PDFS - NASDAQ

Good day, everyone, and welcome to the PDF Solutions, Inc. conference call to discuss its financial results for the second quarter conference call ending Monday, June 30, 2025. [Operator Instructions] As a reminder, this conference is being recorded. If you have not yet received a copy of the corresponding press release, it has been posted to PDF's website at www.pdf.com. Some of the 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 solutions. PDF's actual results could differ materially. You should refer to the section entitled Risk Factors on Pages 16 through 30 of PDF's annual report on Form 10-K for the fiscal year ended December 31, 2024, 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.

Thank you for joining us on today's call. If you've not already seen our earnings press release and management report for the second quarter, please go to the Investors section of our website, where each has been posted. We achieved record revenue in the quarter and established groundwork for continued growth. Given our innovative products, which align well with the trends of 3D processing and advanced nodes, complex packaging and test flows and increased use of AI to streamline operations, we anticipate revenue growth of 21% to 23% for the year, reaffirming our prior guidance. Significant bookings in the quarter were primarily for enterprise-wide solutions, including secureWISE, Sapience and Exensio and for characterization infrastructure. Sapience and Exensio bookings in Q2 were driven primarily by fabless and IDMs as analytics is increasingly becoming important to them as they have a growing need to link manufacturing operations to ERP. Characterization bookings in the quarter were tied to customers deploying CV infrastructure to develop and ramp new nodes with particular strength for the solution in Asia. As is typical, Cimetrix bookings in the quarter were primarily due to equipment vendors utilizing more runtime licenses, particularly our more advanced tool control and communications modules. With respect to DFI, we have previously talked about shipping at least 4 eProbe tools with 2 contributing to revenue this year. So far this year, we have installed and qualified the tool machines we shipped in Q1 as subscription upgrades with incremental revenue. Overall, demo, install and engineering activities with customers are at a high level, and we anticipate meeting our goals for DFI this year with shipping another 2 tools contributing to additional revenue. Our first full quarter with secureWISE showed strong bookings, benefiting from PDF's position in the semiconductor industry. While secureWISE is deployed at all at fabs, in fact, nearly all 300- millimeter fabs in the world, primary customers historically have been the equipment OEMs so they can provide support to their fab customers. However, as the fab owners themselves have more distributed operations, they wish to get the benefit of remote access to tools and data. Thus, we felt that secureWISE would enable our fab customers and eventually our fabless customers to have secure remote operations. We refer to this as the foundation layer of the supply chain orchestration element of the PDF platform. Sapience Manufacturing Hub and DEX are other elements we put in the supply chain orchestration category. As our customers deploy analytics and AI, they increasingly need to connect to other enterprise applications such as SAP and across organizational boundaries to the tools processing their chips. Our supply chain orchestration products enable this. Last quarter, we validated this perspective as a large IDM entered into a contract to deploy secureWISE across the majority of their tools at their internal fabs, test and assembly facilities. This is intended to enable both internal usage as well as allow equipment vendors the ability to remotely access their tools to improve support for the IDM. The benefit to this customer is higher productivity of their engineering effort and operations while having superior auditing and accounting of all activities on the tools. Moreover, they can get better support from their equipment vendors. For the equipment vendors, they can be more responsive when issues occur and by purchasing additional capabilities from PDF. They can provide additional services. We are pleased that in such a short time, customers have validated secureWISE as a network for the IC manufacturing ecosystem to facilitate collaboration and AI in manufacturing. At the Intel Foundry Direct Connect event, we were able to highlight collaboration and how PDF has moved from a capability used internally at customers to an industry-wide platform that enables new ways to work. I was invited to share the stage with Intel's CEO and talk about their strategy for foundry. My comments were about collaboration to achieve great yields and operational metrics. Over the years, we have delivered multiple modules of Exensio and characterization vehicles to customers. With the DEX nodes, we started to connect the modules we delivered to fabless and IBMs out to their OSAT suppliers to improve test. Now with secureWISE and Sapience, we're able to connect enterprises together, linking equipment vendors to the fabs where the tools are installed or fabless to the fabs and OSATs that manufacture for them. We believe this is crucial to achieve greater yields, in part because to deploy AI, you need automated connectivity between the different data, tools and enterprise software systems. We believe PDF is very well positioned to deliver this to our customers as they partner with their suppliers and customers. Recently, we also announced that PDF's user conference and Analyst Day will be held this December. You will see our customers and PDF folks talk about the PDF platform and the impact it's having on the industry and our customers' production. Since 2020, through 2024, we have consistently grown revenue, gross margins and EPS every year, with a 20% CAGR for revenue while expanding gross margins from 63% to 74% and EPS from a loss of $0.02 to a profit of $0.84. In our conference, we will describe how we plan to build on this performance. We look forward to seeing many of you there. I want to thank all of the PDF customers, employees and contractors for their effort during the second quarter. Now I'll turn the call over to Adnan, who will review the finances and provide his perspective on our results. Adnan?

Thank you, John. Good afternoon, everyone, and good to speak with you all again today. We are pleased to review the financial results of the second quarter and to bring you up to date on the progress of the business. Please note that all of the financial results we discuss in today's call will be on a non-GAAP basis, and a reconciliation to GAAP financials is provided in the materials on our website. For Q2, our total revenues were a record $51.7 million, up 24% on a year-over-year basis and up 8% versus the prior quarter. For the first half of this year, our revenues also grew 20% on a year-over-year basis versus the comparable first half of last year. We achieved our long-term target of revenue growth rate of 20% for the 6-month year-to-date period and exceeded it for this quarter. Our analytics revenue were also a record $48.8 million, up 28% from the same quarter of last year. We benefited this quarter from a characterization deal, first full quarter of secureWISE revenues, a new secureWISE deal signed during the quarter, another meaningful booking for Sapience Manufacturing Hub and contributions from Exensio renewals. We see additional opportunities to leverage cross- selling across the elements of our PDF platform and to expand the strategic relevance of PDF with our customers. During the second quarter, revenue contribution from integrated Yield Ramp came in at $2.9 million compared to $3.5 million of the same quarter of last year, driven primarily by the reduction in fixed fee as we completed the engagement and are now in the gain share period. Given the bookings momentum this quarter, we again grew our backlog and ended the quarter with $233 million of backlog. It is worth mentioning that we do not include potential future Cimetrix runtime licenses or gain share revenues in our backlog, and our backlog would be even higher if we included these highly probable future amounts. Based on what we can see in our deal pipeline, we see an opportunity to strongly grow bookings momentum and therefore, our backlog for the second half of this year. We reported gross margins of 76% for Q2, higher than the 75% long-term gross margin target that we shared during our Analyst Day. On a year-to-date basis, our gross margin is now 76%, again, higher than our target 75% long- term gross margin. On the operating expense side, our expenses for the quarter were up. However, they grew at a lower rate than our revenue growth rates, primarily driven by personnel-related expenses. The controlled growth in spend allowed us to expand our operating margin to 19%, higher than both last quarter as well as the same quarter of a year ago. For the 6-month period, our operating margin of 18% are up meaningfully versus 14% of the same period a year ago. We continue to believe we are on the right path to 20% operating margin, which is our target. For EPS, we reported a profit of $0.19 for the quarter, which for the 6-month period also grew 18% on a year-over-year basis compared to the first half of last year. We ended the quarter with cash and cash equivalents of $40.4 million compared to $54.1 million of the prior quarter. We consumed operating cash flow for the quarter. However, we generated positive operating cash flow for the year-to-date period of 6 months. For the quarter itself, we used $8.5 million in CapEx spend, primarily for eProbe machine build as a result of increased customer demand. As we look to the rest of the year and based on the bookings momentum in our deal pipeline discussed earlier, we reaffirm our prior guidance of revenue growth in the range of 21% to 23% for full year 2025 compared to the prior full year 2024. With the first half of the year completed at 20% revenue growth rate, we expect the second half of the year to grow higher than 20% versus a strong comparable period of last year. With that, let me turn the call over to the operator for Q&A. Operator?

[Operator Instructions] Our first question comes from the line of Blair Abernethy from Rosenblatt Securities.

I guess a couple of things for me. Just first off, it's good to see some traction with Sapience. Maybe you can give us a little more color on that. And the -- it sounds like you had a win in the quarter. Is that a new customer? And has this come through your relationship with SAP? Just trying to understand how that product is doing.

Yes. It's an existing customer. As you know, I think we have 350 customers in the chip industry at this point. So almost everybody is an existing customer at some level, except for maybe new entrants in China. Customer that -- the first couple of Sapience contracts we signed were with factory operations, foundries or factory operations sides of IDMs. This was on the product side of an IDM. So product codes also have to manage the supply chain. And as they effectively add more and more advanced packaging, more complex manufacturing flows, they've got as much need for kind of visibility and connecting the supply chain to their ERP systems for -- as I said, to get better productivity, more agility. And ultimately, if you want to apply AI and ML, you really need to have that automation. As we've done pilots on AI/ML, one of the things that customers bump into is like, wait a minute, I need to know where my material is going if I want to go and affect the downstream test based on upstream data, for example. So this is first product type customer. We're very excited about that. We think they are more -- and we think there will be a synergy ultimately, although not with this initial contract with the secureWISE network and the DEX network out to the supply chain itself. So as it's deployed, it's really looking at static data. We think over time, it's going to be able to look more dynamically in the field. And then lastly, you asked a question about the SAP connection. Many of these relationships have got SAP involved. This one did as well come through initial SAP discussions.

Okay. Great. And then just over to the secureWISE acquisition. It sounds like that has gone well with an additional win. Can you just update us as to where you are in terms of integration of the business, but also the products?

Yes, that's a great question, Blair. So on the business, we've been moving over systems, as you know, it was a carve-out. So -- and we have an expectation to get that completed in September. So we're well along our way on that. Some of the new employees you see added this month -- this quarter were people that were contractors prior to -- as of March 30, or whatever, that are now employees from that -- basically secureWISE folks that we brought that were not originally in the secureWISE part of Telit, but in the Telit part of Telit that we've now brought over as employees. So we're moving well along the way on the integration. We've been training -- cross-training the sales teams. That's been ongoing. And we've already started doing things like installing secureWISE on DEX nodes at OSATs and doing internal testing on integration of secureWISE and DEX and having the teams meet on what we can do associated with that. If you really think about it, what secureWISE gives you is a broader set of functions once you're at the factory. DEX gives you the function to be able to run an AI/ML model or a rule and stream test data off. So it's a richer set of functions. DEX has more compute at the node than secureWISE typically does. Then the pipe from the factory back to the consumer of the data -- with secureWISE, it's completely off the Internet and a completely double encrypted channel. It's, I think, the most unique capability out there in the industry. And DEX really was using primarily the cloud infrastructure to do that transmission. So now we're able to offer customers an upgraded or more secure way of communicating or getting their data to and from their OSATs. Already a couple of fabless customers have reached out to us to understand what that means because I think in this environment, you could never be too secure.

Yes. Excellent. One last one for me, and I'll see the line here. The -- just on the CapEx. So just looking back, your CapEx spending a year ago and was sort of running $4.5 million, $5 million a quarter, stepped up in Q1. And again, this quarter sort of $8.5 million. Just what should we be expecting for CapEx spend on a run rate basis?

Yes. Good question, Blair. So look, just like John said, we are pleased with the opportunities we're seeing. You've seen in John's comments, even sounding stronger about the opportunities that lie ahead of us. And candidly, it's for that reason, we stepped up on the CapEx where we see an opportunity to engage on the eProbe side with the multiple customers. From this point on, we feel we can manage the CapEx to either these levels or just a bit below, but we'll do our best. Obviously, it's going to be balanced by if new opportunities come up that we see, then we'll decide to make the appropriate spend. But first half of the year is probably a good proxy of a high level for the second -- is a high number proxy for the second half of the year. So at this level or slightly below is what we would expect for the second half of CapEx.

[Operator Instructions] Our next question comes from the line of Gil Luria from D.A. Davidson & Company.

This is Clark Wright on for Gil Luria. I wanted to quickly just ask on maybe some of the China exposure and the recent developments that we've seen just in terms of potential disruption in this space. I'd love to kind of understand how you guys are positioned to maybe capitalize on this disruption or so the risk that it potentially imposes on growth going forward?

Sure. Thanks, Gil. Good question. China is an important part of the semiconductor market has been and will be. China is building out its own infrastructure. We've been in China since 2006, and we anticipate staying there. That said, we are very careful about bifurcating, in fact, starting in about 2017, bifurcated a lot of our China operations from the rest of the operations in the company. The pandemic accelerated that because we no longer could fly people around. And we run China pretty autonomously. We see continued investment in fabs. Our business with fabs tends to lag the capital equipment folks because they buy equipment, then they realize they need test vehicles and systems to be able to ramp up nodes. And so you kind of see that in our numbers right now. And a sizable fraction of our revenue is really just coming out of China is really just royalties gain share from past nodes, from past deployments. That will continue -- even if China were to be -- for some reason, the U.S. and China were to shut -- completely shut off, we would see a revenue stream out of there for many, many years to come just off royalty payments, gain share payments of past deployments. So that relatively insulates us from short-term shocks between the 2 countries. We think we've done a very good job at separating the way we operate the 2 organizations, our customers in the West really want us to not use our employees from China and our Chinese customers don't want us to use Western employees as well. So it kind of runs relatively independently these days. And I think given our long history there, we're able to do that pretty effectively. We do believe China will be a meaningful producer, particularly on the trailing edge nodes for years to come. So it's an important market for us to participate in.

Our next question comes from the line of Christian Schwab from Craig-Hallum Capital.

We've been talking about Intel for a little while, and it sounds like you're mentioning it a little bit more in the prepared comments. Can you just give us a rough idea of where we stand with that customer and either on a revenue basis or what inning we're in and how fast that potentially could ramp or how big it could be over, say, a multiyear time frame?

Yes. Of course, Christian, we're always very careful about being respectful of customers' confidentiality. And part of the reason why you saw it on this conference call, us to directly call out Intel and not in the past was because they had us up on stage on their event. So at that point, it's like they move first. So part of the reason why we're on -- we mentioned it today. They are an important customer to us. We think they're important company in the industry overall. And they have been a significant customer for us, and we expect them to be a significant and potentially more significant customer going forward, as you probably noticed from the remarks on stage there by their CEO. The technology that PDF provides is increasingly becomes important as they open up their manufacturing to others and even the way they manufacture their own products. So we do expect an improving outlook on our business with them moving forward as well as an improving business with other customers as well. But we do think they will be on dollar value of growing customer.

Great. And then it seems like the last few conference calls, we've gotten pull-through regarding our partnership with SAP, but we have other partnerships which we haven't heard a lot about lately. Is there something going on that's specific to customer need that we're seeing SAP partnerships and pull-ins and business because of that versus, say, other people like Advantest that we've had for quite some time now?

Yes. So that's a great question. And I think what I tried to put in my prepared remarks, and I guess I didn't do as good a job as I could have. I think everybody knows you've got to get your data all in one place and aligned, and that was Exensio. And you need to be able to talk to the testers. That's been our partnership with Advantest and that partnership does go on. But I think what -- even the most savvy customers probably don't always haven't -- didn't really factor when they started having data scientists and AI people start developing and deploying AI models was the need to orchestrate the enterprise. In other words, if I'm going to use AI to be more efficient and test on some very complex package for an AI chip, I need to know where the material is being shipped, which OSAT is going to, when is it going to be on that tester. So I know when to -- when the AI knows when to send a model over. But that information is typically in your ERP or your MES system. So we're seeing customers who are really starting to get to deploy models at scale or in production, realize they need to go back and look at how do they orchestrate the connection between their engineering and their other operations. And right now, we still think that, that's going on relatively through conventional Internet out to their OSAT suppliers. Our secureWISE acquisition is because we think they will ultimately want to do that in a very secure way. One of the features secureWISE has is when you ship a software update down to a piece of equipment, the factory gets to decide what virus scans are run on that software before it's installed. Well, I think factories are going to get more and more wise about, hey, wait a minute, my fabless customer shipping down a model. And I'd like that -- that's code basically. I'd like that code to be scanned and secureWISE is increasingly important. So that's why we really highlighted what we're doing with SAP and what we're doing with secureWISE because we think the early adopters as they start to deploy AI more in their operations are going to find increasingly needs. And that's why you're seeing it in our numbers, and we think in our selling activity. And it will build on the things we've done with the tools, like what we've been doing and continue to do with Advantest and what we're continuing to do with Exensio in terms of AI and overall data alignment.

[Operator Instructions] Our next question comes from the line of Blair Abernethy from Rosenblatt Securities.

I just wanted to follow up on just looking through your 10-Q and the China revenue. So China looks like it was around a little over $12 million this quarter. It's up pretty substantially from Q1 of last year. I think it was $7 million. In fact, year-to-date, it's almost double out of that market. What's -- I know you touched on it a little bit, John, but just maybe a little more color on what's changed in the China environment? And sort of are you feeling if that's sustainable? Have we sort of bottomed out there?

Yes. It is up this quarter. It will probably not stay at this level in the next couple of quarters, it will come down a little bit from this. In part, it's really coming up for 2 reasons. One is just volume shipments on customers; and two, increased deployments of CVs, characterization vehicle infrastructure in Exensio. In part, what we think is going on is folks bought a lot of equipment. There's always rumors about, well, some of it's not being used yet. And we see them starting to run vehicles and put things to use. I kind of touched on this a little bit, I think, with Christian's question. We believe they are starting to put up capacity at meaningful volumes, and that means they've got to get to decent yields and so test vehicles and eventually, it does mean gain share in royalties.

Okay. Great. Great. And then just back on the Exensio platform. Maybe you could touch on just a little bit on sort of what the renewal landscape looks like there in the back half of the year. And what -- just curious about module penetration sort of adding on modules, expanding existing implementations.

Yes. So we do anticipate a number of expansions in the second half of this year, some of which are very significant in size. And usually, they involve additional modules. I would say the guided analytics, the AI that kind of cross through your data and looks through trends is stuff that we have a number of pilots ongoing with customers, a lot of really positive results. We like to point out to customers for the ones that are using our cloud, we can track how much of the data their engineers look at. And usually, it's a relatively low percentage of the total data that they -- the data they collect and test. And so with guided analytics, you're effectively using the AI to crawl through all the data sets. I always say the executives, you fund a certain level of engineering. And you want to make sure that those engineers are looking at the most important and most significant things going on in manufacturing. So we do expect a relatively good strong renewal situation in the second half of the year and expansion situation for Exensio. A fair amount of that, including AI, primarily in guided analytics and then test operations around AI for test. Those are probably the 2 biggest drivers on top of the core renewals and expansions around the core renewals.

Okay. Great, John. And you haven't touched on MLOps at all. How is that doing?

Yes. When I say AI for test, that really is the MLOps capability. We're going to have another -- I mean, stay tuned to this channel. We'll have another couple of significant announcements around what we're doing on MLOps coming out over here in the next month or so. And so MLOps is a big piece of this. Guided analytics is built from our MLOps itself, but it's an ML that we deploy. It's basically a PDF diagnostics, whereas MLOps for test is something the customer builds and deploys themselves.