PDF Solutions Inc (PDFS) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PDF Solutions, Incorporated conference call to discuss its financial results for the third fiscal quarter ended Thursday, September 30, 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. (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 solution. 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 31, 2009 and similar disclosures and 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 Chief Administration Officer and acting Chief Financial Officer. Mr. Kibarian, please go ahead.

Thank you, and welcome, everyone. I will begin this call with a summary of our third quarter results. Then I will end my prepared comments with our assessment of PDF Solutions' performance year-to-date.

In the third quarter of 2010, we achieved revenues of $14.8 million, lower quarter over quarter due to the delayed signature of a new yield ramp engagement initially anticipated in Q3, which I will discuss more in a few minutes.

The non-GAAP profit for the quarter was $0.07 per share and we were breakeven on the GAAP basis. This marks our fifth consecutive quarter of non-GAAP profit and our second consecutive quarter of at least breakeven on a GAAP basis.

We saw business activity continue to gain momentum in Q3 and in the current quarter as well. In Q3, we successfully closed the following contracts; a yield map engagement for our 65 nanometer process at a new account, a yield to our FDC pilot for a 40 nanometer manufacturing process also at a new account, an extension of a 32 nanometer R&D engagement to include the yield ramp, and an extension to a 28 nanometer DFM contract with a fabless chip company.

Noteworthy to mention that subsequent to the close of Q3, a delayed yield ramp engagement mentioned earlier was successfully closed and is now under contract. This is a 28 nanometer yield ramp engagement in a new facility with an existing client. This client had signed an LOA in the second quarter, but we were not able to close the contract last quarter. While the additional revenue and profits from this contract would have had a positive impact in Q3 if signed before quarter end, we do not attempt to rush to close contracts that would require compromises which deviate from our long-term goals.

Business activity in Q3 continued to demonstrate that clients are using PDF Solutions' technology across the entire process life cycle and also on more nodes. Gain share was down slightly quarter over quarter. As we said on our last conference call, we anticipate gain share revenues to trend up in Q4 as newer contracts and facilities begin to contribute.

Now, three-fourths of our way through 2010, I would like to comment on our performance so far. First, we expected this to be a year in which we strengthen our position with logic manufacturers. Our performance to date shows that our solution is being applied across the process life cycle from R&D to late stage production control as evidenced by the fact that we have signed contracts this year for solutions at nodes from 65 nanometer to 20 nanometer.

Moreover, as designers migrate to these leading edge nodes, we continue to make good traction with our DSM solution. We are becoming an important partner to both manufacturers and designers alike.

Second, we expected this year to be a year where we started to demonstrate our process control solutions in adjacent markets such as [memory], solar, LED, and wafer manufacturing. Our goal this year was technical demonstrations rather than business growth. With two months left in the year, we remain confident we are on track to achieve this goal and laid the foundation for more business in these areas.

Finally, we expect to demonstrate the benefits of our new cost structure and improved efficiency. Operating income has improved throughout the year, and we expect this year to be one of the most successful as measured using the metric of operating income as a percentage of revenue.

In summary, we have continued to operate efficiently, expand our business to larger Asian fabs, invest wisely in R&D to better serve our clients in the logic, manufacturing, and adjacent markets, and enhance our position as an important partner to logic chip manufacturers and designers.

Overall, we feel confident we will achieve in 2010 all we set out to achieve and then some. While we continue to feel good about our business activity, we will refrain from providing specific quarterly guidance and stay focused on improving PDF business fundamentals.

Thank you for your time and attention. Now I will turn the call over to Joy, who will discuss in detail our financial results for the third quarter. Joy?

Thank you, John. As a reminder, in addition to using GAAP results in evaluating PDF's businesses, we believe it's also useful to consider our results using non-GAAP measures. Non-GAAP measures exclude stock-based compensation expenses, amortization of acquired technologies 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 third quarter are that PDF achieved total revenues of $14.8 million. On a GAAP basis, net profit was $50,000 or $0.00 per share, down from a net income per share of $0.01 in the prior quarter. On a non-GAAP basis, net income was $1.9 million or $0.07 per basic and diluted share, down from a net income of $2.2 million or $0.08 per basic and diluted share.

Total revenues declined by 3% over Q2 revenues of $15.4 million but reflect a year-over-year growth of 7% when compared to Q3 revenues of $13.9 million. This slight decrease in Q3 was primarily due to the delay signature of a 28 nanometer yield ramp engagement which was signed subsequent to the close of the reported quarter as John mentioned earlier.

Within revenues, design-to-silicon-yield solutions contributed 71% and gain share contributed 29% for the reported quarter compared to 70% and 30%, respectively, in the prior quarter. Let me offer some details. Design-to-silicon-yield solutions revenues in Q3 were $10.5 million down approximately 3% from Q2 2010 and up 24% compared to Q3 '09.

During the quarter, we signed two new engagements, a 65 nanometer yield ramp and one Yield-Aware FDC pilot for a 40 nanometer manufacturing process. In addition, we extended two existing engagements, a 28 nanometer DFM engagement and a 32 nanometer yield ramp engagement.

Gain share performance incentives revenues in Q3 were $4.3 million down 5% from the previous quarter and down $1.1 million or 20% from Q3 '09, in each case, primarily due to the timing of contractual end of gain share revenues on older contracts being only partially offset by an increase in gain share revenues under remainder contracts and the start of gain share on new contracts.

A snapshot look at the total revenues for the reported quarter for the regions reveals Asia contributed 65%, North America contributed 24%, and Europe contributed 11%. During the quarter, 12 service engagements from nine clients each contributed at least $150,000 of revenues. This represents a net increase of two engagements and two new clients from the prior quarter. Gain share revenues were generated from five engagements and five different clients, which is one less contract and the same number of clients compared to the prior quarter.

The top ten clients represented 83% of our revenues in the quarter. The number of clients contributing revenues greater than 10% for the quarter was four, the same from last quarter, up one the same period last year.

Gross margin was 58.5% for the quarter, down slightly by 0.5% quarter over quarter. Gross margin included $413,000 of stock-based compensation expenses and $360,000 of amortization of acquired technology. This compares to Q2 gross margin of 59% on higher revenues of $15.4 million. Note, non-GAAP gross margin was 63.7% for the quarter, down by 0.5% sequentially.

Operating expenses as a percentage of revenues decreased slightly. Total GAAP operating expenses for the third quarter were $8 million or 53.7% of total revenues, down by 4.1% as compared to Q2 2010. Operating expenses included approximately $1.1 million of other charges as follows -- $0.6 million of stock-based compensation compared to $1 million in the second quarter 2010; acquisition-related amortization expenses of $0.1 million flat quarter over quarter; $0.4 million of restructuring charges increased by $0.4 million compared to the prior quarter.

R&D was at 28.9% of revenues, up slightly by 0.7% compared to the prior quarter. Research and development expenses for the reported quarter were $4.3 million and included $0.3 million of stock-based compensation expenses. In absolute dollars, R&D expenses were flat when compared to the prior quarter.

SG&A expenses decreased from 29.3% of revenues last quarter to 21.8% of revenues this quarter. Selling, general, and administrative expenses were $3.2 million and included $0.4 million of stock-based compensation expenses.

Lower expenses for the quarter were primarily the result of lower legal and other sales and marketing related expenses. The net of interest income, interest expense, and other income and expenses in Q3 was a net expense of $0.6 million compared to a net income of $0.4 million in the prior quarter. This delta was primarily the result on a loss on foreign currency exchange.

We recorded tax expense of $28,000 in the reported quarter as compared to a tax expense of $0.3 million in the second quarter 2010. The income tax expense primarily consisted of foreign withholding taxes and income tax on earnings generated from foreign operations and is offset by refunds expected from past year's tax returns and the reversal of reserves related to uncertain tax provisions where the statute of limitation has lapsed.

On a GAAP basis, we reported a net income of $50,000 or $0.00 per share on 27.4 million basic shares and 27.6 million diluted shares down from a net income of $0.3 million or a $0.01 per basic and diluted share in the previous quarter and a net loss of $2.8 million or $0.11 per basic and diluted share a year ago. Included in the reported net income for the quarter are as follows -- $1.1 million or $0.04 per share related to stock-based compensation expense under FAS-123R; $0.4 million or $0.02 per share in connection with amortization of acquired technology and intangibles; and $0.4 million of restructuring charges. Excluding the above items, the non-GAAP income was $1.9 million or $0.07 per basic and diluted share.

Now turning to the balance sheet, at the end of the third quarter 2010, our total cash plus marketable securities and long-term cash investment stood up $35.3 million, up from the prior quarter due to the payment in the reported quarter of a large amount by a customer that had been due in the prior quarter.

Net AR decreased slightly from $23.4 million last quarter to $23 million for the reported quarter. Collectability of our receivables remains current and healthy.

Headcount at the end of Q3 was 296 worldwide. This represents a 3% decrease from the end of Q2 2010 when headcount was 306. Annualized revenues per head remains at $200,000 when compared to the previous quarter, so it was 11% higher than a year ago reflecting improvements to processes and continued productivities made over the past year.

This completes the summary of our Q3 results. Thank you. Now I will turn the call over to the operator for Q&A.

Thank you, Ms. Leo. (Operator instructions.) Our first question comes from K.C. Rajkumar with RBC Capital Markets.

Hi, guys. Thanks for taking my question. John, the past couple of quarters the revenue from [DYs] has trended between $10 million to $11 million and revenue from gain share has trended between $4 million and $5 million. If you were to look out on average for the next couple of quarters, not asking specifically on any particular quarter, would you expect these two line items to break out of this range?

Yes, thanks, K.C. As you said, we're not providing specific guidance. Certainly, when we put together our adjusted cost structure, etc., we expected that to happen so we do expect both the gain share number and design-to-silicone-yield numbers to increase. Of course, the gain share [tent] will go up as we said before just because of new facilities that are coming online and the [D2SY] will go up as you've seen the activity of both of these has been relatively robust in these last few quarters.

Okay. So, if I fold] those two points then the Q4 [166] should be up on the Q3 top line?

We're [refraining] from providing specific guidance on any given quarter basis, so that's got to be your judgment call. But certainly, you need to look at the activity that's gone on over the past couple of quarters and make a judgment on that.

Now, there was a fair amount of (inaudible) that is happening in the foundry space where you do have decent traction with. (Inaudible) last two purchases by the major fabs and foundries. Would you expect that your plans of gaining momentum in the gain share business is going to play out sometime next year?

Yes, K.C. I think if you remember from our last conference call we talked about really the transition that's gone on in gain share from a lot of the IDMs really being a big contribute to our gain share and what we found, especially in Japan and the US, when their facilities were relatively small. When they completed -- when we would complete let's say 90 nanometers, they'd start paying us a gain share. As we brought up 65 nanometer, the volumes would come up on 65. The volumes would come down on 90 and the gain share for 65 almost repeated -- replaced the gain share from 90 in that account. So, there was really no growth, let's say, in terms of the total wafer volumes that they produced. They kind of migrated their product.

The transition that's gone on over this past couple of years with a lot more of our customers [really] in the foundry market or in a hybrid foundry IDM market, they've announced new facilities. Those new facilities represent incremental gain share opportunities. And yes, their tool installs lead our gain share by some number of quarters which really, I think, depends a bit on the robustness of the business environment that they see, how quickly from tool install to revenue shift they see, etc.. But, yes, we expect in 2011 and again in 2012 as some of our accounts that have announced multiple facilities start bringing those facilities online we will start seeing the benefits of being in this part of the market rather than the part we've been in the past.

Okay. Has the revenue per wafer -- has it trended up with time or with (inaudible)? Can we -- or is it that that has stayed basically flat and -- I'm just trying to model on average gain share increases purely as a function of the increased number of wafer starts.

Yes, we model it purely on an increased number of wafer starts. We don't try to put our crystal ball together to figure out what wafer pricing is going to be. Our gain share tends to be proportional to wafer pricing and it's too difficult for us to factor how that's going to affect our price per wafer. So we model it purely on a wafer volume basis and assume some decrease over time in the wafer price for a given node and hence a decrease over time in dollars per wafer that we see. We -- our goal has always been to increase the number of wafers we're paid on and we're not terribly focused on the dollar per wafer we achieve in a contract.

And to -- just to round off this line of questions, at a high level, and not talking specifically about your customers, John, as you have a very good view of the foundry space globally. What would you say would be the -- on average your expectation for increased wafer starts next year versus this year in the foundry space without necessarily confusing that with the logic starts?

Yes, that's a good question, K.C. We model this pretty heavily, and I was just looking at kind of our strategic planning documents. If you look from about 2002 to about 2007 or 2008 and look at the incremental logic starts -- exclude the microprocessor vendors and look primarily at the [SSE] manufacturing facility, so that'd be the foundries and the IDMs, there was not a lot of growth, especially if you contrast that to the growth that had gone on in the memory markets.

Starting in around 2009, as you saw competition in the foundry market really picked up with the advent, I believe, of the [ISDA] partners, we've seen a lot more aggressive behavior in the foundries in terms of adding capacity. That capacity has been coming in now, but as you kind of alluded to in your questions, really hasn't been a factor in terms of the wafer outs and certainly not affected -- those bookings of equipment have not affected our gain share to date as those facilities really haven't contributed anything from a production standpoint.

So now I think what you've seen over these past couple of years and in the indications the customers give us will extend into 2011 a fairly robust build-out of logic capacity, I think really almost as a catch-up for what didn't happen in the 2000 decade as the IDMs by and large decided they were going to be asset light, filled up their capacity that they had internally at 90 and 130 and really stalled out when they were going to be moving to these advanced nodes.

We see an awful lot of design activity in these advanced nodes, the capacity coming up in these factories and these advanced nodes. And as our customers that are in that part of the market enjoy the benefits of that demand. We expect that to affect our gain share, and over time we expect the share of the foundry market that we participate in to grow.

Great. That's great color, John. If I could try to squeeze out from you, what would be the approximate range of increase in number of wafers which would [be in] place exiting calendar '11 versus exiting calendar '10? Is it a 10% range? Obviously, that's probably too small, but what is a ballpark range you would place the number at?

That's a good question, K.C. I don't have the numbers in front of me. We do -- I think 10% would be probably an underestimate. We do expect the capacities and the customers that we are collecting gain share on to go up relatively significantly. What we don't know is some of the -- a couple customers in particular, they have tool-ins in Q4 and early Q1 with an assumption about wafer outs by Q4 -- Q3 to Q4 of this coming year, and year over year not modeling probably as aggressively as they are modeling. When we do our analysis, we think people tend to be overly optimistic both about end market demand and their ability to bring up new facilities, particularly if those new facilities are in new geographies.

There's a lot of -- the slope is relatively steep as you get to the end of 2011 and we're a little bit nervous about that slope, so we're not trying to model that too. We're probably being a little bit more shy, so I think if you look at what people publish out there, you would have a very heady number in terms of year-over-year growth. We probably don't forecast that. That being said, it's probably greater than your 10%.

Okay. Great. Thanks a lot, John.

And your next question comes from Tom Diffely with D.A. Davidson.

Yes, good afternoon. I was wondering if there's some way to quantify the change in the engagement quality on a year-over-year basis. I mean, where you were a year ago versus where you are today. I know you can't talk about working with larger, more significant customers. Is there any way to quantify?

I think it's a hard one, Tom. I think you'll see over the next couple of quarters as business grows the quality of the gross margins and the improvement in the overall operating income levels. I think at that point you'll start getting a sense of where things are. Unfortunately, I think, it's -- customers always tell us and we think some customers are very good customers, have a very strong volume perspective. Until it really materializes, we are always a little bit skeptical. There's a lot of change in the foundry market with a lot of people making a lot of pronouncements about how good their business is going to be. Some of those are our customers. It's hard for us to judge. We think it's a quantum shift from who we sold to in the past, but we need to be a little bit skeptical ourselves on just (technical difficulty).

Okay. Maybe -- I mean, do you have a sense for what percentage of the SOC market you're working with right now versus where you were a year ago?

Yes. As we kind of alluded to in the discussion with K.C., we've been trying to level that and trying to figure out exactly what selection, especially at 40 and 28, in particular 28, that we think we are capturing. It's hard for us to say right now because we have to make assumptions about how successful some of our customers are going to end up being. And if you look at the stated capacity they're putting in place, it would suggest a relatively large percentage of that node. We just don't know how successful they're willing to be.

Okay.

So it's hard -- so, you've kind of got to -- that's why I said you've got to believe their rhetoric or not and then --

Right.

-- how much to [discount] it. If you look at the capacities that are going in, it's a pretty big number.

Yes. Okay. And then, I guess, with your own operations, the 3% decrease in manpower, people, could somebody characterize what those functions were?

It was primarily just general attrition in positions that we haven't filled yet.

Okay. Are they positions that are -- can they be categorized (inaudible) as critical or ones you have to fill?

No.

No.

Okay. And then finally, over the last few months when there's been a little more concern about just the overall, I guess, marketplace on a near-term basis with a little bit of building up of inventory, what -- have you seen any changes in the ramp plans or the -- (inaudible) plans from your customers?

Yes, that's a good question, Tom. We've been watching that very closely with all the customers. We still think the IDM -- the Japanese IDMs always give you the best insight about what's going on, and I think they have -- because they kind of own a lot of the stack. We see in the foundry market very little change in people's behavior -- in spending behavior. We question how much of that is due to the competitive nature in that market versus what's going on in the end markets. Overall, we haven't seen any change in behavior. People seem to be very robust about their business. We do watch it very closely.

Okay.

And we don't see a change.

Okay. I guess just one more. If there was an Asian company with a US facility, is that in your Asian market or is that in your US market when you break out the revenues?

We break out -- if it's an Asian company with a US manufacturing facility --

It's where the shipment goes, where our services are performed.

Right. So, some of that will be in the US.

Okay. Great.

[Some will] be in Europe -- or Asia.

All right. Thank you.

Thank you, Tom.

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