PDF Solutions Inc (PDFS) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PDF Solutions Incorporated conference call to discuss its fiscal results for the fourth fiscal quarter ended Monday, December 31st, 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. (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 would 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. Today I'm going to discuss the results for the fourth quarter of 2007, summarize key achievements for the year 2007, and discuss our outlook for 2008.

For the fourth quarter of 2007, PDF Solutions is reporting total revenue of $24.6 million and non-GAAP net profit of $0.21 per share. Gain share was $6.5 million. All of these results are in the ranges we provided in October. Keith will talk more about these results and our guidance going forward in a few minutes.

Let me start by sharing some highlights of the fourth quarter. Overall, we had a good bookings quarter for new and extended engagements. We signed a letter of agreement for a 45-nanometer DSM engagement with a fabless company, a letter of agreement for a DRAM engagement with an existing client, and a contract for a Yield Aware FDC prove-out engagement at 65-nanometer logic with a new client.

We also signed further extensions to two engagements, one in logic and one in DRAM. These contracts, extensions and LOAs were in Europe, Japan, US and Asia, again highlighting the strength of our account teams around the world.

In addition to good bookings, we achieved the high end of our guidance for gain share. Q4 was our second largest quarterly gain share revenue in the history of our company. We are proud of our accomplishments in 2007. It was a year in which we made significant progress in our growth strategy, focusing on transforming the semiconductor process lifecycle from R&D through yield ramp to mass production.

In 2007, we continued to invest in our world-class solutions to address the needs of our customers. For example, for our 45-nanometer clients, we released a new characterization vehicle infrastructure that provides 10-times the information in the same test time, while minimizing operating costs, including those associated with emersion lithography.

We gained more customer adoption of our Yield Aware FDC solution. Yield Aware FDC is the combination of our CV infrastructure, yield know-how and FDC systems. It is being evaluated and adopted by our clients to solve process control challenges of 90-nanometer, 65-nanometer and 45-nanometer production.

During 2007, we added 2 customers and extended contracts with customers who adopted this new technology in 2006. We acquired new IP design technology and know-how from Fabbrix and launched our PD BRIX solution, which will transform how manufacturability will be integrated into early stages of design. We also signed contracts with customers in 2007 for this technology, demonstrating that clients realize its significance.

In 2007, we drove significant strategic engagements in memory, demonstrating that we are successfully expanding beyond our traditional logic manufacturing customer base. Although logic and memory differ significantly in terms of design complexity and manufacturing process, the fundamental challenges in characterization of the nanotechnologies are the same. In fact, we demonstrated that our solutions met the needs of our memory customers with very little additional investment.

We were able to help one memory client exceed industry benchmark yields, allowing them to attain superior cost structure and therefore, greater competitiveness, despite the downturn in the memory market. With such positive impact, this customer proceeded to expand their relationship with PDF into the deployment of our other solutions. They also proactively introduced us to another DRAM customer with whom we signed an initial contract in Q3.

Our investments in new technologies and markets continue to be valued by our clients. In 2007, PDF grew revenues 24% over the previous year, slightly ahead of our four-year compound annual growth rate of 21%. Moreover, the projects that entered the measurement phase in 2007 have achieved the maximum performance targets set with the client. This establishes strong gain share potential for the future.

More importantly, this means our clients are getting great value from PDF's technology. Clients that get great value tend to be repeat clients who broaden the use of our technology, which bodes well for our future growth.

As we look forward to 2008, PDF is well positioned to address the evolving needs of our customers. Both the breadth of our solution offering and our business model will prove to be advantageous for us, as we navigate what are admittedly difficult market conditions for logic and memory customers.

For logic customers, there is an increasing focus on streamlining the entire process lifecycle, whether making their designs more manufacturable with PD BRIX, or ramping their yield with our IYR solutions, or improving production controls with Yield Aware FDC. For memory customers, the need to transition cost-effectively to new nodes will drive adoption of PDF yield ramp solutions and Yield Aware FDC. And of course, in general, our gain share model allows us to continue to reap the benefits of customer investments made in previous years.

Overall, as customers are increasingly concerned about the cost of using new technology, both from a design and production perspective, PDF's offering will address their concerns and are designed to provide immediate returns on their investments.

So how does this translate into our expected performance in 2008? We expect design to silicon solutions to be up quarter-over-quarter in Q1, as well as for the year. This is driven by continued adoption of Logic Yield Ramp, Memory Yield Ramp, Yield Aware FDC, PD BRIX, as well as improvements in our software business.

We expect modest growth for gain share in 2008. For Q1, we expect gain share to be down quarter-over-quarter due to volumes, but overall expect gain share to grow for the year.

We expect our operating income to improve significantly in 2008 over 2007, as we improve the efficencies in our business and leverage the invsestmetns we have made over the last few years. However, EPS will somewhat be offset during 2008, as we move to paying taxes in contrast to the tax benefits we received in 2007.

Overall, PDF is well poised to help semiconductor companies navigate a turbulent economy. Our solutions help manage cost and increase the results across the process lifecycle. We look forward to 2008 with confidence in the value we will create with clients, as we deliver those solutions to challenging technical and business problems.

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 afternoo, to everyone. Let me again state that this presentation and our press releases issued earlier today, include references to certain non-GAAP financial measures. The press releases contain a reconciliation of such measures to the most directly comparable GAAP measures, and you may access the press releases and reconciliations in the Investor's section of our website, located at www.PDF.com.

Revenue for the fourth quarter ending December 31st, 2007, totaled a record $24.6 million, an increase of 30% and 2% when compared to the fourth quarter of last year and last quarter respectively. These results were in the range we provided in October. Compared to the fourth quarter of 2006, improvement was the result of increases in both design to silicon yield solutions and gain share. Compared to last quarter, the improvement was the result of increase in design to silicon yield solutions, more than offsetting a small decline in gain share.

We are pleased that gain share was at the upper end of guidance provided in October. Design to silicon yield solutions revenue totaled $18.1 million for the fourth quarter, an increase of 28% and 5% from the comparable period last year and last quarter respectively.

Services revenue increased 53% from the comparable period last year and 8% from last quarter. Standalone software license sales continued to show weakness and evidence of volatility, declining 84% and 57% from last year and last quarter respectively.

As John discussed, bookings for the quarter were solid. We closed 2 LOAs with existing customers, which should lead to new full engagements. One was for a new memory node and one was for a DFM project at a fabless customers.

We also signed 2 extensions to existing engagements, and lastly, we signed and kicked off a Yield Aware FDC evaluation with a new logic customer at 65-nanometers. Expectations are for a full favorable outcome for this evaluation, leading to a full engagement before the end of the second quarter.

During the fourth quarter, 15 integrated solution engagements from 13 customers, each contributed $150,000 or greater in revenue. This represented a net increase of 1 engagemetn during the quarter.

Gain share revenue for the fourth quarter totaled $6.5 million, a 33% increase versus the comparable period last year and an expected 5% decrease from last quarter. Gain share revenue was generated from 6 customers and 9 engagements, a net decrease in 1 engagement and 1 customer during the period.

Gross margin for the fourth quarter of 2007, excluding stock-based compensation and amortization of core technology, was 64% of total revenue, an increase from 62% during the fourth quarter of 2006, and a decrease from 68% last quarter.

The increase from last year was the result of improved service margins on integrated solutions, while the decline from Q3 2007, resulted from the decrease in gain share and software licenses, coupled with higher material costs on certain engagements.

Gross margins for the year ended December 31st, 2007, improved slightly to 68% from 67% for the year ended December 31st, 2006. And we expect to see a rebound during the fourth quarter, into the upper 60s in the first quarter of 2008.

Total operating expenses, excluding stock-based compensation expense and the amortization of acquired intangible assets and the write-off of in-process research and development, were $14.5 million for the quarter, up approximately $2.8 million or 24% from the fourth quarter of 2006, and up approximately $938,000 or 7% from last quarter.

The increase from last year was due to increases across all functional areas, primarily the result of a full versus partial quarter of expenses resulting from our acquisition of Si Automation on October 31st, 2006; the acquisition of Fabbrix, Inc. in May of 2007; and the expansion in France, China and Korea; plus increased legal and accounting services; the additional use of subcontractors for development initiatives; and variable compensation.

The increase from last the quarter is the result of increases in legal and accounting fees, greater utilization of outside development resources and variable compensation across all functional groups.

Research and development expenses, excluding stock-based compensation, totaled $9 million for the fourth quarter, an increase of approximately $1.5 million or 21% from the fourth quarter of 2006, and an increase of approximately $556,000 or 7% from last quarter.

The increase from last year was primarily the result of a full versus partial quarter of engineering expenses resulting from our acquisition of Si Automation, the acquisition of Fabbrix, Inc. and the use of outside development resources and increased variable compensation costs. The increase from last quarter was primarily the result of increased use of outside development resources and increased variable compensation costs.

Selling and general administrative expenses, excluding stock-based compensation, were $5.5 million during the fourth quarter of 2007, an increase of approximately $1.2 or 29% from the fourth quarter of 2006, and an increase of approximately $382,000 or 7% from last quarter.

The increase from the comparable period last year was a result of a full versus partial quarter of SG&A expenses resulting from our acquisition of Si Automation and increases in legal and accounting expenses, variable compensation costs and outside sales commissions. The increase from last quarter was primarily the result of increases in legal and accounting expenses, both domestically and associated with the statutory audit and Sarbanes-Oxley implementation program in France, and variable compensation costs.

In 2007, expenses grew at the same rate as our revenue, and as we made many investments to facilitate our growth, such as expediting the integration of the technology acquired from Si Automation, expansion of our presence in Korea and China, and the use of outside resources for development initiatives. Many of those expenses are one-time in nature or variable and we do not expect them to continue in 2008.

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 expense, amortization of acquired intangible assets, the write-off of in-process research and development, and the related tax effects.

Non-GAAP income for the fourth quarter ending December 31st, 2007, totaled approximately $5.8 million or $0.21 per share, in the middle of the range provided in October. This compares with non-GAAP net income of approximately $2.3 million or $0.08 per share for the comparable period last year, and non-GAAP net income of approximately $5.3 million or $0.19 per share during the third quarter of 2007.

On a GAAP basis, including stock-based compensation and the amortization of acquired intangible assets, we reported net income for the quarter of approximately $1.1 million or $0.04 per share. This net income included $3.8 million in stock-based compensation and amortization of acquired intangible assets.

Turning to our balance sheet at December 31st, total cash decreased to $45.3 million, a decrease of approximately $4.7 million during the quarter. Operating activities usesd approximately $3.5 million in cash during the fourth quarter, primarily the result of increased Accounts Receivable.

Capital expenditures used approximately $528,000 during the quarter. Employee stock plans generated $813,000 in cash and $1.5 million was used to repurchase a total of 201,000 company shares in the open market at an average price of $7.57.

Our Accounts Receivables increased $5.9 million to $38.5 million, as timing of invoices and payment terms in most recent contracts negatively affected our ability to collect Accounts Receivables before year-end. Despite this effect and the increase in the balance, the aging and collectibility of our Receivables remains very healthy.

Before turning to guidance, I'd like to reflect a moment on our results for 2007. Total revenue for the year was a record $94.5 million, up 24% from the $76.2 million in 2006. Gain share revenue for the year was also a record $24.1 million, up 20% from $20 million last year. And non-GAAP earnings per share was $0.71, up 61% from $0.44 in 2006. Our growth demonstrates the value we deliver to our customers and their confidence in our solutions and technology.

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 of fiscal year 2008, are forward-looking. These statements include expectations about our future financial results and performance, growth rates, the success of any business objectives, product and service features, and introductions, client products, and demand for PDF designed to silicon Yield solutions.

PDF's actual results could differ materially. You should refer to our current SEC filings and understand that the forward-looking-statements made during this conference call are based upon information available to PDF today. We assume no obligation to update them.

For the first quarter of 2008, we reiterate the guidance we provided in our outlook press release earlier today. Total revenue is expected in the range of $23.5 to $24.5 million. Gain share revenue in the first quarter is expected in the range of $5.3 to $5.8 million, as customer current volume projections reflect a decline in gain share from last quarter.

Non-GAAP earnings per share for the quarter is expected in the range of $0.08 to $0.10 per share and includes an estimated annual tax rate of 20 to 25%. Despite the negative effect of a significant move in our 2008 tax rate, we anticipate operating income to grow materially over 2007.

As John mentioned, we expect to grow design to silicon yield solutions revenue over both last quarter and total year 2007. However, we entered 2008 against a fairly strong headwind in the semiconductor industry, affecting our estimates for the first quarter gain share. Although our clients tell us production volumes and hence gain share will increase throughout the remainder of the year.

We believe we have invested in the right places during 2007, to accelerate the expansion of our technology and broaden our service offerings as a result. We believe we are well positioned to continue to grow our business in 2008, as our new offerings take hold and we tighten control over our variable expenditures.

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

(OPERATOR INSTRUCTIONS) Tim Fox with Deutsche Bank.

Just digging into the fourth quarter results a little bit first, the operating income and margins were well below where we had anticipated and obviously you've reached your target EPS number on a non-GAAP basis, primarily from tax benefits. Just wondering, in the quarter, what was it that really drove the higher operating expenses? You mentioned use of outside development and the variable compensation costs. And as a follow-on to that, how are you intending to grow the operating income meaningfully in '08, given the recent trends in some of these extra costs?

Regarding the operating expenses, what we saw is a spike in, as I mentioned during my script and John alluded to as well, that we did have some kind of nonrecurring costs, in particular. As we see that the acceptance and the excitement in the marketplace for our PD BRIX technology and our Yield Aware FDC technology, we really did accelerate the spending that we have there. So, there were some one-off subcontractor costs that we incurred, just to help bring those products to market and make them more robust sooner rather than later, to make sure that we capitalized on that opportunity.

Secondly, what we have is with our corporate bonus program, if you will, it is based on an annual result. So thus by default, you tend to have a little bit more of a back-loaded expense when it hits, to the extent you have to wait until the end of the year before we tally up and see how we did compared to our expectations.

So, in line to what you might have expected, those are two anomalies that you probably would not have known to necessarily predict from us.

And in general, as we go into 2008, as I said during my discussion, we did make a lot of investments in 2008, to expand into these new areas that I just talked about. And then I think that really set a good platform of where we're going to move with our products and our offerings going forward.

And just like all companies, we're looking at areas where we can be more efficient and we see a lot of opportunities to become more efficient and focus on those areas that give us the greatest amount of opportunity. And with that, instead of being at 10% of operating income, we expect that to be substantially higher as we go into 2008.

Okay. And just maybe to help us model a little bit, you obviously haven't given a full-year revenue guidance number, but are you thinking in terms of growing expenses at some percentage rate lower than the top line, sort of half the rate of the top line, or anything directionally like that to help us think about how the year may shape out?

I think half is a good way to kind of look at it and how we kind of look at it ourselves internally. Obviously to grow the business we do have to spend, as we take on new customers and our R&D spending has to stay ahead of the curve of the industry. But having a growth rate at the same as revenues just doesn't make sense. And candidly, it's not necessary for us at this stage either.

Okay, great. And I guess for John, in looking around the industry, obviously you've mentioned some headwinds from customers. Can you talk a little bit more specifically about some of the discussions you're having with customers as it relates to moving to new process nodes, just exactly how cautious are they being? Do you think it's affecting your rate of being able to close deals at this point or is it more just cautionary in general?

So, on the DRAM side I think the customers are really totally focused on moving to the new nodes. They realize that operating improvements in the trailing edge nodes like 90-nanometer for them, there isn't enough you could do to make it work at $1.80 or now $2.10 spot price for the DDR2 chips.

So we're seeing a lot of activity on -- it's actually helping us quite a bit on selling into the newer nodes on the DRAM side. That is their only card to play, per se.

We did see customers -- when we looked at the volumes spent, you know, our gain share is primarily logic. The headwind I was referring to is what we see as the logic volumes in the first -- for us, the first quarter's worth of gain share. We did see stuff tail-off throughout the quarter and our estimates for Q1 coming down, which is why we set our gain share number down, I think measurably from where probably you and the others had modeled it for Q1 this year. And that's what I was really speakgin about.

As far as logic customers are concerned, you know, I have thought for quite a while that if I were a logic designeer, either IDM or fabless, I would look quite a bit at what am I spending on doing a new design and what nodes make sense to use. And clearly, I think that's why we made the investment in BRIX. The customers need to do something to make their design cost more manageable, so they can take advantage of the futures that the newer nodes provide to them.

I think that's why we're seeing activity on the BRIX side with the logic customers. We saw that in the end of 2007 and we expect that more in 2008.

Okay. And just lastly, can you give us an update on the IBM relationship and the coalition that they've developed and whether or not that's been able to provide you any opportunity to expand your relationships or footprints across there and could we see some benefit from that partnership in 2008?

As you know, we're always really careful about talking about any specific relationships with any customers. I know that we've at times had to declare IBM as a greater than 10% customer, so it's obvious that we do business with them. And we've also said many times that partnerships and alliances are very good selling opportunities for us, because partners need to share results to get the benefits of being partners. And our infrastructure really provides that.

Alliances in the logic business have been very good for PDF's business historically. The one you allude to is a good example. We see some of that happening on the memory side as well in the future. As their R&D challenges are going to become more and more substantial. And we don't speak specifically about the IBM alliance, but Charter does refer to us on their website, so you can kind of already see some of the side benefits of the IBM alliance and what it may do for our business and will continue to do.

I think you can expect that logic is going to consolidate down to a small number of developers with a fair number of licensees and that is a really good environment for PdF to sell into .

Matt Petkun with DA Davidson.

I don't know if I caught it, but Keith, did you mention -- I think you said you had 15 active IYR engagements in the quarter. Did you say how many customers were represented by that number?

Actually, we said we had 15 integrated solutions engagements and 13 custoemrs that each contributed greater than $150,000 in revenue.

Okay, so flat sequentially.

Acutaly, we're up 1 in the number of integrated solutions. We were at 14 last quarter.

The number of solutions, but the customer count was the same?

Relatively, yes.

Okay. And then, you know, from my perspective at least and I hope you guys (inaudible) this, it seems like the last couple of quarters we've seen a nice pickup in the engagement activity and deal closure. When you look out at your solutions revenue and kind of the service business throughout 2008, would you expect to see relatively linear growth as a result of the recent engagements and extensions that you've signed up, or do you think there could be some lumpiness?

I think the integrated solutions is going to probably -- the mix in and of itself is going to be pretty lumpy. I think the opportunities that we see are very exciting. It's going to prevail with a lot of opportunity. However, what we're seeing is that with a lot of our technology in terms of how we wrap it and package it, we can add a lot of value to our customers. But it will be a little bit lumpy, year-over-year growth for sure, and that mix between particular categories will kind of change as we go throughout the year.

Okay. And then on the gain share side, obviously next quarter's down a little bit, some of it I'm sure seasonal. And this quarter you had fewer customers and fewer deals contributing. Does that number continue to erode kind of reflecting that soft patch of engagement activities that we saw in the past, or do you think that this is near the bottom when it comes to the number of contributing deals?

I don't see it decreasing more than what it has right now. And to be clear, it was 1 customer -- net change of 1 contract. And that customer that we had lost actually was not a significant contributor for gain share for us, so it didn't really impact our revenue number greatly.

And do you see -- I think John said that gain share would be up slightly this year, is that correct, in '08?

Yes.

Now, do you think -- are you attributing that slower growth to the overall environment, to fewer new gain share contracts coming on? To what would you attribute the slower growth this year?

If you look at the middle of our range, 5.3 to 5.8, that's 5.5. Our Q1 '07 was a 5.5 gain share quarter. So for it to be up even modestly, we need to see a faster growth rate quarter-over-quarter through the year than we saw in 2007.

We have a lot of contracts that have finished or are finishing their measurement periods and we hit very good targets and we hit max or high percentage of the targets, which means theoretically they should be able to come on line sometime in 2008, as they cross their volume thresholds. We don't always know and can't very well predict where they are.

The numbers that we put together for ourselves as we looked out over the year were over the contracts that we felt we understood why they were going to go to volume in 2008, and put those into our estimates for what we said was then modest growth throughout the year.

Okay. And then I don't think I've seen for several quarters now a new Yield Aware deal, FDC deal with gain share. Has there been any?

There was in Q3 a Yield Aware FDC deal that had gain share associated with it. In Q3. This Q4 one is a short prove-out contract. One of the things we like about Yield Aware is because it's like your traction control on your car, we can demonstrate it, turn it off and you're back to the usual driving habits you had before we turned it on. Which is a great way for us to be able to sell it. And during that little trial period we can charge a reasonable amount of money. So, it's not like it's a free evaluation. It's a paid evaluation and they get to see the benefits, we get to turn it off and still charge for it and establish the gain share value.

Is that the new logic customer evaluation you're talking about?

That is correct.

Okay. And then separately you had 2 extensions and then 2 new LOAs, 1 with a memory customer and 1 a DFM contract? Is that correct?

That's correct.

Mahesh Sanganeria with RBC Capital Markets.

This is Casey calling in for Mahesh. A couple of quick questions. You guys showed a fairly significant growth in the DY segment versus '06. Is it possible to break that down between your traditional products versus the newly required FDC and PD BRIX?

Not to be evasive, it's actually difficult to do so, because in the earlier question that we had, when I talked about some of the lumpiness that we recorded, there is a combination of offerings that we have, so you can't easily break out a PD BRIX, because we have sold a PD BRIX with a Yeild Ramp engagement and likewise with some of our other offerings. They're actually commingled. So our focus is really more so on the customer penetration versus that particular offering. At least it's not an easy way to kind of break it out.

I'll just speak a little bit on that, Casey. Especially for Yield Aware FDC, it's a combination of the software that Si had previously provided, our CVs, service teams, etc. That was the reason that we made the purchase of that company. That really is an integrated piece of the business. That's the growing and important part of the business that was really facilitated by that acquisition. But it's hard to say how much of that comes from either one of the prior companies.

Sticking to the DY segment, given all of the (inaudible) that you folks are talking about, is it reasonable to expect a growth that is much slower in '08 than what you saw in '07?

John had mentioned that historically we've been at about a 20% comp and annual growth rate. At this point in time we're very excited about the opportunity, but we don't anticipate we'd continue to grow at that same rate, but we do see something obviously in the double-digits in terms of what the growth rate will be for 2008.

Are you folks finding that your customers are taking longer to sign the contracts? Are you finding pricing pressure from the customers, because of the obvious difficulties those guys are facing?

Casey, it's a good question. I think when Keith discussed the growth rate, that number that he provided is fully muted by what we get out of gain share. Gain share growth is off past engagement. So, we're projecting a relatively modest growth in gain share. That's really not reflective of the selling environment, but more reflective our customers production environment.

As far as selling is concerned, our solutions really go to address customers' ability to get at more effective cost structure, so this kind of environment is a very good environment from a customer needs perspective. It is at times challenging for them from a budgetary perspective. So, our business model really works quite well in this situation, because the customer is going to pay for the value, really as they get to production volumes. And generally speaking that tmeans production at good yields, which means at more cost effective.

So, we have to always think about our fixed fees during this period and make sure we're doing the things that are going to set us up for the right long-term with the customer. But this knd of environment is a very good environment for our business model.

Okay. How's the imaging business that you folks talked about a couple of quarters ago doing?

Good question, Casey. So, we've sold some engagements to CMOS Image Sensor customers. We've implemented those. We've achieved gain share targets on those. We're waiting for gain share volumes on those. We are out talking with more customers in that area. I think the customer excitement in that area has been more muted this year than it was I think two years ago. And we continue to see how we can add value to them. But, I don't think that's as big an opportunity as the DRAM market has turned out to be and as we expect Flash to be.

Okay. When I look at your past couple of quarters, your total revenue has stayed reasonably flat, going back to first quarter of '07. Now, should I read something into that?

Well, I think if you take a look at it, we've actually posted four quarters consecutively, revenue growth, and candidly, we've actually reported four consecutive quarters of record revenue growth. So, I think what you should read into that is that with our acquisitions and our new technologies, they are taking hold and it's real business opportunities.

I think if you take a look, as John said, that our gain share is a reflection of our past business, in terms of how well we achieved our targets and the actual productions is a bit out of our control. So as we said, we see the design to silicon yield solutions revenue continue to grow from 2007 to 2008, it's going to grow at a faster rate than our gain share, which happens to be affected by some of the early feedback that we get from our customers from wafer volumes in the first half of 2008.

If I take a look at it and I kind of bifurcate between gain share and then our design to silicon yield solutions, I think you'd see a nice steady growth rate.

Okay. A couple of questions from the balance sheet. The Accounts Receivable has shown (inaudible) over '06. Can you comment on that?

Some of our contracts that we had signed in 2007, the milestones in terms of calling out when we were able to bill for those particular contracts, happened a little bit closer in the back end of some of those contracts. But, our customers are really just a world-class list of customers. We actually have no problem in terms of collection on those Receivables.

In 2008, I think you're going to start to see a pretty dramatic swing of it going to the other way, when those items start to catch up for those contracts that are in place. So those were probably some past contracts that we were delivering on and were substantially the way through and as I kind of said during the call, it's just a matter of the timing being at the year-end, where everyone has their year-end budgets and they time things accordingly, the difficulty in kind of collecting that. So, as we go throughout 2008, you will see that Accounts Receivable to reverse itself.

Okay. And one last question if I may, regarding your taxes. Why has the taxes now turned positive and is it possible that they do turn negative later in the year?

We would expect throughout the year to have a tax expense. The benefit that we got in 2006 and 2007 in particular, was really through some tax [planning] strategies that had some fairly large catch-ups and then also when you take a loko at the operating income, we were able to kind of hold those credits on an absolute basis.

But as we go into 2008, the amount of profitability that we talked about and as we said, we do plan to grow our operating income significantly, it's going to yield a tax expense by default, even with those credits that we developed. So, throughout the year you would anticipate a tax expense.

Jeffrey Meyers with Cobia Capital.

First question is on gain share. Looking out to the second half of '08, how much of your increase in gain share that you expect is coming from increased volumes with the same guys who I guess were decreasing volumes in Q1, and how much of the expected increase in gain share is coming from new contracts coming on line?

I'm sure I've got to go back and look at the numbers, but I know of a couple of customers that were making shrinks or transitions at the end of last year, after they got through their Christmas build. What typically happens then is you get one quarter lull and then a buildup. So, a lot of expectation is a buildup throughout the year on the transition to a new node. It's very typical. We've seen that before with [accounts].

We have some modest expectations of other contracts also coming on line, but we tend to discount those pretty heavily than we do fabs that are kind of already full running and we know how they work.

Right, I got you. I guess my main question is how much are you guys expecting the semiconductor market to come back in the second half of '08 and is that why you're expecting the increases or are you expecting things not to significantly come back, but for other reasons you're expecting the gain share to come back?

There's a couple of product transitions that are really I think muting the first part of this year, especially the first quarter more than we would expect. And we're not expecting that this is going to be a great -- 2008 is going to be a great production year. And that's why overall we have relatively modest expectations for gain share growth this year.

Got you. Okay. And my other question is on the software revenue, I guess you guys did about $6.5 million in '07. Any way to think about that in '08? Is that going to be flattish or just hard to tell at this point?

I think for '08 we're going to see an up-tick in that number. But also I do caution that how we plan on selling that, because us wrapping that around some of our services and in particular, time that to some of our CV infrastructure and what not could add a lot of value, which would cause us to charge more, but also to account for it a little bit differently.

But year-over-year, our software sales, I would expect it to increase, but also, as I said in my script, that we expect some volatility quarter-over-quarter and just continue to say that. Because some of the deals became kind of large in one particular period and you do get a bit of lumpiness.

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

Thank you for joining our conference call. We look forward to talking to you again next quarter.

Thank you. This concludes today's conference. You may now disconnect.