PDF Solutions, Inc. (NASDAQ:PDFS) Q3 2022 Earnings Call Transcript

PDF Solutions, Inc. (NASDAQ:PDFS) Q3 2022 Earnings Call Transcript November 13, 2022

Operator: Good day, ladies and gentlemen, and welcome to the PDF Solutions Incorporated conference call to discuss its financial results for the third quarter ending Wednesday, August 31, 2022. At this time all participants are in a listen-only mode. If you have not yet received a copy of the corresponding press release, it has been posted to PDF’s website at www.pdf.com. Some of the statements that will be made in the course of the conference are forward-looking, including statements regarding PDF’s future financial results and performance, growth rates and demand for its solutions. PDF’s actual results could differ materially. You should refer to the section entitled Risk Factors on Pages 17 through 30 of PDF’s annual report on Form 10-K for the fiscal year ended December 31, 2021, and similar disclosures in subsequent SEC filings.

The forward-looking statements and risks stated in this conference call are based on information available to PDF today. 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.

John Kibarian: Thank you for joining us on today’s call. If you’ve not already seen our earnings press release, management report and 10-Q for the third quarter, please go to the Investors section of our website where each has been posted. I will start the discussion by providing commentary on the third quarter and early part of the fourth quarter. From there, I’ll provide our impressions of the current state of the semiconductor industry, the situation in respect to geopolitical factors and the potential impact of the general economy on our business. I will conclude with our expectations for PDF business for the remainder of the year before handing the call over to Adnan for a more detailed financial update. On our last quarter’s call, we expressed our confidence in the second half of 2022 bookings.

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We pointed out that protracted nature of some of our large multi-element engagements with customers would mean that, that bookings would be lumpy and generally stronger in the second half than the first half. The third and early fourth quarter bookings show that we are realizing that prediction. Notable include bookings of Cimetrix on-time licenses were near all-time highs, even as our equipment partners continue to experience part shortages that limited some of their shipments. Bookings of Exensio in the quarter included an eight-figure contract with a large integrated device manufacturer to renew cloud-hosted manufacturing analytics for a number of additional years and to add deployment of test operations for both the customers’ internal test and multiple assets , which enables this customer to leverage the platform benefits.

And at the beginning of the fourth quarter, we booked a multiyear renewal for characterization and DFI infrastructure and for services for a customer using PDF systems on the leading-edge. The last contract enables our customers’ engineers to use on the cloud Exensio Analytics and our software for IP hardening and design manufacturing co-optimization as well as characterization vehicle test chips and our DFI systems on-premise. The contract term is through 2027. And while the total value of the contract is the largest in our history. It is also just the minimum commitment by the customer. Outlined in the contract is a mechanism that allows the customer to order additional elements such as additional cloud capacity or additional eProbe tools on a subscription basis.

Revenue in the quarter was a significant step-up over Q2, and Adnan will go through the details. This included additional revenue from organic growth and Gainshare at 28-nanometer volumes at multiple customers, particularly in China, and grew substantially for the third quarter. Gainshare from the most significant 28-nanometer contract runs through the end of the decade and is not subject to any current geopolitical restrictions. A year ago, when our legacy Gainshare contracts ended, we felt that Q3 2021 would be the bottom for Gainshare revenue, and we expected to see a rebound. For years, we have said that we expect to Gainshare on 28-nanometer, particularly in China, would increase at some point. We are pleased to see the increase this year.

Turning to partnerships, we continue to increase activity. As you may have seen, Advantest has announced their app store with four Exensio apps already available. We anticipate releasing additional apps to the Advantest store in the fourth quarter this year and early next year. We booked additional licenses for our first integrated product, Dynamic Parametric Test, or DPT, that was originally released in 2021. With the success of DPT and these new apps available for the ACS Edge box, we believe our relationship with Advantest will continue to progress. You may have also seen that Exensio is now featured on the Manufacturing Intelligence section of the Amazon website, covering AWS solutions for high-tech electronics and semiconductors. Overall, we anticipate our investments in strategic collaborations will bear more fruit in the coming years.

With strong bookings in Exensio, Cimetrix connectivity, characterization and DFI systems as well as continued progress with our partners, the third quarter demonstrated PDF Solutions’ broad value and strategic relevance across the IC ecosystem. From equipment companies to system manufacturers, PDS data analytics platform is becoming ubiquitous in the IC industry. Moreover, our strong bookings in the year so far means we will end 2022 with strong backlog. Remember that our backlog does not include Gainshare, Cimetrix’s onetime licenses or overage charges for Exensio usage. When factoring in our expectations for these as well as our committed backlog, we expect to enter 2023 in our strongest position ever. Now let me turn to our perspective on the geopolitical situation, IC industry and the general economy.

As many of you have seen, as of October 7, the U.S. government placed restrictions on U.S. entities and persons from shipping edge logic, DRAM or flash facilities in China that are not owned by multinationals. We have been studying these regulations closely and have worked with outside counsel and the U.S. government for clarification. In addition to any potential impact on our ability to sell or support our products and services, we believe these new regulations may impact our customers in China that are developing advanced nodes and change their buying habits. In the lease, it may delay some buying decisions on their part. As a result, and although our current business is not immediately impacted significantly, we are being conservative in estimating the potential impact on our future business in 2023 at this time.

There is a silver lining here, and you see it in our revenue from China this year when compared to last. China revenue in the third quarter of this year is up 80% over last year’s comparable quarter, primarily due to Cimetrix licenses, Exensio and Gainshare even after adjusting for onetime Gainshare in Q3. Moreover, PDF has been in China since 2006, and particularly through the pandemic, has built out a team that can support and serve our customers locally. We have not had any U.S. expats in China since 2018. Hence, while there may be restrictions on some of our products, we anticipate our Chinese customers investing less in the leading-edge technologies and more in 28 and above as well as in fabless entities moving to production. We therefore expect that we will have important products we can sell them complete with fully local support.

We believe China is an important market for PDF to continue to serve while ensuring full compliance with the U.S. rules and regulations. As for the IC industry and general economy, it is clear that our customers to varying degrees, whether they are in the equipment, foundry, fabless or system business, either experiencing or anticipating a slowdown. At the same time, the economic slowdown is occurring, CHIPS Acts has passed in the U.S. and other countries, and there are big movements in supply chain with customers expanding capacity globally. As a result, it is a particularly active time in the industry with both benefits for and pressures on our business. So far, the benefit have greatly outweighed the pressures. We believe this is due in part to the choices we have made over the years that have made the business more resilient.

This is the evidence that PDF Solutions is well on the way to becoming the platform of choice for advanced data and analytics solutions for the IC ecosystem. I want to thank our employees for their commitment to the company, our customers and their colleagues, which has helped us thrive through the COVID lockdown, grow through the chip shortage, navigate the geopolitical landscape and the chip supply corrections. With a large backlog, a strong PDF team located around the world, valued products and services and committed customers, we expect to continue success in driving adoption of our solutions. Now, I’ll turn the call over to Adnan for a review of the financials, after which we will open the call for your questions. Adnan?

Adnan Raza: Thank you, John. Good afternoon, everyone. Good to speak again with you today, and I hope all of you and your families are keeping safe. We are pleased to review the financial results of the third quarter and to bring you up to date on the progress of the business. We have posted our earnings release and management report on the Investor Relations section of our website. Our Form 10-Q has also been filed with the SEC today. Please note that all of the financial results we discuss on today’s call will be on a non-GAAP basis, and a reconciliation to GAAP financials is provided in the materials on our website. Financial results for the third quarter of 2022 were strong and continued our momentum with record revenue and solid year-over-year performance.

It is worth noting that with the Cimetrix acquisition, which closed in 2020, this year 2022 will reflect an entirely organic revenue growth year versus last year. We are pleased to report that third quarter total revenue was $39.9 million, up 35% from the comparable quarter last year and up 15% versus the prior quarter of Q2 this year. Our strong results were positively impacted by four factors. First, our 2022 bookings through today surpassed our full year 2021 bookings. The largest deal for the third quarter was a multiyear $10-plus million Exensio deal with revenue recognition over time, which we believe has the opportunity to expand over the contract term and sets us up well for renewal from future elevated levels. Q4 bookings through today exceed $100 million and will be recognized over multiple years.

Including this, bookings for the second half of the year are already two times larger than bookings for the first half of the year. Second, we experienced onetime increases this quarter in customer reported Gainshare shipments of approximately $2 million related to customer production rates earlier in the year. Third, our Exensio business also had onetime services-related revenues recognized this quarter, which were significantly smaller than the onetime increases in Gainshare I just mentioned. Fourth, our Gainshare during Q3 was more than three times the Gainshare in the year-ago quarter, even after adjusting for the onetime Gainshare in the quarter. While quarter-to-quarter, we may experience fluctuations due to customer production driven by two factors, internal constraints and end market demands.

Over the longer term, we expect Gainshare to be a strong contributor to our results through the end of the decade. Turning to the components of our revenue. Analytics revenue was up 21% to $39 million in Q3 this quarter versus same quarter last year and was up 6% sequentially versus prior quarter of this year. Across the board, we are pleased with the strong year-over-year growth from all pieces of our analytics platform. Exensio Analytics leading-edge and Cimetrix connectivity. IYR revenue for the quarter was $7 million, a strong increase of 196% for the same quarter on a year-over-year basis and 97% versus Q2 of the year. All this said, we look at 2023; we remain cautious about the macro, geopolitical and regulatory environment and continue to evaluate the various restrictions, especially U.S.-China relations.

On expenses, our combined spend from cost of sales and operating expenses for the quarter was up $1.9 million over the last quarter, driven primarily by increases in headcount to support our growing business, some cloud costs and small increases in travel expenses as we visit customers. Our gross margin for the quarter of 72% benefited from the onetime high-margin Gainshare during this quarter. As we have said before, while we have a strong focus on managing expenses from quarter-to-quarter, we will make the necessary investments to enhance our technological capabilities and competitive position to further cement the strategic relevance of our data analytics platform. We are pleased with the positive $0.20 of non-GAAP EPS reported this quarter as a result of a combination of both items, strong revenues and minimum expenses.

For the year-to-date through Q3, we have now generated $0.41 of non-GAAP EPS. We look forward to Q4 and delivering on a strong year. Given this €“ bookings growth, we expect to close this year with record backlog, meaningfully above last year’s level. We also track uncontracted backlog of what we internally call shadow backlog, which is not reported in our committed backlog numbers and encompasses estimates for Gainshare, Cimetrix licenses and overages on Exensio cloud usage. While strong backlog will position us well for the coming years with multiple macroeconomic and regulatory changes, we are evaluating our models for 2023, and we’ll provide an update on the next earnings call concluding fiscal year 2022 results. Turning to the balance sheet.

We ended the quarter with cash, cash equivalents and short-term investments of approximately $116 million in no debt. Now turning to forecast for the full year revenue for 2022 we believe we can close out 2022 with year-over-year growth rate approaching 30%. Purely organically, which would be 26% year-over-year growth we delivered for 2021. We believe we are just start of the multiyear growth cycles of PDF and our stockholders where we have established our data analytics, collection and connectivity platform and are starting to garner attention and recognition from the leading cloud and professional players, ERP leaders and semiconductor test software and hardware platforms. And then we turn to questions.

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Operator: Andrew do you have a question.

Unidentified Analyst: Yes. So on the last call you talked about having identified I think a valuable application at DFI and sort of your initial customer was usage have noticeably risen and sort of enthusiasm for telling either additional tools and driving sort of further adoption and commercialization perhaps you could give us a little bit more of an update did that deal in that you signed in early Q4 does that include an additional machine any other sort of color you could provide on that would be great.

Q&A Session

John Kibarian: Sure, Andrew. Yes. And the contract that we described in that we signed in early Q4 does include and it’s actually the piece of it is these applications, a particular one that we talked about on the last call for design for inspection in the eProbe and does include eProbe shipment in the contract. As I said in the prepared remarks, it also includes the ability to consume additional machines as negotiated in the terms of the contract as well. So they have the ability to expand beyond what is minimally committed in the contract also. And that’s why I spoke with some confidence on the last call. And as I said in prepared remarks, these are very large significant contracts that bookings tend to be lumpy. So one eight-figure contract closed in the quarter in Q3. And the other contracts that we talked about, the total bookings value for the other contracts in excess of $100 million in Q4, that was signed in the early part of Q4.

Unidentified Analyst: Second, that eight-figure, I think IDM Exensio deal sounded like it was both to work internally as well as at their OSAT. Is this I think you’ve talked in the past about sort of trying to secure some like deep thread customers for to really ramp or expand the DEX networks at OSATs to create this sort of virtuous ability to share information throughout the ecosystem. Is that involved here? Is this am I reading too much into that?

John Kibarian: You’re correct, Andrew. Yes, this does include both support for their internal test floors, which is a closed world as well as PDF supporting fully DEX nodes as their OSATs run on PDFs environment so that they as well as others can enjoy real time access to their test flow. And as well as some other contracts that we’ve been doing, that some of which we’ll talk about in the future, expand the network of DEX nodes, and I think it give customers more real-time access to their data around the world.

Unidentified Analyst: And then I guess maybe the last question I had was, obviously, great to see the strength in the bookings through this call. What are you seeing activity-wise sort of as you look through the balance of the quarter? Is there still strong demand? Is there going to change in behavior at all?

John Kibarian: Yes. It’s been obviously, the fourth quarter start up very strong. We still have a number of contracts in discussion, negotiation with customers, and we expect we are not done yet for the quarter. We’re not sending everyone home on holiday in November 10 or whatever it is today. So there’s enough there’s quite a bit to get done for the remainder of the year. We do see a lot of activity on the part of our customers and desire to move forward. Obviously, we’re not immune to and not oblivious to the slowdown in the chip industry overall and the economy. But so far, it’s been very good for us and continues to be. We just don’t know what that means for 2023. We could look at it and say, “Well, it’s great. Everything is going to be super great, when you click out and say, “Okay, the general economy is going to be bad.

And at this point, we have no we have no reason to change our own outlook internally. I don’t know how you guys are all going to build your models, but I don’t know under what data you could use to meaningfully move models up or down in this environment because it’s there’s been a lot of local things that are quite good for us. And when you look in the general market and say, there’s a lot of troubling things out there geopolitically and general economy anyway.

Unidentified Analyst: Great. Thank you.

Operator: We’ll now hear from Tom Diffely from D.A Davidson.