PDF Solutions Inc (PDFS) 2010 Q4 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 fourth quarter and full year ended Friday, December 31, 2010. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session for which instructions will be given at that time. (Operator Instructions) 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 titled 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 would 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 results for the fourth quarter and for the total year. Then I will review progress made on our key strategic initiatives during 2010. Next, I will discuss our perspective on the environment and its impact on PDF. Finally, I will describe our key strategic initiatives for 2011.

In the fourth quarter of 2010, we achieved revenue of $16.2 million, non-GAAP profit of $0.08 per share and a GAAP profit of $0.01 per share. This is our third consecutive quarter of GAAP profit and sixth consecutive quarter of non-GAAP profit. For the full year, we achieved revenue of $61.7 million and non-GAAP net profit of $0.28 per share. These compare favorably with our revenues in the previous quarter and year-over-year.

Business activity in the fourth quarter was strong and gain share improved, as we anticipated on last quarter's call. In Q4 we successfully closed the following contracts. An agreement for a 28-nanometer yield ramp, a design agreement for a 32-nanometer yield ramp characterization vehicle, an extension for a yield aware FDC engagements, a design agreement for a 65-nanometer characterization vehicle, an extension to a fabless DFM engagement, a design agreement for 28-nanometer DFM CVs for a fabless client, and an agreement to deploy our yield-management system dataPOWER for an LED manufacturing customer.

Our sequential increase in design-to-silicon yield revenue and gainshare results, coupled with continued spending discipline resulted in our generating $4 million cash from operations in the fourth quarter. In the second half of the year, we generated approximately $5.5 million from operations on $31 million in revenue.

Turning to our performance in 2010 against our key strategic initiatives. We executed well in our client deployments and product development plans and achieved our cost structure objectives. Overall it was a year that our execution was well-aligned with our strategy, and we experienced strong adoption of our solution and our client base.

As you may remember, we have five priorities for the year. First, our major focus this past year was to drive adoption of PDF Solutions' technology in logic manufacturing and in fabless customers. During the year, we signed engagements with logic manufacturers at nodes from 65-nanometer to 20-nanometer. These engagements included design for manufacturing, yield ramps and process control. Between our DFM engagements and our business directly with foundries, our characterization vehicles [will] run at all major founders in 2010. Second, we started to lay the groundwork to deliver our solutions in markets adjacent to logic manufacturing, such as LED, solar, wafer, and memory manufacturing. As I mentioned earlier, we closed our first contract for dataPOWER with an LED manufacturer.

Third, we focused on achieving our gainshare targets with our clients. For example, in Q4, our new client contributing gainshare was driven by successful completion of critical yield ramp projects earlier in 2010. Fourth, 2010 was the year we drove adoption of our DSM solution at fabless clients. During the year, we signed a number of DFM engagements, laying the groundwork for further expansion in 2011. Finally, we remain committed to prudent spending. During 2010, we maintained spending levels that were roughly constant in comparison with 2009, while we grew our revenues by 27%.

Turning to our assessment of the industry, we anticipate the overall chip industry will continue to grow with logic manufacturers seeing more growth than the overall industry. As most analysts anticipate, we expect the 2011 to 2010 comps will not show the same percentage growth as 2010 did over 2009. Adoption of leading-edge nodes, where PDF is particularly well-positioned, will continue to be the most exciting part of logic manufacturing business. In these notes, yield ramps, DFM and parametric control will be critical issues for IC manufacturers and fabless companies.

Due to this assessment of the industry, in 2011, our strategic direction will remain largely unchanged from 2010. Paramount to 2011, there will be continued focus on driving our clients to achieve their yield targets, as that sets the stage for client satisfaction and future gainshare. We will continue on the strategic objective of expanding the value of our solution across the IC manufacturing process lifecycle.

Like 2010, our primary focus will be logic manufacturers and their fabless customers. We will continue to drive adoption of our DFM and process control solutions in our core market, as well as adjacent markets. In doing so, we will build on the profitability we established this past year.

While we continue to refrain from providing specific quarterly guidance, and we may say ups and downs, quarter-over- quarter, we feel confident that our annual revenue will grow at a rate greater than that anticipated for the overall shape industry. Moreover, due to our business model and focus on cost structure, we anticipate that our earnings growth will be greater than our revenue growth on a percentage basis. Finally, our generating cash from operations -- cash generation from operations will build on our strong performance in the second half of 2010. Thank you for your time and attention. Now we will turn the call over to Joy, who will discuss in detail our financial results for the fourth quarter and for fiscal 2010.

Thanks, John. As a reminder, in addition to using GAAP results in evaluating PDF's business, we believe it's also useful to consider our results using non-GAAP measures. Non-GAAP excludes stock-based compensation expenses, amortization of expenses related to acquired technology and other 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 investor section of our website located at pdf.com.

The highlights of the quarter consist of revenues of $16.2 million, GAAP net income of $0.2 million, or $0.01 per diluted share and non-GAAP net income of $2.2 million, or $0.08 per basic and diluted share. Excluded from the non-GAAP net income is $0.3 million for amortization of acquisition-related expenses, $0.5 million of restructuring charges, and $1.2 million of stock-based compensation expenses under FAS 123R.As of December 31, 2010, total assets on the balance sheet were $68.4 million, reflecting an increase of $3.6 million in cash and marketable securities during the quarter.

Total revenues for the reported quarter reflect sequential growth and year-over-year growth of 9% in each case. Total revenues were comprised of design-to-silicon, yield solution revenues of $11.4 million, and gainshare revenue of $4.9 million. Yield solutions revenues for the quarter increased $0.9 million sequentially, or 8%, and gainshare revenues increased $0.5 million or 12% sequentially. Our gainshare revenues for the quarter, as a percent of total revenues, grew by 1% quarter to quarter, and the total number of clients contributing gainshare increased by one, bringing the total count of clients contributing to gainshare for the quarter to six. We are pleased to see sequential growth in gainshare revenues and contributing clients, as we believe this may be an indication of continued improvements in manufacturing fundamentals.

During the quarter, 14 service engagements from 11 clients each contributed at least $150,000 to revenues. This represents a net increase of two engagements and two clients from the prior quarter. The top ten clients represented 81% of our revenues in the quarter. The number of clients contributing revenues greater than 10% for the quarter was three, down one from last quarter, down two from the same period last year.

On a geographical basis, Asia accounted for 57% of total revenues. Europe represented 23% and North America accounted for the remaining 20% of total revenues. On a sequential basis, we saw approximately 12% growth in Europe.

For the quarter, gross margin was 60%, up from 59% in the prior quarter. Gross margin included $355,000 of stock-based compensation expenses and $206,000 of amortization of acquisition-related expenses. Note non-GAAP gross margin was 63% for the quarter, flat sequentially. Our total GAAP operating expenses were $8.9 million, or 55% of total revenues, up by 1.1% as compared to the prior quarter. Operating expenses included approximately $1.4 million of other charges comprised of $0.8 million of stock-based compensation expenses, $0.1 million of amortization of acquisition-related expenses, and $0.5 million of restructuring charges.

R&D expenses as a percent of total revenues was 28.4% for the quarter, compared to 28.9% for the previous quarter. R&D expenses of $4.6 million included $0.6 million of stock-based compensation expenses. SG&A expenses were 22.7% of total revenues for the quarter, up 1% quarter-over-quarter. Fourth-quarter reported net income increased by $106,000, or approximately 212% sequentially to $156,000. Recorded GAAP results for the fourth quarter included amounts related to amortization of acquisition-related expenses, restructuring charges, and stock-based compensation expenses. On a non-GAAP basis, net income was $2.2 million, or $0.08 per diluted share.

Focusing on our balance sheet and cash flow, cash and marketable securities were $38.9 million, up 10% versus the prior quarter. The increase in cash is primarily a result of our strong positive operating cash flow. Operating cash flow for the quarter was $4 million, compared with operating cash flow of $1.5 million in the prior quarter. Headcount at the end of Q4 was 292 worldwide. This represents a 1% decrease from the end of Q3 2010, when headcount was 296. Annual revenues for head were $211,000, up by $3,000, or 1%, and up by 53,000, or 33% compared to the previous quarter and the prior year, respectively.

And now, highlights of the PDF's accomplishment in fiscal year 2010. 2010 was a year of growth and opportunities for PDF as we continued to execute well by delivering strong financial results. We are pleased with our business fundamentals and continued momentum with five engagements, growth in our design to silicon, yield solutions and gainshare revenues, optimization of our organizational cost structure and increased profitability and cash generation. We closed 2010 with total revenues of $61.7 million, up 27% compared to $48.4 million in fiscal year 2009.

Gainshare revenues for fiscal year 2010 of $18.6 million grew 18% from $15.8 million in 2009. Non-GAAP EPS on a diluted basis for 2010 of $0.28 increased as compared to a loss of $0.26 in 2009. On a GAAP basis, diluted EPS for 2010 of $0.01 increased as compared to a loss of $0.66 in the prior year.

Lastly, cash generated for fiscal year 2010 was $3.3 million, as compared to cash consumed of $5.8 million for 2009. To put this into perspective, 2010 total revenues were 1.3 times total revenues in 2009, and cash generated was 1.1 times cash generated in the prior year. Our second half performance positioned us well to continue a strong cash generation in 2011, in light of continued revenue growth and improvements with our cost and expense management.

That concludes a review of the financials for the quarter and fiscal year 2010. We very much appreciate your interest in our Company and your participation in our earnings call. We look forward to the opportunity to see many of you and to speak with you in person. My personal thanks to the efforts and dedication of our worldwide workforce at PDF and special thanks to PDF stockholders and securities analysts. Thank you, and now I will turn the call over to the operator for Q&A.

(Operator Instructions). Our first question comes from Tom Diffely with D.A. Davidson.Davidson.

Good afternoon. First, Joy, I missed it, but can you go over the other income line a little bit. I thought there would be a little bit income there from the interest. I did not hear what was the expense portion of that.

The interest on income?

Yes. The other interest line, which was down $30,000 or so. I thought it would be up several hundred dollars from interest on your cash.So I was curious what all was in that line.

It also has the currency fluctuations.

Okay. Was that the biggest difference in the quarter then?

I believe that was the primary difference.

Okay. And then John, I was wondering, when you talked about you guys, you and your ability to outgrow the market. Were you talking about just the overall [semi] market that most people expect to be up 10% to 15% this year? Or you thinking of more of a logic subset of that?

Yes. We lump it all to the overall market. Logic as a whole is on the higher end of that, I believe. Some of the other segments are on the lower end of that, those ranges. That we have heard.

Okay. And I am curious on a broader basis, when you go from a 4X to 3X to 2X node, does the length of your initial design-to-silicon engagement increase?

Yes. What we're seeing, we anticipate that for 2011. The R&D phase of this process nodes is getting more lengthy and more long. This is increasing the total dollars and the number of -- we call this basically monetizing different parts of the process life cycle. So our DFM and R&D engagements are really to monetize that part, that early R&D phase of the process life cycle. So we see this actually as a good opportunity for growth for us, as it has been on the EDA -- the fabless side this past year. And we anticipate more of that on the manufacturers this coming year.

Okay. That extra difficulty there, does that push off the gainshare portion a little bit longer than it did for the previous nodes?

In the previous nodes, often, especially with our integrated device manufacturers, we would have two to three years of gainshare. They would introduce a node every two years. Often, the volume came out of the node even before our gainshare terms ended.

What we are seeing now on these newer nodes is the length of time that those nodes -- there's two factors that are going on. The length of time is lengthening. This means that all our effort that we've put into lengthening our gainshare period is really paying off for us. Early on, when we lengthened our gainshare period, we almost did not see very much value in it for some of the integrated device manufacturers. Because, yes we were still technically being able to collect our gainshare royalties, but practically, it was not very much volume.

We anticipate that this is going to be a better situation for us. Moreover, as a customer base, as we have talked before, has really moved to a foundry base model. They tend to build incremental capacity for the new nodes, rather than replace the existing nodes. So the length of time on the gainshare contracts that we have been working so hard on over these past few years becomes, again, more important for us. As we've said on the Q3 call, and we reiterate today, the incremental capacity in this industry are really not coming online until late 2011 and 2012. So we really expect -- we're starting to see improvements in our gainshare, and we expect that will accelerate as these factories come online.

Okay. So the old two year you can double or triple then over the next cycles, as far as gainshare length of manufacturing?

No. Our gainshare lengths are now, on average, in the four- to a six-year range. And we expect that to continue, to move up. That is something that we are able to demonstrate our customers getting value of our technology over a longer period of time. And we also work hard to lengthen the length of time in the contract.

Okay.

I always joke, every royalty-like business model is an N times P, where N is the number of units you get paid on and P is the price per unit. People don't generally sale because P is too small. They sale on N. It is always limited on every one of these models, one way or another. For us, N is a function of T, and we work hard to lengthen T. For others, if you're in the IP sector, you're trying to get more designs to increase your IP. Everyone is always working on increasing N.

Also, when you move into the 2X node, are there different expectations for yields, or higher risk to get to the certain level yields, versus nodes in the past?

That is a very good point, Tom. I think there are two factors that we see happening as you got into the very low twos, so 20-nanometer and below.The scaling factor for the customer is becoming more and more of a challenge. That is why our PD Bricks technology or DSM technology, we are getting a lot of traction from the customers because they see scaling as being difficult to achieve. Number two, the defect densities you can achieve are of question. No one knows what defect densities you will be able to achieve at these nodes. Again, when we work with the customers, we build those risks into the contracts and manage them pretty effectively.

Okay. Going back to your N times P equation, any progress on the memory side where the N is quite large?

We continue to do some work on some pilots in that market. We do not have business that we would want to report that really has an N times P on it, but it is definitely a focus area for us.

Okay, great. And you talked about how the growth was slowing a semiconductor off that nice recovery last year. Can you talk a little bit about unit growth though, and how that -- we are seeing more fabs come online. And actually, unit growth may be going up.

We do believe unit growth -- the chip industry overall was in the low $200 million, $230 million in 2009. It was maybe $300 million in 2010. Growing at that same percentage in 2011I think is hard to believe. It will grow, I think the numbers we heard were anywhere from 2% to 12% ranges or whatever, somewhere in that. As you said, low teens range. We do believe unit volumes will increase. I know people are quite afraid of the CapEx numbers that have been coming online in 2010 and 2011. Our early modeling so far, we are not too nervous about it. We think in the first half of 2011, very little of that incremental capacity is going to really materialize. We won't see a lot of it until the second half of 2011, and even still, when you look at the lags on the logic manufacturers, we think that incremental capacity is going to be more meaningful in 2012.

Yes, that makes sense. Okay. And did I hear you right? You said you now have the CV at every major foundry?

Whether it is part of the fabless engagement or it's part of a direct engagement with the manufacturer, pretty much everywhere in the world, they are running now.

Okay. And then finally, maybe talk a little bit about with your LED wind. What kind of opportunity do you see there on a relative basis to the rest of your business?

It is speculative, along with the rest of the business. That is why we said, again in 2011, our focus remains primarily the logic manufacturers. We were able to generate a contract that has good value for the account and is meaningful to us. We will -- we are actively talking with other customers. We will see, as we go through 2011, how meaningful this business is on a going-forward basis. You can put any line you want through one point. You know? At this point we cannot really say much.

Okay. One more question on the model. Was there anything in the fourth quarter that is a seasonal impact as far as with options or shares or profit sharing. Anything like that is not recurring? Or is the model staying true to form at this point?

The model is staying true to form at this point. Nothing unusual.

Great. Thank you.

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