PDF Solutions, Inc.

Good day, everyone, and welcome to the PDF Solutions, Inc. conference call to discuss its financial results for the second quarter conference call ending Sunday, June the 30th, 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 the 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 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 solution. PDF's actual results could differ materially. You could 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 31, 2023, 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, PDF's President and Chief Executive Officer, and Adnan Raza, PDF's Chief Financial Officer. Mr. Kabarian, please go ahead, sir.

Thank you for joining us on today's call. If you've not already seen our earnings press release and management report for the second quarter, please go to the investor section of our website where each has been posted. Before Adnan discusses the financials in detail, I have some comments to make about our observations for the second quarter and our view for the market for the remainder of the year. Our bookings in the second quarter were lower than the strong Q1. Due to the nature of some of the larger contracts, we expect lumpiness in any given quarter and therefore find it meaningful to look at a rolling average. Since our bookings started improving in Q4 of last year, we've been building backlog, which will support our future growth. The bookings in the quarter are mostly with customers that are either starting to deploy new systems like Sapiens Manufacturing Hub and MLOps or expanding the usage of our platform. In both cases, we anticipate many of these contracts to lead to expansion business in the future. Notable deals in the quarter include a large contract for Accenture Process Control for an advanced LogicFab, contract for initial deployment of Sapiens Manufacturing Hub for a large logic manufacturer who's doing a significant SAP S4 HANA deployment. Successful completion of this initial phase is expected to result in follow-on, much larger, more significant multi-year license for SMH, tying all their manufacturing to ERP system to facilitate new levels of productivity. That same customer, having already deployed Accentio in advanced packaging, is also entering into a contract with us in the quarter to pilot Accenture for wafer fab analytics. We closed our first contract for MLOps, an AI-based product we announced in Q4 of last year. This contract is for a large Valvis customer that is beginning their journey to deploy AI for testing of products. We anticipate successful application of AI for this use will result in their expanding the use of AI for most of tests. A number of customers also expanded Accentio cloud usage. While increasing the annual run rate of these contracts, these expansions also set up for a larger renewal, some of which we anticipate occurring in the next few quarters. Finally, bookings for Symmetrix connectivity runtime licenses showed modest improvements in Q2 over Q1, as our customers' equipment shipments increased. Overall, given a strong backlog in business model where most of our revenue is typically radically recognized, we continue to deliver strong results in revenue and earnings. We were pleased with the business results in the quarter as it demonstrates the strength of our business model. Turning to DFI, as we stated before, we have two machines at one customer and another machine at a second customer. A third has the right to send us wafers this year for us to analyze on the EPO machine in our facility while they build their new FAB. The machine will be shipped to them when the FAB is ready. For the first two customers, usage in Q2 was very high. What is clear is that the direct scan application of the eProbe has very unique capabilities that we believe are valuable in bringing up logic product yields and eventually the control production of those products. In both accounts, we've begun discussions about expanding the number of machines. We anticipate those discussions may take the next couple of quarters to conclude. Now let me turn to discuss our view on the environment and our perspective on the second half of the year. As we talk with our customers about their business, some are experiencing weakness while others are growing. As a result, we believe that for the overall semiconductor market, growth will be unevenly distributed. It won't be the case that a rising tide lifts all boats. With that said, our engagement with customers remains high, driven by fabs developing advanced logic processes such as 2 nanometer, fabless customers deploying advanced test control software, often with AI ML to augment conventional test methodologies, and companies engaged in digital transformations attempting to leverage data, whether that is IDMs, fabless, boundaries, and equipment vendors. Given these trends and strong customer engagement, We continue to expect revenue growth for the second half of the year to be about 20% over the same period a year ago. I want to thank all the 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.

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 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. For Q2, our total revenue was $41.7 million, essentially flat versus the same period a year ago and up slightly versus the prior quarter. Analytics revenue was up 3 percent to $38.1 million this quarter. versus $37.1 million for the second quarter of 2023, and represented 91% of total revenues this quarter. The growth in our analytics revenue came from increased usage and upsized renewals by our Accenture customers, as well as an uptick in our symmetric runtime licenses. As John said, we are excited about the level of engagement with our customers during the quarter, including Accenture adoption by a leading-edge fab customer, expansion of Accenture deployment by multiple merchant semiconductor customers, extension with a cloud provider for the internal use of Accenture, and an additional win on the Sapiens manufacturing hub with our partner SAP. We're also pleased with the engagement activity for our DFI system and E-Probe machine, and you will see us investing further to continue to address the market needs During the second quarter, revenue contribution from integrated yield ramp was 3.5 million, down 0.9 million or 21% compared to the same quarter a year ago, driven by lower gain share from our Asian customers as a result of the low volumes. We're pleased with our backlog, which grew in the first half of this year from 229.8 million at the end of December 23 to 243.2 million at the end of this quarter. The trends John and I have been discussing and the level of customer engagement leads us to believe we will grow our backlog in the second half of the year as well. We reported gross margins of 75% for the quarter, up versus both, 72% for the last quarter and 74% for the same quarter of the prior year. We are pleased with our gross margin performance for the quarter, which is in line with the long-term target financial model we shared at our analyst day and user conference last year. On the operating expense side, our expenses for the quarter were slightly down versus the prior quarter, driven by better utilization of our headcount resources, primarily in R&D, while SG&A expense was essentially flat compared to the prior quarter. For EPS, we reported a profit of 18 cents for the quarter, improving from the 15 cents we reported for the prior quarter. We ended the quarter with cash and cash equivalents of $118 million compared to $123 million for the prior quarter. We generated a small operating cash flow for the quarter. During the quarter, we used cash primarily for investment to support the development of our DFI system to address the market need and the build of additional machines we mentioned earlier. As we look to the rest of the year, we remain committed to our prior guidance for the year, with revenue growth returning to our 20% long-term target for the second half of the year compared to the matching prior year period. With that, let me turn the call over to the operator for Q&A.