PDF Solutions Inc (PDFS) 2021 Q1 法說會逐字稿

Good day, and thank you for standing by. Welcome to the PDF Solutions First Quarter 2021 Conference Call. (Operator Instructions)

I would now like to hand the call over to your conference speaker for today, Joseph Diaz of Lytham Partners. Please go ahead.

Thank you, Erica, and thanks to all of you for joining us today on today's call. We appreciate your time and your ongoing interest in PDF Solutions. As the operator indicated, my name is Joe Diaz. I'm a managing partner at Lytham partner. We are the Investor Relations consulting firm for PDF.

If you do not yet have a copy of today's press release, it's available on the company's website at pdf.com. Some of the statements made during the course of this conference call will be forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995, 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 the company's annual report on Form 10-K for the fiscal year ended December 31, 2020, and similar disclosures in subsequent SEC filings.

The forward-looking statements and risks stated on this conference call are based on information available to PDF today. The company has no obligation to update them. With that said, I'd like to introduce John Kibarian, PDF Solutions' President and Chief Executive Officer, who will be followed by Adnan Raza, Executive Vice President and Chief Financial Officer.

On the conclusion of management's prepared remarks, we will open the call for your questions. Let me now turn the call over to John Kibarian, President and CEO of PDF Solutions. John?

Thank you for joining us on today's call. If you've not already seen our earnings press release and management report for the first quarter, please go to the Investors selection of our website where each has been posted. Today, I will start with a summary of our goals for the year, what we achieved in Q1 and finish with our perspective on Q2 and the remainder of the year. After my remarks, I will turn the call over to Adnan.

As most of you know, our goal is to become the leading analytics company for the global semiconductor and electronics supply chain. We are focused on delivering business impact via improved process efficiency and product reliability. Among the requirements to achieve this goal are providing the right data, data quality and analytics at the equipment edge. This is of growing importance not only to leading edge manufacturing, but also for manufacturers and more mature technologies across the supply chain. Our acquisition of Cimetrix connectivity products and our equipment company partnerships, including Advantest, directly address these requirements. The tool intelligence that connectivity and equipment company partnerships provide, coupled with Exensio's capabilities to ingest and drive actions from the data is the growth driver of our analytics business. Increasingly, our customers want to utilize Exensio Analytics on the cloud to have immediate access to their data and connectivity with their factory equipment processing their products to optimize their production.

Turning to the leading edge. Our characterization solutions, including electrical test and our design for inspection, provide these customers with the deep data and insights required to develop and control advanced processes. Worldwide, investments in leading-edge semiconductor manufacturing continues to increase and has become the focus of semiconductor consumers and governments as well as the foundry and fabless companies.

As a result, we anticipate bookings and contributions to analytics revenue from CV and DFI Systems in Q2 in the second half of the year to grow compared with Q1 in the first half of the year. We'll probably deliver these products as part of an analytics solution, but do have some legacy customers, who are still buying our characterization capability as part of an integrated yield ramp with gain share royalties tied to yield achievement.

With the expected growth in our analytics revenue, the integrated yield ramp revenue as a percentage of total revenues will continue to decrease over time. As we stated in our February call, we are in a period of higher growth for analytics revenue and associated investments as we head towards achieving our long-term model. Our expectation for this year was for analytics revenue to grow by greater than our annual target of 20%, and we anticipated our total company revenues to approach 20% annual growth. In the first quarter of 2021, we started to see the results we anticipated in February as our analytics revenue grew by more than 40% compared with Q1 2020.

Growth in Q1 for total revenue was 14%, materially above the single-digit year-over-year growth over the past few years and particularly strong when factoring in the decline in integrated yield ramp revenue.

Looking deeper into first quarter results, our largest contracts were for Exensio Process Control, Exensio Cloud and on-premise TBLs for Exensio Fabless. Additional strength came from increased runtime license sales of our symmetric connectivity software, which is installed on capital equipment. The strong and growing capital equipment volume suggests that this robust contribution to analytics revenue should continue through the year and is reflected within our annual growth expectations.

During the quarter, we also have many new design wins for our connectivity solutions, meaning our equipment partners are designing our connectivity software into their products under development, which in turn will result in additional onetime licenses in the future. We accelerated our investments in cloud infrastructure and field deployment as well as our capability to support our customers on the leading edge.

Overall, PDF has always been willing to invest in Head of Business when there's future opportunity. At the same time, we expect to generate cash from operations this year as we typically do. As we look towards the second quarter, we anticipate continued total revenue growth on a quarter-over-quarter sequential basis, similar to what we achieved in Q1.

We believe this will come not just from strength in Exensio Analytics and Cimetrix Connectivity that we experienced in the first quarter, but also from our characterization systems and IYR solutions on the leading edge, as we benefit from the investments we made in the first quarter.

In summary, I am really excited about the momentum achieved this quarter. With Cimetrix as part of the team, I am seeing more ways the combination of analytics and connectivity differentiates us further in the marketplace. Moreover, customers' adoption of Exensio in the cloud is opening up new opportunities as they experience the benefits of an integrated end-to-end platform.

Our recent increasing and deeper relationships with customer technical evaluations for DFI and CV systems are strengthening my conviction for the potential of our leading-edge business also. Now I'll turn the call over to Adnan, who will review the financials and provide an updated -- provide his perspective on our business. Adnan?

Thank you, John. Good afternoon, everyone. Good to speak with you again today, and I hope all of you and your families are keeping safe. We're pleased to review the financial results for the first quarter and to bring you up-to-date on the progress of the business.

We posted our earnings release in a management report in the Investor Relations section of our website. Our Form 10-Q has also been filed with the SEC today. Please note that all of the financial results are discussed in today's call will be on a non-GAAP basis and the reconciliation to GAAP financials is provided in the materials on our website. We are off to a good start in 2021. Growth in bookings for the quarter continued the directional trend of 2020, where we booked more than 2.5x the level of bookings of full year 2019.

For Q1, our total bookings, leaving aside Cimetrix, were double our prior quarter bookings, with a core business trends and transition to analytics continuing to deliver. We continue to win large customer bookings with multiple Exensio deals greater than $1 million this quarter, contributing to our recurring revenues.

In Q1 alone, we have already booked approximately half the number of $1 million-plus Exensio contracts compared to the total number of similar-sized contracts booked in all of 2020. As customers appreciate Exensio analytics on the cloud, we have experienced growth in the contract sizes as well. Our largest contract in the quarter was with an existing customer that increased their annual subscription license fee by more than 30%.

The strong bookings in 2020 and the first quarter of 2021 lead us to believe that the pandemic and the subsequent semiconductor shortage has acted as a catalyst in getting semiconductor manufacturers around the world to manage their operations more efficiently and effectively with our analytic solutions.

Total revenue for the quarter was $24.2 million, up 14% versus Q1 2020 and up 8% versus the fourth quarter of 2020. We were particularly pleased with a 26% revenue increase in the Asia Pacific region and a 22% increase in Europe on a year-over-year basis. Analytics revenue was up 46% to $19.4 million versus Q1 of last year, and up 34% sequentially from Q4 of 2020. Contributions from acquisition of Cimetrix played a part in the growth of analytics revenue this quarter. Even putting Cimetrix aside, the core Exensio business grew double digits percentage versus Q4 of 2020 and versus Q1 of 2020 was well ahead of our 20% annual growth targets.

Within Exensio, we are seeing an increase in adoption of our cloud offerings as greater recognition of the convenience and the effectiveness of our analytics platform is realized. We also welcome new customers from Cimetrix in our list of top 20 analytics customers this quarter, which we're very pleased about.

Our Exensio cloud revenue in Q1 was more than double our Exensio cloud revenue of comparable quarter last year. Combined with the ratable revenue we derived from term-based licenses, SaaS cloud deals and recurring revenue streams from Cimetrix, we are building a strong ARR based software analytics platform. This gives us predictability which, coupled with growth of bookings in analytics platform, allows us to feel comfortable about a large percentage of our next quarter's planned Exensio and Cimetrix revenues. Within analytics, the DFI and characterization products combined revenue was down on a sequential and annual basis for the quarter.

The confluence of geopolitical development, automotive supply chain shortages and increased U.S. focus on semiconductor production means that with our analytics, DFI and characterization capabilities, we're uniquely positioned to help achieve the industry vision. Therefore, this year, we expect to capture more value from our investment.

For the first quarter of this year, analytics comprised 80% of our total revenue. This mix of analytics and IYR may change with the continued growth of the analytics business and potential future IYR wins.

We are gaining traction as we continue our transition to becoming the largest independent provider of analytics software solutions to the global semiconductor supply chain. Our IYR business contributed $4.8 million in Q1 2021 revenue. As most of you know, this is a business that we have strategically deemphasized but maintained it with a few selective customers, while enjoying the royalty based high-margin gain share revenues. As we have previously mentioned, we expect gain share to decline in the second half of the year.

On a full year basis, we remain confident about analytics revenue growth to exceed our 20% annual target and total revenues to approach 20% growth. Gross margin for the quarter was 61% versus 65% in last year's first quarter and in line with 61% of the prior quarter.

Our expenses compared to last year were higher due to investments in cloud infrastructure to support our growing recurring revenue streams and from the acquisition of Cimetrix. These strategic investments will support future analytics growth.

We remain committed to our 70% target gross margins with our growing Exensio subscription and Cimetrix product revenues.

R&D expenses for the quarter were up $2.1 million versus Q1 of prior year and up $0.6 million compared to Q4. Majority of which increase was a result of the Cimetrix acquisition, coupled with some smaller increases from personnel and subcontractors. SG&A expenses were up $1.3 million versus Q1 of prior year and up $1.4 million compared to Q4, driven by Cimetrix acquisition.

Taken together, our total expenses, including cost of sales, R&D and SG&A were in line with our plan. And we believe we will be able to manage costs to similar levels, while delivering on the recurring and total revenue growth, we are seeing.

Net loss during the quarter was $1.9 million compared to a net loss of $0.1 million for Q1 of last year and net loss of $1.3 million for Q4. The increase in net loss was primarily attributable to investments related to our continued transformation to an analytics company and the Cimetrix acquisition.

With regards to the balance sheet, cash, cash equivalents and short-term investments totaled $132.3 million, compared to $145.3 million at December 2020.

Cash flow was impacted by accelerated investments to support our business, due in part to cloud infrastructure investments, payments related to Cimetrix acquisition and stock buyback of $4.5 million.

We expect to generate cash from operations for the full year 2021, consistent with our history over each of the last 10 years. With a strong cash position and no debt, PDF is very well positioned to deliver on our organic growth and consider strategic acquisition opportunities as they become available.

In summary, we are pleased with the overall direction of our business. We continue to make measurable progress in expanding our analytics business, benefit from the growth in recurring revenue streams and the Cimetrix acquisition. In the first quarter of 2021, analytics posted double-digit revenue growth versus both year-over-year and the prior quarter, with strong bookings during the quarter positioning us well for the year. We are pleased with the results of the first quarter and look forward to a strong 2021. With that, let's open up the call for questions. Operator, please start the Q&A.

(Operator Instructions) Your first question comes from the line of Christian Schwab.

The commentary regarding large customer bookings, can we assume then that might be taken as a reiteration of previous guidance that Advantest would get to a $10 million run rate before we exit the year?

Actually, these are bookings of new business, Christian. So this is customers beyond Advantest adopting Exensio and our overall analytics platform.

Okay. Do we still expect Advantest to get to that type of ramp in by the end of the year, I guess, then?

Yes, we do, Christian. And in fact, we did say that there was -- we announced in Q4 -- Advantest announced in Q4 products that include PDF's technology. We do believe that, as we go through this year, we will get at least a little bit above that level as some of the new products that generate additional license revenue for us are starting to sell-through. And we expect that to happen by the third quarter of this year.

Okay. Q3. All right. Perfect. The industry seems to be going through a lot of different change. And we have a large IDM out there who's decided that they're going to try to become a substantial foundry in the future. It reminds me of some of your other previous successes of other companies, who made that type of transition in the past. Do you think there's -- I'm sure you know who I'm talking about. Do you think there's an opportunity for you guys? Is there any way to handicap that would be helpful?

Sure. Yes, Christian, in my prepared remarks I talked about worldwide interest on the leading edge. Certainly, we were -- when it gets to 60 -- when things get to be covered on 60 minutes, it kind of speaks to how front center this is in the world.

And I don't think it's just 1 company. We do see multiple companies around the world, increasing their focus on the leading edge in the U.S., in China, in Taiwan and Korea and other places. We -- in my prepared remarks, I did talk about an increased amount of presales activity on the leading edge in the first quarter in part -- which in part resulted in some higher expenses. And we took on those expenses because we felt that we can't predict any 1 single customer or any timing of any single thing. But when this has happened in the past where the world starts focusing on leading edge, it's historically been pretty good for our leading-edge business.

Yes. Can you give us an example of -- I was trying to think of previously when the IBM alliance happened and a certain set of customers kind of went from 0 to, I think, a material number, but I can't remember. Can you remind us of that kind of ramp?

Yes. So that -- sure. I mean there were about 3 customers in that time period. If you go back actually, Adnan's prepared remarks, it was 2009 last year we actually lost money for the year from operations.

And then once those companies started to make that investment, generated a couple of hundred million dollars in cash from operations over the last decade or so. So when those investments happen, they tend to be very big. But we can't say when or if that's going to happen this time. But these bets are -- our customers are making very, very big bets. Peter's technology is very helpful in untangling the Gordian Knot that is yield problems. And so I think that speaks to why we've seen an increased activity with customers around the world, right? I don't think it's anything specific to any single customer.

(Operator Instructions) We have our next question from the line of Gus Richard.

What percentage of your analytics business now is based in the cloud?

We haven't broken that out specifically. And I don't have the number in front of me. I know that for Exensio, it's becoming a sizable percentage of the total Exensio business, but I don't know at the top of my head, Gus. I look at collectively with time-based licenses we have. I'll explain a little bit why it's like that, Gus. We have a lot of customers where they buy the cloud service through us. So they pay for Exensio, and we turn around and pay some of the money to our cloud supplier.

We have other customers who already have contracts with their cloud supplier for the hardware portion of it. But they pay us for the cloud subscription of Exensio, including all the managed services.

So then our gross margin in that case is higher, but the revenue is slightly lower. And we lump that in our time-based licenses, but effectively, it's cloud because we manage the systems and we manage the data ingestion, et cetera. It's just who's paying the portion to the cloud provider, the hardware provider.

What I'm trying to get at is how much of your software revenue is ratable? And how much of it is upfront?

Oh, yes, vast majority of it's ratable. I think last quarter, there were -- as Adnan said, a number of customers that did bookings over $1 million, all of those were either time-based licenses or cloud contracts. There was no perpetual licenses in the large ones. We do still have some smaller customers that buy some of Exensio on a perpetual basis, but it's a relatively minority of that business.

So most of the revenue when you get a $1 million contract, it generally spread over 2 or 3 years?

Correct. Typically, I think last quarter, almost everything was a 3-year term.

Perfect. And then thinking about the electrical characterization business, and it's very different than the software business, although I know they're tied together. How does electrical characterization, be it -- I want to say pro, but you know what I mean. And DFI, how does that fit into your business? And how do you plan on monetizing that moving forward?

Sure. Yes. So in my prepared remarks, Gus, I did talk a little bit about small number of historical customers that we still do sell that on an IYR basis. We've done that with them over many years now.

But for the most part -- I'll give you an example. Customer has a cloud deployment for Exensio for process control in their factory. They are, at this point, more and more selling wafers, where they are not doing the product test. It's a partnership with a customer that's kind of treating like a foundry even though they're historically not a foundry. And they use our scribe line test structures and systems as a way of establishing acceptance on the cloud. So it is the analytics application on the cloud that does a series of alignments and correlations to that scribe data, which is a very rich set of information. With all the upstream data, and I use that on basically like an MRB like application to decide whether to ship the wafer to the customer or not. It's a combination of the scribe line vehicles and the cloud offering that they use. And they used to call from number of others as well.

And how do you charge that? What's the business model? Is it just...

It's a subscription.

Okay. So you'll do the characterization vehicles for the customer, you'll supply the parametric tester, and they'll pay a fee for usage?

On an annual basis, correct.

On an annual basis. Got it. And then last 1 for me, and I'll let somebody ask some more questions. What's the status of DFI in terms of placing additional systems in the field and with your key customer?

Yes. So as I said in my prepared remarks, we have an increased level of intensity on the activity on DFI in the first quarter of this year. And we expect to place additional systems as we get into the remainder of this year. I think timing may be early -- in the second quarter or early third quarter, but we do expect that to happen.

Okay. This was multiple customers or...

We've got activity going on with multiple customers at this point, Gus. Again, part of my prepared remarks, I think there's DFI activity going on with 3 or 4 customers at this point.

Is it reasonable to assume they're all leading-edge logic?

Yes, it's reasonable to assume that.

Your next question comes from the line of Andrew Wiener.

Following up a little bit on Christian and then Gus' question. When we think about potential activity in DFI and BV for that matter, with leading-edge customers. Is it -- is built into your current guidance more expectations of significant bookings with a small revenue contribution? Just how should we think about that? Given, obviously, the ASPs you have historically talked about, particularly with DFI, I would think if we start to see significant success selling multiple units that, that would add a tailwind that you didn't see when you were exiting -- when you're on the last call and gave sort of a similar guidance?

Yes. So Christian asked this question as well, kind of in a little bit different way. And with kind of looking back in the past, it takes years to build that up. But we do it, but you -- the chunks are relatively large. As we look out over the next few quarters, we do expect characterization, it may be a mix of a little bit of yield ramp capability and some CV and DFI capability picking up over the next few quarters. We expect it to be more modest in the next couple of quarters and build up -- from a revenue standpoint and build up more substantially, while the bookings can be relatively meaningful in this year, the bookings will be more meaningful. If we're successful, the bookings will be more meaningful than the revenue impact. The revenue impact will be relatively modest in this year.

Okay. And just to be clear, when you say that some of the customers you're talking to at the leading edge are contemplating an IYR model. So that would be an IYR services engagement with a loyalty back end? Or would it be more -- it would just fall in the IYR category, but be some sort of ratable revenue recognition?

Yes. Let me make sure I'm clear, right? It's an existing customer that's used to gain share contracts in IYR in the past. And it is like the contracts we've done with them in the past, which is deploying, measuring yields and establishing a gain share period over many years.

Okay. But the other leading edge players would likely fall within the analytics category, the way that the DFI customer currently is?

Yes, that's our expectation.

Okay. And then secondarily, it was like to hear that we had a number of 7-figure Exensio wins in the first quarter. Can you talk a little bit about what type of these, they are pilot or beta or pilot activity you have ongoing and what the pipeline looks like?

Yes. Sure. Yes, the activity level on Exensio remains -- continues to increase. And this past quarter, there were a mix of fabless companies, primarily using the cloud, some on-premise. Customers that use extensive process control on -- that were doing relatively large renewals in all the cases of the process control, only a couple of them they were relatively big step-ups in the annual recurring run rate as there's new capability on process control that they wanted to include in their license. Adnan talked about that in his prepared remarks.

As we look at the second quarter and beyond, we have a number of activities with customers. A lot of continuation on the same theme. A lot of customers that have been historically with Exensio on-premise moving to Exensio on the cloud to get that extra productivity. We're releasing some new capabilities for Exensio Cloud that help customers manage their data, particularly for quality sensitive markets like automotive and things like that, that are -- we're piloting with customers now. We anticipate seeing incremental upticks.

I've been told that the way I describe this is confusing, but I call it expand the landed. When you look at PDF, we have a lot of -- most semiconductor companies know PDF or buy something from PDF today.

So we don't need to go and kind of knock-on doors where folks don't think PDF means Acrobat. The customers that we sell to know that what PDF means, and they already are using some part of Exensio, and we're mostly doing a lot of expansion. So a lot of it is -- there are some new names, but I would say the vast majority of it is expanding inside existing accounts.

Okay. And then I guess my last question is, you sort of referenced with Cimetrix that there are, I guess what I would call them, sort of new design wins, where they're being designed into new systems that are being developed, I believe, with how you characterized it.

Just wondering how significant those are, meaning how much does it expand either in customer base or the served market opportunity from like a market share or opportunity perspective?

Sure. Yes. And thanks for picking up on that, Andrew. So yes, the quarter-to-quarter, as we've kind of coming to learn about this business, how much run time license you get is the work the team did a year or 2 ago, getting the connectivity software designed into platforms.

But they track very closely design wins, places where customers evaluate our connectivity solutions versus alternatives, do it themselves or other third party systems.

And the activity this quarter, the wins this quarter were up substantially over the kind of average run rate last year. And we'll see how that maintains for the remainder of the year, but we feel that bodes well for a run rate opportunities next year and the following year as those products, those hardware products get put into the field. And we don't have -- it's really hard to know how many more opportunities are there and the ones that they're taking advantage of, but the success rate is quite high. I think the connectivity product is very strong, and customers are very excited about connecting that with advanced analytics because there's a lot of folks like Advantest that have a tremendous amount of knowledge about their equipment that they want to make available to their customers in the form of analytics. And connectivity is the first step in analytics, right? You got to get the data off the tool to be able to do something with it.

Your next question comes from the line of Tom Diffely.

I was hoping, John, just to -- if you could talk a little bit about -- as you transition to an analytic software company, how has the -- how has your ability been to attract and retain talent from an employee point of view?

You should always have the talent. But we feel pretty good about the talent that we've been able to retain. We have locations in great places. Kim and I were in Salt Lake City last week. I finally got the vaccine. So it's all good enough to travel, and I got to meet the team there, and we have a great team there. The Cimetrix team in 2020 won one of the greatest places in South Lake City to work.

And so that team is a strong team that's been able to grow, and we feel very good about the PDF teams in the other locations we added to the Bay Area this past year, and we added also and in Vancouver, we have an engineering team. And we feel quite good about those locations as well. We've tried to pick locations where people want to live.

So obviously, Salt Lake came -- kind of came with the acquisition, but it's a great place to live, and it's a great location for our team. So retention on the engineer side has been quite good. And the team acquisition in -- particularly in the cities where we're living is cost effective, has been very strong.

Okay. And then I guess related, how much of your workforce in this point is kind of work-from-home environment? And how much of it needs to be, I guess, centrally located around maybe a lab or a facility that you have?

Yes. I think the -- I've always joked that the engineers' perfect work environment is their couch, a robe and a bag of Cheetos. So there's -- for the engineers, particularly engineers doing software, which is the vast majority of them, they all tell me they feel the productivity working from home has been quite high.

We've been doing surveys. And whenever I do employee meetings I -- we use the features in Zoom often to collect data from the team. And I think what the new workplace is going to look like, it's -- we're not going to go back to where we were before. Adnan and I are in the office today. And we do have people coming into our offices now in the U.S. as well. Our Dallas office is back up and Salt Lake never really closed.

And our offices in Asia, folks going every day between Taiwan and in China. So it's coming back, but I would say that people are not going to be back in typically 5 days a week. It will be working from home some number of days and working from work some number of days. We are trying to encourage people to stay near a city where we have an office. So they can go in some amount of time. I really believe the dialoguing and whiteboard stuff, whether it's for business development or product vision and strategy is always valuable. But our teams are geographically spread out anyway. So a lot of the folks you interact with are not in the office.

If you're, let's say, in Santa Clara, a lot of folks you interact with are not in the Santa Clara office anyway. They may be in the Salt Lake office or in Dallas or Vancouver or wherever. So our folks are going to be working in a distributed way on a going-forward basis, probably more than we did in the past, but not 100% distributed.

Okay. No, it's great to hear it because lockup as we talked to ever having issues ramping up software development team since it sounds like you've got a full complement in hand already.

Your next question comes from the line of Gary Schnierow.

I wanted to go back to the conversation of the DFI placement. I assume that those are the eProbes?

That is correct. Yes.

Can you tell us how many eProbes are -- have been placed already?

There is a couple out in factories, at least in 2 different factories.

Okay. And so when you were saying increased activity, additional systems, I assume that's more than 1 that you're going to play later this year?

Yes, we believe that.

Okay. That sounds great. And Gus had asked the question about -- and it was answered that the vast majority of -- is it your total analytics revenue is ratable? Or just Exensio revenue is ratable? Can you clarify that?

Yes. I mean, frankly, even within Exensio, if we were to look at our components that go into the ratable revenue that John mentioned, the time-based licenses, some of the perpetual license -- some of the cloud licenses that we have as well as the ratable portion that we get from the Cimetrix because there's a portion there that's ratable. Yes, there's the software that shifts from the machine to the machine shipment, we get that revenue right away, but then there's some support and maintenance contracts that are ratable.

So measuring as a percentage of our -- and I know we don't break this out. But within our -- I was looking at Exensio CCG. But if you look at within the analytics, it's probably about half already that's ratable. We do have to make some adjustments. This is why John was also cautious because within the way we currently classify TBL, it lumps in there a couple of things. It lumps in there the ratable as well as some of the upfront piece as well, which is why we need some more time to do that work to clean up. But it's starting to head towards being about half ratable as a percentage of the analytics.

Great. And it sounds like you're saying that you're working on getting a more specific number for us going forward?

Yes. This is -- I mean, it's a great question, everybody asks that, and we need to do this. So as we've been transitioning the business, we expect that, hopefully, by the later this year that we can be talking to you about that number, if not sooner.

Okay. Great. And I think, John, in your prepared comments, you said that you expect second quarter total revenue growth quarter-over-quarter to be similar to first quarter?

Yes, growth over fourth quarter. Correct.

Okay. And I -- is it fair that third quarter over second quarter and fourth quarter over third quarter should be similar quarterly growth rates? Or is there something that you see for the second half of the year that you would expect that to slow down?

Yes, we haven't given a specific -- we've given a specific number on an annual basis, Gary, that we expected to approach our -- the total revenue growth to approach our analytics growth target of 20%. But we haven't gone and broken it down specifically within third and fourth quarter.

We have said -- we have that headwind of some gain share contracts tailing off in the second half of the year, but we feel very comfortable about the bookings growth that we are experiencing in this customer activity to grow through that headwind. We grew through a relatively significant headwind this quarter. As you know, if you looked at the IYR revenue Q4 versus -- Q1 versus Q4, it was down pretty substantially, yet we still grew.

So we're not breaking it out right now, Q3 and Q4. But overall, we do expect the second half of the year to be stronger than the first half of the year.

Okay. Great. Yes. And I guess trying to connect the dots on understanding that the IYR is weak as happened. I think analytics growing, but the analytics was up 46% year-over-year in the first quarter.

And I assume that healthy growth rate should continue. But in your press release, I think you just say greater than 20% growth, which it doesn't seem like much of a bogey.

Well, we'd like to exceed our bogeys, Gary, we feel pretty good about where we're going to be for this year.

Yes. I mean there's a lot of shifts like John mentioned happening, right? There's the DFI business that we expect to win. There's the ramp in the very successful Cimetrix acquisition and what the team there is delivering, offset by the gain share. So there's a lot of moving pieces here, which is why we're comfortable saying what we have.

Right. No, I appreciate that. I guess just back to the DFI, that additional machines at the existing customers.

Yes. I think at this point, what we're comfortable saying is we've got activity going on with a handful of customers in exactly handicapping where we installed what I think is still not clear to me. We don't have a lot of bandwidth, right? So we will be at some point, limited by what we can bring up when. And customers will have to see how important this is to them and who wants to make sure we have capacity for them.

Meaning you have multiple customers interested. You have more customers -- customers interested in more devices than you have at the moment. Is that what you're saying?

I think we're limited greatly by our capacity to install and bring up. We have some machine limitations as well. But I think right now, we'll just be -- still with the pandemic. You -- I think Thomas asked me the question like can people work from home. And for everyone on the Exensio and the Cimetrix side, absolutely. For the DFI side, not so much. And so that -- I'd like to kind of not be too specific there because we got to go see what's going to come through first and how many of these things we could do.

The last question that we have is from the line of Orin Hirschman.

Congratulations on the progress. In terms of narrower features more aligned with and more difficult yield situation, does that -- is that making a difference in terms of the acceleration on the bookings? What is driving that acceleration? Is it just, in general, the expansion of fab capacity? If there's more color even -- you've given a lot of color, but if can you give even more.

Sure. I think, in general, for the greater Exensio and Cimetrix connectivity, it's really just the increased activity in semiconductors. Particularly with the Cimetrix products, they ship with every piece of equipment. And equipment volumes are up and they're up on many nodes -- many mature nodes, too. It's not about the leading edge.

With respect to design for inspection and electrical characterization, smaller feature sizes is one of the drivers. But I would say almost the most important one is the 3D nature and the 3D complexity of silicon processing these days. A lot of what you would normally inspect on the surface of the wafer isn't what really drives yield loss, right? Conventional inspection today is still primarily using a light source. So you look at the surface of the wafer.

But at least half of the yield loss that we see on leading-edge products is really about the connections in between the layers, whether they're shorted or opened. And electrical test structures as well as the -- some of the things we do with DFI, really allow you to look at those between layer drivers. And that we feel is a bigger driver for our characterization solutions per se than the feature size itself. But I would say broadly, the analytics business is just about the increased activity in semiconductors overall. It's really just a characterization of DFI that are very sensitive to the number of players investing on the leading edge.

Okay. This is a question I should know the answer to, perhaps, but I don't. When you collect the billions of data points that you collect, obviously, they're available to the customer himself. Are those data points anonymously able to be used by you to continue to perfect algorithms across old customers?

Yes, that's a great question, Orin. So in our cloud contracts, we usually requesting the customers allow that we can use the data to improve our algorithms, improve our systems because the customer benefits from the fact that our data -- our data systems can process data faster, our algorithms can detect outliers and defects more effectively. So it's good for the community overall, if we can make our analytics better.

And so we've put that in our contract, and we manage a few petabytes and we have -- Exensio manges petabytes of data these days. We on our cloud solutions are managing a -- growing fraction of that. And so we use kind of our existing capabilities in sandboxes to optimize and improve things like our ability to load data in parallel fast to retrieve data fast. And our customers will benefit from newer analytics, newer ways of slicing and dicing data.

Okay. And finally, in terms of -- again, I don't know if there's an answer that you guys know that you could tell in terms of how long it will take to go across so many instruments on different back end, et cetera. How many years before that really get to the point of a critical mass where you kind of get a picture from beginning to end of the whole cycle of the chip right through final packaging and assembly. And maybe you could do it perhaps even today across an individual company, if they so desire, but how does that vision unroll and how long does it take, et cetera?

Yes. I think what you're getting -- you're getting at a very important point, Orin. So our industry and our customers, generally speaking, some of our fabless customers chip. They order away from a foundry, they send it to an OSAT to be tested, to another facility to be packaged, to another facility to be tested and then eventually get shipped to a system manufacturer like Sanmina or Foxconn to put into a system.

And never does that chip ever go through a facility that had that fabless company's name on it. So visibility of data across their supply chain is very important. We provide a capability called the DEX nodes that give customers the ability to see their data at their OSATs. And at least at some points as they come out of their foundries, the visibility inside the foundry process is relatively limited these days.

So there is some level of that today for our customers. I think it could always be better than what is available today. Some of that's due to the limitations in the way the boundaries between companies. But for sure, for test, and for some of the packaging and final test capabilities, our customers use the DEX notes to get transparency there. And we are expanding that network of available suppliers as we go through this year. So more and more of their likely suppliers are already covered under the system.

And last part of my question is Cimetrix. How much does that accelerate this old process for you?

That's a great point. Quite a bit on. So Cimetrix, a 30-year company with a long history of defining the standards for data collection. I think they share something like 10 of the standards bodies at SEMI, but also in the Taiwan Printed Circuit Board Association and many of the other industry associations, whether it's in front-end factories, in assembly, in printed circuit board manufacturer, printed circuit board back end, they are the leaders in working with the community in an open source way, in an open way to define the standards in an open way. Obviously, our software supports those standards, but we want the world to adopt them. So we do that in an open fashion.

We have quite a long history through that acquisition of working very closely with about 200 equipment vendors, where we help them deploy those standards. That means -- and that's why in my last bit of prepared remarks that we see a lot of ways we can bring closer together the analytics with that -- those data collection standards and new enhancements in the standards.

So the latest things that have not -- that have been proposed is finished, but have not been fully accepted yet. We're implementing those in the software so our customers can get access to that because people always want the newest way to look at data and more insight about their equipment. Cimetrix is really quite an important piece to the overall vision of end-to-end analytics available on the cloud, across the manufacturing supply chain. It's a very important part.

And will that be done on short order in terms of being able to give the customer access to that additional analytics?

One of the advantages of acquiring a company with a 30-year history is it can look like short order from the 2 of us coming together, but it's due to a tremendous amount of hard work that, that team made over many years, decades in fact, to really define out these standards and get them adopted in the industry, get them into the equipment and now connect them from the equipment to the cloud through product they develop called Sapiens, coupled with the Exensio data collection engines. And so things we can do pretty quickly in a matter of quarters to see in that.

There are no further questions at this time. I would like to turn the call back to Mr. John Kibarian, CEO of PDF Solutions. Please go ahead.

Thank you for participating in our Q1 call. We look forward to talking with you again soon. Have a great day.

This concludes today's conference call. Thank you all for joining. You may now disconnect.