PDF Solutions Inc (PDFS) 2011 Q1 法說會逐字稿

Good day ladies and gentlemen. Welcome to the PDF Solutions Inc. conference call to discuss its financial results for the first fiscal quarter ended Thursday, March 31, 2011.

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, 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 forward-looking 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 9 through 15 of PDF's annual report on Form 10-K for the fiscal year ended December 31, 2010, and similar disclosures in subsequent SEC filings. The forward-looking statements and risks stated in this conference call are based on information available to PDF today. PDF assumes no obligation to update them.

Now I 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. Welcome everyone.

I'll begin this call with a summary of our results for the first quarter. Next, I will discuss our perspective on our performance. Finally, I'll discuss the industry and implications for the remainder of the year.

In the first quarter of 2011, we achieved revenue of $50 million, non-GAAP profit of $0.02 per share, and GAAP loss of $0.02 per share. While revenue and earnings were disappointing, our business activity, bookings and customer engagements were strong and positioned us well to achieve our goals for 2011.

We've successfully close the following contracts -- an agreement for a 20 nanometer process R&D engagement; an agreement for 32 nanometer yield ramp; an agreement for 20 nanometer DFM engagement for a fabless client; and an extension to a fabless 28 nanometer DFM engagement.

As we have stated many times, one of our goals is to expand the usage of our infrastructure across the process lifecycle from early R&D through yield ramp to process control. This past quarter, we made significant progress in customers using our solution at early R&D stage of both process development and chip design.

For process development, the 20 nanometer engagement side this past quarter represents our customers using our technology deeply and broadly as a characterization solution and collaboration environment. We had expected three 20 nanometer contracts to be signed this past quarter. We did sign late -- we did sign one late in the first quarter. Of the two others, one signed early in the second quarter. We expect the other customer to also commit to our solution.

As we have stated before, since contracts like these have multi-year impact them for PDF Solutions and are very significant, we do not let quarter end affect the quality of the contacts signed. Collectively, these contracts have and will contribute significantly to our 2011 bookings and establish PDF Solutions' technology with these clients at their most advanced process nodes.

Our other 20 nanometer contract signed in the quarter is for a fabless customer to use our DFM technology as the basis of its design platform. This engagement represents the most complete usage of our technology and design. Collectively, these signed engagements represent very strong bookings, both in magnitude and strategic value.

Turning to our assessment of the industry, we continue to anticipate more growth for the overall chip industry with logic manufacturing being particularly strong. As (inaudible) continue to discuss, there are significant challenges in yielding products at these advanced nodes. We concur with this view, as we've seen increased business activity so far this year. Given the situation, PDF Solutions' technology is becoming more critical to our clients and positions us well in 2011.

While we continue to refrain from providing specific quarterly guidance and we may see ups and downs quarter-over-quarter, given our first-quarter bookings results, we continue to feel confident that our annual revenue will grow at a rate greater than anticipated for the overall chip industry, consistent with the view we expressed on our last quarter's call. In fact, our bookings for the first quarter were on the pace that we experienced pre-2008 downturn. 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.

Thank you for your time and attention. I'll now turn the call over to Joy, who will discuss in detail our financial results for the first quarter of 2011.

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 measures exclude stock-based compensation expenses, amortization of expenses related to acquired technology and other intangible assets, restructuring charges and their related tax effect, as applicable. You can access a press release that contains a reconciliation of non-GAAP to GAAP results in the Investors section of our website located at PDF.com.

The reported results for the first quarter were total revenues of $15 million, GAAP net loss of $0.6 million, or a loss of $0.02 per basic and diluted share, and non-GAAP net income of $0.6 million, or $0.02 per basic and diluted share. While we are disappointed with the adverse impact to profitability that resulted from lower revenues, we are pleased that total assets in the balance sheet were $69.8 million, reflecting an increase of $1.2 million in cash and marketable securities. Total costs and expenses of $15 million decreased $5.4 million from last quarter. The total cost and expenses consist of $5.9 million of cost of Design-to-Silicon yield solution, and $9.1 million of operating expenses.

Total revenues for the reported quarter were down 7% as compared to the prior quarter and down 2% year-over-year. Total revenues were comprised of Design-to-Silicon yield solutions revenue of $10.6 million and gain share revenue of $4.4 million.

Yield Solutions revenue for the quarter decreased $0.7 million sequentially, or 6%. Gain share revenues decreased $0.5 million, or 10% sequentially. The decrease in Yield Solutions revenue was primarily due to delayed engagements while the decrease in gain share revenues was due to lower-than-expected manufacturing volumes from one of our clients.

Our gain share revenues for the quarter as a percentage of total revenues were relatively flat quarter-to-quarter. The total number of clients contributing to gain share was six, same as last quarter.

During the quarter, we added three new engagements with two clients. There were 12 service engagements from 8 clients, each contributing at least $150,000 to revenues. As is compared to last quarter, this represents a net decrease of two engagements, which were both completed in the quarter, and a net decrease of three clients which consist of one engagement that completed in the quarter and two that are continuing but that contribute less than the $150,000 threshold in the reported quarter. Ten clients represented 86% of our revenues in the quarter. The number of clients contributing revenue greater than 10% for the quarter was four, up one from last quarter and flat from the same period last year. Increasing our client base and our footprint at each client helps to mitigate risk associated with revenue concentration.

On a geographic basis, Asia accounted for 51% of total revenues, Europe represented 20%, and North America accounted for 29% of total revenues. As you're aware, on March 11, there was a devastating earthquake and tsunami on the northeast coast of Japan. Our office in the region located in Kawasaki was not directly affected. Also, our business with most of our customers in Japan has continued uninterrupted. We do not expect any significant effect on our business or results due to this terrible natural disaster.

For the quarter, gross margin was 60%, flat sequentially. Gross margin included $462,000 of stock-based compensation expense and $157,000 of amortization of acquired related expense. Note non-GAAP gross margin was 64.5% for the quarter, up 1.5% from last quarter.

Our GAAP operating expense were $9.1 million, or 61% of total revenues, up by 6% as compared to the prior quarter. Operating expenses include approximately $0.6 million of other charges comprised of $0.5 million of stock-based compensation expense and $0.1 million of amortization of acquisition related expenses.

R&D expenses as a percent of total revenues was 29% for the quarter compared to 28.4% for the previous quarter. R&D expenses of $4.4 million included $0.3 million of stock-based compensation expenses.

SG&A expenses were 31.6% of total revenues for the quarter, up 8.9% quarter-over-quarter. This increase in SG&A expenses for the quarter was due to higher legal and accounting fees realized in the reported quarter.

Reported GAAP results for the first quarter included amounts related to amortization of acquisition related expenses and stock-based compensation expenses. On a non-GAAP basis, net income was $0.6 million or $0.02 per diluted share.

Worth noting, interest and other income expense negatively impacted results by $0.4 million due to the decline of the US dollar compared to the European currency for the three months ending March 31.

Focusing on the balance sheet and cash flow, cash and marketable securities were $40.1 million, up 3.1% versus the prior quarter. The increase in cash is primarily a result of our positive operating cash flow. Operating cash flow for the quarter was $0.5 million, compared to operating cash flow of $4 million in the prior quarter.

Headcount at the end of Q1 was 296 worldwide. This represented a 1% increase from the end of Q4 2010 when headcount was 292. Annualized revenues per head were $203,000 on lower revenues, down by $8,000 or 4% when compared to the previous quarter, flat when compared to the same period in the prior year.

We are very pleased with the health of our business fundamentals, particularly our progress on containing our quarterly total cost and expenses in the range of $15 million to $15.5 million. We are optimistic about delivering increased profitability throughout 2011.

That concludes the review of the financials for the quarter. Now I will turn the call over to the operator for Q&A.

(Operator Instructions). Brian Freckmann, Lyon Street Capital.

Hi guys. So this is the second quarter you guys have talked about having growth that will exceed the expectation of the industry. I think you guys have used sort of an EDAC number, and I think those numbers are around 20%. That would indicate a pretty strong back half of the year. Are you guys still comfortable with that? Are my numbers roughly in line, or have the estimates changed and you're talking about new estimates from an industry standpoint?

First of all, you've got numbers -- I think -- I'm not sure what the EDAC numbers are. We look at the overall chip industry, I think numbers for the overall chip industry that we have heard have been in the single-digit teens to high teens to as much as 20%.

Our expectation is when we look at the chip industry is to outgrow the average industry estimates for the chip industry which is consistent with our view last quarter. It does mean that our second half of the year is (inaudible) steep growth over this year. (multiple speakers)

Then just kind of understanding how, given the business model, what you signed now sort of effects 18 months from now, or what you've been signing. Can you sort of kind of remind us how you look at 2012. It looks like -- a lot of what you've been doing over the last two years is sort of going to come to fruition in 2012. How do I sort of look at trying to even size your opportunity there?

That's a very good question, one we always grapple with two. I think there's a -- you are right. A lot of the activity -- and we've talked about this in the past few calls -- as we've worked with companies that are building much bigger facilities and building multiple facilities, a lot of those facilities come online in 2011 and start contributing in 2012. So, as we go through this year, particularly the second part of this year and into 2012, we expect the gain share portion of our business to be a good strong piece of growth for us and probably outgrowing the other parts of our business, but particularly I think as you look at 2012.

So when we model out the past years looking forward to those -- to 2012 -- we've been modeling out kind of an increased activity of Design-to-Silicon yield solutions. As you said, those have anywhere from a six-quarter to an eight-quarter time period before they start contributing gain share typically. They then start contributing gain share, and it's -- where it gets fuzzy for us is exactly when we -- someone who is not contributing gain share, how much or how quickly their factories ramp up, and in some of the customers' cases, how many of the factories get ramped up on that note and we participate in. So I think the difficult part to model is what is the expansion on incremental facilities as you get into 2012?

Is the goal still at some point in the future to have sort of a 60/40 split of (inaudible) consulting (inaudible) because you're about 70/30 right now. I'm just trying to sort of understand how you guys see the model playing out.

Yes, we do expect the gain share as a percentage of the revenue to increase as -- of the overall total revenue come. The exact split, we expect it to go up from where it is here, but for the exact split, I think it's fuzzy for us.

Joy, one question for you, as you sort of think about the ramp in the back half of the year, how -- modeling the expense side, sort of remind us again how much is sort of variable and how much is fixed. Sort of where are the leverage points?

Yes, I think we've been consistent and we've been able to contain our costs pretty much on a quarterly basis on a run rate of roughly about 15% to 15.5%. So I think we have a really good leverage with having that consistency going forward.

Okay, thank you. I'll get back in queue.

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

Good afternoon. I guess continuing on the same line of questioning, when you look at the second half, do you expect most of the growth to come from the gain share or is it a Design-to-Silicon growth that's going to require more bodies?

We do expect the Design-to-Silicon yield revenue grow, will be actually a significant part of the growth this year. Gain share will grow in the second half of the year as well. We don't expect -- Joy already answered. We don't expect a substantial increase in cost.

I was kind of curious how headcount intensive the Design-to-Silicon part is? A lot of it is consulting work it seems like.

Not particularly. If you look, we've maintained around the same headcount over the last four, eight quarters. Revenues have generally increased over that time period. So we don't expect the headcount to go up all that much.

Ok, all right, good.

Just to give you an idea, right, there's 300 people. The people on the consulting team are about 55 to 60. A significant portion of the Company is in R&D.

Okay, great. Then when you look at the gain share for the reported quarter, maybe give us a little more color on what caused the shortfall there. Was it a customer ramping down as expected or was it just a change in manufacturing plants, or a damaged manufacturing plant?

It's not a damaged manufacturing facility. It is a customer with -- their volumes were not what we expected them to be. We are shaking out what the issues were with that customer, why we didn't expect it or anticipate it coming into the quarter.

Okay, but no sense right now as to whether or not that trend continues, or if that --?

In general, as we go through -- quarter-over-quarter it's very hard for us to predict as we go. On a rolling four-quarter average, we'd expect it to generally trend up as we go through this year.

Most of the big ramps that you are seeing in gain share is really a 2012 event?

We expect some growth this year over last year. We do expect more of the growth in 2012. That's (multiple speakers) what we said in the past is we've talked about this from (inaudible) some facilities. It depends on who's (inaudible) you take. We tend to take them more -- we expect them to take longer than our customers typically take.

Okay. Is there some way to quantify the difference in opportunity for you on a 20 nanometer plant versus the older 30 nanometer plants you worked on in the past?

That's a good -- 45 nanometer, 65 nanometer -- yes. I think if you look at our top 10 customer list circa 2007 and '08, it'd disproportionally be Japanese. The facilities collectively, all of the 300 millimeter logic capacity in Japan would probably be less than 100,000 wafer starts, probably significantly less. If you kind of look at a single node, like let's say 65 nanometer, each of the Japanese manufacturers probably maintained less than 10,000 wafer starts at that node, so on average let's say, so it's maybe 1,000 to 12,000, and others are 7,000 or 8,000. So you're probably looking at collectively, across the three customers, that represented 10% of our revenue in Japan, maybe 30,000 or 40,000 wafer starts. We have two customers now that a single factory for them is 40,000 to 50,000 wafer starts, and they have now multiple factories, or are in the process of building multiple factories.

So even if they have -- get a better volume discount from you on a per wafer basis, it's still a much larger revenue opportunity?

This is correct.

Then is there anything new in kind of the memory front? Because I think most of this is logic initially.

Yes, it's still mostly logic. As we've said, even going into this year, our plan for 2011 from a revenue standpoint is disproportionately logic. We have been actively working with customers who are looking at our memory -- our solution to memory space. We expect to see some traction as we go through this year on that.

It's hard for us to predict the memory market, particularly DRAM, because I think it's a little bit more cloudy for us. We don't have the visibility that we have in the logic piece. In the logic, what we are seeing is a very accelerated rate at which the customers seem to be moving through the nodes (inaudible) activity that we had 20 nanometer really just spoke to the acceleration we're seeing in the customer base. We've even had customers pick up the phone and call us about what's going to happen in '14 and '16. So we're quite surprised at the rates on the logic side, and we see that as affecting a lot of our -- the rate at which people move through 90 and 65 to 40, 28 and 20 nanometer volume I think is going to be pretty substantial.

When you look at the actual technology between the logic and the memory, are they both equally as complicated that require your services ultimately, or is memory easier just because of the structure of the chips?

We are -- characterization, particular characterization around electrical characteristics or electrical parameters seems to be becoming more important for both memory and logic. We have gotten some requests or questions out of the Flash customers recently around electrical characterization. We suspect that will be -- as they make a transition to a different architecture representing opportunity.

Okay. Then just finally, the drop-off in the March quarter Design-to-Silicon, was that just a function of some projects coming off and then other projects not coming on as planned, like you mentioned [here] finally in the quarter, or is there something about individual products that slowed them down?

I think it's just timing and signing.

Thank you.

Andrew Weiner, Burnham.

Hi John. Since it's hard for us to connect the difference (technical difficulty) slowing -- or the revenue performance and your enthusiasm for the business fundamentals, you made a comment in the call (technical difficulty) first quarter were approximately at pre-2008 levels. Without giving -- I know you're reluctant to give specific bookings levels, but without -- if you were to look at the average quarterly bookings in 2010 versus Q1 bookings in '11, could you provide us maybe an order of magnitude of what the difference there was?

Yes. So probably -- what I said was pre-downturn 2008 -- 2008 revenue was greatly off, in the mid-70s range, and it would've had -- as you got to the end of that year, the bookings would've tailed off. But leading into that year, the bookings would've supported that roughly on an annualized and on a one-to-one basis. 2010 bookings, if you compared the first quarter of 2010's average bookings, it's up tens of percents on average.

And so something north of 20%?

Yes.

If I -- just sort of to give me a frame of reference because I know this a long-cycle business, '10 versus '09, the average quarterly bookings, I assume that was also something in the order of tens of percents?

That would be correct.

To what extent when you look at the remaining contract activity you'll need to sign this year to sort of achieve your goal of outgrowing the industry, how much of that is going to come, well, in your sort of base model comes from existing key customers where there is a very defined relationship, and their understanding of your value proposition versus us having to go out and actually bring some other foundry partners in perhaps or --?

When we build our model for this year, our base case was no new customers, just off existing customers primarily.

For the Solutions business, so the business (inaudible). Software, there's always some new customers. But for the -- so let's just say, to be mathematically correct, 90% of the plan is off existing customers, and all of the wafer fee plan that was built in, all of the solutions business that converts to wafer fee was basically assumed off existing customers.

Okay. If you were to look at the revenue contribution from Design-to-Silicon, if you look at sort of the remaining three quarters, how much of it is the existing contracts that are in backlog versus contracts that need to be signed?

I'm looking over it. I don't either one of us have that number off the top of our heads. In any given quarter, the contracts that we (technical difficulty) probably contribute (technical difficulty) at most a couple of million dollars, $2 million or $3 million probably. But you know, I have to -- I couldn't be specific right now.

But again, just from an order of magnitude, it sounds like roughly three quarters or so comes from existing contracts and 25% from new contracts and some Q2 contracts will also contribute in Q3 and Q4.

Yes, Q2, yes. So as you kind of work further out through the year, the percentage that is from contracts that are already signed goes down, and so yes. Of course, when you are done with the first half of the year's bookings, you have a lot of the revenue that you're going to end up seeing in the total year because the contracts you sign in Q4, maybe they contribute $500,000 or $1 million.

Then the one other question I had was, on the last call, you talked about your first sort of commercial type contract in the LED side. I don't think, unless I missed it, heard any commentary on that part of the market. I was wondering if there's been sort of any further progress either from sort of a market development understanding perspective, or even specifically with that customer.

Yes, so we continue to play with that customer. We are getting inquiries from that customer for -- or questions about expanding that capability. We are also getting some inquiries from other customers in the LED market as a result of I think our ability to point to a deployment there. We didn't have any bookings in this quarter associated with it, which is why I didn't talk about it.

Okay. Thank you.

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