PDF Solutions Inc (PDFS) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the PDF Solutions, Inc. Conference Call to discuss its financial results for the 2nd fiscal quarter ended Saturday, June 30th, 2007.

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. If you need assistance during the conference, please press *, then 0, on your touchtone telephone. 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 10K for the Fiscal Year Ended December 31st 2006, and similar disclosures and subsequent SEC filings. Though forward-looking statements and risks stated in this conference call are based on information available to PDF to date, 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 2nd quarter of 2007, PDF Solutions is reporting total revenue of $23.7 million, and non-GAAP net profit of $0.17 per share. Gain share was $5.9 million. All of these results are in the ranges we provided in April. Keith will talk more about these results and our guidance going forward in a few minutes.

Let me start by sharing some of the highlights of the quarter. We entered into a letter of agreement for a yield aware FDC project for 65-nanometer and 45-nanometer logic production with an existing client. As you may recall, yield aware FDC is a solution we developed by combining default detection and classification technology acquired from SI Automation with our proprietary CV technology.

The business terms of this deal are similar in size and structure to our typical Yield Ramp contracts. The letter of agreement was successful converted to a full contract shortly after the 2nd quarter closed. An existing memory client extended their current engagement to include the next half node. As we have stated on previous calls, memory is a growth area for us.

While our larger customers tend to buy our infrastructure for each major node such as 90- and 65-nanometer, this engagement suggests that memory customers will also purchase our solution for half-steps such as 80- and 68-nanometer -- potentially increasing the frequency of purchase per customer. Our goal was to sign up 2 to 3 nodes in the quarter. With this contract and the yield aware FDC engagement, we achieved that goal.

We achieved record gain share. As we discussed in our last quarter's call, we expected gain share to be up due to improved yields. This proved to be the case, and again demonstrates the value we drive to our customer over time.

In addition to the achievements within our customer base, last quarter we took significant steps to strengthen our offering. We expanded our DSM offering by acquiring Fabbrix -- a provider of silicon IP, designed to create highly manufacturable and area-efficient designs targeted for advanced-technology nodes.

The Fabbrix technology, marketed as pd BRIX, addresses a major problem of the semiconductor industry -- the process challenges that prevent [inaudible] from being obtained as leading-edge logic nodes. pd BRIX leverages PDF's CV technology, and helps customers decrease chip size and power.

Fabbrix was a development-stage company, but we saw encouraging demonstration silicon from clients, and believe that over the next few quarters, we will see additional customer interest. Over time, we anticipate this technology will also contribute to our wafer fees. We announced a collaboration with Magma Design Automation to deliver Quartz Yield -- powered by PDF X Signoff -- a new advanced deal simulator.

Quartz Yield is the first commercial yield-enhancement product to combine physical verification with accurately quantified yield modeling. When the product is released to the market, it is anticipated to generate software license revenue for PDF, as well as create call for PDF's characterization vehicle technology.

As we are now halfway through the year, let me reiterate our chief priorities for 2007 and my assessment of where we are against these objectives.

Overall, I am pleased with our performance, in light of some of the challenges in our clients' businesses. First, we must continue to execute on our IYR solutions to deliver yield improvement results for our clients. In the first and second quarter, we saw improving yields that positively impacted our gain share revenue -- enough to offset some weaknesses we saw in volumes. We are pleased with the gain share results in the first half of the year.

For the second half of the year, we have lowered our expectations due to weakening volumes we see at multiple customers. That being said, our revenue for wafer continues to be strong. We do believe that wafer volumes will improve in the 4th quarter from a production standpoint, but won't start contributing gain share until Q1 2008.

Second, we set out to expand our market opportunity by driving our solution from memory and image center -- both large and fast growing markets. In Q1, we signed a contract with our second image-sensor customer. And in Q2, as I previously mentioned, we extended our relationship with a key memory customer.

We are happy with the progress we have made in our memory offering and believe we have the components in place to expand this business later this year, and into 2008. Our forecast for the remainder of the year is based on continued traction in the marketplace for our memory and image-sensor offerings.

Third -- we will deliver our yield aware FDC solution to our customer base, to help them improve manufacturing efficiencies. In Q2, we sold our second yield aware FDC contract. We are on target to achieve our 2007 objectives to yield aware FDC.

Fourth. We will extend our footprint in [the fab] to continue the integration of our data power and [Maistria] products, to create a seamless offering of our technology in the industry's first integrated FDC and YMS solutions.

While the 1st quarter was a strong quarter for standalone software sales, the second quarter was week. We continue to win head-to-head with competitive YMS and FDC products, and are told by our clients that we have the best and most advanced software products for yield-management and production control.

Despite this positive momentum, as customers closely scrutinize what they consider to be discretionary spending in a tight market, we expect our standalone software sales to remain weak during the second half of the year.

Finally, we will continue to work with our partners in EDA inspection and other equipment, to drive applications for and adoption of our yield ramp solutions.

I highlighted earlier our latest relationship with Magma, which is one example of the many initiatives we have going with our partners.

In summary, the first half of the year from a revenue and earnings standpoint, puts us on track for strong performance in 2007. We continue to make progress on our strategic objectives such as yield aware FDC and memory, which strengthens our ability to capture opportunities in high-growth markets. Nonetheless, reduced expectations for wafer volumes in software license revenue in the 2nd half of the year require that we revise our prior guidance for 2007 total-year results.

Now we'll turn the call over to Keith, who will discuss in detail our financial results for the 2nd 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. You may access the press releases and reconciliations in the investor section of our website, located at www.PDF.com.

Revenue for the 2nd quarter ending June 30th 2007 totaled a record $23.7 million. An increase of 32% and 7%, when compared to the 2nd quarter of last year and last quarter, respectively. These results were in the range we provided in April.

Compared to the both the 2nd quarter of 2006 and last quarter, improvement was the result of increases in both design to silicon yield solutions and gain share. We are pleased that gain share was at record levels. Design to silicon yield solutions revenue totaled $17.8 million for the 2nd quarter -- an increase of 45% -- and 3% from the comparable period last year and last quarter, respectively.

Integrated solutions revenue increased 53% from the comparable period last year, and 16% from last quarter. Software license revenue declined 1% and 49% from last year and last quarter, respectively.

Standalone software sales continue to be volatile and challenging for us to predict. Particularly as more customer tighten what the consider to be discretionary spending. As John discussed during the quarter, we entered into a letter of agreement for a new 45-nanometer yield aware FDC engagement with an existing customer.

Subsequent to June 30th, we completed the terms and conditions inside the full multi-year contract. Additionally, we closed significant extensions to our existing memory engagement -- which, as John mentioned, includes work on a new half-step process node and existing yield aware FDC engagement.

During the 2nd quarter, 13 integrated solution engagements from 11 customer each, contributed $150,000 or greater in revenue. This represented a flat number of engagements, but an increase in 1 customer during the quarter.

Gain share revenue for the 2nd quarter totaled a record $5.9 million -- a 3% increase versus the comparable period last year -- and a 20% increase from last quarter.

Gain share revenue was generated from 7 customers in 9 engagements. A drop in 1 engagement due to one fab not reaching gain share volume thresholds during the quarter.

Gross margin for the 2nd quarter of 2007 -- excluding stock-based compensation and amortization of core technology -- was 72% of total revenue. An increase from 66% and 67% during the 2nd quarter of 2006 and last quarter, respectively. The increase from last year and last quarter was a result of improve service margins on integrated solutions, and generally a more favorable mix of overall revenue elements. For the remainder of the year, we expect gross margins to be down modestly from Q2.

Total operating expenses -- excluding stock-based compensation expense and amortization of acquired intangible assets -- were $14 million for the quarter. Up approximately $3.6 million or 34% from the 2nd quarter of 2006, and up approximately $1.1 million or 9% from last quarter.

The increases from last year were due to the increases across all functional areas -- primarily as the result of our acquisitions of SI Automation in October of 2006, and Fabbrix in May of 2007 -- and the opening of our office in China in July of 2006. Coupled with increases in outside sales commissions and tradeshow costs.

The increases from last quarter were also due to increases across all functional areas -- primarily the result of personal costs associated with our Fabbrix acquisition and increased outside sales commissions, travel and tradeshow costs.

Research and development expenses -- excluding stock compensation -- totaled $8.2 million for the 2nd quarter. An increase of approximately $1.9 million, or 30%, from the 2nd quarter of 2006 -- and an increase of approximately $374,000, or 5% from last quarter.

The increase from last year was primarily the result of our acquisition of SI Automation on October 31st 2006. The increase from last quarter was primarily the result of the use of outside development resources to expedite strategic initiatives.

Selling, General & Administrative Expenses -- excluding stock compensation -- were $5.8 million during the 2nd quarter of 2007. An increase of approximately $1.7 million or 41% from the 2nd quarter of 2006, and an increase of approximately $731,000 or 14% from last quarter.

The increase from the comparable period last year was the result of increased expenses associated with our acquisition of SI Automation, coupled with an increase in outside sales commissions, accounting and tax services and tradeshow expenses. The increase from last quarter was primarily the result of an increase from the outside commission, travel and tradeshow expenses.

[Reading earlier] the statement made in 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 expense, amortization of acquired intangible assets, the write-off of in-process research and development, and the related tax effects.

Non-GAAP net income for the 2nd quarter ending June 30th 2007 totaled approximately $5 million or $0.17 per share. At the upper end of the range provided in April, as our annual tax rate adjustment again added approximately $0.02 to our results.

This compares with non-GAAP net income of approximately $3.6 million, or $0.13 per share, for the comparable period last year -- and non-GAAP net income of approximately $3.9 million or $0.14 per share, during the 1st quarter of 2007.

On a GAAP basis, including amortization of stock-based compensation and acquired intangible assets, we reported a net loss for the quarter of approximately $701,000 -- or $0.02 per share. This net loss included $4.6 million of stock-based compensation and amortization of acquired intangible assets.

Turning to our balance sheet at June 30th. Total cash increased to $54 million. An increase of approximately $3.5 million during the quarter. Operating activities generated $2.6 million in cash during the 2nd quarter. Capital expenditures used approximately $924,000 during the quarter. Our employee stock plans generated $1.4 million in cash.

Additionally and principally, all of the cash purchase price associated with our Fabbrix acquisition were approximately $2.7 million, was not paid as of June 30th.

Our accounts receivable decreased approximately $2.8 million, to $32.3 million. The result of improved contract billings and solid collection efforts. The aging and collectability of our receivables remains healthy as approximately $5.5 million or 25% of our billed accounts receivable at June 30th have been collected as of this morning.

Now, turning to our guidance.

I will state again that some of the statements made in the course of this conference call -- including the ones that we are about to make with respect to Q3 and 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 design to 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 3rd quarter of 2007, we reiterate the guidance we provided in our outlook press release earlier today.

Total revenue is expected in the range of $23.5 to 25 million. Gain share revenue in the 3rd quarter is expected to be in the range of $5 to 5.5 million. Down from recent levels, as customer volumes are expected to decline further during the 2nd half of 2007. As a result of declining volumes, gain share for the fiscal year 2007 is expected to be flat or moderately above fiscal year 2006.

Non-GAAP earnings-per-share for the 3rd quarter is expected to be in the range of $0.17 to $0.19.

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 $95 to 100 million. With non-GAAP earnings-per-share expected to be in the range of $0.67 to 0.73. The outlook for software sales in light of tighter customer budgets and gain share as 2nd half customer production volumes declined, have each contributed to our revised expectations for the remainder of the year.

Our non-gap earnings-per-share for the 2nd half of 2007 remain relatively healthy, despite the revenue declines for the full year -- as spinning as tightly controlled, and our bottom line continues to benefit from adjustments to our annual tax rate.

Our current estimate for our annual non-GAAP 2007 tax rate is a benefit in the range of 10-15%. A result of maintaining projected tax credits despite a drop in income resulting from the change in revenue expectations.

With that, I'd like to turn the call back over to the operator to open the floor for questions. Operator, do we have anyone on line with questions?

Yes. Thank you, Mr. Jones.

Ladies and gentlemen, if you have a question at this time, please press * on your touchtone phone. If you are using a speakerphone, please lift the handset before asking a question.

And our first question is from the line of Dennis Wassung.

Thank you. Good afternoon. A couple of questions.

When you look at your guidance, it looks like you're still calling for a fairly significant sequential revenue increase in Q4. Where do you expect to see that? You talked about gain share in software being more depressed than where you were expecting before. But are you still expecting the integrated solutions line to be a big driver in net sequential growth?

Hi, Dennis. How are you doing? This is Keith.

That's a good observation. So John indicated during the call -- and I reiterated during my statement that we do see some softness in the gain share because of volumes. And some softness in our software license.

But we do see our services business being very robust, and we see a lot of traction, there. That's where we see a lot of our growth coming from in the upcoming quarters.

Okay. And when you look at the software line item, obviously this has been a challenge to you guys over the last few quarters. What has changed, as you look from last quarter to this quarter in that business? I know you talked about budgets tightening. But is there an overall change in that market that's driving the weakness there? And also, are you seeing any impact from stand-alone software sales of SI Automations [Maistria] product?

Yes, Dennis, this is John. I'll try to take that one.

I think in Q2, we saw ourselves win the same number of benchmarks we typically win in a bakeoff. We just didn't see those convert to revenue. We got a little bit concerned then about the out quarters. And as we looked in the marketplace, we feel that in please where they're building a new fab, they're going to obviously pick a system and make a decision.

But in fabless companies, where we saw some softness, they can always wait for incremental modules or incremental capability another quarter or 2. And we saw that happen in an existing fab, where they're evaluating new capabilities such as some of our monitoring capabilities.

We know today we're inclined to push our purchase decisions out 1 or 2 quarters. With that, we felt there was a softness, there. I think by and large, it tended to be in places where we saw a weakness in their end volumes. I'd say first in the memory customers, and then we saw it in the logic customers.

I think actually the memory will come back sooner than the logic. And then on the [fabric] side, the mixed signal customer have been a little bit weak now for a while. Although we do think that they will get better as we get onto the latter part of this year.

So overall, we don't see anything different in terms of the marketplace. We think we're still winning. We do see customer stalling purchases. Things they told us they were going to do in the 2nd quarter didn't get done.

Okay. And last one on the [IYR] side of the business. Obviously you've got a pretty robust business going now, here. And you've got some expectations for growth in Q4.

Is it fair to assume that that activity level is more dominated by the memory side of the business as well as the yield aware FDC stuff you're talking about? What gives you the confidence in that pipeline to expect that growth in the 2nd half in Q4, specifically?

Yes. Specifically, we see the overall market opportunity for our integrated solutions expanding as we've developed the yield aware FDC solution. And we've now got a reference customer in the memory part of our offering. Our offering for the memory customers, as well. That has improved the pipeline -- the depth of the pipeline.

For logic customers, we are selling both yield ramps and yield aware FDC. And we do see those 2 opportunities for the memory customers.

So in the 2nd half of this year, we do expect some logic yield ramps. But I think they will be only 1 part of the business for the 2nd half of this year. Whereas in the past, if we were to go back to 2005, that would be the entire business.

What I would add to that John, is that primarily as the result of Fabbrix acquisition, we were starting to see some traction that might manifest itself a little bit later from a revenue contribution standpoint, from our DSM perspective, as well. Where we see that growing as part of our pipeline, as well.

Great. Thanks, guys.

Your 2nd question is from Gus Richard.

Yes. Just a quick couple questions on the FDC yield aware contract. I'm assuming that's for logic and what process node?

It's a 65- and 45-nanometer, and it's logic.

Logic. And is this the new customer in the quarter? Or is this a new customer?

It is an existing customer.

Existing. You had commented that I think you had the same number of ramps in place this quarter as last. 13. One contract and one customer slid off, and you had another customer come on. Did you indeed gain a new customer in the quarter?

Yes. We did, actually. We had a customer that was a previous engagement, actually. As you know, Gus -- the revenue contribution from a contract might not be really finally met for the full impact to the following customer. So as one customer fell off, then a customer that we had signed in the previous quarter actually contributed for a fair amount of revenue contribution for us to offset that.

Okay. Got it.

I think also the contract that you're referring to -- the logic yield aware FDC contract -- all of it didn't count, because it was signed in the quarter. So the revenue contribution for the quarter was pretty small.

Okay. And then on the software side of things. I would imagine there are 2 things that are slowing software sales. One is the uncertainty of the environment for your customers. And the second is, I believe you're coming out with a new version of dataPOWER in the 2nd half.

I was just wondering -- is that indeed one of the impacts on the software line and the timing of the next revision of that software?

Yes. I think you're referring to our 8.0 release of DataPOWER. Most of the software the customers buy, buy maintenance. And 90%-something renew their maintenance every year. So a customer buying DataPOWER now would get 8.0 as part of the standard maintenance and upgrade.

I don't believe that really significantly impacted the selling cycle. Customer are getting demos of the product, now, as we are pretty much in beta. I suspect that that didn't really contribute. Because anyone buying would know that they'd get that as an upgrade in basically less than a quarter's time. So I'm not sure that was a factor. I do believe that we win the benchmarks even without the 8.0 enhancements.

And then in terms of the arrangement with Magma -- when would you expect to start to see software license revenue from that work with Magma?

So, Gus -- the Quartz Yield product is planned on being released sometime in Q4. The nature of the arrangement is that it would be very similar to a royalty reporting. So by default, that revenue would be reported in arrears to us. So based on that, we wouldn't see anything 'til 2008.

Right. Calendar 1st quarter is when it should start to ramp. Is that reasonable?

Yes. I think. We're not familiar with from when they release to when they start taking revenue. So I think that would be the earliest. It could be a quarter later than that.

But there's nothing in our forecast for 2007.

Okay. Then in terms of Fabbrix -- do you have any expectation of revenue this year for that new product?

It's very modest for the current year. We are investing from our R&D standpoint, to look and see how that integrates with our other solutions, and to tie that better into our [CV] sets. So we will actually probably see a lot more, and we'd have a lot more to talk about later in the year. And then more meaningfully in our '08 outlook. But for as far as '07, we are very conservative in terms of providing guidance, from a revenue expectation.

Okay. And then last one for me -- on the memory extension to the half node. Is that a 50-nanometer processor, or is that 70?

It's a derivative of a 70 node.

Okay. And it's a half node [trink]?

Yes. They all have different names for them. It's not quite standardized with logic. Right? People did 90s and some people did 80s. And some did 75s and 70. But I think the 55 is the next major node, and between 55 and 90, there's just a myriad of half nodes. Some customers seem to be doing more than 1.

Right. Got it. All right. Thanks.

Your next question is from the line of Matt Petkun.

Hi, there. Good afternoon. A couple questions just for clarification.

John, the new FDC deal that was officially won in Q3 -- the beginning of Q3 -- that does incorporate some form of gain share. Is that correct?

That is correct.

Okay. And can you refresh us as to kind of the relative opportunity? I understand that the actual engagement portion is very similar to what goes on with an IYR deal. But how does it compare from a gain share perspective, in terms of opportunity there?

Yes. The dollar amounts for the fixed fees and the gain share amounts are very similar to a yield ramp. In fact, the total dollar opportunity is pretty much about the same.

When you look at it from a customer standpoint, the benefits dollar-wise work out to be very similar to the benefits that we can drive for a yield ramp. And really, it all stems from the fact that these advanced nodes -- even once you've brought up the process, controlling the factory -- there is an incredible amount of money wasted in terms of overall equipment efficiency in yield variability that we've been able to demonstrate to the customers, our solution can address.

So dollar-wise for the customer, it's a very similar dollar value, and to us, it's basically the same as a yield ramp, from a dollar standpoint.

Okay. And then just to clarify the number of active IYR customers this quarter was 10? With 1 falling off and one coming on?

We had 13 significant customers or contracts, this quarter.

Oh. So the number totaled 9?

Sure. And we had 9 gain share contracts.

Well, 13 contracts with how many customers on the IYR side?

11.

Oh. 11. Okay. There wasn't [inaudible]

That was flat from last quarter.

Okay. And then John -- I don't know if you'd be willing to characterize what the pipeline look like in terms of new IYR and FDC opportunities. If you see one side of those being maybe more successful in the back half of this year than another side? And how you could characterize?

I know you've said in the past you hope to win 2 to 3 engagements per quarter, and you to a certain extent fell short of that this quarter. I'm just wondering how the pipeline looks.

Yes. I think the pipeline looks very healthy. In terms of this past quarter, I think with the yield aware and the memory PCI, it was 2 engagements. We would have liked to have seen more, of course -- always.

But when we look out in the 2nd half of this year, we see a pretty good pipeline for yield ramps at logic and memory producers. And an awful lot of interest in the yield aware FDC.

With respect to the yield ramps, we have had discussions starting earlier because of the Fabbrix tie-in with the yield ramp. In other words, how people look at things like 45 or 32. There's definitely a synergy between the Fabbrix piece and the yield ramp.

If I were to say what the pipeline looks like now, I do think yield aware FDC is probably stronger this year than we had initially anticipated. In terms of our total dollars for our design to silicon yield solutions, our yield business -- fundamentally, the first half of the year came in exactly where we expected it to be. And we expect the entire year to be where we expect it to be, from the original forecast, if you go back to January timeframe.

So, by and large, I think the signing up of engagements has been pretty reasonable, and will be for the 2nd half of the year.

And then just refresh my memory. My final question. On this extension -- do those extensions typically last as long as the original engagement? Or do they have a shorter term?

When we typically announce extensions, and we have extensions for contracts pretty frequently -- but we don't always announce them. But when we do announce them, you're looking at an extension that's probably going to take place over multiple quarters.

In this particular instance, it's -- I believe -- 3 to 4 quarters, at least, that we're taking a look at for the extensions that we disclosed.

That's all for me. Thanks.

Your next question is from the line of [Mahash Bangadeer].

Hi. This is [inaudible] calling for [Mahash]. I have a couple of questions.

My first question was, try to comment a little bit about the increase in the gross margins of the [inaudible] product.

Well, this quarter, you saw that the gross margin increased at 72%. The reason why that was relatively higher this quarter is that we had a little bit lower outside 3rd party costs that we needed to perform in previous quarters to provide some work on a particular customer. And then in addition, we had a little bit lower costs associated with our equipment. Our PD Fast test systems that have a pretty high cost associated with them, as well as providing a tremendous amount of value to the customer.

When you factor in those 2 items, we have a higher gain share amount. Then you have a pretty healthy margin for the quarter. That's why it was a little bit higher.

So as we look into Q3, in particular, we do have a bit of a drop in the gain share, which will hurt the overall margin. Our revenue would be driven a little bit more by the services piece of our business that has -- by default -- a higher cost associated with that. And then we do anticipate having some PD fast-test system costs in the quarter, as well.

The gross margin associated with the services. The IYR portion of the [inaudible] increased from 47.5 to 58.8. Going forward, do you think despite the slight increase in the PD Fast equipment class, would you think that the margins should hold around the high 50s?

Yes. What we'd anticipate is that we do anticipate a strong margin for the year. But we would anticipate it coming down slightly from Q2. So we don't anticipate having a 72% Q3/Q4 gross margin. Btu we do anticipate having a very healthy, very strong gross margin contribution from our business. From our service business, in particular.

A couple of more questions.

What would you say was the [inaudible] incremental business that you had from the FDC portion of your offerings? And how does that look, going forward?

Not to be evasive, but quite frankly from a selling standpoint, we are -- from the wedding or the marriage that we've had with the FDC business -- we were combining a lot of the solutions.

And the revenues get a little bit commingled. And we don't spend a lot of time on trying to break it out in that amount of granular detail. But overall, I could say that we are very pleased with the results that we've gotten from the FDC business, and it's pulled in a lot of business elsewhere for us, as well.

But overall, to try to break that out is a little bit of an exercise of futility, to the extent that we bundle that with other offerings, and we add value to the customer, which we get rewarded with a good revenue contribution contract.

So it's very hard to say what that standalone revenue is, but they have performed very well, this year.

Could you expect [inaudible] cost to [inaudible] going forward?

With R&D, we would probably anticipate seeing in Q3, in particular, a slight increase. We have variable compensation salary increases, and then also spending associated with our yield aware product offering. And then our investment into our Fabbrix business. So you will see a slight increase there.

With the SG&A line, as we mentioned during the call, or as I had mentioned during the call -- our outside commission costs and our tradeshow costs really drove up the expenditure this quarter.

So in particular, in Q3, we would see that expense coming down moderately, but we're also surprised to see a little bit of an increase in that expense from Q3 to Q4, as we had a little bit more of variable compensation costs at the end of the year.

And lastly, are you guys anticipating more calibrations as you had with the Magma with the Quads offering in the future?

Yes. This is John. We do anticipate working closer with the EDA companies, as well as the equipment companies. And we should, as we get out in the later half of this year and into next year, a conditional announcement.

You have a follow-up question from the line of Dennis Wassung.

Thanks. Just a quick follow-up on the gross margin side. You expect it to come down a little bit in the second half. Can you quantify that?

And I guess would you expect structurally, as we looked forward, are we going to be at a little bit higher rate than we were last year, for example? Obviously it was a higher gain share component -- that answer is yes. But is there anything structurally that's changing over time, here?

So Dennis, we would expect the gross margin year-over-year to increase. To improve. Like I said, we would expect it to go down slightly over what we had in Q2.

I would anticipate it being a little bit better or better than what we'd seen in Q1. And we do expect to see some improvement in that kind of quarter-over-quarter basis. So overall for the year, we expect an overall improvement on a year-over-year basis. And then we do expect to have fairly healthy gross margins for Q3 and Q4. But I don't anticipate us having 72% for Q3 and Q4 on a standalone basis.

Right. The extra color helps, there. And then last one on the tax side. Expecting a kind of 15% benefit for the year -- how long are we going to be looking at this type of tax effect? How should we be modeling this as we go forward?

Well, in this particular case, when we talk about the tax benefit and where it came from, I think if you take a look at our Q4 results, we have a pretty favorable -- very significant tax benefit. And that really was the result of us doing an investment. Going through and taking a look at what credits were out there for us. And those were very solid credits for us to take.

And if you take a look at it, that's a fixed number. So regardless of what our income level is, that's a benefit that we get to factor in. So in some cases, as opposed to reporting a very high tax rate, we're always going to have a built-in cushion.

So for '08 and beyond, that still remains to be seen -- depending on what forecasts that we provide at that time, which we'll do in the future.

Okay. Thank you.

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

Thank you. In spite of declining wafer volumes and tighter discretionary spending by clients affecting software revenue, we remain confident in our business because of the progress we continue to make on our strategic objectives.

Notably, we have met with early success in expanding on our available market, through deploying [inaudible] memory fabs, selling our yield aware FDC solutions, and acquiring Fabbrix. We look forward to building our business in Q3 and beyond.

Thank you for joining our conference call. Goodbye.

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