PDF Solutions Inc (PDFS) 2007 Q1 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 first fiscal quarter ended Saturday, March 31st, 2007. (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 rates and demand for its' solutions. PDF's actual results could differ materially. You should refer to the section entitled "Risk Factors" on pages 11 through 19 of PDF's annual report on Form 10-K for the fiscal year ended December 31, 2006, 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.

Thank you and welcome, everyone. For the first quarter of 2007, PDF Solutions is reporting total revenue of $22.1 million and non-GAAP net profit of $0.14 per share. Gain share was $4.9 million. All of these results are in the middle of the ranges we provided in February. Keith will talk more about these results and our guidance going forward in a few minutes.

The first quarter of 2007 was our first full quarter as an integrated company since the acquisition of Si Automation. Our clients responded positively to our leadership envisioned for yield improvement and production control based on a combination of our characterization vehicle infrastructure, dataPOWER, our Yield Management System, and Maestria, our FDC, our Fault Detection and Classification System. Over the coming years, we expect to further benefit from this strategy as we release integrative products and services.

During the quarter, our highlights were we closed two integrated Yield Ramp, one at 45-nanometer logic and one image sensor. These were contracts based on LOAs that were signed before the February conference call. We also converted an LOA for 45-nanometer logical ramp from Q4 2006 into a contract.

We extended the DFM assessment we signed in Q4 into a full DFM engagement at 65-nanometer.

We leveraged our expanded footprint in the fab by licensing our first combination of dataPOWER and Maestria. This customer purchase is evidence that the clients value the superior production control that PDF Solutions can provide by integrating our online FDC and our offline Yield Management Systems.

In Q1, gain share was flat over Q4. As we've discussed many times before, our gain shares is a reflection of our customers' success in implementing our solutions. In the quarter, excellent yield improvement at some clients offset volume declines in others. Overall, the gain share in the last 1.5 years has mostly been due to production at 90-nanometer, where the majority of ramps were completed some time ago. The large (inaudible) aspect of our business model enables us to make the kind of R&D investments we need to in order to innovate and deliver ongoing value to our clients.

Now, let me reiterate to you our key priorities for 2007. First, continuing to execute on our integrated Yield Ramp solutions to deliver yield improvement results for our clients. Our clients' success, as measured by our gain share, is key to our future success

Second, expanding our relationships with major semiconductor manufacturers by driving our solutions for memory and image sensors, both large and fast growing markets.

Third, delivering our Yield-Aware FDC solution to our customer base to help them improve manufacturing efficiencies. For 300-millimeter fabs, maximizing equipment utilization and minimizing unnecessary downtime are as critical to the clients' financial viability as yield improvement. This makes PDF Solution's infrastructure important, not just during the introduction of a new technology, but for the entire life of the production.

Four, extending our footprint in the fabs through continued integration of our dataPOWER and Maestria products to create seamless offering of our technology and, last but not least, continue to work with our partners in EDA inspection and other equipment to drive applications for an adoption of our Yield Ramp solutions.

Q1, from a revenue, earnings and execution standpoint, puts on track towards the annual guidance and goals we provided for 2007. Our outlook for Q2 continues on that path. In Q2, we expect improvements in gain share over Q1, primarily due to world-class yield improvements offsetting some weaknesses in volumes for some clients.

Our guidance in Q2 also assumes we can continue to find two to three new engagements per quarter, as well as seeing continued strength in our software license business.

As we look to the second half of the year, we will consider the number of engagements we sign in Q2, our forecast for Q3 and Q4, and our software license revenue forecast to guide our perspective for the entire year. At this point, we see positive signs that our business is strengthening.

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

Revenue for the first quarter ending March 31st, 2007, totaled a record $22.1 million, an increase of 17% and 12% when compared to the first quarter of last year and last quarter, respectively. These results were in the middle of the range we provided in February, and represented the first quarter ever that PDF's quarterly revenue exceeded $20 million. Compared to both the first and fourth quarters of 2006, increases in both integrative solutions and software licenses more than offset flat or slightly lower gain share revenue, respectively. We are pleased with the results across all reported revenue elements.

Total design to silicone yield solutions revenue totaled $17.2 million for the first quarter, an increase of 23% and 16% from the comparable period last year and last quarter, respectively.

Integrated solutions revenue increased 19% from the comparable period last year, and 13% from last quarter. Software license revenue grew 36% and 33% from last year and last quarter, respectively.

During the quarter, we signed a full contract for a new 45-nanometer Yield Ramp and converted a CMOS image sensor assessment into an engagement. Both these deals were announced as Q1 orders during our February call, and both were with existing customers.

Additionally, we converted the DFM assessment from Q4 into a full DFM engagement. During the first quarter, 13 integrated solution engagements from 10 customers each contributed approximately $150,000 or greater in revenue. This represented an increase of two engagements during the quarter.

Gain share revenue for the first quarter totaled $4.9 million, a 2% decrease versus the comparable period last year and flat from last quarter. Gain share revenue was generated from 7 customers and 10 engagements. No change from last quarter.

Gross margin for the first quarter of 2007, excluding stock-based compensation and amortization of core technology, was 67% of total revenue, a decrease from 71% in the first quarter of 2006, but an increase from 62% last quarter. The decrease from last year was the result of a decline in service margins, result of higher material costs, and underutilization of labor resources, partially offset by a more favorable mix of revenue elements.

The increase from last quarter was the result of a modest shift to more favorable revenue elements, coupled with an improvement in service margins, as we suggested they would during the February call. We are pleased to see gross margins rebound at historical levels.

Total operating expenses, excluding stock-based compensation expense, amortization of acquired intangible assets, and the write-off of in-process research and development were $12.9 million for the quarter, up approximately $3.2 million, or 33%, from the first quarter of 2006, and up approximately $1.1 million, or 10% from last year. The increase from last year and last quarter were due to increases across all functional areas, primarily the result of our acquisition of Si Automation in October of 2006.

Research and development expenses, excluding stock compensation, totaled $7.8 million for the first quarter, an increase of approximately $2.2 million, or 38% from the first quarter of 2006, and an increase of approximately $336,000, or 5% from last quarter. The increase from last year and last quarter were primarily the result of the acquisition of Si Automation on October 31st, 2006.

Selling, general and administrative expenses, excluding stock compensation, were $5.1 million during the first quarter of 2007, an increase of approximately $1 million, or 26% from the first quarter of 2006, and an increase of approximately $792,000, or 19% from last quarter.

The increase from the comparable period last year was a result of increased expenses associated with our acquisition of Si Automation, coupled with increases in legal and accounting services. The increase from last quarter was the result of increased expenses associated with our acquisition of Si Automation, and increases in outside sales commissions.

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 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 first quarter ending March 31st, 2007 totaled approximately $3.9 million, or $0.14 per share, in the middle of the range we provided in February, 2007. This compares with non-GAAP net income of approximately $3.3 million, or $0.12 per share for the comparable period last year, and non-GAAP net income of approximately $2.3 million, or $0.08 per share during the fourth quarter of 2006.

On a GAAP basis, including amortization of stock-based compensation and acquired intangible assets, we reported a loss for the quarter of approximately $2.4 million, or $0.08 per share. This net loss included $4.4 million in stock compensation and amortization of acquired intangible assets.

Turning to our balance sheet at March 31st, total cash decreased to $50.5 million, a decrease of approximately $2.4 million during the quarter. Operating activities used cash of approximately $330,000. Capital expenditures used approximately $473,000 during the quarter, while employee stock plans generated $446,000 in cash. Additionally, $2 million was paid to the former SIA Automation shareholders, pursuant to the terms of our acquisition agreement.

Our accounts receivable increased approximately $7.5 million to $35.1 million, primarily the result of continuing to leverage our strong balance sheet and negotiating contract terms. Such leverage, while helping operationally, often manifests itself in late in the quarter contractual billings which may accommodate customer budgets. The aging and collectability 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 Q2 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 features and introductions, client products, and demand for PDF designed 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.

Now, for the second quarter of 2007. We reiterate the guidance we provided in our outlook press release earlier today. Total revenue is expected in the range of $23.6 million to $25.1 million. Gain share revenue in the second quarter is expected to be in the range of $5.6 million to $6.1 million, and non-GAAP earnings per share is expected to be in the range of $0.15 to $0.17 per share.

Also reiterating the guidance that was provided earlier today in our outlook press release, total revenue for fiscal 2007 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.

We maintain guidance for the year at previously projected levels due to strong bookings and fiscal results in Q1, and current expectations for the quarter ending June 30, 2007. However, booking levels over the next 90 days, which will contribute heavily to second half revenues, will be instrumental to our ability to maintain our guidance for the remainder of the year.

Our current estimate for our annual 2007 tax rate is in the range of 10% to 20%. 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, Mr. Jones. (OPERATOR INSTRUCTIONS.) Tim Fox.

Good afternoon. Nice execution on the quarter.

Thanks, Tim.

Just a question on the gain share for the year. You're projecting a nice sequential increase next quarter. Should we model an incremental increase across the rest of the year to get to your -- you haven't given full year guidance for gain share, but are you anticipating sequential increases across the year?

Yes, Tim. This is John. We do. And in fact, as we've been trying to put together our forecasting gain share for the second half of the year by talking with our clients, we still see what should be a good 2007 gain share year.

We're a little bit hesitant about what it looks like in the second half of the year because, as we've said about our Q1 gain share, there were some volumes in Q -- that were Q4 production or early Q1 production volumes that were lower than they had been in that -- those fabs in the past.

So, at the leading edge, not all the utilization -- not all the fabs are 100% or even highly utilized right now. And so, we're a little bit cautious about what it looks like in the second half of the year.

Okay. And on that subject, is there any particular end application that showed a little bit of weakness from a wafer volume perspective, or is it more just leading edge production?

Over all, the leading edge production definitely looked a little bit weaker than we would have thought it would be had the volume stayed higher. We anticipated this when we gave our guidance for Q1, that the volumes weren't looking good and we knew some accounts where the yield were coming up strongly so we knew they were going to pretty much compensate for each other. Had those volumes not been lower, we would have had a Q1 gain share number that would have been much better than it was, but it still wasn't bad. But overall, when we looked across the product mix, it's a pretty broad product mix, but the volumes don't look great.

Okay. And there had been a time last year where -- I think it was primarily in the software business, we had run into a little bit of CapEx issues. And I'm wondering, has that stabilized? Whether it's beyond your forecasting or sales effort, or do you feel that that outlook just seems to be a little bit more stable?

Yes, this is John again. I think as we broaden the product line out, the combination of Maestria with dataPOWER, we do see a lot of interest from the customers. I think that's helped us sell, certainly our dataPOWER sales this quarter were influenced by the fact that we also provided some of those same accounts, or one particular, with Maestria.

We expect that to continue. The customers really do see the integration of those two products to be pretty important. That's also given us a little bit of a portfolio effect on the software revenue.

But I think overall for the year, Tim, I think what we see is that the software business overall is strong. There's some challenges there in terms of securing our market share. And I think with us kind of combining our applications, there's really showing a competitive offering that's really good for our customers and really good for our outlook. But overall for the year, we do see strength in our software business, and in particular with the Maestria and the dataPOWER business.

Excellent. And just lastly, in looking at the opportunities you had outlined around memory and image sensors, can you talk a little bit about the opportunities there? Do you have a growing pipeline, and particularly around memory? And do you expect to convert more of those later this year?

We do expect to convert more of those later this year. We are in learn mode in that market, make no doubts about it. We don't have to do that much to grow over our last year's memory business because we were really just starting only part way through the year.

So, we do expect good growth from the memory customers this year. We do see a lot of interest. We are tuning what is our product offering, or what's our combination of products and service that we're providing to the customer based on the customer feedback. But, we still feel that it is a combination of our existing technology, primarily off the shelf modified for their market, but not really requiring a different R&D spend than what we've been doing in the past.

Excellent. Thanks. Nice quarter. Thank you.

Gus Richard.

Yes. Just real quick, on the SG&A in the quarter was kind of up a little bit more than I was modeling. What was the effect there?

Well, Gus, basically what we had is we had some outside commissions that we had paid. In part, that was a carryover from our business with Si Automation, where they had -- didn't have quite the expansive sales force that we had and they had actually done quite well in terms of business traction with some deals that closed. So, there was a little bit of more increase in there.

And than also, Gus, as you realize, you have higher sales you're going to have higher commissions that you need to pay out to your sales folks as well.

Absolutely. So for that expense line in the upcoming quarter, should I think about that as flat sequentially?

It's going to be relatively flat, but there actually is some growth because as our business grows we will have a little bit more expenses internally from our sales people in terms of paying commission. But, from a G&A perspective and whatnot, I think it's a more moderate growth rate than you would see from other parts of our business.

Okay. So, effectively how I should think about this is your external sales folks for Si Automation are sort of trialing off and your own sales force will take over aiding your SG&A a bit? Is that reasonable?

That's correct. That's correct, Gus.

Okay. And then just a quick one for you, John. Are you -- I'm sorry. I may have missed this. Are you receiving gain share on the [D-Ram] contract at this point?

No, we are not. We're still in build mode in that part of the business.

Okay. When might you anticipate either some gain share from that contract, or potentially a second D-Ram customer?

So I think -- it's really hard to forecast the additional business in the market. We do expect to build our business with the existing customer, and with new customers out over the next few quarters. But, we don't have a forecast for that.

We've built into the business model, with the initial stuff we did, something -- a license that's scaled with the capacity that they bought our technology out across. So, it will show up I think a little bit differently if it expands or how it expands.

But, we're still in -- I really -- we expect the contracts to change over time as we get more understanding in this marketplace. So, I do expect them to contribute to gain shares as we get into the future, and probably later on this year into next year.

Okay. And then one final model question--.

But honestly, our estimates for '07 gain share are primarily off much more historic contracts, all right? It takes a long -- even for our logic business, if you look at the 65-nanometer contracts they're only forecasted to contribute as meaningful as you get into the second half of this year.

Correct. The lion's share of our gain share forecast is based off of logic business.

Okay. Got it. And then finally, given the richer mix of software and gain share, should we expect margins to trend towards 70% or high 60s, higher in the 60s?

Well, our -- we've been at in excess of 70% before, and I definitely think it's achievable. And based on us controlling our expenses, the mix of our revenue elements and then the -- and continue to improve in our gain share, that is our goal to trend up to that point by middle of the year, end of the year, to be at those levels.

Okay. And do you feel -- I know how when you turn on a contract you've got to ship the hardware and that usually pulls it down a bit. Is there any of that phenomenon in the upcoming quarters?

Well, we have that pretty much every quarter and that's kind of been built into our cost structure for the last two to three quarters. But, in this particular case, where we were at in Q4, the cancellation of the deal that had eroded the margins there. But, the -- our forecast of reaching those historical levels does include those higher cost associate materials. So, all those items of having to deliver the testers, that does factor in to still achieving those higher margin rates.

Okay. So, exiting '07, 70% is a reasonable guestimate?

Yes.

Okay. Wonderful. Thanks a lot.

Dennis Wassung from Canaccord Adams.

Thank you. A few questions. I guess first, John, on some of the contract details, just want to make sure I got the details right here. You signed IYRs in the quarter, a 45-nanometer logic and an image sensor customer -- or contract. Where those with existing customers? New customers? Can you give us any other details?

Those are both with existing customers, Dennis.

Okay. And the DFM conversion, is that something that will bear gain share as well?

The DFM part has a license component to it. We are -- this is a process that as they transfer we would like to be able to expand this to a Yield Ramp. And we believe that, give they will be using our CDs, we have a way of justifying and convincing them that there's a sale. But, the production part of that -- there's a license part of this, but there's not a production part of this yet. It's really an R&D engagement.

Okay. And you had mentioned when you were talking about your deals, something about year end but I missed that. Was there DRM activity in the quarter as well?

No, there was no DRM activity in the quarter. Folks were asking when do we expect to see more DRM business. And with our existing DRM customer we do expect that in 2007, and we expect to be able to sign up new names in DRM as we get into the second half of 2007. And of course, like most of our contracts, it takes some times awhile for them to really contribute.

Okay. Is there any impact from the flash side of the business as well as you look through '07?

We are talking with flash customers, potential flash customers as well. I think for us, our solution doesn't look all that different between DRM and flash. Some of the device under test is different, but the methodology is quite the same. So, it's really kind of a -- really wherever the customer sees their initial interest. Many of the customers we're talking to are both flash and DRM manufacturers.

Okay. Fair enough. And onto sort of general customer activity, we've seen over the last year, at least, some delays going 65 and 45 and the like. How is the customer activity level in terms of their willingness to move forward at this point? Have you seen any sluggish behavior or sort of a reacceleration in their behavior as you look to sign more 65 and 45-nanometer deals?

Yes, that's a good question, Dennis. So, we see a fair amount of customer interest. We do believe some of it is due to the offering that we're providing the customer. I think the combination of our CDs with the Maestria product is quite enticing to the customer. It really does offer them more than just yield improvement or whereas improving an overall operation efficiency.

So, we -- I think some of it, the interest is really actually due to strategic moves on our part. Of course, when you run a business you'd like to think some of that, that some of the things you do have an effect.

The general market conditions, we do see interest from the customers in moving it to 65 and 45 for the higher volume products. We do see hesitation on the lower volume products. There's no question about that. Due to the increases on our [e-cost] of getting designs into those technology nodes. But, we do see generally decent interest from the customers at those nodes.

And I think also, because we are talking to the customers about image sensor and memory, it's a broader customer base that we've made ourselves available to and I think that's taken a lot of the edge off the hesitancy on some of the logic.

Okay. Can you say how much of your 90-nanometer customer base has transitioned to 65 or 45 with you at this point?

I don't know that we know that off the top of our heads, and we'd have to go back and figure out who's producing and who's not producing at that node. I think the majority of the ones that are -- I'm sure the majority of the ones that are serious are -- we have business with.

And I think in particular the ones that have significant volume are--.

--Volume. Right--.

--Are who have done that.

Right. Okay. A quick question on the gain share side of it. Obviously, you mentioned here good numbers, good expectations. You talk about yield improvements, or higher than expected yields driving, or offsetting some of the lower volumes.

Right.

Is that something that's going to drive a higher dollar per wafer at those engagements for the life of the contract now? Have you reached that kind of set dollar amount?

For a majority of the customers, it's a set dollar amount. There is some -- and particularly one historical customer, where the dollar amount is set every quarter based on the average yield in that quarter. A very historic -- very old contracts. And so there there's fluctuation but, generally, once they achieve a yield they don't go backwards that far. So, it has almost the same effect as the newer contracts. And we do expect that -- that dollar is pretty stable at this point.

Okay. And last quick one. On the software business, you guys have had a little bit of volatility in this business over the last year or so, but you've got -- you mentioned a portfolio effect here. What's the general outlook in terms of your visibility and your maybe expected volatility in that business now with the combined offering?

Well, this is Keith. I do still think that it's a volatile business by nature because a lot of opportunities that are presenting themselves are fairly large. So, you will see some fluctuations from quarter to quarter. However, the reception that we received from the combined product offering is quite tremendous, where competitors for each one of the individual spaces don't have a competitive offering on a combined basis.

So, what we see is quite a bit more traction in the pipeline growing and getting bigger. But, with all things, it takes time to kind of negotiate and value price these offerings. So, I think over the year you'll see some volatility. But, we're quite pleased with the traction that we're seeing. It's very positive and we're very excited where this is going to lead us to for 2007 and into 2008.

Okay, great. Thanks, guys.

Matt Petkun with DA Davidson and Co.

Hi. Good afternoon. John, could you tell us -- or you may have already mentioned it, how many specific IYR engagements contributed to the quarter?

I think Keith did. Keith?

We had 13 engagements that contributed greater than $150,000 in revenue.

So, that was up from 11 last quarter, is that correct?

That's correct, Matt.

Okay. That's nice. And last quarter when you guys had your conference, you kind of alluded to the two IYR deals that you then subsequently won this quarter. John, are you willing to make any other statements about how the Q2 IYR engagements are unfolding?

We see a lot of good activity right now. We don't have paper that we're willing to report on, but we do see a lot of activity.

Okay. And one other thing I was hoping you could update us on was, back in Q3 of last year you guys signed up a silicon process characterization contract with a gain share component. And I was wondering if you could sort of update us on that and whether or not that's still something that you are hopeful that you'll see more of those types of engagements with some new customers this year.

I think you're referring to what we call the Yield-Aware FDC. A wonderful--.

--Yes--.

--(Inaudible) here at PDF.

Yes, that's exactly it.

And we are ongoing with that customer. We see some good technical results with that customer and I think the client's pretty pleased with the technology. We are in discussions with our clients about that same solution.

And as I -- I think when I was answering Dennis' question I said that I think the combination of the FDC with our Yield Ramp, which is really the Yield-Aware FDC, has made the customers realize there's a lot of leverage they can get by putting one set of -- one CD infrastructure into their fab. They can address their DFM, their process bring-up, as well as their production control. And I think that production control application, we're going to see additional contracts as we get through 2007.

Okay. And then, John, this is I know a question that's often asked and there's no real pure answer. But, as the market continues to evolve, and it's clear that both EDA companies and equipment companies see an opportunity in the integration of design and manufacturing, I'm wondering how you would characterize your competitive landscape today in as much as people are out there competing for the same dollars that you're competing for? And maybe how you see -- who you see your closest competitors to be today? And how that has changed over the last year or so.

Yes, I'll try to answer it, Matt. I think I've tried to answer it before. I've obviously done a great job, but then the environment's changed, too.

I think primarily, what PDF tries to provide is a set of technology where the customer then pays based on a result. And there's really no one else out there that's selling a result and then providing the technologies required to get to that result.

So invariably, the number one competitor is an internal R&D team who says, well, I think we can get that result if I do some internal R&D and we buy some components from one vendor or next, and we can get there anyway. That has been historically PDF's biggest competitive threat when we sell. And of course, the other providers, be it design automation or equipment vendors, can be enablers to that competitor because they may buy component software from someone, a test vehicle from someone, etc. So, still, that's really the number one competitor.

The key thing for PDF is to continue to innovate and develop new capabilities, like the Yield-Aware FDC, because we're in the best position in the industry to do that. And when we bring that incremental capability out to the customer base and say, yes, but when you buy our infrastructure this is another application you can enable, it does help us quite a bit in a competitive -- or a selling situation.

I don't think today there's another company out there with the collection of technologies that we have, or the customer base that -- much of the customer base that's made the same investment in the technology that we have. So, I feel like our competitive position for what we deliver has improved over the last year, especially with the acquisition of Si Automation.

But, we will also sell against a customer saying do I need to spend money with PDF or is there a way I can build this by buying pieces from outside suppliers and having my R&D team do things on their own? And that will be, at least for the near future, I think our competitive situation.

Okay. One other just quick numbers question for Keith. The total number of IYR customers, was that still 10?

Yes. It's 10 customers from 7 engagements, 7 contracts.

Okay. And maybe to ask you one more question. I'm sorry, John. A couple quarters ago, I recall you discussing some of the challenges of working across customer relationships where there may be multiple sub-sites or multiple partners engaged. And I think it's pretty clear when we look at the semiconductor manufacturing landscape today that that's problem only going to get worse for you.

So, I'm wondering what new processes you may have put in place and how you see those types of opportunities progressing through the course of this year.

Yes, that's a good question, Matt. At the time what we put in place, which we really do feel is working for us, is we put in account teams with an account general manager that's responsible both for working with the sales folks to sell the engagement, as well as working with the execute -- the sales folks and the execution team. And setting those folks up, not necessarily geographically, but by following the partnership trail. And we found that has worked for us reasonably well and we can see it working better as we've gone out over the last couple of quarters.

I think accounts expect us to understand what their partners are doing and how, by buying from us, they get more leverage. And when you look at the competitive selling situation, none of them want to use the other guy's internal solution. So, they are going to more and more look for a commercial solution that they can all use and has more easily shared results. So, it does play well to us when they set up those kinds of partnerships. It makes timing more difficult because you end up having a multi-bodied problem. We're trying to solve that with the account teams and I think it's been working.

Okay. Thank you.

Mahesh Sanganeria with RBC Capital Markets.

Thank you, John. I have a question on FDC.

Sure.

Can you give some sense on how -- or how that customer can use that to cut their budget on wafer inspection? Is that something -- can you give us some sense to quantify that?

Sure. I think what the customers -- So, Mahesh, what the customers see as very valuable is improving their overall equipment efficiencies and improving over their overall efficiency of the fab. What the accounts -- most of the accounts have starting implementing FDC over the last couple of years in 300 millimeter.

Between the alarms that those tools set and the alarms that they were getting from just doing regular metrology inspection, the customers were reporting something like 9,000 "events" in a fab per day. And with 9,000 events, there was no way they could actually address all of them. A lot of times, they would react to an event and, as a result, stop a machine because most machines are multiple chambers when you have an event on one chamber, you sometimes are forced to lose the entire tool.

So, these tools have very high throughput these days and so -- because of the multiple chambers, a small number of them can serve an awful lot of wafers. So, they would take a chamber -- take a tool down to examine a situation. And if that was a false alarm they would unbalance their line, lose the productivity on that chamber, starve wafers downstream and glut wafers upstream.

So, what we've been doing with the system is they run our characterization vehicles and our spy systems to build better models that sit on the FDC system, minimize the number of nuisance alarms, and also, when it does set off an alarm, be able to schedule an inspection or a metrology. So, they can be a lot more targeted about which wafers they send to the inspection metrology, wafers that clearly have issues or problems, or at least the deposition system, our system, etc., seem to indicate that there's a problem.

Now, I don't necessarily believe that they can -- whether they can use us to go back and reduce their inspection budget or whatever, I think that's really not our problem. I think that's not something that we're actively promoting. What we think they can do is improve their overall factory efficiency. And how they choose to leverage that factory efficiency I think is mostly their choice.

But, what they've all told us is they have a huge issue about controlling a fab and minimizing how much engineering effort they take to deal with excursions and identifying what really are excursions and what aren't. And that, we think the system is quite well set up to do.

Thanks a lot for a detailed answer, John.

Sorry for going into so much detail.

No, I -- that's very helpful. And so, I won't ask any more questions.

Scared you off. Sorry, Mahesh.

Dennis Wassung.

Thanks. Just a quick balance sheet question for you, Keith. You talked about the accounts receivable increase. And also, there's a pretty sizeable deferred revenue increase. Can you just go into a little more detail on those? I mean A/R side, you mentioned kind of using your balance sheet strength I guess in customer negotiations, for payment terms, but also late in the quarter billing. Any more detail you can give us around there? Was one a bigger factor than the other, or do you expect that number to come down in the next quarter or so?

Sure, Dennis. That's a good question. So, in terms of taking a look at -- well, the initial statement of using our balance sheet to kind of help leverage deals, one of the things that we want to do is we want to get paid for the value that we derive, that we give to our customers. And we don't want to have to sacrifice when a customer runs into a budget constraint, right? So, to the extent we can be a bit more flexible with our payment terms, that's good for us, that's good for our investors, that's good for everyone.

So, in essence, what we do from time to time, we can shift out the timing of some of those payments to help accommodate their budgets. So, if you take a look at the A/R, you see some pretty sizeable growth. But, if you take a look at the quality of A/R, it is extremely healthy.

So this year -- or I'm sorry, this quarter, we ended at about $35.1 million in A/R. That's up about $7.5 million. If you compare the quality of our aging at end of December, we had 90% of our receivables were current. If you look at our aging today, 90% of those receivables are current. Thus far, up until the conference call, we've collected about 22% of the receivables that we had outstanding.

And if you remember in the past, maybe a couple years ago, from time to time we used to talk about what percent of our receivables that we had collected and it's a similar number. It's a very similar number on a much lower volume, a much lower base.

So, when I take a look at our receivables, quite frankly, we've never had any collection issues. If you take a look at who our customers are, it's a Who's Who. I don't have anyone in my finance department who even spends 10% of their time doing collections. The payments come in like clockwork.

And if you take a look at the cash and the A/R on a combined basis, because we consider our cash to be extremely liquid, it comes in very quickly, our numbers, if you compare it from Q1 to versus maybe Q1 a years ago, it's at the same level, which is a little bit surprising to you, or to most, given that we spent $20 million to acquire Si Automation.

So, our cash is very healthy. We're doing a good job of generating cash with this company. And then our A/R balance and our A/R -- the aging and the quality of our aging is very, very strong.

That's helpful. How about the deferred revenue line item?

Deferred revenue kind of increases and decreases to a large degree with support and maintenance renews on our software licenses. So, to the extent that our software license grows and historically, most of our renewals happen at Q4 and Q1. So, then you tend to see some peaks in our deferred revenue. And then when you get down to Q3, the deferred revenue tends to drop and it's just a matter of when customers renew. And we have a very strong -- very competitive, if you will, to our peers in terms of the percentage of customers renewing for their support and maintenance renewal.

So, to some degree it's a matter of timing and then also it's a matter of our license business growing.

Okay. And I guess last question. The Si Automation acquisition, how much is that impacting on the actual revenue side of the equation at this point? I know you lose a lot of deferred revenue on the deal closure. I'm assuming you'd expect to see the revenue contribution grow through the year. Can you say anything about that at this point?

Well, what's difficult, Dennis, is that what we see is that the sum of the two companies working together is much better than working apart. So, John had mentioned on the call that there was a deal that we had signed that was a first combination of our dataPOWER and our Maestria cell. And quite frankly, we have a lot of cross-collaboration with that.

So, we don't necessarily spend a lot of time kind of peeling the onion versus trying to focus on getting value and getting the right dollar amount. So, it's not really easy to say as to what the revenue contribution was. But -- however, we are quite pleased at the amount of business that we see coming from them. And it's very much in line what our expectations were.

Fair enough. Thanks, guys.

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, Q1 was a good quarter that leaves us in a position to achieve our 2007 goals. Thank you for joining our conference call. Goodbye.

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