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 2025, ending Wednesday, December 31, 2025. 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 16 through 30 for of PDF's annual report on Form 10-K for the fiscal year ended December 31, 2024, and similar disclosures in subsequent SEC filings. The forward-looking statements and risks stated in this conference call are based on the 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.

Thank you for joining us on today's call. If you've not already seen our earnings press release and management report for the fourth quarter and full year, please go to the investor section of our website where each has been posted. 2025 was a transformative year for PDS. In my prepared remarks, I will summarize our current positioning, key achievements in the year, and our major goals. I will also comment on the near-term business climate and our expectations for 2026. After Adnan's remarks on our financial results, we will take your questions. As we discussed last December in our users conference, there are semiconductor industry trends that have established PDF's opportunity today and in the future. I see manufacturing processes both in the way for FAB and assembly are creating more complex 3D structures. IC companies have moved from providing components to systems. The complexity of system manufacturing, particularly of 3D components, is driving the customers to look for new ways to characterize, analyze, and control production. As the industry rapidly scales to over $1 trillion in revenue, it is building manufacturing operations around the world. To operate effectively, these facilities need the collaboration of engineers and systems from the entire ecosystem of suppliers, factory operators, and customers. In our industry, this means moving from a people-centric approach to an AI-driven collaboration. Finally, the chip industry is a critical driver for AI and increasingly needs to benefit from AI to keep up with the demand. These drivers, 3D manufacturing, supply chain complexity, and AI present a significant opportunity for PDF to reinvent itself again. In the first half of this decade, PDF solutions growth stemmed from our transition to an analytics platform provider. Since 2020, the company grew at approximately 20% compound annual growth rate and expanded its growth margins from the mid-60s to the mid-70s, and its operating margins from basically break-even to 20%. As we enter 2025, we believe the trends that enabled our growth as an analytics platform were accelerating greatly because of the impact AI is having on the IC industry. This acceleration meant that our customers needed us to evolve from providing an analytics platform primarily used by each of our customers independently to increasingly becoming a platform for AI driven collaboration, both across the enterprise and across the supply chain. Our actions in 2025 spoke to our conviction of this vision. For our customers to leverage AI to drive collaboration within their organization and across the industry, they needed orchestration systems to enable aligning operational processes, sharing data, and driving coordinated actions. In 2025, we signed multiple contracts with our customers to deploy our Sapiens Manufacturing Hub, including a contract in the fourth quarter. Sapiens Manufacturing Hub, initiated from our partnership with SAP, enables collaborations between engineering, manufacturing operations, and finance. As our customers drive AI collaboration to their suppliers and customers, they need a secure connectivity layer. And in 2025, we acquired SecureWise, the leading connectivity platform that connects equipment vendors to the fabs. Under our stewardship, we recommitted to the core SecureWise customers, for example, closing an eight-figure contract with one of the leading equipment suppliers. We also began expanding applications with foundry customers, closing an eight-figure contract with a multinational IC manufacturing company to enable collaboration across their enterprise. As we further integrate SecureWise with our DEX network at OSATS, we are expanding collaboration to include the Fabless. While orchestration enables larger data sets and the need to operate near real time, we realized it was important to also reinvent analytics. Our customer's challenge includes aligning, storing, and leveraging data to make decisions, often driven by AI. we undertook reinventing three critical components of Accentio. First, we are enhancing our data model to support new use cases where the Accentio database would be used for applications beyond the native analytics it provides. Second, we are integrating an AI operations platform for data science within Accentio so customers can use the PDF solutions platform to build and deploy their AI pipeline. Third, we are releasing Accenture Scalable Analytics, which is designed to enable engineers to interact with datasets that previously could only be processed in batch. Progress on all three of these initiatives was demonstrated in 2025. In the third quarter, we announced a large eight-figure contract for Accenture Enterprise that included advanced database AI operation capabilities and scalable analytics. Also in the third quarter, we announced that we licensed the source code for Tiber AI Studio, which was previously known as Converge.io from Intel, and began selling it as Accenture Studio AI. Accenture Studio AI is designed to enable AI scientists to use the data in Accenture as they develop and deploy pipelines at scale and across the SecureWise network to their suppliers. This is particularly valuable for our customers that have multiple test insertions, as is the case with advanced packaging. In Q4 at our users conference, we announced Xentio Scalable Analytics. We demonstrated the ability for engineers and algorithms to interact with datasets that were previously only possible to process in batch. Intel spoke about the advantages of Xentio Enterprise and Xentio Scalable Analytics at the same conference. Finally, to collaborate and populate an analytics system and AI models, our customers need data. In that regard, in 2025, we expanded our Symmetrix connectivity business, achieving record runtime license revenues. Also, in the second half of the year, we shipped two E-Probe inspection machines to a manufacturing site for one of our customers. In conjunction with our FHIR and Accentio software, This enables customers to ramp and control production of advanced 3D products through an application we call Direct Scan. This customer is now able to improve production control and yields by identifying new production issues in line using the Direct Scan system. So, while we started the decade as a provider of analytics platform that benefited from the unique data generated from our characterization vehicle test chips, we ended 2025 having greatly expanded our platform to include our orchestration layer in our manufacturing solutions while reinventing the core analytics platform. As a result, we achieved record total revenue in 2025, 22% growth over the previous year, and grew our growth in net margins as we benefited from scale. Our goals for the next phase of PDF Solutions growth are to establish orchestration analytics and the data component of our platform across the industry. As we discussed at our analyst day, we believe this will enable us to continue to grow at 20% CAGR while expanding our margins. As we begin 2026, we see a market whose need for AI-driven collaboration is accelerating. Activity with customers has been at an elevated level across our Fabless, Fab, and Equipment customers. We see opportunities in logic and advanced memory for our characterization vehicle and direct scan systems, including both in R&D and manufacturing. We expect to nearly double the number of E-Probe machines in the field this year. From an IDM and Fabless perspective, we anticipate increased customer activity, particularly in the second half of the year, as we release more capabilities building on and expanding Accenture Scalable Analytics and Studio AI. Given our strong portfolio of SecureWise and Symmetrix products for equipment control, connectivity, and remote access, we anticipate continued growth within our equipment customers. As a result, and even without the benefit from the inorganic growth that we experienced in 2025, We anticipate 2026 revenues to grow consistent with our 20% long-term growth target. I want to thank customers, employees, contractors, and stockholders that helped the company achieve its success in 2025. I look forward to working with all of you to make 2026 even better. Now we'll 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 2025. 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 2025 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 and accounting estimates that are identified prior to the time we file our 10-K. Please note that all 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. We are pleased to again report record quarterly and annual total revenues. We finished the year strong with Q4 total revenues of $62.4 million versus $50.1 million in the same quarter a year prior. We are pleased that our total revenues for the quarter grew 25% year-over-year, ahead of our long-term growth rate target model. For the full year 2025, we generated record total revenues of $219.0 million versus $179.5 million in 2024, a 22% year-over-year increase and consistent with our guidance for the full year. As you will recall at our analyst day in December, 2025, we previewed plans for a new presentation of revenues, breaking the total into platform and volume based. For a different insight, we also disaggregate total revenue into two different categories of recurring and upfront. Further description of these categories is provided in our 8K file today. Platform revenue for the fourth quarter was 52.5 million. and up 20% versus platform revenue a year prior, driven primarily by contributions from booking the new contract that John spoke about. Volume-based revenue for the quarter was $9.9 million, up 58% versus volume-based revenue a year prior, driven primarily by gain share and secure wise. On an annual basis, our platform revenue was $181.0 million, up 15% on a year-over-year basis, while volume-based revenue of $38 million was up 70% year-over-year, driven by patterns similar to what we saw during the last quarter of the year. Recurring revenue for the fourth quarter was $61.1 million, up 62% versus the same period prior year, and for the year was $205.1 million, up 41% year-over-year. driven primarily by CV systems for the leading edge and SecureWise. Our upfront revenue was down annually for the comparable quarter and full year basis, driven primarily by the fact that in the fourth quarter of 2024, we had completed a CapEx direct scan system sale. 2025 was an important year for PDS Solutions on many fronts. We completed our largest acquisition ever of SecureWise, finalized the licensing of Tibber AI Studio to combine with our recently announced product, Accenture Studio AI, and shared our product progress and roadmap during users group and analyst day conference. We're thankful to the many customers who spoke about PDF's breadth of product lines and the strategic relevance to their organizations. On the booking side, we also are pleased that during the year, we were able to book new deals for Sapiens Manufacturing Hub, a large deal for Accenture Analytics, and a SecureVise deal with a new customer. We also shipped four direct scan systems during the year to our customers, expanding their use of these tools into manufacturing. We are pleased that we ended the year with $254 million of backlog while delivering on strong revenue growth of 22% for the full year. For the fourth quarter, our gross margin came in at 77%, operating margin was 24%, and we reported EPS of 30 cents per share. On a full year basis, our gross margin came in at 76%, operating margin was 21%, and we reported EPS of 94 cents. It is worth noting that we exceeded our prior long-term target model of 75% gross margin and 20% operating margin for 2025 on a full year basis with the reported 76% gross margin and 21% operating margin. As you will recall, we recently revised upwards both of our target margin targets to 77% for gross margin and 27% for operating margin at our analyst day in December 2025. Turning to operating expenses. we managed to grow our operating expenses at a slower pace than our revenue growth for both the last quarter and full year basis, which allowed us to expand our operating leverage. On a full year basis, we grew our R&D expenses by 23%, primarily from direct hires and subcontractor spend, while managing SG&A spend growth to 14%, with better focus on pre-sale spending. We continue to believe we can grow the needed R&D investments and manage SG&A spend such that with revenue scale, we continue to expand our operating margins towards our target model. For the full year 2025, we reported EPS of 94 cents a share and EPS growth of 12% versus prior year EPS of 84 cents per share. During the year, we generated positive operating cash flow of approximately 24 million and spent approximately 33 million on CapEx. primarily related to our direct scan systems, and 0.2 million on share buybacks. We also spent approximately 130 million on the acquisition of SecureWise, funded with a combination of 70 million debt and balance sheet cash. We expect to spend an approximately similar amount on CapEx during 2026 compared to 2025, and expect to generate increased levels of operating cash flows during 2026 compared to 2025 as we grow our revenues and expand our margins. Turning to the balance sheet, we ended 2025 with cash and equivalents and short-term investments of approximately $42 million. Our ending debt balance is approximately $68 million, reflecting the amortization payments during the year. We are pleased with another year of positive operating cash flow generation consistent with our history. paying down our debt and funding the capex while growing our quarter over quarter cash balance. In summary, we are proud of our performance in 2025 and over the long term remain committed to our target long term model we set at our analyst day in December of 20% year over year total company revenue growth rate, 77% gross margin and 27% operating margin. Now turning to our financial outlook, For 2026, we look forward to another year of growth. To reiterate John's comments in our press release, for the full year, 2026, we expect the annual growth rate of our total revenue to be consistent with our 20% target model. With that, I'll turn the call over to the operator to commence the question and answer session. Operator?