PDF Solutions, Inc.

Good day, everyone, and welcome to the PDF Solutions, Inc. conference call to discuss its financial results for the third quarter conference call ending Monday, September 30th, 2024. At this time, all participants are in a listen-only mode. After the 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 statements, 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 PDS'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 and risks stated in this conference call are based on information available to PDS today. PDS assumes no obligation to update them Now I'd like to introduce John Kabarian, PDS's President and Chief Executive Officer, and Adnan Raza, PDS'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 and management report for the third 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 from the third quarter, our view of the market, and our business prospects for the remainder of the year. Bookings for the third quarter were driven by customers continuing to buy Accentio and Symmetrix connectivity software. Accentio sales include a large cloud customer renewing at a 50% increase in annual revenue due to the continued growth in usage as well as a number of customers deploying Accenture for process control. Advanced front-end logic, advanced packaging, and high voltage semiconductor manufacturing fabs drove the increase in process control licenses. This is consistent with our perspective of where investments are being made in the industry. Improvements in equipment runtime licenses of Symmetrix connectivity was relatively broad-based. Our integrated yield ramp business was weak in Q3, as wafer volumes were low and new contracts were slower to sign. We believe that both situations will likely improve over the next few quarters. Turning to design for inspection execution during the quarter, I am pleased to report continued great results. The U-Prove manufacturing evaluation at our second customer is proceeding well. The customer and PDF team believe that the evaluation can be completed ahead of schedule. This speaks to unique capabilities of the solution and the robustness of a hardware deployment. Utilization at our initial customer for E-Probe Direct Scan, where two machines in place, remains high. While exact timing is always a challenge to predict, we anticipate both customers impacting our bookings over the next quarters. As our confidence in E-Probe value and logic increased, we began exploring applications in memory, R&D, and production. In Q3, evaluations of the advantages of direct scan on memory was very promising, with the customer reporting that sensitivity and throughput advantages were over 10 times superior than conventional methods. The impending completion of the manufacturing evaluation, continued application development at our lead customer, and new applications in memory increase our confidence in the DFI ePro business. As evidenced by our ramping capital spending this year, we anticipate the ePro being a driver of revenue growth in Q4 and having a meaningful positive impact on our 2025 and beyond. Now a few comments on our view of the environment and our perspective on the fourth quarter and beyond. As we talk with customers about their business, some are experiencing weakness while others are growing. Consistent with our view last quarter, we believe our business will be 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 transformation attempting to leverage data, whether that is IDMs, fabless, foundries, or large equipment companies. So while we anticipate an industry where there will not be a rising tide lifting all boats, we believe we can extend the momentum we've begun in Q3 for continued growth in Q4. And while it's too early to comment on specific numbers for 2025, we expect robust growth then also. I do want to remind folks about our one-day AI executive workshop in San Francisco on December 12th, which is the day after the IEEE IEDM conference. We are bringing together a great collection of customers, industry experts, and PDF folks to talk about the advances in the application of AI for semiconductor manufacturing, driven in part by our new Model Ops, Guided Analytics, and our Accenture Analytics platform. I invite you all to attend. I want to thank all of the PDF employees and contractors for their efforts during the year. Let's have a great Q4 so we can deliver another record year. Now I'll turn the call over to Adnan, who will review the financials and provide his perspective on the results.

Adnan. Thank you, John. Good afternoon, everyone. Good to speak with you all again today. 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 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 on the materials on our website. Financial results for the third quarter of 2024 came in strong. Our bookings for the nine months of 2024 have now exceeded our bookings for the full year of 2023. We ended the quarter with a backlog of approximately $240 million, essentially flat from last quarter, even with record revenues delivered this quarter. Our total revenue for Q3 came in at $46.4 million, which is 11% higher versus the prior quarter of this year, and 10% higher versus the same quarter of last year. We are pleased with this strong performance in total revenues in spite of the decline in integrated yield ramp revenue. Our analytics revenue came in at $44.8 million, which was 17% higher versus the prior quarter and 13% higher versus the same quarter of last year. Analytics comprised 96% of revenue for the quarter. The strength in analytics revenue this quarter compared to last quarter was driven by all elements of our analytics platform. As John said, we are pleased with the level of engagement with our analytics customers, one example of which was a multi-year, eight-figure renewal where we were able to increase the annual spend rate by approximately 50%, primarily driven by increased usage and licenses the customer is deploying. As more people inside their organization rely on Accenture for yield analytics and manufacturing improvements. For our Symmetrix connectivity product, we saw a slight improvement in runtime licenses during Q3 compared to the prior quarter with strong year-over-year growth. Integrated yield ramp revenue was 4% of total revenues in Q3 and was lower by $1.9 million compared to the prior quarter and $1.2 million compared to the same quarter of the prior year. Overall, we are pleased with the growth rate we delivered for analytics, total revenues for the quarter, and continued engagements with our customers across our analytics platform. On gross margins, we reported an unusually strong 77% gross margin for Q3, which benefited from one-time perpetual software license deals during the quarter. While we are pleased with this result, for the next quarter, we expect gross margin to revert towards what we have been seeing during the first half of this year, driven by a shift in the mix of our product offerings. As announced at our analyst day in October, we remain committed to our long-term gross margin target of 75% and making progress towards that over the coming quarters. Our operating expenses in Q3 grew compared to the prior quarter, primarily due to increased investments in sales and marketing and R&D to support our future growth. On EPS, we were able to deliver $0.25 per share for the quarter, our strongest quarter for the year. Turning to the balance sheet, we ended the quarter with cash, cash equivalents, and short-term investments of approximately $120 million, incrementally higher compared to the prior quarter's ending cash balance of approximately $118 million. This quarter, we used a portion of our positive operating cash flow for investments in the eProve tool, as well as investment in a private company where we see opportunities to partner for the benefit of our leading edge enterprise customers. After achieving year-over-year revenue growth for the third quarter of 10% for total revenues and 13% for analytics revenue, we expect year-over-year total revenues in Q4 to grow in line with our long-term revenue growth target of 20%. We are also thankful to our customers and partners for supporting the growth uplift we delivered this quarter and look forward to growing sequentially in Q4. With that, we'll turn the call over to the operator to commence the Q&A session. Operator?