Q2 2022 PDF Solutions Inc Earnings Call

Please stand by. Good day, ladies and gentlemen, and welcome to PDF Solutions Conference Call to discuss its financial results for the second quarter ending Sunday, June 30, 2022. At this time, all participants are in a listen-only mode.

Later, we will conduct a question and answer session for which instructions will be given at that time. If you need assistance during the conference, please press star then zero on your touch tone telephone. 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 PDF's website at www.pdf.com. Some of the states that will be made in the course of the conference are forward looking.

including statements regarding PF's future financial results and performance, growth rates, and demands for its solutions. PDF's actual results could differ materially. You should refer to section entitled Risk Factors on pages 17 through 30 of PDF annual report on form 10K for the fiscal year ended December 31, 2021, and similar disclosures in subsequent SEC filings.

The forward-looking statements and risks stated in this conference call are based on information available to PDF today and PDF assumes no obligation to update them.

Now, I'd like to turn the conference over to John Kabarian, PDF's President and Chief Executive Officer, and Adnan Raza, PF's Chief Financial Officer. Mr. Kabarian, please go ahead.

Thank you for joining us on our call today. If you have not already seen our earnings press release management report in 10Q for the second quarter, please go to the investors section of our website where each has been posted.

We appreciate your taking time to join us today. I will start the discussion by providing commentary on our Q2 highlights. From there, I'll provide our impressions of the semiconductor industry and conclude our expectations for PDS business in the second half of the year before handing it over to Adnan for more detailed financial update.

Highlights for the second quarter show progress towards our long-term objective of being the go-to manufacturing data and analytics platform for the semiconductor electronics ecosystem.

Bookings in the second quarter include significant customer renewals of Accentio, new customers deploying Accentio, additional wins for Symmetrics equipment connectivity solutions, and Yale Removal andRS Judy.

The largest extensive renewal in the quarter was the US base and renewed at an increase to ARR of approximately 30%. Our business in China contributed a meaningful portion of our bookings as activity improved over the first quarter when some customers were impacted by the lockdowns.

Our gain sheet revenue increased quarter over quarter due to customers reporting higher wafer volumes.

We also saw an increase in symmetric runtime licenses quarter over quarter due to improved volumes at equipment manufacturers related to accelerated equipment shipments.

Partnering with other leading companies to extend our solutions to new applications and uses continues to be an important part of our growth strategy.

In the second quarter and continuing this quarter, we achieved many milestones.

First, at the start of the second quarter, we announced collaboration with Kulik and Sofa to deliver new smart manufacturing solutions and announced our early access program. Our interest is proceeding well.

Second, later in the quarter, at Adventist Voice Conference, we demonstrated three new applications that run on their Edge High Performance Compute Box.

We anticipate them to initiate offering these apps to customer base later this year, as well as other applications we intend to release.

Third, in July at the SemiCon West Conference, Amazon Web Services, or AWS, hosted us in their booth.

Our team demonstrated applications in Accentio of the semi-E142 standard, which allows for traceability through manufacturing, including assembly of complex system and packaged products.

Also at SemiCon and our symmetrics booth...

We demonstrated SDK support for our equipment partners to develop and deliver semi-E142 data streams.

This means that equipment companies can create this new data type and chip makers can use this data type for critical analysis to enable efficient manufacturing and high quality for system and packages.

Fourth, and finally, in July we announced our collaboration with SAP to tie manufacturing data analytics with business planning and operations.

This work, over one year in the making, is the result of strong interest from our mutual customer base.

Today, the top floor of our customers often have a static view of their operations and engineering does not always have the most detailed view of costing, customer demand, and other constantly changing business constraints.

By tying Accentio to SAP's S4 HANA, we believe mutual customers can get more accurate view of their business. That responds dynamically to the changing marketplace.

You can see more information about these partners on our new partnership page on our website.

Overall, these partnerships are resulting in early access programs with lead customers.

While the associated revenue is not material, we are seeing the benefits of increased awareness of Accentio and PDF in the minds of the top of our customers' organizations, and we anticipate there will be a larger impact to our revenue over the next few years.

Overall, looking at the first half of the year, we are very pleased with the progress we have achieved today.

On a year-over-year basis, we grew analytics revenue 58% for the first half of the year, and total revenue grew 32% year-over-year.

I would now like to turn to what we're seeing in the industry.

Overall, semiconductor electronics companies continue in elevated investments in process control and new node bring up, which bodes well for our business.

Moreover, the EU and the US now have, similar to China, established programs to support manufacturing.

We have thought for years there's been an underinvestment in manufacturing, and these programs have the potential to increase the need for characterization, including our DFI systems and Accenture and Symmetric software.

Across the chip industry, there are a number of challenging signals with the potential of recession, geopolitical restrictions on sale of technology, and supply constraints.

Despite these headwinds, we have continued to see strong interest in our products and solutions.

We anticipate bookings in the second half of the year to be up versus the first half of the year.

We are pleased with the progress we have made in the first half of the year in making PDF Solutions, the go-to manufacturing data analytics platform for the industry, which helps us build recurring revenue streams and provide greater visibility and predictability of our financial results.

Now I'd like to turn the call over to Adnan for review of the financials, after which we'll open the call for your questions.

Adnan? Thank you, John . Good afternoon, everyone, and good to speak with you all again today. We are pleased to review the financial results for the second quarter and to bring you up to date on the progress of the business.

Our Form 10Q has also been filed with the SEC today.

Please note that all of the financial results we discussed in today's call will be on a non-GAAP basis, and a reconciliation to GAAP financials is provided on the materials on our website.

Financial results for the second quarter of 2022 continue to be strong, coming after a solid first quarter.

Q2 total revenue was $34.7 million, up 26% versus a comparable quarter last year.

Analytics revenue was up 59% to $31.1 million in Q2 2022 versus $19.6 million in the second quarter of 2021, and represented 90% of total revenue this quarter.

This growth in our revenues came from all components of analytics, including software licenses from Symmetrics and Accentio and our leading edge engagements.

On a quarter-over-quarter basis, our analytics revenue was up 0.7 million, or 2%, driven up by growth in leading edge and software licenses and were offset by lower perpetual licenses this quarter, which had benefited last quarter.

We are very pleased with the various analytics engagements we have currently ongoing, the business we are winning, and the customer mindshare we are getting across the hierarchy of customer organizations.

which plays well towards our goal to be the go-to manufacturing data analytics platform for the global semiconductor and electronics ecosystem.

During the second quarter, revenue contribution from the integrated yield ramp was $3.6 million, down from last year primarily due to gainshare contracts that ended in the second half of last year, which we have spoken about in prior calls.

On a quarter over quarter basis, our IIR revenue was up 0.5 million, primarily due to higher shipment volumes at customers.

We are pleased about the transition to analytics and the total company revenue growth we are starting to deliver for our shareholders.

As you will note, today via our press release, we have also guided to 25% total revenue growth for the full year 2022, having already delivered approximately similar percentage annual growth for the prior 2021 full year.

We find this annual growth in revenue for 2022 quite meaningful, as it is against the backdrop of two items.

First, that 2021 already benefited from the full year results of our symmetric acquisition.

So our total growth this year will need to build on top of that.

Second, 2021 still had half a year of gainshare revenue from contracts that ended last year, which we do not have for the current full year.

Our ending backlog was $184.4 million and is up 33% on a year-over-year basis.

We believe we can grow our backlog over the coming quarters as we close key ongoing engagements with multiple customers across various product lines of our business.

We have also continued to expand on our partnerships, as John mentioned, and this quarter in particular announced collaboration with SAP.

to closely connect the shop floor manufacturing data with the top floor analysis data.

We also continue to work on prior announced collaborations with Adventest, Siemens, Cliquot and I.B.M. all influential leaders in our industry.

We reported gross margins of 69% for the quarter, similar to last quarter, and markedly above 65% for Q2 of prior year.

On a quarter over quarter basis, we may see slight variations on this metric as we modulate the spend for our various customer engagements and grow our cloud spend to support the growth of recurring revenues.

We are committed to our non-gap gross margin target model of 70%.

On the operating expense side, our R&D spend was up 0.7 million compared to last quarter, primarily due to personnel-related costs from timing of worldwide merit increase during Q2, and increased spend for child costs.

Our SG&A was down 0.4 million due to some one-time saving items and timing of annual expenses occurring during the quarter.

For EPS, we reported a profit of 11 cents for the quarter, compared to a profit of 9 cents for the prior quarter, and a loss of 1 cent for the quarter a year ago.

We are pleased about this 12-cent positive swing in EPS compared to the same quarter last year.

On cash flows, we generated $3.6 million in cash from operations, and we expect to generate cash from operations for the year consistent with our history.

We ended the quarter with cash and cash equivalence of approximately $117 million compared to $134 million at the end of prior quarter, with the change primarily driven by stock buyback of $17 million during the quarter.

Note that for the year 2022, through the end of Q2, we have now repurchased approximately $22.5 million of shares or approximately 934,000 shares.

at an average price of $24.07 per share.

We believe there are positive operating cash flows and the strengths of our balance sheet position as well to consider strategic acquisition opportunities as they become available.

Looking forward, given our backlog and anticipated bookings, we are gaining confidence with the expected results for the remainder of 2022.

And now expect full year calendar year 2022 total revenue to grow approximately 25% on a year over year basis.

With that, I'll turn the call over to the operator to commence the question and answer session. Operator? Hi everyone, my name is Matthias and welcome to our session on Gustav terrifying any Liu Matz of my laptop and thank you for watching.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. A voice prompt on the phone line will indicate when your line is open. Please state your name before posing your question.

Once again, it is star one if you would like to ask a question or pose a comment. And we'll pause for just one moment to allow everyone an opportunity to signal.

And we'll take our first question.

Yeah, hi, Tom, definitely. Dea Davidson, can you hear me OK?

Yes, we can. Hi, Tom. Hey, hi. I was going to share. So, John , you talked about –

You talked about some nice growth with China recovering. I'm curious what percent of your overall business does China represent today?

And where do you think that goes longer term?

For Q2, I think it was right about 13%. I'll pull up the exact number and confirm for you, but you can comment for the rest of the year. It's been in the mid-teens, and we don't expect it – we expect it to continue to grow above on pace with the rest of the business. We've had very strong growth outside of China, and we expect it to stay in that teens range. We do not expect it to get much bigger than that. And it was 13%.

Okay great helpful and then when you look at the second half you talked about bookings being bigger half over half so it sounds like your previous comments here that that's more than just China recovering that is actual just expansion across the board.

Correct, yeah we have a number, you know, our deals have gotten over the last couple of years the size of the analytics business, the size of the average deal has gone up quite a bit. And we have a number of them in the hopper that we anticipate closing the second half of this year that would drive significant bookings growth here quarter, second half of the year over first half of the year. Remember to share, collaborate and don't forget our trust.

Okay great and then appreciate the information about all the partnerships that you've entered into over the last couple years. I'm curious when do you think these partnerships do start to create some material revenue and what do you think the first of the partnerships will be? Will it be kind of the advanced test new applications or what do you think is the first to drive revenue out of that group?

Yeah, we have released our first product that VENT has now over a year and a change ago. It is the Dynamic Parametric Test application that is contributing revenue today. We anticipate, given their forecast, and limited maybe somewhat by ability to ship equipment, we anticipate that over the next four quarters contributing more meaningfully, significantly more meaningfully than it is now. When we look at some of the other ones, we have...

KULIK and SOFA has been a partner for quite a while and a meaningful one. We expect it to grow substantially because of this application out over the next couple of years. But these take probably one year-ish. If you look at our Advent test relationship, we announced dynamic parametric test about a year ago with the first sales. It took about a year after those first sales for them to give us a forecast that shows it ramping up. And we expect similarly with our other partners as we...

engage with the first lead customers will drive some additional revenue. It's not meaningful, but it is something and then it shows really end customer interest and then we expect that will take some number of quarters after those first contracts for that to start, for them to be able to give us a forecast of more substantial growth.

Okay great and then finally moving over to the model. I was a little surprised to see some of the OpEx come down in the quarter as I thought you know you've been ramping on several programs lately. Curious if maybe a little more color behind the sequential drop-off and then what your expectations are for the next couple quarters from an expense point of view.

Yeah, so R&D, as you mentioned in the commentary during the prepared remarks, was primarily due to the merit increases. We do expect that to grow a little bit in line with what we are estimating for revenue or a little bit lower. In terms of SG&A, we also mentioned on the call there were some savings from one-time items and also the timing of expenses during the year, so we expect that to grow. Overall, our goal is going to stay the same, that revenue growth should exceed the growth that we see in our total spend, both cost of sales and opex combined.

Okay, helpful. Well, thank you both for the questions today.

Thank you Tom.

And moving on to our next question.

Yes, good afternoon. This is Gus Richard with Northland. A couple questions on these partnerships with IBM and SAP. How is that impacting the work you guys need to do for integration to a customer system and how does it affect your cost and your ability to build standard products?

That's a great question, Garcia. We have integrated Accenture with MES systems.

for forever, as long as I can remember. And we have something like 10 different scripts, we support 10 different MES systems with different scripts and whatever. What we noticed once we started moving Accenture to the cloud was, wow, we could standardize this.

So you don't have to go through and customers, yeah, they're gonna always want to have a special report or a different way of cutting the data, but the piping, the connections between the systems, that should be established. So now with SAP's S4 HANA, which is a cloud solution, and Accentio also now greatly a cloud solution for most of our customers, we can more formally standardize, do a one-time integration that works. And yes, with each customer will be another

customization and tuning, but that base pipe is already there, which greatly reduces the effort the customer needs to undertake in order to be able to connect, let's say, test floor operational and yield data with shipment, scheduling, and planning information.

So, you know, we think this is really very valuable to decrease the burden the customers needed to undertake in order to be able to get kind of more real-time, integrated information flows between the different silos within their organization. And it's enabled by the fact that, you know, more and more of these systems are on the Cloud.

Okay, and on any sense on sort of how much goodness this is for gross margin?

Yeah, not yet.

Ideally, we could just make it where what the customer only buys from us is cloud and time-based licenses and we don't do any deployments. That would be wonderful because that would, for sure, you're right. The deployments are not as good margin as the ongoing recurring revenue from the system once it's up and going. So I don't know that we've quantified it yet, but that is a secondary benefit of why we're doing it. The primary benefit is to drive up total usage.

and hence the business impact we can have for the customer and the revenue they spend with us. The secondary impact was it will come at a benefit of gross margin.

And then just, you know, the CHIP Act is now passed. Clearly a boatload of that money is going to go for capacity, but even more important to realize what the government is trying to push for.

is advanced process technology available. And I'm sort of in a US-based foundry, and I'm sort of wondering to what extent you can help your customers either create, you know.

you know, EDA and design enablement, you know, internal IP, you know, is there a role for you to play with your

characterization vehicles, you know, as the push for a more advanced semiconductor manufacturing in the US now comes to fruition.

Yeah, it's a great question. We were very excited about the chip sack passing and we think that it's a significant event for the industry overall for PDA specifically. And there's a couple of things here. I think the impact is quite broad and I'll touch on the one that you bring up, Gus, but I also want to point out when you think about moving manufacturing to high labor cost areas like the United States and Europe , what you first need to think about is how can we use software and analytics and machine learning to drive down what has been a very, very labor intensive.

operation, part of the industry. Whether even the front end fabs have an awful lot more of engineering and you know, grunt work that goes on when we, you know, we've been inside fabs all over the world for decades, if you look at how they're run, you know, in East Asia there's a lot of engineering work that goes in that we in the West had tended to not invest in. Now with the advances of AI and analytics, you can replace a lot of what's wrote in higher education more than that. So that's really counterintuitive and to me, it was really kind of a monster, to be able to earn

detailed engineering analysis of equipment data, of operational information in the factory with machine learning. We think that's a very important opportunity for, as we bring, you know, for our systems like Accentio, as we bring it out to the industry because these fabs here are going to need a lot more automation.

Secondly, the point you bring up is a really good one. What happened in Asia over the last two decades was factories served many, many product groups, right? That is the rise of the Fondry model. And the Fondry model says it's really hard to get a great return on investment when you just, as an integrated device manufacturer. So now as you see manufacturing coming back to the US, you see a number of US companies and entities that are putting factories in the US.

What's being built in the US, whether it's from Intel or TSMC or Samsung, are foundry capacity.

Right, which is different than what's gone on in the U.S. in the past, which is primarily IDM capacity. But how can we fix this internal cost point, if we keep trying to will the U.S.isman ready

If you look at our history, as people try to open up to foundry, they need exactly the point you bring up. You need to have a way of characterizing the variability due to layout, due to design factors and how that affects the transistor performance and hence the PDK. In the first quarter of this year we announced that follow on contract for using PDF capability, characterization and systems for design for manufacturability. This really was the first step with people anticipating what the CHIPS Act is going to do.

If you look at how our customers are using our design for inspection, it's going to greatly be used for helping bring up new designs and new varieties of IP, because it's design aware as it does the inspection. And again, if you want to do that in a labor and cost sensitive market, you want to use a lot more machine learning and analytics, which is what's embedded in the design for inspection capability.

So when we look at our characterization design for inspection, as you bring Foundry to the rest of the world, where I think you're going to have to employ a lot more software and a lot less human capital, we think it's a phenomenal opportunity for PDF overall.

And that brings me to my last question. You know, DFI, you know, clearly a great lab tool and helps people get products into production. And I'm just wondering sort of where you are in terms of, you know, increasing the throughput and capabilities so that it might, you know, leap from lab to fab.

Yeah, we've been monitoring usage and the applications. In the second quarter, there was just an explosion of applications for the system as we were able to demonstrate improved capability on the machine and were able to demonstrate with the software some very sophisticated automated analysis of design sensitivities. It went from running you know...

individual wafers a day to, you know, five to ten wafers a day and its utilization is really shot through the roof. We feel really good about where we are for this becoming a much more...

standard way people bring up new designs and control them in these advanced nodes. And as you look at the roadmaps with more 3D structures, more novel ways of whether it's gate all around, power via, way for bonding, we feel the future yield issues are really well lined up for what

a design for inspection can do.

Okay, in the near term, this is my last question, I promise. Any additional sales of DFI tools?

We do expect it to impact our business. That can happen this year.

Okay, great. Great. Thank you. Thank you for your patience.

Cheers, Pearson Technologies.

And once again, as a reminder, if you would like to ask a question, you may do so by pressing star 1 on your telephone keypad. Also, a phone line on your, excuse me, a voice prompt on your phone line will indicate when your line is open. Please state your name before posing your question. Moving on to our next caller.

Hi guys, it's Blair Abergree with Rose and Black.

Hi Blair.

Hi guys, just adding on one quick one for you. I wonder if you could talk about your backlog a little bit. $184 million this quarter, down a little bit it looks like, I think Q1 was around $197. Was there any FX in that backlog, any FX impact? Also, what's the duration of that backlog? What's your visibility into 2023 at this stage?

Yeah, sure. So, no, not from an FX perspective, but look, I mean, the reality is our business is starting to get engagements and customer attention for larger and larger deals. As these deals are getting larger, we're engaging not just with the engineering level, but also with the executive level at these organizations, and also broadening our business into the other partnerships like John mentioned. Net result of these is some of these larger deals take a little bit longer, and frankly, that's the only reason. It's a little bit of a function of timing where we are in the current quarter with respect to some of the deals that we're closing.

which is why you saw that dip in the backlog number. Overall, like John said, we remained very confident and expect the second half of, from a booking perspective, to be stronger than the first half of the year. And, you know, as far as looking forward to 2023, we continue to build on our momentum, and that's going to be the plan to end the year on a solid note that positions us well even better from a recurring standpoint, where we can have better predictability to our growth numbers as we go into next year than we did coming into the current year.

Okay, great. And just on the product side, John , the Adventist obviously is starting to do well with the first dynamic parametric testing. But the new applications, I wonder if you can just give some color around some of the new applications and are they going to take a year or so to ramp or do you think because you're already out there with the one product, it might go a little faster?

Yeah, so I think what we announced at Advent Test Voice was applications that take advantage of their edge high performance computing box. So Advent Test innovated the idea of putting an AI computer right next to the tester wired deeply into the way the tester collects information in real time. So now you have a lot more computing power. Historically,

When you do screening at test, you establish some very simple rules. If, you know, the test, if this chip is tested well, but all the chips around it were bad, it's called good die bad neighborhood, you reject that anyway. These are very simple rules. And you do that in part because the amount of compute that is available to you on the tester is quite small, so you have to be very efficient. Now, what AdventTest is opening up is the ability to do much more deep machine learning. So, these first three apps...

take advantage of PDFs, more computationally intensive algorithms, and bring them close to the tester so you can do more real-time capability. And we'll announce later on in the second half of this year, additional applications that take advantage of PDFs ML pipeline and even more intensive computationally intensive algorithms. This will allow for a couple of things. Smarter and more intelligent screening and binning, which is very important for customers and the system in package.

where you want to marry the right chips together that are similar in performance characteristics, and also allow for more security because the entire approach is containerized. So, you know, a lot of our FABUS customers that tested the OSATs, they want to make sure the information all the way from the cloud all the way down to the machine is encrypted, and that work goes on in a very encrypted way. So even within the OSAT, the OSAT has very little visibility and how things are screened.

I think we don't know Blair, we'll find out. I hope we see an acceleration. We hope in part by announcing many of them at once, we're able to stimulate a lot more demand and do in parallel what we did serially with dynamic parametric tests.

Great, thank you for that. Just another question I made on the partner side, IBM was mentioned earlier in the call. Maybe just give us a bit of an update on how things have progressed there. I think it's been almost a year now. What sort of stage are you at with IBM?

Yes, that's great. So IBM, we have integrated Accenture with Sideview. It drove business for us and continues to drive business for us where they sell, when they sell Sideview, they also introduce and sometimes sell Accenture even as part of an IBM contract. So then we, the contract between the customer is with the customer and IBM and then IBM turns back around and licenses Accenture from us.

We have a number of ongoing selling opportunities. As you know, MES systems like SciVue tend to sell when a new factory is built. So they are less frequent than tester installations or extensio deployments. But we do have a number of them ongoing with them. And it also is now affecting how we work with SAP too, because all three of us work together in some factories. And so we've now in some companies, it's now started talking

the three of us together with customers around MES analytics data and ERP data available to customers in real time.

And so these, many of these partnerships actually interact with each other, right? So what we're doing with Siemens affects what you do with test, you know, K and S on the wire bonder with final test. So it's one of the ways that we're bringing the partners together more and more tightly, not just one on one between us and each partner.

That's great. Thanks for the call, John .

Thank you, Blair.

And once again, as a final reminder, if you would like to ask a question or pose a comment, you may do so at this time by pressing star 1. We'll pause for just one moment.

And there are no further questions at this time. That will conclude today's conference. We thank you for your participation, and you may now disconnect.

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