PDF Solutions, Inc.

Good day, everyone, and welcome to the PDF Solutions, Inc. conference call to discuss its financial results for the first quarter conference call ending Sunday, March 31, 2024. 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 the session, you will 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 PDS'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 PDS's future financial results and performance, growth rates, and demand for its solutions. PDS's actual results could differ materially you should refer to the section entitled Risk Factors on pages 16 through 36 of PDF's annual report on Form 10-K for the fiscal year ended December 31st, 2023, and similar disclosures in subsequent SEC filings. The forward-looking statements Enrique stated in this conference call are based on information available to PDFs today. PDF assumes no obligation to update them. Now I'd like to introduce John Kebarian, PDS's President and Chief Executive Officer, and Adnan Raza, PDS's Chief Financial Officer. Mr. Kebarian, 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 strong start to our year. Business activity continues to be robust as our products and solutions are well aligned with the larger trends driving the IC industry. Before Adnan discusses the financials in detail, I have some comments to make about the events in the first quarter and our perceptions of the market in the second quarter and for the remainder of the year. Building on a strong Q4, Q1 bookings were again up over the previous quarter, which continues to build backlogs. When we look at the nature of the business in Q1, we see that bookings and pre-sales activities were driven by the alignment between larger macro trends in the industry and our product development investments. I will describe three of these. First, AI is driving strong demand for advanced logic processes that leverage 3D transistors like nanosheets and 3D interconnects such as backside power. In the quarter, our largest booking, was with a new customer deploying our systems, including DFI, CVs, and Accentio to accelerate the development and manufacturing of advanced two nanometer logic. Second, customers are driving digital transformations to achieve more efficient operations. Our systems from Accentio Cloud, Accentio Test Operations, and Sapiens Manufacturing Hub are gaining increased attention from our customers for this workload. Bookings in the quarter include cloud customer expanding Accenture usage, and pre-sales activities include a number of customers evaluating a Sapiens manufacturing hub as part of the SAP S4 HANA deployment. Third, customers are accelerating their use of AI and machine learning to achieve their yield and operational targets. In Q4, we announced our MLOps system that enables engineers to build AI models and publish them in manufacturing, both at the factories they own, as well as their partners facilities via our DEX network. Customers report to us that they are mastering the ability to train AI models, but the challenges are to deploy them in the field, monitor their performance, and act on the results. Our MLOps system was designed for these challenges. It leverages Accenture Cloud, DEX, and test infrastructure. In the first quarter, we started running MLOps pilots with our lead customers. Overall, we believe the strong engagement we have with customers is due to our investments in our E-Probe DFI systems, our SMH digital platform for manufacturing, and our MLOps for testing of complex system and package products. I know many of you are curious about progress with our DFI and E-Probe. Utilization of the tools in the field is extremely high. We believe because its unique ability in seeing 3D yield issues. In February, we said we anticipated a third customer starting to deploy DFI, and we would ship a third tool to our lead customer. The contract we signed this past quarter brings us a new customer for the E-Probe. We also remain on track to ship our third tool to our lead customer this quarter. Given this acceleration of our 2024 goals for DFI, we are now looking to accelerate our manufacturing, as we believe demand is quite strong for this solution. Our results have occurred while the industry is at an unusual time. Government investments have resulted in outside capital spending in parts of the world. Demand for some chips has been very weak, while silicon for AI has been strong. That said, we believe the industry is starting to see a general improvement due to the metrics we track about its health. As we look to our runtime license sales, which track our equipment customer shipments, we see improvements when compared to Q4 of last year. This, as well as our strong bookings in Q4 of last year and Q1 of this year, suggest customers expect stronger business as they go through the year. We are pleased with the business activity in the quarter as it demonstrates the strength of our strategy and investments. Consistent with our comments in the February call, we expect the first half of the year to be flat year over year, with the second half of the year getting back to our growth target of 20%. I want to thank all the PDF employees and contractors for their efforts during the call, during the first quarter, sorry. Now I'd like to turn the call over to Adnan, who will review the finances and provide his perspective on our results.

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 for the first quarter of 2024. 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 gap financials is provided in the materials on our website. We're excited about the booking momentum during the quarter, especially the meaningful multi-year leading-edge booking with a new customer. Our backlog ending the first quarter was $262 million, or approximately $32 million higher compared to our prior quarter ending backlog of $230 million. Total revenues for the first quarter were $41.3 million, up slightly versus the prior year, and up slightly on a sequential basis as well. Analytics revenue came in at $38.5 million, an increase of 6% year-over-year. On a year-over-year basis for the quarter, our IYR business was down, driven by lower fixed fee and gain share. However, the growth in analytics allowed us to be slightly up for total revenue versus prior year period. Like John said, for our Accenture products, we continue to engage with customers on opportunities we are seeing for the digital transformation initiatives and deploying the Accenture platform across their manufacturing operations. For our leading edge solutions, we are emboldened by the booking with the new customer, which encompasses our broader offerings, including CB infrastructure, DFI, and Accenture software. We're starting to see opportunities for further expansion over the coming years with continued investment in the DFI system. For our Symmetrix products, we saw growth in runtime licenses versus the prior quarter and remain cautiously optimistic. Taken as a whole, we believe our portfolio product offerings provides us the opportunities for strategic engagement with customers for our analytic solutions. IYR revenue came in at $2.8 million for the quarter. and was down compared to 4.4 million of prior year period, primarily driven by lower time spent on fixed fee projects and lower gain share. We remain optimistic about the IIR business in the longer term as eventual customer product shipment volumes increase. Our gross margin for the first quarter came in at 72% versus 75% for Q1 last year and flat versus 72% of Q4. On a year-over-year basis, our cost of sales was driven by the lease accounting treatment for the DFI hardware, increased personnel costs, and increases in cloud costs. Our operating margin for the first quarter came in at 12%, versus 19% for the year-ago same period, and 15% for the prior sequential quarter. On a year-over-year basis, we were able to better manage and reduce our R&D expenses, while our SG&A expenses increased as we utilized our technical resources and added sales and marketing headcount to support the pre-sales and sales activities with our customers. Net income for the quarter totaled $5.7 million or $0.15 per share, both essentially similar to Q4, however lower on a year-over-year basis. Turning to the balance sheet, we ended the quarter with cash, cash equivalents, and short-term investments of $123 million, compared to $136 million at the end of the prior quarter. with the change primarily driven by $7 million of share buybacks completed during the first quarter, annual bonus payout for calendar year 2023, and CapEx expenses to support the build out of our DFI systems that John talked about. We have also adopted a new larger $40 million share buyback program. Overall, we're pleased with the new leading edge booking during the quarter, rose in our backlog, and are excited by the opportunities we're seeing in our pipeline. As we look to the rest of the year, we remain committed to our prior guidance of flat revenues for the first half of this year, with the revenue growth returning to our 20% long-term target for the second half of the year, both compared to the respective prior year periods. With that, let me turn the call over to the operator for Q&A.