PDF Solutions Inc (PDFS) 2009 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 the fourth fiscal quarter ended Thursday, December 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. If you need assistance during the conference please press star then zero on your touch tone telephone. As a reminder this conference is being recorded. If you have not 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 31st, 2008 and similar disclosures in subsequent SEC filings. The forward-looking statements and risks stated in this conference call are based on the information available 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, you may begin your conference.

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 review the progress made on our key strategic initiatives during 2009. Next, I will discuss our perspective on the environment and its impact on PDF. Finally, I will describe our key strategic initiatives for 2010.

In the fourth quarter of 2009 we achieved revenue of $14.8 million and a non-GAAP profit of $0.05 per share. For the full year we achieved revenue of $48.4 million and a non-GAAP net loss of $0.26 per share.

Business activity in the fourth quarter continued to gain momentum and higher utilizations in fact improved gainshare. In Q4 we successfully closed the following contracts; a new 32-nanometer yield ramp with an existing client, a new 32-nanometer DFM engagement with a fabless client, an extension of a 32-nanometer DFM contract with a manufacturer to include their 28-nanometer technology, an extension of a 32-nanometer yield ramp engagement to include 28-nanometer process technology, a license for substantial deployment of our Maestria FDC software with a new customer, and a number of other smaller contracts for extensions to existing agreements and licenses of PDF technology and software.

Our sequential increase in design-to-silicon yield revenue and gainshare results, coupled with continued improvements to our cost structure generated $2.2 million from operations and drove to two consecutive quarters of improved GAAP and non-GAAP results. This is the first evidence of the point we have made in our prior earnings calls; as the top line improves, our known cost structure provides leverage to achieve better earnings.

Turning to our performance in 2009 against our key strategic initiatives, despite beginning the first half of 2009 with depressed revenue and earnings, PDF improved both significantly during the year due to an unwavering focus. We executed well on our client deployments and product development plans and achieved our cost structure objectives. Overall it was a year that execution was well aligned with our strategy and we experienced strong adoption of our solution in the client place.

A summary of our 2009 achievements includes the following; one, as part of our goal to extend the value of our characterization vehicle infrastructure across the IC manufacturing process lifecycle we drove adoption of our DFM and process control solutions in the logic IC customer base. We signed DFM yield-aware FDC process control and integrated yield-ramp engagements throughout the year. These engagements span process nodes from 28-nanometer to 65-nanometer, thus extending our potential gainshare revenue on each process node.

We entered 2009 with the goal to benefit from our strategic alliances. We leveraged our unique position in the industry as the provider of commercial characterization technology and services. We are becoming an important resource for asset light and fabless clients. This is evidenced by the traction of our DFM solutions. This also improved our business with the manufacturers, who are increasingly using our parametric characterization capability to support their customer interface.

Three, we perform demonstrations of our yield-aware FDC process control solution in adjacent markets such as solar and wafer manufacturing. We provided good technical achievement and look to 2010 to start building business in these markets. Four, after reducing our cost structure by $6 million per quarter during 2008, we reduced it again by approximately $4 million per quarter during 2009. As we stated before, a substantial amount of these improvements were sustainable changes that will provide leverage to our earnings results as we grow revenue.

Five, lastly, over the last two years, through buybacks and option cancelations, both as an unintended result of our reductions in force and intended results of two RSU conversion offers, we reduced the fully diluted share count plus overhang by 14%. We expect that our success on these objectives will result in improved top-line growth, more total earnings and more earnings per share than had we not made these changes. As a result, 2009 set a foundation for improved performance in 2010 and beyond.

In 2010 we will continue on the strategic objective of expanding the value of our solution across the IC manufacturing process lifecycle. Our observations about the semiconductor industry as we enter 2010 include the following; fabs, in particular logic fabs, have communicated intentions to increase their investments in mass production capacity at the advanced nodes. Parametric characterization requirements will likely continue to increase, driven in large part by fabless company's requirements and parametric control is a growing problem for the industry.

Given these observations, PDF's strategic initiatives during 2010 are as follows; expand market focus beyond our core client base to include all advanced logic manufacturers. Last year we focused on our core accounts, structuring long-term relationships with our existing clients. Now we are expanding this to a broader group of logic companies, including both fabs and fabless. At the same time, we need to lay the groundwork in adjacent markets such as memory, wafer, solar, LED, battery and LCD. In 2010 our goal is to demonstrate good business value for accounts and build strong business model for PDF Solutions.

Achieve the targets on our client projects to drive value to the accounts and thus drive gainshare results. To aid our clients to achieve product tape outs that benefit from our DFM solution to position us for incremental gainshare revenue and drive continuous efficiency in development in operations and grow revenues while keeping cost contained.

While we feel more confident about the market and our business activity these days, we will continue to refrain from providing specific quarterly guidance. Our cost structure will continue to benefit from the structural changes we have made in the past.

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 2009. Keith?

Thank you, John, and good afternoon to everyone. As a reminder of the statements made in our press release issued earlier today, 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, impairment charges on goodwill and certain intangible assets 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 fourth quarter of 2009 totaled $14.8 million, an increase of 7% when compared to both the prior quarter and the fourth quarter of 2008. The quarter-over-quarter increase in revenue was driven by increases in both gainshare and design-to-silicon yield solutions revenue, reflecting higher production volumes and improved business in the fourth quarter of 2009. The increase in revenue when compared to the same period a year ago was driven by higher production volumes, resulting in increases in gainshare revenue which was only partially offset by a decrease in design-to-silicon yield solutions revenue resulting from a slightly lower number of client engagements contributing revenue during the period.

Design-to-silicon yield solutions revenue totaled $9.1 million for the fourth quarter of 2009, an increase of 8% from the prior quarter and a decrease of 19% when compared to the fourth quarter of 2008. We signed 2 new engagements during the quarter; a 32-nanometer logic yield-ramp engagement and a 32-nanometer DFM solution project. Additionally, we signed 2 extensions to existing engagements, a 32-nanometer logic yield-ramp and a 28-nanometer DFM solution engagement.

During the fourth quarter, 10 service engagements from 8 clients, each contributed approximately $150,000 or greater in revenue. This represents a net increase of 2 engagements and 1 client from the prior quarter. Gainshare revenue totaled $5.6 million for the fourth quarter of 2009, an increase of 4% from the prior quarter and an increase of 124% when compared to the fourth quarter of 2008. Gain share revenue was generated from 7 clients and 8 engagements, up 1 contract and 1 client as compared to the prior quarter.

Total expenses from operations for the fourth quarter of 2009, excluding stock-based compensation expense, amortization of acquired technology and tangible assets, restructuring charges, impairment charges on goodwill and other certain intangible assets and their related tax effects as applicable totaled $13.6 million, an increase of approximately $381,000 or 3% from the last quarter and a decrease of approximately $4 million or 23% when compared to the fourth quarter of 2008.

The increase from the third quarter of 2009 was primarily due to out of period adjustments to recognize previously deferred contract cost associated with the yield-ramp engagement and decreases in variable compensation costs. For comparison purposes only, if you exclude out all prior adjustments, total quarterly expenses was consistent during the year. The decrease when compared to the fourth quarter of 2008 was primarily the result of additional cost reduction initiatives implemented in the beginning of 2008 and through 2009.

Gross margins were lower in the fourth quarter as compared to the prior quarter, primarily due to previously mentioned out of period adjustments to recognize previously deferred contract costs.

Research and development expenses, excluding stock-based compensation expense totaled $4 million for the fourth quarter, a decrease of $319,000 or 7% from the prior quarter and a decrease of approximately $3.4 million or 46% when compared to the fourth quarter of 2008. The decrease from the prior quarter was due to an out of period adjustment to decrease variable compensation costs and our continued cost reduction efforts in the quarter. The decrease when compared to the fourth quarter of 2008 was primarily due to our cost cutting efforts.

Selling, general and administrative expenses, excluding stock-based compensation were at $3.5 million for the fourth quarter of 2009, a decrease of approximately $402,000 or 10% from last quarter and a decrease of $248,000 or 7% when compared to the fourth quarter of 2008. The decrease in SG&A expenses from the prior quarter was due to and out of period adjustment to decrease variable compensation cost. The decrease when compared to the fourth quarter of 2008 was primarily the result of additional cost cutting efforts.

Non-GAAP net income for the fourth quarter of 2009 totaled $1.4 million or $0.05 per share or $0.03 per share better than the prior quarter and up $5.2 million from the same period last year or $0.19 per share when compared to the fourth quarter of 2008. On a GAAP basis, net loss for the fourth quarter of 2009 was $701,000 or $0.03 per share. The net loss included $724,000 in stock-based compensation expense, $449,000 in amortization of acquired technology and intangible assets and restructuring charges of $934,000.

Now turning to our balance sheet, cash including both short and long-term investments totaled $35.6 million, an increase of approximately $1.7 million from the prior quarter. The company generated positive cash flow from operations of $2.2 million during the quarter. Our net accounts receivable balance of $19.8 million reflects an increase of $1.6 million from the prior quarter, which reflects our improved business during the period. Collectibility of our receivables remains healthy and current.

Moving to our full year operating results, revenue for 2009 totaled $48.4 million, a decrease of 35% from $74 million for 2008. Total non-GAAP expenses totaled $54.8 million for 2009, a decrease of 29% from 2008. Non-GAAP net loss was $0.26 per share for 2009, an increase of 125% from non-GAAP net loss of $0.12 per share for 2008.

Our annual operating results were primarily impacted by the continued cautious CapEx spending and lower production levels in the first half of 2009. However, we saw improvements in customer spending and higher production volumes in the second half of 2009. We focused on cost control initiatives throughout the year and we saw the results of these efforts in lowering our spending by $22.8 million or 29% when compared to fiscal year 2008.

As John stated earlier on this call, we are optimistic about continued improvements in the overall economy, but we remain cautious. As a result, we are not providing specific revenue or EPS guidance; however, we believe our results will continue to benefit from the substantial changes we previously made to our cost structure. Please keep in mind that the general statements that I just made about expectations about our future financial results and performance and that PDF's actual results could differ materially from those 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.

Now I'd like to turn the call back over to the operator for questions. Operator?

(Operator instructions) Our first question is from Casey Rajkumar with RBC Capital Markets.

Could you comment on your views on how do you see your traction with the memory customers pan out this year? I realize that this was a focus a couple of quarters ago and then it fell out. Now with the return of strength in the memory sector, how do you see it pan out this year?

Yes, you're right, in 2006 and in 2007, memory was a relatively prominent amount of revenue for us. Prior to 2006 it was really not a significant amount of revenue for us. In 2006 we started building our business with the memory customers very concentrated on a couple of the customers. As the memory market really kind of graded in 2008, we saw all that opportunity dry up in 2008 and 2009. We do have discussions ongoing with customers in the memory market. We do believe the market overall for memory has improved and hence the spending will improve at some point. We did not build our own internal plan in 2010 assuming that would really affect us in a positive way and felt we could achieve good performance off the logic market. But as I highlighted in my prepared comments, we are working hard to lay the groundwork for memory. It would be upside for us if we were to make that happen in this year.

Okay. In the logic arena you mentioned the extension of the stents fabless and asset light companies; can you give us a bit more color on how are those engagements proceeding this year?

I think you know it's been well covered in the press about just the challenges around the parametric variability at the 40-nanometer node. I don't believe anybody anticipates that to get easier as we move down to 28 and eventually 20-nanometer, so the customers have become really quite sensitive to parametric characterization. You know, that started for us a couple of years ago with the RF CMOS folks at the 65-nanometer node and we've now seen this in 2010 spread to the logic customers. With that characterization folks look to reduce the variability, what can they do as designers to reduce the variability associated with these challenging nodes and the PD BRIC technology then becomes an outgrowth.

So we've been leading off with our characterization capability, which we believe is quite substantially ahead of what anybody else can provide in the world and then we layer on top of that the BRICS technology and its ability to help folks manage the complexity and the variability. And we're moving down those programs quite nicely and on the plan that we expected.

Okay. Can you give some general thoughts on how do you expect the gainshare portion of your top line to trend in this quarter and a couple of quarters out?

You know, Casey, at the end of the Q3 conference call you asked me this question and I said, well you know, the utilizations were really high in Q3, I just can't see how they can stay like that, so I don't expect them to stick up like this. And frankly, Q4 surprised us for being a little bit better than we expected. If it had been a few hundred grand lower, that would have been probably what I would have expected if I were a betting person.

As we look at utilizations in Q4, they were quite high, near 100% or at 100% and as I said in my prepared remarks or actually I didn't say in my prepared remarks, but the transition to 40-45 nanometer from a volume standpoint really hasn't started. So we expect factories to churn over some of the IDM factories to turn over their 65-nanometer production to 40-45 throughout the year. That will potentially create blips or downward pressure on gainshare. The long-term it will be fine, but you know, factory kind of depletes as it ramps back up. This happens less in the foundries, but it does happen somewhat in the IDM. So overall as we add new engagements to gainshare we expect gainshare to improve but in the short-term it's a little bit difficult for us to see how it trends up here. We're focused near 100% utilization already and know transition is having to happen at some point.

And lastly, (inaudible) view the prospects for revenue growth in calendar 2010 to be roughly in line with the average top line increase for semi companies in the up mid teens.

I understand why you're asking that question, Casey and you're quite clever. You know, we've got to be very careful about it. I'm just going to say we're not going to provide guidance. I think if you look at the consensus estimates for Q4 you had us at $14.8 million which is what we achieved, so somehow I think you folks are pretty good at your crystal ball to figuring out what we're capable of achieving. We didn't provide guidance in Q4 and you all seemed to do a fine job on predicting the top line. So I think we're going to leave that business to you folks at this point.

Your next question is from Greg Gerst with Gerst Capital.

Probably following a little bit along the lines of what Casey's trying to get at, which is for us outsiders to kind of get a better idea maybe of where you guys are and what things are looking like for you going forward. You guys do provide information on customers and engagements for both your solutions and your gainshare business. What I'm wondering is, would it be possible or would you consider trying to break that down in a little bit more granular fashion?

I'm not asking for who your customers are, but more in the sense of if you just provided each quarter if you've got eight customers for instance, how many are at 28, how many are at 32, so on and so forth; any additional information, when they started, how long they're expected to last, then in terms of the gainshare customers as well, not only nodes but would it be possible to give us a little bit more color on breaking down those customers as far as are they in the early ramp phase or are we in just development phase or later ramp or are they in mature phase. It's just very difficult, you know, Keith has heard me gripe about this, it's very difficult and I understand the nature of your business where you've got a lot of proprietary information and you've got to be very careful what you disclose, but at the same time it would be great for us outsiders to be able to get a little bit better color beyond just number of customers and number of engagements. So if you could comment on that, that would be great.

We hear you and I think we understand your frustration as far as that's concerned. Frankly, we've taken this period as kind of a reset for ourselves to go back and look at how do we best communicate the business. We've been very mindful of basically balancing a few things; one of course is customer confidentiality. We take that very seriously here. You know, over the years we've I think done a very good job with customer confidentiality. In our industry that's absolutely crucial and you've seen what's happened in the press when folks in our industry are not careful with that.

Number two, we do know we've got to give folks a sense of where the business is going. We're also trying to get a good handle on it. In the past when we really were just focused on the ramps of the nodes, the engagement became a very good surrogate for the business. It's a little bit more muddy now because engagements tend to have an awful lot of extensions and as we add on things like DFM and the yield-aware FDC. So you know, we are balancing kind of how do we communicate something that is really meaningful about the business, mindful of customers' confidentiality and of course thirdly, mindful of any competitive information in terms of us with potential future or existing competitors that we don't really want to give any incremental information to. And that last constraint is probably the least important of the three.

So we will do something; we're not sure how yet and we are sitting back and cranking on our modeling on what would have been good indicators of our business in the past. As you know, we are modeling folks here. We are trying to figure out what are reasonable predictors.

Okay. If you're open to suggestions, I've got some ideas I'd like to discuss. Follow-up on the memory side of the business and also maybe the solar side; you've discussed both of those in the past and I'm wondering if you can give us a high level view on the technical side. Is the difficulty in penetrating memory, is it in your view -- and you mentioned the state of customers and their finances, but also I imagine there's less maybe of a technical challenge that the memory guys do have. Could you comment on that? Is part of the problem getting in there just that there aren't as many problems to solve or how you guys can help them solve it or is it something else?

Let me give you my perspective on this. We've done a lot of our own internal homework to understand this and looked at other companies in related and allied spaces to understand what's going on. I think if you look, for example, in the probe card market -- I know that doesn't seem related to PDF, but there are some reasons why there's relevance there. The companies that we're very exposed to one particular camp, you know, the Elpida camp in particular, when the market recovered you didn't see them really recover. And I think the reason for that is at the end of the day I don't have a lot of -- I think it's difficult for that camp because of the way it's been funded for it to really expand as fast as some of the other camps in particular, the market leaders in both DUM and flash.

When you say expand, what do you mean by that?

Well, I think if you just look at the CapEx numbers that are coming out of Samsung versus the CapEx numbers that have come out of the Elpida, I mean today you now have four Dum camps; Samsung, Hynix, the Micron camp and the Elpida camp and if you look at the projections for CapEx in those four camps, it's a Dickens-like story right now. So I think that folks that have had their DRAM business exposed to one part of that market versus another, I think see different expansion rates. And I think that would explain some of the probe card discrepancies with the market.

When you look at the overall process control solutions, so you look at the metrology business, historically the metrology business has been less sensitive in the memory market than it has been in the logic market. And that I think is evidenced if you look at kind of bellwether stocks in process control like KOA, you generally see that trend. We believe the problem on the memory market on a going forward basis is parametric control as these technologies are hitting their wall. I think if you listen to the call from KOA they talked about how they felt. What happened on the 4X node for the logic makers will happen on the 3X node for the memory makers because the parametric challenges basically happened a node late there. You know, there's a lot of different ways we're triangulating to try to understand what's really going on in the memory market.

We do believe the problem will be a parametric control problem. We do believe that it's somewhere between the 4X node and the 2X node. We do think we actually have a good solution or technology for that market. We are mindful of the fact that that market is really kind of a collection of the haves and the have-nots and hence, where you enter the market is quite important.

And with all of that said, that's why I kind of dodged Casey's answer, we are working really hard to build business in that market. We built our plan for growth in 2010 assuming we don't. We penetrate but we don't see a lot of revenue from it in 2010. We believe we can get strong business performance off our logic business in 2010 because of the really heavy investment that we think is going on in that market, but we really can't predict when and how the memory market works for us and the process control vendors in general this year.

Okay. And lastly, on that solar side of it, do you guys know enough about that market to say we think if we found the right customer there is a problem to solve there or is this more just exploratory at this point?

That's a good question, Greg. So we've done some technical pilots where we've hooked up our software, collected data directly off their tools, used that to show how our process control solution could improve the distribution of performances in that facility. So technically we believe we can show success. There is a whole business question about okay, what does that mean in terms of their business and how do you price that and how do you value that and then how do you roll that out.

I think the technical thing we're pretty confident about. The business question for them and hence then our business model, we are still in the process of answering. And as we get through that, we're going to understand exactly what's the right form of our business model and what's the right channel to use for it. We're still answering those two questions.

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