PDF Solutions Inc (PDFS) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PDF Solutions, Incorporated conference call to discuss the financial results for the fourth quarter and full year ended December 31st, 2011. (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 solutions. PDF's actual results could differ materially. You should refer to the Section entitled Risk Factors on page nine through 15 of PDF's Annual Report on Form 10-K for the fiscal year ended December 31st, 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'd like to introduce John Kibarian, PDF's President and Chief Executive Officer, and Greg Walker, PDF's Chief Financial Officer. Mr. Kibarian, go ahead, please?

Thank you, and welcome, everyone. PDF Solutions made strong progress in 2011 towards our goal of being pervasively applied to leading edge logic manufacturing and generating Gainshare from our clients' successful yields.

In the fourth quarter of 2011 we achieved revenue of $17.6 million, non-GAAP profit of $0.12 per share, and a GAAP profit of $0.07 per share. For the full year we achieved revenue of $66.7 million and a non-GAAP net profit of $0.26 per share, and a GAAP profit of $0.07 per share. I am pleased to say that this was our second consecutive year of GAAP profitability. We believe this is clear evidence of our commitment to conserve spending policy that has been closely aligned to our revenue opportunities.

On the new business side, activity in the fourth quarter was very strong, as we anticipated on last quarter's call, and we successfully closed the following business, all with existing clients. An [early start] contract for 14-nanometer process R&D, an extension to an existing contract for 22-nanometer process R&D, an extension to an existing 32-nanometer yield ramp, a contract for a 29-nanometer process R&D, an extension to a fabless company's 28-nanometer DFM contract, a commercial license for a beta customer of our next generation yield to [ware] process control software, and lastly a single contract for yield ramps of a client's 32, 28, 22 and 20-nanometer processes.

This last contract replaced and extended prior agreements from some of those nodes in facilities and added additional nodes in all facilities at which these processors are run. This resulted in a larger, more comprehensive implementation of PDF's integrated solutions across the client's organization. As a result, we'll be able to drive more value with this client with better ramp. This will benefit their business, as well as ours. The beginning of this benefit was already evident in their manufacturing and our Gainshare results in Q4 2011.

The 20-nanometer R&D engagement I listed is yet another contract and a key collaboration between a number of logic manufacturers at this node. This 20-nanometer collaboration, as well as our 22-nanometer and 14-nanometer engagements demonstrate the continued trend of process developers applying PDF Solutions' Characterization Vehicles to optimize the design rules and technology definition. This is another extension of PDF's value across the process lifecycle and a form of DFM for technology development.

Sequential increases in solutions and Gainshare revenue, coupled with continued spending discipline resulted in our generating $2.2 million in cash from operations in Q4. For the year we generated approximately $8.2 million from operations.

As I said at the beginning of the call, our primary goal this past year was to make PDF's yield ramps pervasive leading edge logic, execute well for our clients, and position ourselves to generate future Gainshare from these facilities.

As you may remember, to achieve this goal we had five priorities for the year. First, drive adoption of our technology in logic manufacturing and in fabless customers across the manufacturing process lifecycle.

During the year we signed engagements with logic manufacturers at nodes from 45-nanometer to 14. These engagements include DFM yield ramps and process control solutions. Between our DFM engagements and our direct work with foundries, PDF's Solutions Characterization Vehicle tested were run at all major foundries in 2011. As a result, PDF is a unique resource as our characterization of leading edge silicon across the entire industry is unparalleled.

In particular, the value of our solution to fabless clients has started to be publicly recognized. In the third and four quarters of this past year [AMD] referred to PDF Solutions on their earnings call as an important partner in driving their manufacturing efficiencies. In our strategy of helping our foundry clients achieve great operating results our CV infrastructure and DFM solutions are becoming more recognized capability for both the factories and the fabless design teams using them.

The second priority in 2011 was achieving our yield targets with our clients to maximize Gainshare results. We made good progress on this during the year. For example, in Q4 we started to see Gainshare contribution from nodes below 40-nanometer for the first time. Achieving our yield targets means that our clients are experiencing improved manufacturing execution, in part by using PDF's characterization and ramp capabilities.

Our third priority for the year was to drive adoption of our DFM solutions at fabless clients. We already mentioned the work with our clients and the value AMD has recognized. During the year we signed a number of DFM engagements and laid the groundwork for further expansion in 2012.

In particular, as fabless companies begin manufacturing at 28-nanometer our process control solutions, which leverage our proprietary Characterization Vehicles implemented in product scribe lines, are beginning to demonstrate value. As 28-nanometer volume picks up in 2012 we anticipate this capability becoming an important part of PDF Solutions' value proposition to fabless, augmenting the DFM solutions that clients engaged prior to [tape-out].

Our fourth priority for the year was to continue to deliver our solutions to markets adjacent to our logic manufacturers, such as LED, solar, wafer, and memory manufacturing. As I mentioned in the third quarter call, during 2011 we successfully expanded on the relationship with our first LED manufacturer that we began in 2010.

One of the features of the next generation process control software, I mentioned earlier, is more cost effective deployment for our yield [to ware] process control capability to these adjacent markets. We expect to see continued traction in logic in adjacent markets for this technology in 2012.

Finally, our fifth priority for the year was to remain committed to improving spending. During 2011 we grew our design of silicon revenue by 20%, while our cost of sales increased only approximately 10%. We are pleased with this margin expansion.

Our strategic direction in 2012 will remain largely unchanged from 2011, while we will increase our focus on achieving our yield targets as it sets the stage for client satisfaction and future Gainshare.

In 2012 we anticipate the overall chip industry will continue to grow, with logic manufacturers seeing more growth than the industry overall. In 2011 our business, in particular our solutions revenue, which is an indicator of future Gainshare, grew faster than the overall logic industry. Adoption of the leading edge nodes where PDF is particularly well positioned will continue to be the most exciting part of logic manufacturing business. In these nodes yield ramps, DFM, and process control will be critical issues for IP manufacturers in fabless companies.

As a result, while we will continue to refrain from providing specific quarterly guidance and we may see ups and downs quarter-over-quarter, we expect to continue to grow our solutions revenue in 2012 at a level that is faster than the overall logic manufacturing industry. Further, we believe Q4 foreshadowed a return to more consistent growth in Gainshare results as the investments we had been making on the leading edge nodes with our clients start bearing fruit.

Finally, due to our continued focus on conservative spending we anticipate that our earnings growth will be greater than our revenue growth on a percentage basis.

Thank you for your time and attention. Now I'll turn the call over to Greg, who joined PDF just about three months ago as our new CFO. We are pleased to have him as part of our team. Greg will discuss in detail our financial results for the fourth quarter and fiscal 2011. Greg?

Thanks, John.

As a reminder, in addition to using GAAP results when evaluating PDF's business, we believe it is also useful to consider our results using non-GAAP measures. In this case non-GAAP measures excludes stock based compensation expenses, amortization of expenses related to acquired technology and other tangible assets, restructuring charges and their related tax affects, as applicable. You can access the earnings press release that contains a reconciliation of non-GAAP to GAAP results in the Investor Section of our website located at pdf.com.

Now let's turn to a review of the financial results. First, let me cover some of the highlights of the quarter and for the year. As John stated, total revenues were $17.6 million for the quarter with a GAAP net income of $2.1 million. This resulted in an EPS of $0.07 per share for both basic and diluted shares. Net income on a non-GAAP basis totaled $3.3 million or $0.12 per diluted share. Cash grew by $1.9 million during the quarter. Cost of sales and operating expenses were $15.5 million, an increase of approximately $100,000 from last quarter.

Looking at the full year, total revenues were $66.7 million with a GAAP net income of $1.9 million as compared to prior year total revenues of $61.7 million and GAAP net income of $22,000. Resulting EPS of $0.07 for both basic and diluted shares on a full year basis compared to zero cents per share last year. Net income on a non-GAAP basis totaled $7.4 million or $0.26 per diluted share compared to $7.8 million or $0.28 per diluted share last year. This reduction was due to an increase in tax provision of approximately $1.1 million, which more than offset an increase in pretax non-GAAP income of approximately $700,000. Cash and cash equivalents grew by $7.9 million during the year, with $8.2 million being generated by operations.

We are very pleased with the improvement in our pretax earnings, both on a quarter and a full year basis, and our strengthening balance sheet. We continue to investigate strategies to mitigate the impact of foreign withholding taxes on the results of the Company going forward.

Moving on to revenues, and for the quarter total revenues of $17.6 million in the fourth quarter were up 4% as compared to $16.9 million in the prior quarter, and up 9% compared to $16.2 million for the same period last year. Total revenues were comprised of design to silicon yield solutions revenues of $14.2 million and Gainshare revenues of $3.4 million. Yield solutions revenues for the quarter increased $300,000 sequentially or 2%, and Gainshare revenues increased $400,000 or 13% sequentially.

The increase in yield solutions revenue was due both to new engagements and extensions of existing engagements with existing customers. The increase in our Gainshare revenues was principally generated by the inclusion of a new process node and related wafer volumes at an existing customer. Gainshare revenues for the quarter as a percentage of total revenues were 20% as compared to 18% in the prior quarter.

During the quarter we continued to observe further concentration at the leading foundry manufacturers within the marketplace. Reflecting this market trend, the total number of customers contributing to Gainshare revenue in the quarter fell to five, down from six in the prior quarter. Offsetting this affect, however, the total number of Gainshare eligible process nodes and related wafer capacity at those five customers is continuing to increase, both on a quarterly basis and an annual basis.

During the quarter we added two new contracts, four extensions to existing contracts, and a significant new software license contract. In the quarter 14 engagements, spanning seven customers, contributed at least $150,000 of revenue.

Finally, our top 10 customers represented 88% of total revenues in the quarter. Three of these customers contributed revenues greater than 10% each. This was the same number as last year and the same number as the fourth quarter last year. I'm sorry, same number as last quarter and the same number as fourth quarter last year.

On a geographic basis, Asia accounted for 31% of total revenues, Europe represented 26%, and North America accounted for the remaining 43% of total revenues.

Moving on to cost of sales, the total cost of our yield solutions was $8.2 million, an increase of approximately $400,000 as compared to prior quarter. Fourth quarter gross margin as a result was slightly lower at approximately 53% compared to 54% last quarter. Non-GAAP gross margin was 57% for the quarter compared to 58% last quarter.

Our total GAAP operating expenses were $7.2 million or approximately 41% of total revenues compared to $7.6 million or 45% of total revenues in the prior quarter. R&D expenses totaled $3.1 million or 17% of total revenues compared to $3.4 million in the prior quarter. SG&A expenses totaled $4.1 million or 23% of total revenues compared to $4.2 million in the prior quarter.

Other income at $282,000 was favorable when compared to $201,000 in the previous quarter.

Worth noting, the income tax provision decreased quarter to quarter by approximately $840,000 and by approximately $230,000 as compared to the same quarter last year. In general, our tax provision is primarily comprised of foreign withholding sales tax, that's withholding tax on sales.

As mentioned earlier, we strengthened the balance sheet during the quarter, primarily as a result of our positive operating cash flow. Cash from operations was approximately $2.2 million. During the quarter the Company also repurchased $440,000 in stock, which was partially offset by $240,000 in employee stock option exercises.

Headcount at the end of the quarter was 319 people worldwide compared to 321 people at the end of Q3.

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

Thank you, Mr. Walker. (Operator Instructions)

Your first question comes from Tom Diffely.

Hey, good afternoon. Maybe first a couple questions on the model, itself. The tax decrease that we saw this quarter is that something that's sustainable or is that just a onetime item that we go back around a million dollars going forward?

I would say that that's more of a onetime item dependent on the revenue mix in any particular given quarter, between those revenues subject to foreign withholding tax and domestic revenues primarily. So as that mix may shift you would see the tax provision right now shift and, of course, that is potentially increase or decrease. Our goal, we're looking at ways through which we may be able to mitigate some of those impacts, but at this point in time we don't have anything specific identified.

All right. And are you subject to -- do you benefit from the R&D tax credit if it comes back?

Yes.

Okay, and then also looking at the operating expenses, the reduction you saw quarter-over-quarter is that just better control of discretionary spending or is there a headcount reduction that went along with that?

I would say that those are actually somewhat related. We had some legal expenses that were significantly reduced. We are managing the headcount very tightly. So I'd say there's some onetime items in there, but at the same time we're trying to manage the run rate as low as we can.

Okay, so I mean do you look at those being kind of a starting point for the run rate going forward or did the onetimers bring it below what you would think as being normal run rate?

I would say the onetimers probably brought it down a couple $100K.

Okay.

Off what would be a starting run rate for 2012.

Okay, and then, John, looking at the nice uptick in the Gainshare portion, so was all of that driven by the new, I think it was 40-nanometer or sub 40-nanometer Gainshare coming out or was there some older stuff that came back, as well?

It was -- the sub 40-nanometer stuff compensating for what had been lower in some of the legacy stuff. We do think that as we go through 2012 some of the legacy stuff may do better, Q4 was not a great quarter for the legacy stuff.

Right. Okay, but those contracts haven't come to an end, it's just a matter of utilization rates?

Right.

Okay, and then when you look at the top line, the design, the silicon business, based on kind of the book that you have would you expect that to continue to go up, as well? Or have we gotten to a plateau in just your consulting part of the business?

Yes, (inaudible) solutions, it's consulting and some software, and solution revenue in there. In general we expect, as I said in my prepared comments, we expect that portion of the business, the overall business and that portion of the business to continue to outgrow the overall growth in the logic industry. So we do expect that number to continue to grow.

Okay, and then getting a little more I guess kick from the Gainshare in addition to that?

Exactly.

Okay, great. All right. And then when you look at the adjacent markets, right now it's pretty slow. Do you see it as being a meaningful portion? I know you're going to probably get some pretty nice ramps here coming up on the new nodes, I'm just curious if those adjacent markets come into play, at all, this year?

We do expect them to come into play this year, but not relative to the amount of the increased growth that we expect in the logic industry. We think they'll still be dwarfed. That could be a very good piece of business for PDF in 2012. The growth will continue to be further penetration as the logic customers move to the advanced nodes, more investment in advanced products and processes, bigger facilities, running more wafers on the advanced nodes, contributing bigger to Gainshare, that's going to be the big driver. That's the headline story for PDF this year.

Yes, yes, okay. And then you mentioned, too, some increased emphasis on the DFM solutions going forward, like 28 and below, how big do you see that as part of the I guess the top line? Is that something that once the fab is up and running, the next is almost like maintenance work going forward, or is that something that (inaudible) with the yield and then tapers off?

Yes, that's a good question, Tom. So we continue to have customers engage with us, pre [tape-out] work via the DFM, most of the business that we saw in 2011, towards the end of the year, fabless customers started to use our Scribe line. And I think what they recognized was how very tight the process windows are for these advanced nodes. And, as you know, some of them are now on wafer buys, and a wafer buy basis you really need to understand what is the variability that the key technology is able to hold and how does that relate to your product yields.

So we're encouraged that there may be an application of our Scribe solutions for the fabless accounts as they test the wafers themselves in their assembly facilities to understand the process windows that the manufacturers are actually delivering for them. And we started getting some of that business in 2011 with one of the fabless accounts, and we saw some good data coming off those vehicles. We're hopeful that there's an opportunity to expand that in 2012.

Okay, and then you talked about a multigeneration contract, I guess I'm just kind of curious inside of a customer how active are they at multiple nodes at the same time? Is there one that completely dominates your work there or are there separate groups that all work on their own node and it's a lot of work on each node at the same time?

Yes, so that's a great question. I think every generation the technology developers tell you they're going to do one version of the process for that node, right? [HPM] was the definition, default foundry standard technology on 28-nanometer. Then the reality is the fabless companies have tremendous leverage and they need specials, and so you start seeing the poly silicon versions, the versions of poly silicon, the versions of super high performance, and medium high performance. And you start seeing more and more and more derivatives. And the layout optimizations that each of the major companies is using is unique. But fabless, and I've heard this now from multiple ones tell us, gee, we need vehicles for each of the specific flavors of the node.

And from our standpoint that means they may need more than what we originally allotted for. So we need to have a way of scaling the amount of capacity they needed from us in terms of capability, funding that through incremental [fix fees] and then enjoying the wafer fees that that would represent. So overall encompassing engagement, which is what we did in this case with this one account, to cover all of the nodes and all of the flavors gives them the ability to apply that to whichever one of the flavors that are there. From our standpoint that means that we get paid on all flavors, whether they take specific test vehicles or not, and all facilities. So for us it has an advantage of de-risking the nodes, which is very significant for us.

Yes.

And for them it's, you know, it gets them PDF characterization for all of the fabless accounts. And we hear consistently fabless guys prefer our vehicles and prefer the data that comes off our vehicles, as an understanding of the manufacturability of the fit between the specific technology choices they're making and the ones the manufacturers are making.

Okay, great. And then are you seeing any kind of migration from all this (inaudible) work you're doing to your customers' other product lines, like the memory side?

Yes, still primarily focused on the logic side of the businesses across the customer base. We do from time to time see opportunities in the memory, but we haven't given it a lot of focus yet. That may change as we go through 2012, but right now 2012 will all be about logic.

Great. Thanks for your time today.

Thank you.

Our next question comes from [Adam Fisher].

Hi, how are you?

Good. Adam, how are you doing?

Good. Thank you. I have a couple questions. AMD talked a lot in both their Analyst Day and on their calls about kind of increased yields, like global foundries, particularly. Can you talk, at all, about how we might have played a role in that, their discussion of our technology in their call has kind of coincided with an increase in their yields, seemingly?

Yes, thank you. Yes, so I'll try to take that question. I mentioned it also in our call. We were very pleased. I guess at some levels for fabless guys it's better if they don't mention PDF in their call, that means they're not talking about manufacturing, they're talking about products. But as you've probably seen on many of the calls for the fabless community, industry yields on the 32 and 28 are hard to achieve.

AMD talked about how using our Characterization Vehicles and our technology could help them build a tighter relationship with their key supplier and result in better yields. In Q3 they said this was the way, that they had already put in place, to improve their manufacturing. And then after their fourth quarter they said that they had improved manufacturing as a result of applying our technology to that ramp. For us that's just a super nice endorsement for our Characterization Vehicles and PDF technology can help bridge the gap between the manufacturers and designers. I think they mentioned us in both cases because there is a cause and effect there.

And I think historically our relationship with AMD (inaudible) global foundries had been mostly in Asia. My understanding is AMD's volumes generally come out of the [Dresden] facility, which global foundries has kind of discussed being kind of I think 30,000, 40,000 wafers a month capacity. Is that all incremental capacity to us as we go forward with that relationship?

Obviously, AMD is using us (inaudible) interest, and that is incremental capacity to us as we go out through 2012.

Okay, and your expectation is that they'll use us on additional nodes going forward?

It always comes down to achieving great yields for our comps, when they achieve great yields and they say they're getting great yields as a result of applying you, they tend to apply your technology on more product lines and future products, et cetera. So we would, you know, our expectation, as we said in our prepared remarks, is to drive even further to achieve customers' yields this year. And we expect that as we've always seen, when customers get great yields from us they purchase.

The second part of my question has to do with our large Asian customer who discussed, who is building, just finished building a fab in Texas, and I believe they're talking about being in full capacity there. My understanding is that as their wafer volumes there increase our Gainshare should kind of commensurately increase. Is that a fair assessment?

That's also a fair assessment.

Okay. So can you discuss, at all, kind of on a percentage growth basis, we touched X number of wafers in 2011, how many we could potentially touch given our current customers and the new capacity that's come online over the last couple quarters that we're now touching, kind of what the percentage growth would be?

That's a great question, Adam. I don't, you know, we don't have the number off the top of our head. We do, as we said in our prepared remarks, right, we've made a lot of investments in the leading edge with a number of companies that have been investing very significantly in their capital in the leading edge over the last couple of years, and we anticipate that bearing fruit for us as we go into 2012.

The exact amount of fruit and how significant it's going to be, it's really hard for us to quantify it right now. They've certainly built a lot of capacity, I mean the capacity builds, at least a couple of our customers has been quite substantial. So we anticipate that, meaning that there is a lot more wafers that we are going to be collecting wafer fees from our Gainshare from in the 2012 time period and the 2011, but we don't know that we have a specific number to say it's X percent.

Okay. Can you talk, at all, about you mentioned the software contract with -- for the next generation [yield ware]?

Right.

Can you -- it sounded significant, but so can you elaborate a little bit, the significance of that product, the significance of a customer kind of adopting it this early in the lifecycle, et cetera, and maybe give whatever detail you can around the kind of customer it was?

Yes, so, well, it's a customer that's in the (inaudible) area, in the image sensor area, actually. And that customer has been a customer of ours over the years. As we said, it's an existing customer, primarily in the logic manufacturing area. What we see more and more, as (inaudible) moves from scaling its purely lithographic to scaling and technologies start having more and more unique materials, unique capabilities, et cetera, your ability to control a manufacturing facility based purely on looking at inspection data or visuals doesn't give you a lot of indication about the actual control. It gives you one piece of information.

We've made an investment, we felt it was coming back in 2005, started making investments in 2006, and the first set of engagements with the logic manufacturers, where the investments were very high, we could charge an awful lot for the deployment of the solution, and really it was a very human intensive deployment to get the system up and running and be able to make some small impacts. We used that to understand how to make the system more deployable, more efficient in the way it ran, less human intensive on a deployment. This new (inaudible) process control solution is our kind of next, our third evolution in this field, and here's a case where we've got a customer signed up today because I think they recognize how important it is in the image sensor market.

And we're doing a deployment, it's going I think quite smoothly, and much less intensively from a human capital standpoint. That's why, as I said in my prepared remarks, we feel like we have an opportunity to expand the number of places we can deploy the solution and the number of different end markets where we think this kind of capability would be valuable. It's still hard for us to kind of put a number on what the opportunity is and how much we can get out there.

But when we made this investment we worked a lot with the game system guys on their businesses, and a one of the things they always told me about being efficient in manufacturing was it gave them an efficiency to dial-up how much of the market, you know, if you can sell an Xbox for very little money, you can get a lot of them out there and then make the money off the titles. For us we're trying to make our deployment as efficient as possible so we can really understand what's the market opportunity. Well, our deployment was so expensive we'd be very risk adverse in taking on adjacent markets.

Does the new solution open up new opportunities for you guys, you know, the lower capital or people intensity of it, does it open up some opportunities that we may not have had up to this point?

Yes, that's our expectation. And we're measuring this engagement pretty heavily to see exactly what the deployment cost is for us, and it's been substantially less so far. We feel pretty good about it, very good about it.

Good. That covers it for me. I appreciate it. Thank you.

Thank you.

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