Pdf Solutions Inc Q4 FY2021 Earnings Call

Good day and thank you for standing by. Welcome to the PDF Solutions, Fourth Quarter and year-end 2021 conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session for instructions will be given at that time, and I would now like to hand this over to Mr. Joseph Diaz of Lytham Partners. Please go ahead, sir.

Thank you, operator. And thanks to all of you for joining us today on this call. We appreciate your time and your ongoing interest in PDF Solutions. As the operator indicated, my name is Joseph Diaz. I'm with Lytham Partners, we're the Investor Relations consulting firm for PDF. If you do not yet have a copy of today's press release, it's available on the Company's website at pdf.com. Some of the statements made during this conference call will be forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding PDF's future financial results, performance, growth rates, and demand for its solutions. PDF results could differ materially. The forward-looking statements and risks referred to on this call are based on information available to PDF today. The Company has no obligation to update them. You are advised to refer to the section titled Risk Factors on the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2020, and similar disclosures in subsequent SEC filings. With that, I'd like to introduce John Kibarian, PDF Solutions' President and Chief Executive Officer. He will be followed by Adnan Raza, Executive Vice President, and Chief Financial Officer. At the conclusion of management's prepared remarks, we will open the call for your questions. Let me now turn the call over to John Kibarian, President and CEO of PDF Solutions. John.

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 the full year, please go to the Investors section of our website where each has been posted. As Adnan will discuss in more detail, 2021 was a record year for total revenue and a year where our Analytics business achieved tremendous growth. Also exciting is the foundation that we have laid to establish a stronger business in 2022 and beyond. In the fourth quarter, we celebrated our 30th year in business. So today in addition to summarizing the progress we made in Q4 in 2021, and providing our expectations for the coming year, I will provide some perspective on our journey, what has gotten PDF to this point and what we believe will position us for continued long-term success. During our 30 years, we have been a leader in Analytics for semiconductor manufacturing, demonstrating consistent and persistent innovation. We have advanced the application and capabilities of our products and solutions by combining a team with extended longevity and deep knowledge of the company with a continuous addition of new team members that bring unique perspectives. Besides our dedication to manufacturing Analytics, virtually everything else has changed over the years, including our customer base, selling and marketing strategy, and fundamental business model. For many years, our business was defined by the integrated Yield Ramp, or what we call IYR. In that business, we accelerate our customers' Yield Ramp by combining Analytics with our characterization systems that provide the missing quality information that enables yield engineers to make the best improvements. By the end of 2014, we realized that drivers of the IYR business, robust geometry scaling, and competitive foundry markets were waning. However, we believe that the future drivers for the semiconductor industry would benefit from new applications of our manufacturing analytics. Where the IYR business had a handful of customers and a unique business model, the new opportunities are across the entire industry and affect every aspect of chip manufacturing, not just the foundry's ramping new nodes. Today, PDF's customers number over 300. They include equipment companies that use our software to control their tools and communicate data from their tools to the fabs, fabless and system companies that use our systems to qualify new products faster, control yield and drive test quality, and foundries that use our software to control their wafer fabrication and increasingly, package processing. Many of these customers benefit from our cloud offering, where the systems are managed by PDF for better availability and performance. The business model once tied primarily to the ramp up of new nodes is now primarily subscriptions where customers pay ratably for access whether to the cloud or on-premise systems. Q4 and 2021 demonstrate the success of the evolution that we have been making over the many years. In particular, Analytics is now the vast majority of our revenue. The customer base is much deeper and broader than before. Development and manufacturing of new nodes is still an important part of our business as evidenced by the New Yield Ramp in the leading edge Analytics engagement slide in the second and third quarters of 2021. However, the majority of our Exensio customers use our Analytics platform for products that are built for more mature nodes. Overall for 2021, bookings were up substantially year-over-year and grew faster than chip industry revenues. As we increased the value that we deliver to our customers from our cloud deployments and applications of CV and DFI systems for leading edge. Our business with equipment vendors also grew faster than the market as more companies benefited from our advanced control and communications options for Cimetrix software. The synergy between Cimetrix products and the Exensio platform enables PDF to advance the standards for new kinds of process equipment information and provide new Analytics applications. For the fourth quarter, we extended many of the trends we experienced in the previous quarters. Again, Exensio cloud and on-premise subscriptions were important contributions to our bookings. Cimetrix runtime license activity with our equipment OEMs was also strong as they shipped our software with their tools. In the fourth quarter, we also finalized another quick-start contract with a leading edge customer. This time to apply our CV systems and design for manufacturability applications. We anticipate the quick-start to convert to significant business in 2022. During the quarter, we also announced our partnership with Siemens EDA to link Exensio with diagnostic products. Customers on the Exensio cloud will be able to use Tessent to further their root cause understanding by leveraging the market-leading logic and memory diagnostics capabilities from Siemens EDA. Coupled with our partnership with Advantest and Exensio as new product introduction module, we believe Exensio customers will be able to bring up their products faster and achieve entitlement yields, which are critical in the supply-limited world. Following up on our December announcement, we had our first webinar for the Siemens partnership in January and experienced strong interest from engineers at IDM, fabless, and system companies. This builds on our collaboration with IBM for interoperability between Sideview and Exensio. Our Advantest, Siemens, and IBM partnerships, as well as our strong partnerships with all of our Cimetrix OEMs, build on the foundation of PDF as an open and collaborative platform for semiconductor industry Analytics. They all stem from our core belief that Analytics is more valuable to each of our customers when our capability is integrated with the world's semiconductor processing equipment, whether they're owned by our direct customer or one of their suppliers. It is linked with the other software systems such as EDA and MES. We believe that Analytics, besides being useful when there are mountains of data to train algorithms like in the case from mature nodes, can also aid our customers for new process nodes, new assembly processing, and products for which conventional machinery and techniques are inadequate. As we begin 2022, the semiconductor environment remains robust and demand for integrated circuits is broad-based. We anticipate continued demand for our Analytics platform, particularly on the cloud, from a broad-based cross-section of customers, including equipment companies, fabs, OSATs, fabless, system companies, and Tier 1 auto suppliers. Governments, carmakers, and Tier 1 suppliers and system companies are realizing the importance of the semiconductor supply chain. This is driving interest in PDF's products and services. Given the industry tailwinds I just summarized, we anticipate continued revenue growth. Out of 2019 Analyst Day, we set a long-term growth target for Analytics at a 20% compound annual growth rate, and we have subsequently reconfirmed this. We met this target in 2021, not only for Analytics revenue, but for total revenue as well. In 2022, we again anticipate overall company revenue to grow above 20%, in part due to strong 2021 bookings and continued momentum in new bookings. For 2022, we also anticipate lower Gainshare levels for the year as we see the full-year impact of the Gainshare contracts that concluded in the second quarter of 2021. Our confidence in total revenue growth over 20% with a full-year of Gainshare decline implies that we expect Analytics to grow meaningfully above our 20% target again. Overall, we expect 2022 to be a year of continued revenue growth. I started off this talk reflecting on the past 30 years and the evolution we have made in our business over the last eight years. I want to take this time to remind our stockholders, employees, contractors, and customers, what this experience has reinforced in our culture. We have demonstrated that we are willing and able to reinvent just about every aspect of our company, to make sure PDF Solutions can serve our customers' needs. While reinventing our business, we remain true to our values, employees, and partners, while respectful to our stockholders. For example, over these last years, we have developed the ability to serve our customers' test floor control, e-beam characterization, equipment data collection, and assembly manufacturing, all while building a SaaS business model from the ground up. We have accomplished these things by believing in our team while welcoming new teammates and entire companies, so we can deliver the solutions our customers need. This was accomplished by anticipating the changes our customers were going to see and making sure we could be there for them in advance of their needs. Executives at our customers tell me that this anticipation and persistent investment in their future needs is one of the key reasons why they select PDF as a critical supplier. Moving forward, we will build on both our ability to sustain our differentiated capabilities while developing and adopting new solutions that will enable us to serve our customers' present and future needs. Finally, I want to thank all of our PDF employees and contractors for their efforts during what has been an exceptional year. We managed to work in tight concert, executing our largest bookings and revenue year in the history of the company. Now I will turn the call over to Adnan, who will review the finances and provide his perspective on our business.

Thank you, John. Good afternoon, everyone. Good to speak with you again today, and I hope all of you and your families are well and enjoyed a great football weekend. We are pleased to review the financial results for the full year and the fourth quarter of 2021. We posted our earnings release and our management report in the Investor Relations section of our website. Our Form 10-K with final results will be filed with the SEC in early March after review by our auditors. 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. As John indicated in his comments, 2021 was a strong year for PDF Solutions. We generated record revenue of $111 million, versus $88 million in 2020, a 26% year-over-year increase. While 26% year-over-year revenue growth is remarkable in of itself, it is worth noting that the Analytics business grew in 2021 at a rate well in excess of that. The growth of Analytics more than compensated for the expected decline in IYR revenues, far outgrowing our 20% Analytics revenue growth targets. Analytics revenue increased 63% on a year-over-year basis and accounted for 84% of total revenue. Non-GAAP gross margin for the full year was 64% compared to 63% for the prior year. Earnings per share on a non-GAAP basis came in at $0.08 versus negative $0.02 in 2020; a $0.10 per share profitability improvement. Bookings were up more than 40% compared to the full year 2020, and recall that 2020 was a record year for bookings. Our backlog also increased 66% versus last year. The increase in bookings and backlog gives us confidence that 2022 will be another strong year for us and sets a meaningful base for total revenue growth into 2022 and beyond. We believe we can continue to grow total company revenue at more than 20% for full-year 2022, which means that Analytics is expected to grow faster than our long-term target model, just as it did in 2021. For the fourth quarter, total revenue was $29.9 million, up 34% from the comparable quarter last year and slightly better on a sequential basis from Q3. Analytics revenue was up 88% to $27.3 million, versus $14.5 million in the fourth quarter of 2020, and also slightly better on a sequential basis from Q3, 2021. Non-GAAP gross margin for the fourth quarter came in at 65%. Turning back to the full year 2021, I will now provide detailed comments. For the full year, Analytics revenue increased 63% to $93.4 million, whereas total revenue was up from the previous year. Our transition to become the leading analytics software provider to the global semiconductor supply chain is now taking hold, and Analytics is now the dominant component of our overall business. The number of large customers adopting our Exensio platform over the cloud continues to be strong. We look for that trend to continue in 2022. We are also very pleased with the Cimetrix contribution to the Analytics results for the year. From a strategic standpoint, Cimetrix has been complementary as we are able to capture more data from the manufacturing process and drive machine learning applications. Notably, our full-year 2021 Analytics revenue was more than the 2020 total company revenue from just a year ago. For 2021, IYR revenue was $17.6 million, down as expected from $30.8 million in 2020 and represented about 16% of overall revenue. As we expected, and mentioned in past earnings calls, in 2021, some of our key IYR contracts came to the end of their Gainshare period and contributed to the large year-over-year decrease of IYR revenue from 2020 to 2021, as expected. The focus of our company remains Analytics. However, for select engagements where we see possibilities of high-margin, long-term royalties, we will capture those opportunities for our shareholders via an IVR model to benefit us for many future years. On a non-GAAP basis, gross margin for 2021 increased to 64.4%, up from 63% in 2020, as revenue growth and expense management initiatives throughout the year contributed to the 140 basis-point improvement. We're proud that we accomplished this gross margin expansion against the backdrop of the end of high-margin Gainshare revenue. We continue to target a long-term gross margin of 70%, as shared during our 2019 Analyst Day, and see a path to achieving it. Bookings for the full year 2021 increased more than 40% compared to full year 2020. This is growth on top of the remarkable booking year of 2020, where we had the large $50 million Advantest booking. Backlog at the end of the year totaled $179.5 million, up 66% compared to the prior year. Cost of sales increased 21% driven by the combination of Cimetrix and our increased cloud expenses to support the growth of our business. SG&A expenses for the year totaled $30.8 million, representing a 17% increase from 2020 with R&D up 30% to $8.7 million, both primarily driven by the Cimetrix business, which carries high gross margins and therefore carries the majority of costs in operating expenses. For the year, we took a $3.2 million write-down for prior-generation older equipment as required by rules for GAAP purposes only. CapEx for the year totaled $4.1 million versus $7 million in the prior year. For the year, we generated positive cash flow of $4.2 million as we successfully increased revenues and carefully managed expenses. We are pleased with another year of positive operating cash flow generation consistent with our history. Turning to the balance sheet, we ended the year with cash and equivalents of approximately $140 million compared to $145 million in the prior quarter and we carry no debt. In terms of major cash uses during the year, we made stock buybacks of approximately $4.5 million, paid for the Cimetrix acquisition, remaining hold back of $3 million, and funded capital expenditures of approximately $4 million. Coming off a robust 2021 performance, we head into 2022 with the business very well-positioned for another solid year. As I mentioned earlier, we believe we can grow total revenue in excess of 20% in 2022, even while experiencing a full year of IYR revenue decline, which means that we expect Analytics revenue to grow faster than our long-term target model just as it did in 2021. We have also successfully embedded our Exensio platform into a critical mass of our core customers. We can now seek to manage our resources and cost of sales and shift our spend towards sales and marketing to expand our market footprint leading to expanding our gross margins. We remain committed to our gross margin goal of 70% and believe we can make consistent incremental progress in the coming quarters and years ahead. With growing revenues, expanding gross margin, and positive operating income contribution margin, we believe we can deliver another profitable year for our shareholders this year. With that, I will turn the call over to the Operator to commence the question and answer session.

Thank you, presenters. We have our first question from Christian Strong from Craig-Hallum. Your line is open.

Hey guys, this is Tyler on the question and thanks for letting us ask a couple of questions. First, I guess point of clarification, the quick start contract that you signed here in Q4. I just want to make sure that's with the same customer that you booked a couple of previous contracts with over the last couple of quarters and then if so, your time will be multiyear type contracts. I was wondering if you can maybe frame the magnitude. Would you expect this customer to be a 10% customer? In '22 you called it significant revenue, but any frame we can put on that would be helpful.

This quick start is similar in size to the previous quick start. The follow-up contract is expected to be slightly smaller than the last one but will have a similar duration. The mix of hardware and software elements is a bit different this time compared to the previous one. We are always cautious about discussing specific customers, so we won't comment much on any one customer. However, we do expect to have at least one customer contributing 10% of our revenue in 2022.

That's great. Appreciate the color. And then maybe a little bit of a modeling question. Your OpEx in Q4 was down sequentially, about $700,000 or so, I think, mostly due to selling or SG&A expense being down. As we look to '22, just wondering if you could help us think about OpEx. Should that SG&A stay at similar levels while R&D ramps modestly as we invest for growth, or was there any sort of one-time thing in Q4 that we should be aware of?

No. From an operating profit perspective, just like we alluded to in our comments, we would expect those margins to expand. I think we also commented that we would manage the cost between our cost of sales and our operating expenses, so that we can invest more in the sales and marketing side. Specifically on the total spend, we would expect that to expand less than our total revenue growth rate, thereby increasing the operating margin. On the SG&A and the R&D spend, I think we're feeling comfortable with where we are, but we will continue to work towards expanding the operating margins.

All right. That's great. I appreciate the color. That's all from me, guys. Thanks.

We have our next question from Tom Diffely from D.A. Davidson. Please go ahead.

Yes. Good afternoon and thanks for the question. Adnan, I was wondering if you could give us a little bit of detail on an organic basis for things like bookings or revenue for the year.

I think it's important to note that growth trends remain strong this year. We are experiencing a boost from the full-year impact of the Cimetrix acquisitions. However, even without that, we are pleased with the growth coming from Exensio and other business segments. Our bookings have increased by over 40%, and our backlog has risen by around 66% on a full-year basis. Overall, we are quite positive about these figures, and perhaps John can elaborate on some specific deals.

Another point, Tom. You may recognize that the Cimetrix runtime license is mostly a turns business, right? It doesn't really impact our bookings much more than the revenue that's there. If you take your estimate of Symmetrix revenue, subtract that from the bookings, you'd say that the vast majority of the bookings came from what you would declare as organic business.

Okay. That's helpful. Thank you, John. Also John, when you look at the DFI business on a go-forward basis, is that a business that will be ramping on a quarterly basis? Are you at a set run rate, what is the initial quick start customer at a current level that should maintain through the year?

Besides our customer, we have other activities going on. We do anticipate it ramping through the year. I don't know that it will be linear through the year; it's kind of lumpy in the way that it would come on. We do expect to ramp it through this year. The timing exactly, I would say, will be between the second and third quarters.

Okay. And between your traditional customers to new customers, how many tools do you think you could have in the field by the end of this year?

I don't think we'll be limited by our ability at some point to put machines in place. But our goal would be to have no more than two or three installed in the world by end of this year.

Okay. And finally regarding the Gainshare aspect, are you finished with your older traditional customers, and is the current Gainshare largely due to aging customers?

That's correct. And as we said in the previous prepared remarks, right? Because we are full-year without the historical contracts, your Gainshare will be down. But as we said on the previous call, on a quarterly basis, this level that we saw in Q3 and Q4 is roughly a floor, and we expect it to slowly build back up.

Okay. One more question for Adnan, quickly. When you look at the DFI expansion, does that change anything in the operating model?

No, I think you're seeing the benefit of all of the business pieces. Cimetrix has done really well for us, Exensio is growing strong, as well as the leading edge pieces. Which is why you're hearing this optimism in our tone regarding increased revenue growth, even in the face of the decline in IYR impacting on a full-year basis, number one. Number two, You're hearing from us on gross margin; we're starting to feel confident, and therefore that should carry to the operating expenses and operating profit expansion, which is why we are seeing another profitable year for this year.

Great. Thank you both for your time today.

Sure thing.

We have our next question from Gus Richard from Northland. Please go ahead.

Yes. Thanks for taking the question. Just curious on the quick start contracts you signed in the quarter; is there a DFI component of that?

This pertains to DFM, specifically for the foundry fabless interface. It primarily involves software and characterization for design rules, focusing on design and foundational IP, but does not include DFI P.

Okay. So it's CBs and that sort of thing?

Yeah, Exensio and systems, there's a layer of Exensio that pre-analyzes foundation IP and looks for weaknesses in foundation IP and helps the engineers optimize that. So it's all geared around the foundry fabless interface.

Okay, I understand.

We believe the majority of Exensio usage is trailing edge stuff. We see that being a very robust part of the business throughout 2021, and looking into 2022, we expect that to be the same as well.

Okay. And then just the write-down of equipment in the quarter, any more color around what that was?

Yes. We've put a number of older pieces of equipment into the field that were some spare parts and components that we had purchased as part of all of that. As those machines completed their usage, we wrote down the extra components that we had associated with those machines.

Got it. That's it for me. Thanks so much.

We have our next question from Andrew Weiner from Samjo Capital. Please go ahead.

Hi, good afternoon, guys.

Hey, Andrew.

Adnan, I want to make sure, sort of thinking about the math correctly. If I take the back half of 2021 on the IYR business or the like, and even assume a modest increase from that run rate through 2022 to get to a minimum of 20% growth, it implies a minimum of 30% growth in the Analytics business. I assume I got that math right?

At the risk of stealing John's comment from a few calls ago, yeah, your math scores must be really good.

And then second, John, I was maybe hoping you could talk about whether or not you've started to see any revenue contribution from the Siemens relationship; if not, when you'd expect that, and how we should think about the size of the opportunities perhaps. Whether it's more of a commercial opportunity versus building a moat, if I think about the IBM partnership and the Siemens partnerships.

Sure. So when we did the webinar in January, Andrew, we announced that we were having early access partners or customers join Siemens, and what that means is they will use the beta version of the product. There is a small charge for that. It's not huge revenue, so we do expect revenue in this year associated with those early access customers. They would get access to the diagnostics tools, use it to debug and bring up their new products. They get some ability to influence the roadmap of the product, and as we and Siemens finalize the future set. And then in terms of beyond that, how it generates revenue for us. Siemens EDA's full diagnostic products are market leaders. And so they have, from what we can tell, the largest share in the market. There is a good overlap of customers. But when we look at the attendees of the webinar, there were a number of companies on that list that were not previously Exensio customers. Even companies that were Exensio customers, it was parts of the organization that historically had not been users of Exensio but have been using their diagnostic tools. So we do expect it to grow the customer base both within our existing customers as well as with new customers. I think the same will be true for Siemens as well.

So along those lines, John, we've talked a lot about in the past the importance you view of building partnerships sort of an ecosystem. What are the potential holes you would look to fill from a partnership perspective in 2022?

Yeah. Well, I don't want to blow any thunder on that stuff. One of the things that we'd like to be able to announce them with some excitement when we announce them. But I can say this. If you just think about the way companies work, obviously, and as Gus's questions alluded to, there are a lot of issues about understanding my supply chain, where my parts are, what's going on, and what's my prediction, if my yield dropped; what does that mean downstream? Am I going to have a problem making unit shipments? If a test floor is bottlenecked, what is the implication of that? If I add more testers, would that get me more capacity out? Will I be able to ship significantly more units? So there's a lot of customers who want to answer questions quickly regarding engineering from semiconductor engineering to industrial engineering or operations research. There's a lot of activities touching on what you want to do in finance. As we look at product diagnostics, there's a lot to do there too. Most customers are redesigning products with lots of reused IP. When you have a challenge on one product, you'd like to understand what the impact is across a wide variety of other products. So, all the ways of being able to answer questions much more quickly. You can think of it like when I was a kid and I wanted to know something. I can nag my parents to take me to the library so I could go look stuff up. My kids just takes out his phone at dinner and does a Google search. We had a debate about cilantro and coriander being the same thing, and he just looked it up on his phone, right? I would have to go to the library for that as a kid. So those same kinds of questions that our customers want to answer, whether they have financial implications, industrial engineering implications or product design implications or chip manufacturing. We want them to be able to answer those questions without having to go and wrangle off the data.

Okay. And as you build this out, is that tied to the deployments of the DEX networks?

Of course, yes. It's important to identify where equipment might be affected or if there needs to be a change in screening criteria. Taking action means modifying what's happening with the equipment. Simply being aware that a change has occurred is not sufficient; action is necessary. A DEX plays a crucial role in this process, which is why we view the platform as a collaborative space for the industry to work collectively. This collaboration with Advantest and its customers allows for crossing operational boundaries to maximize productivity.

Great. Thank you.

At this time, I will return the call over to Mr. Kibarian for closing remarks.

Thank you for participating in our Q4 call. We look forward to talking with you again soon. Have a great day.

Ladies and gentlemen. This concludes today's presentation. Thank you for participating. You may now disconnect.