PDF Solutions Inc (PDFS) 2010 Q1 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 first fiscal quarter ended Wednesday, March 31, 2010.

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 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 12 through 22 of PDF's annual report on Form 10-K for the fiscal year ended December 31st, 2009 and similar discussions 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 Joy Leo, PDF's acting 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, followed by a discussion on the progress we made on our key strategic initiatives to date. Then I will share our perspective on the environment and its impact on PDF.

In the first quarter of 2010 we achieved revenue of $15.3 million and non-GAAP profit of $0.06 per share. We narrowed the gap loss from $0.03 a share in Q4 2009 to $0.01 a share in Q1 2010.

Business activity grew in the first quarter and we continued to gain momentum in our design-to-silicon yield solutions. Gainshare was strong. In Q1 we successfully closed the following contracts. A yield ramp engagement for a 22-nanometer process development. A yield where FDC deployment for a 40-nanometer manufacturing process. And an extension to a 28-nanometer DFM contract with a fabless chip company. The breadth of nodes and engagement types encompassing DFM, process control, and yield ramp demonstrates the success we're having in delivering value across the process lifecycle.

Our sequential increase in design-to-silicon yield revenue and gainshare, coupled with continued improvements to our cost structure, created four consecutive quarters of improved GAAP and non-GAAP results. To reiterate from our past earnings call, as the top line improves, our new cost structure provides leverage to achieve better earnings.

Turning to our progress on key strategic initiatives, we continue to execute well on our client deployments and yield targets, product development plans, and achieve our cost structure objectives. Our goals for the year continue to be expand our market focus beyond our core client base to include all advanced logic manufacturers, leverage our deep penetration in the fabs to deploy our characterization and DFM solutions to a broader group of logic companies including both fabs and fabless, demonstrate the value of our process control solutions in adjacent markets such as memory, wafer, solar, LED, battery, and LCD, achieve the targets in our client projects to drive value to the accounts and thus drive gainshare results, aid clients to achieved product tape outs that benefit from our DFM solution to position us for incremental gainshare revenue, drive continuous efficiency in development and operations, and grow revenue while keeping costs contained.

We will continue on the primary strategic objective of expanding the value of our solution across the IC manufacturing process lifecycle.

One quarter into 2010, our observations about the semiconductor industry remain unchanged from our prior call. 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 the fabless companies' requirements and parametric control is a growing problem for the industry.

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

Thank you for your time and attention. I will now turn the call over to Joy, who will discuss in detail our financial results for the first quarter and fiscal -- first quarter of 2010. Joy?

Thank you, John. As a reminder, in addition to using GAAP results in evaluating PDF's business, we believe it is also useful to consider our results using non-GAAP measures. Non-GAAP excludes stock-based compensation expense, amortization of acquired technology and intangible assets, restructuring charges and their related tax effects as applicable. You can access the press release that contains a reconciliation of non-GAAP to GAAP results in the Investor section of our website, located at pdf.com.

As John just reported, the summary results for the quarter are that PDF achieved total revenues of $15.3 million in the first quarter. On a GAAP basis, net loss is $0.3 million or $0.01 per share down from the net loss per share of $0.03 in the prior quarter. On a non-GAAP basis, net income was $1.7 million or $0.06 per share and diluted share.

The total revenues reflect a sequential growth of 3% over Q4 '09 revenues of $14.8 million and maintain a strong year over year growth of 50% from Q1 '09 revenues of $10.2 million.

Within revenues, design-to-silicon yield solutions contributed 68% and gainshare contributed 32% for the reported quarter compared to 62% and 38% respectively in the prior quarter. Let me offer some details. Design-to-silicon yield solution revenues in Q1 were $10.4 million, up approximately 14% from Q4, '09 and 34% compared to Q1, '09. Our strong client base has helped maintain our quarter to quarter revenues growth in a challenging economy.

During the quarter we signed two engagements, a yield ramp for a 22-nanometer development process and a YAFDC deployment for a 40-nanometer manufacturing process. In addition, we sent in an extension to an existing 28-nanometer DFM engagement.

Gainshare performance incentive revenues in Q1 were $4.8 million, down 14% from the previous quarter, primarily due to a slower production ramp on the 45-nanometer process node than expected. Compared to the same period last year, gainshare doubled as inventory demand improved, a reflection of industry expectation for a healthier environment.

A snapshot look at total revenues for the reported quarter by region reveals Asia contributed 68%, North America contributed 22%, and Europe contributed 10%. During the quarter, 12 service engagements from eight clients each contributed approximately $150,000 or greater in revenue. This represents a net increase of two engagements and no change to the client count from the prior quarter.

Gainshare revenues were generated from six clients and six engagements, down two contracts and one client compared to the prior quarter. The top ten clients represents 88% of our revenues in the quarter. The number of clients contributing revenues greater than 10% for the quarter was three, down two from last quarter, up one from the same period last year.

Gross margin was 56.2% for the quarter, up 2% sequentially. Gross margin included $602,000 of stock based compensation and $359,000 of amortization of acquired technology. This compares to fourth quarter 2009 gross margin of 54.6% on lower revenues of $14.8 million. Note non-GAAP gross margin was 62.5% for the quarter, up 4% sequentially.

Operating expenses as a percentage of revenue decreased overall. Total GAAP operating expenses for the first quarter were $8.6 million and included approximately $1 million of other charges as follows. $0.9 million of stock based compensation expense compared to $0.5 million in the fourth quarter 2009, flat when considering the out of period adjustment of $0.4 million. Acquisition related amortization of expenses of $0.1 million, flat from last quarter. Restructuring expenses of $1,000, down from $0.9 million last quarter.

R&D was at 26%, down compared to the previous quarter. Research and development expenses for the reported quarter were $4.4 million, and included $0.3 million of stock based compensation expense. Lower expenses for the quarter were driven by lower outside subcontractor development expense and the shift of some R&D resources to revenue engagements.

SG&A expenses increased from 25.1% of revenue last quarter to 30% of revenue this quarter. Selling, general and administrative expenses were $4.6 million and included $0.6 million of stock based compensation expense. This increase from $3.7 million in Q4 '09 included increased legal expenses and approximately 75% of 2009 audit fees as the bulk of these services were performed in the first quarter.

The net of interest income, interest expense, and other income and expense in Q1 was $0.3 million compared to $0.1 million in Q4 '09. The delta was primarily driven by a gain on foreign exchange when compared to Q4, '09.

We recorded tax expense of $0.5 million that compared to a net benefit of $0.1 million in the fourth quarter 2009. The income tax expense primarily consists of foreign withholding taxes, minimal foreign tax expense on earnings generated from foreign operations, and local statutory withholding taxes.

On a GAAP basis, we reported a net loss of $0.3 million or $0.01 per share on 26.9 million basic shares. This includes $1.5 million or $0.06 per share related to stock based compensation expense under FAS123R and $0.5 million or $0.02 per share in connection with amortization of acquired technologies and intangibles. The net loss for the quarter was $0.3 million or $0.01 per basic share on a GAAP basis versus a net loss of $0.7 million or $0.03 per basic share in the previous quarter and a net loss of $7.3 million or $0.28 per basic share a year ago.

Excluding above items, the non-GAAP income was $1.7 million or $0.06 per basic and diluted share.

Turning to the balance sheet, at the end of the first quarter our total cash plus marketable securities and long term cash investments stood at $35.6 million, flat from the end of last year. Net A/R decreased to $19 million from $19.8 million at the end of Q4. Collectability of our receivables remains current and healthy.

Headcount at the end of Q1 was 302 worldwide compared to 306 at the end of the prior quarter and representing a 17% reduction from the end of Q1 '09 when headcount was 363. Annualized revenue per head of $202,000 was up 5% from the previous quarter and was 80% higher than a year ago which reflects improvements to processes and productivity in both time periods.

This completes a summary of our first quarter results. I will conclude by saying that while we are optimistic given the past few quarters and the health of the business currently, we are not providing guidance at this time. Now I will turn the call over to the operator for Q&A.

(Operator Instructions). K.C. Rajkumar, RBC Capital Markets.

Hi, guys. Thanks for taking my question. Could you provide some general comments on why you're not able to provide guidance?

Yes, K.C., this is John. As you know, when the downturn started the end of 2008, mid 2009 we stopped providing guidance. From our business today, we do see an improvement and we do believe the business has been improving nicely the last couple of quarters. We still at this point feel that every contract is very critical and has a big impact on our overall earnings and because we're at that bubble, as you could see our non-GAAP was up a few cent profit, a $0.06 profit, our GAAP was a $0.01 loss. We're right at that bubble where one or two, a few hundred thousand dollars has a material impact one way or the other. So we've chosen at this point really not to single out anything in terms of our expectations to our customers and to other folks out there while we build the business back up and get a material gap between our revenues and our expenses.

Do you guys see a possibility of fab spend and if it starts grouping off in the back half of the year?

You know, when we started this year I think we felt that that was a possibility. That I still think is always a risk. There is an awful lot of CapEx spend going on right now. Customers as we've talked with them during the last quarter seemed to maintain a very positive attitude and their window as you go out towards the latter part of the year in terms of their CapEx spending remains to be relatively positive.

And I think overall the sentiment in the industry is relatively positive. But frankly sometimes they'll tell us they don't seem to see it coming when it hits them and the numbers that they are spending right now are actually quite large.

Have you guys seen an increase in the R&D spend at fabs due to the additional CapEx and also due to (inaudible)?

Increase in R&D spend, it's harder for -- I mean I think what we saw even through the downturn, our largest customers continued to spend on R&D in advanced nodes. And that moved on and you saw I think in the 32 and 28-nanometer development activities.

So I don't know that we've seen a significant change in that. I do think people are investing even more. Now we're starting to see the fabless companies, as you saw one of our contracts was an extension with a fabless company at 28-nanometer. We see the fabless accounts starting to really ramp up their interesting characterization and R&D spend on design starts for what would be the newer nodes. I don't know if that's anything more than anecdotal though at this point, K.C.

All right. A couple of more before I sign off. The (inaudible) you talked about the slight downtick in the quarter due to a slower than expected ramp of the (inaudible) nodes. Is it possible to give sort of general color on what is the exposure of your gainshare projects to these (inaudible) nodes?

Yes, this is John. I think the majority of our gainshare is at this point 65 and below nodes. So there's really no production at 28, so practically that means flavors of 40, 45 and 65 with maybe a very small amount still in the more mature nodes like 70 and above.

If that is the case, if that is the case why would you expect -- why would the -- how can we understand that the gainshare has actually slightly decreased from the previous quarter when all anecdotal evidence seem to point to (inaudible) starts having increased from Q4 into Q1. Is it --

I understand your question, K.C. So we had a couple of accounts that as they transitioned capacity from one node to the next -- in fact we talked about this on the prior call as a possibility and it's still something that we've been concerned about as we go through this year. As some of our accounts transition capacity from one node to the next, they put an awful lot in, utilization remains high, and sometimes the new node capacity does not come out as cycle times are actually relatively higher increase. Or if they have an excursion or something to the effect that they end up not shipping as much. We generally get paid on shipments, but when things come out of the factory. So anything that causes utilization to stay quite high, but doesn't cause the outs to happen, does have an impact on our revenue. Couple that with the fact that sometimes the timing of the quarter and the revenue recognition versus the actual quarter that we reported in, there is a gap.

Right. One quick question for Joy. How would you characterize the OpEx trending for the rest of the year?

I think that the OpEx is basically going to trend pretty close to where we're running at.

Okay. So one should expect OpEx to stay flattish for the year, correct?

We're pretty comfortable where we currently are and we will actually work to make sure that we're reducing costs as appropriately not to affect the long term health of the business.

Thanks, guys.

Greg Gerst, Gerst Capital.

Hi, John. Hi, Joy. Quick question. Kind of a follow up from a discussion we had on the last call. Have you made progress in determining how you can better communicate your business? I think at the time, John, if I was reading the last transcript correctly, you were talking about kind of cranking your model in and trying to figure out what are some reasonable predictors for your business. Just wanted to get an update on how you guys are doing there.

Yes, Greg, I appreciate the question. And yes, we have continued to work on what we're going to do and what we're going to communicate. I also think if you just go back and look at the transcript from Joy's script, you see that it itself is structured definitely to provide a number of different metrics.

Right, I noticed some additional metrics in there.

So we're already starting to do some things I think differently than we did in the past. In terms of -- I think the question mark that you asked on the last call was around how we discuss or talk about the gainshare piece. And that's the one that's of course the stickiest for us because that's customer confidentiality as well as just us signaling things that we don't want to signal to potential competitors or other customers.

Right. And something you raised in an earlier conversation I hadn't thought of before, that in terms of coming up with a residual value of gainshare contracts not getting anywhere close to customer confidentiality, but really looking at an aggregate residual value, have you guys thought about this some more? I know you've worked on it internally, but can you just give us little bit of color? Do you think you'll be able to get to a point where you could provide outsiders enough information where we can come up with on our own just a range of what's some possible residual value of those contracts might be?

Yes. We've looked at it a number of times from our internal stuff and we've actually gone back and looked at what we said in the past to what happened to see how accurate our predictability was. Because we don't want to put ourselves in a position where we're really misleading people one way or the other.

I don't think we sat there and said, oh wow, that was so greatly predictable that we should be able to communicate this. We are still trying to figure out how to establish the value on that. Because what you find is a mix in the factory and the nodes. You get paid on some nodes, not on others. How you establish that residual is hard to do.

The next one, I'm going to mention a customer, I'm not trying to kind of ask specifically on them, but just based on what you've revealed publicly, in February last year you had this press release on your strategic relationship with IBM to design this chip platform. Reading the latest 10-K, it indicates the goal is to get this chip design platform used by as broad a set of manufacturers and fabless firms as possible. And I think you mentioned a little bit of this on the call, but could you give us some color on the progress you're making there either in terms of you're seeing traction with a number of fabless guys or manufacturers? Any kind of color on that would be helpful.

Sure, Greg. I think the technology you're referring to is pdBRIX which was in part some technology that the basis of that was part of an acquisition of a company called Fabbrix that we completed in 2007. We did do a joint development project or are in the process of doing that with IBM that we announced in February last year associated with SPIE. If you actually looked at the lithography conferences this year, you would see a series of joint papers with us and ASML including looking at this technology at the 22 and 20-nanometer node and its applicability or value in what's referred to as source mask optimization and double patterning.

So I think there's really two things that we are doing here right now. Number one we are continuing the R&D. In part that's the work that we're doing with IBM and folks like ASML as well as others in our internal R&D. We see increased interest from partners to work with us on this as I think they see a lot of the looming issues that are problems at 28 will be bigger problems at 20 and even bigger problems below that.

The second thing we're doing is customer adoption or customer attraction. We've I think if you've noticed over the last few calls talked about our RFDM engagements with fabless accounts. You will probably see from us over the the next couple of quarters additional announcements about pdBRIX or DFM wins in the IDM and fabless space some of which is a result of the work we've done with IBM and ASML and others, and some of which is really just a result of our basic (inaudible) technology.

So on the pdBRIX aspect of things, in just reading some of the trade rags I see periodic articles on gridded design for the advanced nodes. But I see it coming not only from you guys but from other people. I guess the question is, does the pdBRIX intellectual property enable you guys to go after, I shouldn't say go after, but is the intellectual property such that you're going to be able to make money on this and make sure other people aren't using your technology? I know it's kind of a dumb question, but I'd like to get your thoughts on that.

Yes. So of course, Greg, I think the Carnegie Mellon folks which were the founders that started Fabbrix that then became our technology had quite a long history in this. In fact if you really want to get back to when we first started talking with Carnegie Mellon, it was around when the venture funding went into PDF in the mid 1990s. And they said, well it doesn't make sense for our university to research into what PDF is commercializing because obviously it's got commercial value, let's talk about what the next big issues were. And they started looking in these areas. The two principal investigators, one of which is still our chief technology officer, the other of which is involved with the company as a result of the acquisition.

So I think we have a very long history in this and as a result a significant patent position. You made reference to gridded design and it's important that there are a lot of ways you get to regularity. pdBRIX has a set of unique capabilities that are probably a little bit different than what you think of when you say gridded design. And as a result I think there's a pretty differentiated capability in technology. The impact of that differentiation really comes in the amount of area efficiency and process latitude we're able to demonstrate with our benchmarks that we've been doing with the accounts and with the R&D engagements that we've been doing with folks like ASML and IBM.

As far as will we descend ourselves on this, I mean we will certainly protect our intellectual property if we believe someone else has violated it. It's something that we believe very strongly especially given our heavy investment in R&D as a percentage of our company. So I think you will see that there is an awful lot of IP in this space that we happen to own and we think we have a pretty strong position there. Certainly we would evaluate anyone else's potential offer and potential conflicts.

Do you believe anyone else is either violating today or close to it?

That's really hard for me to speculate, Greg. I know we look at things like that and try to look at what folks are patenting to understand relative positions in the marketplace. I don't know that I have an answer for you.

That's fine. I've got a couple more, I'm trying to run through them quick. This is in regards to another press release you guys did, this was April '09. You talked about the Samsung engagement on your YAFDC. Subsequent to that, you watch the Samsung foundry news and they seem like they're making pretty good progress. It sounds like they've gotten the iPhone, some of those processors, they've got the iPad A4. We're here trying to ascertain is PDFS helping in this success, so anything you can comment on there would be appreciated.

Yes, it's a good question. You're right, we did have a joint development agreement with Samsung on some applications for YAFDC. We are very careful about never talking about clients or OEMs or who's paying us wafer fees unless, or basically using our technology on a particular node, unless of course they've put out something that says something with respect to that. So outside the specifics of that particular press release and the work we're doing with them on that, we really aren't in a position that we would talk about anything we may or may not be doing with them.

Are you allowed to say we're still engaged with them and we're still there? That's probably the simplest. Or no?

I think we can say that joint development agreement is still ongoing and we still have work with them in that regard. And we may or may not have work that is revenue generating outside of that engagement. That we won't talk about.

All right. And then I guess the final thing, kind of related to some of my earlier thrust of my questions is, we ask ourselves here given the -- not blaming you for anything, this is the situation you're in, you're really very constrained on what you can reveal about customers. On top of that, there isn't -- you're unique in your niche of the market, there isn't really anything available on total available market, market share, things typical of other public companies in the space. So we kind of ask ourselves, why are these guys public? It's difficult for them to be public given the limited information they can reveal. So asking you in a slightly different manner, would you and the board consider actively seeking to sell the company to a larger player in the space and/or taking it private?

You know, Greg, I think every day we're always buyers and we're always sellers. So we're always looking at every opportunity about what's the best way to maximize the value of the business. We understand the nature of your question. I think it's again one where I don't think that we're going to communicate on a call like this any intention one way or the other.

Okay. Thank you. That's it for me. Thanks.

(Operator Instructions). Tom Diffely, D.A. Davidson.

Good afternoon. I was curious, did I hear you say that you lost a client on the gainshare model?

That would be Joy.

Gainshare was generated by six clients and six engagements and two contracts and one client.

So what is the dynamic of losing a client in the gainshare? Do they just stop producing at 45-nanometers, or?

It was a very mature node if I think it's one I know it is.

Okay, so this client had been around for a couple of years and just --

Three or four years probably.

Yes. Okay. And the other thing on gainshare, is that business recorded one quarter in arrears? So what you report this quarter reflects what your clients did a quarter ago?

We talked about this before. It's one manufacturing (inaudible) so that's not necessarily lined up with the fiscal quarter. So for some accounts if the manufacturing quarter was November, December, January, we would recognize that in February. Others may be December, January, February recognized in -- or invoiced in March, they recognize it the next quarter.

Okay, but it just seems by the time the call comes around you should have a pretty good feel for what that number is.

Not necessarily. We have to go back and work to get the information. They have to provide that information to us, so they have their own work to do so they're not going to get to it before they have to.

Okay, so it's just a matter of timing of when they get to you?

Right.

All right. And what was the reason for the increased legal fees in the quarter?

We just had a little higher legal fees and that was relating to some of just general stuff as well as what was filed in our 10-K on the litigation errors.

Okay. And is that something that was just a one quarter phenomenon or stuff that could trail into future quarters as well?

We do not have the ability to predict what will happen beyond what we currently know today.

All right. And then how about a little on the cash flow for the quarter?

We are expecting cash to basically be flat or trail up. We will continue to basically cash manage our receivables as well as our cash and working capital.

Okay. And then, John, I was wondering if you could just give us some color on the activity among the different types of customers, be it foundries or fabless or IDMs. What is most active right now?

Yes, so I think the most active activity for us is primarily in the foundry market where we see -- I think you can see that just from their press announcements about their CapEx. Our foundry activity has probably grown significantly over this downturn, in this now upturn that's happening. The fabless market is -- we see a fair amount of interest I believe as a lot of them have struggled to bring up their products at the advanced nodes and understanding the value of characterization, the importance of characterization. And then from the characterization value, then trying to understand the impact of technologies like BRIX.

Okay. Over the last couple weeks we've heard a lot of good news about like ASML shipping a bunch of these advanced steppers out there. At this point do you think the market is starting to broaden as far as who's getting this advanced technology? Or is it still kind of going into the hands of just a few players?

Yes, so clearly the number of players that are deploying 40 and 45-nanometers is going up. And that is I think early on there were very small players that had meaningful capacity. We certainly, what we saw was in the '08/'09 time period, you had really one major foundry with substantial capacity. Some IDNs that had very meager capacity, so 3,000 to 6,000 wafer starts a month type of range. And the other manufacturers really not having very much capacity. As we see this year we see that capacity of the other next wave of foundry manufacturers really starting to come online. And we expect that to happen as you get into the second half of this year really more meaningfully next year. They order now, they install, stuff comes out towards the end of this year.

Yes. And then finally on the new contracts for the design-to-silicon yield solutions, do those include gainshare at the tail end of them?

In general when we sign contracts we always strive to assign a gainshare piece to them. They sometimes have the first phase of something that may not have gainshare on it, but then the technology turns off to be then put in place in the gainshare piece.

Okay. All right. Thank you.

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