Q1 2024 PDF Solutions Inc Earnings Call
Operator: Good day, everyone, and welcome to the PDF Solutions Inc. conference call to discuss its financial results for the first quarter ending Sunday, March 31, 2024. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone.
Good day, everyone and welcome to the PDF Solutions, Inc Conference call to discuss its financial results for the first quarter Conference call lending Sunday March 31st 2024 at this time all participants are in a listen only mode. After the speaker's presentation, there will be a question.
Operator: And the answer session to ask a question during the session you will need to press star one on your telephone.
Operator: 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 on PDF's website at www.pdf.com. Some of the statements that will be made in the course of this conference are forward-looking, including statements regarding PDF's future financial results and performance, growth rates, and demand for its solution. However, PDF's actual results could differ materially. You should refer to the section entitled Risk Factors on pages 16 through 36 of PDF's annual report on Form 10-K for the fiscal year ended December 31st, 2023, and similar disclosures in subsequent SEC filings.
Operator: As a reminder, this conference is being recorded.
Operator: Have not yet received a copy of the corresponding press release. It has been posted to Pdf's website at Www P. D F dotcom.
Operator: Some of the statements that will be made in the course of this conference are forward looking including statements regarding P. D. S. Its future financial results and performance growth rates and demands for each solutions P. T. S. It's actual results could differ materially you should refer to the section entitled risk factors on pages six.
Operator: <unk> 236 P. D S. Its annual report on Form 10-K for the fiscal year ended December 31st 2023, and similar disclosures in subsequent SEC filings.
Operator: The forward-looking statements and risks stated in this conference call are based on information available to PDFs today, and PDF assumes no obligation to update them. Now, I'd like to introduce John Kibarian, PDF's President and Chief Executive Officer, and Adnan Raza, PDF's Chief Financial Officer. Mr. Kibarian, please go ahead.
Operator: The forward looking statements and Rick stated in this conference call are based on information available to PDF today P.
Speaker Change: D S assumes no obligation to update them.
John K. Kibarian: Now I'd like to introduce a junkie Berrien P. D S. Its president and Chief Executive Officer, and Adnan Raza P. D S as Chief Financial Officer, Mr. Barry I'm. Please go ahead.
John K. Kibarian: Thank you for joining us on today's call. If you've not already seen our earnings press release and management report for the first quarter, please go to the investor section of our website, where each has been posted. The first quarter was a strong start to our year.
John K. Kibarian: Thank you for joining us on today's call if you've not already seen our earnings press release and management report for the first quarter. Please go to the investors section of our website, where each has been posted.
John K. Kibarian: The first quarter was a strong start to our year.
John K. Kibarian: Business activity continues to be robust as our products and solutions are well aligned with the larger trends driving the IC industry. Before Adnan discusses the financials in detail, I have some comments to make about the events of the first quarter and our perceptions of the market in the second quarter and for the remainder of the year. Building on a strong Q4, Q1 bookings were again up over the previous quarter, which continues to build the backlog.
John K. Kibarian: Business activity continues to be robust as our products and solutions are well aligned with the larger trends driving the IC industry.
John K. Kibarian: Before I go discusses the financials in detail I'll have some comments to make about the events in the first quarter and our perceptions of the market in the second quarter and for the remainder of the year.
John K. Kibarian: Building on a strong Q4 Q1 bookings were again up over the previous quarter, which continues to build backlog.
John K. Kibarian: When we look at the nature of the business in Q1, we see that bookings and pre-sales activities were driven by the alignment between larger macro trends in the industry and our product development investments. I'll describe three of these.
John K. Kibarian: When we look at the nature of the business in Q1, we see that bookings and pre sales activities were driven by the alignment between larger macro trends in the industry and our product development investments.
John K. Kibarian: I'll describe three of these.
John K. Kibarian: First, AI is driving strong demand for advanced logic processes that leverage 3D transistors like nanosheets and 3D interconnects such as backside power. In the quarter, our largest booking was with a new customer deploying our systems, including DFI, CVs, and Accentio, to accelerate the development and manufacturing of advanced two nanometer logic.
John K. Kibarian: First <unk>.
John K. Kibarian: Driving strong demand for advanced logic processes that leveraged three D transistors like nano sheets, and three D interconnects such as dockside power.
John K. Kibarian: In the quarter, our largest booking was with a new customer deploying our systems, including Deify C DS and <unk> to accelerate the development and manufacturing of advanced 10 nanometer logic.
John K. Kibarian: Customers are driving digital transformations to achieve more efficient operations. Our systems from Accentio Cloud, Accentio Test Operations, and Sapiens Manufacturing Hub are gaining increased attention from our customers for this workload. Bookings in the quarter include a cloud customer expanding its extensible usage, and pre-sales activities include a number of customers evaluating a Sapience manufacturing hub as part of the SAP S4 HANA deployment.
John K. Kibarian: Second.
John K. Kibarian: Customers are driving digital transformation to achieve more efficient operations.
John K. Kibarian: Our systems from extensive cloud Accenture test operations and circuits manufacturing hub are getting increased attention from our customers for this workload.
John K. Kibarian: Bookings in the quarter include called customer expanding accenture usage and pre sales activities include a number of customers evaluating our city its manufacturing hub as part of the S. S. E T S. Four holler deployment.
John K. Kibarian: Sir, customers are accelerating their use of AI and machine learning to achieve their yield and operational targets. In Q4, we announced our ML Ops system that enables engineers to build AI models and publish them in manufacturing, both at the factories they own, as well as their partners' facilities via our DEX network. Customers tell us that they are mastering the ability to train AI models, but the challenges are to deploy them in the field, monitor their performance, and act on the results. Our MLOps system was designed for these challenges and leverages Accenture Cloud DEX and test infrastructure.
John K. Kibarian: Third.
John K. Kibarian: Customers are accelerating their use of AI and machine learning to achieve their yield and operational targets.
John K. Kibarian: In Q4, we announced our MLR system that enables engineers to build AI models and publish them in manufacturing both at the factories, they own as well as their partners facilities.
John K. Kibarian: Via our <unk> network.
John K. Kibarian: Customers report to us that they are mastering the ability to train AI models.
John K. Kibarian: But the challenges are to deploy them in the field monitor their performance and act on the results.
John K. Kibarian: Our <unk> system was designed for these charges.
John K. Kibarian: It Leverages, our extensive cloud decks and test infrastructure.
John K. Kibarian: In the first quarter, we started running MLOps pilots with our lead customer. Overall, we believe the strong engagement we have with customers is due to our investments in our E-Probe DFI systems, our SMH digital platform for manufacturing, and our MLOps for testing of complex system and package products. I know many of you are curious about progress with our DFI and E-PRO. Utilization of the tools in the field is extremely high.
John K. Kibarian: In the first quarter, we started running pilots with our lead customers.
John K. Kibarian: Yeah.
John K. Kibarian: Overall, we believe strong engagement.
John K. Kibarian: I believe the strong engagement, we have with customers is due to our investments in our E probe to EFI systems.
John K. Kibarian: Our <unk>.
John K. Kibarian: Digital platform for manufacturing.
John K. Kibarian: No ops for testing of complex system and package products.
John K. Kibarian: I know many of you are curious about progress with our DSI in April.
John K. Kibarian: Utilization of the tools in the field is extremely high.
John K. Kibarian: We believe because of its unique ability to see 3D yield. In February, we said we anticipated a third customer starting to deploy DFI, and we would ship a third tool to our lead customer. The contract we signed this past quarter brings us a new customer for the E-Print. We also remain on track to ship our third tool to our lead customer this quarter. Given this acceleration of our 2024 goals for DFI, we are now looking to accelerate our manufacturing, as we believe demand is quite strong for this solution. Our results have occurred while the industry is at an unusual time. Government investments have resulted in outside capital spending in parts of the world.
John K. Kibarian: We believe because it's unique ability you've seen three D yield issues.
John K. Kibarian: In February we said, we anticipated a third customer starting to deploy DSI, we would ship a third tool to our lead customer.
John K. Kibarian: The contract we signed this past quarter brings us a new customer for the <unk> probe.
John K. Kibarian: We also remain on track to ship, our third tool to our lead customer this quarter.
John K. Kibarian: Given this acceleration of our 2024 goals for DSI. We are now looking to accelerate our manufacturing as we believe demand is quite strong for the solution.
John K. Kibarian: Our results have occurred while the industry is that unusual time.
John K. Kibarian: Government investments have resulted in upside capital spending in parts of the world.
John K. Kibarian: Demand for some chips has been very weak, while silicon for AI has been strong. That said, we believe the industry is starting to see a general improvement due to the metrics we track about its health. As we look to our runtime license sales, which track our equipment customer shipment, we see improvements when compared to Q4 of last year. This, as well as our strong bookings in Q4 of last year and Q1 of this year, suggest customers expect stronger business as they go through the year.
John K. Kibarian: Demand for some chips has been very weak while silicon for AI has been strong.
John K. Kibarian: That said, we believe the industry is starting to see a general improvement due to the metrics we track about itself.
John K. Kibarian: As we look to our one time license sales, which track our equipment customers shipments, we see improvements when compared to Q4 of last year.
John K. Kibarian: This as well as our strong bookings in Q4 of last year and Q1 of this year suggest customers expect stronger business as they go through the year.
John K. Kibarian: We are pleased with the business activity in the quarter as it demonstrates the strength of our strategy and investment. Consistent with our comments in the February call, we expect the first half of the year to be flat year over year, with the second half of the year getting back to our growth target of 20%. I want to thank all the PDF employees and contractors for their efforts during the call and during the first quarter. Now I'd like to turn the call over to Adnan, who will review the finances and provide his perspective on our results.
John K. Kibarian: We are pleased with the business activity in the quarter.
Adnan: <unk> the strength of our strategy and investments.
Adnan: Consistent with our comments in February call, we expect the first half of the year to be flat year over year with the second half of the year.
Adnan: Youre getting back to our growth target of 20%.
Adnan: I want to thank all the PDF employees and contractors for their efforts during the call during the first quarter I'm sorry.
Adnan: Now I'd like to turn the call over to Arnold who will review the financials and provide his perspective on our results.
Adnan Raza: Thank you, John. Good afternoon, everyone.
Adnan: Thank you John Good afternoon, everyone. Good to speak with you again today and I Hope all of you and your families are well.
Adnan Raza: 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 for the first quarter of 2024. As mentioned, our earnings release and a management 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.
Adnan Raza: We are pleased to review the financial results for the first quarter of 2034.
Adnan Raza: As mentioned our earnings release and management report are posted in the Investor Relations section of our website.
Adnan Raza: Our Form 10-Q was also filed with the SEC today.
Adnan Raza: Please note that all of the financial results, we discuss on today's call are <unk>.
Adnan Raza: non-GAAP basis, and a reconciliation to GAAP financials is provided in the materials on our website.
Adnan Raza: We're excited about the booking momentum during the quarter, especially the meaningful multi-year leading edge booking with a new customer. Our backlog ending the first quarter was $262 million, or approximately $32 million higher compared to our prior quarter ending backlog of $230 million. Total revenues for the first quarter were $41.3 million.
Adnan Raza: We are excited about the booking momentum during the quarter.
Adnan Raza: Specially the meaningful multiyear leading edge booking with a new customer.
Adnan Raza: Our backlog ending the first quarter was $262 million.
Adnan Raza: Approximately $32 million higher compared to our prior quarter ending backlog of $230 million.
Adnan Raza: Total revenues for the first quarter were $41 3 million.
Adnan Raza: Up slightly versus the prior year and up slightly on a sequential basis as well, Analytics revenue came in at $38.5 million, an increase of 6% year-over-year. However, on a year-on-year basis for the quarter, our IIR business was down, driven by lower fixed fees and gain share.
Adnan Raza: Up slightly versus the prior year and up slightly on a sequential basis as well.
Adnan Raza: Analytics revenue came in at $38 5 million.
Adnan Raza: An increase of 6% year over year.
Adnan Raza: On a year over year basis for the quarter.
Adnan Raza: Our <unk> business was down driven by lower fixed fee and gain share. However, the growth in analytics allowed us to be slightly up for total revenue versus prior year period.
Adnan Raza: However, the growth in analytics allowed us to be slightly up for total revenue versus the prior year period. As John said, for our extensive products, we continue to engage with customers on opportunities we are seeing for the digital transformation initiative and deploying the Accenture platform across their manufacturing operations. For our leading-edge solutions, we are emboldened by the booking with a new customer, which encompasses our broader offerings, including CB Infrastructure, DFI, and Accenture Software.
Adnan Raza: Like John said for our extensive product we continue to engage with customers on opportunities. We are seeing for the digital transformation initiatives and deploying the extensive platform across their manufacturing operations.
Adnan Raza: Our leading edge solutions, we are emboldened by the booking with the new customer, which encompasses our broader offerings, including CV infrastructure EFI and extensive software.
Adnan Raza: We're starting to see opportunities for further expansion over the coming years with continued investment in the DFI system for our Symmetric Squad. We saw growth in runtime licenses versus a prior quarter and remain cautiously optimistic. Taken as a whole, we believe our portfolio of product offerings provides us opportunities for strategic engagement with customers for our analytic solutions.
Adnan Raza: We're starting to see opportunities for further expansion over the coming years with continued investment in the DSI system.
Adnan Raza: For our symmetric products.
Adnan Raza: We saw growth in runtime licenses versus the prior quarter and remain cautiously optimistic.
Adnan Raza: Taken as a whole we believe our portfolio of product offerings provides us the opportunities for strategic engagement with customers for our analytic solutions.
Adnan Raza: IYR revenue came in at $2.8 million for the quarter and was down compared to $4.4 million for the prior year period, primarily driven by lower time spent on fixed-fee projects and lower gain share. We remain optimistic about the IYR business in the longer term as eventual customer product shipment volumes increase. Our gross margin for the first quarter came in at 72% versus 75% for Q1 last year and flat versus 72% of Q4.
Adnan Raza: <unk> revenue came in at $2 8 million for the quarter and was down compared to $4 4 million of prior year period, primarily driven by lower time spent on fixed fee projects and lower gain share we remain optimistic about our business in the longer term as eventual customer product shipment volumes increase.
Adnan Raza: Our gross margin for the first quarter came in at 72% versus 75% for Q1 of last year and flat versus 72% of Q4.
Adnan Raza: On a year-over-year basis, our cost of sales was driven by the lease accounting treatment for the BFI hardware, increased personnel costs, and increases in cloud costs. Our operating margin for the first quarter came in at 12% versus 19% for the year-ago same period and 15% for the prior sequential quarter. On a year-over-year basis, we were able to better manage and reduce our R&D expenses while our SG&A expenses increased as we utilized our technical resources and added sales and marketing headcount to support the pre-sales and sales activities with our customers.
Adnan Raza: On a year over year basis, our cost of sales was driven by the lease accounting treatment for the BSI hardware increased personnel costs and increases in cloud costs.
Adnan Raza: Our operating margin for the first quarter came in at 12% versus 19% for the year ago same period and 15% for the prior sequential quarter.
Adnan Raza: On a year over year basis, we were able to better manage and reduce our R&D expenses, while our SG&A expenses increased as we utilize our technical resources and added sales and marketing head count to support our pre sales and sales activities with our customers.
Adnan Raza: Net income for the quarter totaled 5.7 million, or 15 cents per share, both essentially similar to Q4, however, lower on a year over year basis. Turning to the balance sheet, we ended the quarter with cash, cash equivalents, and short-term investments of $123 million, compared to $136 million at the end of the prior quarter, with the change primarily driven by $7 million of share buybacks completed during the first quarter, an annual bonus payout for calendar year 2023, and CAPEX expenses to support the build out of our DFI systems that John talked about. We have also adopted a new, larger $40 million share buyback program.
Adnan Raza: Net income for the quarter totaled $5 7 million or <unk> 15 per share both essentially similar to Q4, however, lower on a year over year basis.
Adnan Raza: Turning to the balance sheet, we ended the quarter with cash cash equivalents.
Adnan Raza: And short term investments of $123 million.
Adnan Raza: Compared to $136 million at the end of the prior quarter with the change primarily driven by $7 million a share buyback completed during the first quarter.
Adnan Raza: Annual bonus payout for calendar year, 2023, and Capex expenses to support the build out of our DSI systems that John talked about.
Adnan Raza: We have also adopted a new larger $40 million share buyback program.
Adnan Raza: Overall, we are pleased with the new leading-edge bookings during the quarter, growth in our backlog, and excited by the opportunities we are seeing in our pipeline. As we look to the rest of the year, we remain committed to our prior guidance of flat revenues for the first half of the year. With revenue growth returning to our 20% long-term target for the second half of the year, both compared to the respective prior year period. With that, I will turn the call over to the operator for Q&A. Thank you, Mr. Raza. And ladies and gentlemen, if you will.
Adnan Raza: Overall, we're pleased with the new leading edge bookings during the quarter growth in our backlog and are excited by the opportunities youre seeing in our pipeline.
Adnan Raza: As we look to the rest of the year, we remain committed to our prior guidance of flat revenues for the first half of this year.
Adnan Raza: With revenue growth returning to our 20% long term target for the second half of the year, both compared to the respective prior year periods with that let me turn the call over to the operator for Q&A.
Operator: Thank you, Mr. Raza. And ladies and gentlemen, if you do have a question at this time, press star 11 on your telephone. If you're using a speakerphone, please lift the handset before asking a question. Again, that is star 1-1 to get in the queue. One moment while we compile the Q&A roster. And our first question comes from the line of Blair Abernethy with Rosenblatt Securities. Please proceed.
Speaker Change: Thank you, Mr Raza, and ladies and gentlemen, if you do have a question at this time Crestar one one on your telephone.
Blair Harold Abernethy: Thank you. Hi guys.
Blair Harold Abernethy: You're using a speaker phone please lift the handset before asking a question.
Blair Harold Abernethy: Again that is star one one to get in the queue.
Blair Harold Abernethy: One moment, while we compile the Q&A roster.
Blair Harold Abernethy: And our first question comes from the line of Blair Abernethy with Rosenblatt Securities. Please proceed.
Blair Harold Abernethy: Thanks for taking the question. John, just wondering if you can expand a little bit on the DFI market traction you're seeing there. This new customer, I assume this is the second customer. It looks like we have one machine now. What is the size and scope of that opportunity with that customer over the next few years? And secondly, are there other pilots ongoing now, or sort of what do you see in terms of activity with other potential customers for DFI?
Blair Harold Abernethy: Thank you hi.
Speaker Change: Hi, guys. Thanks.
Speaker Change: Thanks for taking the question.
Blair Harold Abernethy: John just wondering if you can expand a little bit on the DSI.
Blair Harold Abernethy: Market traction youre seeing there.
Blair Harold Abernethy: This new customer I assume this is the second customer.
Blair Harold Abernethy: It looks like one machine now what sort of is the size or scope of that opportunity with that customer overall over the next few years and secondly.
Blair Harold Abernethy: Are there other pilots ongoing now or sort of what do you see in terms of activity with other potential customers for DSI.
John K. Kibarian: Blair, so as you know, we talked about our lead customer right, who had two machines, and now we will ship a third. We started in Q4 a manufacturing evaluation with the customer, a second customer, that was a non-paying evaluation at this point. That is ongoing quite well, and we feel very good about that one as well.
Blair Harold Abernethy: Sure.
John K. Kibarian: So.
John K. Kibarian: As you know we talked about.
John K. Kibarian: Our lead customer who had two machines scenario all ship a third.
John K. Kibarian: We started in Q4.
John K. Kibarian: Factoring evaluation with the customer.
John K. Kibarian: Second customer that was a non paid evaluation at this point that is ongoing quite well, we feel very good about that one as well and then this past quarter, we signed a contract with a third customer.
John K. Kibarian: And then this past quarter, we signed a contract with a third customer, and for all of them, you know, rather than speak about any one specific one, what we believe is the following: Yield loss for these advanced technologies is very much due to the conduction between layers or underneath the surface of the wafer. Conventional inspection is to shine a light and look at the surface of the wafer for a defect.
John K. Kibarian: And for all of them.
John K. Kibarian: I won't speak about any one specific line what we believe is the following.
John K. Kibarian: The.
John K. Kibarian: Yield loss for these advanced technologies is very much due to the conduction between layers are underneath the surface of the wafer conventional inspection has to shine a light and look at the surface of the wafer for a defect.
John K. Kibarian: So you obviously can't see something that is going down below the surface of the wafer, like a via or a contact that's open or short in the gate all around structure. So this voltage contrast, or using an electrical test method, has always been desirable. But the issue has been you could never see enough on the wafer because throughput was so slow; you couldn't see what was going on.
John K. Kibarian: So you obviously can't see something that is going down below the surface of the wafer.
John K. Kibarian: Our contact US open are short and the gate all around structure.
John K. Kibarian: So this voltage contrast, or using an electrical test method has always been desirous, but the issue has been that you could never see enough on the wafer.
John K. Kibarian: Throughput was so slow you can't see what's going on and you don't know enough about the design to know what matters and what doesn't matter what is it could be a defect and what's not what's unique about what we've done with DIY is the software first knows what's in the design. So it knows where to look and it has a simulation model of what to expect.
John K. Kibarian: And you don't know enough about the design to know what matters and what doesn't matter, what could be a defect and what's not. What's unique about what we've done with DFI is the software first knows what's in the design. So it knows where to look, and it has a simulation model of what to expect. It drives the machine to look there.
John K. Kibarian: It's measuring billions, in fact, we'll ship later this quarter over 10 billion features in an hour. So it's seeing huge statistics. And then there's an analytics problem on the other side of that, OK? 20 sales.
John K. Kibarian: It drives the machine to look there, it's measuring billions, but will ship later on this quarter over $10 billion.
John K. Kibarian: Features in an hour.
John K. Kibarian: So it seeing huge statistics and then its an analytics problem on the other side of that Okay 20 sales, that's still less than let's say a lesson I'd tell you on a $1 billion in fractions of a five year $1 billion, what's unique about that from a design perspective that Paul.
John K. Kibarian: That's still less than a failure in a billion, and fractions of a failure in a billion. What's unique about that from a design perspective? That whole end-to-end capability is what is embedded in the DFI with the E-Probe. And I think the question for customers and what they've told me is, hey, if this could really do this, we would use it in production, right? And we hear that from multiple customers.
John K. Kibarian: And capability is what is embedded in the DSI with the April and.
John K. Kibarian: The question for customers and what they've told me is hey, if this can really do this we would use these in production and we hear that from multiple customers.
John K. Kibarian: And then the market would be significant for this, right? Right now, the market for E-beam inspection in and of itself is hundreds of millions of dollars, but it's been primarily used in the early stages of yield ramp because once you improve the process to a certain level, typically the sensitivity of the machine isn't good enough. What we've been able to demonstrate with the E-Probe and the roadmap for how much it's evolved is that it's able to see quite a lot of silicon, and hence it can see things as the process is maturing.
John K. Kibarian: And then that the market would be significant for this right right now the market for E beam inspection in of itself is hundreds of millions of dollars, but it's been primarily used in the early stages of yield.
John K. Kibarian: Ramp because once you.
John K. Kibarian: You improve the process to a certain level typically the sensitivity of the machine isn't good enough what we've been able to demonstrate with the program the roadmap for how much it has evolved.
John K. Kibarian: Is that a table to see quite a lot of silicon and hence it can see things.
John K. Kibarian: That process is maturing and that's really the question Mark how far can we push those how much can we prove you can use as a manufacturing if that were the case. It would look a lot more like the optical inspection business than the E beam inspection business today, but also on improving thing.
John K. Kibarian: And that's really the question mark. How far can we push this? How much can we prove that you can use this in manufacturing? If that were the case, it would look a lot more like the optical inspection business than the E-beam inspection business today, but that's an unproven fact. And then lastly, to answer your question about pilots, we do have a number of other requests for customers for pilot wafers and demonstration capabilities outside of the three that we've discussed. And we are slowly, you know, opening up the aperture to take on a little bit more of this work. But obviously, we really want to succeed everywhere we go.
John K. Kibarian: And lastly to answer your question around.
John K. Kibarian: Our pilots, we do have a number of other request for customers on pilot wafers and demonstration capabilities outside of the three that we've discussed.
John K. Kibarian: And we are slowly.
John K. Kibarian: Opening up the opportunity to take on a little bit more of this work, but obviously, we really wont have succeeded everywhere we go.
John K. Kibarian: That's great. Thanks. Thanks for the call, John. Really appreciate it. And just a second question, just over on the battery manufacturing side, the lantern technology acquisition you made last year, any update on that in the market? Yes. So we have
Speaker Change: That's great. Thanks, Thanks for the color John really appreciate it.
John K. Kibarian: Just second question.
John K. Kibarian: Just over on the battery manufacturing side of the land for a technology acquisition you made last year any any update on that in the market.
John K. Kibarian: Yes, so we've been engaged with a couple of lead customers on some pilots. Those are ongoing, and they look promising.
John K. Kibarian: Yes, so we've been engaged with a couple of lead customers on some pilots those are ongoing.
John K. Kibarian: We think we understand what are, you know, common issues. And again, it's one of those things, can you, you know, can the engineering achieve what the customer is looking for in terms of analytics? And the biggest thing there is around AI for extracting critical issues from their inline data.
John K. Kibarian: Look promising we think we understand what our.
John K. Kibarian: Common issues.
John K. Kibarian: Ken It's one of those things can you can the engineering.
John K. Kibarian: Achieve what the customer is looking for in terms of.
John K. Kibarian: The analytics and the biggest thing there is around AI.
John K. Kibarian: We're extracting critical issues after inline data.
Gus Richard: Thank you. One moment for our next question, and it comes from the line of Gus Richard with Northland. Please proceed.
Speaker Change: Okay, great. Thank you.
Gus Richard: Thank you one moment for our next question.
Gus Richard: And it comes from the line of Gus Richard with Northland. Please proceed.
Gus Richard: Yes, thanks for taking the question. Congratulations on the new customer. That was a rapid addition. I was just wondering the relative size of that contract relative to the size of the one you booked a couple years ago with, you know, the contract that included DFI and other services. Could you give sort of an order of magnitude? Is it, you know, a capital raiser. What is it comparable to? Yes. Okay. Wow.
Gus Richard: Yes, thanks for taking the question.
Gus Richard: Congratulations on the new customer that was a rapid addition.
Gus Richard: I was just wondering.
Gus Richard: The relative size of that contract relative to the size of the one you booked a couple of years ago.
Gus Richard: The contract that included <unk> and other services could you give.
Gus Richard: Give us sort of an order of magnitude is it.
Gus Richard: Paralyzer.
Gus Richard: Is it comparable.
John K. Kibarian: Um, and then can you talk a little bit about how quickly you can ramp DFI manufacturing to meet increased demand? I think the plan is for three or four systems this year. And you know, how, you know, how rapidly can you ramp that up into next year?
Gus Richard: Yes.
Gus Richard: Wow.
John K. Kibarian: And then can you talk a little bit about how quickly.
John K. Kibarian: How quickly you can ramp.
John K. Kibarian: <unk> manufacturing to meet increased demand I think.
John K. Kibarian: The plan is for three or four systems this year.
John K. Kibarian: How how rapidly can you ramp that into next year.
John K. Kibarian: Our original plan was really to effectively commit to two more machines this year, and now we've actually committed to those. So that's, you know, we were planning on building three or four machines, but the build completion would be into next year. We're looking to do now, as I said in my prepared remarks, Gus, accelerate that, pull in as much as we can. We had, of course, preordered some long lead items and been somewhat thoughtful about them, you know, in anticipation of success. And then accelerate the build beyond that number.
Speaker Change: Sure Yes.
John K. Kibarian: Well, it's really two effectively commit to two more machines. This year now we've actually committed.
John K. Kibarian: So thats.
John K. Kibarian: We were planning on building three or four machines, but they were they built completions would be into next year.
John K. Kibarian: We're looking to do now as I said in my prepared remarks, cusses accelerate that.
John K. Kibarian: Pulling them as much as we can we are of course preordered. Some long lead items have been somewhat thoughtful about.
John K. Kibarian: In anticipation of success and.
John K. Kibarian: And then accelerate.
John K. Kibarian: It's too early for us to really say, you know, what we would be able to commit to because we're still working with our suppliers. But we do want to be able to meet customer demand if it materializes the way that, you know, we hope it will. You know, we still have a lot of work to do there, too. So, you know, I think at this point, it's kind of a wait and see.
John K. Kibarian: To build beyond that number it's too early for us to really say.
John K. Kibarian: You would be able to commit to because we're still working with our suppliers.
John K. Kibarian: Yes.
John K. Kibarian: We do want to be able to meet.
John K. Kibarian: Customer demand if it materializes the way that we hope it will.
John K. Kibarian: We still have a lot of work to do there too. So I think at this point, it's kind of a wait and see because we can't promise you that we're going to build more than we originally committed we think we have some flexibility that we hope to.
John K. Kibarian: Gus, we can't promise you that we're going to build more than we originally committed. We think we have some flexibility there. We hope to, at least at the end of this year or early next year, squeeze in a little bit more. And then we expect to have a more steeper manufacturing ramp in 2025, which we have more flexibility on, obviously, because there's plenty of time.
John K. Kibarian: At least at the end of this year early next year to squeeze it a little bit more and then we expect to have a more steeper manufacturing ramp in 2025 that we have more flexibility on obviously, because there's plenty of time there.
John K. Kibarian: Right, and just, you know, are you at this point contemplating, you know, outsourcing the manufacturing of the equipment? Thank you for joining us today.
John K. Kibarian: Right and.
John K. Kibarian: And just.
Speaker Change: At this point contemplating outsourcing the manufacturing of the equipment.
John K. Kibarian: And that is all sourced today.
John K. Kibarian: I mean, we, we don't, you know, up till now, we've done final QA and assembly here in the States, and we review it, but all of our production is offshore, and we have the ability to just, you know, if we want to, not ever land them back here and complete. Final Q&A at the Producers' Conference. Okay, so then what are the long lead time items the limiter to a more rapid ramp and in like next year?
John K. Kibarian: Today.
Speaker Change: We don't.
John K. Kibarian: Sure.
John K. Kibarian: Sure.
John K. Kibarian: Up till now we've done final QA and assembly here in the states and we review it but all of our production is offshore.
John K. Kibarian: We have the ability to just.
John K. Kibarian: If we wanted to not ever landman back here and complete.
John K. Kibarian: Final QA.
John K. Kibarian: <unk>.
Speaker Change: Okay. So then what.
John K. Kibarian: Is the long lead time items limiter to a more rapid ramp in.
John K. Kibarian: Sure.
John K. Kibarian: Okay, and the technology and this thing is not simple, and it's not off the shelf, right? Yeah, pretty bespoke stuff, right? So, um, you know, refresh my memory as to the typical lead times for your longest lead time item for the tool.
Speaker Change: Alright, okay.
John K. Kibarian: And obviously the technology on this thing is not simplistic and it's not off the shelf pretty bespoke stuff right.
John K. Kibarian: So.
John K. Kibarian: Refresh my memory.
John K. Kibarian: Memory is too typical lead times for your longest lead time item for their tool.
John K. Kibarian: Well, I think what we've been able to do this first quarter, and I really applaud the team, is take items that did not have a deterministic lead time, right? In other words, the suppliers would build them, then we would test them, and then we would send them back because they didn't meet specifications, or you know, you would start with more material than you needed just to get out a small amount with relatively poor yields.
John K. Kibarian: Well I think what we've been able to do this first quarter I really applaud. The team is take items that did not have a deterministic lead time right in other words, they were customers suppliers would build them that we test them and then we would send them back because they didnt meet spec or.
John K. Kibarian: You would start more material than you needed just to get out a small amount was relatively poor yields and what do you know a company that is kind of predicated on manufacture ability.
John K. Kibarian: And what do you know, a company that's kind of predicated on manufacturability? We went back and worked on a lot of that with our suppliers and got the manufacturing yields up to get the times to be deterministic. So you could put an order in and, in a fixed number of months, get a subsystem out that actually meets requirements. So I think, you know, we've been working through that in the first quarter, and I think I feel really great about the results the team achieved on that.
John K. Kibarian: We went back and embarked on a lot of that with our suppliers and got the manufacturing yields up together.
John K. Kibarian: The times to be deterministic. So you could put in order rather than fixed number of months gap.
John K. Kibarian: Our sub system out that actually meets requirements. So I think we've been working through that in the first quarter I think I feel really great about the results the team achieved on that.
John K. Kibarian: And we're rerolling that up to say, okay, now where can we take slack out of our overall build schedule because our build schedule had a lot of slack time in it for, you know, some components that were basically undetermined. You could order them, and you didn't know when you were going to get them.
John K. Kibarian: And we're rolling that up to say, Okay, now where can we take slack out of our overall build schedule because our build schedule had a lot of.
John K. Kibarian: Our flat time in comps for.
John K. Kibarian: Some components that were basically undetermined you could order and you didn't know when you're going to get them.
John K. Kibarian: Got it. Got it. I understand. And then just switching to the, you know, the software side of the world, the extensio, I know you're working on some large enterprise deals, and you have some potential for some rather, you know, eight-figure deals, I believe, and I was just wondering, are customers beginning to come out of the fog and start getting closer to, you know, committing to orders, and, you know, sort of where does that funnel look? What does that funnel look like today?
John K. Kibarian: Got it got it I understand and then just switching to the.
John K. Kibarian: Software side of the World the extent CEO I know youre working on some large enterprise deals.
John K. Kibarian: You had some potential for some rather.
John K. Kibarian: Figure deals I believe and I was just wondering.
John K. Kibarian: Our customers beginning to come out of the fog and start getting closer to.
John K. Kibarian: Committing to orders and sort of where is that funnel.
John K. Kibarian: Yeah, so we did have some, I would say, seven-figure contracts last quarter. This quarter, I do see, this quarter and the next quarter, it's always hard to pick the timing, whether they're going to be Q2 or Q3.
John K. Kibarian: That funnel look like today.
John K. Kibarian: Yes.
John K. Kibarian: So we did have some I would say seven figure contracts last quarter. This quarter I do see this quarter. The next quarter, it's always hard to pick timing, where theyre going to be Q2 or Q3, we do have a number of larger opportunities out there.
John K. Kibarian: We do have a number of larger opportunities out there. And they are, you know, I chose my words around Accentio Cloud, Accentio Test Operations, and the Stapiens Manufacturing Hub, a lot around customers' digital transformations. This seems to be one critical area for the customer, so the SAP connection is an important one for a lot of this work and all of these contracts. And we're part of an overall larger engagement in those cases.
John K. Kibarian: And they are.
John K. Kibarian: Charles My words around extensive cloud extensive test operations in the sapiens manufacturing a lot around our customers' digital transformations this seems to be.
John K. Kibarian: One critical area for the customer.
John K. Kibarian: SAP connection is an important one for a lot of this work and all of these are contracts and we're part of an overall larger engagement in those cases, so it's a little bit trickier for us to have.
John K. Kibarian: So it's a little bit trickier for us to have clear visibility, but we feel pretty good over the next couple of quarters to see, well, you know, we'll have larger contracts, what's the total size of them, and how they break up. I think, of course, it's early, but we do feel engagement quite strong with the company.
John K. Kibarian: With clear visibility, but we feel pretty good over the next couple of quarters to see.
John K. Kibarian: It will be larger contracts, what's the total size of them and how they break up I think of course, it's early but we do feel engagement quite strong with the comps.
Gus Richard: Got it, got it. Thank you so much for answering the questions. I'll jump back in the queue.
Speaker Change: Got it got it.
Speaker Change: Thank you so much for answering the questions I'll come back in the queue.
Operator: Thank you. One moment for our next question, please, and it is from the line of William Jellison with G.A. Davidson. Please proceed.
Speaker Change: Thank you one moment for our next question. Please.
Operator: Yeah.
Operator: And it is from the line of William Jellison with D. A Davidson. Please proceed.
William A. Jellison: Good afternoon. Thank you for taking my questions. For the first one, I wanted to start out by asking you about the core Accentio business. What sort of trends are you seeing in customer behavior with respect to adopting incremental Accentio modules or their usage trends of the software overall? I'm curious what you're seeing there.
William A. Jellison: Good afternoon. Thank you for taking my questions.
William A. Jellison: The first one I wanted to start out by asking you.
William A. Jellison: The core <unk> business.
William A. Jellison: Sort of trends are you seeing in customer behavior with respect to adopting incremental like since your modules or their usage trends software overall im curious what youre seeing there.
John K. Kibarian: Sure, yeah, so I think there are basically three places where we see, you know, I think common access. So cloud customers are evaluating and looking at tests. Cloud customers are looking at the guided analytics AI module, right? So more automation on the way they're doing analytics. And then I would say our larger customers are really looking at the Accentio and Sapien connection between SAP and their factory. And that is kind of the way I answered Gus's question and my prepared remarks. Well, we're all around those, basically, those three capabilities. That's what we see.
Speaker Change: Sure, Yes, so I think there's basically three places where we see.
Speaker Change: Yes, I think common comment so.
John K. Kibarian: So cloud customers evaluating and looking at test.
John K. Kibarian: Cloud customers looking at guiding analytics AI module right. So automate more automation on the way they are doing analytics, and then I would say on the larger customers really looking at.
John K. Kibarian: <unk> and sapiens connection between SAP PNM factories.
John K. Kibarian: And those are probably the way I answered.
John K. Kibarian: <unk> question in my prepared remarks, while we're all around those basically both III capabilities, that's what we see.
John K. Kibarian: We look at that as A, customers trying to kind of change their digital platform, digital transformation, some call that. That often starts with an S4 HANA deployment, and then it's how they get kind of real-time feeds from manufacturing. It tends to have an impact on tests and the DEX networks and things like that because a lot of their supply chain isn't in their control. So the test operations are a piece of that.
John K. Kibarian: We look at that as a customer is trying to kind of change.
John K. Kibarian: Their digital platform digital transformation some of them call that that often starts.
John K. Kibarian: With an S. Four Honda deployment, and then how do they get kind of real time fees from the manufacturing.
John K. Kibarian: That tends to have an impact on test because the.
John K. Kibarian: <unk> networks and things like that because a lot of their supply chain isn't in their control. So.
John K. Kibarian: The tough operations as a piece of that and of course it starts with the cornerstone of the cloud.
John K. Kibarian: And, of course, it starts at the cornerstone of the cloud. So, you know, it's like I said, after the cloud, it ends up being analytics, test operations in the SMH, you know, SAP connection. And those are all ongoing now. We've had stuff close in the quarter, Q1, related to some of those. And we have stuff in the pipe in Q2 and Q3.
John K. Kibarian: So it's like I said after cloud it ends up being got analytics test operations in the SMH.
John K. Kibarian: S&P connection.
John K. Kibarian: And those are all ongoing out we've had we had stopped caused in the quarter Q1 some of those.
John K. Kibarian: And we have stuff in the pipe in Q2, and Q3 on those activities as well.
John K. Kibarian: Okay, great. And then as a follow-up to dive a little bit deeper into that with respect to the model ops pilots currently going on, talk about how you expect customers to ultimately uptake model ops and how it affects PDF monetization overall across that extensio.
Speaker Change: Okay, Great and then as a follow up to dive a little bit deeper into that with respect to the model ops pilots currently going on let's talk about how.
Speaker Change: Do you expect customers to ultimately obtain uptake model apps and how.
Speaker Change: And effects Pds monetization overall.
Speaker Change: Cynthia business.
John K. Kibarian: Yeah, that's a question where we're learning as we go. Well, but what we think so far is the following.
John K. Kibarian: Yes.
John K. Kibarian: A question, we're learning as we go well, but what we think so far is the following.
John K. Kibarian: It does drive our test ops VITAS my prepared remarks, we're model up primarily around.
John K. Kibarian: It does drive our, you know, test operations. So if you notice my prepared remarks for model operations, primarily around testing for advanced packaging. So multiple test insertion points, data feed forward, predictive bidding, all the things around being more able to make sure the chiplet you put in the package is going to really be there, you know, be at the performance levels you need, and then make sure that the testing is. That will drive model ops deployment, which is basically tied to the number of machines that they deploy model ops on.
John K. Kibarian: Testing for advanced packaging, so multiple parts insertion points data feed forward predictive bidding all the things around being more.
John K. Kibarian: More able to make sure. The triplet you put in the package is going to really be there be it the performance levels you need and then make sure that.
John K. Kibarian: Testing is.
John K. Kibarian: Sure.
John K. Kibarian: Efficient because we've added so many test insertion points. They are trying to be as efficient as possible with our test. So this is a bedroom a lot of the engagement on the pilots almost all the pilots are in that area right now related to advanced.
John K. Kibarian: Typically advanced packaging and triplets.
John K. Kibarian: So it scales with the capacity of the deployment. And it also has kind of a follow-on effect, because then you need more clouds, you need more analytics on the other side, and more of the ML training capability in the cloud as well. We think what will close first is the stuff around moving data around and the MLOps as deployed. That's why, in my previous remarks, I talked about the challenges of being able to monitor, maintain, and act on the models.
John K. Kibarian: That will drive model ops deployment, which basically is tied to the number of machines that they deploy model op sponsored scales with the capacity of the deployment and it also has kind of a.
John K. Kibarian: Follow on effect, because then you need more cloud you.
John K. Kibarian: You need more analytics.
John K. Kibarian: On the other side and.
John K. Kibarian: More of the ml training capability in the cloud as well.
John K. Kibarian: We think but will close first as the stuff around the moving data around an MLP.
John K. Kibarian: Ml ops as deploy that's why in my prepared remarks, I talked about the challenges of being able to monitor maintain and act on the models.
John K. Kibarian: And over time, as they get more and more sophisticated, we think it will also have an impact on our general cloud business as they drive more compute, roll out more models, manage larger data sets, and do more complex things. But I would say overall, the industry is really relatively simple in what they're doing. AI Models Today
John K. Kibarian: And over time as they get more and more sophisticated we think it will also have an impact on our general cloud business as they drive more compute.
John K. Kibarian: Rollout more models.
John K. Kibarian: Managed larger datasets and do more complex things I would say overall the industry is really relatively simplistic in what theyre doing.
John K. Kibarian: AI models today.
William A. Jellison: Great. Thank you for that, John.
Speaker Change: Alright, thank you for that John.
Operator: Thank you. And ladies and gentlemen, as a reminder, if you do have a question, simply press star 11 to get in the queue. One moment for our next question, and it comes from Christian Schwab with Craig Hallam Capital. Please proceed.
Speaker Change: Okay. Thank you and ladies and gentlemen, as a reminder, if you do have a question simply press star one one to get into Q1.
Operator: One moment for our next question and it comes from Christian Schwab with Craig Hallum Capital. Please proceed.
Christian David Schwab: Hey, good evening guys. So, if we use DFI eventually and move it in as a production tool, you know, what would you charge for that versus the way that you're kind of charging customers to use it as what I guess I would call more of a research and development tool?
Christian David Schwab: Hey, good evening guys. So.
Speaker Change: Yes, if you take the <unk> eventually.
Christian David Schwab: It's a production tool.
Christian David Schwab: What would you charge for that versus the way that you are in China.
Christian David Schwab: Charging customers to use against what I guess I would call more of an <unk>.
Christian David Schwab: <unk> in development today.
John K. Kibarian: Yeah, that's a great question, Christian. I think we're still in active dialogue with the customers on this right now. Today we charge the whole thing as a bundled subscription, and the customer gets quite a deal because we actually manage the uptime on the machine, we manage the spare parts, and we provide the entire software stack for the application layer. We've said we're open to selling the machine piece itself. [inaudible] We've priced that.
Speaker Change: Yes, that's a great question Christine I think we're still working in active dialogue with our customers on those right now.
John K. Kibarian: The the.
John K. Kibarian: Today, we charged the whole thing as a bundled subscription and the customer gets quite a deal because we actually manage the uptime on the machine repair spare parts.
John K. Kibarian: When we provide the highest software stack for the application layer.
John K. Kibarian: If.
John K. Kibarian: We said, we'd be open to selling the machine piece itself.
Speaker Change: That's all.
John K. Kibarian: On a capital purchase basis and that would still be potentially then a subscription on all of the.
John K. Kibarian: Analytics.
John K. Kibarian: And.
John K. Kibarian: Systems.
John K. Kibarian: Systems that drive the machine and tried to date off it particularly for the product level inspection.
John K. Kibarian: There are ways, where we could make it less capital intensive for us and maybe more conventional to the customers.
John K. Kibarian: We've had dialogues with customers around that part I don't think we have anything that is set in stone at this point and I think as we've gone through that we've learned a lot about just.
John K. Kibarian: I think we did that in a way that made it very, very, easy for the customer to get into the machines and see the value that's there, right? While they're relatively meaningful subscriptions, when you consider the total value, I think it's quite a good deal.
John K. Kibarian: Our subscription business of how we evolve.
John K. Kibarian: Price I think we did that in a way that made it very very very easy for the customer got into the machines and see the value that's there right.
John K. Kibarian: While they're relatively meaningful subscriptions when you consider the total value I think it's quite a good deal.
Christian David Schwab: And should we assume that if you sold them as a piece of capital equipment, the ASP would be $4 to $5 million? Is that still fair?
Christian: And should we assume that if you sold them as a piece of capital equipment that NASP would be $4 million to $5 million.
John K. Kibarian: Yeah, I think that would probably be much lower than where you'd expect them to be on a capital basis.
Speaker Change: Still fair.
John K. Kibarian: No I think that would probably be.
John K. Kibarian: But much lower than where you would expect them to be on a capital basis.
Christian David Schwab: Okay, okay. And then, on a capital, you know, on a, you know, I guess my last question is, if it was used in production. Do you have an idea yet of how many tools would be needed? You know, based on wafer starts per month, but every 10,000, 50,000, 100,000, whatever. Have you done the work to know how many would be needed?
John K. Kibarian: Okay.
Christian David Schwab: And then.
Christian David Schwab: Capital.
Christian David Schwab:
Christian David Schwab: And I guess my last question is if it was used in production.
Christian David Schwab: Do you have an idea how much.
Christian David Schwab: Any tools would be needed.
Christian David Schwab: Based on wafer starts per month.
Christian David Schwab: Every 10050 thousand 100000 or whatever.
Christian David Schwab: And have you done the work to know how many would be needed.
John K. Kibarian: You know, I think we don't really know that answer yet, Christian, but what I can tell you is the following, right? When we first started doing this many years ago, right, even before the last couple of years, all of the customers that we're going to talk to said, you need eBeam a lot in the first one or two years of development, then once you get to a certain defect density, you can't see anything anymore.
Christian David Schwab: Yeah.
John K. Kibarian: I think we don't really know that answer yet Christian but what I can tell you is the following right. When we first started doing this many years ago even before.
John K. Kibarian: So last couple of years all of the customers that we're going to talk to us a unique E beam a lot in the first one or two years of development and then once you get to a certain defect density you can't see anything anymore. So everyone was very comfortable with the subscription because they didn't think you see it.
John K. Kibarian: The facts are very long lived.
John K. Kibarian: So everyone was very comfortable with the subscription because they didn't think you'd see it, you know, you would see defects for very long. But the reality is, we've proven the capability, especially as we've done further revs of the machine, right? So, you know, the first thing we shipped, we called it a 250. Then we shipped last year, a 350. This year, we'll ship a 450.
John K. Kibarian: The reality is we've proven with the capability of that.
John K. Kibarian: Especially as we've done further revs of the machine first and we shipped to cover the 250 than we shipped last year and $3 50. This year will ship a $4 50. These are getting incrementally faster and faster and faster early due to the software layer.
John K. Kibarian: These are getting incrementally faster and faster and faster, really due to the software layer. And, you know, we know overall what the market is in terms of defect entities. And we think we're very unique in being able to see these 3D problems, even as customers are getting to pretty, pretty good yield. So, you know, that. That's why I think customers' early idea about how long you would need an E-beam tool and, you know, what's turning out to be the case is, I think, surprising the industry overall, and, you know, that was our original thesis, so it's nice to see it come true, but we didn't know it would when we started.
John K. Kibarian: And.
John K. Kibarian: Yes, we know overall, where the market is in terms of defect entities and we think we're very unique in being able to see these problems even as customers are getting to pretty pretty good yields. So.
John K. Kibarian: Yes.
John K. Kibarian: That's why I think.
John K. Kibarian: Customers early idea about how long you would need to E beam tool.
John K. Kibarian: Whats turning out to be the case.
John K. Kibarian: It's I think surprising the industry overall.
John K. Kibarian: That was our original.
John K. Kibarian: Leases.
John K. Kibarian: So it's nice to see it come through but we didn't know when we started.
Christian David Schwab: Okay, great. No other questions. Thanks, Hannes. Thank you.
Speaker Change: Okay, great no other questions. Thanks, guys. Thank.
Operator: Thank you. Thank you. One moment for our next question, please. And it's from Gus Richards with Northland. Please proceed. Yes.
Speaker Change: Thank you. Thank you one moment for our next question. Please.
Gus Richard: And he's from Gus Richard with Northland. Please proceed.
Gus Richard: Yes, thank you for asking me just one more question. And I kind of want to be clear, you know, there's three buckets for DFI, process bring up, product bring up, and then there's infab. Unknown Speaker in production and the custom conversations you have with at least one or more of your customers. Does that include the third bucket where you're talking to them about production, production tools?
Gus Richard: Yes. Thank you for asking me one more question.
Gus Richard: And I kind of wanted to be clear.
Gus Richard: The three buckets for DSI process spring up.
Gus Richard: Product bring up.
Gus Richard: And then there is in fab.
Gus Richard: In production and the coffee.
Gus Richard: Conversations youre, having with.
Gus Richard: At least one or more of your customers does that include the third bucket, where you are talking to them about production production tools.
Gus Richard: So.
John K. Kibarian: You know, I think people are asking about that, Gus. People have used E-Beam historically for test vehicles and process development, S-RAMs, and very simple structures in the product where they know what's there, where the quote-unquote nuisance rate is low. I think customers have been surprised, and we see this already in the way we've engaged customers. The customers, at least a couple of them so far. The EPRO was very, very good at looking at the product.
Gus Richard: I think people are asking about that.
John K. Kibarian: Yes.
John K. Kibarian: People use E beam historically for test vehicles and process bring up S Rams and very simple structures and the product while they know what's there where the quote unquote nuisance rate as well I think what customers have been surprised and we see this already in the way we've engaged with.
John K. Kibarian: The customers are comfortable with.
John K. Kibarian: A couple of them so far.
John K. Kibarian: The problem is very very good at looking at product. So that you can bring up each product each new chip each new design and see via open issues complex issues.
John K. Kibarian: So now you can bring up each product, each new chip, each new design, and see via open issues, complex issues, because it is very targeted where it lands the beam. You can even sequence the landing of the beam, so turn on areas and look in other areas.
John K. Kibarian: Because it is.
John K. Kibarian: Very targeted on where it lands a beam if you can even sequence the landing of the game. So turn on areas and look at all or is it is very very sophisticated in the way. It can work and so I think customers know themselves getting around it can be very powerful for product bring up.
John K. Kibarian: It's very, very sophisticated in the way it can work. And so I think customers are now themselves recognizing that it can be very powerful for product promotion. They are asking us about the third application as well. And now, of course, because we've deployed this on very advanced nodes that are just getting into production now, we're starting to begin those engagements. That pilot that we announced in Q4 of last year was really around the manufacturing question. Okay, can you really run one of these things in manufacturing?
John K. Kibarian: They are asking us about the third application as well and now of course, because we deployed some very advanced nodes that are just getting to production now that we're starting to begin those engagements that pilot that we are now.
John K. Kibarian: In Q4 of last year was really around the manufacturing question. Okay. Can you really one can you really run one of these things in manufacturing that was their question.
John K. Kibarian: That was their question. And we've seen, of course, across the fleet, the uptime data and the consistency data, and we feel pretty good that, you know, again, the e-beam tools tend to be like Formula 1 cars, and customers have asked, "OK, can you really run one of these things?" And we've seen our uptime data, and we feel pretty good about it. So we'll have to go ahead and answer that third question. People are asking it now. I think they're pretty comfortable now with the second. You can do product inspection, and even have an ultimately mature yield as you bring in new products. And I think that's a very new application for you.
John K. Kibarian: And we have seen of course.
John K. Kibarian: Across the fleet.
John K. Kibarian: Uptime data and the consistency that and we feel pretty good that.
John K. Kibarian: Again E beam tools tend to be like Formula one cars right.
John K. Kibarian: And customers that question. Okay can you really run one of these things and we've seen uptime data and we feel pretty good about it. So we'll have to go on and answer. The third question people are asking it now I think they are pretty comfortable now with the second question.
John K. Kibarian: You can do product inspection, even a relatively mature yields as you bring in new products and I think that's a very new application for E beam.
Gus Richard: Got it. All right. Very helpful. Thanks. That's it for me.
Speaker Change: Got it alright.
Speaker Change: Very helpful. Thanks, that's it for me.
Operator: One moment for our next question, and it's coming from the line of William Jellison with D. A. Davidson. Please proceed.
Speaker Change: Thank you.
Speaker Change: One moment for our next question.
William A. Jellison: And it is coming from the line of William Galison with D. A Davidson. Please proceed.
William A. Jellison: Okay, thank you for taking the follow up. Adnan, I wanted to ask you with respect to gross margin during the quarter. My impression was that much of the year over year drag was related to that lease accounting for the BFI that you mentioned. And so the question that springs from that is, DFI accelerates and becomes a bigger part of PDF growth into the future. Does that change at all the way you think about the long-term greater than 75% target?
William A. Jellison: Okay. Thank you for taking the follow up.
William A. Jellison: I wanted to ask you with respect to gross margin during the quarter my impression was that.
William A. Jellison: The year over year drag was related to lease accounting for the <unk> that you mentioned and so the question that springs from that is it.
William A. Jellison: <unk> accelerates and becomes a bigger part of pediatric growth into the future.
William A. Jellison: That change it all the way you think about the long term greater than 75% target.
Adnan Raza: Yeah, thanks very much for asking that question. So look, you know, now with multiple machines shipped into the market, we are actually getting quite better. And the team has been doing a great job about managing the cost over the longer term, especially as we think of some of these advanced, early orders that we're starting to look at, that we are placing with our vendors. So I'm feeling pretty good about the machine side of it as well, being able to not hurt our 75% gross margin targets that we have set.
Adnan Raza: Yes, thanks, very much for asking that question so look.
Adnan Raza: Now with multiple machines shipped into the market, we are actually getting quite better and the team has been doing a great job about managing the cost over the longer term, especially as we take off some of these advanced at these early orders that we're starting to look at.
Adnan Raza: That would be replacing with our vendors so feeling pretty good about the machine side of it as well being able to not hurt our 75% gross margin target that we have set well.
Adnan Raza: Well, yes, in the last two quarters, some of the margin was lower compared to our gross margin targets. But you know, as revenue ramps up to the rest of the second half of the year, we certainly expect to be, you know, getting back to our target gross margin model, particularly by the time we're ending the year. I think we're starting to think that the 75% gross margin and the 20% operating margin targets that we had set for the year seem like they would be achievable by the end of the year.
Adnan Raza: Yes, the last few quarters.
Adnan Raza: Margin was lower compared to our gross margin targets, but as the revenue ramps through the rest of the second half of the year, we certainly expect to be getting back to our target gross margin model, particularly by the time. They are any of the year I think we're starting to think that 75% gross margin in the 20% operating margin targets that we had set for the year. It seemed like there would be achievable ending of the year.
William A. Jellison: That's great. Thank you, Adnan.
Adnan Raza: <unk>.
Speaker Change: That's great. Thank you Adam.
Operator: One moment for our next question, please. And it's from Andrew Wiener with SamJoe Management. Please proceed.
Adnan Raza: Thank you.
Speaker Change: A moment for our next question please.
Operator: Okay.
Operator: And he is from Andrew Wiener with Sam Joe Management. Please proceed.
Andrew N. Wiener: Hi, good afternoon, guys. Good afternoon, everyone.
Andrew N. Wiener: Hi, good afternoon guys.
Andrew N. Wiener: One of the follow-ups on Kristen and Gus's questions, I guess. The first is with respect to the potential, and I realize, you know, you're still evaluating it as a model. But the idea of selling the tool and then, you know, charging a license for the analytics and the, you know, and the design, etc. And the software, it sounds like you believe, you know, and I don't want to give away anything from a pricing strategy perspective, but you believe, relative to sort of other eBeam tools or inspection tools and then, sort of the software that's required to manage them, perhaps our initial subscriptions were Is that a fair sort of, you know, interpretation of your earlier comments?
Andrew N. Wiener: Good afternoon Andrew.
Andrew N. Wiener: Wanted to follow up on Christian and gases questions I guess.
Andrew N. Wiener: The first is with respect to the potential and I realize you're still evaluating it as a model.
Andrew N. Wiener: But the idea of selling the tool and then charging of license for the analytics and the.
Andrew N. Wiener: And the design et cetera, and the software.
Andrew N. Wiener: It sounds like you believe.
Andrew N. Wiener: I want to give away anything from a pricing strategy perspective, but you believe relative to sort of other <unk>.
Andrew N. Wiener: E beam tools, our inspection tools, and then sort of the software that's required to manage them that perhaps our initial subscriptions were under pricing the overall value.
Andrew N. Wiener: In part because we need to prove that it works and drive adoption is that a fair sort of.
Andrew N. Wiener: Interpretation of your earlier comments.
John K. Kibarian: Yeah, I mean, and also, the machine got a lot more capable. So from that first generation we shipped in 2022 to today, it's about 16 times faster. [inaudible] Improvements to the software, improvements to the machine. Take advantage of the software. I've made it quite a different experience than we think it continues to be. You know, so yeah. Then you can go and look at where it is performance wise and competitive in the marketplace, and we feel pretty good there.
Speaker Change: Yes, I mean and also.
John K. Kibarian: The machine you got a lot more capable so from that first generation, we shipped in 2022 today its about 16 times faster.
John K. Kibarian: Yeah.
John K. Kibarian: Because of the software because of the capability of getting smarter about the design. There is a lot of the software side and the control system side that make that possible. There is changes to the machine tool to basically take advantage of what the software does but that software.
John K. Kibarian: No.
John K. Kibarian: Procurements of the software improvements of the machine.
John K. Kibarian: To take advantage of the software I've made it quite a different experience than we think it continues to be.
John K. Kibarian:
John K. Kibarian: So yes.
John K. Kibarian: And then you can go and look at where it is performance wise competitively in the marketplace and we feel pretty good there.
Andrew N. Wiener: Okay, and then second, I realize we're not ready to put a fine point yet on what the number of units is for market sizing. But you know, if I take your earlier comments of, you know, E-beam being a market for hundreds of millions of dollars, and then I take your response to Gus's question about, you know, that we sort of prove it, or we're in the process of proving it. And then the question, obviously, would be how much larger, and that would be somewhat dependent upon sort of the proof of getting into manufacturing. Is that a fair comment?
Speaker Change: Okay, and then second I realize we're not ready to put a fine point yet on what the number of units are sort of market sizing, but if I take your earlier comments.
Andrew N. Wiener: And being a market in the hundreds of millions of dollars and then I take your response to <unk> question about that.
Andrew N. Wiener: We sort of prove it we're in the process of permitting.
Andrew N. Wiener: That you cannot only use it to bring up a process, but you could actually use it to bring up sort of each individual design or each individual product.
Andrew N. Wiener: Somewhat suggests that you believe that minimum the market for <unk>.
Andrew N. Wiener: Hi is larger than the current <unk> market and then the question obviously with the how much larger and that would be somewhat dependent upon sort of the peripheral of getting into manufacturing is that a fair comment.
John K. Kibarian: It's fair, Andrew, yeah. I mean, I think, look, there's a, the conventional uses of EV, there's more than just voltage contrast. They use it for, you know, fine feature inspection, right? And the number I was quoting was for the inspection market, not the review market, and not the CD market or the overlay markets, all the other ways that people use EV tools, so just the EV inspection market. And they, you know, we've focused primarily so far on the logic producers, right?
Andrew N. Wiener: Sure.
John K. Kibarian: Andrew Yes, I mean, I think what this.
John K. Kibarian: The conventional uses of <unk>, there's more than just voltage contrast, they use it for.
John K. Kibarian: Find feature inspection and the number I was cutting out the inspection market not the review market and not the.
John K. Kibarian: CD market or the overlay market as all the other ways that people use.
John K. Kibarian: E beam tool side, just the E beam inspection market.
John K. Kibarian: And a lot of EV goes into memory, right? You know, you've got to slice that all up a little bit and then say, okay, for the, you know, can you make the market for logic voltage contrast bigger if you can do products and not just early vehicles? Yeah, I think that's true. How much bigger is that in the regular, the whole market, or is it just the whole market? Well, that depends a little, a little bit more on how relevant what we're doing is to memory customers, you know, etc.
John K. Kibarian: We focused primarily so far on the logic producers right and a lot of it even goes into memory right. So.
John K. Kibarian: You've got to go on slides that all up a little bit and then say okay.
John K. Kibarian: Can you make the market for logic.
John K. Kibarian: Voltage contrast, bigger if you can do product and not just early vehicles.
John K. Kibarian: I think that's true how much bigger that is in the regular the whole market or has it been the hallmark of that depends a little a little bit more about Rob.
John K. Kibarian: Relevant while we're doing it to the memory customers et cetera. So.
John K. Kibarian: So, you know, that's why I'd like some wiggle room there, Andrew, because I think we're still really digesting all that. I think, you know, we are feeling pretty comfortable that this will be an important part of the PDF business, and we think it can be an important part of the subscription for PDFs on a subscription basis for the PDF business.
John K. Kibarian: That's why I'd like some wiggle room, there Andrew because I think we're still really digesting all of that I think we are.
John K. Kibarian: We're feeling pretty comfortable that this will be an important part of pvs business and we think it can be an important part of the subscription for Pds honest because subscription basis for Pdf's business.
Andrew N. Wiener: Okay. And then lastly, I just wanted to sort of make sure that I understood. So we're planning to ship a third tool this quarter to our leading customer. I think, you know, on prior calls or, you know, prior public comments, you talked about shipping sort of another tool in the fall. Was that, was that always intended for the customer who signed the current contract? And is that sort of the timing of when you'd expect to ship that tool?
Speaker Change: Okay and then.
Andrew N. Wiener: Lastly, I just wanted to sort of make sure I understand.
Andrew N. Wiener: So we're planning to ship this quarter, a third tool to our leading customer I think on prior calls.
Andrew N. Wiener: Prior public comments, you talked about shipping.
Andrew N. Wiener: Another tool in the fall.
Andrew N. Wiener: Is that.
Andrew N. Wiener: That always intended for the customer who signed the current contract and is that sort of the timing of when you'd expect to ship that door.
John K. Kibarian: Yeah, so that is that customer. We are set up now where we can help them at this stage, being able to use the machines in our facility as they go through this year. And then at the end of this year, potentially could slide into early next year if they're not ready, that machine would move from our site to their site as they transition their status, right? So I think what we're able to get done here is the ability to start supporting them sooner than later this year.
John K. Kibarian: So that is that customer.
John K. Kibarian: We're set up number we can help them in this stage being able to use the machines in our facility as they go through this year and then at the end of this year potentially could slide until early next year, if theyre not ready.
John K. Kibarian: That machine would move from our site to their site.
John K. Kibarian: This transition.
John K. Kibarian: Their status so.
John K. Kibarian: But I think what we're able to get done here with the ability to start supporting them sooner than.
John K. Kibarian: Okay, and then the comments about trying to pull forward, you know, potentially availability of tools, you know, into late 24 are, you know, mostly for pilot sort of evaluations, or are you seeing actual, you know, sort of customer interest in, you know, installing a commercial tool in their facility?
John K. Kibarian: Later this year.
Speaker Change: Alright, okay.
John K. Kibarian: And then the comments about trying to pull forward.
John K. Kibarian: Actually availability of tools.
John K. Kibarian: Late 'twenty four is.
John K. Kibarian: Is that.
John K. Kibarian: Mostly for pilot sort of evaluations or are you seeing actual sort of customer interest in.
John K. Kibarian: Installing a commercial.
John K. Kibarian: Tool in their facilities.
John K. Kibarian: Customers are asking us now, Andrew, about the availability of additional capacity, which we really, you know, I wouldn't say they've come and said they want to buy one now. I would say, okay, if I wanted to buy one, what would it take?
John K. Kibarian: Customers are asking us now Andrew about availability of additional capacity.
John K. Kibarian: Which we really.
John K. Kibarian: And as, you know, I think we would want to be able to take advantage of that, those opportunities. We are looking at what we can do. Obviously, you've got an instantaneous supply chain, which gives you maximum flexibility, right? And anyone that's taken control theory knows the longer the feedback loop, the more likely you go out of control, right?
John K. Kibarian: I wouldn't say that commentary, we want to buy one now and saying, okay. If I wanted to buy one what would it take.
John K. Kibarian: As.
John K. Kibarian: I think we would want it doesn't take advantage of those opportunities. We are looking at what we can do obviously, if you've got an instantaneous supply chain gives you maximum flexibility right.
John K. Kibarian: Anyway, that's taking control a lot of the feedback loop the more likely you can go out of control right. So.
John K. Kibarian: So it behooves us to figure out how to shorten all of that for maximum business flexibility and also because customers are asking about it. And we think the way we thought about the supply chain should give us some advantages. I think historically people said, oh, PDF's not a manufacturer. There are some disadvantages to that. And, you know, go ask a fabless company if not having a side is an advantage or
John K. Kibarian: Moves us to figure out how to shorten all of that for maximum business flexibility and also because customers are asking about it.
John K. Kibarian: And we think the way we thought about the supply chain.
John K. Kibarian: Give us some advantages I think historically people said on pdfs not a manufacturer, there's some disadvantages to that and.
John K. Kibarian: Go ask a fabless company as not having us other than advantage or disadvantage I think most of the public companies will tell you that they are quite happy with being tablets and I think similarly share. If you think there's ways that we can be.
John K. Kibarian: I think most of the fabulous companies would tell you that they're quite happy with being fabulous. And I think similarly here, we think there are ways that we can be, you know; we can leverage the way that we operate to maximize flexibility.
John K. Kibarian: We can leverage the way that we operate.
John K. Kibarian: To maximize flexibility.
John K. Kibarian: And I guess the last question around that is, the customers doing the manufacturing evaluation, I think you thought you might know by the end of this year, sort of if it's a go or not a go, have they given any indication whether if it's a go, they would require additional tools? Yes. And I assume the answer is yes, they would require additional tools.
John K. Kibarian: And I guess the last question around that is the customers during the manufacturing of valuation I think you thought you might know by the end of this year.
John K. Kibarian: Sort of if it's a go or no doubt have they given any indication whether if it's a go they would require additional tools.
John K. Kibarian: Yes.
John K. Kibarian: And then I assume the answer is yes, they would require additional tools, yes, yes.
John K. Kibarian: Yes, they would. Yeah. But that's the purpose of a manufacturing evaluation, right?
John K. Kibarian: The purpose of our manufacturing revaluation right.
John K. Kibarian: Yeah, okay. No, that's what I thought.
Speaker Change: Okay, Yeah, that's what I thought I just wanted to confirm okay. Great. Thank you guys.
Operator: Thank you, and ladies and gentlemen, as a reminder to ask a question, simply press star 1 1 Well, at this time, there are no more questions. Ladies and gentlemen, this concludes the program. Thank you for joining us on today's call.
Andrew N. Wiener: I just wanted to confirm. Okay, great. Thank you guys. Thank you. And ladies and gentlemen, as I remind you,
John K. Kibarian: Thank you and ladies and gentlemen, as a reminder to ask a question simply press star one one.
Andrew N. Wiener: Yeah.
Andrew N. Wiener: Well at this time there are no more questions.
Andrew N. Wiener: Ladies and gentlemen, this concludes the program and thank you for joining us on today's call.
Andrew N. Wiener: Okay.
Andrew N. Wiener: Okay.
Andrew N. Wiener: [music].
Andrew N. Wiener: Okay.
Andrew N. Wiener: [music].