Good day, ladies and gentlemen, and welcome to PDF Solutions Conference Call to Discuss its Financial Results for the Second Quarter Ending Sunday, June 30, 2022. [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 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 section entitled Risk Factors on Pages 17 through 30 of PDF 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, and PDF assumes no obligation to update them. Now I’d like to turn the conference over to 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 our call today. If you’ve not already seen our earnings press release, financial report and 10-Q for the second quarter, please go to the Investors section of our website where each has been posted. We appreciate you’re taking time to join us today. I will start the discussion by providing commentary on our Q2 highlights.

From there, I’ll provide our impressions to the semiconductor industry and conclude our expectations for PDF’s business in the second half of the year before handing it over to Adnan for a more detailed financial update.

Highlights for the second quarter show progress towards our long-term objective of being the go-to manufacturing data and analytics platform for the semiconductor electronics ecosystem.

Our bookings in the second quarter include significant customer renewals of Exensio, new customers deploying Exensio, additional wins for symmetric equipment connectivity solutions and yield ramp solutions. The largest Exensio renewal in the quarter was a U.S. based and renewed at an increase to ARR of approximately 30%.

Our business in China contributed a meaningful portion of our bookings as activity improved over the first quarter when some customers were impacted by the lockdowns. Our gain share revenue increased quarter-over-quarter due to customers reporting higher wafer volumes.

We also saw an increase in Cimetrix onetime licenses quarter-over-quarter due to improved volumes at equipment manufacturers related to accelerated equipment shipments. Partnering with other leading companies to extend our solutions to new applications and users continues to be an important part of our growth strategy.

In the second quarter and continuing this quarter, we achieved many milestones. First, at the start of the second quarter, we announced a collaboration with Kulicke & Soffa to deliver new smart manufacturing solutions and announced our early access program. Customer interest is proceeding well.

Second, later in the quarter, at Advantest voice Conference, we demonstrated three new applications that run on their edge high-performance compute box. We anticipate them to initiate offering these apps to customer base later this year as well as other applications we intend to release.

Third, in July, at the SEMICON West Conference, Amazon Web Services or AWS, hosted us in their booth. Our team demonstrated applications in Exensio of the semi-E142 standard, which allows for traceability through manufacturing, including assembly of complex system and packaged products.

Also at SEMICON and our Cimetrix booth, we demonstrated SDK support for our equipment partners to develop and deliver semi-E142 data streams. This means that equipment companies can create this new data type, and chip makers can use this data type for critical analysis to enable efficient manufacturing and high quality for system and packages.

Fourth and finally, in July, we announced our collaboration with SAP to tie manufacturing data analytics with business planning and operations. This work, over one year in the making, is a result of strong interest from our mutual customer base.

Today, the top floor of our customers often have a static view of their operations, and engineering does not always have the most detailed view of costing, customer demand and other constantly changing business constraints.

By tying Exensio to SAP’s S/4HANA, we believe mutual customers can get more accurate view of their business that responds dynamically to the changing marketplace. You can see more information about these partners on our new partners page on our website. Overall, these partnerships are resulting in early access programs with lead customers.

The associated revenue is not material. We are seeing the benefits of increased awareness of Exensio and PDF in the minds of the top of our customers’ organizations, and we anticipate there will be a larger impact to our revenue over the next few years.

Overall, looking at the first half of the year, we are very pleased with the progress we have achieved to date. On a year-over-year basis, we grew analytics revenue 58% for the first half of the year, and total revenue grew 32% year-over-year. I would now like to turn to what we’re seeing in the industry.

Overall semiconductor and electronics companies continue in elevated investments in process control and new node bring up, which bodes well for our business. Moreover, the EU and the U.S. now have, similar to China, established programs to support manufacturing.

We have fought for years there’s been an underinvestment in manufacturing, and these programs have the potential to increase the need for characterization, including our DFI systems and Exensio and Cimetrix software.

Across the chip industry, there are a number of challenging signals with the potential of a recession, geopolitical restrictions on sale of technology and supply constraints. Despite these headwinds, we have continued to see strong interest in our products and solutions.

We anticipate bookings in the second half of the year to be up versus the first half of the year.

We are pleased with the progress we have made in the first half of the year and making PDF Solutions the go-to manufacturing data analytics platform for the industry, which helps us build recurring revenue streams and provide greater visibility and predictability of our financial results.

Now I’d like to turn the call over to Adnan for a review of the financials, after which we’ll open the call for your questions.

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. Our Form 10-Q has also been filed with the SEC today.

Please note that all of the financial results are discussed in today’s call will be on a non-GAAP basis, and a reconciliation to GAAP financials is provided on the materials on our website. Financial results for the second quarter of 2022 continue to be strong coming after a solid first quarter.

Q2 total revenue was $34.7 million, up 26% versus the comparable quarter last year. Analytics revenue was up 59% to $31.1 million in Q2 2022 versus $19.6 million in the second quarter of 2021, and represented 90% of total revenue this quarter.

This growth in our revenues came from all components of analytics, including software licenses from Cimetrix and Exensio and our leading-edge engagements.

On a quarter-over-quarter basis, our analytics revenue was up $0.7 million or 2%, driven up by growth in leading edge and software licenses and were offset by lower perpetual licenses this quarter, which had benefited last quarter.

We are very pleased with the various analytics engagements we have currently ongoing, the business we are winning and the customer mind share we are getting across the hierarchy of customer organizations, which plays well towards our goal to be the go-to manufacturing data analytics platform for the global semiconductor and electronics ecosystem.

During the second quarter, revenue contribution from the integrated yield ramp was $3.6 million, down from last year, primarily due to gain share contracts that ended in second half of last year, which we have spoken about in prior calls.

On a quarter-over-quarter basis, our IYR revenue was up $0.5 million, primarily due to higher shipment volumes at customers. We are pleased about the transition to analytics and the total company revenue growth we are starting to deliver for our shareholders.

As you will note, today via our press release, we have also guided to 25% total revenue growth for the full year 2022, having already delivered approximately similar percentage annual growth for the prior 2021 full year. We find this annual growth in revenue for 2022 quite meaningful as it is against the backdrop of two items.

First, that 2021 already benefited from the full year results of our Cimetrix acquisition. So our total growth this year will need to build on top of that. And second, that 2021 still had half a year of gain share revenue from contracts that ended last year, which we do not have for the current full year.

Our ending backlog was $184.4 million and is up 33% on a year-over-year basis. We believe we can grow our backlog over the coming quarters as we close key ongoing engagements with multiple customers across various product lines of our business.

We have also continued to expand on our partnerships, as John mentioned, and this quarter, in particular, announced collaboration with SAP to closely connect the shop floor manufacturing data with the top floor analysis data.

We also continue to work on prior announced collaborations with Advantest, Siemens, Kulicke & Soffa and IBM, all influential leaders in our industry. We reported gross margins of 69% for the quarter, similar to last quarter and markedly above 65% for Q2 of prior year.

On a quarter-over-quarter basis, we may see slight variations on this metric as we modulate the spend for our various customer engagements and grow our cloud spend to support the growth of recurring revenues. We are committed to our non-GAAP gross margin target model of 70%.

On the operating expense side, our R&D spend was up $0.7 million compared to last quarter, primarily due to personnel-related costs from timing of worldwide merit increase during Q2 and increased spend for cloud costs. Our SG&A was down $0.4 million due to some onetime saving items and timing of annual expenses occurring during the quarter.

For EPS, we reported a profit of $0.11 for the quarter compared to a profit of $0.09 for the prior quarter and a loss of $0.01 for the quarter a year ago. We are pleased about this $0.12 positive swing in EPS compared to the same quarter last year.

On cash flows, we generated $3.6 million in cash from operations and we expect to generate cash from operations for the year, consistent with our history.

We ended the quarter with cash and cash equivalents of approximately $117 million compared to $134 million at the end of prior quarter, with the change primarily driven by stock buyback of $17 million during the quarter.

Note that for the year 2022 through the end of Q2, we have now repurchased approximately $22.5 million of shares or approximately 934,000 shares at an average price of $24.07 per share.

We believe that our positive operating cash flows and the strength of our balance sheet position us well to consider strategic acquisition opportunities as they become available.

Looking forward, given our backlog and anticipated bookings, we are gaining confidence with the expected results for the remainder of 2022 and now expect full year calendar year 2022 total revenue to grow approximately 25% on a year-over-year basis. With that, I’ll turn the call over to the operator to commence the question-and-answer session.

Operator?.

[Operator Instructions] And we’ll take our first question..

Tom Diffely, D.A. Davidson.

Can you hear me okay?.

Yes, we can. Hi, Tom..

Hi. So John, you talked about some nice growth with China recovery.

I’m curious what percent of your overall business does China represent today? And where do you think that goes longer term?.

For Q2, I think it was right about 13%. I’ll pull up the exact number and confirm for you, but you can comment on the rest of the year..

It’s been in the mid-teens, and we don’t expect it – we expect it to continue to grow about on pace with the rest of the business. We’ve had very strong growth outside of China, and we expect it to stay around that teens range. We do not expect it to get much bigger than that..

And it was 13%..

Okay. Great. Helpful. And then when you look at the second half, you talked about bookings being bigger half over half. So it sounds like your previous comments here that that’s more than just China recovery, and that is actual just expansion across the board..

Correct. Yes, we have a number. Our deals have gotten, over the last couple of years, the size of the analytics business, the size of the average deal has gone up quite a bit.

And we have a number of them in the hopper that we anticipate closing in the second half of this year, that would drive significant bookings growth year quarter – second half of the year or first half of the year..

Okay. Great. And then appreciate the information about all the partnerships that you’ve entered into over the last couple of years.

I’m curious, when do you think these partnerships do start to create some material revenue? And what do you think the first of the partnerships will be? Will it be kind of the Advantest new applications? Or what do you think is the first to drive revenue out of that group?.

Yes. We have released our first product, Advantest, now over a year or change ago. It is the dynamic primatic test application. That is contributing revenue today. And we anticipate, given their forecast, limited maybe somewhat by ability to ship equipment.

We anticipate that over the next 4 quarters contributing more meaningfully, significantly more meaningfully than it is now. When we look at some of the other ones, we have early Kulicke & Soffa has been a partner for quite a while and a meaningful one. We expect it to grow substantially because of this application out over the next couple of years.

But these take probably 1 year-ish on – if you look at our Advantest relationship, we announced dynamic parametric test about a year ago with the first sales. It took about a year after this first sales for them to give us a forecast that shows it ramping up.

And we expect similarly with our other partners as we engage with the first lead customers, they’ll drive some additional revenue. It’s not meaningful, but it is something.

And then it shows really end customer interest, and then we expect that will take some number of quarters after those first contracts for that to start for them to be able to give us a forecast of more substantial growth..

Okay. Great. And then finally, moving over to the model. I was a little surprised to see some of the OpEx come down in the quarter as I thought you’ve been ramping on several programs lately.

Curious if maybe a little more color behind the sequential drop-off, and then what your expectations are for the next couple of quarters from an expense point of view?.

Yes. So R&D, as we mentioned in the commentary during the prepared remarks, was up primarily due to the merit increases. We do expect that to grow a little bit in line with what we are estimating for revenue or a little bit lower.

In terms of SG&A, we also mentioned on the call, there were some savings from onetime items and also the timing of expenses during the year. So we expect that to grow. Overall, our goal is going to stay the same, that revenue growth should exceed the growth that we see in our total spend, both cost of sales and OpEx combined..

Okay. Helpful. Well, thank you both for the questions..

Thank you, Tom..

And moving on to our next question..

Yes. Good afternoon. this is Gus Richard with Northland. A couple of questions on these partnerships with IBM and SAP.

How is that impacting the work you guys need to do for integration to a customer system? And sort of how does it affect your cost and your ability to build standard products?.

Yes, it’s a great question, Gus. We have integrated Exensio with MES systems for forever, as long as I can remember. And we have something like 10 different scripts and – we supported 10 different MES systems with different scripts and whatever. What we noticed once we started moving Exensio to the cloud was, wow, we could standardize this.

So you don’t have to go through, and customers, yes, they’re going to always want to have a special report or a different way of cutting the data, but the piping, the connections between the systems, that should be established.

So now with SAP’s S/4HANA, which is the cloud solution, and Exensio also now greatly a cloud solution for most of our customers, we can’t more formally standardize – do a onetime integration that works.

And yes, with each customer will be another customization and tuning, but that base pipe is already there, right, which greatly reduces the effort the customer needs to undertake in order to be able to connect, let’s say, test for our operational yield data with shipment scheduling and planning information.

So we think this is really very valuable to decrease the burden the customers needed to undertake in order to be able to get kind of more real-time integrated information flows between the different silos within their organization. And it’s enabled by the fact that more and more of these systems are on the cloud..

Okay.

And any sense on sort of how much goodness this is for gross margin?.

Yes, not yet. Yes, ideally, we could just make it where what the customer only buys from us is cloud and time-based licenses and we don’t do any deployments. That would be wonderful because that would – for sure, you’re right. The deployments are not as good margin as the ongoing recurring revenue from the system once it’s up and going.

So I don’t know that we’ve quantified it yet, Gus, but that is a secondary benefit of why we’re doing it. The primary benefit is to drive up total usage and hence, the business impact we can have for the customer and the revenue they spend with us. The secondary impact, it will come at a benefit of gross margin..

Got it. And then just the chip act is now passed. Clearly, a boatload of that money is going to go for capacity, but even more important to realize what the government is trying to push for is advanced process technology available.

And sort of in a U.S.-based foundry, and I’m sort of wondering, to what extent you can help your customers either create design enablement, internal IP? is there a role for you to play with your characterization vehicles as the push for more advanced semiconductor manufacturing in the U.S.

comes to fruition?.

Yes, it’s a great question. We were very excited about the chips act passing, and we think that is a significant event for the industry overall, for PDF specifically. And there’s a couple of things here. I think the impact is quite broad, and I’ll touch on the one that you bring up, Gus.

But I also want to point out, when you think about moving manufacturing to high labor cost areas like the United States and Europe, what you first need to think about is how can we use software and analytics and machine learning to drive down what has been a very, very labor-intensive part of the industry, whether even the front-end fabs have an awful lot more of engineering and grunt work that goes on when we’ve been inside fabs all over the world for decades.

If you look at how they’re run in East Asia, there’s a lot of engineering work that goes in that we, in the West, had tended to not invest in. Now with the advances of AI and analytics, you can replace a lot of what wrote and detailed engineering analysis of equipment data, of operational information in the factory, with machine learning.

We think that’s a very important opportunity for as we bring – for our systems like Exensio as we bring it out to the industry because these fabs here are going to need a lot more automation. Secondly, the point you bring up is a really good one.

What happened in Asia over the last two decades was factories served many, many product groups, right? That is the rise of the foundry model. And the foundry model says, it’s really hard to get a great return on investment when you just – as an integrated device manufacturing.

So now as you see manufacturing coming back to the U.S., you see a number of U.S. companies and entities that are putting factories in the U.S., what’s being built in the U.S., whether it’s from Intel or TSMC or Samsung, are foundry capacity, right, which is different than what’s going on in the U.S. in the past, which is primarily IDM capacity.

If you look at our history, as people try to open up to foundry, they need exactly the point you bring up. You need to have a way of characterizing the variability due to layout, due to design factors and how that affects the transistor performance and hence, the PDK.

In the first quarter of this year, we announced that follow-on contract for using PDF’s capability, characterization and systems for design for manufacturability. It really was the first step what people anticipating what the chips act is going to build.

If you look at how our customers are using our design for inspection, it’s gone to greatly be used for helping bring up new designs and new varieties of IP because it’s design aware as it does the inspection.

And again, if you want to do that in a labor and cost-sensitive market, you want to use a lot more machine learning and analytics, which is what’s embedded in the design for inspection capability.

So when we look at our characterization design for inspection, as you bring foundry to the rest of the world, where I think you’re going to have to employ a lot more software and a lot less human capital, we think it’s a phenomenal opportunity for PDF overall..

Yes. And that brings me to my last question. DFI, clearly, a great lab tool and helps people get products into production. And I’m just wondering sort of where you are in terms of increasing the throughput and capability so that it might lead from lab to fab..

Yes, we’ve been monitoring usage and the applications. In the second quarter, there was just an explosion of applications for the system as we were able to demonstrate improved capability on the machine, and we’re able to demonstrate with the software, some very sophisticated automated analysis of design sensitivities.

It went from running individual wafers today to five to 10 wafers a day, and its utilization has really shot through the roof. We feel really good about where we are for this being becoming a much more standard way people bring up new designs and control them in these advanced nodes.

And as you look at the road maps with more 3D structures, more novel ways of whether it’s gate-all-around, power via, wafer bonding, we feel that the future yield issues are really well lined up for what design for inspection can do..

Okay.

And is that leading in the near term, this is my last question, I promise, any additional sales of DFI tools?.

We do expect it to impact our business in the second half of this year..

Okay. Great, great. Thank you for your patience..

Sure. No problem, Gus..

[Operator Instructions] Moving on to our next caller..

Hi, guys. It’s Blair Abernethy with Rosenblatt..

Hi, Blair..

Hello..

Hi, guys. Just, Adnan, one quick one for you. Just I wonder if you could talk about your backlog a little bit. $184 million this quarter, down a little bit, it looks like. I think Q1 was around $197 million.

Was there any FX in that backlog, any FX impacts? And also, what’s the duration of that backlog that is – sort of what’s your visibility into 2023 at this stage?.

Yes, sure. So no, not from an FX perspective. But look, I mean, the reality is our business is starting to get engagements and customer retention for larger and larger deals.

As these deals are getting larger, we’re engaging not just with the engineering level, but also with the executive level at these organizations, and also broadening our business into the other partnerships like John mentioned. Net-net result of these, some of these larger deals take a little bit longer. And frankly, that’s the only reason.

It’s a little bit of a function of timing where we are in the current quarter with respect to some of the deals that we’re closing, which is why you saw that dip in the backlog number. Overall, like John said, we remain very confident and expect the second half, from a booking perspective, will be stronger than the first half of the year.

And then as far as looking forward to 2023, we continue to build on our momentum, and that’s going to be the plan to end the year on a solid note that positions us well, even better from a recurring standpoint where we can have better predictability to our growth numbers as we go into next year than we did coming into the current year..

Okay. Great. And just on the product side, John, the Advantest obviously is starting to do well in the first dynamic parametric testing.

But the new applications, I wonder if you can just give some color around some of the new applications? And are they going to take a year or so to ramp? Or do you think, because you’re already out there with the one product, it might go a little faster?.

Yes, what we announced at Advantest VOICE was applications that take advantage of their edge high-performance computing box. So Advantest innovated the idea of putting an AI computer right next to the tester, wired deeply into the way the tester collects information in real time. So now you have a lot more computing problem, power.

Historically, when you do screening at test, you establish some very simple rules. If the test – if this chip is tested well, but all the chips around it were bad, it’s called good die, bad neighborhood, you reject that. I mean these are very simple rules.

And you do that in part because the amount of compute that is available to you on the tester is quite small, set to be very efficient. Now what Advantest is opening up is the ability to do much more deep machine learning.

So these first three apps take advantage of PDF’s more computationally intensive algorithms and bring them close to the tester, so you can do more real-time capability.

And we’ll announce later on in the second half of this year, additional applications that take advantage of PDF’s ML pipeline and more – even more intensive computationally intensive algorithms. This will allow for a couple of things, smarter and more intelligent screening and binning, which is very important for customers in systems and package.

We want to marry the right chips together that are similar in performance characteristics and also allow for more security because the entire approach is containerized.

So the – a lot of our fabless customers that test at the OSATs, they want to make sure the information, all the way from the cloud, all the way down to the machine, is encrypted, and that work goes on in a very encrypted way.

So even within the OSAT, the OSAT is very little visibility and how things are screened, that’s important, as you may know, in this world of counterfeit chips when you have a tight supply.

So it’s really kind of taking advantage of what the partnership intended, right? PDF’s more and more sophisticated algorithms, and Advantest’s ability to build unique systems that take advantage of their detailed and deep knowledge of test. How long it takes for that to drive revenue? I think we don’t know, Blair. We’ll find out.

I hope we see an acceleration. We hope, in part by announcing many of them at once, we’re able to stimulate a lot more demand and do in parallel what we did serially with dynamic parametric test..

Great. Thank you for that. Just another question, if I may, on the partner side. IBM was mentioned earlier in the call. And maybe just give us a bit of an update on how things have progressed there? I think it’s been almost a year now.

What sort of stage are you at with IBM?.

Yes, it’s great. So IBM, we have integrated Exensio with SiView. It drove business for us. It continues to drive business for us where they sell – when they sell SiView, they also introduce and sometimes sell Exensio even as part of an IBM contract.

So then we – the contracts between the customer is with the customer and IBM, and then IBM turns back around and licenses Exensio from us. We have a number of ongoing selling opportunities. As you know, MES systems like SiView tend to sell when a new factory is built. So they’re less frequent than tester installations or Exensio deployments.

But we do have a number of them ongoing with them. And it also is now affecting how we work with SAP, too, because all three of us work together in some factories. And so we’ve now in some companies, now started talking, the three of us together, with customers around MES analytics data and ERP data available to customers in real time.

And so these – many of these partnerships actually interact with each other, right? So what we’re doing with Siemens affects what you do with test, KMS on the wire bond or with final test. There’s ways that we are bringing the partners together more and more tightly, not just one-on-one between us and each partner..

That’s great. Thanks for the color, John..

Thank you, Blair..

[Operator Instructions] And there are no further questions at this time. That will conclude today’s conference. We thank you for your participation, and you may now disconnect..