PDF Solutions Inc (PDFS) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PDF Solutions Inc. conference call to discuss the financial results for the second fiscal quarter ended June 30, 2011. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer 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 page 9 through 15 of PDF's annual report on Form 10-K for the fiscal year ended December 31, 2010. And similar disclosures and subsequent SEC filings. The forward-looking statements and risks stated in the 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 Michael Shahbazian, PDF's Interim 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 second quarter. Next, I will discuss our perspective on our performance. Finally, I will discuss the industry and implications for the remainder of our year.

In the second quarter of 2011, we achieved revenue of $17.2 million, non-GAAP profit of $0.05 per share, and we will break even on a GAAP basis. Last call we said we anticipated strong growth in this quarter in solutions bookings and revenues, in part due to 2 20-nanometer R&D engagement contracts that we expected to sign in the quarter.

The results are consistent with our expectations. During the reported quarter, we successfully closed the following contracts. A 20-nanometer process R&D engagement. A 45-nanometer yield ramp. A 40-nanometer yield ramp. An extension to an existing 28-nanometer DFM engagement with a fabless customer. And an extension to an existing 22-nanometer process R&D engagement.

Regarding our expectation to sign 2 20-nanometer R&D engagement contracts as part of the collaboration between a number of logic manufacturers, the first engagement I just listed is 1 of those contracts. In the first weeks of the third quarter we closed the second of those contracts.

In summary, our bookings in the quarter were strong in terms of the number of engagements, overall economic value and strategic value. This gives us additional confidence in our fixed fee revenues this year as well as our future gain share.

Turning to our assessment of the industry, customer activity is high, as evidenced by our bookings in the first 2 quarters and the interest level in the third quarter. We attribute this increase in customer interest in PDF Solutions technology to the continued trends of mobile computing devices being built from the leading edge logic and active competition in logic manufacturing.

In the second quarter, we saw a decrease in some of our customer's manufacturing in the quarter, as well as relatively low forecasts for them for the third quarter. While we continue to refrain from providing specific quarterly guidance, and we may see ups and downs quarter over quarter, we remain confident in our expectation to continue to grow our revenue at a pace which is greater than the estimates for the segment of the chip industry that we serve. However, we now expect more of the growth in revenues to shift towards fixed fees due to new business bookings, and as a result of relatively low forecast and wafer volumes.

Thank you for your time and attention. Now I'll turn the call over to Mike who will discuss in detail our financial results for the second quarter of 2011. Mike?

Thanks, John. As a reminder, in addition to using GAAP results in evaluating PDF's business, we believe it is 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 contained the reconciliation of non-GAAP to GAAP results in the investor section of our website located at PDF.com.

Before commenting on the operating results of the quarter, in order to update you all on our ongoing review of our internal controls, and as a point of clarification, I should mention that we will be making some non-material adjustments to our historical financials that show up in our upcoming reports for comparative purposes. As discussed in our 2010 Form 10-K, we've been aware that we've had material weaknesses regarding stock-based compensation.

As part of the remediation program, we discovered that some of the employee stock purchase programs features had not been properly accounted for. The impact of these errors to any individual period previously reported was not material. But, in aggregate they amounted to $840,000 in additional stock-based compensation bases which would be material to the current quarter and to 2011 as a whole, if the cumulative correction was booked in this fiscal year.

In addition, during the quarter we also determined that cost of sales should include activities performed by certain international subsidiaries that have historically been included in R&D and SG&A. As this is a reclassification of expenses, it has no current impact to the net income or loss in any historical period. However, it does result in a decrease to the gross margin in the reported periods of approximately 4 percentage points.

Accordingly in both cases we made these corrections as an accounting revision, which means we have revised the affected periods going back to January 1, 2009. As part of this revision, we have also reversed previously disclosed out-of-period adjustments that were immaterial and recorded them instead in the periods in which they originated.

We will use the revised amounts for comparative purposes in today's call, in our upcoming 2011 second quarter 10-Q and in all future 10-Q and 10-K filings with the SEC. As none of the revisions are material to the affected periods, all current filings with the SEC on Form 10-K and 10-Q continue to be in effect and may continue to be relied upon as materially correct.

There is no requirement to file any amended SEC filings and we have no plans to do so. A more complete description of the revision and the circumstances leading up to it, along with the table comparing revised amounts to amounts as originally reported, will be included in our upcoming Form 10-Q for the second quarter of 2011 when we file it with the SEC.

Now, let's turn to the review of the financial results for the second quarter. First, let me cover some of the highlights. Total revenues were $17.2 million with a GAAP net loss of $57,000. This resulted in nearly break-even results on an EPS basis for both basic and diluted shares.

Non-GAAP net income totaled $1.5 million or $0.05 per diluted shares. We are pleased with the revenue growth and the improvements in earnings per share over the first quarter.

We continue to strengthen the balance sheet. Cash grew by $2.3 million during the quarter, which is net of $1 million of repurchases of Company stock. Cost of sales and operating expenses were $16.3 million, an increase of $1.1 million for the quarter.

Total revenues for the second quarter were up 15% as compared to the prior quarter, and up 12% compared to the same period in the prior year. Total revenues were comprised of design-to-silicon yield solutions revenue of $13 million and gain share revenues of $4.2 million. Yield solutions revenues for the first quarter increased $2.4 million sequentially, or 23%. And gain share revenues decreased $300,000 or 7% sequentially.

The increase in yield solutions revenues was primarily due to new engages with existing customers and higher software license sales. While the decrease in our gain share revenues was due to lower manufacturing volumes for particular devices and products.

And to slower gain share ramps in some factories due to challenges with advanced nodes. Our gain share revenues for the quarter as a percentage of total revenues was 24% as compared to 30% in the prior period. The total number of clients contributing to gain share was 6, the same as last quarter.

During the quarter we added 3 new engagements. There were 14 service engagements from 9 clients with each contributing at least $150,000 to revenues. As compared to last quarter, this represents a net increase of 2 engagements, and includes 2 engagements that completed in the quarter, and a net increase of 1 client.

There was 1 engagement which started in the quarter that contributed less than the $150,000 threshold. 10 clients represented 85% of our revenues in the quarter. 3 clients contributed revenues greater than 10%. Down 1 from last quarter and down 1 from the same period last year.

On the geographic basis, Asia accounted for 48% of total revenues, Europe represented 27%, and North America accounted for the remaining 25% of total revenues.

The total cost of design-to-silicon yield solutions was $7.4 million, an increase of $800,000 as compared to the prior quarter, primarily driven by the increased cost to support the higher revenues. On a revised basis, second quarter gross margin was 56.8% compared to 56.1% last quarter.

Gross margin included $522,000 stock-based compensation expenses versus $468,000 last quarter. And $156,000 of amortization of acquisition-related expenses, flat with last quarter.

Non-GAAP gross margin was 60.7% for the quarter compared to 60.3% last quarter. Total GAAP operating expenses were $8.9 million, or 52% of total revenues, compared to $8.6 million in the prior quarter. Operating expenses included approximately $950,000 of stock-based compensation expenses compared to approximately $650,000 in the prior quarter.

During the quarter, we subleased a portion of our previously vacated facility, resulting in a credit of approximately $120,000 to restructuring expense. R&D totaled $3.7 million, or 21.7% of total revenues for the quarter, flat with the prior quarter, and included approximately $350,000 of stock-based compensation expenses, also flat with the last quarter. SG&A expenses totaled $5.2 million, or 30.5% of total revenues, compared to $4.8 million in the prior quarter. And included approximately $600,000 of stock-based compensation expenses.

As noted in my earlier comments, reported GAAP results for the second quarter included amounts related to amortization of acquisition-related expenses and stock-based compensation expenses. Excluding these items on a non-GAAP basis, net income was $1.5 million or $0.05 per diluted share. The effect of foreign currency fluctuations and other income and expenses, negligible in the current quarter when compared to the $400,000 negative impact in the previous quarter.

Worth noting, the income tax provision increased by approximately $800,000 as compared to the first quarter 2011, and approximately $600,000 as compared to the second quarter 2010. This expense is primarily due to an increase in foreign revenue subject to foreign withholding taxes that are not currently recoverable in the US because the Company's historical losses have been expensed in the current period.

In the future, as the Company realizes taxable income in the US, these foreign tax credits will be available. During the first quarter 2011, the Company realized a benefit in its tax revision of approximately $400,000 due to statutory expiration of periods in which tax accruals were previously taken.

As mentioned earlier, we strengthened the balance sheet during the quarter, primarily as a result of our positive operating cash flow. Cash flow from operations was approximately $3.4 million. The during the quarter, the Company repurchased $1 million in stock which was offset by $850,000 in employee stock purchases and stock option exercises during the first half of 2011.

Head count at the end of the second quarter was 309 worldwide compared to 296 at the end of the first quarter. Head count was up, in part, due to summer engineering interns and 5 G&A adds. Annualized revenues per head was $222,000 on higher revenues, up $19,000 or 9% when compared to the previous quarter.

That concludes the review of the financials for the quarter. And now I will turn the call over to the Operator for questions and answers.

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

John, in regards to the gain share, did you say the manufacturing volumes are actually getting weaker right now or just remaining at a low level?

Yes. If you look at our Q1 versus Q2, it was down slightly. That was volume -- same number of accounts. Primarily that was due to lower volumes in a couple of accounts. As we look at our forecast for the second half of the year, we had 1 set of expectations going into the year about the rate of increase.

And when we go back and look at that, we think some of the advance nodes are starting later than we thought. They will start a little bit slower than we expected.

And some of the volumes on the more mature notes we expect to remain somewhat weak, at least in Q3. We expect improvements in Q4 as we look at the customer's forecasts. And those are always taken with a grain of salt.

And that is typically 1 quarter in arrears of when you receive that?

Some are, some are not. Some are 1 month in arrears. Some are 1 quarter in arrears.

So, in general, do you see a pretty good correlation between industry utilization rates or are all these customer specific 1-offs?

Yes. I think in general, if you look at the general comments and the most leading edge nodes. So, in the foundry world, that would be 28, 32. If you look at TSMC, not as any particular customer or anything, but just as a surrogate for the general foundry industry, I think their forecast for the percentage of their revenue coming from 28-nanometer this year is down from where it was in January when they communicated with their investors to what they communicated in July.

I think it's about half what they originally expected. That is consistent with what we're seeing across a broader set of our customers. I think in general the utilizations on the foundry capacities are down in Q2 and Q3 in comparison to Q1 or year-over-year comps. So, I would say in general if you look at TSMC or UMC's calls, you would see that their utilizations are down right now. That is also consistent with what we're seeing with our customers, some of whom don't publicize utilization data.

Okay. So, when you look at the broader business and in the marketplace we hear about how some of these companies are having troubles ramping up yields at either 32 or 28 nanometers, do you view that as optimistic? Like it potentially creates more demand for your consulting fees? Or is bad news because it delays the ramps you ultimately get paid with?

So, if you look at the business this year, last quarter 2 of the engagements, the 40 and 45, I think those were things we did not expect or put into our original forecast when we started the year. It was an account who I think they thought they could move nodes around easily, and realized moving nodes around without PDF's characterization technology was not as effective as it was with.

And those were incremental ads. And we are seeing a lot of activity with customers or interest on all of the nodes, mostly because of the challenges. It's basically a net good to us.

And worse case is, if there's a delay, it's just a couple quarters before.

On advanced node it basically just starts the time on the clock on the gain share, and that is generally not a bad thing for us.

And then if you look at some of the guys that are pushing out a little bit of capacity expansion in the third quarter into maybe the fourth quarter, possibly the first quarter of next year, I assume that doesn't have a huge impact on you because it seems like you have to build up the yields in the first place anyway, so they already have single line work on the yields?

Yes. So, I think in general most of that doesn't really have much impact. If that were sustained, not just pushouts but reductions in their estimates, that would impact 2012 or 2013 gain shares.

Because if people, for a sustained period do not invest incremental in capacity, that has an impact. Most of our expectation in terms of incremental adds in capacity. I think the guy from Mento commented on this, there has been a lot of capacity that has been put into the ground that is not really shipping yet. That being really the primary driver for gain share growth in 2012 is off the capacity as it happened.

Okay. So, just in general it sounds like everything from, on the design-to-silicon side is going great, and then the gain share a little bit slower over the next quarter or so. But then ultimately the ramp is driven by the design-to-silicon in the first place. So, pretty bright outlook for next year.

Absolutely.

(Operator Instructions) And there are no questions at this time. Ladies and gentlemen, this concludes the program. Thank you.