Q1 2022 PDF Solutions Inc Earnings Call

Good day, Thank you for standing by welcome to PDF solutions first quarter 'twenty to 'twenty two conference call. At this time, all participants lines are in listen only mode.

After the speaker's presentation, there will be a question and answer session for which instructions will be given at that time.

I would now like to hand, the call over to Joseph D. S. A platinum partners. Sir. Please go ahead.

Thank you Kristian and thanks to all of you for joining us today on the call with you.

Appreciate your time and your ongoing interest in PDF solutions.

Greater indicated my name is Joe Diaz I'm with.

And partners, we are the Investor relations consulting firm for PDF.

You do not yet have a copy of today's press release its available on the company's website at PDF com.

Some of the statements made during this conference call will be forward looking within the meaning of the private Securities Litigation Reform Act of $19 95.

Clothing statements regarding pdf's future financial results.

<unk> growth rate and demand for its solutions pdf's actual results could differ materially.

Forward looking statements and risk referred to on this call are based on information available to PDF today. The company has no obligation to update them.

Our advice to refer to the section titled Risk factors on the company's annual report on Form 10-K for the fiscal year ended December 31, 2021, and similar disclosures in subsequent SEC filings.

With that said I'd like to introduce John Varian, PDF solutions, President and Chief Executive Officer.

He'll be followed by non Roger Executive Vice President and Chief Financial Officer.

The conclusion of managements prepared remarks, we will open the call for your questions. Let me now turn the call over to John <unk>, President and CEO of PDF solutions.

Thank you Joe the first quarter was a great start to our year before Oddone discusses the financials in detail I have some comments about the nature of our business in the quarter and our perceptions of the market.

The first quarter bookings built on a strong trend in 2021 with many of the same themes that we experienced last year continuing.

For the industry in the first quarter supply constraints, Covid Lockdowns and sanctions as a result of the Ukraine War made for an EV.

The ability of equipment wafers in consumables.

Customers expressed to us increased uncertainty in meeting shipment requirements and increasingly we noticed our customers executives spending effort to assure supply.

Fight the stock drop and in some cases because of these trends we had a very strong bookings quarter.

We did see some customer ship fewer tools than we had anticipated which impacted the contribution from runtime licenses to analytics revenue in the quarter at the same time the contribution from gained share to integrated yield ramp revenue was improved modestly as a result of increased wafer shipments.

We also experienced the uptick and extensive process control perpetual licenses as customers built out new capacity.

Overall, the first quarter, the macro trends, while not all positive for our business tends to break in our favor from a revenue perspective.

Beyond these puts and takes that were a function of the macro challenges and opportunities our business activity and results were very strong in the quarter.

I will briefly briefly touch on some highlights in bookings and partnership activities.

First building on the quick start contract that was signed with a leading edge customer in the fourth quarter of last year and as anticipated we signed a large follow on contract. This makes it possible for this customer to use pdf's characterization vehicle test chips, DFM software and extensive analytics to optimize its PDK.

<unk> and foundry interface for a broad range of chip designs.

Second.

And consistent with recent history, the largest access to your contract in the quarter was for a cloud deployment.

This contract was for one of our first cloud renewals as the customer was one of the early adopters of extensive cloud in 2019.

The renewal grew a R. R from this customer well over 50% as they took advantage of tiered storage and expanded usage.

There are other accents you called contracts in the quarter as well as contracts for Centennial process control and test modules. These were at both new and existing customers.

Third we continue to experience strong customer adoption of our SDK for symmetric connectivity products and while impacted by supply chain still strong shipments of runtime licenses on an absolute basis.

We ended the quarter with record runtime license backlog, which speaks to our customers' challenges and making equipment shipments, but also gives us confidence in the future contribution from one time licenses.

Finally cooperation with cooperating with other industry leaders continues to be an important part of our business as.

As we discussed last quarter, we announced our partnership with Siemens E. D. I don't think makes sense here with testing diagnostic products. Our first webinar in Q1 was highly attended and the.

Follow up customer interest is high.

In April we announced a collaboration with cooler can sofa to linking Cynthia what theyre with their assembly manufacturing equipment.

This partnership builds on our existing OEM relationship where KNX includes our Accenture analytics for assembly operations to enable traceability.

Like our Siemens collaboration this expanded engagement starts off with an early customer access program.

Our relationships with Adventist, Siemens and K Ines I'll speak to our customers desire to add more analytics to the backend Assembly and test. This is particularly true for chip and system companies employing system in package processes to implement two and a half D and three D chip systems.

I'd been tests voice user conferences coming up next week, and we anticipate announcing new products as a result of our continued collaboration in conjunction with this conference.

Audience. So I view user group conferences also soon and we'll be working with IBM to outline our cooperation for <unk> customers.

Overall customer and partner activities in the first quarter were strong and consistent with our expectation entering the year.

Now one quarter into 2022.

Semi country environment remains robust and demand for integrated circuits is broad base. We anticipate continued demand for our analytics platform, particularly on the cloud from a broad cross section of customers.

Given the industry tailwind I, just summarized and in spite of the macro economic uncertainty we remain confident in the outlook. We provided earlier this year.

Before I turn the call over to odd none I would like to thank all of the employee PDF employees and contractors for their efforts during the first quarter. We managed to work in tight concert navigating many of the challenges are the strongest revenue quarter in the history of the company.

Now I will turn the call over to our noncore will review the financials and provide his perspective on the business.

Thank you John Good afternoon, everyone. Good to speak with you again today and I Hope all of you and your families are doing well. We're pleased to review the financial results of the first quarter of 2022 as mentioned our earnings release in a matter that report are posted in the Investor Relations section of our website. Our Form 10-Q was also filed with the SEC.

Today.

Please note that all of the financial results. We discuss in today's call are on a non-GAAP basis and a reconciliation to GAAP financials is provided in the materials on our website.

We are off to a strong start in 2022 total revenues for the first quarter came in at $33 5 million up 38% over last year's first quarter and up 12% versus the prior quarter of Q4 2021.

Analytics revenue came in at $30 4 million, an increase of 57% year over year and 12% quarter over quarter.

The increase versus prior quarter was driven primarily by the start of a new leading edge booking with John spoke about and increased access to your software license sales.

Analytics represented 91% of total Q1 revenues.

For the quarter integrated yield ramp revenue was $3 1 million a year over year decrease versus $4 8 million and a quarter over quarter increase versus $2 6 million. This.

This quarter over quarter improvement was primarily due to higher wafer volumes driving gained share.

We believe that our transition to a leading analytics provider to the global semiconductor supply chain is progressing well and is widely recognized within the industry.

John also spoke about the progress of our ongoing and future plans for collaborations we have announcements with Adventist Siemens police and sulfur and IBM.

All important influential leaders in our industry.

We are pleased that non-GAAP gross margin for the first quarter came in at 16, 9% versus 61% year over year and 65% quarter over quarter.

Improved our margins as we started to reap the benefits of scale in our cloud business, allowing us more efficient cloud spend and the ability to apply application engineering resources to pre sales and product management rather than customer support.

We also benefited from increased perpetual software license sales during the quarter, both of which together contributed to getting closer to our 70% long term gross margin target.

Bookings for the quarter increased more than 90% year over year and our backlog at the end of the quarter crude to a healthy $196 8 million.

non-GAAP net income for the quarter totaled $3 7 million or nine cents per share versus a non-GAAP net loss of $1 9 billion or five cents per share loss in the year ago period, our year over year increase of <unk> 14 per share.

Turning to the balance sheet, we have carefully manage our cash position and carry zero debt.

In Q1, 2022, we purchased approximately five $8 million worth of shares.

After the conclusion of the quarter, we purchased an additional $16 $7 million worth of shares in a privately negotiated transaction when a block of approximately 715000 shares became available.

The total number of shares purchased this year totaled 933000, and 458 at an average price of $24 seven per share for total ear to date buybacks of $22 5 million.

Our latest share count of $36 9 million shares as of May six 2022 as noted on the cover of our 10-Q is now lower than the number of shares outstanding when we filed our Form 10-K for the year 2020.

As we look to the next quarter and the rest of the year, we expect to increase cost in Q2, as we wrap investment again to continue delivering on the increased interest in our products and solutions.

We expect Q2 total revenue to be similar to Q1 levels and for the full year 2022, we expect total revenue growth to be between 20% to 25% on a year over year basis.

All in all it was a solid first quarter. We are pleased with the organic growth of our analytics business and are making good progress to meet or exceed our target model gross margin of 70% with that let me turn the call over to the operator for Q&A.

Operator.

Thank you, Sir ladies and gentlemen, if you have a question at this time. Please press Star then the number one key on your Touchtone telephone again that is part one on your telephone keypad.

If you wish to withdraw your question press the pound key.

We'll pause for just a moment to compile the Q&A roster.

Your first question is from Christian Schwab from Craig Hallum. Your line is open.

Hey, guys. This is Tyler on behalf of Christian Thanks, a lot to ask a few questions.

So first I guess I wanted to you know.

The announcement of the partnership with Coke and sulfur during the quarter. That's multiple backend customers. We're partnered with now I was wondering is that what.

What we should expect going forward more more backend equipment partnerships or how do you feel about the possibility of partnerships more on the front end.

Yes sure Tyler This is John we do see we are well engaged with customers on the front end as well, there's just the backend with something where there was very little analytics historically in a very simple processes complexity has gone up.

<unk> desire to have more automation and more.

<unk>.

Of course, our customers that are doing analog and sensor systems to the most complex <unk>.

Computer systems.

Tips. So we see a lot of opportunity there is a lot of.

Need so probably it's more balance to the backend of the front end, but we do a front end customers moving also.

That sounds great and then.

Maybe a little bit on the model the gross margins, obviously really strong in Q1 that is great to see it it sounded like I just wanted to confirm I guess that there wasn't anything one.

Onetime in nature in that and.

Would it be fair to expect that kind of 69%.

To go forward as we trend towards that 30% target.

Yeah, I think that's fair.

I'm increasingly confident in the way, we've been able to manage our business count getting comfortable with the scale. We are achieving and also what we're seeing in the outlook for the rest of the year.

I think you can pick that up also in our comment that we expect our revenue to be 20% to 25%, which is a little bit of a more positive change compared to the last earnings release as well.

Alright, perfect. That's all for US thanks, guys.

I get an answer we reminder, that is star and then the number one on your telephone keypad to ask a question.

Your next question is from Tom <unk> from D. A Davidson your line is open.

Yes. Thank you for let me take this question and I gave a question too so I guess on the collaborations with dentists click Siemens IBM.

John maybe just talk a little bit about what is your investment going into those collaborations.

You projected timelines before they will drive.

Revenue and kind of how you view those collectively.

Sure Yeah, I mean, I think we're learning as we go Tom.

For sure they take a few quarters at least generally before we announce them we've been working on them for quite a while.

The case of <unk> for over a year.

An early analysis of prototypes.

<unk>.

<unk> modules to take advantage of their data leveraging our traceability.

Looking for what kinds of things machine learning can pick up on on manufacturing so.

By the time, you folks see them Theres already been a good solid year of investment typically sometimes longer and then we as I said in the prepared remarks, we look to do early access customer programs. They may have some small amount of revenue associated with them they're really.

The revenues, mostly to make sure we've got some level of commitment on the part of the <unk>.

Customers are really deploying and then those will take some.

Months to quarters, and then they start kicking in revenue. If you look at out of interest. It was about nine months. After the contract was announced when we started getting revenue above the minimal of the minimum level, there and we expect similar maybe sometimes six months, but in that range.

Okay and are these contracts that you do these four plus companies are going to have with their customers and you'll get a percentage of that or how do you think the contracts will be ultimately a structure.

Yes.

Again, something that's a work in progress Tom So some of them ourselves through its customers want it.

Sell it to the customer they want to our partner wants to sell to the customer directly or manage.

Contracting we've done that with other testing is done.

Specific customer situations. When IBM is then the front end.

They've done the selling and then.

The contract between them and the customer for a bundle of Accenture when their software systems and then they pass through to us.

Our model for revenue there.

There are also ones, where we are in these.

Our early access programs each selling our part and then as we see the pattern that develops through those early access programs. We may choose to continue to sell separately and just how far connectors or choose to leverage the channel one of our interest of course is to leverage our partners channels as you know.

Because of Pdf's history, we've never built out a very very large selling channel. Yes, we think there's an awful lot of latent interest in our platform so we'd like to leverage there.

Channel as much as possible and sometimes that does mean, having them having had the direct relationship with the customer.

Okay, Great that's helpful and then.

When you look at the cost of these programs.

Is there any dramatic change to your cost structure. Once they started once they start to produce revenue in the sense that are there certain costs that are.

Nonrecurring engineering costs that you'll get lumped into the later date.

No I mean, the perspective, we take on all of these engagements is like John said right either their incremental revenue contribution that we're getting from the revenue that they're getting or its revenue directly to us but in all those cases, we want these to be positive marginal contribution. So no nothing that would tend to make our model had in an aggressive direction, we feel pretty good about some of the engagements.

And frankly some of these have also been yielding results and are already part of our results.

Over the past couple of periods. So we feel pretty good about these engagements.

Okay, and then John just finally, maybe a little update on the progress on the DSI tool in the field.

Yeah.

We feel very good about that in full manufacturing running.

No.

Basically tens of wafers are weak, we don't get time on it.

Do any R&D related work or setup.

So I think moving along quite well.

At the Spi Conference Samsung.

Let me conductor engineers.

That had firsthand experience with with the capabilities, we're presenting on keynotes and talked about what they saw on the machine and what it was capable of doing and the overall approach and we were really pleased with the comments made in a public setting.

Great and then do you think this is.

It is essentially augmentin.

The optical inspection.

Working.

Working closely together or is this one set of to replace it ultimately.

You know I think its I mean generally the device I've gotten many many years ago. When we got involved in this whole thing with a focus on the things you can't see or I think the one of the technology leaders from Nvidia when he spoke at our user conference.

Inspect beyond I'd expect the invisible if you look at the early applications. It's a lot to look at open.

Contacts in various which you can't see optically because the surface of the wafer looks great.

You know the machines Kimball scanning billions of those per hour and when you look at a complex chip, even a 50 square millimeter chip theirs.

So many billions of those features on a chip that you need to have visibility to.

Five or 10 billion minimum per wafer to just.

See if you are at your target yields. So we feel we have the only ability to see opens on an in line inspection case.

It's very much dependent on all the analysis the system does on the design database software that our DFM software for that and then all the analysis on the backend with Accenture you have to look for the trends and the layout features that are there. So I think it's quite complementary to optical inspection.

Our industry for decades has had a problem of not being able to see opened now that we're trying to do more and more with three D.

Opens across layers as an increasingly important problems. So we feel like.

The <unk> program is skating to where the puck is going in terms of inspection problems.

Great well I appreciate your time today and thanks John .

Tom.

Your next question is from Gus Richard from Northland. Your line is open.

Yes, Thanks for taking my question nice quarter.

Just on the on the top line.

90% is now the analytics business, which I would imagine it's pretty predictable.

Can you give me a sense of how much of your you know your guidance between 20, and 25 is sort of already in backlog if you will.

Yes, the color we gave on our backlog.

That we put in our 10-Q as well consistent with the last few quarters itself. This backlog.

More than half of it in the next few years I think within that it's also fair to say that the majority of that happens within the next year.

Look where we're starting to get increasingly confident every year, we don't break out the specifics, but I will tell you in our internal board decks over the last two years, we've been putting every year or as part of our annual operating plan what percentage of extra spoken for and I can tell you that percentage has been going higher.

So it's all a function of having this recurring revenue across the variety of streams of our business.

We keep working on other areas today for example in the symmetric side that are run time to also explore how to make those recurring as well as parts of that are you know headed there, but again very small and lots of opportunity but.

Increased confidence from.

Product standpoint in time, the expense you know leading edge stuff gasses, all ratable right.

Some perpetual licenses on the sensor side, but it's it's.

Any given quarter it's.

Under 10% of the.

Analytics revenue.

The piece that we're still working on it the runtime licenses on.

On some metrics comes down to when customers ship I think said in my prepared remarks, we had anticipated them shipping a little bit more this quarter than they actually shipped we saw our backlog go up to.

Records, I mean super level, which gives us some predictability about runtime licenses over the next couple of quarters, but we're still learning that piece of the business gotten that piece, it's kind of a shadow backlog, we know they're going to ship something but we don't really know each quarter, how much it's going to be.

Okay that was super helpful and then.

R&D came in a lot higher than I thought he goes for things came in a lot higher than I thought.

Depending on when an engineer is doing there.

They're allocated to Cogs or R&D was there a little bit of that in the quarter do we think about R&D.

R&D at this run rate or.

Is that going up.

You know go up a little bit more.

Yeah. So a couple of comments alright, one that I think Tyler already asked so we feel pretty good about our gross margin targets going forward so that should be.

I'll, probably point about how we're feeling about the costs and the management of cost second specifically within the quarter look it's also that time of the year, starting with Q1, where we start to accrue some personnel related bonuses and things like that so that's part of the reason why youre seeing a little bit of a jump as well most of our jump was related to some of these accruals and some onetime things related to the head count, but overall on the R&D.

As a percentage of margin or our gross margin target is feeling pretty good about the rest of the year, where we are.

Very helpful.

Color on that yes.

Yes, just.

A lot of the improvements.

But first.

When we first got Accenture on on the cloud we didn't take advantage of a lot of the features that were.

In the cloud systems themselves as I talked about tiered storage in our prepared remarks, we're taking advantage of features that are available on the hardware on the call that our on premise customers. Just don't have so now we're able to go back and say the customers well why manage backups backups cost you a lot of money and it's a pain and you never can find them when you need them and the engineers to always go back.

Can I ask for the for them when you have a field return we now offer a feature called tiered storage and <unk>, we're offering another tier this year, where they can effectively just let the software manage pushed.

Pushed the data to colder and colder and cheaper storage to the engineered it still looks like and ask you I'm curious, though he never has to go on or she has to go and ask for getting an RMA offer backup tape, it's always been there.

But it's from a cost standpoint extremely cost effective for the customer and these are ways, we're improving the margin on the extensive cloud deployments by giving customers more features that help them manage their total cost of doing analytics lower while growing what they spend with us and that's why that was up so much amount of content features like that.

See us do more and more of those things.

Got it got it alright, great very helpful and then.

I think my last one is.

The quick start contract.

Handed to a full blown contract and.

You're talking about helping your customer developed pdk's.

And I'm just wondering if you could talk a little bit more about that.

I don't believe I've ever heard you you know.

Work in that arena before and I'm, just kind of wondering what it is youre doing for the customer and sort of how you are helping them along.

No.

With their customer enablement.

Yeah.

Any of these technologies at the at the leading edge.

The interaction between foundation IP modeling support.

All needs to be validated with silicon.

A very very broad.

Lay out usage.

Nowadays you can say this is a design rule, but that design win will be differently in different density environments with different neighborhoods environments and as you know we've always had the highest density of.

Information per unit timing per unit area in the industry, we feel.

When you look at what you can get off of PDF systems, and just the analytics that.

We provide one time when an engineer was asked by an executive what's the difference with PDF, it's like well, we test maybe 30% of those test chips that we design and we analyzed 30% of that so we're looking at 10% of our data the PDF systems. We've looked at all of it right. So that it got Exhaustiveness is really important as you try to go from supporting a very new.

<unk> set of IP to supporting a very broad set of designs and IP as you broaden out the number of designs that are going into a leading edge technology, which typically happens as you look at.

Moving away from a single product company to multiple product families are opening up a factory availability.

So that capability has always been there and it was effectively giving away as part of gain share.

And as we've unbundled.

What was the gain share.

We've been able to create a series of applications that we're able to license on a subscription so it was embedded in that.

But we're on the hook for hitting a yield target. So we gave away a lot of that stuff to help the customer that youll target and in hindsight, probably we under we under capital are under monetize it now we can sell it directly to the organization part of the organization that wants that benefit.

And charge for it separately and deliver.

Therefore, additional capability over time with that with that application.

Yeah.

Okay, I understand what you're doing and does this significantly is this.

Capability per node is it is it.

And what time based licensing you can use it anywhere you want you know how I would say.

I mean, it's a subscription across a note or a family of notes depending on the way the contract structured it comes with a set of vehicles.

Accenture cloud.

Analytics and.

It.

Part of that is additional vehicles, so as they bring on new.

Products, new product families, sometimes associated with third party customers that are able to use the vehicles.

Injunction with those IP families.

So it's really around that design manufacturing interface.

Got it and if they need additional CBS is that.

Incremental charge for them or is there there's incremental charges on top of a base level, there's an assumption associated with mpw's for certain amount of.

Customers that are coming into the product to the technology node and then there's the upcharge as if they want to use more than that.

Its designed got it.

Got it and then.

If you can help me out.

As you know the size of an old.

Our contract or is it smaller.

Can you size it relative to prior prior opportunities for business models.

Yeah.

No.

These are contracts tend to be in that as you can see from.

Our announcements the quick start was enough.

Single digit millions range. These tend to be in the double digit millions range recognized over a couple of years. So they are relatively sizable.

You know obviously, what we want to do is extend the subscription period because.

Make sure the system is adding value over a longer time period of renewal. How these renewable is going to be very important for us to watching.

The more we see these renew the happier we'll be worst in the early innings on this.

Great. Okay. Thank you for your patience with me I appreciate you.

Alright.

Sure.

Again, if he would like to ask a question. Please press star and then the number one key on your Touchtone telephone again that is part one.

Your next question is from Blair Abernethy from Rosenblatt Securities. Your line is open.

Thanks, nice quarter guys.

Thank you.

Just a just a couple of follow ups.

Here.

John I was just wondering if maybe on the on the BSI.

I guess two things really one is.

Are you seeing any or experiencing any supply chain issues with components going into your.

You're into the product that may be slowing or delaying delaying you in any way now or near term.

And.

Just in terms of the backlog growth the sequential growth of 10% very healthy.

Is it all really expense, you'll driving that or is <unk>.

Part of that as well just kind of wanted to get some color into that backlog growth.

Sure. So first to answer your question on supply chain for sure when we when we do go in order things we've had some customers even on computers, who wanted to deploy some extensive process control on premise and they've asked us to.

Purchased the computing configured for <unk> and we found the lead times for everything to of course be up like everybody else is in.

Theres always abilities too.

By your way to the front of the line in many cases.

So there are there always are.

Waste ameliorate those concerns should you need to we feel very good about our availability of what we need.

D F I E Pro program for the remainder of this year certainly embedded in our.

Our.

Our expectations for the remainder of this year as odd months at 20% to 25% growth. It is not gated by an availability of any single any part for anything.

So we don't see that as being really a factor for us and if you keep on extending shortage on availability of components out over a multiyear time period.

Yes, it would have thought.

Could impact us, but for the remainder of this year that will not be a limiter on our business that we see.

And greatly for our cloud customers and one of the things I always like pointing out to customers. When they are considering putting extensive on premise or expense. He on cloud we can spin them up on cloud tomorrow right. If they want us to order equipment and ship it on premise it could be six 812 weeks right. So availability on cloud is always much more immediate.

And for the <unk> programs, we've got enough capacity for what we need to do for the remainder of this year.

I think that's the answer on the supply chain I think I'll turn it over to <unk> for the second question. You asked I think on the second question look I mean, if you look within the analytics business again as others have pointed out 90% plus of revenue and we feel pretty good I mean within that when we look at the three components that John also talked about right. The extensive piece or the leading edge piece of the CCG piece.

We track progress of each one of them, but in our businesses and we're pretty pleased with how the debt quarter over quarter, and obviously year over year as well then in terms of a booking color, which you asked about as well, yes. When we do sign these larger deals leading edge deals it will contribute to.

The total bookings growth of course, but at the same time. We were also pleased with the bookings that we saw in the extensive business and then as well as the CCG business I'll give you two colors right Jon already talked about the leading edge well within <unk>, it's the type and the quality of the bookings that we're starting to focus much more on the comment that John made about the Ara growth for that customer that came up for renewal of greater than 50%.

That is precisely the kind of thing we'd like to drive in the CCG business. Yes. It is mostly perpetual and we book and we ship, but what is what's important is how much more growth in booking there is that we weren't able to ship or might be for booking in the future. So the backlog even for that business.

Starting to reach very strong levels is another positive indicator. So all in all feel pretty good.

Of course, focusing on making sure that we continue to deliver on growth from all of these three components off analytics.

Okay, great. Thanks, Thanks for the color and then just shifting to your I mean margins gross margins were solid this quarter.

As you look at.

As you look at sort of these partnerships that you're supporting you are taking on.

Versus your R&D internal R&D spend how are you.

How are you looking at.

Capital allocation, if you will or.

You have limited resources. So how are you deciding where you're going to spend this year and what sort of your hiring outlook.

For the rest of this year.

Yeah. Yeah. Good question. So look I mean part of the reason you know as I think it was Gus who was asking about so the head count spend increases as well, particularly on the R&D side and also in the total Opex side. If you look at it it's really some of the head count hiring we did so we actually were surprised that we were able to add.

I'd gone higher than what we were even thinking so we were able to.

Get some of the hiring done faster than what we thought which in this environment, we're pretty happy about it. So that's part of what drove the R&D increase second pieces. When the business is going strong you know obviously with the sales is going to be sales bonuses and commissions. So that was the second piece there and the third piece is what I alluded to earlier in terms of at this time of the year start to close some of the boxes.

So in terms of capital allocation for the new business is look we think of them in two ways either is it a business that's going to contribute to us revenue coming through that partner or it is going to be new deal in both of those cases, we look at it like we do for other deals on a deal by deal by deal basis to see what resources, we have and sometimes you'll get contractors.

You, obviously use a meaningful number today, and we expand or contract that elastic need with the needs of our business. So we will continue to manage that this goal is going to be making sure that we deliver on the margins and incrementally improve from where we are.

Great. Thanks, very much guys.

I'm showing no further question at this time I would now like to turn the call back to CEO of PDF solutions, Mr. John Companion for closing comments.

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

Ladies and gentlemen, this does conclude PDF solutions first quarter conference call. Thank you for participating you may now disconnect.

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