We’ve had dialogues with customers around that point. 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 our subscription business and how we’ve priced that. I think we did that in a way that made it very, 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.
Christian Schwab: And should we assume that if you sold them as a piece of capital equipment that an ASP would be $4 million to $5 million, is that still fair?
John Kibarian: No, I think that would probably be much lower than where you’d expect them to be on a capital basis.
Christian Schwab: Okay. Okay. And then on a capital, 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 based on wafer starts per month with every 10,000, 50,000, 100,000, whatever, have you done the work to know how many would be needed?
John Kibarian: I think we don’t really know that answer yet, Christian. What I can tell you is the following, right, when we first started doing this many years ago, right, even before, for the last couple of years, all of the customers that I talk to, they said, you need e-beam a lot in the first 1 or 2 years of development. 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’d see it. You would see defects are very long. But the reality is we’ve proven with the capability that, especially as we’ve done further revs of the machine, right, so the first one we shipped, we called it 250, then we shipped last year the 350, this year, we’ll ship the 450.
These are getting incrementally faster and faster and faster really due to the software layer. And we know overall what the market is in terms of defect densities, and we think we’re very unique in being able to see these 3D problems even as customers are getting to pretty good yields. So that’s why I think customers’ early idea about how long you would need to be in the tool, and what’s turning out to be the case is, I think, surprising the industry overall. And that was our original thesis. So it’s nice to see it come true, but we didn’t know when would we start it.
Operator: One moment for our next question, please, and it’s from Gus Richard with Northland.
Gus Richard: Just one more question. And I kind of want to be clear, there’s 3 buckets for DFI: process bring-up, product bring-up and then there’s in-fab in production. And the conversations you’re having with at least one or more of your customers, does that include the third bucket where you’re talking to them about production tools?
John Kibarian: So I think people are asking about that, Gus. The people have used e-beam historically for test vehicles and process bring-up, SRAMs and very simple structures in the product where they know what’s there where the “nuisance rate” is low. I think what customers have been surprised, and we see this already in the way we’ve engaged with the customers across, at least a couple of them so far, the eProbe is very, very good at looking at product. So now you can bring up each new chip, each new design and see via open issues, complex issues because it is very targeted on where it lands the beam. You can even sequence the landing of the beam. So turn on areas and look in other areas is very, very sophisticated in the way it can work.
And so I think customers now themselves are getting on that. It can be very powerful for product bring-up. 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 to production now, 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? 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, again, e-beam tools tend to be like Formula 1 cars, right? And customers will question, okay, 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 and answer that third question. People are asking it now. I think they’re pretty comfortable now with the second question. You can do product inspection, even have ultimately mature yields as you bring in new products, and I think that’s a very new application for e-beam.
Operator: One moment for our next question, and it’s coming from the line of William Jellison with D.A. Davidson.
William Jellison: 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 DFI that you mentioned. And so the question that springs from that is, if 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?
Adnan Raza: Yes. Thanks very much for asking that question. So look, 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 costs over the longer term, especially as we think of some of these advanced, these early orders that we are starting to look at that we are placing with our vendors. So feeling pretty good about the machine side of it as well, being able to not hurt our 75% gross margin targets that we have said. Well, yes, the last 2 quarters, some of the 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 we are 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 ending the year.
Operator: One moment for our next question, please, and it’s from Andrew Wiener with Samjo Management.
Andrew Wiener: I wanted to follow up on Christian and Gus’ questions, I guess. The first is with respect to the potential, and I realize you’re still evaluating it as a model, but the idea of selling the tool and then charging a license for the analytics and the design, et cetera, and the software, it sounds like you believe, and I don’t want to give away anything from a pricing strategy perspective, but you believe relative to sort of other e-beam tools or inspection tools and then sort of the software that’s required to manage them that perhaps our initial subscriptions were underpricing the overall value, in part, because we need to prove that it works and drive adoption. Is that a fair sort of interpretation of your earlier comments?
John Kibarian: Yes, I mean, and also the machine got a lot more capable. So from that first generation we shipped in 2020 to today, it’s about 16x faster. Because of the software, because of the capability of getting smarter about the design, there’s a lot on the software side and the control systems side that make that possible. There is changes to the machine, too, to basically take advantage of what the software does. But that software, improvements to the software, improvements to the machine to take advantage of the software have made quite a different experience than we think it continues to be. So yes, then you can go and look at where it is, performance-wise, competitively in the marketplace, and we feel pretty good there.
Andrew Wiener: Okay. And then second, I realize we’re not ready to put a fine point yet on what the number of units or sort of market sizing. But if I take your earlier comments of e-beam being a market in the hundreds of millions of dollars and then I take your response to Gus’ question about that we sort of prove it, or we’re in the process of proving that you can not 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. It’s sort of, it somewhat suggests that you believe at minimum, the market for eProbe or DFI is larger than the current e-beam market. 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?
John Kibarian: It’s fair, Andrew, yes. I mean I think, look, the conventional uses of e-beam, there’s more than just voltage contrast. They use it for fine feature inspection, right? And the number I was quoting was the inspection market, not the review market and not the CD market or the overlay markets, all the other ways that people use e-beam tools. They’re just the e-beam inspection market. And the, we focus primarily so far on the logic producers, right? And a lot of e-beam goes into memory, right? So you’ve got to go and slice that all up a little bit and then say, okay, can you make the market for logic voltage contrast bigger if you can do product and not just early vehicles? Yes, I think that’s true. How much bigger that is in the regular, the whole market or is it being the whole market?
Well, that depends a little bit more about how relevant to what we’re doing to the memory customers, et cetera. So that’s why I like some wiggle room there, Andrew, because I think we’re still really digesting all that. I think we are feeling pretty comfortable that we, this will be an important part of PDF’s business, and we think it can be an important part of the subscription for PDF on a subscription basis for PDF’s business.
Andrew Wiener: Okay. And then lastly, I just wanted to sort of make sure I understand. So we’re planning to ship this quarter a third tool to our leading customer. I think on prior calls or prior public comments, you talked about shipping sort of another tool in the fall. Is 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?
John Kibarian: Yes. So that is that customer. We had said that now we can help them in this stage of being able to use the machines in our facility as they go through this year. And then at the end of this year, potentially good flight internally next year. If they’re not ready, that machine would move from our site to their site as they transition their status, right? So, but I think what we’re able to get done here was the ability to start supporting them sooner than later this year, right?
Andrew Wiener: Okay. And then the comments about trying to pull forward potentially availability of tools into late ’24, is that mostly for pilot sort of evaluations? Or are you seeing actual sort of customer interest in installing a commercial tool in their facilities?
John Kibarian: Customers are asking us now, Andrew, about availability of additional capacity, which we really, I wouldn’t say they’ve come and said, we want to buy one now. They’re saying, okay, if I wanted to buy one, what would it take? And as I think we would want to be able to take advantage of those opportunities, we are looking at what we can do. Obviously, if you’ve got an instantaneous supply chain, it gives you maximum flexibility, right? And anyone that’s taken control fairly knows the longer the feedback loop, the more likely you go out of control, right? So it eludes 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 is not a manufacturer. There’s some disadvantages to that. And go ask a fabless company, it’s not having a side as an advantage or a disadvantage. I think most of the fabless companies would tell you that they’re quite happy with being fabless. And I think similarly here, if we think there’s ways that we can be, we can leverage the way that we operate to maximize flexibility.
