PDF Solutions, Inc.

Good day, everyone, and welcome to the PDF Solutions, Inc. conference call to discuss its financial results for the first quarter and year-end 2023 conference call ending Saturday, December 31st, 2023. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 11 on your telephone. As a reminder, this conference is being recorded. If you have not yet received a copy of the corresponding press release, it has been posted to PDF's website at www.pdf.com. Some of the statements that will be made in the course of this conference are forward-looking, including statements regarding PDF's future financial results and performance, growth rates, and demand for its solutions. PDFs' actual results could differ materially. You should refer to the section entitled Risk Factors on pages 15 through 29 of PDF's annual report on Form 10-K for the fiscal year ended December 31, 2022, and similar disclosures in subsequent SEC filings. The following 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 your host, John Cravanian, PDF's President and Chief Executive Officer, and Adnan Raza, PDF's Chief Financial Officer. Mr. Cravanian, please go ahead.

Thank you for joining us on today's call. If you've not already seen our Earnings Press Release and Management Report for the first quarter, please go to the investor section of our website where each has been posted. The first quarter was a good start to our year. Revenue remained strong, and we benefited from our newer strategic partnerships as we experienced continued adoption of our end-to-end analytics by our customers. Before Adnan discusses the financials in detail, I have some comments about the events in the first quarter and our perceptions of the market in the second quarter and the remainder of the year. Bookings were light in the first quarter, following a record bookings in Q4. This is a similar pattern to Q2 of last year, which also followed a strong quarter. Despite the bookings level, activity with customers remained very strong. In the quarter, we started benefiting from our collaboration with SAP. We experienced our first large seven-figure booking for our products that integrate SAP's HANA ERP data with manufacturing analytics data, enabling more accurate and timely applications for operations and finance organizations. Our solutions are designed to enable customers to react more quickly to changing business environments. This product is a result of our collaboration with SAP, as well as our acquisition of Symmetrix that we completed about three years ago. The solution provided to the customer includes our Sapiens Manufacturing Hub, which enables near real-time connection between ERP manufacturing and engineering data as well as Accenture application that leverages financial, operational, and engineering data. More than this being an important first proof point for our collaboration with SAP, many of our customers are expressing interest in this application. While SAP Generated Business was the largest strategic partner related booking in the quarter, our other collaborations also resulted in bookings and important leads. In total, Over 40% of bookings in Q1 were VR strategic partners. This speaks to the value of our collaboration strategy. As the largest independent end-to-end analytics SaaS provider to the semiconductor industry, we are a natural partner. Other significant bookings in the quarter include contracts for leading-edge infrastructure for advanced development, including one with a memory customer. Our memory customers are experiencing strong correction this year. so you were encouraged to see this customer investing with PDF Solutions. Gainshare remained nearly unchanged from Q4 of last year as customers, particularly in China, shipped at similar volumes. Finally, bookings for Symmetrix connectivity runtime licenses decreased meaningfully in Q1 versus Q4 as our customers' equipment shipments decreased. This is not surprising given the weakness in the capital equipment market. Overall, with our strong backlog in business model, where most of our revenue is readily recognized, we continue to deliver strong results in revenue and earnings. We were pleased with the business activity in the quarter as it demonstrates the strength of our business model and partnership strategy. Now let me turn to discuss product development. Beyond the Sapiens manufacturing hub, we have other new products and capabilities coming out this year. This includes the next advancement in our E-Probe DFI tool. As part of the large contract we signed last year, we shipped the first of these advanced tools in April. It is designed for customers ramping three and two nanometer technologies, which often include backside power and gate all around structures. We are very excited about this milestone. Customers are building more systems and package products, targeting end markets where quality is key, such as automotive and data center. For these customers, it is critical to use more advanced test screening at more test insertion points. We have built AccentioTest exactly for this emerging need. This week, at Adventest's voice conference, we will demonstrate the next set of applications for their ACS edge box. These applications are designed for customers to deploy ML models at scale and benefit from our DEX data exchange network and Accentio cloud platform and managing the required data feed forward and feedback, as well as model building and model quality monitoring. Overall, from a product release standpoint, we expect the first half of this year to be very fruitful, which we believe will position us to have strong results in the second half strong results this year and in the future. One quarter into 2023, the semiconductor environment is unsettled. There has been an inventory correction affecting many of our Fabless and IDM customers. This has also generally impacted the foundries, OSATs, and equipment companies that we serve. While the short-term environment is unclear, the long-term drivers for our customers, including increased use of AIML, 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 chain that many of our customers are embracing. We remain confident in the outlook we provided earlier this year of overall annual revenue growth for the year approaching mid-teens. We would also like to announce that on October 24th through the 26th, we will have the PDF users group meeting at the Santa Clara Marriott. As with our pre-COVID event, we will host an analyst day on October 24th. This gives our customers, partners, analysts, and stockholders a chance to see the latest capabilities from PDF and also learn from each other. We hope that you'll be able to attend. I want to thank all the PDF employees and contractors for their efforts this quarter. Now I will turn the call over to Adnan, who will review the finances and provide his perspective on our results.

Adnan. 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 first quarter of 2023. As mentioned, our earnings release and 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're off to a good start with the first quarter of 2023. Total revenues for the first quarter were $40.8 million, up 22% over last year's first quarter, and up slightly on a sequential basis as well. Analytics revenue came in at $36.3 million, an increase of 19% year-over-year, and also up slightly on a sequential basis. Our year-over-year strong performance is a result of the strength from leading edge and Accenture business, offset by some of the equipment shipment trends we saw recently. For our Accenture products, we are benefiting from the recent large deals we spoke about over the last few quarters. utilizing the Accenture platform across manufacturing operations. For our leading edge solutions, we continue to engage strongly with multiple customers and see opportunities to expand this business. For Symmetrix products, while we saw meaningful impact due to the downturn in capital equipment spend, we benefited from our investments in new products such as Sapiens Manufacturing Hub. Taken as a whole, we believe our analytics business continues to be strong exhibiting near or in-line growth to our long-term growth targets. IYR revenue came in at $4.4 million and was up 44% over last year's first quarter. We are pleased that we have been able to rebuild this business over the last year and a half to meaningful levels. Our backlog for the quarter ended at a strong $261 million level, though down from $278 million a quarter ago. As John mentioned, our bookings will vary in size from quarter to quarter, and we are encouraged by what we see in our pipeline for the rest of the year. On a year-over-year basis, our backlog at the end of Q1 is up over 30%. Our gross margin for the first quarter came in at 75%, versus 69% for Q1 last year and 74% for Q4, as we benefited from incrementally higher revenues and were able to realize savings from lower expense accruals and some cloud spend optimization. Our operating margin for the first quarter came in at 19% versus 11% a year ago, same period, and 20% of prior sequential quarter. On a year-over-year basis, the operating margin expansion was driven primarily by stronger revenue growth coupled with lower expense growth from a cost of sales and operating expenses. We have improved our margins compared to last year as we reap the benefits of scale in our cloud business, allowing us the ability to apply engineering resources efficiently and more effective cloud spend. Net income for the quarter totaled $7.3 million or $0.19 per share, both essentially similar to Q4. However, meaningfully higher compared to Q1 last year's net income of $3.7 million or $0.09 per share. For year over year, our EPS increased by 10 cents per share. Turning to the balance sheet, we have carefully managed our cash position and carry zero debt. We ended the quarter with cash and equivalent balance of 133.5 million, compared to 139.2 million at the end of prior quarter, with the change driven primarily due to timing of payment of accrued employee bonuses and CapEx spend to support the opportunities ahead of us. As we look to the next quarter and the rest of the year, we expect to moderately increase costs for ramped investment to meet the bookings opportunities and customer pilots for a stronger second half of the year. For the full year 2022, we continue to be comfortable with our previously stated revenue growth rates approaching mid-teens on a year-over-year basis. All in all, it was a solid first quarter. and positions as well for the rest of the year. We are pleased with the resilience of our business model and the realized and potential value from our strategic partnerships. We also look forward to hosting you all during our planned analyst day and PDF users group conference starting on Tuesday, October 24th. Please look for a save the date press announcement later this week. With that, let me turn the call over to the operator for Q&A.