PDF Solutions Inc (PDFS) 2009 Q2 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 second fiscal quarter ended Tuesday, June 30, 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 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 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 second quarter. Then I will discuss our perspective on the environment and its impact on PDF Solutions. Lastly, I will discuss our focus for the third quarter.

Business activity in the second quarter improved over the first quarter. While we will benefit from this increased activity in coming quarters, revenue and gain share results for the second quarter remained low. We achieved total revenue of $9.6 million, which includes gain share revenue of $2.2 million. Our non-GAAP loss for the quarter was $0.14 per share, as we continued to benefit from the restructuring plan we put in place at the end of 2008.

A key element of PDF's strategy is to invest in technologies that add to our value across the entire IC process lifecycle. Our business in the second quarter continued to show the results of this work. We successfully entered into contracts that extend our technology usage and fees later in the process lifecycle. We signed a comprehensive contract which includes our Yield Aware FDC solution for 65, 40 and 32-nanometers with an existing client. They were already using or had used our solutions to ramp these processes. In doing so, our client gets access to our unparalleled process control solution, and in exchange we add multimillion dollars of fixed fees and extend gain share for additional years of the process lifecycle.

We signed an extension to a 90-nanometer contract that allows our client the benefit of continued use of our Yield Ramp infrastructure. We signed an extension to an existing engagement with a leading foundry, which will enable our client to ramp individual new products with our scribe line technology. Our foundry clients are finding this solution to be extremely useful in debugging product specific issues. Overall, the total dollar value of the contracts signed in the second quarter was much larger than what we had signed in the first quarter or fourth quarter of last year.

We continued improving our cost structure during the quarter 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 Q1 to Q2 by $2.1 million. Over the past two quarters we have decreased our expenses by a combined total of $4.3 million. We put a plan in place to decrease our costs further over the remainder of the year. As a result of our past efforts and strong collections, we entered the quarter with approximately $3.9 million in cash on the balance sheet.

Additionally, we expect better gain share results in the near-term now that wafer volumes are increasing. In the second quarter we began to see an upturn in some of our clients' wafer volumes. Moreover, their estimates for the production months July through September also improved. These estimates are confirmed by the widely reported volume trends seen in industry publications.

Not withstanding the 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 with their spending. While we may see a short-term increase in wafer volumes, we are still cautious.

As a result of our assessment of the environment, we will not provide public guidance for our revenues or earnings for the third quarter of 2009. We will say that we anticipate further expense reductions in the third quarter of 2009, resulting from the actions we took in Q2.

In Q3 we will continue to invest in our Yield Aware FDC solution for logic, memory and solar manufacturers; refine our Yield Ramp solution for 32-nanometer and 28-nanometer High-k and metal gate processes; demonstrate the benefits of our PD bricks technology based on our joint development with IBM; and continue 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.

Thank you John, and good afternoon to everyone. 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 evaluate its results using non-GAAP measures, which exclude stock-based compensation expense, amortization of acquired technology and 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 second quarter ended June 30, 2009 totaled $9.6 million, a decrease of 6% and 55% when compared to the last quarter and the second quarter of 2008 respectively. The quarter-over-quarter decrease in gain share and design to silicon yield solutions reflect lower production volumes and the continued cautious outlook and conservative spending of our clients, given the length of the downturn.

The decreases when compared to the same period last year are the result of the completed changed environment, including investments and advanced technology nodes once the significance of the downturn really started to be realized.

Design to silicon yield solutions revenue totaled $7.3 million for the second quarter, a decrease of 6% from the prior quarter and a decrease of 53% from the comparable period last year. As John mentioned earlier, we signed a new comprehensive contract with an existing logic customer. A major component of this contract is our Yield Over FTC solution which offers the client significant value later in the process lifecycle. Additionally, we signed 2 extension engagements; 1 for the use of Yield Ramp infrastructure on a 90-nanometer logic process; and 1 for a leading foundry client.

During the second quarter, 9 service engagements from 8 customers, each contributed $150,000 or greater in revenue. This represents a decrease of 1 engagement from last quarter and there was no change in the number of customers from the prior quarter.

Gain share revenue totaled $2.3 million for the second quarter, a decrease of 4% from the prior quarter and a decrease of 60% from the comparable period last year. Gain share revenue was generated from 6 customers and 7 engagements; no change from the prior period.

Total expenses from operations for the second quarter of 2009, excluding stock-based compensation expense, amortization of acquired technology and tangible assets and restructuring charges totaled $12.7 million, a decrease of approximately $2.6 million or 17% from the last quarter and a decrease of approximately $7.6 million or 37% from the comparable period last year. The decreases compared to the first quarter in the same period last year were primarily the result of our ongoing cost reduction initiatives implemented in the second half of 2008.

Gross margins were higher in the second quarter, primarily as a result of improved utilization of resources deployed on client engagements. Research and development expenses, excluding stock-based compensation, totaled $4.7 million for the second quarter, a decrease of approximately $776,000 or 14% from the last quarter, and a decrease of approximately $3.8 million or 45% from the second quarter of last year. The decrease from last quarter and last year were due to cost cutting measures.

Selling, general and administrative expenses, excluding stock-based compensation expense were $3.6 million during the second quarter of 2009, a decrease of approximately $382,000 or 10% from last quarter, and a decrease of $1.4 million or 27% from the second quarter of last year. The decreases in SG&A expenses as compared to last quarter and last year are the result of cost cutting measures.

Non-GAAP net loss for the second quarter ended June 30, 2009, totaled $3.7 million or $0.14 per share. This compares with non-GAAP net loss of approximately $5.1 million or $0.20 per share during the first quarter and non-GAAP net income of approximately $774,000 or $0.03 per share for the comparable period last year.

On a GAAP basis, net loss for the quarter was $6.6 million or $0.25 per share. This net loss included $1.3 million in stock-based compensation expense, $447,000 in amortization of acquired intangibles and technology, and restructuring charges of $1.2 million.

Now turning to our balance sheet. Cash, including both short-term and long-term investments, totaled $39.1 million, a decrease of approximately $800,000 during the quarter. Our accounts receivable of $16.9 million decreased $3.5 million, primarily due to lower revenues. We are pleased that the collectibility of our receivables remains healthy.

Lastly, as John mentioned, since our customers remain cautious regarding their spending in the near-term, we are not providing specific guidance. However, we expect improvement in gain share revenues in the near term and now that wafer volumes are increasing. Also, we do not anticipate further deterioration in fixed fee revenues quarter-over-quarter.

We will continue to make improvements in our cost structure, although at more moderate levels than we have experienced in the last two quarters. You will see cash decrease on our balance sheet due to payout of ongoing restructuring charges in the third quarter. We remain focused on cost control and balance sheet management and committed to coming out of this downturn as a stronger PDF.

Please keep in mind that the statements I just made, including expectations about our future financial results and performance and that PDF's actual results could differ materially from these expectations. 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.

With that, I'd like to turn the call back over to the operator for questions.

(Operator instructions) Our first question is from Matt Petkun with D.A. Davidson.

First, just on the housekeeping side; I missed the number of active engagements in the quarter and the number of customers. Was it again 10 and 8?

No, it was 9 and 8; we were down 1 engagement, same number of customers.

Okay. And then John, I understand the caution regarding guidance, but give me a reason why I shouldn't model your gain share revenues to be up roughly what I saw some of your key customers wafer volumes up in Q2? Some guys were up as much as 60% sequentially.

Keith made the comment, Matt, that we do expect gain share to be up quarter-over-quarter. The magnitude of the increase, we're not really commenting on yet. So I think you've seen the utilizations at these factories bounce up pretty dramatically, some better than others. The foundries, I found their utilizations bounce up faster than some of the IDMs, but generally I think they've come up pretty steeply, surprisingly actually.

Right. And then John, one of the things that we've definitely noted out there in the equipment world is a real pick up from the memory guys, maybe not from a volume perspective, but installing call it 5,000 wafer starts per month next gen lines. I'm wondering what the opportunity is for you guys to maybe help any of those folks out there in the memory market, as they do choose to make transitions to the 5x or even 4x node?

For most people, and us included, the real contract signing meat and potatoes kind of stuff has been in the logic area at this point. We have seen some increased activity or discussions, maybe we'd like to see you come in and talk about XYZ or show us a proposal for Y in the memory space, more so than we have. The previous quarters have been pretty dismal. So there are some signs of life, and yes, it is related to the 5x or 4x nodes. We haven't really sat down from our own standpoint and started putting that into our own expectations. We are still very cautious about the memory sector overall. But yes, there is more activity than there was let's say three months ago or anytime over the previous three quarters.

Okay. Then when I look at your active engagements right now there's 9 of them you said, and in the last really three quarters you've really only signed extensions to these contracts. So I've got to believe that the shelf life of those engagements is starting to -- and I know you're not providing guidance, but the shelf life of those engagements are starting to become more limited in nature. Is that fair and how should we think about what you need to do from a new deal signing perspective to sustain the present Solutions business, call it into 2010?

From our current deals in our backlog basically, we don't see any precipitous drop-off that would dramatically affect our revenue over the short-term. However, obviously to get the revenue back to a level that we are more comfortable with, we definitely do need to book at a rate that we had set forth in the past. So short-term there is nothing that is dropping off that would create a big hole for us.

Your next question is from K.C. Rajkumar with RBC Capital Markets.

I'd like to understand, why is the June quarter gain share revenue down from March, when we all realize and accept that the starts across the board were significantly up in Q2 compared to Q1?

I'll try to answer that question. There's two factors going on here; the manufacturing quarters that represent our Q2 gain share revenues can be anything from January, February, March and then recognized in April; February, March, April recognized in May; or March, April, May recognized in June by and large. So the Q2 gain share number from us represents kind of a blend of Q1 volumes and some Q2 volumes. Within our customer base we did see an up-tick in some of our customers' wafer volumes, especially the customers from whom we tend to recognize later manufacturing months. And for the customers that we tend to recognize earlier manufacturing months, those were weaker.

Okay, that's helpful. So going forward, is your reluctance to give a normal guidance for gain share especially, is it still based on the fear which you had last quarter that the starts across the board are very, very lumpy and unpredictable? You had this comment that whereas the starts are strong at the moment, you feel that they're going to drop off before the quarter is over?

No. I think that's why Keith said in his part of the script that we expect our gain share to be up quarter-over-quarter. We haven't given a specific number, because it's really from a revenue standpoint it's A plus B equals C, so commenting on B doesn't really give the investor the picture of what C is meaningfully. We do expect it to be up.

My comments in my script, out through October most of the customers are relatively confident about their manufacturing volumes, mostly because stuff is already going in the line that gets you out pretty close to there. Customers have said to us, they really still don't have good visibility in the November and December. We heard that from our foundry customers and also some of our IDMs. And when you even look at Toshiba, who tends to be one of our more significant customers and they're guidance about their semiconductor business, on their investor call last night, they said the same thing, that as you go out towards the very end of this year, visibility is rather poor.

So at this point, yes, we're very comfortable with an increase gain share in Q3 and we know that, as Matt alluded to, that wafer volumes are up pretty significantly, we just don't know what's going to happen as you get two quarters out from now.

If a large fraction of the September gain share revenue comes from that starts in the June quarter, why would the gain share items for September quarter be impacted by what's going to happen in the month of November and December?

It's not, K.C. We feel pretty good about the Q3 gain share number. We're not providing the number, because we would get in the habit of providing a number and then two quarters out saying we no longer feel we have good visibility, we don't want to provide the number again. So, I'd like to see a couple of quarters and okay we now see it's tracking, it's staying up, it's meaningful, and yes, then we'd feel more comfortable. But right now, yes, it looks promising, but very short; it's one quarter.

I think I understand what you're saying. The theme that we are working under is that both the logic foundries, as well as the memory guys, are pretty bullishly ordering tools [for coupons] and also there are well-known problems with deals at some of the larger foundries. I mean, I would have imagined that you would have had a decent uplift in your [RYR] business, given the fact that the memory guys and the foundries are willing to spend on tools. I would imagine that they would also be willing to sign up [e-RAM] contracts?

I'll answer that. I think we do see that on the logic side, and that's why we said that our bookings in Q2 were substantially larger than the bookings have been over the past couple of quarters. I think you have to go back three or so quarters or maybe four to get to similar booking levels. So in the bookings basis in last quarter, yes, as a result of people's concerns about the difficultly in controlling leading edge process nodes like 65, 40 then the future 32-nanometers, we did see increased booking activity and what will show up over the subsequent quarters as our Solutions revenue.

We did not see that on the memory side as of yet, but we are in discussions or talking with customers on the memory side, but we are not as well entrenched in the memory business as we are in the logic business. So at this point we saw exactly what you described, in the logic business last quarter and we anticipate that the customers are still willing to invest in what they need to, to bring up 40-nanometers successfully.

Just to add to that, K.C., part of where we're going from where we are today in my call just to kind of reiterate what John said is that from the fixed fee side of the business, that we don't foresee the quarter-over-quarter declines that we saw over the last several quarters, so take from that as a benchmark in terms of where we're at today versus where we're headed towards.

Okay, that's fair. A couple of questions on below the line items. How should we look at OpEx in the second half compared to the first half?

It's a good question. We were quite pleased at the amount of spending decrease overall, going from $15.8 million in Q1, to getting down to $12.7 million. I would say that you would definitely not see that type of a decrease. It's going to be very moderate decrease quarter-over-quarter from the current spending levels that we have today. So I'd say very moderate to slight, is the terminology that I would use. So I think if you looked at that for the remainder of the year, it's a good benchmark to have from our Q2 rate.

And finally, are we still going to see calendar 2009 with near breakeven cash flow from operations?

I guess your question is, where do we expect our cash to end up at the end of the year. Our initial goal, as we talked about, was to end with approximately the same level of cash that we started the year with, so we are roughly $40 million in the path to get back to $40 million, given that we do expect a decrease in Q3. That goal is still there. We do have a little bit of pressure, but that goal is still achievable.

Your next question is from Steve [Bowman] with [Divistar] Capital.

Keith, just to follow on that last question about cash; can you just break out what the restructuring charges are, what the cash restructuring impact is going to be in Q3?

We're not really giving guidance in terms of what the restructurings are and there's always a little bit of trickiness in terms of when you book the accrual and when you incur the payouts, so some of the amounts sitting on the balance sheet and then some things you see as expense line items, so you'll see some fluctuation in the accrued. But overall, I kind of want to refrain a little bit from giving you a number for anything that might occur in Q3 from a restructuring standpoint.

Okay, but some of it already is on the balance sheet and I assume that's other accrued liabilities is where it is?

That is correct.

Okay. So that at least gives me kind of a top end of what we're talking about that's already on the balance sheet.

There are various things in that account, but it would also fall into that. I apologize, it's in accrued compensation related benefits, not other.

Okay. And then following on, obviously you guys have done a very good job of controlling expenses and I think you said that cash expenses in the quarter were $12.7 million. As the business starts to recover here, maybe looking out three or four quarters, I assume that you're going to need to add to that expense level as the business pace returns?

When we went about this, we have been very thoughtful about the way we've gone, so there's always the things you can do that are kind of short-term measures; shutdowns, suspension of bonuses, etc. And those, to us, felt artificial, because you're going to, when you unwind those, you're going to -- the investor is going to wonder, well your numbers -- revenues are going up and your earnings aren't going up. So we've tried to be very careful with the extent to which we used those techniques, because we felt that those techniques wouldn't give us an earnings increase on the other side of this.

And we tried to do things that structurally make us more efficient over the long-term; moving things closer to our customers to minimize travel expenses, taking things from parts of the world where we don't have as many customers as we did in the past, let's say Europe, and put them in places where we do have a lot more customers and expect more customers in the future, let's say Asia. So those have been a lot of the things we've been doing in this downturn.

We are in the process now of kind of modeling, as the revenues go back up, exactly how much more leverage we've put into the model. We set out with a goal for that; we haven't really disclosed that. And now we're kind of going back in and saying okay, as we've gotten through most of this very heavy lifting, where are we now? And by the end of this year I think we'll have a pretty good handle on that. We do not expect to have to do a lot of hiring to get to more substantial revenue numbers than we're at now.

Okay. John, I appreciate that discussion. I think in the past -- well now I'm trying to remember if you guys said that breakeven was below 15 or if that was just kind of the back of the envelope math -- or breakeven was at 15 million a quarter. It seems like it's pretty safe to assume, given the comments you just made, that you think that you've taken breakeven below that level.

That would be correct.

Okay, that's helpful. And then John, I don't want to beat a dead horse here, but in terms of the gain share revenue and how the calendar works, it sounds like the previous questioner had some of the same misunderstandings that I did, where I expected to see gain share up in the quarter, given that your customers definite saw wafer volume increases.

Is it possible for you to talk about kind of what percentage of gain share comes in each month? And by that I mean you've put it in three buckets there; January through March production, February through April, and March through May. Is it possible to break that down, how much in arrears you guys are?

We don't have that with us right now. I wouldn't be able to answer it. Probabilistically I would guess I would imagine it's a third, but I don't know the specifics. Since these are all small numbers in this case, that one account one way or the other makes a relatively big difference. It's an interesting thing. I haven't seen it. I'd have to go back and look at it that way.

Follow-up question from Matt Petkun.

John, I'm wondering if you could opine for a little bit, but maybe not too long, on what we're seeing from a consolidation standpoint, looking at a lot more in the way of manufacturers consolidating on a few individual process consort ions and how you feel you're positioned going forward with call it 5 likely or less, process manufacturers out there?

Thanks Matt. I will try not to opine too long. Net, we believe the wafer volumes are going up. That's why the length of the process life cycle that we get paid gain share for was at one time 18 months, it became 3 years kind of on the last downturn and this downturn we're trying to turn it closer to 6 years. We keep on increasing that length of time. That's a very important element to our business, because the wafer units are going up. Our costs are associated with the number of places that we have to bring up, and as you know from our model, our gross margins on the fixed fee portion are not nearly as lucrative as the gross margins on the gain share portion.

So to some extent, having a small number of manufacturers with a common set of process technologies is a very good thing for us to incrementally improve the leverage in our model. And that's why on the previous caller's question, I said we went back and looked at this, we felt structurally, some really significant things were going to change in this downturn, and coming out of this downturn the industry would look very differently. And as a result, we needed to do some long-term things that really positioned us well for what the world is going to look like.

And that meant that assume there is going to be 3 to 5 unique processes in the world on logic. You can argue the number; I think it's 4. But it's somewhere in that range, with 1 of them being licensed across many potential manufacturers, and that would be the IDM technology, where the manufacturing facilities are often invested in by sovereign nation funds or have unique holdership, which creates I think some unique opportunities.

We set up our infrastructure and our delivery mechanism to aid those process licensors and to generate leverage as those things turn to volume manufacturing. I think you'll see as we come through this downturn, at the upturn, incremental leverage in the model as a result.

Okay great. Embedded in some of the changes you've made, have you made any incrementally different investments or changed your long-term thesis on wanting to get into the memory market and DRAM and [RAM] in particular?

No, not really. When we started delivering the Yield Aware FDC and process control solution, our experience with memory, we felt there were two opportunities; the technology development phase and the production control. We believe there is more leverage in the production control in the memory market and we believe that's also true for what we would consider adjacent markets like solar, LCD, battery and wafer manufacturing. So we tried to tune the investment we made in our Yield Aware FDC solution, as it pertains to outside of logic, to be something we thought was generally applicable across all of those end markets.

Okay. And in that market do you still think there's an opportunity to see Yield Aware FDC with gain share?

I think we are very strong believers in gain share and fees which are tied to a customers' production volumes, and at all of those end markets that would be things that we are targeted to do.

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