PDF Solutions Inc

NASDAQ:PDFS

Earnings Call Analysis

PDF Solutions Reports Strong Q3 Revenue Growth

In Q3 2023, PDF Solutions posted $42.4 million in total revenue, a 6% increase year-over-year, with earnings per share (EPS) of $0.20. Analytics revenue, which made up 93% of total revenue, grew by 20%. Despite lower Integrated Yield Ramp (IYR) revenue of $2.9 million, gross margins reached 70%. Operating expenses grew by 3%. The company expects full-year revenue growth in the lower double digits and remains committed to a long-term growth rate exceeding 20%, aiming to exceed market growth despite broader semiconductor industry challenges.

Steady Performance Amidst Market Challenges

As the year progressed into its third quarter, the company maintained a similar pace as seen in its first two quarters, portraying a resilience in revenue generation. A strong sign of this has been the continued adoption of the company's end-to-end analytics by its customers. Despite facing weak bookings, a spectrum of favorable contracts were signed, including with a cloud provider, and a mix of old and new patrons implementing Exensio Analytics for their production needs.

Elevated Growth Aspirations and Revenue

Signifying optimism, the company has uplifted its long-term revenue growth target from a specific 20% for just analytics to a more inclusive, ambitious aim of over 20% across the entire organization. Consequently, gross margin aspirations have also been revised upwards from 70% to 75%, driven by scaling in cloud solutions and operational efficiency. These revised goals come in light of increased customer interest following corporate updates, reflecting the company's progressive stance even as they anticipate year-over-year growth to remain in the low double digits percentage-wise.

Record Revenues with Focused Analytics Momentum

Third quarter revenues hit a record $42.4 million, a 6% climb from the preceding year, signaling a forward momentum that's strongest in the analytics sector with a noteworthy 20% growth. The significant deals cut across Exensio deployments and the success of eProbe installations shone through, outweighing the modest improvements seen with Cimetrix Connectivity run-time licenses. However, decreased volumes in Asia presented a downturn in gainshare contributions, aligning with the cautious outlook over slowing contract closures in this unsettled market period.

Gross Margin Influenced by Gainshare and Accounting Adjustments

In the third quarter, a gross margin of 70% was reported, this being shaped by factors distinct to the quarter. These included diminished gainshare revenues—which typically have greater margins—and accounting adjustments related to sales-type lease of DFI hardware owing to extended customer usage. While such fluctuations affected the short-term margin figures, the long-term target of attaining a 75% gross margin reveals the company's undeterred path to financial optimization.

Earnings Call Transcript 2023-Q3

[Operator]

Good day, everyone, and welcome to the PDF Solutions, Inc. Conference Call to discuss its Financial Results for the Third Quarter ending Saturday, September 30, 2023. [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 PDFs 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 PDFs future financial results and performance, growth rates and demand for its solutions. PDFs actual results could differ materially. You should refer to the section entitled Risk Factors on Pages 15 through 29 of PDFs annual report on Form 10-K for the fiscal year ended December 31, 2022, 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, PDFs President and Chief Executive Officer; and Adnan Raza, PDFs Chief Financial Officer. Mr. Kibarian, please go ahead.

[John Kibarian, executive]

Thank you for joining us on today's call. If you've not already seen our earnings press release and management report for the third quarter, please go to the Investors section of our website where each has been posted.Before Adnan discusses the financials in detail, I have some comments about our observations from the third quarter, a summary of our Users Conference and our perceptions on the market for the remainder of the year.The third quarter was very similar to the first 2 quarters of the year. Revenue was strong as we experienced continued adoption of our end-to-end analytics by our customers. Bookings in the third quarter remained weak, even while we continued to experience a high level of presales activities, particularly for larger contracts.Significant contracts that closed in the quarter include a cloud provider, multiple existing and new customers deploying Exensio Analytics on the cloud for their own production and deployment of our Characterization infrastructure for a mature node in Asia. Bookings for Cimetrix Connectivity, run-time licenses continued to show modest improvements in Q3 versus Q2 as our customers' equipment shipments increased.Our yield ramp revenue decreased meaningfully as volumes in Asia declined and reduced gain share. Analytics revenue accelerated in the quarter because of the success of the second eProbe installed at the lead customer and increased applications deployed. We're very excited about the progress we are making with DFI and expect to ship our third tool to a new customer beginning a manufacturing evaluation this quarter.Overall, given our strong backlog and business model where most of the revenue is typically viably recognized, we continue to deliver strong results in revenue and earnings.On October 24 through to 26, we held our Users Conference and Analyst Day. Registration from over 100 companies was twice the level of our last Users Conference and included engineers and executives from all aspects of the semiconductor supply chain. We used this opportunity to reintroduce PDF and our end-to-end platform with its machine learning capabilities to our community.Our customers face 3 challenges: [ bringing ] up increasingly complex process technologies, achieving cost-effective use of 3D packaging, and working with the global supply chain. With the PDF platform that integrates equipment, measurement data and Exensio Analytics, customers can diagnose complex yield issues, improve the control and efficiency of production and achieve higher yield and reliability.With our integrated platform's machine learning or what we call ModelOps, customers can use AI to improve control and production. Customers presenting included Intel, GF, Analog Devices, Renesas, STMicroelectronics and Multibeam. They spoke about how they rely on PDFs platform to drive transformations in their R&D and production, achieving tremendous acceleration in technology development, yield improvement and operations excellence. We were also fortunate that many of our partners presented, including Advantest, Teradyne, SAP, Siemens, AWS, IBM and others. They demonstrated how the integration of our platform with their products enables our mutual customer success.Finally, in the analyst meeting, we announced updated long-term operating targets for the company. We moved our long-term revenue growth target, which had been 20% growth for just the analytics portion of our business to over 20% for the overall company growth. We also increased our long-term gross margin target from 70% to 75% as we get scale in our cloud solutions and operations. We kept our long-term operating margin target at 20% as we continue to invest, particularly in sales, applications and marketing to enable further growth.Based on the follow-up meetings we had with our customers, our message was received loud and clear. Customer interest in our new solutions after the conference has been very high.Now let me turn to discuss our view of the environment and our perspective on the last quarter of the year. In our second quarter call, we expressed confidence in low double-digit growth for the year as the anticipated second half 2023 recovery in the chip industry did not seem to be occurring. Now, with the third quarter behind us, we continue to have the same expectation. Namely, we anticipate year-over-year growth achieve low double digits on a percentage basis.The contributions to this outlook are consistent with what we saw last quarter. Our gainshare customers in China are reporting decreased wafer volumes, which we believe will continue to result in reduced gainshare through the second half of the year. We anticipate continued increase in Cimetrix run-time licenses, but at a muted rate of improvement. Finally, for Exensio and our Characterization Solutions customers, we continue to have many significant pilots and sales discussions ongoing, but believe closing contracts will continue to move slowly during the remainder of the year.While the short-term environment is [ unsettled ], the longer-term drivers for our customers, which include increased use of AI, ML, cloud, smart devices and the electrification of the energy economy, remain in place. These drivers are being amplified by the various government investments in semiconductors we are seeing around the world and the increased diversification of the supply chains that many of our customers are embracing. This is evident in our strong business pipeline, and we remain confident in our continued success and long-term growth.I want to thank all of the PDF employees and contractors for their efforts during the quarter.Now, I'll turn the call over to Adnan who will review the financials and provide his perspective on our results.

[Adnan Raza, executive]

Thank you, John. Good afternoon, everyone. Good to speak with you again today, and I hope all of you and your families are well.We are pleased to review the financial results of the third quarter and to bring you up to date on the progress of the business. We posted our earnings release and management report on the Investor Relations section of our website. Our Form 10-Q has also been filed with the SEC today. Please note that all of the financial results we discuss 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.Financial results for the third quarter of 2023 came in strong with record revenues and strong bottom line EPS. We are pleased with the increasing platform-level engagement we are seeing with our customers, utilizing the various product offerings from PDF Solutions. Third quarter total revenue was $42.4 million, up 6% from the comparable quarter last year, and incrementally up 2% versus the prior quarter of this year.Our Q3 performance demonstrates the continued business shift towards Analytics revenue, which accounted for 93% of the total revenue this quarter. Analytics revenue grew at 20% for Q3 compared to the same quarter of prior year. On a year-to-date basis, our Analytics revenue also grew a similar 20% compared to the similar period of last year. Within Analytics, during the quarter, we closed multiple Exensio deals greater than $1 million, mostly for cloud deployments, which helped grow our ratable revenue stream.For leading-edge, we're happy with the engagement we're seeing with our key customer and the installation of a second eProbe machine during this quarter with the same customer. As John mentioned, we are also preparing to ship an eProbe machine within this calendar year to a second leading-edge customer for on-site evaluation. We believe one customer taking a second machine and another leading-edge customer taking their first machine demonstrates the unique value our platform approach and solutions bring for our customers.For our Cimetrix Connectivity business, while we saw a slight improvement in run-time licenses during Q3 compared to the prior quarter, we remain cautious about the growth rate of capital equipment purchases.Overall, we are pleased with the 20% growth rate of Analytics revenues for this quarter and year-to-date compared to similar periods of last year. IYR revenue for the quarter was $2.9 million, down compared to the prior quarter of this year and the same quarter of last year, as we shared earlier. We saw weakness in the gainshare contribution to IYR revenue this quarter, as John discussed. Despite the weakness in IYR, given the strength in our Analytics business, we were able to deliver a record revenue Q3 quarter.On gross margins, we reported 70% gross margin for Q3, driven by a few factors this quarter versus prior quarter. Lower gainshare revenues, which carry higher gross margins, a onetime sales-type lease treatment on the DFI hardware as a result of extended use by the customer and ASC 842 accounting rules applied to this transaction. And lastly, headcount growth to support the increasing customer engagement we're seeing. As announced at our Analyst Day in October, we remain committed to our long-term gross margin target of 75% and making progress towards that target over the coming quarters.Our operating expenses grew 3% for the quarter compared to the prior quarter, with a similar percentage expense growth of 3% for each of R&D and SG&A. Overall, the increases were to support increased headcount, primarily for R&D and presales activities, as we see increased opportunities to enhance the PDF platform and develop it in conjunction with customers to meet their future needs.On EPS, we were able to deliver $0.20 per share for the quarter, incrementally ahead of our prior quarters this year. It is worthwhile highlighting that on a year-to-date basis for the 9 months, our EPS of $0.58 is 42% ahead of EPS for the similar period of the prior year.Turning to the balance sheet. We ended the quarter with cash, cash equivalents and short-term investments of approximately $135 million or $11 million higher than last quarter, primarily driven by strong collections. During the quarter, we also repurchased shares for $0.7 million, spent $2.9 million on CapEx and $1.8 million on the acquisition of Lantern Machinery Analytics.Now, turning to our outlook. As stated during our Q2 earnings call, at our Analyst Day in October and with our press release today, we continue to expect that our full year 2023 revenue growth rate will be in the lower double digits on a year-over-year percentage basis. We believe that against the backdrop of the macro environment that John has spoken about, where semiconductor growth has not been as strong this year as last few years, we at PDF can continue to grow ahead of the market. Our confidence stems from the strength of our platform approach and increasing customer engagements we see in our sales pipeline. Additionally, we remain committed to the total company long-term growth rate of greater than 20% announced at our Analyst Day.In closing, for Q3, we are excited about the strong revenue we delivered, the cloud deals we signed, the leading-edge engagements we expanded, all with strong EPS and balance sheet to close the quarter. We are also thankful to our customers and partners for their resounding support of the PDF platform at our Analyst Day and to allow us to share a new look at how PDF Solutions has become a platform company since our last Analyst Day a few years ago.With that, I'll turn the call over to the operator to commence the question-and-answer session. Operator?

[Operator]

[Operator Instructions] Our first question comes from Blair Abernethy with Rosenblatt Securities.

[Blair Abernethy, analyst]

Nice quarter. Just want to ask you a little bit -- a couple of things. First, Cimetrix. I looked in your 10-Q, it sort of says it was a little lower year-over-year. Is that right, but sequentially, it was a little stronger?

[Adnan Raza, executive]

Sequentially, it is a little bit stronger, both on the total revenue as well as we're starting to see strength throughout the year, frankly, even in the run-time licenses. On a year-over-year basis, Cimetrix, yes, just given the CapEx purchase cycles and the equipment shipments that we have seen, we have seen that come down as alluded to in our prior calls, particularly in the last Q2 call when we spoke about the rest of the year.

[Blair Abernethy, analyst]

Okay. Okay. Great. So it sounds like -- then is that business bottoming out here then?

[John Kibarian, executive]

Yes. We believe so, Blair. We track the backlog, in other words, like, run-time licenses that the customer takes from us, but they have not shipped the equipment, and that bottomed out in Q1, the backlog has been slowly building up. In other words, customers expect to be shipping more equipment back out in the subsequent quarters. We still remain a little bit cautious about Q4. We don't know that it will improve all that much in Q4 over Q3. But as we look into 2024, we do anticipate it building.

[Blair Abernethy, analyst]

Okay. Great. And just shifting to end markets, John, just with the increased U.S. export controls shipping into China in various shapes and forms over the last year or so. Is there any direct or indirect impact on you guys this year?

[John Kibarian, executive]

Yes. I mean, so far, we've been kind of been a beneficiary of that. As we see a lot of activity in China, we see the run-time licenses for Cimetrix, a lot of it is going into China; Chinese equipment companies that use our software that are shipping in that country. So there's been benefits there. We've also had a fair number of fabless customers in China that use Exensio and manufacturers as well, factories that have tended to deploy Exensio. So, so far, that's been -- the kind of the accelerated rate of investment in China has been beneficial for our business in China. We did not see much impact for us on the leading-edge because most of our business in China has been on the trailing-edge, to be candid with you.We are waiting for that same effect to happen in the United States and in Europe as folks are starting to get access to their chipset money, and we start to see some behavior from customers, maybe a little bit more positive reactions. But we haven't seen that kind of government stimulus as being as big a factor in the West as we've seen it in China today so far.

[Operator]

[Operator Instructions] And at this time, there are no more questions. Ladies and gentlemen, this concludes the program. Thank you for joining us on today's call.