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 31, 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 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 could differ materially. You should refer to the section entitled Risk Factors on page 17 through 30 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 Kiberian, PDF's President and Chief Executive Officer, and Adnan Raza, PDF's Chief Financial Officer. Mr. Cabrera, please go ahead.

Thank you for joining us on today's call. If you have not already seen our earnings press release and manager report for the fourth quarter and the full year, please go to the investor 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-country market and conclude with our outlook on PDF Solutions prospects for the year and beyond. I then will then provide an overview of our financial results and its 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 Accentio Process Control and the E-Probe in the second half of the year. For Q4, we are happy to announce that the manufacturing evaluation of the E-Probe converted to revenue in the quarter. The customer elected to purchase the machine early due to achievement of the evaluation criteria sooner than they had anticipated. Similar to this customer, we believe other customers It 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 ePro purchases via a sale model for the machine to our business. Beyond the ePro purchase in the fourth quarter, the majority of other bookings in the quarter were for Accentio 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, Cerebus, 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 semiconductor 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 semiconductor community, there's an excitement about the impact of 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 our accomplishments in 2024. For the E-Probe, we'll 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 E-Probe sold in Q4, customers expressed to us a desire to buy the machines and then optionally subscribe application services and software. Accentio modules, including process control, MLOps, test, and manufacturing analytics, as well as Symetrix connectivity and SafeBeats Manufacturing Hub, are anticipated to drive most of the bookings this year. While IYR revenue has declined 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, IBMs, 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 year-over-year total revenues to grow at a rate approaching 15%, albeit with some potential lumpiness quarter-to-quarter associated with E-PROB 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 a management report in the investor relations section of our website. We expect to file our annual report on Form 10-K 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 10-K. Please note that all 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. 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% year-over-year, ahead of our long-term growth rate target model. For the full year of 2034, we generated record total revenues of $179.5 million versus $165.8 million in 2023, an 8% year-over-year increase, where we saw nearly all of the growth during the second half of 2034. 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 a year-over-year basis for the full year 2024. During the fourth quarter, we booked multiple extensive renewals and experienced strong growth in Symmetrix licenses driven by increased runtime orders from customers. We were particularly pleased with the momentum of our DFI ePRO 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 ePRO 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-share and 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 could repeat for another year in a row. For the fourth quarter, our gross margin was 72%, and we reported EPS of $0.25 per share. On a full year basis, our gross margin was 74%, and we reported EPS of $0.84. 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 year-over-year basis, we were able to grow gross margin 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 year-over-year basis. Our combined sales and marketing and G&A expenses or SG&A expenses, were higher by 16% on a year-over-year basis, predominantly driven by increased sales and marketing spending to meet increased customer pre-sales activities. 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 $0.84 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 ePRO 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 remain committed to our target model we set at our analyst day in October 2023 of 20% year-over-year total company revenue growth rate, 75% gross margin, and 20% operating margins. 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 drive growth. We are also pleased with the success of the DFIE Pro 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 eProve systems, we look at our total business as composed of, one, a strong base business driven by a diverse and growing product portfolio mix of essential software, leading edge software systems, and symmetric connectivity software. And two, as we're just starting to grow the book of business on the EPROM 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 a year-over-year basis. With that, I'll turn the call over to the operator to commence the question and answer session. Operator?