PDF Solutions Inc (PDFS) 2008 Q4 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 fourth fiscal quarter ended Wednesday, December 31st, 2008. (Operator Instructions). 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, (inaudible). PDF's actual results could differ materially. You should refer to the section entitled "Risk Factors" on pages 10-18 of PDF's annual report on Form 10-K for the fiscal year ended December 31st, 2007 and similar disclosures in subsequent SEC filings. The forward-looking statements and risks stated in this conference call are based on information available to PDF today. PDF assumes no obligation to update them. Now, I'd like to introduce John Kibarian, PDF's President and Chief Executive Officer, and Keith Jones, PDF's Chief Financial Officer.

Mr. Kibarian, please go ahead.

Thank you, and welcome everyone. I will begin this call with a summary of our results for the fourth quarter and for the total year. Then, I will discuss our perspective on the environment and its impact on PDF Solutions. Lastly, I will review the progress made in our key strategic initiatives during 2008.

In the fourth quarter of 2008, we achieved revenue of $13.8 million and a non-GAAP loss of $0.14 per share. For the fiscal year, we achieved revenue of $74 million and a non-GAAP net loss of $0.12 per share. At this point, it is no surprise for me to say that Q4 proved to be a difficult quarter with regards to both bookings and client production volumes. We continue to be recognized by our clients as having unequaled technologies and capabilities and our clients acknowledge the return on investment of our engagements. However, in this uncertain environment, they continue to be exceedingly cautious about any new investments. As a result, no new Gain share engagements were closed in the quarter.

Nonetheless, in Q4, we did successfully close the following three contracts: An extension to an existing 45-nanometer engagement with a leading foundry; a deployment of a fault detection and classification software at a large foundry; and a deployment of Yield Management software for a large wireless fabless company. In Q4, Gain share revenue was $2.5 million.

Production volumes have been declining across our entire customer base and utilization rates are now significantly lower than those we experienced in the last downturn. Unfortunately, we do not believe we see a near-term change in our client's spending behavior or their production volumes. While the downturn has led to disappointing financial results in 2008, we were able to make good progress in several areas of strategic importance.

First, we have significantly diversified our business model beyond yield ramps to address the entire process life cycle, and by doing so we have broadened our addressable market. With solutions that address the entire process lifecycle, we have been able to increase our revenue per process node by providing more technology and driving longer term Gain share contracts. Our Yield Aware FDC solution addresses our client's most critical issues in the fab without deploying traditional capital intensive process control methodologies. This allows customers to drive significant operational efficiencies with a much lower level of investment.

In 2008, customers moved from pilots and initial engagements to more comprehensive engagements. PD Bricks addresses the design for manufacturing challenges of nodes at 32-nanometer and below. In 2008, we completed a significant pilot program and converted to an engagement which will deploy this technology.

Second, we continue to establish significant alliances that will allow -- will leverage our market penetration strategy. As we have described in the past, one of our go-to market strategies has been to leverage relationships with process licensors to reach their licensee fabs. Engaging with licensee fabs, in turn, leads to engagement opportunities with their fabless customers. As more IBMs in the industry transition to an asset light or fabless business model, we believe this strategy will pay significant dividends to PDF and we will expand it.

Third, we validated our hypothesis that our process control solutions are relevant to manufacturers in adjacent markets, namely solar, LCD and LED. In 2008, we entered in a number of discussions and pilot engagements with manufacturers of these products. We plan to further develop this opportunity in 2009, to again increase our total addressable market in what are projected to be high growth segments. Our investments in these three strategic areas, solutions for the semiconductor process lifecycle, increasing go-to market leverage, and expanding into new markets, position us for growth in the future.

In 2009, we will invest in these projects. If we invest in projects that implement these strategies, focus on parts of the environment we can control, and continue our commitment to drive value in every client engagement. We have been and will continue to be prudent in managing our expenses and drive efficiencies throughout our organization. We exited 2008 with our quarterly non-GAAP expense run rate approximately $6 million lower than Q4 2007. In Q4, we instituted further cost reduction programs, the benefits of which we will realize during 2008.

Lastly, we continue to maintain a healthy balance sheet and there is strong residual value in contracts that will contribute to Gain share over the the next few years. Coupling this with our strong client relationships, we believe we are well-positioned to drive new business when the market begins to turn. Given the murky nature of the present business environment, we will not provide guidance for this quarter. We will focus on improving our cost structure, as well as building strong, long-term business with our clients. Thank you for your time and attention.

Now, I'll turn the call over to Keith, who will discuss in detail our financial results for the fourth quarter and fiscal 2008. Keith?

Thank you, John. And good afternoon to everyone. As a reminder of the statement 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 measures, which exclude stock-based compensation expense, amortization of acquired intangible assets, restructuring charges, impairment charges on goodwill and certain intangible assets and their related tax effects as applicable. The press release contains a reconciliation of such measures to the most directly comparable GAAP measures and you may access the press release in the "Investor" section of our website located at www.pdf.com.

Revenue for the fourth quarter ended December 31st, 2008 totaled $13.8 million, a decrease of 26% and 44% when compared to the prior quarter and the fourth quarter of last year respectively. These results were within the range we provided in our updated Q4 outlook press release on January 14th, but below the guidance we provided on October 28. As compared to the last quarter, and the fourth quarter of 2007, the decrease was the result of both decreases in design-to-silicon- yield solutions and Gain share as our clients reacted sharply to the downturn by reducing their CapEx spend rate and decreasing production volumes. All aspects of our business have been negatively impacted by the worldwide economic downturn.

Design-to-silicon-yield solutions revenue totaled $11.3 million for the fourth quarter, a decrease of 15% from the prior quarter and a decrease of 37% from the comparable period last year. The bookings for the quarter were significantly below expectations and were the primary reason we were unable to achieve our original revenue guidance. During the fourth quarter, 11 service engagements from nine customers each contributed $150,000 or greater in revenue. This represents a decrease of two engagements and two customers from the prior quarter.

Gain share revenue for the fourth quarter totaled $2.5 million, a decrease of 53% from the prior quarter and a decrease of 61% from the comparable period last year. Gain share revenue was generated from six customers and seven engagements, a net decrease of one engagement and one customer during the period. Overall expenses from operations for the fourth quarter of 2008, excluding stock-based compensation expense, amortization of acquired technology and intangible assets, impairment of goodwill and intangible assets, and restructuring charges totaled $17.5 million, a decrease of approximately $1.2 million or 6% from the last quarter, and a decrease of approximately $5.7 million or 25% from the comparable period last year.

The decreases from the prior quarter and the comparable period last year were primarily the result of planned cost control actions implemented earlier in 2008. Like most companies, we will continue to focus on cost control during these challenging times. Margins from the fourth quarter were primarily the result of lower Gain share contributions due to lower production volumes at our customer sites.

Research and Development expenses, excluding stock-based compensation, totaled $7.4 million for the fourth quarter, an increase of approximately $96,000 or 1% from the last quarter, and a decrease of approximately $1.6 million or 18% from the fourth quarter of 2007. The increase from the prior quarter was primarily the result of the additional personnel associated with our asset purchase of Triant's FDC business in the quarter, as well as a shift from our client service personnel onto development projects and a one-time personnel related charge. The decrease from last year was due to cost cutting measures.

Selling, general and administrative expenses, excluding stock-based compensation, were $3.7 million during the fourth quarter of 2008, a decrease of approximately $975,000, or 21% from last quarter, and a decrease of $1.8 million or 33% from the fourth quarter of 2007. Both decreases were the result of planned cost cutting measures. Non-GAAP net loss for the fourth quarter ended December 31st, 2008 totaled $3.8 million, or $0.14 per share, below the range we provided on our call in October, due to the shortfall in revenue, more than offsetting our cost control initiatives. This compares with non-GAAP net income of approximately $192,000, or $0.01 per share, during the third quarter of 2008 and non-GAAP net income of approximately $5.8 million or $0.21 per share for the comparable period last year.

On a GAAP basis, net loss for the quarter was $79.1 million, or $2.92 per share. This net loss included $1.8 million in stock-based compensation expense, $1 million in amortization of acquired technology and intangible assets, a restructuring charge of $1.9 million, and an impairment charge of $70.3 million on our goodwill and other intangible assets due to the continued decline in our Company's stock price.

Turning to our balance sheet at December 31st, cash, including both short-term and long-term investments, totaled $41.5 million, a decrease of approximately $1.5 million during the quarter. Our accounts receivable decreased $8.4 million to $25 million and the collectability of our receivables remains healthy. During the quarter, we repurchased 1.7 million shares of our own stock on the open market at a cost of $3.8 million and utilized $1.6 million to close our asset purchase of Triant's FDC business.

As previously stated, our customer spending contracted significantly during the fourth quarter due to the accelerated weakness in the semiconductor market. Our clients' limited visibility into their own business impairs our ability to provide guidance at this time. Consistent with John's earlier remarks, we will focus on areas that are within our control. Cost and cash management are within our control. Our goal is to continue to preserve cash and lower our break-even point as we manage our way through this economic downturn. With that, I'd like to turn the call back over to the operator for questions.

Thank you, Mr. Jones. (Operator Instructions). Our first question comes from Matt Petkun, DA Davidson.

Hi, good afternoon. John, it's obviously a tough environment. Would it be safe to say as we're modeling that your Gain share numbers should be roughly down maybe 35%, consistent with what we're hearing about -- out of the foundries about wafer starts, or are there any potential positive or negative offsets to that number?

We're not giving a number out. I think that looking at the general market and basing a trend for us is a reasonable place to start, Matt.

Okay. And with that in mind, Keith commented that the goal here now is to preserve cash. Can you guys share what you would like to see as a cash break-even number from a revenue perspective?

Well, I think overall, our goal for -- as we finish 2009 is to basically end the cash in the same position that we are today. But give or take some volatility within that. But overall, picking that revenue number is -- and part of the reason why we didn't provide guidance, due to kind of the murkiness in the business in terms of our customers and their related customers.

Okay. And then Keith, I missed the number, you gave the number of active engagements in the quarter were how many?

Yes, Matt. So we said we had 11 customers contributing $150,000 or more. I'm sorry, 11 engagements from nine customers.

From 9 customers?

Yes, and we had seven Gain share contracts from six customers.

Okay. And when you look at that and obviously if you're serving fewer customers right now, I guess I'm wondering how you can control expenses. The operating margin expense reductions have been somewhat obvious and I think things are headed in the right direction there. But on the gross margin side, I'm wondering how, with the solutions business down, how you can manage margin there?

Well, what we're doing is we're taking a look at our revenue and our outlook and we're looking at the appropriate staffing levels that we need to achieve that planned revenue and then in addition to that, Matt, we've also taken actions in other places, in particular where we have -- we've taken action in the past, as you know, this is the second quarter where we incurred a restructuring charge in 2008. We also wrote off some excess facilities that helps alleviate some of our spend rate, so there's various things that we can do that we look across the board, but also as you kind of point out, we do look very closely at our staffing levels.

Okay. Two other questions from me. John, any update on the progress of the dataPower deal that you guys signed at the beginning of the year?

Yes. We're not at liberty, of course, to say who it's with. We continue to deploy there and R&D facilities and we expect, depending on their timing of bringing out across their manufacturing facilities, to see further deployments in the future. We're, of course, cautious on that because we believe people will go back and relook at timing on the deployment of their next generation nodes. They seem to be making progress on that, at least that's what we understand, but having not talked to them in the last four weeks, we'll wait until we talk to them again.

I don't know who the customer is, but it seems like somebody you should talk to more often than every four weeks. I'm teasing. The other question, John, is kind of from a macro perspective, maybe I should ask this question first. What's left in your revenues from Memory? In Q4?

Very little left in Memory at this point. Our customers in memory have generally been technology creators, located in the US and in Japan. We are -- we still get revenues from them. It's very small. But frankly, we are very skeptical about and have taken it out of our plan entirely almost for 2009.

Okay. And then finally, you sort of spoke to this a little bit when you said that one of the things you're going to work on this year is go-to market leverage, but what do you expect, how does consolidation, the likely consolidation that we see this year impact your model overall?

Yes, it's a very good question, Matt. We have a very efficient way of reaching customers in terms of the amount of revenue we get out of an engagement, especially when we deliver a technology, Characterization Vehicle and infrastructure. The less we have to go and tweak or adjust out for additional customers, the more efficient we can be. What we've seen happen in this cycle, of course, is further partnerships and alliances on the leading edge and we engaged earlier with some of the key licensors on their technology development, which we are going to then use to drive efficiency in the way we roll out our 32-nanometer solution.

I think it's part of the way we'll see an improvement in our COGS in the future because our cost to bring up incremental 32-nanometer customers I believe will be more efficient or gotten at in a more efficient manner. When you kind of go back and look at the FDC, when we had this past quarter, our 32-nanometer engagements during the year of 2008, our Yield Management software solutions, our 45-nanometer Yield Ramp engagement that we signed I think in Q2 of this past year, if you were to make a list of the companies you believe that are going to be standing in this industry when this downturn ends and come out stronger and you look at that list of customers, it's pretty much a one to one, Matt, and we're going to continue to focus on them.

We don't have -- we hadn't gone out and served a lot of companies that were off the top tier list. So we're not too exposed to that part of the market. I know a lot of equipment companies have exposure on Memory manufacturers in Taiwan that are having inability to pay. We really aren't exposed to that in this situation. So, frankly, we're going to keep on expanding on working with the leaders and then following them out to their licensees and partner fabs.

Okay. Thank you so much. Good update.

Thank you.

Our next question will come from from (inaudible) RBC Capital Markets.

Hi, guys. Thanks for taking my question. Do you guys anticipate multiple quarters of slow spending by your IDM and foundry customers?

So [Casey], this is John. I was pretty -- as you know, I travel quite a bit and I saw behavior in November, sentiment in November, sentiment in December, sentiment in January and I was visiting customers multiple times in January. I was surprised to see the change in their expectation on their business. I think some of the consumer electronics companies seemed to think that they were going to see improvement in Q2 of this year. I think especially in Japan, they might have been whittling down inventories as you went to the end of their 2008 fiscal year, which is March 30th.

Where some of them might think think they're going to see improvements in the second quarter, a replenishment at some level. Obviously they told us that earlier. I don't know that we believe that at this point. We don't believe that any of the advice or guidance we get out of the customers about the strength of their business is spoken from a position of accurate information. So we've discounted pretty much everything at this point until we see actual demonstrated change.

Okay. Would it be fair to, at this point in time, a lot of your fab customers really have no visibility as to what to expect in terms of Q2 wafer starts?

Yes, that's -- Casey, yes, when I met with a number of the consumer electronics guys in December, they would say to us, look, we know we're going to dwindle down inventories, especially the ones in Japan, as we go through Q1. Our order levels are very low. The car manufacturers aren't ordering anything anyway, but once we get into the new fiscal year we expect order levels to return and their fiscal year for Japan is typically April 1. And frankly, I thought, I felt that they were telling that to us with less conviction.

As we got into January and to the point where if one said it and the others didn't, I just -- I think we believed that their data was less up-to-date than their peers. So at this point we don't know that any accurate -- any of our customers have an accurate estimate of what Q2 is going to be like. Hence, we stopped trying to predict it ourselves.

Okay. I mean, that is interesting because that seems to be at odds with the expectation I think based on the market that which would see an upturn in starts in Q2.

Yes, and customers tell us, some customers tell us that. And we'll wait to see that.

Okay. So in terms of modeling, I mean, what parameters do you expect us to follow in setting topline estimates?

Well, from a revenue standpoint, we're very cautious so we're not obviously trying to predict any significant growth. And over time, you'll see us -- the initiatives that we've taken already and some more initiatives that we'll take, you'll see that the spending rate will be very commensurate with the revenue rate, so that we end the year basically at a break-even standpoint. But we're very conservative about any type of revenue growth, so I think it would be prudent to be conservative as well on your end.

But in terms of giving any type of direct number, as John says, just because of the lack of visibility, we're at this point in time, didn't really didn't want to give any guidance on that. We have our own internal numbers but those could swing pretty wildly depending on how things turn around and how some of those statements that our customers make in terms of the overall health of their business comes to fruition.

Okay. If you folks are looking at a couple of quarters of sub par topline, can we expect further (inaudible) in the near term?

So, as Keith said, with a very pessimistic outlook over the year, we do strive to drive our OpEx to the point where as we get to the end of this year, we are cash flow neutral. We want to end our cash balance close to where we began this year.

Okay. All right, guys. Thanks a lot.

(Operator Instructions). At this time, there are no more questions. Ladies and gentlemen, this concludes the program. Thank you.