PDF Solutions Inc. Q1 2023 Earnings Call
Good day, everyone and welcome to the PDF solutions, a conference call to discuss its financial results for the first quarter and year end 2023 conference call ending Saturday December 31st 2023 at this time all participants are in a listen only mode. After the speakers presents.
<unk> and there will be a question and answer session to ask a question. During this session you'll need to press star one one on your 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 P. D. F website at Www Dot P D F Dot com.
Some of the statements that will be made in the course of discomforts are forward looking including statements regarding pdfs future financial results and performance growth rates and demand for it solutions P. D. F. Actual results could differ materially you should refer to the section entitled.
Risk factors on page is 15 through 29, a P. D. Fs annual report on Form 10-K for this fiscal year ended December 31st 2022, and similar disclosures and subsequent S. C. C filings. The fall we look forward looking statements and risks stated in this conference call or.
Based on information available to P. D. F. Today P. D. F assumes no obligation to update them now I'd like to introduce your host John <unk>, <unk>, <unk>, President and Chief Executive Officer, and <unk> browser P. D F Chief Financial Officer <unk>. Please go ahead.
Thank you for joining us on today's call if you're not already seen our earnings press release, a manager report for the first quarter. Please go to the investors section of our website, where each has been posted.
But first quarter was a good start to our year revenue remains strong and we benefited from our newest strategic partnerships.
As we experienced continued adoption of our antenna analytics by our customers.
Before I discuss the financial detail I have some comments about the events in the first quarter and hope assumptions of the market in the second quarter of the remainder of the year.
Looking for light in the first quarter following a record bookings in queue for this.
This is similar similar pattern to Q2 of last year, which also followed a strong quarter.
Despite the buttons level activity with customers remained very strong.
In the corner, we started benefiting from our collaboration with US a P.
Have you experienced our first large seven figure booking for our products. The immigrate S. A PS <unk> E. R. P data with manufacturing analytics data, enabling more accurate and timely applications for operations and finance organizations.
Our solutions are designed to enable customers to react more quickly to changing business environment.
This product as a result of our collaboration with S. A P as.
As well as the acquisition of symmetric that we completed about three years ago.
The solution provided to the customer includes our safety, it's manufacturing hub, which enables near real time connection between ERP manufacturing and engineering data as well as extensive application that leverages financial operational in engineering data.
More than this being an important first proof point for a collaboration with us a P. Many of our customers are expressing interest in this application.
Well S. A P generated business was the largest strategic partner related booking in the corner.
Our other collaborations also resulted in bookings and importantly.
In total over 40 per cent of bookings in Q1 worthy our strategic partners.
Speaks of the value of our collaboration strategy.
As the largest independent and two analytics SaaS provider to the semiconductor industry, we are a natural partner.
Other significant booking through mcwhorter include contract for leading edge infrastructure for advanced development, including one with the memory customer.
Memory customers are experienced a strong correction. This year. So you were encouraged to see this customer investing with Pbf's solutions.
<unk> remained nearly unchanged from Q4 of last year as customers, particularly in China shifted similar volumes.
Finally booking for symmetric connectivity runtime licenses decreased meaningful meaningfully in Q1 versus Q4 as our customers equipment shipments decreased.
This is not surprising given the weakness in the capital equipment market.
Overall with us strong backlog in business model, where most of our revenue is widely recognized we continued to deliver strong results in revenue and earnings.
We were pleased with the business activity in the quarter as it demonstrates the strength of our business model and partnership strategy.
Now, let me turn to discuss product development.
You're on a sapient manufacturing hub, we have other new products and capabilities coming out this year.
This includes the next advancement in our <unk>.
As part of the large contract we signed last year, we shipped the first of these advanced towards in April .
It is <unk>. It is designed for customers ramping three and two nanometer technologies, which often include backside power and gate all around structures.
We're very excited about this milestone.
Customers are building more systems, and packaged products targeting and markets, where quality is key such as automotive and data center for these customers. It is critical to use more advanced test screening at more test insertion points.
We have built extensive test exactly for this emerging need.
This week at Adventist Voice conference, we will demonstrate the next set of applications for their Acs edge Fox.
These applications are designed for customers to deploy M. L models at scale.
And benefit from our deck data exchange network, and Asencio cloud platform and managing the required data feed forward and feedback as well as model building and model quality monitoring.
Overall from a product release standpoint, we expect the first half of this year to be very fruitful, which we believe will set what position is to have a strong results in the second half.
Strong results this year and in the future.
One quarter into 2023.
The semiconductor environment is unsettled.
There have been many inventory there has been an inventory collection affecting many of our fabulous and IBM customers.
This is also generally impacted the foundries, oh set and equipment companies that we serve.
While the short term environment is unclear the longterm drivers for our customers, including increased use of AI AML, Claude smart devices and the electrification of the energy economy remain in place.
These drivers are being amplified by the various government investments and semiconductors, we are seeing around the world.
And the increased diversification of the supply chain that many of our customers are embracing.
We remain confident in the outlook. We provided earlier this year of overall annual revenue growth for the year approaching mid teens.
We would also like to announce that on October 24th through the 26th we will have the PDF user's group meeting at the Santa Clara Maria.
US with our pre Covid event, we will host an analyst day on October 24th.
This gives our customers partners analysts and stockholders a chance to see the latest capabilities in P. D F and also learn from each other.
We hope that you'll be able to attend.
I want to thank all the PDF employees and contractors for the references quarter.
Now I will turn the call over to <unk>, who will review the finances and provide his perspective on our results.
Hold on.
John Good afternoon, everyone. Good to speak with you again today and I Hope all of you and your families are well. We are pleased to review the financial results of the first quarter of 2023 as mentioned our earnings release and a manager to report or posted an investor Relations section of our website or Form 10-Q was also filed with the SEC today.
Please note that all of the financial results were discussing today's call or on a non-GAAP basis, and a reconciliation to not to gape financials is provided in the materials on our website.
We're off to a good start with the first quarter for any 23 total revenues for the first quarter over $48 million up 22% over last year's first quarter and up slightly on a sequential basis as well.
Analytics revenue came in at $36 $3 million, an increase of 19% year over year and also up slightly on a sequential basis.
Or ear or ear strong performance as a result of this transform leading edge and Excelsior business offset by some of the equipment shipment trends we saw recently.
For our Excelsior products, we are benefiting from the recent large deals we spoke about over the last few quarters utilizing the extent to your platform across manufacturing operations.
For our leading edge solutions, we continue to engage strongly with multiple customers and see opportunities to expand this business.
Four are symmetric products, while we saw a meaningful impact due to the downturn in capital equipment span b benefited from our investments in new products, such as sapiens manufacturing hub take.
Taken as a whole we believe our analytics business continues to be strong exhibiting near or in line growth to our long term growth targets.
Highway or revenue came in at $4 $4 million and was up 44% over last year's first quarter.
We are pleased that we have been able to rebuild this business over the last year and a half to meaningful level.
Our backlog for the quarter ended at a strong 261 million dollar level, though down from $278 million a quarter ago as.
As John mentioned, our bookings vary in size from quarter to quarter and we are encouraged by what we see in our pipeline for the rest of the year.
On a year over year basis, our backlog at the end of Q1 is up over 30%.
Our gross margin for the first order came in at 75% or 69% for Q1 last year and 74% for Q4 as he benefited from incrementally higher revenues and we're able to realize savings from lower expense accrual and some cloud spend optimization.
Are operating margin for the first quarter came in at 19% versus 11% a year ago same period, and 20 per cent of prior sequential quarter.
On a year over year basis, the operating margin expansion was driven primarily by stronger revenue growth coupled with lower expense growth from our cost of sales and operating expenses, we have improved our margins compared to last year as we reap the benefits of scale in our cloud business, allowing us the ability to apply engineering resources efficiently.
And more effective cloud spend.
Net income for the quarter totaled $7.3 million or 19 cents per share both essentially similar to queue for however, meaningfully higher compared to Q1 last year's net income of $3.7 million or nine cents per share.
Four year over year R. E. P F increased by 10 cents per share.
Turning to the balance sheet, you have carefully managed our cash position and Carrie zero at.
We ended the quarter with cash and equivalents balance of $133.5 million compared to $139.2 million at the end of prior quarter with they changed driven primarily due to timing of payment of a crude employee bonuses and capex spent to support the opportunities ahead of us.
As we look to the next quarter and the rest of the year, we expect a moderately increased costs for ramped investment to beat the bookings opportunities in customer pilots for a stronger second half of the year.
For the full year of 2022, we continue to be comfortable with our previously stated revenue growth rates approaching mid teens on a year over year basis.
All in all it was a solid first quarter and physicians as well for the rest of the year. We're pleased with the resilience of our business model and they realized and potential value from our strategic partnerships.
We also look forward to hosting you're all doing our plan to analysts state and PDF users Group conference starting on Tuesday October 24th Please look for estate. The date press announcement later this week.
With that let me turn the call over to the operator for Q&A.
Thank you ladies and gentlemen, if you do have a question at this time. Please press star one one a new telephone if you're using a speaker phone. Please lift the handset before asking you a question. Please wait one moment for our first question.
And our first question comes from the line up Blair Abernathy from Rosenblatt Securities. Your question. Please.
Thanks for a great quarter guys.
John I Wonder if you could just give us a more a little more color around the the the.
Manufacturing execution.
Execution systems solution with with S. A P and just in terms of <unk>.
This seven figure deal you know how long, what what sort of the selling cycle here and maybe some sense of what the pipeline looks like going forward.
Sure. Thank you Blair.
So the selling cycle.
We've been in discussion we've been working I think with the safety.
On this now for a couple of years I wouldn't say that was the selling cycle, but that was definitely our work with them on to finding out this application building up the software for it showing it to a number of early potential customers of what's this first customers one of them and you know it closed actually relative.
Really quickly.
With them I think are helping us quite a bit to understand.
How to.
Participate in that part of the market.
Cause it's.
Working with parts of the organization company's customers companies that have been our customers in some cases for years, but a different part of their organization.
Applications take advantage of the real time information that accent, you have how much Ah consumables are used for each way for how much time are they.
Wait for going through each tool what are the yields a different insertion points. So when you combine that with the ERP data and also the data and the manufacturing execution system.
The operations organizations can have a very accurate costing model understandably truly what their cost on a per product basis on a per hour basis.
And then a number of other applications that enhance their ability to look at field returns and understand the economic analysis and his first contract we sold the costing module and the base a platform that connect data together deploy.
Deployed to a customer that is doing a large sapa deployment.
And we talked with as I said, a number of other customers probably a handful at this point that sapa brought to us of other companies that are also interested in the same application and we see that.
Before we embarked on this we felt there was a pretty good demand for this as we talk to our other customers beyond the ones.
Brought to US we do hear a constant desire from companies they want to be more nimble and as the supply chain gets to be more and more sophisticated having all of these feeds handle in a very automated real time, <unk> time way becomes increasingly important for the customer base. So it really is a new way to use <unk> data.
In the extensive connection and we're super happy that S&P work with us to help us understand this application and built out this capability.
That's that's great. Thanks, John and I'm, not and if I could just ask just from your perspective could you just clarify the you said some of your spending areas. We're gonna be going up this year could you just go through that again and and also in terms of your sales and marketing.
Spend in 2023, I know, how how are you feeling with respect to spend.
Spending levels for partners the Rep count and so forth. What are you what are you sort of plans there.
<unk> to drive growth.
Yeah sure. So look I'm a number one goal for US is to continue to grow the business and as we focus on that goes from time to time and not necessarily matching the revenue that'd be may realize just because of the 606 and function of the book is coming you will see us wrap up the investment. This was true a few years ago right before we were getting ready for the Adventist engagement. This was true.
Last year and the year before when we were doing some of the leading edge engagements with this comment is just similar to those past event that we have seen as well you're also hearing from us how we feel about the rest of the year in terms of some of the booking in the pipeline and how that makes us feel good. So some of the comments with regard.
Increasing someone that's been are related to getting ready to do some of those bookings as to the sales and marketing spend look at it again another area, we try to optimize with the increased revenue in the increase scale that we have the hope that those margins will improve over time, but we we we take a close look at that from a quarter to quarter.
Most of our inquiries I think we expect would be you know on the kind of R&D development areas as we ramp up the capabilities of our solution set in platform for serving the customers.
Okay, great. Thanks, Adam.
Thank you one moment for our next question.
And our next question comes from the line of Tom definitely from da David send your question. Please.
Yes. Good afternoon. Thanks for taking a few questions Hey, John I would thought I'd ask you a little bit more about the memory customers I mean, historically memory's not been a huge portion of your business and just curious what's driving and increased activity level there.
Sure. Thank you Tom Yeah, we've seen this this customer as well as others. When you look at futures of computing it involves memory moving from being a commodity <unk>.
Separate since subsystem kind of through some very standard interfaces to the processing elements to more and more memory as a as.
More integral part of the computer system. So customers are wanting to get better statistical characterization of the logic portion of the memory elements to design more sophisticated.
Interface capabilities.
Able to characterize them and control them in manufacturing in the past and historically the logic portion of the memory was really kind of a belt with legacy are relatively relaxed design rules are typically not very aggressive in terms of performance and.
Kind of an afterthought now what we see customers. This one and others increasingly looking at is how do we really integrate mommy with logic, how do we get more performance there and of course. Some of this is coming in because memory technologies are moving like if you look at the X Dot technologies.
The flash element on one way for the logical about another way for the new bond them together certainly it gives you a lot of ability to use more advanced nodes more sophisticated logic. So this is like.
Not an insignificant contract.
Kind of demonstrates an early interest in the customers.
As we.
Included in my comments. This is kind of like what we saw a couple of years ago, we started putting our toll on the water with some other new customers when they start out with the characterization around this PDK area and a gentleman expense into a more broader characterization of course successful and of course, we have to.
Demonstrate the value of our systems to them, but I think the broader trend that you're.
Asking about Tom Israeli this idea that.
Memory subsystems are going to increasingly become important as you.
Get more performance per watt per dollar for future computing systems and has with or without PDF. I think the world is going to have an awful lot more use of advanced logic and memory subsystems.
Okay. It sounds like it's a lot more complicated than just going from BT afford a D. D. R five and increased logic, but it's just a <unk>.
The heterogeneous packages that are being put together.
Correct Yeah.
Alright, great and then I'll need the automotive side have you seen the strength and the power side with silicon carbide or the control side with just the silicon.
You know.
In terms of the places where the most sophisticated test operations are being applied I think you are kind of reference to my comments around customers looking for the most sophisticated test screening we do see that on a lot of the <unk> cause the chips are quite sophisticated they're trying to use <unk>.
Vincent below technologies and cars, which historically cars.
The controllers that go into cars would be very very relaxed geometries relative to the leading edge. So the time between when let's say you would see seven nanometer in your phone and you would see seven nanometer in your car.
It's on the historical timescale that would've been measured in decades now it's measured in years until the screening sophistication receiving first happening. There. We are seeing an increase use of analytics for silicon carbide Silicon carbide primary still is in a lot of the bring up stages and the sophistication an antenna analytics is I think really still just getting there.
So the first place we see this more advanced capabilities on the leading edge, where they're trying to use technology.
Not that far behind the phone companies, which tend to use them first.
So we expect it to kind of spread across the majority of the automotive market overtime Testification will go up across the automotive market.
Okay makes sense and then when you see some strengthened and the data center Saturday, you're starting to see kind of the next generation silicon photonics as well.
We do have some small number of silicon photonics customers on <unk> I think I alluded to that in one of our previous calls that's part of it is still very very nascent really still on the R&D stages with folks using the system to look at R&D silicon.
Data center side, we see an increase number of application specific chips designed by a broader set of companies send your conventional.
Processor vendors that are driving more use of <unk> and we anticipate that time continuing as you are seeing the workload is being moved to more and more specialized logic that is driving both more system in package and you know more complex Assembly flows.
As well as you know analytics being performed by a class of companies that historically didn't really design their own silicon.
Okay. Thanks, So very helpful. And then maybe just a quick clarification question. The seven figure deal with S. A T is that.
Four P D F alone or is that a joint venture how would you describe that that's yeah. That's the that's the booking for the PDF technology I think you know frankly, when I say P books business with customers is probably got a couple more zeros on it than us [laughter].
You know so that's just for our for our product. We are available. If you look at the manufacturing hub is on the <unk> website. It's.
It is a product on the S&P store, so when sold to the store. They do get a commission on that you know so that that does drive revenue for them from time to time and but it is primarily our product.
Okay, Great and final question when you look at the symmetric installed base what is your opportunity for upsell with new products in that installed base.
Yeah, that's a great question, Tom and you know one of our little really to.
Direct ideas, we had when we did the symmetrical a merger the first was ways of bringing new data types of new connectivity to analytics M. S. A S. A P. R opportunity not one we have really originally imagined, but really it's kind of in the spirit of that first you know really big.
<unk> new data types into analytics was the first piece the second piece of it was bringing our analytics products to equipment companies. You know most of the larger equipment companies generate recurring revenue from the equipment by making and analytics available to improve customer.
The uptime for equipment the functionality equipment the use of consumables and these are usually a a large service contracts. When you look at the matrix installed base. We do have a couple of the top five companies using of Sinatra's conductivity, but a lot of the customers are equipment company number five through 50 and for them they need it.
They want to generate recurring revenue with analytics or with some services to that our analytic spaced. So we've been actively working in development.
Making new analytics products that leverage the equipment.
Equipment companies ability to create a new service products, leveraging our analytics, they're incremental data types and the infrastructure and platform that combines the matrix <unk>.
We're hoping to engage with customers on that as we get through this year and into next year.
But that is the second leg of the relationship that you 142 was kind of the first one of those traceability, we've already released that but.
But there are some others that we're working on that would enable that the equipment companies to generate a recurring revenue stream, which is a desire for most of our customers.
Yeah, great well I appreciate your time today John .
Thank you come.
Thank you and as a reminder, ladies and gentlemen, if you have a question at this time. Please press star one one on your telephone will pause briefly.
[noise] one moment for our next question.
And our next question comes from the line of Christian swap from Craig Hallum Capital. Your question. Please.
Hey, good quarter guys. So I'm just one quick question around a backlog I mean, I know the vast majority of that should be done you know over the next couple of years, which gives you great visibility is this something that we think over time is you know is it.
Work through is gonna move down materially or or do you expect you know to have that type of visibility continued to be later dawn.
Like you know where she'll be like backlog to be exiting calendar twenty-three jaw.
Yeah, I mean, I I know that we've.
Yeah can give you kind of a specific number on a specific color on a year over year basis, we generally expect it to grow Christian how exactly does on any given quarter versus the previous quarter of course, that's always like this quarter right, it's down a little bit we do see a.
A lot of significant deals.
Oh, you know out there for us timing is always difficult or is it a Q3 Q for Q1 that could in fact, where you are at the end of the year, but on a year over year basis, we generally expected to increase it like done resident is prepared remarks, if I could add yeah similar pattern to what we saw last year. If you looked at our backlog at Q2 of 2022, it was done compared to Q1 so.
It's more a function of the timing of the bookings will always look too annual performance and how we can exceed that ear over here.
Great and then I guess they do have one quick follow up you know can you give us an update <unk> you know how much pulse through is <unk> or new opportunities have come from them you know what type of level that customer is business as rabbit to or where you would expect it to rap.
<unk> the next year or two yeah.
Yeah. So that's a great. The first product that we announced with them was dynamic primary test or Dept, we've come up with a derivative of that that continues to book <unk> I would say a couple of times a year, we see incremental bookings from that that continues to grow it's an all writable business. So obviously every time we.
Book Incrementally March layering on more we've announced five additional products I think in Q3 of last year.
Still I've been touched Acs edge store those products are all we're all doing demos with them on those products with customers and entering in some pilots that we anticipate some point you know over the next few quarters Crystal May should start also like dynamic Prometric test.
Start driving incrementally available revenue.
And then we announced we're announcing at this demonstrating at this voice this week, they're user conference, which is going on today actually.
Additional products that really muggeridge R. A I N.
Capability. So those first set upon its release were primarily statistical and model and rule based.
Cool applications. These are all M L model based applications.
For data feed forward data feedback customer can bring their own model of leverage the PDF modeling environment, and we anticipate having those on their store you know over the next quarter or so they are believable now and then.
We would anticipate by the time, we would have somewhere north of eight apps on their store and we anticipate those going through the same kind of eval.
Selling cycle, so hopefully over the next year or so that these products I'll start driving come out more revenue in the meantime, I think both of <unk>.
Our commitment to bringing more advanced analytics to the marketplace. We've helped each other in the market I would say a different accounts, where their vision with their ads box and our vision with advanced modeling has been <unk> for them to solids boxes, and the point for us to sell modeling capability, even if it's too.
Not directly through their store.
That's great. Thank you know other questions. Thank you.
Thank you Christian.
Thank you.
At this time there are no more questions, ladies and gentlemen. This concludes the program. Thank you for joining us on today's call.
Mmm.
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