PDF Solutions Inc (PDFS) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to PDF Solutions' Inc. conference call to discuss its financial results for the first fiscal quarter ended Tuesday, March 31, 2009. 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 performances, 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 10 through 18 of PDF's annual report on Form 10-K for the fiscal year ended December 31, 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.

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 first quarter. Then, I will discuss our perspective on the environment and its impact on PDF Solutions. Lastly, I will discuss our focus for the second quarter.

As we expected, the first quarter of 2009 proved difficult for new sales bookings. We achieved revenue of $10.2 million, and a non-GAAP net loss of $0.20 per share. Gain share revenue was $2.4 million, down slightly from the fourth quarter of last year. While we did not find any new engagements during the quarter, we did continue to gain traction with customers and build high leveraged relationships with key partners. We signed an extension to an existing 45-nanometer engagement with a leading foundry. We announced a joint development program with IBM for 32-nanometer, 28-nanometer and 22-nanometer design IP platform built on our pdBRIX technology. This agreement is an affirmation of our technical direction of our pdBRIX investment. Moreover, with the silicon results from this collaboration, we plan to demonstrate to foundry customers the advantages of this solution on the high-k metal gate process.

As we announced earlier today, we entered into a joint development program with Samsung, to build new online control applications to use with our Yield Aware FDC process control solution. This represents an important milestone in driving worldwide adoption of our Yield Aware FDC as Samsung's leadership in manufacturing can be influential on driving future sales. The endorsement and partnerships with IBM and Samsung highlight that industry leaders recognize the advantages of our new solution. We focused internally during the quarter to improve our cost structure, to preserve our strong balance sheet, and to align our development resources with our key long-term growth areas. We decreased our non-GAAP costs from Q4 to Q1 by $2.2 million or quarter-over-quarter decline of 12%. We put in place a plan to decrease our cost further over the remainder of the year. As a result of our past efforts, and strong collections, we ended the quarter with approximately $40 million in cash on the balance sheet.

Overall, we believe the environment improved somewhat towards the end of the quarter. Although production volumes had been declining across our entire customer base during the second half of 2008 and the first few months of 2009, we did notice an improvement in volumes towards the end of Q1. Additionally, we have seen an upturn in our client's wafer volume estimates for production March through June. These estimates are also confirmed by the widely reported wafer volume trends reported in the industry publications.

Notwithstanding recent positive reports, we feel that manufacturers are still unsure of the outlook beyond the near term. As a result, we believe clients will continue to be cautious in their spending. While we may see a short-term increase in wafer volumes, we are still cautious and our outlook has not changed.

As a result of our assessment of the environment, we will not provide public guidance for our revenues or earnings for the second quarter of 2009. We will say that we anticipate further expense reductions in the second quarter of 2009, resulting from the actions we took in Q1. Our focus for Q2 will be continuing our investment in process control solution, Yield Aware FDC for the logic, memory and solar manufacturers, refining our yield ramp solution for 32-nanometer and 28-nanometer high-k and metal gate process. Demonstrating the benefits of our pdBRIX technology based on our joint development with IBM. And continuing to drive adoption of our expanded solutions, laying the groundwork for future gain share. We believe we are making beneficial cost structure, technology and client investment decisions for the long-term health and growth of PDF Solutions. 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 first quarter. Keith?

Thank you, John and good afternoon to everyone. As a reminder, the statement made in our press release, in addition to using GAAP results and evaluating PDF's business, management also believes it is useful to measure its results using non-GAAP measures which exclude stock-based compensation expense, amortization of acquired intangible assets, restructuring charges and the 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 first quarter ended March 31, 2009, totaled $10.2 million, a decrease of 26% and 50% when compared to the last quarter and the first quarter of last year respectively. As compared to the last quarter and the first quarter of 2008, the decrease was a result of both a decrease in design to silicon yield solutions and gain share as our customers during this downturn continue to show significantly reduced CapEx spending for new projects and reduced production volumes in anticipation of lower consumer demand. All aspects of our business have been negatively impacted by the worldwide economic downturn.

Design to silicon yield solutions totaled $7.8 million for the first quarter, a decrease of 31% from the prior quarter and a decrease of 48% from the comparable period last year. Once again, our bookings and revenues were negatively affected by the severe market conditions facing the semiconductor industry. During the period, we signed one extension with an existing logic yield ramp engagement.

During the first quarter, ten service engagements from eight customers each contributed $150,000 or greater in revenue. This represents a decrease of one engagement and one customer during the period. Gain share revenue for the first quarter totaled $2.4 million, a decrease of 5% from the prior quarter and a 55% decrease versus the comparable period last year. Gain share revenue was generated from six customers and seven engagements. No change from the prior period. Overall expenses from operations in the first quarter of 2009 excluding stock-based compensation expense and amortization of acquired technology and tangible assets, impairment of goodwill and intangible assets and restructuring charges totaled $15.4 million, a decrease of approximately $2.2 million or 12% from the last quarter. And a decrease of approximately $6.5 million or 30% from the comparable period last year.

The decreases from the prior quarter and the comparable period last year were primarily the result of our ongoing planned cost control actions implemented in 2008. We will continue to focus on cost control during these challenging times. Margins were lower in the first quarter, primarily as a result of lower revenues and costs incurred on two projects which were not signed during the period, thus resulting in no revenue for those related projects.

Research and development expenses excluding stock-based compensation totaled $5.5 million for the first quarter of 2009, a decrease of approximately $1.9 million or 26% from the last quarter and a decrease of approximately $3 million or 36% from the first quarter of 2008. The decrease from the prior quarter and last year were due to cost cutting measures.

Selling, general and administrative expenses excluding stock-based compensation expense were $4 million during the first quarter of 2009, an increase of $312,000 or 8% from last quarter and a decrease of $1.4 million or 26% from the first quarter of 2008. The increase from the prior quarter was primarily due to the timing of 2008 audit fees and the timing of the recognition of such related expenses. The decrease from last year was due to cost cutting measures. Non-GAAP net loss for the first quarter ended March 31, 2009, totaled $5.1 million or $0.20 per share. This compares with non-GAAP net loss of approximately $3.8 million or $0.14 per share during the fourth quarter of 2008 and non-GAAP net loss of approximately $429,000 or $0.02 per share for the comparable period last year. On a GAAP basis, net loss for the quarter was $7.3 million, or $0.28 per share. This net loss included $1.1 million in stock-based compensation expense, $428,000 in amortization of acquired technology and intangible assets and a restructuring charge of $633,000.

Turning to our balance sheet at March 31, including both short-term and long-term investments, cash totaled $39.9 million. A decrease of approximately $1.6 million during the quarter. Our accounts receivable decreased $4.6 million to $20.4 million and the collectability of our receivables remains healthy.

During the quarter there were no stock repurchases. As previously stated our customer spending has continued to detract during the first quarter as a result of the continued weakness in the semiconductor market. As John discussed, while there are signs of improvement, with increases in current period production levels, our customers are unable to determine if this is a sustainable trend or not. Therefore, with our clients' limited visibility into their own operating levels, our ability to provide guidance at this time continues to be impaired. As such, we will not be providing any forward guidance at this time. Consistent with John's earlier remarks, we'll focus on areas that are within our control. Cost control and cash management are within our control. Our cost control efforts are proceeding as planned and we continue to reduce our overall spending level and create internal efficiencies. Our goal remains to further reduce our spending levels and preserve our cash as we manage our way through this downturn. With that, I'd like to turn this call back over to the operator for questions.

Thank you, Mr. Jones. (Operator Instructions). Our first question comes from Matt Petkun with D.A. Davidson and Company.

Hi, good afternoon. A couple of things. First, I understand the unwillingness to provide guidance, but in the engagements that you do have, there's a contractual obligation, kind of on average those last about 18 months. Is there any way you can provide directionally what to expect from that solutions business next quarter? I understand the gain shares may be more variable.

I think from the solutions business, we will see somewhat of a moderate revenue level as we saw in the last quarter. A lot of it is deferred. Any uptick really depends on us booking new business on a go forward basis. I don't think we see any dramatic swings one way or the other.

Okay. Would you call the move from December to March dramatic?

I would definitely call that dramatic.

Okay. Okay. You just underset my question, there's right now seven deals and you guys know when those expire and we don't. So I understand it's going to take awhile to get new businesses in but we just want to know how to model it going forward?

Just to be clear, Matt, in Q4 we announced that we had 11 deals from, I believe it was eight customers or nine customers.

Seven -- yes, I was talking gain share.

So the gain share number is flat. In terms of number of customers contributing, it was just a matter of volume production and going forward we don't see any of the contracts rolling off in any significant sense. It's just a matter of production volumes and from the services business, which was really what I was addressing, was that we did see a decrease in one customer. One contractor and one customer during the current quarter but we don't anticipate any further deep drop in the number of customers or contracts.

Okay. Thanks a lot. And then John, kind of on IYR deals in general, there is a fair amount of talk now, although it's mostly talk and some fund raising, especially in the memory world, focusing again back on design shrinks and I'm wondering if -- obviously there's no business to do today but there's probably a lot of work for you to do and maybe identifying where there may be opportunities. Do you see new opportunities emerging maybe in the back half of the year into next year as customers move to shrinks or do you think that most of your focus is going to be not on the IYR yield ramps but more on FDC.

Thank you, Matt. So on the yield ramp portion, I think there's two parts of it. We, even as going through these last couple of quarters, we saw -- we had a significant amount of activity even in discussions on 32-nanometer and 45-nanometer IYR activities on the logic portion and we expect as you get into the second half of this year you'll see a pickup on that. Memory went almost near dead towards the end of 2008 and beginning of 2009. We start hearing rumblings from customers about well, we're thinking about moving here to this node or thinking about doing XYZ or asking us to come in and talk about our technology and it's very, very, very early but we do see rumblings over the last few weeks of that stuff, of at least chatter again. Whereas if you went back to November, December of last year, really there was almost no discussions going on at all. There was even some level even in that time period. So I think logic will, for us, recover faster than memory but there will be some memory discussions at least as we go through 2009. Similar to what happened with pricing and a whole bunch of things, whether they really do invest or not.

Great. On the announcement you guys made today with Samsung, obviously that's more of a collaborative agreement but I'm wondering how you can talk about the opportunity to monetize what you're doing there in FDC, not just with them, across -- across the industry?

Yes. So that we had signed an agreement with them a couple of quarters ago. This was part of that and was time with achieving some milestone that we could make a press announcement. For us we felt it was important because they have a well-earned reputation of being very innovative in manufacturing. And we thought -- we felt it spoke to a connoisseur looking at our technology and seeing that it's really valuable, as opposed to just a layman. The applications that they are interested in are all related to the online control applications. Different ways you can use the space, the other way RTC technology to drive further efficiencies in your consumables, your equipment uptimes, your ways of getting more efficiency or more value out of a factory. We believe that those applications are very generally applicable and the results that come from these -- this engagement as well as others are the basis for us to continue to sell into the logic, memory and, non-chip related industries, like solar, et cetera.

Okay. Great. And then just one final question for Keith. Keith, on the last call you had said that it was your objective for the full year to maintain the cash levels and basically have breakeven cash flows for the year. Is that still obtainable?

Yes. It is. We're making good progress towards that, Matt, with our cost reductions that you can see. We've really dropped the spending, went from even a high of $23 million to in Q4 '07 to $15 million this quarter. As we look toward, the spending will come down. We're hoping for a little bit of an uptick but regardless, from a booking standpoint, but regardless from that aspect of it, we would still see from our plans and our actions today to be roughly at the same cash level as we started the year and you might have a little bit of give or take here or there, but we're still making traction and that is still our goal.

Okay. Fantastic. Thanks a lot, guys.

(Operator Instructions). Our first question -- I'm sorry, our next question comes from [Casey Rajkumar] with RBC Capital.

Hi, guys.

Hi, Casey.

Hi, guys. Thanks for taking my question. Could you give a general ballpark idea as to how you guys see second half evolving on top of first half?

Yes. So that's a very good crystal ball question. As I said in my written remarks, Casey, we do see the volumes ticking up in the fabs in the second quarter in March, April, May, June. We're trying to understand why they're ticking up. Some of the customers are -- have pointed to different things, stimulus packages in the world, new product introductions, they said they're not -- some customers tell us they're not reorders of existing products, or replenishing depleted inventories but actually truly new products. When we look at the data we thing it's far muddier than that. We see replenish volumes, existing products that are -- they're buying more wafers worth because we felt the manufacturing volumes were so low in the December, January time frame that it had to be the case, they were going to have to uptick their volumes.

So from our standpoint we see what is a very complicated world and we haven't made sense out of it which is why we're -- we don't feel smart enough to give out a -- or insightful enough to give out, either continue to go up in Q3, and Q4 (inaudible) volumes and hence our business as well or we feel that this is a blip and it will not continue to go up. We don't have a good visibility right now. We see a number of different things happening. For sure, there is new products that are driving volume. For sure, some of it seems to be related to stimulus packages. But we also see reorders in there too and they're significant portions of the volume.

Okay. For the past month or so, there has been enough chatter about the average starts across fabs and foundries have gone up from February, March into April. Do you guys see that?

Yes.

And is it that you guys don't quite believe that the trend is going to last, even through this quarter? Or is it that the -- some of the wafer forecasts that you folks are getting from the customers, you don't quite believe them?

So we've always gotten from the foundries the most optimistic forecast looking out and relative -- I always felt that sometimes you get the most pessimistic (inaudible) from the Japanese IDMs but they never seem to miss them. And the rest of the world, the variant, mileage may vary.

So people have given us and we see in the starts, because a lot of our software is used to control fabs and monitor fabs, we do see that the wafer volumes have ticked up. There's no question about it. When we ask people how long that is going to go on for, we feel that the answers we get are not as grounded in facts and after what we just went through over the last few months, we're not really in a position to take what would be anecdotal reasons why they think it's going to continue and make business decisions like slow down our rate of decreasing our cost structure.

So from our standpoint, which is why I think both Keith and I stressed in our remarks, we're continuing down the path of reducing our cost structure to where we think it's a safe level on a relatively modest amount of business so that we do preserve our cash and should we be surprised that this growth rate maintains itself and these factories all build back up to the utilization numbers that they claim, then that's great and we'd be happy to see that but no one's given us kind of a crystal ball reason that is unassailable for the second half of this year that would get us to change our plans.

I think if you take a look at our operating results in Q4, it goes both ways to what you're saying now. As we entered the call and we provided guidance for Q4 in the October time frame, the starts that we were hearing from our customers, that projection and the final number came out to be drastically different, which affected our operating results, which was a much lower gain share number for revenue. So as we look forward, it behooves us just to be conservative and our approach, our planning just underlines that whole premise.

Okay. What would need to change for you folks to have a confidence in the projections that you guys get from the customers?

When we see -- if Q2 volumes come out like people forecast and we see the ins going into the Christmas season look like a normal year, I think we would probably be -- have a different opinion as you got through the summertime of this year. If you remember 2008, we felt like the Christmas build started off on a very unusual trajectory and we didn't understand it at all and it got more and more complicated as the year went on. We'll watch how this looks for us this year. How the kind of ramp up towards the end of year happens this year. If it looks more normal, that would probably make us more comfortable.

Is it possible that midway through this quarter you folks would be able to have a better idea as to how the core plays out and come back and give us a line as to--?

Probably not. I think we would feel a lot more comfortable in the July/August time frame, understanding what the remainder of the year is going to look like, and things change very, very quickly October through December. I guess we're just kind of guarded that something like that doesn't happen to us again.

Okay. And as a last question, from my side, Keith talked about further cost savings in the second half. Can you (inaudible)?

Well, we didn't necessarily give out specific guidance but the general trend you can see over the last five quarters, we've been bringing down our expenses fairly steadily. You would expect that trend to continue in the short term, maybe not as dramatic as what you saw Q4 to Q1, but we will see ongoing cost reductions as we find greater efficiencies in our business.

Okay. Thank you, folks.

Our next question comes from Gus Richard with Piper Jaffray.

Thanks for taking my question. Hey, John, on this deal with Samsung, is this sort of like one of your prove-outs where you're working with the customer and if things work well it will result in some future business?

Good question, Gus. We have other business with them on a more traditional yield ramping and as part of that, we are deploying some parts of Yield Aware FDC. They have some ideas about applications for online control. That they think are very important and we're flushing out those specific applications. It's in some ways like a development, though the majority of the systems preexist and should it be successful, this is only part of that Company, so this would represent a potential sale into that part of the Company as well as other parts of the Company and obviously a lot of the manufacturing challenges in this chip business are very -- I always joke with customers, the physics are the same on your island as they are everywhere else.

The generality of these things is pretty broad and what we're finding with the Yield Aware FDC is there's just a plethora of ways or applications that you can apply for this general capability. Once you have an ability to be predictive at Esh you can predict what your parametric yield is going to be. You can predict what your defect on those yields is going to be. You can predict the overall health of a piece of equipment. Then there's just a lot of ways you can look at this from both dispositioning product wafer as well as assessing efficiencies at a tool level. So there's just -- there's a lot of applications that our customers are coming to us and telling us they really want. Some of them we think are generally good and we are willing to kind of work with them, especially as you look at connections into MES Systems, how to best connect into someone's MES System to exploit adaptive applications or ones where we're working with the customer directly is very important.

Got it. And then sort of as a slightly different tangent, just thinking about your pipeline, clearly there's some issues of 28-nanometers and folks are having difficulties with high-k metal gate. What does the pipeline look like there and some of the equipment companies are talking about more demos and a little bit of an increase in quote activity, that sort of thing. Are you seeing sort of at least some movement out of your customers, maybe not orders but at least they're waking up from the dead?

Yes. Especially in the logic side. I think that the interest level on high-k metal gate is picking up. And I think part of that's because of the unique -- or the challenges that people have seen with the mainstream 40-nanometer technologies and how difficult it is to achieve the parametric control required to bring these parts out. If you -- we monitor closely 40-nanometer production and believe it's off from historical introduction rates compared to 65. 40 is the new 45 so it's a little bit hard to judge that. Some people may say we're being a little bit overly critical on the industry with respect to that comment but in general if you look at the design starts at 40 are really the ones that would have been at 45.

The industry's moved to this new pace and we think it's a little bit off and it's due to how difficult the parametric control is on that node. Certainly high-k metal gate would greatly alleviate a lot of those issues. We do believe, especially with the downturn kind of muting some of the 40-nanometer volume wins, that the customers have a tremendous interest in getting 28 up and running. I think you're going to see that one come in probably -- the demand will come sooner than it would have and maybe a little bit faster than if you took the delta between 65 and 40 and just -- and then do that again.

And then just one final. Have you got -- sort of what percentage of your existing contracts on the Yield Ramps are sub 40-nanometer, if you will?

There's I think only a couple of those and we expect that to grow as we get through this year.

Got it. All right. Thanks so much.

Thank you, Gus.

At this time, there are no further questions. Ladies and gentlemen, this concludes the program. Thank you.