PDF Solutions Inc (PDFS) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome the PDF Solutions Inc. conference call to discuss its financial results for the third fiscal quarter ended Tuesday, September 30, 2008. 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 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 PDFs future financial results and performance, growth rates and demand for its solutions. PDFs actual results could differ materially. You should refer to the section entitled risk factors on pages 10 through 18 of PDFs annual report on Form 10-K for the fiscal year ending December 30, 2008. 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. I'd now 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. I will begin this call with a brief summary of our results for the third quarter. This will also entail discussing the date of the economy as it affects the semiconductor industry industry and implications for our business. Then I will go over key strategic initiatives. In the third quarter we achieved revenue of $18.8 million, gained share of $5.4 million and non-GAAP EPS of $0.01 per share. Revenue was below the range we provided in July while gain share and earnings were within the targeted ranges. The disappointing revenue was due to delays in customer capacity expansion times that impacted our bookings.

As we look at our customers' production, utilization in their factories has gone from over 80% in Q2 to an anticipated 50% or below in Q4. The utilization levels we are seeing now are similar to the levels we experienced in 2002 and have us believing that the slowdown in high technology is more significant and widespread than originally thought. This presents short-term business challenges that weren't cautioned but at the same time presents us significant long-term opportunity that I will describe later. In the third quarter, we signed two new engagements while focusing on cost reduction. The first was a multinode, multimillion dollar engagement with an existing client for PD Bricks development and deployment targeted at the 32-nanometer node and below. This is a client who began a prove-out for PD Bricks last year. After seeing strong results, this client chose to expand their use of PD Bricks and brought in our relationship even further.

This engagement will have the impact of helping PDF drive PD Bricks to a wider client base. It also highlights how we're expanding our business from core yield ramps across the process life cycle and to design and manufacturing, with our Bricks and Yield Aware FDC offerings. I will further expand on the strategic impact of this business later in this discussion.

The second engagement was a smaller engagement to accelerate new introduction of advanced products for an asset light integrated device manufacturer. Again, this demonstrates success in our ability to move from traditional yield ramps into clients product engineering, based upon our unique ability to characterize their manufacturing processes, both internal and external.

While our revenues were disappointing in the third quarter, our non-GAAP earnings were within the range we provided. This is due to our focus on improving operational efficiencies. The reductions from Q4 2007 through Q3 of this year have enabled us to lower our quarterly expense run rate by approximately $5 million per quarter. Even with weak Q3 revenues, we generated cash from operations and achieved non-GAAP earnings. Our goal is to remove $1 million in expenses in Q4, when compared with Q3, and even more coming in the following quarters. With lower expense levels, we believe we'll be able to preserve cash while we weather this environment.

In terms of our revenue outlook for the fourth quarter, our gain share revenue will be lower, due to production volumes. In Q4, we also anticipate that customers will be conservative regarding their investments and capacity expansion. However, as in every downturn, we expect some clients to invest in new technology and advanced processes to create new products which will eventually drive demand. This is where we see our strategic opportunities. We will use this downturn to improve our position within our customer base and help them improve their businesses. Our key strategic customer and product initiatives center on the following.

First, drive improvement in yield ramps of next generation process technologies. In particular, we are investing in the deployment of our technology for logic manufacturers who compete in the foundry market. Second, widen our footprint by improving our customer's manufacturing efficiencies by utilizing our Yield Aware FDC technology. Third, position PD Bricks to be the keystone for new revenue opportunities when customer's volumes pick up. Fourth, leverage our success with early pilot projects to expand the use of our solutions in adjacent markets such as memory, solar and flat panel. These initiatives are important to ensure that our established business model, particularly at 65-nanometer and below, will provide greater gain share opportunities from a larger percentage of the industry's wafer production.

I would like to come back to a point I alluded to earlier. We know we are in a significant downturn in the chip industry. To a level that we have not seen since 2002. Our experience from the past two downturns tells us that the leading semiconductor companies will still invest to improve their manufacturing efficiencies and to develop leading edge technologies. We have deep and established relationships with many of those companies. As they look for new solutions in difficult times, our business model affords them key flexibility in that we align our benefits with theirs.

During this phase of the semiconductor cycle, we will focus our efforts on helping our clients solve their most critical problems, providing greater value during such tenuous periods should allow us to further solidify our relationships which will no doubt benefit us when the cycle turns upwards.

I would like to remind everyone that the past downturns have been critically important to the success of PDF Solutions. We established our game share model during the Asian flu in the late 1990s. During the next downturn in 2002 and 2003, we introduced new technology, such as our PD fab systems which provided greater value to our clients, enhanced our characterization of vehicle infrastructure and drove gain share to triple the size of revenues from the earlier contracts. From 2003 through Q3 of this year, we have generated over $80 million in gain share with more to come. We anticipate that our new technology, such as Yield Aware, FDC and Bricks, and our clients current business challenges will provide ample opportunities during this downturn to increase the value we deliver to our customers and strengthen our business for better economic conditions ahead.

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

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

Revenue for the third quarter ended September 30, 2008, totaled $18.8 million. A decrease of 11% and 22% when compared to last quarter and the third quarter of last year, respectively. These results were below the range we provided in our outlook press release in July. Compared to last quarter, and the third quarter of 2007, the decrease was the result of both a decrease in design of silicon yield solutions and gain share. However, gain share in the third quarter was $5.4 million and in the range provided in July. Design silicon yield solutions revenue totaled $13.3 million for the third quarter, a decrease of 14% from last quarter and a decrease of 23% from the comparable period last year. The bookings for the quarter were more modest than expected, and impacted our ability to achieve our revenue guidance.

We closed two new engagements, one with a significant PD Bricks engagement which is strategic to our, relative to our long-term objectives and the other was a smaller spry PD engagement, both with existing customers. During last quarter's conference call, we commented that we did not expect third quarter bookings at the same rate as the second quarter. The actual results were lower than expected, as the worldwide economy was in much worse shape than anyone thought it would be at this juncture.

During the third quarter, 13 service engagements from 11 customers each contributed $150,000 or greater in revenue. This represents a decrease of one engagement and one customer from last quarter. Gain share revenue for the third quarter as mentioned earlier totaled $5.4 million, a modest decrease of 4% from last quarter, a 20% decrease versus comparable period last year. Gain share revenue was generated from six customers and eight engagements, a net decrease of one engagement during the period.

Overall expenses from operations for the third quarter of 2008 excluding stock-based compensation expense, amortization of acquired technology and intangible assets totaled $18.7 million. A decrease of approximately $1.6 million or 8% from last quarter, and a decrease of approximately $2.6 million or 12% from the comparable period last year. The decreases from last quarter and the comparable period last year were primarily the result of planned cost control actions taken earlier in the year. We continue to focus on cost control, as we move forward during these challenging times.

Research and development expenses excluding stock-based compensation totaled $7.3 million for the third quarter, a decrease of approximately $1.1 million or 13% from last quarter, and a decrease of approximately $1.2 million or 14% from the third quarter of 2007. Both decreases were the result of cost cutting measures taken earlier in the year. Selling, general and administrative expenses, excluding stock-based compensation, were $4.7 million during the third quarter of 2008, a decrease of approximately $324,000 or 6% from last quarter and a decrease of $429,000 or 8% from the third quarter of 2007. Again, both decreases were the result of planned cost cutting measures.

As a reminder of 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 use a measure -- to measure its results using a non-GAAP measure of income, which includes stock-based compensation expense, amortization of acquired intangible assets, deferred tax asset valuation reserves and the related tax effects as applicable. As PDF's, investment in Lehman Brothers, this non-GAAP net income measure also now excludes the loss of on the sale of commercial paper from a bankrupt institution. Non-GAAP net income for the third quarter ended September 30, 2008, totaled approximately $192,000 or $0.01 per share. In the guidance provided in July. This compares with non-GAAP net income of approximately $774,000 or $0.03 per share during the second quarter of 2008, and non-GAAP net income of approximately $5.3 million or $0.19 per share for the comparable period last year.

Net income on a GAAP basis which includes stock-based compensation expense, the amortization of acquired technology and intangible assets, the loss from the sale of commercial paper from a bankrupt institution and a deferred tax asset valuation reserve on a GAAP basis reported a net loss of $12.2 million, or $0.44 per share. This net loss includes $1.7 million in stock-based compensation expense, $825,000 in amortization of acquired technology and intangible assets, a loss from the sale of commercial paper of Lehman Brothers of $444,000 and the establishment of a deferred tax asset valuation allowance of $9.5 million. The reserve against the value of PDFs deferred tax assets was driven by the uncertainty in the semiconductor industry and the resulting impact in the short-term outlook of PDF Solutions as well as PDF's ability to utilize its deferred tax assets in the near term.

Turning to our balance sheet, at September 30, cash including both short-term and long-term investments totaled $43 million, a decrease of approximately $1.5 million during the quarter. Additionally, our accounts receivable decreased $2.1 million to $33.4 million, and the collectability of our receivable 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 Q4 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 introduction, client products, and demand for PDFs design and silicon yield solution. PDFs 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.

For the fourth quarter of 2008 we reiterate the guidance we provided in our outlook press release earlier today. Total revenue is expected in the range of 16 million to $17.5 million. Gain share revenue in the fourth quarter is expected to be in the range of 3 million to $3.8 million. The decrease in gain share is primarily due to decreased wafer production. Since many of our gain share contracts are with the world's leading semiconductor companies, we expect that gain share will improve when volumes recover.

Non-GAAP net loss per share for the quarter is expected to be the range of $0.05 per share to break-even, including a normalized estimated annual tax rate of 0%. During the month of September and October, the rapid deterioration in the memory market has spread to the broader overall semiconductor industry. Some of the steps we took during the first part of 2008 to reduce our costs have buffered us from the greatest negative impact of the downturn. Along with this cost reduction, our strong balance sheet, and deep customer relationships helped us weather the early stages of this downturn. However, the magnitude and duration of this downturn are now making it necessary to further improve our efficiencies and cut additional costs.

As a result we are projecting a fourth quarter restructuring charge of approximately $1.5 million. At that point, we anticipate our expense rate for Q4 to be approximately $17.6 million, excluding the aforementioned restructuring charge. Over the next few quarters, we anticipate reducing our quarterly expense run rate even further. Our goal is to preserve our cash in the event that the downturn is more protracted. We also anticipate maintaining non-GAAP earnings at or above break-even as this downturn continues into 2009. We are the leader in our field with a strong balance sheet and a broad product portfolio with clients who value our technology solutions. As John discussed, we intend to use the downturn to expand our market position to financially benefit when the industry turns around. 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) Please wait one moment for our first question. Our first question comes from the line of Matt Petkun with D.A. Davidson and Company.

Hi. Good afternoon. I was just hoping to get a little bit more of a sense in the solutions business, why there was a shortfall? I would think that that would be one of your more visible areas of business. Were you expecting or needing to win a specific engagement to hit your numbers for this quarter and/or was there some sort of cancellation of a previous deal?

Well, I'll start off the questioning. John can add a little bit more color. There was not one particular deal. There was a couple things that we saw being pushed out as people tightened up their belts from a spending perspective. But as John mentioned in his call, those who are moving forward and advancing, they are continuing to do so, but the difficulties that we see in the industry were not only isolated to us but to our customer base as well.

I'll take a different stand from a customer perspective, Matt. We saw one of our larger FDC deployment customers who had planned a 40-nanometer roll-out. Our target in that quarter, push out that factory capacity expansion. I think that's somewhat the same reason we believe the 40-nanometer roll-out will be slower as the leading foundries are definitely suffering with their capacity at that node. We saw that having a pretty significant impact in the quarter. We also saw some of the solution business with some of the customers delay our push out. In general, those were all deals associated with them expanding our process into an adjacent factory or expanding into incremental capacity for an existing node. We saw that mostly dry up. I think the one thing that I'm pretty convinced about, when you look at the logic 40-nanometer node, the leading foundries I think are struggling quite a bit with that node. Their capacity at that node is I think potentially lower than they anticipated. That is why I think we're seeing the increased activity on 32-nanometer especially with the high K metal gate and we think that we basically very cautious on all of the volume estimates we got from customers coming out over those next subsequent quarters as we don't believe the volumes will materialize.

Okay. And so when we look towards the end markets, what types of things -- I mean, obviously the industry needs to go through some measure of consolidation as well as a real rebound in demand. What are you looking towards to see potentially higher solutions business next year?

I think that's a good question, Matt. From a solutions business, from a new yield ramps and new Yield Aware FDC, et cetera, we'll see two basic drivers that we think are going to affect that. One is the 32-nanometer early roll-out, like we signed in the beginning part of this year. We know of a number of licensees of that technology all of whom are going to start rolling that out in 2009, for tape outs in 2010. We expect that to drive some of our business. The other part that we expect, and we see that already now and have a lot of discussions with the customers is the cost effectiveness of 90, 65 and 40 is still difficult for these folks. We have gotten a lot of traction in our pilot with Yield Aware FDC. This is the comment I was trying to make in my closing remarks in my script.

We find a lot of interest in the customers in their Yield Aware FDC technology. We know that they're in a downturn. We know we can use this to enhance the total value of our contracts. We are not anticipating in that greatly impacting our short-term revenues but we do believe that will greatly impact our long-term revenues as we go through 2009 and beyond as we increase the total value by increasing the number of wafers we get paid on, the length of time that we get paid on them and the dollar we make per wafer, as well as improving the fixed fees that we capitalize on. So those would be the two drivers for our solutions piece of the business.

One more quick question, then I'll hop back in the queue. You referenced this 32-nanometer process technology and a number of new licensees. There was one high profile microprocessor company that announced they would be moving to I believe that process technology. Is there a chance that you guys might be able to interact with them?

Yes, that's a good question, Matt. Of course we are always careful about speculating about customers. But when you look across the logic partnerships, we probably have very good share and all the people that are looking to use those processes on a foundry basis, most I think, if not all of the ones that use those processes for a foundry basis are licensees of PDF technology at the 40-nanometer node and below and we anticipate that we would have a very good value proposition for someone embarking on, beginning their business on a foundry basis.

Okay. Thank you.

Your next question comes from the line of Mahesh Sanganeria with RBC Capital Markets.

Hi, guys. This is Casey calling in for Mahesh. Couple of quick questions. And you may have answered this earlier. On PD Bricks, is this the largest contract which you guys have signed up for PD Bricks?

By far, yes.

And it's not the first contract; right?

It is not the first contract. It is the first contract that has customers really adopting it more broadly.

Casey, we approximately had about three PD Bricks agreements in the past but as John said the order of magnitude, this one is much greater. We integrated into a full yield ramp that we signed last year that we had also a stand-alone project.

Okay. It's interesting that you guys don't have any new traditional IRR contracts this quarter. Does that tell us something? Both the new contract you have, quote unquote non traditional, but I don't see a traditional fab-based contract.

Yes, so that's a good question, Casey. So we talked about this for about the last four quarters, since AA last year. That we saw the problem of driving down cost and driving out adoption in new nodes as one that's migrating. So in the past the customer would bring up the new node, bring on the defect density and the volumes of that node would come because the cost effectiveness of the newer node that's a 130-nanometer in comparison to 180-nanometer was so great that you would see customers move to that node.

What we've seen for the 65, 40 and we expect for 32-nanometer as well that you can bring up the node and that's not enough to attract the wafer volumes. The customers, or the manufacturers need to address the customer's designed silicon cost, their cost of getting the design into the node. That's already driven the PD Bricks technology. And they have to basically continually try to drive efficiencies in their factories because the bring-up of the node really isn't enough. The other FDC is quite important. So of course, this makes both challenges and opportunities in our business. But we chose to do this and say okay, we need to invest in our Yield Aware FDC, that's why we made that investment in 2006 and 2007, drove up some of our costs during that time period. And we need to invest in the Bricks technology. What that does for us is it drives much more revenue out of the node than we had in the past and a much longer time period that we can collect money off that node. Including incrementally providing opportunities for us to provide, scribe technology and production control technology for nodes that we've long again -- long since ramped, like one of the engagements this quarter was for a 90-nanometer engagement. Of course, 90-nanometer from a reveal ramp standpoint, I don't think we've done substantially any work in yield ramps for quite some time, the bulk of our ramps in 90 finished in 2005, maybe 2006.

Okay.

What we really try to do is use this as an opportunity to increase the number of times we can monetize a node because we do have to anticipate that the length of time between nodes is longer as these challenges become bigger so we need to get more money out of a node.

Can I sort of conclude from what you're saying that the lack of interest in right now is an indication that not too many new end customers are moving to 40, 45 node?

No, we -- I think what we will see as we go through 2009 is just like we saw in the 90-nanometer node. We'll sign up a lot of those customers within a very small window, where they will all pretty much sign up over a small number of quarters. We anticipate that at the 40 and the 32-nanometer nodes, primarily 32 where we think the opportunity will be substantial with the movement from polysilicon from monoxide to high K metal gates and the opportunity for volumes I think that that will bring.

Okay. If by some strange miracle we're able to see an upturn in let's say two quarters, how far away is the broader customer base outside of the top two customers starting the -- in adopting 32-nanometer? I mean, besides the IBMs, for the next level of customers, how many years out is the adoption of 32 so that you folks can see business?

Yes, so let's make sure we're clear. We have a number of 45-nanometer contracts under way, under deployment. We expect those to contribute gain share as we expect 65-nanometer contracts to contribute gain share in 2009 and '10 and beyond. We expect 32-nanometers as a deployment of characterization vehicles to begin the 2009 because those companies will want to be able to take prototypes in 2009 and 2010 and ship volumes in 2011 and 2012. So from our solutions business standpoint, we will see an increasing amount of business off 32-nanometer in 2009. Almost -- that will happen as people make technology buys even in the middle of a downturn that would still happen. And we would expect that out of a lot of the licensees of people like IBM licensees as well as series of others.

And my last question, the falloff in the gain share, can you go into a bit of detail as to any specific end markets or customer type that that seems to show the most falloff?

Yes, really have to be careful, speaking about our specific customers. In general when we got -- we looked at the wafer volumes coming or predictions or forecasts coming from our customers for the month of September, October, November, December, January. What we saw was a continuous decrease in their volumes and relatively broad-based in terms of the end markets that were served. When we talked -- I made my trips to Asia in the early part of October and talked with the consumer electronics companies as well as the folks who have insight about even the largest foundries, we saw the utilizations forecasted for Q4 to be below the Q3 utilizations which were below the Q3 utilizations and it was relatively broad-based in terms of the utilization forecasts.

One of the consumer electronics companies told me they generally see the second half of the year between 55 and 60% of their revenue in the first half, 40 to 45 and they said this year it's almost exactly the inverse. So it's been a relatively broad base. I think when you look at the foundry reports that will come out this week from Charter, TS&C and UMC, you'll probably get an insight about specific end markets. From what we can see so far it's relatively broad with things touching the consumer having the most exposure.

Okay. Thank you, folks.

Your next question is from the line of [Gary Shingro] with JPMorgan.

In your comments, John, early on you mentioned that PD Bricks, this particular deal should drive a broader client base or something to that extent. Could you elaborate on that?

Yes, we're going to make more press announcements about this later, Gary, but the accounts with (inaudible) is a flagship account that will provide for us also under this agreement, marketing and support to get out to a larger established customer base as well as an asset light customer base which will create incremental revenue opportunities from this deployment.

Got it. And your fourth quarter guidance for DSY solution, is that based on keeping current contracts and no contracts rolling off or adding a couple contracts?

So there's a range there that we provided and we anticipate what is relatively modest traction in this quarter.

And we anticipate one contract rolling off, be it the revenue contribution it was not that significant.

So if that one contract rolls off, and that was pretty light, I mean, that shouldn't have material effect.

If you look at the actual Q3 numbers, it was roughly, what, 18.8, the middle of our gain share range is about $2 million under our existing, our Q3 gain share. So if you take $2 million off 18.8 you're at 16.8. If you take the range we provided, that's roughly the middle.

You lost me. I was looking at it as you've got the 13.3 of DSY from third quarter and fourth quarter is about the same number?

Fundamentally.

Right. Okay. Got it. And with the hit your stock is continually taking, you're trading not a lot above your networking capital. Any more aggressive thoughts on what to do?

Well, we do plan to be in the market and being active. I think that goes without saying. And then we're weighing different things. But in terms of the stock price being where it's at, our ability to maintain and grow our cash, we need to be active in the market to take advantage of this situation.

Got it. And then can you remind me what you paid for PD Bricks when you bought that?

PD Bricks I believe was about $4 million.

No, 6.

$6 million.

Got it. Great. Thanks.

Your next question comes from the line of [Joe Ostler] with OFI.

Can you just -- I'm curious on the PD Bricks, the deal that you just signed. Can you talk about, is this going to be paid -- I guess how did it change the gain share percentage or your expected fee per wafer on this deal? And then also, when you talked about getting into a marketing agreement with this, with someone to do this going forward with other people, is this more of an ARM model where you will sell a certain license to the fabless and then the foundries will be the one that pay the fee?

Yes. So I think we have to be really careful about how much we talk about. I think it's probably better if we wait until we can kind of get it in a clear and concise fashion in a press release.

Okay.

What we are -- what we believe is that the -- this addresses both the manufacture's challenges and problems as well as product teams, both of whom are monetization opportunities for us.

Is it something--?

This is addresses the first half for one of the factories, but not that same technology and any licensee of the process technology, nor any of the design companies using the internal production or the factories outside of this initial factory.

What kind of or how fast will the others follow in your mind?

Well, it's a good question, John. And generally IP technology takes a while for customers to adopt. I think that because it's attached to 32-nanometers which has high K metal gate and I believe that's truly a game changer for the logic business for a number of significant reasons, like really evident to 40-nanometer ramp now, I think quite clear. We expect an awful lot of fabless company interest in shuttles in 2009 and we will use those shuttles in 2009 to highlight the advantage of Bricks.

Okay. And then also when you were talking about 2009 you said that the 32 million or the 32-nanometer program starting up in '09, then you said something about Yield Aware FDC, maybe not contributing to revenue but being in solutions business? I'm not exactly sure.

Sorry for being so confusing. At 45 and 65-nanometer, there are Yield Aware FDC opportunities today that we are addressing. When we model 2009, we said okay, they may not have a significant impact in the early part of the year because the customers are in significant capacity issues. However, we know we've used these opportunities like 2002 and 2003 in the past to structure really good contracts that then generate an awful lot of revenue off them. As the volumes come back, even though all they will contribute in the short term may be incremental fixed fees and we'll do the same.

Okay. And then also I think you had a significant data power sale earlier in the year that was supposed to ramp throughout the fourth quarter. Is that still on track?

Yes, we're still on track.

And is there any follow-on with that extending to other (inaudible)?

We expect that and we are, as we get through this quarter I think we'll have better visibility as to the timing.

Okay. Great. Thank you.

You do have a follow-up question from the line of Matt Petkun with D.A. Davidson.

Hi, John. Maybe can you update us with your strategy, more specifically on the memory markets and obviously there's a lot of consolidation going on there. Maybe is there an opportunity for you to restructure in your memory offerings or just update us with that market.

Yes, thank you, Matt. Yes, we are -- we believe that -- as we learned a lot about the memory market, we believe pretty strongly that our Yield Aware FDC solution is an important technology. We also see the memory customers going through a number of significant product transitions. Almost all of the memory markets whether it's NAND or DRAM is making a transition in terms of the memory structure that they're going through. If you looked at even SanDisk, they actually talk a lot about 3D memory, they're all doing something. This is providing a new opportunity for characterization technology. So we are really going back and sitting down with the customers and really going back to the top tier customers, especially those who have both memory and logic and we may already be in their logic businesses, and showing them what technology we can deliver there and looking at how we can structure contracts, again taking advantage of the gain share type concept to drive more of the business as their wafer volumes pick up and their new nodes get adopted. So we are really targeting the very leading edge guys, the top tier guys. Really not focusing as much on some of the followers at this point and really looking at the yield aware FDC as the kind of the solution to drive value for them.

Okay. And then just finally, could you break out roughly, if you look at your gain shares today, what percentage of the gain shares are coming from 45-nanometers, if any?

I believe actually 45 isn't contributing anything.

Okay. That's what I would have assumed. And so as we go through this next downturn, and if we see a real acceleration in perhaps 45-nanometer production, do you feel like you have the wins that are necessary for you to maintain the gain share levels or are we really waiting for 32-nanometers to pick back up?

Good point. I'm glad you asked that because I think I was kind of muddled in my response earlier. Gain share will go up in 2009 if wafer volumes of 65 and 45 go up. And we won substantial accounts in those nodes that we know are winning tape-outs and those tape-outs don't have a lot of volume. So we know over time those volumes are going to come back up and that gain share is going to come back up. We do not need 32-nanometer to improve the gain share line from where it is. We just need the wafer volumes to come up at 65 and 40, 45.

So if there's any hole in your business pipeline so-to-speak, it's maybe more that associated risk what the customers are doing from a development standpoint at 45 and that there's more opportunity for you on the solutions side at 32?

Yes. Yes. But from a gain share standpoint, we won significant wafer volumes already. I mean, substantial, factories that represent very substantial wafer volumes and we need them to take these tape-outs that they're winning and convert them to volume orders and the gain share will improve itself. In 2004, '5 and '6 and '7 it basically improved itself. Right?

Right.

That was all stuff that we had won -- a lot of it stuff we had won earlier than that. It just basically improves itself. There's nothing we can do. We need to let that just kind of simmer and improve. What we can do right now is use the Yield Aware stuff to increase and enhance that opportunity and then use the 32-nanometer solution to make sure we build out an even bigger business.

Fantastic. Thank you.

Thanks.

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

Thank you for joining our conference call. Good bye.

This concludes today's conference call. You may now disconnect.