also had one for Maestria, our FDC product. As we went through Q4, we felt a little bit more comfortable about our Maestria estimates and kind of ratcheted them a little bit towards the high range, and a little less comfortable with the dataPOWER estimates and brought those down a little bit towards the lower end of our original range. In the end, those tended to be basically a wash. And our gain share estimate has fundamentally for the year stayed about constant.

To the gain share expectation for '07, what can you say about that? Obviously, you guys had a great number in '06 in terms of growth. Do you see similar opportunity in terms of growth here, or how would you kind of characterize that? I know you don't want to give guidance for the full year on that number. But how should we think about that?

Well, Dennis, we're very optimistic about the gain share opportunities and the pattern that will be established in 2006. I think what we see is that through a lot of the hard work that we had done in 2005 and 2006 is actually going to really begin to pay off and show a very strong gain share number.

So as you know and as you stated, we don't particularly provide a gain share number for the full year. But it's safe to say that we do see an increase in gain share, not necessarily at the same rate that we saw--the dramatic growth in 2006. But we do definitely see growth in gain share as we see more contracts coming on and we see significant volumes at those particular contracts. And then, also, the number of contracts contributing gain share should remain relatively healthy and strong throughout 2007.

All right. The last couple here. John, you talked about image sensor and memory being a bigger piece of the yield ramp business for you guys, at least, as you look forward here. Can you quantify that at all? How much has that been as a percentage of the business in '06, or maybe the second half of '06? And how much bigger is it going to be in '07 do you think?

Yes. Yes, Dennis. In terms of percentages, I don't really know. I think in '06 it was one of each type. And we expect to have a handful of them--a few of them--three or four let's say, by the '07 time period. But typically, we run with let's say 12 or so engagements at any given time. So as a percentage, it's starting to get up to a third let's say of the total number of engagements outstanding.

So the actual numbers, Dennis, kind of reflects to what John is saying in terms of the ratio of customers where we had a couple. And the revenues from that portion of the business were kind of commensurate with that. So it was roughly--or in the neighborhood of a little less than 10%. But as we began to add or acquire more customers, we do see that being a little bit more significant in 2007.

Great. That's helpful. Thanks, guys.

Our next question comes from the line of Matt Petkun.

Hi. Good afternoon. John, as you just mentioned, you said you have about 12 active IYR engagements at any given point in time. What it sounds like is that--if I'm--correct me if I'm wrong. You kind of had one new IYR engagement this quarter, one DFM assessment, and then was that other deal won in the beginning of Q1 with the existing 45-nanometer customer - the LOA.

That was also a yield ramp as well. Yes.

Was that in Q1 or Q4?

Q1.

Okay. So--and how would you compare the DFM assessments to the IYR engagements in terms of the revenue opportunity?

So for us the DFM assessments are really basically a way of creating the yield ramp. So our expectation is to expand that as a DFM engagement--a full DFM engagement in Q1. And as we get into Q2, have the opportunity to expand that into a yield ramp, as we've done with other clients in the past.

But often times you can get a customer to sign up for an IYR engagement up front?

Yes. I think it often depends a little bit on where our entry point is into the account. If the entry point is the product line, the business unit sometimes will come in through DFM and then get introduced to the manufacturing team as part of them needing to run CVs in order to be able to give these people the data they need, and then turning that into a yield ramp. And that's where we are I think in that engagement. It's very similar to what happened when we signed up Infineon.

Okay. So it's fair to say that at least just a DFM assessment is a much smaller revenue opportunity than a total gain share and IYR opportunities that you could get going forward with that customer.

It's--yes, I think if we target, let's say, a total opportunity in the tens of millions of dollars--$10 to $20 million-something range for a yield ramp, a DFM engagement is maybe a third of that.

Okay. Well, I guess where I'm a little bit confused then is that if I look just at Q4, and obviously not at what's gone on thus far in Q1, it sounds like the new business that you won through your IYR engagement and that DFM assessment is less than the average of 2 to 2.5 new deals that would be required to sustain that calls it 12 active engagement level. So I'm confused by that and I'm confused by how you have visibility outside of the SI Automation business guide up for this year.

Well, I think if--to be kind of clear about the economics of the DFM engagement, the fixed [indiscernible] portion of that's very similar to what we have for yield ramp.

Okay.

It--for this assessment, Matt, it's a little bit shorter period of time, so in essence, we didn't try to frame it as a full yield ramp engagement and we described it as such. But as we go to Q1, as we migrate to a bigger engagement, then you'll see a much stronger revenue contribution.

Okay. How many quarters should that assessment last for?

The implementation I think is--.

--I think it's three.

Three quarters. Okay. So you do have just on--based on the new activity in Q4 an equal level of business when it's still--what you're guiding to implies growth. So I guess I'm wondering how you see the new IYR and maybe even silicon process characterization opportunities for this next year from a general perspective.

I think our general goal is really the same of having between two to three new customers per quarter. And as John mentioned, we had taken a look at the world for logic and we realized and we saw opportunities within memory and image sensor. So focusing on that and, well, spending more of our R&D dollars there has actually just kind of opened up the opportunity to make that even more achievable. And that is in essence what we're kind of basing our guidance on to try to get to that level.

Okay. And when you look at the memory market and--or--and let's start first with the image sensor market. Most of what's going on right now is kind of a node behind the rest of the industry in the market. How does your pricing compare between logic deals and what you're doing in the image sensor market?

Well, the value per wafer is a little bit lower, as they are lower ASP wafers. The implementation period is a little bit shorter, but roughly it's very similar economics in terms of gross margin contribution when you look at what we expect to put into that engagement and what we expect to get out in terms of total revenue. The fact that they're actually behind on nodes, what surprised me in the beginning of this year was the number of customers actually showing us very aggressive ramps.

And in fact, a couple of them saying, hey, they're on a node introduction cycle that's as fast as the rate at which flash is moving and much faster than logic. And I still don't fully understand why they feel that way, but I've heard that from a couple of customers in the first part and in January of this year with the customer that we signed up, as well as one of the customers in Asia, telling me that they fully expect to actually move down the nodes at a rate faster than the logic guys can catch up pretty quickly and be right there moving through the nodes as fast as flash is.

Okay. And then, my last question. I haven't followed you guys as long as some of my peers on this call. Is this the first time that you've provided full year guidance in January?

In October was the first time that we had provided for the full year. Typically, in the past, we have started off initially just providing one quarter's worth of guidance, then we went to two. And just kind of giving a little bit more color and a little more visibility of what we saw as opportunities. We--in October, during that call we had provided the full year for the first time.

But do you actually feel like your visibility has improved from a year ago in terms of your ability to give that kind of guidance?

That was the basis of our judgment. Yes. And we still feel that way.

Okay. Okay. Thanks so much.

Our next question comes from the line of [Maheesh Unganaria].

Hi. Thank you. Hello? Hello?

Hi, Maheesh.

You've got some feedback there. Maybe if you could take us off speakerphone.

Can you hear me now?

Yes, we can hear you.

Okay. Thank you. John, can you provide a little bit more color on how the integration of SI Automation is going specifically? With the customer that you are engaged, are you at a stage where you are able to take the data from [indiscernible-accented] software and your characterization [indiscernible-accented] and put it into the dataPOWER and able to say, well, here is the data [indiscernible-accented] and it came from charging in this chamber. That kind of--are you at that stage now?

Yes, we are. That's a very technical, Maheesh. That's very accurate in what we're able to do at this point. It's very focused on yield, so less on the parametrics for that account. Another account we're actually looking at the parametrics. But fundamentally, because the vehicles--the data coming off the FDC software, they don't know it's collected on the tools. If it's because the customer ran our CV instead of product, they have--it doesn't matter.

And that data can be collected off the FDC software. Our software tool can load in all of the CV data. And then, actually it's a combination of the dataPOWER software as well as some of the analysis software that they had at SI Automation put together that is doing the identification of which parameters are affecting the customers' yields.

In fact, for something as simple as a via module, the customer is tracking something like 1,500 parameters on their tools. And the software basically said, okay, these are the 15 parameters that control your via yield. This controls the center of your wafer. This controls the edge of your wafer. This controls different layout types of vias, et cetera. So that is what we are doing with the combined technology and were able to demonstrate that through Q4.

Actually, that sounds very exciting. I have a second question on dataPOWER.

Sure.

When it comes to the [third] of dataPOWER, is their market share more in line more with the customers that you have IYR engagement, or it should not matter. Memory customers should be able to equally use the dataPOWER.

Correct.

Yes, correct, Maheesh. When--actually the way that we broke into the memory market was we sold dataPOWER to a memory customer first. They employed the solution. And then, after having good success with dataPOWER asked us what else we provided, and then we started talking to them about our yield ramp capability and CVs and how they could be valuable to them. And so, really, it was the cross-selling of a dataPOWER customer that got us a yield ramp.

And when we take a look at the customers that we've sold to over the last few years, we see a fairly equal mix between logic customers and memory customers.

Is--on a similar line, is SI Automation--is that helping you? Has that actually helped you get in some customers with the new engagement, or is that a potential there?

There is a potential there. In fact, already some of the SI Automation customers--SI had the most market share in 300 millimeter fabs of any FDC solution out there that we could find. And after we did the--announced the acquisition, of course, we immediately talked to all of their significant customers. Some of those were mutual customers, and it's helped us both in business. Some of them were customers that we had and they did not, or they had very little--limited penetration. And we've been able to get the customer more interested in SI.

And also, and importantly, some of their customers have become interested in our yield ramp technology and we've gone in and started making presentations to them about what the total company can deliver.

Okay. So, one more. How are you doing in the foundries? How is your engagement at the foundries?

Yes. So we've had penetration at only a couple of foundries so far. SI Automation had very good penetration in one of the larger foundries. And this is one of the places where we're having joint selling opportunities. Fundamentally, I think we've done a very good job of delivering value to our lead foundry customers. And we'll use that as a springboard into additional customers. And we also are using the SI footprint at some of those companies to create an integrated offering that's valuable to those guys.

Okay. Thanks a lot.

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

Thank you. In summary, 2006 was a year in which we started key investments. We brought in our solution to include fault detection software and our new YieldWare FDC offering. We provided solutions to a broader group of IC manufacturers as we expanded into image sensor and memory markets. PDF Solutions enters 2007 stronger and better positioned to continue to gain market share, increase profits, and develop long-term shareholder value.

Thank you for joining our fourth quarter 2006 conference call. Goodbye.

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