PDF Solutions Inc (PDFS) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PDF Solutions Inc. conference call to discuss its financial results for the first fiscal quarter ended Tuesday, March 31, 2015. (Operator Instructions) As a reminder, this conference is being recorded. If you have not yet received a copy of the corresponding press release, it has been posted to the PDF 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 rate, and demand for (inaudible) solution. PDF's actual results could differ materially. You should refer to the section entitled Risk Factors on page 12 through 18 of PDF's Annual Report on Form 10-K for the fiscal year ended December 31, 2014 and similar disclosures in subsequent SEC filings. The forward-looking statements [and other statements] in this conference call are based on the information available to PDF today. PDF undertakes no obligation to update them.

Now I would like to introduce John Kibarian, PDF's President and Chief Executive Officer, and Greg Walker, PDF's Chief Financial Officer. Mr. Kibarian, please go ahead, sir.

Thank you and welcome, everyone. Today I will start a discussion with a brief summary of our first-quarter results followed by a review of the overall semiconductor logic market and its impact on PDF. I will then conclude with more details about our first quarter. Greg will then walk you through the financial results in detail and give some comments on our 2015 outlook. We'll take your questions after that.

In Q1, our solutions revenue in bookings were strong. A highlight was from Extensio, our process control software. Gain share, however, was weaker than previously expected as 28 nanometer revenue wafer volume came in below last quarter's level. I would like to talk more about these wafer volumes for a few minutes.

As the foundry volume leader has recently reported, capacity utilizations on 28 nanometer is expected to decline significantly through the first half. In fact, I believe their previously quoted 28 nanometer utilizations had been close to 100% whereas they are now projecting Q2 utilization in the 80s. They are, however, anticipating improvement in second half of the year.

For PDF specifically, we experienced a relatively steeper decline across our 28 nanometer customer base, only partially offset by a ramp-up of newer nodes at a few customers. If you recall our comment at the beginning of the year, we anticipated an increase in gain share revenue driven by expected growth in 28 nanometer volumes as well as the introduction of new gain share revenue streams from 20 nanometer and potentially 14 nanometer.

At that time, we thought the highest risk in our outlook was the timing on 14 nanometer yield ramps while the lowest risk was on 28 nanometer volumes.

Now the quarter into 2015, the market has clearly changed and our perspective (inaudible). We remain positive on 28 nanometer over the long-term and expect volumes to recover. However, we do not have the visibility to say when that recovery happens. As a result, we are now planning 28 nanometer volumes to remain depressed this year.

That said, we are now confident that two of our customers will reach contractual shipping volumes for 14 nanometer in the third quarter of this year, which will mean that 14 nanometers should start contributing to our gain share no later than Q4.

We have always stated, given our business model, that once we achieve our gain share targets, the variability in gain share revenues will depend primarily on our customers' volumes. While we've experienced strong revenue on 28 nanometer over the last few years, we are now being negatively impacted by our customers' lack of sales volumes. As you are aware, our business models prepare for variability like this and we are already taking steps to adjust our operations to minimize the impact on our earnings.

At this time -- at the same time, however, we continue to focus our efforts with our customers to meet their FinFET yield goals and drive volumes on that note. Given our strong start on FinFETs this year, the fourth quarter in 2016 gain share should clearly benefit from these efforts.

Turning to a summary of business for the first quarter, the contract signed in the first quarter include the two contracts related to the delayed 14 nanometer and 10 nanometer projects that were closed in January and discussed on our February call. A DFM engagement for our major 10 nanometer fabless client, a DFM engagement for a leading system company that is designing circuits on displays. This is the first time we are applying our Characterization Vehicle infrastructure to statistically characterize transistors and circuit elements using leading-edge mobile displays.

Multiple agreements in the yield management process control area for deployment of our Extensio big data analytics system for fabless and foundry clients. Most exciting of these was for our lead customer which experienced the use of Extensio across all of their image sensor fabs. This speaks to the success of our customers -- our customers are having applying big data analytics to process control.

And finally, multiple deployments of our recently announced Extensio test module. A significant note is that some of our largest Extensio yield agreements include the Extensio test, which speaks to the synergies of the combined offering. At the beginning of the year, we said that we expected strong growth and solutions booking and the first quarter met those expectations. Given the success just mentioned and the leverage across our technology and solutions that we continue to build, we remain confident that our customers will continue to increase adoption of our solutions.

Turning to our product innovation. On our call in February, we mentioned that PDF Solutions has a long history of inventing and commercializing new products for yield characterization. We stepped up our investments in new products this year. One of the key areas of investment is the application of our Characterization Vehicle technology to in-line inspection of electrical defects.

We intend to extend the use of our characterization IP from yield ramp to the control of mass production. During the first quarter, we had continued success validating our IP, made further progress in developing our measurement system, and delivered our on chip characterization IP to multiple fabless companies for their designs at 16 nanometer, 14 nanometer, and 10 nanometer.

Most exciting about the solution is the fabless companies' desire to include our on ship characterization instruments and their designs to improve their inspectability. Hence we call this design for inspection or DFI. We intend to make announcements throughout the year as we achieve significant milestones in the commercialization of this solution.

We recently announced that our latest version of Extensio, our big data analytics system for in fab process control, and shortly followed up with an additional announcement for the expansion of that solution into the test floor with Extensio Test. Extensio Test is based on the integration of recently acquired testable control software from Fallon Engineering, combined with existing Extensio functions and capabilities.

Let me tell you a little bit more about this. Our fabless customers, who have interest in big data analytics, know that many process control issues that have root cause in wafer fabrication are only detectable at the package or wafer test level. The impact is not just chip yield but also includes the reliability [in field] returns. Similar to our fab customers, now many of our fabless customers are asking for Extensio to capture data from the test floor. Extensio Test has been released to adjust that need.

Turning from new product development to new business developments. During the quarter, we extended our pilot projects at both fabless and fab customers in China and Taiwan and remain on track to convert a number of these pilot projects to full commercial agreements in 2015.

In summary, while we are disappointed in the 28 nanometer volumes in gain share revenue, we are taking measures to minimize the impact on our business. We are seeing the success of our work on 14 nanometer yields, which is very encouraging for future gain share revenue. We are also extremely excited about our new product development and our marketplace expansion as we've made great strides in Q1.

I want to thank our stockholders, customers, and employees for their support of the Company. I look forward to working with all of you to deliver and increase PDF's value. Now I will turn the call over to Greg to discuss in detail our financial results for the first quarter. 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 other non-GAAP measures. For internal purposes, the Company focuses on non-GAAP net income and EBITDAR. Non-GAAP net income excludes nonrecurring items, stock-based compensation expenses, and amortization of expenses related to acquire technology and other intangible assets, and their related tax effects as applicable.

Additionally, the income tax provision has been adjusted in our non-GAAP net income to reflect cash tax expenses only.

EBITDAR is equal to earnings before income taxes, adjusted to exclude nonrecurring items, depreciation, amortization, and stock-based compensation. You can access the earnings press release that contains a reconciliation of EBITDAR and non-GAAP net income 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.

Total revenues for the quarter were $26.8 million with a GAAP net income of $6 million. This resulted in GAAP EPS of $0.18 per fully diluted share. Net income on a non-GAAP basis totaled $8.2 million or $0.26 per fully diluted share. Cost of sales and operating expenses together were $17.3 million on a GAAP basis and $17 million on a non-GAAP basis, which is an increase in non-GAAP spending of approximately $1 million over Q4.

Moving on to revenue detail, total revenues of $26.8 million in the first quarter were $756,000 higher than the prior quarter. Total revenues were comprised of designed to silicon yield solutions or solutions revenue of $18.2 million and gain share performance incentive or gain share revenue of $8.7 million. Our top 10 customers represented 95% of total revenues in the current quarter. Three of these customers contributed revenues greater than 10% each for a total of 82% as compared to 84% in the prior quarter.

Looking at solutions revenue in more detail, 13 engagements contributed at least $100,000 of solutions revenue in the quarter, four more than in the previous quarter. Overall, solutions revenue at $18.2 million was $4.3 million higher than in the prior quarter. This increase primarily reflects the recognition of previously delayed solutions contracts revenue for $6 million, offset by the completion and ending of a 20 nanometer engagement and revenue timing related to one of our enterprise engagements.

Gain share revenue for the quarter was $8.7 million, a decrease of $3.5 million from the prior quarter. The total number of nodes sites which we define as an individual fab and process node combination contributing to gain share revenue in the quarter was 18 as compared to 17 node sites in the previous quarter.

As John stated in his remarks, gain share revenue for the quarter was adversely affected by reduced 28 nanometer volumes at our customers. This reduction was offset to a degree by the ramp-up of 20 nanometer royalties and a couple of customers including one fabless. It might be interesting to note that we did, in fact, see increased 28 nanometer gain share from at least one smaller volume customer.

On a geographic basis, North America accounted for 39% of revenues, which is down 10% from the prior quarter. Asia accounted for 33% of total revenues, an increase of 21% over the prior quarter, and Europe accounted for the remaining 28%, down 11% from the prior quarter.

Moving to expenses, cost of sales for the quarter was $8.8 million on a GAAP basis which was approximately $745,000 lower than in the previous quarter. GAAP gross margin was 67% compared to 63% in the prior quarter.

On a non-GAAP basis, cost of sales was $9.8 million which was $1.2 million higher than the previous quarter. This increase in non-GAAP cost of sales was driven by us including, on a pro forma basis, $1.9 million of previously impaired project costs in order to match the associated revenue with those projects recognized in this quarter.

This increase was partially offset by reduced variable compensation expenses in the quarter and a gain on sale of previously expensed test equipment. Total GAAP operating expenses at $8.5 million were approximately $208,000 lower than the last quarter and approximately 32% of total revenues, down 2% from the prior quarter.

R&D expenses totaled $4.1 million, approximately $306 million higher than the prior quarter. R&D expense as a percent of revenue was 15% in the quarter, the same as in Q4.

SG&A expenses totaled $4.5 million, or 17% of revenues, compared to $5 million or 19% of total revenues in the prior quarter. The overall GAAP operating expense decrease was primarily driven by reduced variable compensation expenses.

On a non-GAAP basis, looking at operating expenses and cost of sales together, total spending was $17 million versus $16 million in the prior quarter. As stated earlier, this was principally due to us including, on a pro forma basis, $1.9 million of previously impaired project costs in order to match the costs with the associated revenue recognized from those projects in this quarter.

This increase was partially offset once again by reduced variable compensation expenses and the gain on sale of previously expensed test equipment.

The GAAP income tax provision for the quarter was $3.6 million which reflects an effective tax rate of 37% compared to 28% in the prior quarter. The prior quarter effective tax rate reflected the reinstatement of the 2014 federal R&D tax credit program, which allowed the Company to benefit in Q4 from credits related to the full year of 2014 R&D activities. The current quarter is more in line with our full-year expectations for 2015.

Of the $3.6 million in tax provision into the quarter, approximately $1.6 million represented cash tax liabilities. This represents an effective cash tax rate for the quarter of 17% of pretax GAAP income. This compares to a Q4 cash tax rate of 14%.

In regards to the tax rates for the remainder of the year, we expect our GAAP tax provision rate to be in the range of 38% to 40% and our effective cash tax rate to increase during the year to the range of 22% to 24%. GAAP net income of $6 million for the quarter resulted in GAAP EPS of $0.18 per fully diluted share, which compared to $5.8 million in Q4 and also $0.18 per share in the prior quarter.

On a non-GAAP basis, net income was $8.2 million and non-GAAP EPS was $0.26 for the quarter compared to $9.1 million and $0.29, respectively. EBITDAR, which I defined earlier, and is also defined in our press release, was $10.4 million for the quarter as compared to $10.8 million for the prior quarter. EBITDAR for fully diluted share was $0.32 compared to $0.34 in Q4.

Total cash at the end of the quarter was $131.9 million, representing an increase of $16.4 million when compared to December 31. This increase was primarily due to strong collections, including $6 million of previously delayed customer payments, cash generated from operations during the quarter was $15.6 million. Additionally, the Company repurchased approximately 200,000 shares of its common stock for $3.6 million. Cash generated from the exercise of the stock option and the employee stock purchase plan was $3.8 million.

Trade Accounts Receivable. DSO was 69 days for the quarter compared to 98 days in the previous quarter. Trade Accounts Receivable balance at the end of the quarter was $20.4 million, representing a decrease of $7.7 million over the prior quarter. The unbilled Accounts Receivable balance was $9.2 million, a decrease of approximately $446,000 from the prior quarter. Of the $29.6 million in total receivables, $68,000, or significantly less than 1%, was more than 60 days past due. The total DSO for the quarter, including unbilled receivables, was 101 days compared to 132 days in the prior quarter.

Headcount at the end of Q1 was 351 people worldwide, which was slightly down when compared to the end of Q4.

Now, looking to the remainder of the year, based on our strong Q1 solutions bookings and the pilot project activity levels in China and Taiwan that John noted, we remain positive regarding the solutions business for the remainder of the year.

In regards to gain share revenue, we're now expecting 28 nanometer volumes for the remainder of the year to remain depressed. On the positive side, as John stated, we are far more confident in the 14 nanometer ramp at our major customers and therefore we are now more confident regarding 14 nanometer gain share in Q4 -- no later than Q4 this year and in 2016.

Given the change in the environment, we will adjust our spending levels to the extent practical to offset any reduction in revenue growth. We will, however, maintain a increased levels of investment in both R&D and Asia in support of our strategic objectives and new product innovation.

Now I will turn the call over to the operator for Q&A. Operator?

(Operator Instructions) Jon Tanwanteng, CJS Securities.

Can you update us on the net impact of the slowdown in 28 and the firming up of the 14 market just for 2015 on the gain share side?

Well, if you will recall, we, at the beginning of the year stated that the majority of gain share for 2015 would be driven [out at] 28 node, so a reduction there, if it's significant, has a significant impact whereas we always thought that 14 nanometer was going to hit in the second half of the year, likely Q4, and it would be in a ramp buildup, so nowhere near as large a level.

Okay. And then you've had several press releases on the software side and new products. Can you give us more color on the recession via customers and how we should think about the impact on the P&L going forward?

Yes, hi, this is John. Yes, so this is a product we've been working on for a number of years brought out to some of our core customers initially in Japan and more broadly, some of our yield ramp customers.

It replaces a number of products that we had acquired over the years, dataPOWER, Maestria, Modelware, and now replaces the Fallon products. This past quarter was our biggest bookings quarter for that product -- for any of our software solutions products over many, many years -- and primarily had very little revenue impact in the quarter because most of that bookings are ratable, so they would impact -- those bookings will impact future quarters.

It is broad on a standalone basis at times, in which case it's on more of a [viable] software business model and is also integrated as an overall solution basis where it has both a component of a deployment element and then a license element is proportional to (inaudible). And depending on the type of customer, it goes out on each -- either one of those models.

Okay, and then just jumping back to the 28 nanometer for a second, you said that capacities were -- capacity utilization was around 80% in the last quarter. You mentioned recovery going forward. Do you have any expectation for what that utilization is going to?

Yes, so I think if you look at the foundry volume leader, they were talking about 80 in the first half of the year and then picking up into the 90s in the second half of the year. The customers that reported 28 nanometer volumes to us, as I said -- as Greg said in his prepared remarks, one actually increased their volumes off a relatively small basis. They are just beginning their 28 nanometer volume ramp. The others reported down volumes. One was down very significantly, larger then with the foundry leader reported.

We don't have the visibility to understand why or when it would go back up in the short term, so for our modeling purpose, we assume we were at this depressed level on 28 nanometers for this year.

Hopefully if the foundry leader is right and the recovery does happen the second half the year, we would be pleasantly surprised. But at this point, we don't have the visibility to the end customers that would lead us to believe that our customers' volume is in imminent return and recovery. So we just took this depressed level and said okay, projected forward from the remainder of the year. Which is what we did and then out upside as we go out in the year, as we said, comes from our increased confidence on 14 nanometer as we see our customers loading factories now on much more decent yields. And so we anticipate no later than a Q4 contribution to gain share.

Okay, fair enough. So if you're saying that you are assuming the same depressed rate for the rest of the year on the 28 side, which assumes that the run rate you had right now will be that base plus any gains from 20 and 14? Is that the right way to look at it?

It's a reasonable way to look at it, yes. Given our lack of visibility it's the reasonable way to look at it.

Okay, great. And just one more. Regarding the customer you had the negotiations with earlier this year and last year, have you entered into any new engagements with them at all?

No, we have not at this point, except the ones that we've mentioned signing in January.

Okay, thank you very much.

Tom Diffely, D.A. Davidson.

So getting back to the 20 nanometer business -- so it sounds like you referenced TSMT and your seasonality was little softer in the first half year but it sounds like from the magnitude of what happened you guys is your largest customer lost their largest customer and you are just not sure when they might win the customer back or is that how you would characterize it?

Yes, we have to be really careful, Tom, about protecting our customer's confidential information as well. We did see it across multiple customers. Of course given the magnitude and given our customer concentration, I think my third-grader could do the math and figure out how much went to -- had to have come from different ones of our customers. And we did see that decrease at our customers across a broad number of products.

So we don't know that we would characterize it as one customer in particular. Their largest customers maybe were significant contributors to the decrease but wouldn't be the only ones.

Okay. But nothing happened along the lines of yields. There's nothing along that category where they would have to stop paying you royalties? They're just --

No, this is about volumes as we said in my prepared remarks.

Okay. And then, just to clarify the timing, was this one quarter in arrears? So this was fourth-quarter volumes or was this actually first-quarter volumes working through?

Combination of the two actually because it blends across the reporting quarters.

Correct.

Okay. We've actually heard that some of the Asian customers have been adding a little bit of 20 nanometer capacity, expecting to ramp up a little bit this year. Did you see anything on those fronts where some of the -- /

I think Greg -- we don't speak about specific customers, but Greg did in his prepared remarks say that we did see one customer increase in the 28 nanometer volumes in gain share to us of a relatively small base.

Okay. Okay. And then there were two other potential customers to start our initial ramp later this year with you guys?

There are other customers that will ramp later this year, that is correct.

Okay, all right. And then I guess moving to the expense side then, would you expect to see the expenses come down by that $1.9 million plug that you had in the first quarter because of the one-time piece?

Yes.

Okay. And then on a go-forward basis, you talked about being very tight on expenses, yet keeping the investment up in R&D for certain projects. So, how does that play out -- the combination of those two comments over the next few quarters?

Yes, the -- if you look at R&D spending levels, those will continue to increase, but we are going to reduce and control other expenses across the Company to both offset the impact of that step-up in R&D, and also absorb to the extent that we can, any slowdown in the growth rate from revenue driven by these 28 nanometer volumes.

Okay. And if the 20 nanometer stays low for a few quarters, then would you expect the stock-based compensation type of expenses to be lower as well during that period?

Oh, stock-based compensation? That's highly dependent on what the stock price is. So I can't really estimate that.

Okay. All right, and then I guess from a tax point of view, it looks like the cash tax rate, 22% to 24% this year. For the out year, would you expect another incremental increase?

For 2016, yes, we would expect an incremental increase probably into the mid- to slightly above mid-20% range.

Okay. And then, I guess, final question, when you look at the ramp of 14 nanometer later this year, is that, in your minds, going to cannibalize some of the current 28 or is that a separate line that would be in addition to if both of them were running full out?

That's a great question, Tom. This is John on that one. So we know that products that are in 28 nanometer will move over to 16, 14. And so there is -- of those products, particularly products in the mobile space and graphics and to some extent application processors in the laptop. We will move on to the 14 nanometer.

What we don't know for our customers and, in fact, we -- probably the reason we were concerned about the report this quarter is how are they backfilling for the second wave of customers into 28 nanometer. On a foundry model, right, there's always a constant wave of customers coming in and out of the node. We would expect them to backfill that capacity with other customers, typically mobility goes in next as well as networking another -- a series of other customers. So we will be watching that closely through the year. We see the diversification of our customers' end customers because that should be happening this year.

Okay. And I guess finally, Greg, when you look at or -- your comment about solutions and how you stated it as being positive for the year, does that mean you would expect sequential growth taking off the one-time lump sum payment in the first quarter, but sequential growth throughout the year?

Yes.

Okay. Great, thank you.

Brian Freckmann, LS Capital.

Most of my questions have been answered, but just wanted to touch base on more of the yield characterization. You've been pretty clear about 20 and 28 and about 14 ramping in the fourth quarter and, obviously, I think we all think it will be very big in 2016. Any thoughts on how we should maybe create an extra line item of such for the characterization portion, but when that might become revenue of some material nature?

Yes, I think you are referring to what we call design for inspection or basically applying the characterization technology into production control.

We are working pilots this year. This I was really encouraged by the fabless design community. I think our fab foundry customers are going to be really pleasantly surprised how much designers are willing to do something about making their products more inspectable. I think they all recognize what's the challenges out there and what's the risk out there.

With all of that excitement said, we modeled lots of cost this year and we model costs in the early part of 2016, but we expect revenue contribution going to be to the second half of 2016. Certainly we would love to have it happen earlier, but we've pretty much put ourselves in the model of, okay, we have to figure out how to observe this over the next year. But we think it will be a very significant part of PDF's business should we demonstrate the technical capabilities that we think it will do.

Okay. And then, finally, you guys -- Greg, you may have said $14 million of free cash flow in the quarter. I think -- I'm just eyeballing it, about 25% of your market cap is now cash. Your 14 nanometer customers are not commercial yields and as we just talked about, the characterization is being paid for in R&D line. Any thoughts, comments on use of excess cash right now?

Good question, Brian. I guess I'll answer that. I think our first and foremost biggest challenge for PDF is our customer concentration and, as evidenced by this last quarter, if we had been more broadly exposed on 28 nanometer, we would have seen a downtick. I think everyone's utilizations went down, but we wouldn't have seen what we saw.

So we constantly look for ways that we could use cash or anything else that we could ever think of around adjusting our customer concentration issues, and we continue to look for that. That said, we don't think that would consume the amount of cash that we've generated and we do expect to return cash to shareholders through the buyback that we did to execute this quarter.

We, from time to time, get closed out of those on blackouts like we did in the second half of 2014, due to the discussions we have ongoing with that customer. But we would anticipate being able to increase our buyback levels should we not be locked out on blackouts.

Okay, thank you very much.

Gus Richard, Northland.

The first place I wanted to start is on the 28 nanometer -- sorry I'm beating a dead horse, can you just talk about not your customers -- customer, but the end markets that you think were the biggest impact on that wafer volume dropped? I think I know the answer, but I want to hear from you.

Sure. Yes, so as you know, Gus, there's multiple flavors of 28 nanometer. It's like going up an alphabet soup of 28 nanometers. We saw weakness particularly in the oldest more or less performance-driven versions of that node. So polysilicon would be the lowest performing, less performance-driven. We saw a lot of weakness there. We saw some of the others, but those are by far the biggest weakness. The growth we saw was kind of in the highest performing versions of 28 nanometers. So the ones that use the most aggressive Pi-K gate last like integration scheme. So we saw the -- where we saw the improvement, albeit off a small base.

When you look at the end markets they serve, in general, of course, the mobile market consumes much of all of the versions of the node, but by far the polysilicon node is most exposed on the mobile market -- probably the most narrowly exposed in the mobile market. And that's where we saw the biggest part of the weakness.

Got it. So, just to translate all that basically, cell phone markets have been week. Some of the old implementations of polysilicon, those designs are going away in favor of some more modern process technology and designs and, basically, your customers had a higher exposure to the [poly/SiON] 28 nanometer process.

That would be a pretty good characterization.

Got it. Okay, and then moving on to more favorable topics, DFI indicated you are working on 2016 and 2014. How many fabless guys are you working with now within that technology? In other words, how many tape-outs have you done or how many people are you engaged with?

The number of tape-outs, I don't know off the top of my head. The number of customers that we've put it on either test vehicles with them or product, I can think of four or five off the top my head right now, all kind of early adopters of leading-edge technology. And it's pretty much a Who's Who list of early adopters.

When do you see -- you see those or at least some of those customers reaching production 14, 16, by the end of this year?

We are on silicon greatly -- of course R&D vehicles right now, especially the 10 nanometer. All R&D vehicles and some of the 14's R&D vehicles too. Only had our first real product tape-out this past quarter which is truly a production radical, not a R&D radical.

That would go to volume probably sometime in early 2016. It would take this year on qualification, right, and it would probably go to volume in early 2016.

The others have done an R&D silicon, right? So they will be things that we can use to demonstrate to foundries the advantages of this capability and they have taped out on basically every -- all of the people that have got 10s and 14s, 16s to talk about, we have a fabless company taping out at one of those factories.

So, we will have demonstration -- demonstratable silicon across the industry, we hope, by the second half of this year. But from a volume standpoint, we think it's at 2016 before you actually have the first one of the fabless guys in volume with products that have this capability in it.

Got it. And would that be the 14 or 16?

That would be 14.

Yes, okay. Great. And then, I think that does it for me. Thanks so much for taking the question.

Jon Tanwanteng, CJS Securities.

Just one more follow-up on the 28 and I promise I will leave it alone. Just given the magnitude of the decline in Q1, what should we expect on a year-over-year growth basis for that? Is it going to be negative on the gain share line?

We anticipate it being negative unless the volumes come back up on 28. We can't take a big hit on 28 nanometer and not have it be negative. This -- 14 -- even if it starts contributing in Q3 will be better than we thought it was when we gave our February call, but it can't be better enough to make up for how big the 28 volumes are.

Okay, great. And I just -- sorry, go on.

That's it. I'm sorry. Go ahead.

And insist on the amount that you are able to cut spending on not R&D side, maybe SG&A, what should we expect as a run rate going forward?

I would say we're still working through some of that. So I can't give you a complete sizing, but it will be in the [billions] that we can cut out.

On an annual basis?

Yes. Okay, great. Thank you very much again.

Tom Diffely, D.A. Davidson.

So, another 28 nanometer question. So, when you look at the big picture of the industry overall, 28 nanometer -- even the low end of 28 is still pretty high end for the industry. So, once you expect at some point even if the old customer doesn't come back, that you have that capacity being utilized by some other product at some other time? Just because it is more advanced? So really it's kind of a timing issue here more than anything else?

Yes, that's a great point. Actually, if you look at the transcript from my prepared remarks, we still believe very strongly that 28 nanometer is a long-time node and will be a long-live node. And we anticipate it coming back.

I think it's very hard for us. That's why I said we just don't have the visibility in terms of how much prototyping and next wave customer activity is going on at our customers' right now to forecast when the low recovers. That's why we just became cautious and said, well, we don't know what this is going to recover so we'll just assume it doesn't for the remainder of this year although certainly other indications would be that it could.

Okay. And I know obviously you don't give out your guidance since you don't give out quarter guidance; but if you were to look at your expectations for gain share in the out year, do they change at all based on what happened over the last quarter?

For 2016?

(multiple speakers)

What we've assumed as we've looked out on the out years, we feel more as we said in our prepared remarks we feel a lot more bullish about 14. If you remember when the first IDM brought up the 14 FinFET node. Their CEO was going on saying it's going to be very hard for the foundry industry ever to be able to produce a 14 nanometer product, etc., etc. And now you can see that that's not really the case and we feel pretty good. That certainly, I think, scared lots of people in the industry including us about what we didn't know. We now see our customers loading up their factories with 14 nanometer products which was why we feel pretty good about gain share this year. And we feel better about gain share -- the volume of gain share on 16, on 14 because it takes a while for them to ramp up to get up to peak volumes.

So we now feel pretty good that 16 is going to be a peak -- may not be a peak but certainly be in a full year's volume at full capacity. So we feel pretty good about 16 and 14 nanometer.

We have built out our 28 nanometer assumptions assuming some improvement as we go throughout the year, because as you said in your first question, Tom, we do believe that others come back to 28 nanometer. It should be a long live node. Overall, that's given us a more positive feeling about the 2016 gain share that we had in February. But it's very hard to quantify it (inaudible) to be quite large.

Yes, okay. And just finally, when you look at the different flavors of 28, are you in fairly good position if your customer decides to switch from an older flavor to a newer flavor on 28 to still get the full royalties for that?

Our key customers -- we get -- we had gain share irrespective of those 28 they built. So shifting from one to the other would not make much impact to us. ASPs can be different one flavor to the next to be honest with you.

That said, some of them are more general-purpose versions and hope that their end market availability -- applicability is bigger than others. So some of our customers are supporting versions of 28 to have relatively small amounts of design in.

Okay, great, thank you.

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

Thank you very much.

Thank you all.