PDF Solutions, Inc.

Good day, everyone, and welcome to the PDF Solutions, Inc. conference call to discuss its financial results for the second quarter and year-end 2023 conference call ending Friday, June 30, 2023. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during a session, you will need to press star 101 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. PDF's actual results code different materially. You should refer to the section entitled Risk factors on page 15 through 29 of PDF's annual report on Form 10-K for the fiscal year ended December 31st, 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 Kabarian, PDS President and Chief Executive Officer, and Adnan Raza, PDS 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 and management report for the first quarter, please go to the investor section of our website where each has been posted. The second quarter was very similar to our first quarter. Revenue remained strong 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 our observations from the second quarter and our perceptions of the market for the remainder of the year. Bookings in the second quarter were similar in magnitude to the first quarter. Significant contracts that closed in the quarter included customers deploying process control and finance apps, a cloud customer deploying analytics for an internal chip design team, and a chip company deploying analytics for complex 3D packaging. With continued strength in Asia, gain share improved in Q2 versus Q1 as shipments improved. Finally, bookings for Symmetrix connectivity runtime license showed modest improvements in Q2 versus Q1 as our customers' equipment shipments, particularly in China, started to increase. Overall, given our strong backlog in business model, where most of our revenue is typically ratably recognized, we continue to deliver strong results in revenue and earnings. Beyond the business that we booked, we have experienced significant customer interest in our analytics and a number of pilots are underway with customers. We were pleased with the business results in the quarter as it demonstrates the strength of our business model. Subsequent to the second quarter, we announced an acquisition of Lantern Machinery Analytics. Over the past year and a half, we have been evaluating with some battery manufacturers the ability to apply PDF's analytics platform to lithium-ion battery manufacturing. Today, lithium-ion battery manufacturing is under $100 billion in revenue, and over the next 12 years is forecasted to be over $400 billion. So there's going to be a tremendous increase in capacity. Moreover, controlling variability of manufacturing to improve yields and product quality is becoming of interest. Through our work with manufacturers, we recognize that there is a need to collect and process images. This data, when combined with upstream equipment sensor data, has the potential to be used to improve yields and product quality. Machinery Analytics had developed an ML pipeline for battery image processing. This capability may also have applications for our IC customers as well, particularly in the assembly processes where many images are collected. Machinery Analytics had some small revenue with early customers, but for the most part was a pre-revenue company. We will incorporate their ML pipeline in our products as we develop applications for battery and IC manufacturing. We're excited to have them join the team. Turning to DFI and our E-Probe machine, the customer we previously talked about has qualified our new E-Probe 350 and now has two machines running at their facility. After a lengthy evaluation in RFAB, we anticipate shipping another E-Probe 350 by the end of the year for an on-site evaluation with a different customer. We are very excited about the progress we are making with the DFI program. As our customers develop 3D processes like gate all-around and backside power, we believe electrical inspection will increasingly be important to ramp and control yields. Now let me turn to discuss our view of the environment and our perspective of the second half of the year. Midway into 2023, we are more cautious in our short-term view. Our gainshare customers in China are reporting decreased wafer volumes, which will reduce gainshare in the second half of the year. We anticipate continued increases in Symmetrix runtime licenses, but a lower rate of improvement than we initially anticipated. as equipment suppliers, particularly outside of China, remain conservative on the increase in equipment shipments. Finally, for Accentio, in Q2, we saw customers delay some expected bookings to the second half of the year. Although some of those bookings already closed in July, we remain cautious about the timing of others. Early this year, we anticipated revenue growth for the year approaching mid-teens. Our expectation now is year-over-year growth will be in the low double-digit percentage. The core analytics growth is expected to exceed the overall growth, but it will be offset partially by a year-over-year decline in integrated yield ramp. While the short-term environment is unsettled, the long-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 supply chains that many of our customers are embracing. As a result, our pipeline of business is strong and remain confident on our customers' continued success and growth. We would also like to remind everyone that on October 24th through the 26th, we will have the PDF users conference meeting at the Santa Clara Marriott. As with our pre-COVID event, we will combine one of those days with an analyst day, which will be on October 24th. This gives our customers, strategic partners, analysts, and stockholders a chance to see the latest capabilities of PDF and to learn from each other. The theme this year is applying AI ML to transform manufacturing and technology R&D. The list of speakers is turning out to be the strongest we have ever assembled. Sanjay Natarajan, SVP and co-GM of the Intel Logic Technology Development, will talk about the transformation they have made, which has enabled them to deliver five nodes in four years. Other speakers include executives from SAP, Siemens, Adventest, global foundries, and analog devices. We also expect additional executive engineers will commit to speak at the event. Our attendees usually include executives and engineers from system companies, Fabless, IBMs, OSATs, foundries, and equipment companies, who all share a passion for analytics and ML that drives R&D and manufacturing. We are looking forward to the event this year after a multi-year hiatus after COVID. I want to thank all PDF employees and contractors for their efforts during the first half of the year. Now I'll turn the call over to Adnan, who will review the financials and provide his perspective on our results.

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 10Q has also been filed with the SEC today. Please note that all of the financial results we discussed 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 second quarter of 2023 continue to be strong, coming after a solid first quarter. Q2 total revenue was $41.6 million, up 20% versus the comparable quarter last year. Analytics revenue was up 19% to $37.1 million in Q2 2020. of this year, versus $31.1 million in the second quarter of 2022, and represented 89% of total revenue this quarter. The growth in our analytics revenues came from growth in Accentio and leading edge products, offset by decline in Symmetrix runtime licenses. On a quarter-over-quarter basis, our analytics revenue was up $0.8 million. During the second quarter, revenue contribution from integrated yield ramp was 4.5 million, up 26% from last year's comparable quarter, primarily due to increased level of gain share from higher volumes than some of our Asian customers. We are very pleased with the various engagements we have currently ongoing, the deal sizes of bookings we are working to close, and the strategic conversations we are involved in with our customers, strategic partners, and major semiconductor governmental initiatives around the world. All of these factors evidence progress towards our goal to be the go-to manufacturing data analytics platform for the global semiconductor and electronics ecosystems. Our ending backlog at the end of Q2 of this year was 244.9 million, which is 33% higher than our prior year Q2 ending backlog. We reported gross margins of 74% for the quarter, up meaningfully versus 69% for Q2 of prior year. As we have said before, on a quarter-over-quarter basis, we may see some variations on this metric as we modulate the spend for our customer engagement and grow our cloud and people spend to support the growth of recurring revenues. We remain committed to our non-GAAP gross margin target model of greater than 70%. On the operating expense spending side, our R&D spend was down 0.6 million versus the prior quarter as we continue to take advantage of our leverage and shift our resources to pre-sales and new business initiatives. Our SG&A was up 0.9 million versus the prior quarter, primarily driven by increased spend in pre-sales and marketing efforts. Overall, within SG&A, we have invested faster into sales and marketing, while ensuring that on the G&A side, we can take advantage of our scale and have brought down G&A as a percentage of our revenue slightly, versus both prior quarter as well as Q2 of prior year. For EPS, we reported a profit of $0.19 for the quarter, similar to last quarter level, but meaningfully higher than $0.11 for the same quarter a year ago. We are pleased about our year-over-year $0.08 positive swing in EPS compared to the same quarter of last year. We ended the quarter with cash and cash equivalents of $124 million compared to $117 million at the end of the same quarter a year ago and $134 million in the prior quarter, with the change versus the prior quarter primarily driven by an increase in our accounts receivables at the end of the quarter due to timing of billings. Since the end of the quarter through today, we have already collected the majority of our quarter-end billed receivables. During the quarter, we also spent approximately $1.9 million of cash to close the acquisition of Machinery Analytics, as John mentioned, with an excellent team based out of Canada and Poland to expand our analytics platform for EV battery manufacturing. We continue to believe that the strength of our balance sheet positions as well to consider strategic investments and acquisitions as they become available. Like John mentioned, as we look forward, we expect to grow our revenue for this year on a year-over-year basis. at lower double-digit percentage level instead of the approaching mid-teens level we had previously guided. We were being careful based on three key observations of the rest of the year. First, our gain share from some Asian customers is expected to slow down for the rest of the year as they face their own economic and demand challenges and volumes decrease. Second, our Symmetrix runtime licenses, while upwards this prior quarter, are still facing a mix of increased demand from some regions, coupled with muted demand from other regions. Third, consistent with John's comments, the timing of bookings is less clear, given the industry dynamics. As we become strategically important for our customers and partners, the size of our bookings is growing, with many approaching the high single-digit or double-digit millions of dollars. Overall, when we look at the longer term, we feel emboldened by two factors, the demand for our products that we can see in our sales pipeline, and the strategic relevance of our analytics platform, which is taking hold with all three constituents, customers, strategic partners, and the various government initiatives. We also believe that in our analytics platform, we have three strong elements that complement each other. the Accenture analytics platform, the unique data collection capabilities of our leading edge products, and our Symmetrix connectivity products. We're excited about the future and the growth ahead for PDF. With that, I'll turn the call over to the operator to commence the question and answer session. Operator? Thank you, Mr. Raza.