PDF Solutions, Inc.

Good day everyone and welcome to the PDF Solutions Inc. conference call to discuss its financial results for the fourth quarter and year end 2024, ending Tuesday, December 31st, 2024. 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 the session you will need to press star 1-1 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 .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 could differ materially. You should refer to the section entitled Risk Factors on page 17-30 of PDF's annual report on Form 10-K for the fiscal year ended December 31st, 2023, and similar disclosures and 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 Kibarian, PDF's President and Chief Executive Officer, and Adnan Raza, PDF's Chief Financial Officer. Mr. Kibarian, please go ahead.

Thank you for joining us on today's call. If you have not already seen our earnings press release and management report for the fourth quarter and the full year, please go to the Investors section of our website where each has been posted. Today I will start by reviewing 2024 with a particular focus on Q4. I will then provide our perspective on the semi-culture market and conclude with our outlook on PDF Solutions prospects for the year and beyond. Adnan will then provide an overview of our financial results and his perspective on the business before we turn the call over for questions. A year ago, when we talked about 2024, we anticipated revenue for the first half of the year being roughly comparable to the previous year, and then in the second half of the year our revenue growth would approach our target growth rate of 20%. Revenue for the second half of the year was up about 16% and up 22% for the fourth quarter, each one compared to the same period during the previous year. The return to growth in the second half of the year was due to leading edge and advanced packaging companies making investments in process control and yield improvement. This was reflected in our sales of Accentia Process Control and the eProbe in the second half of the year. For Q4, we are happy to announce that the manufacturing evaluation of the eProbe converted to revenue in the quarter. The customer elected to purchase the machine early due to the achievement of the evaluation criteria sooner than they had anticipated. Similar to this customer, we believe other customers will elect to purchase the hardware and then subscribe to the software and services on a roundable basis. As we discuss our outlook for 2025 and beyond, we will discuss the implications of the eProbe purchases via SAIA model for the machine to our business. Beyond the eProbe purchase in the fourth quarter, the majority of other bookings in the quarter were for Accentia and runtime licenses of our Symmetrix Control and Communication software. Also in the fourth quarter, we sponsored an AI executive workshop. 140 external attendees from more than 75 organizations listened to presentations from executives and engineers from analog devices, Cerobus, Intel, Qualcomm, Tokyo Electron, as well as partner presentations from Adventest, SAP, Siemens, and Teradyne. There were a few clear messages. First, it is necessary to organize semi-clutched data using a semantic model to align data across the manufacturing flow. Second, direct connections to the tools and other enterprise systems are necessary to take actions based on AI. And third, collaboration across the supply chain is necessary. Feedback from the attendees was fantastic. They told us that there was a good focus on tangible applications. They liked the range of speakers and breadth of topics, and the panels provided key insights. Across the semi-clutched community, there's an excitement about the impact that AI ML can have on business. We are proud that our event was a nexus for key members of the industry to discuss this important topic. Overall, we were very excited to see growth return to the company in the second half of the year and to experience the customer interest in the products and solutions we are delivering. Turning to our view of 2025. As we go into this year, we see an industry that is very much in a similar position as 2024. Customers in advanced logic, high bandwidth memory, and advanced packaging are investing, while other sectors of our customer base have a more cautious outlook. From a product perspective, we will build upon accomplishments in 2024. For the eProbe, we will expand the applications for advanced logic, including gate all around, backside power, contact, and via yield loss mechanisms, while also expanding applications for advanced DRAM. We anticipate being able to ship over four machines. From a business perspective, not all the shipments will convert to revenue in the year, and timing of the machine purchases could drive some additional lumpiness quarter to quarter. Like the eProbe sold in Q4, customers expressed to us a desire to buy the machines and then optionally subscribe application services and software. Existing modules, including process control, ML ops, test, and manufacturing analytics, as well as Symmetrix connectivity and Sapiens Manufacturing Hub are anticipated to drive most of the bookings this year. While IYR revenue has declined in the past few years, this year we anticipate it recovering as manufacturing volumes from new factories, particularly in Asia, are expected to drive improvements in gain share. Years ago, our business was mostly dependent on advanced process development at foundries. Today, our business is much more balanced, spread across equipment makers, foundries, IDMs, fabless, and system companies. It spans advanced logic to high voltage semiconductors. From customers using our systems for analytics of the most advanced packaging to discrete devices. So, while the industry growth is projected to be mixed, we anticipate -over-year total revenues to grow at a rate approaching 15%, albeit with some potential lumpiness quarter to quarter associated with the eProbe sales. I want to thank the customers, employees, contractors, and shareholders that helped the company achieve its success in 2024. And look forward to working with you all in 2025. I will now turn the call over to Adnan for more detailed comments on our results. Adnan?

Thank you, John. Good afternoon, everyone. Good to speak with you again today. We are pleased to review the financial results of the full year and the fourth quarter of 2024. As John said, we posted our earnings release and the results of the first quarter of 2024. We have a financial report and a management report in the investor relations section of our website. We expect to file our annual report on Form 10K with the SEC by the end of February, after our 2024 audit is complete. As a result, all financial results described in this call should be considered preliminary and are subject to change to reflect any necessary adjustments or changes in accounting estimates that are identified prior to the time we file our 10K. Please note that all the financial results we discussed in today's call will be on a non-GAP basis, and a reconciliation to GAP financials is provided in the materials on our website. We are pleased to again report record quarterly and annual total revenues. We finished the year strong with Q4 total revenues of $50.1 million. We are pleased that our total revenue for the quarter grew 22% -over-year ahead of our long-term growth rate target model. For the full year of 2024, we generated record total revenues of $179.5 million versus $165.8 million in 2023, an 8% -over-year increase, where we saw nearly all of the growth during the second half of 2024, which increased 16% over the comparable period of the prior year. Our analytics revenue grew 22% in Q4 over the comparable period of the prior year, and 11% on an -over-year basis for the full year 2024. During the fourth quarter, we booked multiple extensive renewals and experienced strong growth and symmetric licenses, driven by increased runtime orders from customers. We were particularly pleased with the momentum of our DFIE-approved systems in the fourth quarter, including, importantly, the successful conversion of an evaluation to a completed sale for a leading-edge customer base in Asia. This marks three of the major leading-edge global semiconductor companies now on the eFRO platform, and validates the success we believed we would see for the investments we made. We are also pleased with the improvement we saw in our integrated yield ramp revenue for the fourth quarter compared to the prior quarter and the same quarter of the previous year. Overall, for the full year, we are pleased with our revenue growth in spite of the IYR revenue decline, which was more than offset by the analytics revenue growth. Our analytics revenue accounted for 96% of the total revenue for the quarter and 94% of the total revenue for the full year. This percentage may vary quarter to quarter, depending on the anticipated increases in gain chain IYR and product portfolio mix and timing of machine sales, as John mentioned, within analytics. Just as we highlighted for the last few years on our earnings calls regarding full year 2022 and 2023 results, it is worth noting for this year 2024 as well that our full year analytics revenue for 2024 was more than the total company revenue of the prior year 2023, a noteworthy achievement we felt we repeat for another year in a row. For the fourth quarter, our gross margin was 72% and we reported EPS of 25 cents per share. On a full year basis, our gross margin was 74% and we reported EPS of 84 cents. The full year gross margin of 74% moves us towards our target model gross margin of 75% compared to 73% in the previous year. Despite the fact that gain share, which was very high gross margin, decreased on a -over-year basis, we were able to break gross margins in part due to overall growth but also driven by better control of our spending. Turning to operating expenses, we invested in R&D to advance the product roadmap and our analytics platform, increasing our R&D spend by 4% on a full -over-year basis. Our combined sales and marketing and G&A expenses or SG&A expenses were higher by 16% on a -over-year basis, predominantly driven by increased sales and marketing spending to meet increased customer pre-sales activity. On the G&A side, we incurred expenses related to ongoing litigation against the vendor, which we expect to decrease over time. For the full year 2024, we reported EPS of 84 cents a share and EPS growth of 15% versus the prior year. During the year, we generated positive operating cash flow of approximately $10 million and spent approximately $18 million on CAPEX related to primarily our DFI E-Proof systems and approximately $7 million on share buybacks. We are pleased with another year of positive operating cash flow generation consistent with our history. Turning to the balance sheet, we ended 2024 with cash and equivalents and short-term investments of approximately $115 million compared to approximately $136 million at the end of 2023, where the decrease was due primarily to the spending that we just discussed. We are proud of our performance in 2024 against the macro environment and over the long term we remain committed to our target model we set at our analyst day in October 2023 of 20% -over-year total company revenue growth rate, 75% gross margin and 20% operating margin. Now turning to our financial outlook for 2025, we look forward to another year of growth. Our outlook for the year reflects both the short-term weakness in the semiconductor industry and the strength of our pipeline, bolstered by the macro trends of distributed manufacturing, energy electrification and AI, which we expect to grow in growth. We are also pleased with the success of the DFI E-Proof system, including in particular the sale of the system to another leading edge customer during Q4 of 2024. Given the customer engagement and activity we are seeing for DFI in the overall market, we expect to ship multiple machines during 2025. As we see increased customer interest in DFI E-Proof systems, we look at our total business as composed of One, a strong base business driven by diverse and growing product portfolio mix of extensive software, leading edge software systems and symmetric connectivity software. And two, as we are just starting to grow the book of business on the E-Proof as an equipment sale, we can expect lumpiness quarter over quarter, but on an annual basis we expect this business to grow as we are entering the adoption phase. To reiterate John's comments and our press release, for the full year 2025 we expect the growth rate of our total revenue to approach 15% on an -over-year basis. With that, I'll turn the call over to the operator to commence the question and answer session. Operator?

Thank you, Mr. Raza. Ladies and gentlemen, if you have a question at this time, please press star 1-1 on your telephone. If you're using a speakerphone, please lift the handset before asking your question.

Please wait one moment for our first question. And our first question

comes from Blair Abernathy with Rosenblatt Securities. Your line is open.

Thanks. Good evening, gentlemen.

Hi,

Blair. Hi. John, I wonder if you could just maybe provide us with a little more color on the E-Probe, just particularly on the pipeline. So you talked about maybe several deals potentially this year. Are you looking to add additional new customers this year or are these follow-on sales? And the other question I had was just around the backlog. It came in around 221. It was 239 in Q3. Just maybe some sense of what's happening in the backlog as well.

Sure. As far as the E-Probe, yes, it will be a combination of repeat sales and existing customers as well as new sales and new customers. From an application space, as I said in my prepared remarks, it will be a combination of advanced logic as well as advanced DRAM. We did some pilot in Q3 and Q4 on DRAM with a couple of customers, one in particular. And we anticipate very positive results for DRAM for the E-Probe. And we were able to show some things, I think, that were quite impressive to the customer base. Again, the unique capability of the machine is the understanding of the design as it looks for yield issues. So, as I said in my prepared remarks, we do believe we will ship greater than four machines. And the question is how much we convert to revenue this year is a little bit questionable to us. So, we're being a little conservative on how we do that, in part because as we learn this first sale, when you turn over the title of the machine as opposed to subscribing it, there was a lot of other paperwork and things we needed to do and requirements that they have when they take title of the machine. So, this change, I think, is something we are learning. We learned it for one customer. We anticipate learning it for others. That gets to your question on backlog. Right? Had these been subscription machines, you would have seen, with the way that we would have done it, you would have probably changed the backlog characteristics a little bit. This will create a little bit higher terms percentage of revenue in the year than we've had in the past. This is kind of the nature of the change. Initially, I think we're not seeing that much difference in revenue as we build a book of business there. We will have a higher revenue and a higher terms rate likely as we look out beyond 2025 with this model shift.

Okay. Great. And in terms of what's the pipeline of new customers looking at this? Is it broadening out? Do you have the capacity to keep starting the sales process with new customers?

Yes. Like the machine that we shipped, actually it was installed in the first quarter of last year that we converted to revenue this year, we have machines that we will ship on a demo basis to customers in this first half of the year that we anticipate ship converting in subsequent quarters, potentially in this year and into early next year. And we're basically making sure that as we look across the application space, we're getting enough machines in enough different people's hands. Because if you just kind of think through the business, when you make a transition like that, you want enough customers going on so that it's not, you know, you're not dependent on anyone. So we are probably going more forward in this first half of the year, starting a number of new customer engagements and selling, you know, effectively a small number of machines. That's why we said that we said the lumpiness quarter over quarter to set up for the second half of this year and into next year a higher number of customers ongoing with the E-Probe than we had. Right. We learned a lot about this. Honestly, you got this manufacturing eval, the positives that that got us. That got us a customer really seeing what it could do in a manufacturing facility, not in an R&D facility, which then they came back to us in Q4 was an early Q1 with a whole bunch of additional applications for a number of different process technologies that they thought the machine would be suited for. We thought, OK, we need to figure out how we get evals into a lot of people's hands right now. That could be very valuable to us. And so that's what we're doing in this year.

Got it. So some of the activity levels have certainly picked up from earlier. A year ago.

Absolutely.

Yeah. OK, great. Thank you. I'll get back in the queue.

Thank you. Our next

question comes from William Jellison with the Davidson and Company. Your line is open.

Thanks for taking the questions, John. The first one is for you. You know, over the last few months, I saw PDF and sometimes yourself specifically be very active on the publication circuit talking about Model Ops. And I'm curious, as you say here today, what has been the rest activity to that product so far and how important is customer adoption of that product to the growth outlook this year?

Yeah, that's a great question. Well, yeah, it's been quite high. We converted customers in 2024 onto Model Ops. We expect we have a number of pilots ongoing on Model Ops, the increase in sales and marketing expenses in part due to Model Ops, in part due to other capabilities like guide analytics, which also uses, you know, AI, one of the things I like putting out to customers. You know, because we measure data, we can see what percentage of the data an engineer actually looks like. And so when a customer may store 500 terabytes of data, the engineer may only look at, their engineers may only look at 25 or 28 or 30 terabytes, in other words, five to 8% of their data. So you really want, AI can look at all the data and then make sure the engineers looking at the 5 or 8% that has the real signal. So, you know, Model Ops is for online applications, the offline applications, guide analytics, both of those things, we have a number of pilots ongoing, they will be important to our business in 2025. Also, as I said in my prepared remarks, what customers are learning as we've gone and put this in place and done pilots, they need to have all their data properly aligned. So now they're going back and realizing, okay, I wasn't doing a very good job at getting all the meta fields correctly in my systems. One of the speakers at our AI conference talked about that. And you really can't apply AI until you do that. And they're also learning, I need to be able to talk to the other systems, whether that's equipment, and you know, Advent Test and Teradyne talked about that at our user conference, or just the ERP system. I need to know where that wafer is going to go and be tested at wafer sort or final test. So, you know, AI will have direct impact on our business for things like Model Ops and guide analytics, but it will also have an indirect impact on, you know, the extent of your cloud deployments, the scale of those, also the scale of the test deployments, and the scale or the deployment of our Sapience Manufacturing Hub and the connection to ERP and MES systems. So, you know, there'll be the direct impact on the AI related products and then the indirect impact on the things that customers need to get done in order to apply AI, whether it's ours, you know, or anybody else's. And stay tuned. I think you'll see more announcements in these next couple of quarters on this stuff.

Great. Thank you, John. And then I'm on for you. I wanted to ask, it looks like the accounts receivable balance was quite elevated at the end of the quarter, which would have impacted cash flow. Is there anything in particular that is hurting collections on that front?

I

will.

Thanks

for the question.

No, absolutely. I'm for a question. We're actually quite pleased. You know, that was obviously our first talk when we saw that too, and it's a matter of timing and billing and, you know, of course, the new conversion of the Brooksdale that John talked about as well. And we've actually looked at how far we are into the collections already at the point of this earnings call, and we feel pretty good about the progress we've made. So nothing concerning there and actually look forward to collecting that cash and then reporting good numbers with those cash collections.

Great. Thanks, Adnan.

Anytime.

Thank you. As a reminder, if you'd like to ask a question, please press star 1-1. Our next question comes from Gus Richards with Northland Capital Markets. Your line is open.

Yes, thanks for letting me ask a few questions. Hey, I just want to understand a little bit better the terms of the contract and the sale. There's two elements. There's the applications and software licensing, which is a recurring revenue, and then there's the tools itself. And I kind of look at the ARs popping up and I'm just trying to make sure I understand how this deal works and is this going to be the model for DFI sales going forward?

Yeah, so we will still subscribe the entire systems, including the machines for customers that want that. We do have customers that prefer that. But there are customers that want to take title for the machine. And so what we've moved to is the machine title transfers. That's why you saw the AR. And they owe that money upfront. That's the AR balance increase that you saw. And then they subscribe for software and application services, even support services on the machine thereafter. And that is optional to them. They can do that or not. When you look at the machine compared to a regular EV machine, it does some things very well. But if you want to scan, if you went to our user conference, the stuff where you can take designs and know exactly where to go look at the designs, but the combination with Siemens, the way of being very design aware and the way you expect, that's stuff that you would see as a subsequent software sale, sometimes at the same time as the equipment. Sometimes it's stuff that comes a quarter or two later.

And I just kind of want to understand the revenue recognition here. You transfer title, but is it factory accepted? Is there any, it's a done deal, but or is there part of the acceptance still to go?

The acceptance was complete. So the revenue recognized for the machine itself has been done. There's some support portions that are not recognized that will be recognized out over the next year. So services aren't.

Got it. And then the next question I have is, you know, there's been management changes with a couple of your key customers. And you also talk about, you know, you know, shooting out evals rather than revenue machines in the first half. And I'm just wondering if the management changes at these couple of companies is sort of having an impact on your ability to close business.

You know, we have quick roads, very careful about commenting on any specific customer. I don't know that there's any real impact on leadership changes in the customers. As I said in my preparer remarks, though, you know, this is definitely a Dickens period of the best of time and worst of times when we look across our customer base. Right. So we have some customers we've seen pull in and accelerate. We've seen other customers be more cautious. You know, if we've been vetting people at the beginning of the year where we thought we were going to see Q4 come in, we probably would have guessed a different set of customers. Then, you know, we looked at Q3 and Q4. You know, Q3 and Q4, we saw stronger participation from our Asian customers. As I said in my preparer remarks, software and control systems for advanced packaging and logic in the E-PRO. We probably thought that would go a little bit different than it did if you had asked me to be a vetting person in February of 2024 versus, you know, with hindsight in 2025. But I think it kind of gets to the point I put in my preparer remarks. We have a business now that is very diverse. The percentage of any single customers come down tremendously. The percentage of different parts of the market have come down. Right. You know, a year ago, I was very excited about the silicon carbide market. Most of our customers in silicon carbide are not doing great. Right. But it really hasn't impacted much our Accentio business because our customers in advanced packaging picked a lot of that up. So, you know, today, you know, we are rapidly moving to a place where our advanced logic businesses, you know, are going to be in that 40 percent range. And I put the characterization in E-PROB DFI business, about, you know, 40 plus percent on fabulous IDMs and system companies using analytics for test product engineering, yield engineering, and then a growing percentage in the equipment category as well. As they get more and more, you know, software aware. You probably saw that at our conference, you know, what we demonstrated on digital twin and analytics, AI for equipment and the equipment vendors that spoke at the conference on their excitement there. And that will be a growing piece of our business. But, yeah, I mean, I don't think we focus too much on leadership change. If you go back to 2014-15 when, you know, 85 percent of our revenue was through your accounts, yes, I was very concerned about CEO changes that all of our customers. Today, it's just, you know, regular course of business.

Okay, got it. And then, you know, there's clearly a shortage of co-waz capacity. A lot of the OSATs are bringing up what I call co-waz light. And at the same time, I'm seeing the complexity of these triplets assemblies getting more so. And I'm just wondering is that, are those the things that are driving the advanced packaging? Are you sort of seeing a flurry of activity over the last couple quarters because of this?

Yeah, so far, our business on the advanced packaging has been with the most advanced parts of the market. We're working with the, you know, foundries and IDMs that are really kind of leading the forefront of the most sophisticated. But the point you bring up is exactly what we think is going to be impacting our business as we get out in these next years because when I meet with those leaders, particularly at some of the companies, they really don't want to build out all the capacity. They want to rely more and more on their OSAT partners for doing a lot of the parts of that manufacturing flow and test flow that they are really very well skilled at doing, diatach, testing, et cetera. So the manufacturing flow, when it gets to scale, right now, I think it's bespoke and very targeted to a small number of customers with very important and very high volume products. But it's not an easy to use technology so far for a lot of companies. So as that happens, you're going to see pieces of that flow move out to those companies. We think that's going to have a profound change on how, you know, if you just look at that manufacturing flow, it's a very complex process. It relies on amazing performance and precision out of the equipment. And it's very specific and bespoke to the products, the die sizes, the mechanical stress, the amount of thinning on the materials, et cetera. So really the collaboration across those three parts of the market are going to more and more be required. And, you know, we think that will impact our business in 2025 and 26 as we bring out more DEX notes to that part of the market and the dialogue that we've been having with our equipment customers right now. But so far, the second half of the year, it's been the leaders where they've got tremendous systems, you know, and capability process expertise internally, relying less on the equipment vendors, don't need as much help from their customers. We think going forward, you're going to see more and more equipment company participation in that work as it goes to the OSATs and more and more of the customers engaged in the qualification.

Got it. And then just last one for me, I apologize for so many questions. On HVM DRAM and the complexity there, you know, are you starting to penetrate those accounts with Accentio and back end applications?

Yeah, that's a great question, Gus. We have historically not made a lot of effort on the software side in the memory area. What was really surprising, positive for me, you know, in August, an executive asked their team to quickly send us wafers for the E-Probe. And within a month, no changes to the system. The team was able to show them what you could do with the E-Probe on the process technologies that go into HVM, right? Particularly on the silicon processing, the very advanced front end processing, wafer processing. And that kicked off a whole flurry of work in the fourth quarter, which is why, you know, my prepared remarks, I talked about DRAM. It is very much related to the HVM work, but it's primarily on the silicon processing so far and primarily on the E-Probe. It's reintroducing us to that part of the market that we had, began with, you know, neglected for many years. And so now we're starting to see, you know, opportunities beyond the E-Probe into Accentia and other things that probably we were a little bit tone deaf to, you know, to be candid with you. Because a lot of our Accentia business is really with Fabulous and system companies and IDMs that are basically asset-like manufacturers, really. Even for them, most of the silicon analyze and Accentia is coming out of foundries. So this is kind of, you know, the E-Probe work has kind of introduced us to that part of the market. We will explore that as we get into 2025. But right now, in our anticipation of our outlook for 2025 and 2026, when it comes to memory, it's primarily because of the E-Probe.

Got it. Got it. Very helpful. Appreciate it. Let me pass it on. Thank you.

Thank you. Again, if you'd like to ask a question, please press star 1-1.

At this time, there are no more questions. Ladies

and gentlemen, this concludes the program. Thank you for joining us on today's call. Good day.