John Kibarian - President and Chief Executive Officer, Director, Co-Founder Greg Walker - Vice President, Finance, Chief Financial Officer.

Jon Tanwanteng - CJS Securities Tom Diffely - D.A. Davidson Gus Richard - Northland Capital Markets.

Good day, ladies and gentlemen, and welcome to the PDF Solutions Inc., Conference Call to discuss its financial results for the First Fiscal Quarter ended Tuesday, March 31, 2015. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. For which instructions will be given at the time.

[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 Page 12 through 18 of PDF's Annual Report on Form 10-K for the fiscal year ended December 31, 2014 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 would like to introduce John Kibarian, PDF’s President and Chief Executive Officer and Greg Walker, PDF’s Chief Financial Officer. Mr. Kibarian, please go ahead, sir..

Thank you, and welcome, everyone. Today, I will start our discussion with a brief summary of our first quarter results. Followed by a review of the overall semiconductor logic market and its impact on PDF. I'll then conclude with more details about our first quarter.

Greg will then walk you through the financial results in detail and give some comments on our 2015 outlook. We will take your questions after that. In Q1, our solutions revenue and bookings were strong. Highlights was from Exensio our process control software.

Gainshare however, was weaker than previously expected as 28-nanometer revenue wafer volume came in below last quarter's level. I'd like to talk to more about these wafers volumes for a few minutes.

As the foundry volume meter has recently reported, capacity utilizations on 28-nanometer is expected to decline significantly through the first half of this year. In fact, I believe that previously quoted 28-nanometer utilizations have been close to 100%. Whereas, they're not projecting Q2 utilizations in 80's.

They are however anticipating improvements in the second half of the year. For PDF specifically, we experienced a relatively steeper decline across our 28-nanometer customer base only partially offset by a ramp up of few newer nodes added [ph] few customers.

If you recall our comment at the beginning of the year, we anticipated an increase in Gainshare revenue driven by expected growth in 28-nanometer volumes. As well as introduction of new Gainshare revenue streams from 20-nanometer as potentially 14-nanometer.

At that time, we felt the highest risk on our outlook was the timing on 14-nanometer yield ramps well the lowest risk was on 28-nanometer volumes. Now a quarter into 2015, the market is clearly changed and our perspective has with. We remain positive on 28-nanometer over the long-term and expect volumes to recover.

However, we do not have the visibility to say when that recovery happened. As a result, we are now planning 28-nanometer volumes to remain depressed this year.

That said, we are now confident that two of our customers will reach contractual shipping volumes for 14-nanometer in the third quarter of this year, which will mean that 14-nanometer should start contributing to our gain share no later than Q4.

We have always stated given our business model that once we achieve our Gainshare targets variability in Gainshare revenues will depend primarily on our customers volumes. While we've experienced strong revenue on 28-nanometer over the last few years, we are now being negatively impacted by our customers lack of sales volumes.

As you are aware, our business models prepared for variability like this and we are already taking steps to adjust our operations to minimize the impact on earnings. At the same time however, we continue to focus our efforts with our customers to meet their FinFET yield goals and drive volumes on that note.

Given our strong start on FinFET's this year, the fourth quarter and 2015 Gainshare should clearly benefit from these efforts. Turning to a summary of business for the first quarter.

The contracts fine [ph] in the first quarter include the two contracts related to delay 14-nanometer and 10-nanometer projects that were closed in January and discussed in our February call. A DFM engagement for our major 10-nanometer fabless clients.

A DFM engagement for leading system company that is designing circuits on displays, this is the first time we are applying our Characterization Vehicle Infrastructure to statistically characterize transistors and circuits elements using leading edge mobile displays.

Multiple agreements in the yield management process control area for deployments of our Exensio big data analytic system for fabless and foundry clients. Most exciting of these was for our lead customer, which expands the use of Exensio across all of their image sensor fabs. This speaks to the success of our customers.

Our customers are having applying big data analytics to process control. And finally, multiple deployments of our recently announced Exensio-Test module. A significant note is that, some of our largest Exensio yield agreements include the Exensio-Test, which speaks to the synergies of the combined offering.

At the beginning of the year, we said that we expected strong growth in solution bookings and the first quarter met those expectation. Given the success just mentioned in the leverage across our technology and solutions that we continue to build. We remain confident that our customers will continue to increase adoption of our solutions.

Turning to our product innovation. On our call in February, we mentioned that PDF Solutions has a long history of inventing and commercializing new products for yield characterization. We stepped up our investments in new products this year.

One of the key areas of investment is the application of our Characetrization Vehicle technology to inline inspection of electrical defects. We intend to extend the use of our Characterization IP from yield ramp to the control of mass production.

During the first quarter, we had continued success validating our IP made further progress in developing our measurement system and delivered our on ship characterization IP to multiple fabless companies for their designs at 16-nanometer, 14-nanometer and 10-nanometer.

Most exciting about this solution is the fabless companies desire to include our on-chip Characterization instruments in their designs to improve their inspectability. Hence we call this, Design For Inspection or DFI. We intend to make announcements through the year as we achieve significant milestones in the commercialization of this solution.

We recently announced that our latest version of Exensio. Our big data analytics system for infab [ph] process control and shortly followed up with an additional announcement for the extension of that solution into the test floor with Exensio-Test.

Exensio-Test is based on the integration of recently acquired test flow control software from sound engineering combined with exciting Exensio function and capabilities. Let me tell you, a little bit more about this.

Our fabless customers who have interest in big data analytics know that many process control issues that have root cause in wafer fabrication are only detectable at the package or wafer test level. The impact is not just chip yield, but also includes reliability and field returns.

Similar to our fab customers, now many of our fabless customers are asking for Exensio to capture data from the test floor. Exensio-Test is been released to address that need. Turning from new product development to new business development.

During the quarter, we extended our pilot projects at both fabless and fab customers in China and Taiwan and remain on track to convert a number of these pilot projects to full commercial agreements in 2015.

In summary, while we are disappointed in the 28-nanometer volumes and Gainshare revenue, we're taking measures to minimize the impact on our business. We are seeing the success of our work on 14-nanometer yields which is very encouraging for future Gainshare revenue.

We are also extremely excited about our new product development and our marketplace expansion, as we have made great strides in Q1. I want to thank our stockholders, customers and employees for their support of the company. I look forward to working with all of you to deliver and increase PDF value.

Now I'll turn the call over to Greg to discuss in detail our financial results for the first quarter.

Greg?.

Thanks, John. As a reminder in addition to using GAAP results when evaluating PDF's business, we believe it is also useful to consider our results using other non-GAAP measure. For internal purposes the company focuses on non-GAAP net income and EBITDAR.

Non-GAAP net income excludes non-recurring items, stock-based compensation expenses and amortization of expenses related to acquire technology and other intangible assets and their related tax effects is applicable. Additionally, the income tax provision has been adjusted in our non-GAAP net income to reflect cash tax expenses only.

EBITDAR is equal to earnings before income tax, adjusted to exclude non-recurring items, depreciation, amortization and stock-based compensation. You can access the earnings press release that contains the reconciliation of EBITDAR and non-GAAP net income to GAAP results in the Investors section of our website located at pdf.com.

Now let's turn to review of the financial results. Total revenues for the quarter were $26.8 million with a GAAP net income of $6 million. This resulted in GAAP EPS of $0.18 per fully diluted share. Net income on a non-GAAP basis totalled $8.2 million or $0.26 per fully diluted share.

Cost of sales and operating expenses together were $17.3 million on a GAAP basis and $17 million on a non-GAAP basis, which is an increase in non-GAAP spending of approximately $1 million over Q4. Moving onto revenue detail, total revenues of $26.8 million for the first quarter was $756,000 higher than the prior quarter.

Total revenues were comprised of Design-to-silicon-yield solutions or solutions revenue of $18.2 million and Gainshare performance incentive or Gainshare revenue of $8.7 million. Our top 10 customers represented 95% of total revenues in the current quarter.

Three of these customers contributed revenues greater than 10% each for a total of 82% as compared to 84% in the prior quarter. Looking at solutions revenues in more detail, 13 engagements contributed at least $100,000 of solutions revenue in the quarter, four more than in the previous quarter.

Overall solutions revenue at $18.2 million was $4.3 million higher than in the prior quarter. This increase primarily reflects the recognition of previously delayed solutions contract revenue or $6 million offset by the completion and ending of 20-nanometer engagement and revenue timing related to one of our enterprise engagements.

Gainshare revenue for the quarter was $8.7 million a decrease of $3.5 million from the prior quarter. The total number of node sites which we define as an individual fab and process node combination contributing to Gainshare revenue in the quarter was 18, as compared to 17 node sites in the previous quarter.

As John stated in his remarks, Gainshare revenue for the quarter was adversely affected by reduced 28-nanometer volumes at our customers. This reduction was offset to a degree by the ramp up of 20-nanometer royalties and a couple of customers including one fabless.

It might be interesting to note, that we did in fact see increased to 28-nanometer Gainshare from at least one smaller volume customer. On a geographic basis, North America accounted for 39% of revenues which is down 10% from the prior quarter.

Asia accounted for 33% of total revenues, an increase of 21% over the prior quarter and Europe accounted for the remaining 28% down 11% from the prior quarter. Moving to expenses, cost of sales for the quarter was $8.8 million on a GAAP basis, which was approximately $745,000 lower than in the previous quarter.

GAAP gross margin was 67% compared to 63% in the prior quarter. On a non-GAAP basis, cost of sales was $9.8 million which was $1.2 million higher than the previous quarter.

This increase in non-GAAP cost of sales was driven by us including on a proforma basis, $1.9 million have previously impaired project cost in order to match the associated revenue with those projects recognized in this quarter.

This increase was partially offset by reduced variable compensation expenses in the quarter and the gain on sale of previously expense test equipment. Total GAAP operating expenses at $8.5 million were approximately $208,000 lower than last quarter and approximately 32% of total revenues down 2% from the prior quarter.

R&D expenses totalled $4.1 million approximately $306,000 higher than the prior quarter. R&D expense as a percent of revenue was 15% in the quarter, the same as in Q4. SG&A expenses totalled $5.4 million or 17% of revenues compared to $5 million or 19% of total revenues in the prior quarter.

The overall GAAP operating expense decrease was primarily driven by the reduced variable compensation expenses. On a non-GAAP basis, looking at operating expenses and cost of sales together. Total spending was $17 million versus $16 million in the prior quarter.

As stated earlier, this was principally due to us including on a proforma basis $1.9 million to previously impaired project cost in order to match the cost with the associated revenue recognized from those projects in this quarter.

This increase was partially offset once again by reduced variable compensation expenses and the gain on sale was previously expense test equipment. The GAAP income tax provision for the quarter was $3.6 million, which reflects an effective tax rate of 37% compared to 28% in the prior quarter.

The prior quarter effective tax rate reflected the reinstatement of the 2014 Federal R&D Tax Credit Program which allowed the company to benefit in Q4 from credits related to the full year 2014 R&D activities. The current quarter is more in line with our full year expectations for 2015.

Of the $3.6 million in tax provision in the quarter approximately $1.6 million represented cash tax liabilities. This represents an effective cash tax rate for the quarter of 17% of pre-tax GAAP income. This compares to a Q4 cash tax rate of 14%.

In regards to the tax rates for the remainder of the year, we expect our GAAP tax provision rate to be in the range of 38% to 40% and our effective cash tax rate to increase during the year to the range of 22% to 24%.

GAAP net income of $6 million for the quarter resulted in GAAP EPS of $0.18 per fully diluted share which compared to $5.8 million in Q4 and also $0.18 per share in the prior quarter. On a non-GAAP basis, net income was $8.2 million and non-GAAP EPS was $0.26 for the quarter compared to $9.1 million and $0.29 respectively.

EBITDAR which is defined earlier and is also defined in our press release was $10.4 million in the quarter as compared to $10.8 million for the prior quarter. EBITDAR per fully diluted share was $0.32 compared to $0.34 in Q4.

Total cash at the end of the quarter was $131.9 million representing an increase of $16.4 million when compared to December, 31. This increase was primarily due to strong collections including $6 million of previously delayed customer payments, cash generated from operations during the quarter was $15.6 million.

Additionally, the company repurchased approximately 2000,000 shares of its common stock for $3.6 million. Cash generated from the exercises of stock option and the employees stock purchase plan was $3.8 million. Trade accounts receivables; DSO was 69 days for the quarter compared to 98 days in the previous quarter.

Trade accounts receivable balance at the end of the quarter was $20.4 million representing a decrease of $7.7 million over the prior quarter. The unbilled accounts receivable balance was $9.2 million, a decrease of approximately $446,000 from the prior quarter.

Of the $29.6 million of total receivables, $68,000 or significantly less than 1% was more than 60 days past due. The total DSO for the quarter including unbilled receivables was 101 days compared to 132 days in the prior quarter. Headcount at the end of Q1 was 351 people worldwide which was slightly down when compared to the end of Q4.

Now looking to the remainder of the year, based on our strong Q1 solutions bookings and the pilot project activity levels in China and Taiwan that John noted, we remain positive regarding the solutions business for the remainder of the year.

In regards to Gainshare revenue, we are now expecting 28-nanometer volumes for the remainder of the year, to remain depressed.

On the positive side as John stated, we are far more confident in the 14-nanometer ramp at our major customers and therefore, we are now more confident regarding 14-nanometer Gainshare in Q4, no later than Q4, this year and in 2016.

Given the change in the environment, we will adjust our spending levels to the extent practical to offset any reduction in the revenue growth. We will however, maintain our increased levels of investment in both R&D and Asia in support of our strategic objectives and new product innovation. Now I will turn the call over to the operator for Q&A.

Operator?.

[Operator Instructions] your first question comes from the line of Jon Tanwanteng with CJS Securities.

Can you update us on the net impact of the slowdown in 28-nanometer and the firming of the 14-nanometer market just for 2015 in the Gainshare side?.

Well, if you recall we at the beginning of the year stated that the majority of Gainshare for 2015 will be driven out of 28 node.

So reduction there, if it's significant has an significant impact, whereas we've always thought that 14-nanometer was going to hit in the second half of the year likely Q4 and it would be in a ramp build up, so no way near as large level..

Okay and then, you had several press releases on the software side and new products.

Can you give us more color on the reception by your customers and how was your thinking about the impact on the P&L going forward?.

Hi, this is John, Jon. This is the product we've been working on for number of years brought onto some of our core customers initially in Japan and more broadly some of our yield ramp customers. It replaces a number of products that we had acquired over the years dataPOWER, maestria and Modelware and now replaces the salient products.

This past quarter was our biggest bookings quarter for that product. For any of our software solutions products over many, many years and primarily we had very little revenue impact from the quarter because most of that bookings are ratable. So those bookings will impact future quarters.

It is brought on a standalone basis at times in which case it's more of ratable software business model and it is also integrated as an overall solution basis, where it has both the component as a deployment element and then a license on its proportional to wafer model and depending on the type of customer. Goes out on each along those models..

Okay and then just jumping back to the 28-nanometer for a second. You said that capacities utilization was around 80% in the last quarter and you mentioned recovery going forward.

Do you have any expectation for what that utilization is going to?.

Yes, so I think, if you look at the foundry volume meter. They were talking about 80's in the first half of the year and then picking up into the 90's in the second half of the year.

The customers that reported 28-nanometer volumes to us, as Greg said in his prepared remarks one actually increased their volumes off relatively small base as they're just beginning their 28-nanometer volume ramp. The others reported down volumes, one was down very significantly larger than what the foundry leader reported.

We don't have the visibility to understand why or when it would go back up in the short-term. So for our modelling purposes, we assumed we were at this depressed level at on 28-nanometers for this year.

Hopefully, if the foundry leader is right and the recovery does happen in the second half of the year, we will be pleasantly surprised, but at this point we don't have the visibility to the end customers that will lead us to believe that, there are customers volume is an imminent return and recovery.

So we just took this depressed level and said okay, projected for the remainder of the year, which is what we did and then, our upside as we go out in the year. As we said, comes from our increase confidence on 14-nanometer.

As we see our customers loading factories now on much more decent yield and so we anticipate, no later than a Q4 contribution to Gainshare..

Okay, fair enough.

So if you're saying that you're assuming the same depressed rate for the rest of the year on the Gainshare on the 28-nanometer side, would you assume the run rate you had right now, will be that based plus any gains from 20-nanometer and 14-nanometer, is that the right way to look at it?.

It's a reasonable way to look at it, yes. I mean given our lack of visibility, it's a reasonable way to look at it..

Okay, great and then just one more, regarding the customer you had the negotiations with earlier this year and last year, have you entered into any new engagements in the middle?.

No we have not at this point, except for the ones that we mentioned signing in January..

Okay, thank you very much..

Next question comes from the line of Tom Diffely with D.A. Davidson.

So getting back to the 28-nanometer busies and so it sounds like, you referenced here some state and held, your seasonality was little softer in the first half year, but it sounds like from the magnitude of what happen to you guys, is your largest customer was their largest customer and you're just not sure when they might win the customer back or is that how, you would characterize it?.

We've to be really carefully Tom about protecting our customers confidential information as well. We did see it across multiple customers, of course given the magnitude and given our customer concentration. I think my third grader can do the math and figure out, how much went to, how to come from different ones of our customers.

And we did see that, decreased our customers across a broad number of product. So we don't know that, we would characterize it as one customer in particular. Their largest customers maybe were a significant contributors to the decrease, but wouldn't be the only ones..

Okay, but nothing happened along the lines of yields or something along that category, where that they'd have to stop paying you royalties, it's just shrink in the volumes..

Not this is about volumes as we said in my prepared remarks..

Okay and then just to clarify the timing, was this one quarter in arrears.

So this was, fourth quarter volumes or was it actually first quarter volumes working through?.

The notation, it's two to actually because it's a, it blends across the reporting quarters..

Correct..

Okay and we've actually heard that, some of your Asian customers have been adding a little bit of 28-nanometer capacity expecting to ramp up a little bit this year.

Did you see anything on those fronts where, you know some?.

We don't speak about specific customers, but Greg did in his prepared remarks said that we did see one customer increase their 28-nanometer volumes in Gainshare to us, offer relatively small base..

Okay and then, there are two other potential customers to start initial ramp later hits year, with you guys?.

There are other customers that will ramp later this year that is correct..

Okay, all right and then I guess, moving into the expense side then, would you expect to see the expenses coming down by that $1.9 million plug that you had in the first quarter because of the one-time?.

Yes..

Okay and then on a go forward basis. You talked about being very tight on expenses, yet keeping the investment up in R&D for certain projects.

So how does that play out the combination of those two comments over the next few quarters?.

If you look at R&D expending levels, those will continue to increase, but we're going to reduce and control other expenses across the company to both offset the impact of that step up in R&D and also absorb to the extent that we can, any slowdown in the growth rate from revenue driven by these 28-nanometer volumes..

Okay and if the 28-nanometer stays low for few quarters and would you expect, I guess the stock-based compensation type expenses to be lower as well during that period..

Stock-based compensation, that's highly dependent on what the stock price is, so I can't really estimate that..

Okay, all right and then I guess from tax point of view, it looks like the cash tax rate 22% to 24% this year for the out year, would you expect to that kind of incremental increase?.

For 2016, yes we would expect that incrementally increased probably into the mid to slightly above mid 20% range..

Okay and then, I guess final question, when you look at the ramp of 14-nanometer later this year, is that in your minds going to cannibalize some of the current 28-nanometer or is that a separate line that it would be an addition to both of them are running full out?.

That's a great question, Tom. This is Jon on that one. So we know that products that are in 28-nanometer will move over to 16 node, 14 node and so there is, of those product. Perfectly products in the noble space and graphics to some extent application processors in the laptop will move on to 14-nanometer.

What we don't know for our customers and frankly probably, we were concerned about the report this quarter is, how are they backfilling for the second wave of customers into 28-nanometer. On a foundry model right, there is always a constant wave of customers coming in and out of a node. We would expect them to backfill, that capacity.

Whereas other customers typically mobility goes in that as well as networking and series of other customers. So we'll be watching that closely through the year, we seeing diversification of our customers and customers because that should be happening this year..

Okay and then I guess finally, Greg when you look at your comment about solutions and how you stated as being positive for the year.

Does that mean, you would expect sequential growth taken after one time lump sum payment in the first quarter, but sequential growth throughout the year?.

Yes..

Okay, great. Thank you..

Next question comes from the line of Brian [indiscernible], with Ellis Capital..

Most of my questions have been answered, but just wanted to touch base on I guess I caught more the Yield Characterization.

Even though you've been pretty clear about 20-nanometer and 28-nanometer and about 14-nanometer ramping in the fourth quarter and obviously I think we all think, who'll be very big in 2016, any thoughts on how we should maybe create an extra line item of such for sort of the characterization portion like when that might become revenue of some material measure..

Yes, I think you're referring to what we call Design For Inspection or based..

Yes, correct..

Characterization technology into production control. You know we are working pilots this year, as I said we are really encouraged the fabless design community. I think our fab foundry customers are going to be really pleasantly surprised how much designers are willing to do something about making their products more inspectable.

I think they all recognize what's the challenges out there, what's the risk out there. With all of that excitement, that we model up for cost this year and we model cost in the early part of 2016, but we expect revenue contribution going to be till the second half of 2016.

So we'd love to have, have it happen earlier but we pretty much put ourselves in the model of okay, we have to figure out how to absorb this over the next, we won't say year but we think it will be a very a significant part of the PDF business, should we demonstrate the technical capabilities that we think it will do..

Okay and then finally, I mean you guys I think, Greg you managed to have $14 million of free cash flow in the quarter. I think, if I'm just eyeballing it, about 22% to 25% of your market cap is now cash.

Your 14-nanometer customers are now commercial yields and as you're just talking about the characterization kind of in the, is being paid for in the R&D line.

Any thought, comments on use of excess cash right now?.

Yes, I think good question Brian, I guess I'll answer that. You know, I think our first and foremost biggest challenge for PDF is their customer concentration.

And as evidenced by this last quarter, we have been more broadly exposed on 28-nanometer, we would have seen a downtick, I think everyone's utilization went down, but we wouldn't see, what we saw.

So we constantly look for ways that we could use cash or anything else that we could ever think of around addressing our customer concentration issues and we continue to look for that.

That said, we don't think that would consume the amount of cash that we've generated and we do expect return cash to shareholders through the buyback, that we did execute this quarter, from time-to-time get closed out of those on blackouts, like we did in the second half of 2014 due to the discussions we're ongoing with that customer.

But we would anticipate being able to increase our buyback levels, should we not be locked out on blackout..

Okay, thank you very much..

Question comes from the line of Gus Richard with Northland.

Let's see, but first, I want to start is on the 28-nanometer, sorry I'm beating a dead horse. Can you just talk about not your customers-customer, but the end markets that you think were the biggest impact on that wafer volume drop. I think I know the answer, but I want to hear it from you..

Sure, yes. So as you know, Gus there is multiple flavors of 28-nanometer, right? It's like going up in alphabet soup of 28-nanometers. We saw weakness particularly in the oldest more less performance driven versions of that node. Right? So Polysilicon be the lowest performing less performance driven.

We saw a lot of weakness there, so some in the others but that was by far the biggest weakness in the growth. We saw it was kind of in the highest performing versions of 28-nanometers, so the ones that use the most aggressive High-K, gate last like integration scheme. But we saw the improvement in, albeit up to small base.

When you look at the end markets they serve, in general course the mobile markets serves, consumes much of all of known versions of the node, but by far the Polysilicon node is most exposed on the mobile market, probably been most narrowly exposed in the mobile market and that's where we saw the biggest part of the weakness..

Got it, to just translate all that. Basically, cell phones markets in weak [ph] some of the old implementation of Polysilicon, those designs are going away in favour of some more modern process technology and designs and basically your customers had a higher exposure of Poly/SiON 28-nanometer process..

That would be a pretty good characterization..

Got it and okay and then moving onto more favourable topics. DFI, you indicated you're working on 10-nanometer, 16-nanometer and 14-nanometer.

How many fabless guys are you working with now in that technology? In other words, how many tapeouts have you done or how many did you engage?.

The number of tapeouts, you know I don't have it on top of my head. The number of customers that we've put it on either test vehicles with them or a product. I can think of four or five up top of my head right now, all kind of early adopters of leading edge technology and it's pretty much who's who list of early adopters..

And when do you see those or at least some of those customers reaching producing 14-nanometer, 16-nanometer, probably the end of this year?.

We're on Silicon greatly on course R&D vehicle right now especially with 10-nanometer, while R&D vehicle and some of the 14-nanometer vehicles too. Only, only had our first real product tapeout this past quarter which was truly a production radical, not a R&D radical. That would go to volume probably sometime in early 2016.

Right, it would take, this year on qualification, right and it would probably go to volume in early 2016.

The others have been in R&D Silicon, right so they'll be, things that we can use to demonstrate to foundries, the advantages of this capability and they have taped out on basically every, all of the people that have got 10's and 14-nanometer, 16's to talk about. We have fabless company taping out at one of those factories.

So we'll have demonstrable silicon across the industry, we hope by the second half of this year, but from the volume standpoint we think it's 2016, before you actually have the first one of the fabless guys in volume with product that have this capability in it..

Got it and would that be, 14-nanometer or 16-nanometer?.

That'd be 14-nanometer..

Yes, okay. Great and then, I think that does it for me. Thanks so much for taking the question..

You have a follow-up question from the line of Jon Tanwanteng with CJS Securities.

Hi, guys just one more follow-up on the 28-nanometer and promise to leave it alone.

Just given the magnitude of the decline in Q1, what should we expect on a year-over-year growth basis for that? Is it going to be negative on the Gainshare line?.

We anticipate it being negative on those lines come back on 28-nanometer.

We can't take a big hit on 28-nanometer and not have it be negative, there's 14-nanometer, even if it does contributing in Q3, it will be better than we thought it was, when we gave our February call, but it can't be better enough to make up for how big the 28-nanometer volumes are..

Okay, great. Sorry go on..

That's I'm done. Sorry. Go ahead..

Okay and then just on the amount that you're able to cut from spending on the not the R&D side, maybe SG&A, what should we expect as a runway going forward?.

I would say, we're still working through some of that. So I can't give you a complete sizing. But it will be in the billions that we can cut out..

On an annual basis?.

Yes..

Okay, great. Thank you very much again..

You have a follow-up question from the line of Tom Diffely with D.A. Davidson.

So one another 28-nanometer question. So when you look at kind of the big picture of the industry overall, 28-nanometer even the low end of 28-nanometer is still pretty high end for the industry.

So once you expect at some point, even if the old customer doesn't come back that you have that capacity being utilized by some of the other product at some other time, just because it is more advanced and so it really it's kind of timing issue here more than anything else?.

Yes, it's great point and actually if you, look at the transcript from my prepared remarks. We still believe very strong the 28-nanometer is a long time node and will be a long lymph node and we anticipate it coming back.

I think it's very hard for us, that's why I said we just don't have the visibility in terms of how much prototyping and next great [ph] customer activity is going on at our customers right now, the forecast one below recovers. That's why, we just became cautious and said well, we don't know when this is going to recover.

So it's just in dozen for remainder of this year. Certainly other indications would be that, it could..

Okay and I know you obviously don't give out your guidance since you don't give out quarter guidance, but if you look at your expectations for Gainshare in the out year, do they change at all based on what happened over the last quarter?.

For 2016?.

Yes, what we've assumed as we looked out in the out years. We feel, as we said in our prepared remarks. We feel lot more bullish about 2014. If you remember when the first IDM brought up the 14 FinFET node.

I mean in OCO, we've gone out things, been very hard for the foundry industry ever to be able to produce a 14-nanometer product etc and now you can see that's not really the case and we feel pretty good. I mean that certainly I think scared a lots of people in the industry including us, about what we didn't know.

We now see, our customers loading up their factories with 14-nanometer product which is why we feel pretty good about Gainshare this year and we feel better about Gainshare share and fixed the volume in 16-nanometer on 14-nanometer because you know, it takes a while for them to ramp up to get up to peak volumes.

So we now feel pretty good as 16-nanometer is going to be a peak. It may not be a peak, but certainly be in a full year as volume at full capacity. So we feel pretty good about 16-nanometer and 14-nanometer. We've built out our 28-nanometer assumptions assuming some improvement as we go throughout the year because as you said in your question, Tom.

We do believe that orders come back to 28-nanometer should be a long lymph node. Overall, that's given us a more positive feeling about the 2016 Gainshare now we had in February. It's very hard to quantify the other bars around they'd be quite large..

Yes, okay and then just finally, when you look at the different flavors of 28-nanometer, are you in fairly good position if your customer decides to switch from an older flavor to a newer flavor on 28-nanometer to still get the full royalties flat..

Our key customers, we get, where Gainshare a respect of 28-nanometer, they don't so you know shifting from one to another would not make much impact to us. ASP's can be different one flavor to the next to be honest with you.

That said, some of them are more general purpose versions and how their end market availability is, [indiscernible] is bigger than others. All right, so some of our customers are supporting version of 28-nanometer that have relatively small amounts of design in..

Okay, great. Thank you..

At this time, there are no more questions. Ladies and gentlemen, this does conclude the program..