PDF Solutions, Inc.

Good day, ladies and gentlemen, and welcome to the PDF Solutions Incorporated conference call to discuss its financial results for the third quarter ending Wednesday, August 31st, 2022. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session for which instructions will be given at that time. If you need assistance during the conference, please press star then zero on your telephone keypad. As a reminder, this call 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 the section entitled Risk Factors on pages 17 through 30 of PDF's 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 risk 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 Kabarian, PDF's President and Chief Executive Officer, and Aznan Raza, PDF's Chief Financial Officer. Mr. Kabarian, please go ahead.

Thank you for joining us on today's call. If you've not already seen our earnings press release, management report, and 10-Q for the third quarter, please go to the investor section of our website where each has been posted. I will start the discussion by providing commentary on the third quarter and early part of the fourth quarter. From there, I'll provide our impressions of the current state of the semiconductor industry, the situation with respect to geopolitical factors, and the potential impact of the general economy on our business. I will conclude with our expectations for PDF Business for the remainder of the year before handing the call over to Adnan for more detailed financial update. On our last quarter's call, we expressed our confidence in the second half of 2022 bookings. We pointed out that protracted nature of some of our larger multi-element engagements with customers would mean that bookings would be lumpy and generally stronger in the second half than the first half. The third and early fourth quarter bookings show that we are realizing that prediction. Notable events include bookings of Symmetrix runtime licenses were near all-time highs, even as our equipment partners continued to experience part shortages that limited some of their shipments. Bookings of Accentio and the quarter included an eight-figure contract with a large integrated device manufacturer to renew cloud-hosted manufacturing analytics for a number of additional years and to add deployment of test operations for both the customer's internal test floors and multiple all sets, which enables this customer to leverage the platform benefits. And at the beginning of the fourth quarter, we booked a multi-year renewal for characterization and DFI infrastructure and for services for a customer using PDF systems on the leading edge. The last contract enables our customers' engineers to use on-the-cloud Accenture analytics and our software for IP hardening and design manufacturing co-optimization, as well as characterization vehicle test chips and our DFI systems on-premise. The contract term is through 2027, and while the total value of the contract is the largest in our history, It is also just the minimum commitment by the customer. Outlining the contract is a mechanism that allows the customer to order additional elements, such as additional cloud capacity or additional E-Probe tools on a subscription basis. Revenue in the quarter was a significant step up over Q2, and Adnan will go through the details. This included additional revenue from organic growth and gain share at 28 nanometer volumes at multiple customers, particularly in China, grew substantially for the third quarter. Gain share from the most significant 28-nanometer contract runs through the end of the decade and is not subject to any current geopolitical restrictions. A year ago, when our legacy gain share contracts ended, we felt that Q3 2021 would be the bottom for gain share revenue, and we expected to see a rebound. For years, we have said that we expected gain share on 28 nanometer, particularly in China, would increase at some point. We are pleased to see the increase this year. Turning to partnerships, we continue to increase activity. As you may have seen, Advent has announced their app store with four Accenture apps already available. We anticipate releasing additional apps to the AdventTest store in the fourth quarter this year and early next year. We booked additional licenses for our first integrated product, Dynamic Parametric Test, or DPT, that was originally released in 2021. With the success of DPT and these new apps available for the ACS Edge box, we believe our relationship with AdventTest will continue to progress. You may have also seen that Accentio is now featured on the manufacturing intelligence section of the Amazon website, covering AWS solutions for high-tech, electronics, and semiconductors. Overall, we anticipate our investments in strategic collaborations will bear more fruit in the coming years. With strong bookings in Accentio, Symmetrix connectivity, characterization, and DFI systems, as well as continued progress with our partners, The third quarter demonstrated PDF Solutions' broad value and strategic relevance across the IC ecosystem. From equipment companies to system manufacturers, PDF's data analytics platform is becoming ubiquitous in the IC industry. Moreover, our strong bookings in the year so far means we will end 2022 with strong backlog. Remember that our backlog does not include gain share, Symmetrix runtime licenses, or overage charges for Accentio usage. When factoring in our expectations for these, as well as our committed backlog, we expect to enter 2023 in our strongest position ever. Now let me turn to our perspective on the geopolitical situation I see industry and the general economy. As many of you have seen, as of October 7th, the US government placed restrictions on US entities and persons from supporting leading-edge logic, DRAM, or flash facilities in China that are not owned by multinationals. We have been studying these regulations closely and have worked with outside counsel and the US government for clarification. In addition to any potential impact on our ability to sell or support our products and services, we believe these new regulations may impact our customers in China that are developing advanced nodes and change their buying habits. In the least, it may delay some buying decisions on their part. As a result, and although our current business is not immediately impacted significantly, we are being conservative in estimating the potential impact on our future business in 2023 at this time. There is a silver lining here, and you see it in our revenue from China this year when compared to last. China revenue in the third quarter of this year is up 80% over last year's comparable quarter, primarily due to Symmetrix licenses, Accentio, and Gainshare, even after adjusting for one-time Gainshare in Q3. Moreover, PDF has been in China since 2006, and particularly through the pandemic, has built out a team that can support and serve our customers locally. We have not had any U.S. expats in China since 2018. Hence, while there may be restrictions on some of our products, We anticipate our Chinese customers investing less in the leading edge technologies and more in 28 and above, as well as in fabulous entities moving to production. We therefore expect that we will have important products we can sell them complete with fully local support. We believe China is an important market for PDF to continue to serve while ensuring full compliance with the US rules and regulations. As for the IC industry and general economy, it is clear that our customers, to varying degrees, whether they are in the equipment, foundry, phallus, or system business, are experiencing or anticipating a slowdown. At the same time the economic slowdown is occurring, CHIPS acts have passed in the US and other countries, and there are big movements in supply chain with customers expanding capacity globally. As a result, It is a particularly active time in the industry with both benefits for and pressures on our business. So far, the benefits have greatly outweighed the pressures. We believe this is due in part to the choices we have made over the years that have made the business more resilient. This is the evidence that PDF Solutions is well on the way to becoming the platform of choice for advanced data and analytic solutions for the ICE ecosystem. I want to thank our employees for their commitment to the company, our customers, and their colleagues, which has helped us thrive through the COVID lockdown, grow through the chip shortage, navigate the geopolitical landscape, and the chip supply corrections. With a large backlog, a strong PDF team located around the world, valued products and services, and committed customers, we expect to continue success in driving adoption of our solutions. Now I'll turn the call over to Adnan for review of the financials, after which we will open the call for your questions. Adnan.

Thank you, John. Good afternoon, everyone. Good to speak again with you today, and I hope all of you and your families are keeping safe. We're pleased to review the financial results of the third quarter and to bring you up to date on the progress of the business. We have posted our earnings release and management report on the investor relations section of our website. Our form 10Q 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 2022 were strong and continued our momentum with record revenue and solid year-over-year performance. It is worth noting that with the Symmetrix acquisition, which closed in 2020, This year, 2022, will reflect an entirely organic revenue growth year versus last year. We are pleased to report that third quarter total revenue was $39.9 million, up 35% from the comparable quarter last year and up 15% versus the prior quarter of Q2 this year. Our strong results were positively impacted by four factors. First, our 2022 bookings through today surpass our full year 2021 bookings. The largest deal for the third quarter was a multi-year $10-plus million Accenture deal with revenue recognition over time, which we believe has the opportunity to expand over the contract term and sets us up well for renewal from future elevated levels. Q4 bookings through today exceed $100 million and will be recognized over multiple years. Including this, bookings for the second half of the year are already two times larger than bookings for the first half of the year. Second, we experienced one-time increases this quarter in customer reported gainshare shipments of approximately $2 million related to customer production periods earlier in the year. Third, our Accenture business also had one-time services-related revenues recognized this quarter, which were significantly smaller than the one-time increases in gain share I just mentioned. Fourth, our gain share during Q3 was more than three times the gain share in the year-ago quarter, even after adjusting for the one-time gain share this quarter. While quarter-to-quarter we may experience fluctuations due to customer production driven by two factors, internal constraints and end-market demands, Over the longer term, we expect Gainshare to be a strong contributor to our results through the end of the decade. Turning to the components of our revenue, analytics revenue was up 21% to $32.9 million in Q3 this quarter versus same quarter last year. It was up 6% sequentially versus prior quarter of this year. Across the board, we are pleased with the strong year-over-year growth from all pieces of our analytics platform. Extensio Analytics, Leading Edge, and Symmetrix Connectivity. IYR revenue for the quarter was $7 million, a strong increase of 196% for the same quarter on a year-over-year basis and 97% versus Q2 of the year. All this said, we look at 2023, we remain cautious about the macro, geopolitical, and regulatory environment. and continue to evaluate the various restrictions, especially US-China relations. On expenses, our combined spend from cost of sales and operating expenses for the quarter was up $1.9 million over the last quarter, driven primarily by increases in headcount to support our growing business, some cloud costs, and small increases in travel expenses as we visit customers. Our gross margin for the quarter of 72% benefited from the one-time high margin gainshare during this quarter. As we have said before, while we have a strong focus on managing expenses from quarter to quarter, we will make the necessary investments to enhance our technological capabilities and competitive position to further cement the strategic relevance of our data analytics platform. We are pleased with the positive 20 cents of non-GAAP EPS reported this quarter as a result of combination of both items, strong revenues and amendment of expenses. For the year to date through Q3, we have now generated 41 cents of non-GAAP EPS. We look forward to Q4 and delivering on a strong year. Given the strong bookings growth, we expect to close this year with record backlog, meaningfully above last year's level. We also track uncontracted backlog, or what we internally call shadow backlog, which is not reported in our committed backlog numbers and encompasses estimates for gainshare, symmetric licenses, and overages on Accenture Cloud usage. While strong backlog will position as well for the coming years, with multiple macroeconomic and regulatory changes, we are evaluating our models for 2023. and will provide an update on the next earnings call concluding fiscal year 2022 results. Turning to the balance sheet, we ended the quarter with cash, cash equivalents, and short-term investments of approximately $116 million in no debt. Now turning to forecast for the full year revenue for 2022, we believe we can close out 2022 with year-over-year growth rates approaching 30%, purely organically, which would be better than the 26% year-over-year growth we delivered for 2021. We believe we're at the start of a multi-year growth cycle for PDF and our stockholders, where we've established our data analytics collection and connectivity platforms and are starting to garner attention and recognition from the leading cloud infrastructure players, ERP leaders, and semiconductor test software and hardware platforms. And then we turn to questions. So, Andrea, if you're still there, back to you then. Thanks for your patience.