PDF Solutions, Inc.

Good day. Thank you for standing by. Welcome to PDF Solutions' first quarter 2022 conference call. At this time, all participants' lines are in listen-only mode. After the speaker presentation, there will be a question and answer session for which instructions will be given at that time. I would now like to hand the call over to Joseph Diaz of Lithium Partners. Sir, please go ahead.

Thank you, Christian, and thanks to all of you for joining us today on the call. We appreciate your time and your ongoing interest in PDF solutions. As the operator indicated, my name is Joe Diaz. I'm with Letham Partners. We are the investor relations consulting firm for PDF. If you do not yet have a copy of today's press release, it's available on the company's website at PDF.com. Some of the statements made during this conference call will be forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding PDF's future financial results, performance, growth rates, and demand for its solutions. PDF's actual results could differ materially. The forward-looking statements and risks referred to on this call are based on information available to PDF today. The company has no obligation to update them. You are advised to refer to the section titled Risk Factors on the company's annual report on Form 10-K for the fiscal year ended December 31, 2021, and similar disclosures in subsequent SEC filings. With that said, I'd like to introduce John Kabarian, PDF Solutions President and Chief Executive Officer. He'll be followed by Adnan Raza, Executive Vice President and Chief Financial Officer. At the conclusion of management's prepared remarks, we will open the call for your questions. Let me now turn the call over to John Kabarian, President and CEO of PDF Solutions. John.

Thank you, Joe. The first quarter was a great start to our year. Before Adnan discusses the financials in detail, I have some comments about the nature of our business in the quarter and our perceptions of the markets. The first quarter bookings built on a strong trend in 2021 with many of the same themes that we experienced last year continuing. For the industry in the first quarter, supply constraints, COVID lockdowns, and sanctions as a result of the Ukraine war made for uneven availability of equipment, wafers, and consumables. Customers expressed to us increased uncertainty in meeting shipment requirements and increasingly noticed our customers' executives spending effort to assure supply. Despite this backdrop, and in some cases because of these trends, we had a very strong bookings quarter. We did see some customers ship fewer tools than we had anticipated, which impacted the contribution from runtime licenses to analytics revenue in the quarter. At the same time, the contribution from gain share to integrated yield ramp revenue was improved modestly as a result of increased wafer shipments. We also experienced uptick in Accenture process control perpetual licenses as customers built out new capacity. Overall in the first quarter, the macro trends, while not all positive for our business, tended to break in our favor from a revenue perspective. Beyond these puts and takes that were a function of the macro challenges and opportunities, our business activity and results were very strong in the quarter. I will briefly touch on some highlights in bookings in partnership activities. Building on the Quick Start contract that was signed with a leading-edge customer in the fourth quarter of last year, and as anticipated, we signed a large follow-on contract. This makes it possible for this customer to use PDF's characterization vehicle test chips, DFM software, and Accentio Analytics to optimize its PDKs and foundry interface for a broad range of chip designs. Second, and consistent with recent history, the largest Accentio contract in the quarter was for a cloud deployment. This contract was for one of our first cloud renewals, as the customer was one of the early adopters of Accentio Cloud in 2019. The renewal grew ARR from this customer well over 50%, as they took advantage of tiered storage and expanded usage. There were other Accentio Cloud contracts in the quarter, as well as contracts for Accentio process control and test modules. These were at both new and existing customers. Third, we continue to experience strong customer adoption of our SDKs for Symmetrix connectivity products, and while impacted by supply chain, still strong shipments of runtime licenses on an absolute basis. We ended the quarter with record runtime license backlog, which speaks to our customers' challenges in making equipment shipments, but also gives us confidence in the future contribution from runtime licenses. Collaborating with other industry leaders continues to be an important part of our business. As we discussed last quarter, we announced our partnership with Siemens EDA to link Xensio with Tessin diagnostic products. Our first webinar in Q1 was highly attended, and the follow-up customer interest is high. In April, we announced a collaboration with Kulik and Sofa to link Xensio with their assembly manufacturing equipment. This partnership builds on our existing OEM relationship, where K&S includes our Accentio analytics for assembly operations to enable traceability. Like our Siemens collaboration, this expanded engagement starts off with an early customer access program. Our relationships with Adventest, Siemens, and K&S all speak to our customers' desire to add more analytics to the backend assembly and test. This is particularly true for chip and system companies employing system and package processes to implement 2.5D and 3D chip systems. Adventest's voice user conference is coming up next week, and we anticipate announcing new products as a result of our continued collaboration in conjunction with this conference. IBM's Sideview user group conference is also soon, and we'll be working with IBM to outline our collaboration for Sideview customers. Overall, customer and partner activities in the first quarter were strong and consistent with our expectation entering the year. Now, one quarter into 2022, the semiconductor environment remains robust and demand for integrated circuits is broad-based. We anticipate continued demand for our analytics platform, particularly on the cloud, from a broad cross-section of customers. Given the industry tailwinds I just summarized, and in spite of the macroeconomic uncertainty, We remain confident in the outlook we provided earlier this year. Before I turn the call over to Adnan, I would like to thank all of the PDF employees and contractors for their efforts during the first quarter. We managed to work in tight concert, navigating many of the challenges to have the strongest revenue quarter in the history of the company. Now I'll turn the call over to Adnan, who will review the financials and provide his perspective on the business. Adnan.

Thank you, John. Good afternoon, everyone. Good to speak with you again today, and I hope all of you and your families are doing well. We're pleased to review the financial results of the first quarter of 2022. As mentioned, our earnings release and a management report are posted in the investor relations section of our website. Our form 10Q was also filed with the SEC today. Please note that all of the financial results we discuss in today's call are on a non-GAAP basis, and a reconciliation to GAAP financials is provided in the materials on our website. We are off to a strong start in 2022. Total revenues for the first quarter came in at 33.5 million, up 38% over last year's first quarter and up 12% versus the prior quarter of Q4 2021. Analytics revenue came in at 30.4 million, an increase of 57% year-over-year and 12% quarter-over-quarter. The increase versus prior quarter was driven primarily by the start of a new leading-edge booking, which John spoke about, and increased Accenture software license sales. Analytics represented 91% of total Q1 revenues. For the quarter, integrated yield ramp revenue was $3.1 million, a year-over-year decrease versus $4.8 million, and a quarter-over-quarter increase versus $2.6 million. This quarter-over-quarter improvement was primarily due to higher wafer volumes driving gain share. We believe that our transition to a leading analytics provider to the global semiconductor supply chain is progressing well and is widely recognized within the industry. John also spoke about the progress of our ongoing and future plans for collaborations via announcements with Adventest, Siemens, Kulik and Salfa, and IBM. All important influential leaders in our industry. We are pleased that non-gap gross margin for the first quarter came in at 69% versus 61% year over year and 65% quarter over quarter. We improved our margins as we started to reap the benefits of scale in our cloud business, allowing us more efficient cloud spend and the ability to apply application engineering resources to pre-sales and product management rather than customer support. We also benefited from increased perpetual software license sales during the quarter, both of which together contributed to getting closer to our 70% long-term gross margin target. Bookings for the quarter increased more than 90% year over year, and our backlog at the end of the quarter grew to a healthy $196.8 million. Non-GAAP net income for the quarter totaled $3.7 million, or $0.09 per share, versus a non-GAAP net loss of $1.9 million, for $0.05 per share loss in the year-ago period, a year-over-year increase of $0.14 per share. Turning to the balance sheet, we have carefully managed our cash position and carry zero debt. In Q1 2022, we purchased approximately $5.8 million worth of shares. After the conclusion of the quarter, we purchased an additional $16.7 million worth of shares in a privately negotiated transaction when a block of approximately 715,000 shares became available. The total number of shares purchased this year totaled 933,458 at an average price of $24.07 per share for total year-to-date buybacks of 22.5 million. Our latest share count of 36.9 million shares as of May 6, 2022, as noted on the cover of our 10Q, is now lower than the number of shares outstanding when we filed our Form 10-K for the year 2020. As we look to the next quarter and the rest of the year, we expect to increase costs in Q2 as we ramp investment again to continue delivering on the increased interest in our products and solutions. We expect Q2 total revenue to be similar to Q1 level. And for the full year 2022, we expect total revenue growth to be between 20% to 25% on a year-over-year basis. All in all, it was a solid first quarter. We are pleased with the organic growth of our analytics business and are making good progress to meet or exceed our target model gross margin of 70%. With that, let me turn the call over to the operator for Q&A. Operator?

Thank you, sir. Ladies and gentlemen, if you have a question at this time, please press star and then the number one key on your touch-tone telephone. Again, that is R1 on your telephone keypad. If you wish to withdraw your question, simply press the pound key. We'll pause for just a moment to compile the Q&A roster. Your first question is from Christian Schwab from Craig Harlem. Your line is open.

Hey, guys. This is Tyler on behalf of Christian. Thanks for letting us ask a few questions. So first, I guess I wanted to ask, the announcement of the partnership with Kuhl Consult for during the quarter, that's multiple back-end customers we're partnering with now. I was wondering, is that what we should expect going forward, more back-end equipment partnerships? Or how do you feel about the possibility of partnerships more on the front end?

Yeah, sure, Tyler. This is John. We do see and we are engaged with customers on the front end as well. There's just, you know, the back end was something where there was very little analytics historically and very simple processes. Complexity has gone up. The desire to have more automation and more analytics we hear across our customers that are doing, you know, analog and sensor systems to the most complex computer system chips. So we see a lot of opportunity there. There's a lot of need. So probably it's more balanced at the back end and the front end, but we do have front-end customers moving also.

That sounds great. And then maybe a little bit on the model, the gross margins are obviously really strong in Q1. That's great to see. It sounded like, I just want to confirm, I guess, that there wasn't anything one time in nature in that, and would it be fair to expect that kind of 69% growth to go forward as you trend towards the 70% target?

Yeah, I think that's fair. We've become increasingly confident in the way we've been able to manage our business, getting comfortable with the scale we're achieving, and also what we're seeing in the outlook for the rest of the year. I think you can pick that up also in our comments that we expect the revenue to be 20% to 25%, which is a little bit of a more positive change compared to the last earnings release as well.

All right, perfect. That's all for us. Thanks, guys.

Again, as a reminder, that is star and then the number one on your telephone keypad to ask a question. Your next question is from Tom DeFelle from DA Davidson. Your light is open.

Yes, thank you for letting me take a question. I'll give a question today. So I guess on the collaborations with Dantes, Click, Siemens, IBM, John, maybe just talk a little bit about, you know, what is your investment going into those collaborations? You know, what are your projected timelines? before they drive your end market revenue and kind of how you view those collectively?

Sure, yeah. I mean, I think we're learning as we go, Tom. For sure they take a few quarters at least. I mean, generally before we announce them, we've been working on them for quite a while, you know, in the case of K&S for over a year on early analysis and prototypes of, you know, Accentio modules to take advantage of their data, leveraging our traceability, looking for what kinds of things machine learning can pick up on manufacturing. So by the time you folks see them, there's already been a good solid year of investment, typically, sometimes longer. And then, you know, we, as I said in the prepared remarks, we look to do early access customer programs. They may have some small amount of revenue associated with them. They're really, the revenue is mostly to make sure we've got some level of commitment on part of the customers early deploying, and then those will take some months to quarters, and then they start kicking in revenue. If you look at Adventest, it was about nine months after the contract was announced when we started getting revenue above the minimum level there, and we expect similar, maybe sometimes six months, but in that range.

Okay, and are these contracts that, you know, these four-plus companies are going to have with their customers and you'll get a percentage of that? Or how do you think the contracts will be ultimately structured?

Yeah, that's, again, something that's a work in progress, Tom. So some of them are sell-to's. Customers want to sell it to the customer. They want to, our partner wants to sell it to the customer directly and manage the contract. And we've done that with Adventus and then specific customer situations when IBM is, then the front, and they've done the selling, and then the contract between them and the customer for a bundle of Accentio and their software systems, and then they pass through to us certain amounts of revenue. There are also ones where we are in these early access programs, each selling our part, and then as we see the pattern that develops through those early access programs, we may choose to continue to sell separately and just have a connectors or choose to leverage the channel. One of our interests, of course, is to leverage our partners' channels. As you know, because of PDF's history, we've never built out a very, very large selling channel, yet we think there's an awful lot of latent interest in our platform. So we like to leverage their channel as much as possible, and sometimes that does mean having them have a direct relationship with the customer.

Okay, great. That's helpful. And then Adnan, when you look at the cost of these programs, is there any dramatic change to your cost structure once they start and once they start to produce revenue in the sense that are there certain costs that, like non-recurring engineering costs that, you know, get lumped in at a later date?

No, I mean, the perspective we take on all these engagements is like John said, right? Either their incremental revenue contribution that we're getting from the revenue that they're getting or it's driven you directly to us. But in all those cases, we want these to be positive marginal contributions. So nothing that would tend to make our model head in a regressive direction. We feel pretty good about some of the engagements. And frankly, some of these have also been yielding results and are already part of our results over the past couple of periods. So we feel pretty good about these engagements.

OK. And then, John, just finally, maybe a little update on the progress on the DFI tool in the field.

Yeah. We feel very good about that. In full manufacturing, running now basically tens of wafers a week, we don't get time on it to do any R&D-related work or setup. So it's, I think, moving along quite well. At the SPIE conference, some semiconductor engineers that had first-hand experience with the capabilities were presenting on keynotes and talked about what they saw in the machine and what it was capable of doing and the overall approach. And we were really pleased with the comments made in a public setting.

Great. And do you think this is essentially augmenting, I guess you'd call it the optical inspection? Are they working closely together or is just one set up to replace it ultimately?

You know, I think it's, I mean, generally, the advice I've gotten many, many years ago when we got involved in this whole thing was focus on the things you can't see. I think one of the technology leaders from NVIDIA, when he spoke at our user conference, said, you know, inspect the invisible. If you look at the early applications, it's a lot to look at open applications contacts and vias, which you can't see optically because the surface of the wafer looks great. You know, the machine's capable of scanning billions of those per hour. And when you look at a complex chip, even a 50 square millimeter chip, there's, you know, so many billions of those features on a chip that you need to have visibility to, you know, five or 10 billion minimum per wafer to just, you know, see if you're at your target yields. So we feel we have the only ability to see opens on an inline inspection case that's very much dependent on all the analysis the system does on the design, databases, our DFM software for that, and then all the analysis on the back end with Accenture to look for the trends and the layout features that are there. So I think it's quite complementary to optical inspection, and our industry for decades has had a problem of not being able to see opens. Now that we're trying to do more and more with 3D, open to cross layers is an increasingly important problem. So we feel like, you know, the DFI program is, you know, skating to where the puck is going in terms of inspection problems.

Great. I appreciate your time today. Thanks, John.

Thank you, Tom. Your next question is from Gus Richard from Northland. Your line is open.

Yes. Thanks for taking my question this quarter. just on the on the top line you know 90 is now the analytics business which i would imagine is pretty predictable you know can you give me a sense of you know how much your you know your guidance between 20 and 25 is sort of already in in backlog if you will yeah the color we give on our backlog um that we put in our 10q as well consistent with the last two quarters is of this backlog

more than half is within the next two years. I think within that, it's also fair to say that the majority of that half is within the next year. Look, we're starting to get increasingly confident every year. We don't break out the specifics, but I will tell you in our internal board decks over the last two years, we've been putting every year as part of our annual operating plan what percentage of next year is spoken for. And I can tell you that percentage has been going higher. So it's all a function of having this recurring revenue across the variety of streams of our businesses. We keep working on other areas today, for example, on the symmetric side that are runtime to also explore how to make those recurring as well. And parts of that are headed there, but again, very small and lots of opportunity, but increased confidence.

From a product standpoint side, the Accentio and the leading edge stuff, Gus, is all ratable. There's some perpetual licenses on the Accentio side, but in any given quarter, if under 10% of the analytics revenue. The piece that we're still working on is the runtime licenses on Symmetrix comes down to when customers ship. As I said in my prepared remarks, we had anticipated them shipping a little bit more this quarter than they actually shipped. We saw our backlog go up to records, I mean, really super level, which gives us some predictability about runtime licenses over the next couple of quarters. But we're still learning that piece of the business, Gus, and that piece You know, it's kind of a shadow backlog. We know they're going to ship something, but we don't really know each quarter how much it's going to be.

Okay. That was super helpful. And then, you know, R&D came in a lot higher than I thought. And gross margins came in a lot higher than I thought. And, you know, depending on, you know, what an engineer is doing there, they're either allocated to COGS or R&D. Was there a little bit of that in the quarter? You know, do we think about, you know, R&D at this run rate or, you know, is that going to, you know, go up a little bit more?

Yeah, it's a couple of comments. One that I think Tyler already asked. So we feel pretty good about our gross margin targets going forward. So that should be a proving point about how we're feeling about the cost and the management of cost. Second, specifically within the quarter, look, it's also that time of the year starting with Q1 where we start to accrue some personnel-related bonuses and things like that. So that's part of the reason why you're seeing a little bit of jump as well. Most of our jump was related to some of these accruals and some one-time things related to the headcount. But overall, on the R&D, the percentage of margin and our gross margin target is feeling pretty good about the rest of the year where we are.

Got it. Very helpful. A little bit of color on that. Yeah, just a lot of the improvements. When we first got Accenture on the cloud, we didn't take advantage of a lot of the features that were – in the cloud systems themselves. As I talked about tiered storage in our prepared remarks, we're taking advantage of features that are available in the hardware in the cloud that our on-premise customers just don't have. So now we're able to go back and say to customers, well, why manage backups? Backups cost you a lot of money, and it's a pain, and you never can find them when you need them. And the engineers always go back and ask for them when you have a field return. We now offer a feature called tiered storage in Accentio, and we're offering another tier this year where they can effectively just let the software manage, push the data to colder and colder and cheaper storage. To the engineer, it still looks like an SQL query, so he never has to go and, or she has to go and ask IT for, you know, getting an RMA off a backup tape. It's always there. But it's, from a cost standpoint, extremely cost effective for the customer. And these are ways we're improving the margin on the Accentio cloud deployments by giving customers more features that let them manage their total cost of doing analytics lower while growing what they spend with us. And that's why that ARR was up so much on that account. It's features like that. And you'll see us do more and more of those things.

Got it. Got it. All right. Very, very helpful. And then I think my last one is, you know, the quick start contract, you know, expanded to a full-blown contract. And you're talking about helping your customer develop PDKs, And I'm just wondering if you could talk a little bit more about that. I don't believe I've ever heard you, you know, work in that arena before. And I'm just kind of wondering what it is you're doing for the customer and sort of how you're helping them along, you know, with their customer enablement.

Yeah. You know, so with any of these technologies at the leading edge, the interaction between foundation IP, the modeling support, All needs to be validated with silicon across a very, very broad layout usage. Nowadays, you can say this is your design rule, but that design rule will behave differently in different density environments with different neighborhood environments. And as you know, we've always had the highest density of information per unit time and per unit area in the industry. We feel when you look at what you can get off of PDF systems, and just the analytics that we provide. You know, one time when an engineer was asked by an executive, what's the difference with PDF? It's like, well, we test maybe 30% of the test chips that we design, and we analyze 30% of that, so we're looking at 10% of our data. The PDF systems, we look at all of it, right? And so that exhaustiveness is really important as you try to go from supporting a very narrow set of IP to supporting a very broad set of designs in IP as you broaden out the number of designs that are going into a leading-edge technology, which typically happens as you look at moving away from a single-product family to multiple-product families or opening up factory availability. So that capability had always been there, and it was effectively given away as part of Gainshare, Gus. And as we've unbundled what was the Gainshare, we've been able to create a series of applications that were able to license on a subscription. So it was embedded in the, you know, it was like, well, we're on the hook for hitting a yield target. So we gave away a lot of that stuff to help the customer at the yield target. And in hindsight, probably we under, we under capital or under monetize it. Now we can sell it directly to the organization, probably the organization that wants that benefit, um, and charge for it separately and deliver, uh, therefore additional capability over time with that, with that application.

Okay, I understand what you're doing. And is this capability per node? Is it a time-based license? You can use it anywhere you want?

It's a time-based license. I mean, it's a subscription across a node or a family of nodes, depending on the way the contract's structured. It comes with a set of vehicles, a set of Accenture Cloud analytics and Part of that is additional vehicles, so as they bring on new products, new product families, sometimes associated with third-party customers, they're able to use the vehicles in conjunction with those IP families. So it's really around that design manufacturing interface.

Got it. And if they need additional CVs, is that, you know, incremental charge for them?

Yes, it's incremental charges on top of a base level. There's an assumption associated with, you know, MPWs for a certain amount of, you know, customers that are coming into the product to a technology node. And then there's up charges if they want to use more than that as it's designed. Got it.

Got it. And then, you know, if you could help me out, is this as, you know, the size of an old, you know, IYR contract or is it smaller? You know, can you size it relative to prior opportunities or business models?

Yeah, you know, These contracts tend to be in the, as you can see from our announcements, the quick start was in the single-digit millions range. These tend to be in the double-digit millions range, recognized over a couple of years. So they're relatively sizable. Obviously, what we want to do is extend the subscription period and make sure that the system is adding value over a longer time period. The renewal, how these renew is going to be very important for us to watch and the more we see these renew, the happier we'll be in the early innings on this.

Great. Thank you for your patience with me. I appreciate you. All right. Have a good one. Sure.

Again, if you would like to ask a question, please press star and then the number one key on your touchtone telephone. Again, that is star one. Your next question is from Blair Abernetti from Rosenblatt Securities. Your line is open.

Thanks. Nice quarter, guys.

Thank you.

Just a couple of follow-ups here. John, I just wonder if maybe on the BFI, I guess two things really. One is, are you seeing any or experiencing any supply chain issues with components going into your end of the product? that may be slowing or delaying you in any way now or in near term. And just in terms of the backlog, the sequential growth of 10% is very healthy. Is that all really Accentio driving that, or is DFI part of that as well? I just kind of wanted to get some color into that backlog growth.

Sure. So first to answer your question on supply chains, For sure, when we do go and order things, we've had some customers, even on computers, who wanted to deploy some Accenture process control on-premise, and they've asked us to purchase the computing configured for Accenture. And we found the lead times for everything to, of course, be up like everybody else is. And there's always abilities to buy your way to the front of the line in many cases. You know, so there are always... ways to ameliorate those concerns should you need to. We feel very good about our availability of what we need on the DFI ePRO program for the remainder of this year. Certainly embedded in our expectations for the remainder of this year, as Adnan said, 20% to 25% growth. It is not gated by an availability of any part for anything. So we don't see that as being really a factor for us And if you keep on extending shortage and unavailability of components out over a multi-year time period, yes, it could impact us. But for the remainder of this year, that will not be a limiter on our business that we see. And greatly for our cloud customers, and one of the things I always like pointing out to customers when they're considering putting Accentio on-premise or Accentio on-cloud, we can spin them up on cloud tomorrow. If they want us to order equipment and ship it on-premise, it could be six, eight, 12 weeks, right? So availability on cloud is always much more immediate. And for the DFI programs, we've got enough capacity for what we need to do for the remainder of this year. I think that's the answer on the supply chain. I think I'll turn it over to Adnan for the second question you asked.

Yeah, I think on the second question, look, I mean, if you look within the analytics business, again, as others have pointed out, 90% loss of revenue And we feel pretty good. I mean, within that, when we look at the three components that John also talked about, right, the extensive piece or the leading edge piece or the CCG piece, we track progress of each one of them within our businesses. And we're pretty pleased with how they did quarter over quarter and obviously year over year as well. Then in terms of a booking color, which you asked about as well, yes, when we do sign these larger deals, leading-edge deals will contribute to the total booking growth, of course. But at the same time, we're also pleased with the booking that we saw in the Accenture business as well as the CCG business. I'll give you two colors. John already talked about the leading edge. But within Accenture, it's the type and the quality of the booking that we're starting to focus much more on. The comment that John made about the ARR growth for that customer that came up for renewal of greater than 50% ARR, That's precisely the kind of thing we like to drive. In the CCG business, yes, it is mostly perpetual and we book and we ship, but what's important is how much more growth and booking there is that we weren't able to ship or might be for booking in the future. So the backlog even for that business starting to reach very strong levels is another positive indicator. So all in all, it feels pretty good. Of course, focusing on making sure that we continue to deliver growth from all these three components of analytics.

Okay, great. Thanks to the caller and And just shifting to your, I mean, margins, the gross margins were solid this quarter. You know, as you look at, Adnan, as you look at sort of these partnerships that you're supporting, you're taking on versus your R&D, internal R&D spend, how are you looking at capital allocation, if you will, or, you know, you have limited resources, so how are you So deciding where you're going to spend this year and what's sort of your hiring outlook for the rest of this year?

Yeah, good question. So, look, I mean, part of the reason, you know, as I think it was Gus who was asking about, so the headcount, spending increases as well, particularly on the R&D side. And also in the total OPEC side. If you look at it, it's really some of the headcount hiring we did. So, you know, we actually were surprised that we were able to add, you know, headcount higher than what we were even thinking. So we were able to kind of get some of the hiring done faster than we thought, which in this environment, we're pretty happy about. So that's part of what drove the R&D increase. Second piece is when the business is doing strong, obviously with the sales, there's going to be sales bonuses and commissions. So that was the second piece there. And the third piece is what I alluded to earlier in terms of this time of the year, start to increase some of the bonuses. So in terms of capital allocation for the new businesses, look, we think of them in two ways. Either is it a business that's going to contribute to us revenue coming through that partner, or it's going to be a new deal. In both of those cases, we look at it like we do for other deals on a deal-by-deal basis to see what resources we have. And sometimes we'll get contractors. We obviously use a meaningful number today, and we expand or contract that elastic need with the needs of our business. So we will continue to manage that. The goal is going to be making sure that we deliver on the margins and incrementally improve from where we are.

Great. Thanks very much, guys.

All right. I'm showing no further questions at this time. I would now like to turn the call back to CEO of PDF Solutions, Mr. John Kibarian, for closing comments.

Thank you for participating in our Q1 call. We look forward to talking with you again soon. Have a great day.

Ladies and gentlemen, this does conclude PDF Solutions' first quarter conference call. Thank you for participating. You may now disconnect.