Pdf Solutions Inc Q2 FY2025 Earnings Call

Good day, everyone, and welcome to the PDF Solutions, Inc. conference call to discuss its financial results for the second quarter conference call ending Monday, June 30, 2025. 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 Pages 16 through 30 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 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 second quarter, please go to the Investors section of our website, where each has been posted. We achieved record revenue in the quarter and established groundwork for continued growth. Given our innovative products, which align well with the trends of 3D processing and advanced nodes, complex packaging and test flows and increased use of AI to streamline operations, we anticipate revenue growth of 21% to 23% for the year, reaffirming our prior guidance. Significant bookings in the quarter were primarily for enterprise-wide solutions, including secureWISE, Sapience, and Exensio, as well as characterization infrastructure. Sapience and Exensio bookings in Q2 were driven primarily by fabless and IDMs as analytics is increasingly becoming important to them as they have a growing need to link manufacturing operations to ERP. Characterization bookings in the quarter were tied to customers deploying CV infrastructure to develop and ramp new nodes with particular strength for the solution in Asia. As is typical, Cimetrix bookings in the quarter were primarily due to equipment vendors utilizing more runtime licenses, particularly our more advanced tool control and communications modules. With respect to DFI, we have previously talked about shipping at least four eProbe tools with two contributing to revenue this year. So far this year, we have installed and qualified the tool machines we shipped in Q1 as subscription upgrades with incremental revenue. Overall, demo, install, and engineering activities with customers are at a high level, and we anticipate meeting our goals for DFI this year with shipping another two tools contributing to additional revenue. Our first full quarter with secureWISE showed strong bookings, benefiting from PDF's position in the semiconductor industry. While secureWISE is deployed at all fabs, in fact, nearly all 300-millimeter fabs in the world, primary customers historically have been the equipment OEMs so they can provide support to their fab customers. However, as the fab owners themselves have more distributed operations, they wish to get the benefit of remote access to tools and data. Thus, we felt that secureWISE would enable our fab customers and eventually our fabless customers to have secure remote operations. We refer to this as the foundation layer of the supply chain orchestration element of the PDF platform. Sapience Manufacturing Hub and DEX are other elements we put in the supply chain orchestration category. As our customers deploy analytics and AI, they increasingly need to connect to other enterprise applications such as SAP and across organizational boundaries to the tools processing their chips. Our supply chain orchestration products enable this. Last quarter, we validated this perspective as a large IDM entered into a contract to deploy secureWISE across the majority of their tools at their internal fabs, test and assembly facilities. This is intended to enable both internal usage as well as allow equipment vendors the ability to remotely access their tools to improve support for the IDM. The benefit to this customer is higher productivity of their engineering effort and operations while having superior auditing and accounting of all activities on the tools. Moreover, they can get better support from their equipment vendors. For the equipment vendors, they can be more responsive when issues occur and by purchasing additional capabilities from PDF, they can provide additional services. We are pleased that in such a short time, customers have validated secureWISE as a network for the IC manufacturing ecosystem to facilitate collaboration and AI in manufacturing. At the Intel Foundry Direct Connect event, we were able to highlight collaboration and how PDF has moved from a capability used internally at customers to an industry-wide platform that enables new ways to work. I was invited to share the stage with Intel's CEO and talk about their strategy for foundry. My comments were about collaboration to achieve great yields and operational metrics. Over the years, we have delivered multiple modules of Exensio and characterization vehicles to customers. With the DEX nodes, we started to connect the modules we delivered to fabless and IBMs out to their OSAT suppliers to improve test. Now with secureWISE and Sapience, we're able to connect enterprises together, linking equipment vendors to the fabs where the tools are installed or fabless to the fabs and OSATs that manufacture for them. We believe this is crucial to achieve greater yields, in part because to deploy AI, you need automated connectivity between the different data, tools, and enterprise software systems. We believe PDF is very well positioned to deliver this to our customers as they partner with their suppliers and customers. Recently, we also announced that PDF's user conference and Analyst Day will be held this December. You will see our customers and PDF team talk about the PDF platform and the impact it's having on the industry and our customers' production. Since 2020, through 2024, we have consistently grown revenue, gross margins, and EPS every year, with a 20% CAGR for revenue while expanding gross margins from 63% to 74% and EPS from a loss of $0.02 to a profit of $0.84. In our conference, we will describe how we plan to build on this performance. We look forward to seeing many of you there. I want to thank all of the PDF customers, employees, and contractors for their effort during the second quarter. Now I'll turn the call over to Adnan, who will review the finances and provide his perspective on our results.

Thank you, John. Good afternoon, everyone, and good to speak with you all again today. We are pleased to review the financial results of the second quarter and to bring you up to date on the progress of the business. 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. For Q2, our total revenues were a record $51.7 million, up 24% on a year-over-year basis and up 8% versus the prior quarter. For the first half of this year, our revenues also grew 20% on a year-over-year basis versus the comparable first half of last year. We achieved our long-term target of revenue growth rate of 20% for the six-month year-to-date period and exceeded it for this quarter. Our analytics revenue were also a record $48.8 million, up 28% from the same quarter of last year. We benefited this quarter from a characterization deal, the first full quarter of secureWISE revenues, a new secureWISE deal signed during the quarter, another meaningful booking for Sapience Manufacturing Hub, and contributions from Exensio renewals. We see additional opportunities to leverage cross-selling across the elements of our PDF platform and to expand the strategic relevance of PDF with our customers. During the second quarter, revenue contribution from integrated Yield Ramp came in at $2.9 million compared to $3.5 million in the same quarter of last year, driven primarily by the reduction in fixed fee as we completed the engagement and are now in the gain-share period. Given the bookings momentum this quarter, we again grew our backlog and ended the quarter with $233 million of backlog. It is worth mentioning that we do not include potential future Cimetrix runtime licenses or gain-share revenues in our backlog, and our backlog would be even higher if we included these highly probable future amounts. Based on what we can see in our deal pipeline, we see an opportunity to strongly grow bookings momentum and therefore, our backlog for the second half of this year. We reported gross margins of 76% for Q2, higher than the 75% long-term gross margin target that we shared during our Analyst Day. On a year-to-date basis, our gross margin is now 76%, again, higher than our target 75% long-term gross margin. On the operating expense side, our expenses for the quarter were up. However, they grew at a lower rate than our revenue growth rates, primarily driven by personnel-related expenses. The controlled growth in spend allowed us to expand our operating margin to 19%, higher than both last quarter as well as the same quarter of a year ago. For the six-month period, our operating margin of 18% is up meaningfully versus 14% of the same period a year ago. We continue to believe we are on the right path to a 20% operating margin, which is our target. For EPS, we reported a profit of $0.19 for the quarter, which for the six-month period also grew 18% on a year-over-year basis compared to the first half of last year. We ended the quarter with cash and cash equivalents of $40.4 million compared to $54.1 million in the prior quarter. We consumed operating cash flow for the quarter. However, we generated positive operating cash flow for the year-to-date period of six months. For the quarter itself, we used $8.5 million in CapEx spend, primarily for eProbe machine build as a result of increased customer demand. As we look to the rest of the year and based on the bookings momentum in our deal pipeline discussed earlier, we reaffirm our prior guidance of revenue growth in the range of 21% to 23% for the full year 2025 compared to the prior full year 2024. With the first half of the year completed at a 20% revenue growth rate, we expect the second half of the year to grow higher than 20% versus a strong comparable period of last year. With that, let me turn the call over to the operator for Q&A.

Our first question comes from Blair Abernethy from Rosenblatt Securities.

It's good to see some traction with Sapience. Can you provide more details on that? It seems like you had a success in the quarter. Is that a new customer, and has this been facilitated by your partnership with SAP? I'm trying to understand how that product is performing.

Yes, it's an existing customer. Currently, we have about 350 customers in the chip industry, so the majority are existing customers to some extent, apart from a few new entrants in China. The initial couple of Sapience contracts we secured involved factory operations and foundries related to Integrated Device Manufacturers (IDMs). This pertains to the product side of IDMs, which also need to manage the supply chain. As they increasingly incorporate advanced packaging and more intricate manufacturing processes, they require improved visibility and integration of the supply chain with their ERP systems for enhanced productivity and agility. If we aim to implement AI and machine learning, automation becomes essential. During our AI/ML pilots, customers have found that they need to track material movement to influence downstream testing using upstream data. Therefore, this is a first product type customer and we are very pleased about that. We anticipate a future synergy, although it isn't linked to this initial contract with the secureWISE network and the DEX network in the supply chain. As this is rolled out, it will initially utilize static data but we expect it to transition to more dynamic data analysis in the field over time. Lastly, regarding the SAP connection, many of our partnerships involve SAP, and this one originated from preliminary discussions with them as well.

Okay. Great. And then just over to the secureWISE acquisition. It sounds like that has gone well with an additional win. Can you just update us as to where you are in terms of integration of the business, but also the products?

Yes, that's a great question, Blair. We have been transitioning systems since it was a carve-out, and we expect to complete this process by September. We are making good progress in this area. Some new employees added this quarter were previously contractors who were with secureWISE or part of Telit. We are effectively moving forward with the integration, including cross-training the sales teams. We have started installing secureWISE on DEX nodes at OSATs and conducting internal tests on the integration of secureWISE and DEX while having teams collaborate on this. SecureWISE provides a broader set of functions at the factory while DEX enables running AI/ML models and streaming test data, resulting in a richer functionality. DEX typically has more computing power at the node than secureWISE does. The data transmission from the factory to the consumer through secureWISE is completely off the Internet and utilizes a fully double encrypted channel, making it one of the most unique capabilities in the industry. Previously, DEX mainly used the cloud infrastructure for such transmissions, but now we can offer customers a more secure way to communicate and transfer their data to and from their OSATs. Several fabless customers have already contacted us to inquire about the implications of this enhancement, as security is increasingly vital in this environment.

Yes. One last question from me. Regarding CapEx, a year ago your spending was around $4.5 million to $5 million per quarter, which increased in Q1, and this quarter it was about $8.5 million. What can we expect for the CapEx spend on a run rate basis?

Yes, that's a great question, Blair. As John mentioned, we are optimistic about the opportunities we are encountering. John's comments reflect a stronger outlook regarding the prospects ahead of us. That's why we've increased our capital expenditures where we see the chance to engage with various customers on the eProbe side. Moving forward, we believe we can manage the capital expenditures at these levels or slightly below, but we will strive to do our best. Of course, this will be influenced by any new opportunities that arise, at which point we will determine the appropriate spending. However, the capital expenditures during the first half of the year likely serve as a good gauge for what we anticipate for the second half. Therefore, we expect the capital expenditures to remain at this level or just below for the latter half of the year.

Our next question comes from Gil Luria from D.A. Davidson & Company.

This is Clark Wright on behalf of Gil Luria. I wanted to quickly just ask on maybe some of the China exposure and the recent developments that we've seen just in terms of potential disruption in this space. I'd love to kind of understand how you guys are positioned to maybe capitalize on this disruption or so the risk that it potentially imposes on growth going forward?

Sure. Thanks, Gil. Good question. China is a crucial part of the semiconductor market, now and in the future. China is developing its own infrastructure. We have been operating in China since 2006, and we plan to continue this presence. With that said, we have been careful about separating our China operations from the rest of the company, a process we began in 2017. The pandemic accelerated this separation since we could no longer travel. Our operations in China are largely autonomous. We expect ongoing investment in fabs. Our business with fabs typically follows the capital equipment investments because they purchase equipment first, then realize they need testing vehicles and systems for ramping up nodes. This pattern is reflected in our current numbers. A significant portion of our revenue comes from China, primarily through royalties and gain share from previous nodes and deployments. This revenue stream will persist, even if there were a complete shutdown between the U.S. and China, as we would still receive payments from past deployments. This situation somewhat shields us from short-term impacts between the two nations. We believe we have effectively managed the separation of our operations in the two regions. Our Western customers prefer that we do not engage our employees from China, and our Chinese clients have similar preferences regarding Western employees. Consequently, the two operations now function quite independently. Given our extensive history in China, we are well-equipped to manage this effectively. We believe China will continue to be a significant producer, especially in trailing edge nodes, for many years, making it an important market for us.

Our next question comes from the line of Christian Schwab from Craig-Hallum Capital.

We've been talking about Intel for a little while, and it sounds like you're mentioning it a little bit more in the prepared comments. Can you just give us a rough idea of where we stand with that customer and either on a revenue basis or what inning we're in and how fast that potentially could ramp or how big it could be over, say, a multiyear time frame?

Yes, Christian. We always prioritize customer confidentiality. The reason we highlighted Intel on this call, unlike in the past, is that they featured us at their event. Since they took the first step, it felt appropriate for us to mention them today. They are a significant customer and an important player in the industry. We anticipate they will remain a major customer for us, potentially even more so in the future, as indicated by their CEO's comments at the event. The technology that we provide is becoming increasingly vital as they expand their manufacturing capabilities and the way they produce their products. We expect positive developments in our business relationship with them and with other customers as well, and we believe they will continue to grow in terms of dollar value.

Great. And then it seems like the last few conference calls, we've gotten pull-through regarding our partnership with SAP, but we have other partnerships which we haven't heard a lot about lately. Is there something going on that's specific to customer need that we're seeing SAP partnerships and pull-ins and business because of that versus, say, other people like Advantest that we've had for quite some time now?

That's a great question. In my prepared remarks, I aimed to communicate that it's crucial to consolidate your data and ensure alignment, which is where Exensio plays a role. Engaging with testers has been a core aspect of our collaboration with Advantest, which continues. However, even the most knowledgeable customers might overlook the importance of orchestrating the enterprise when they begin involving data scientists and AI professionals in developing and deploying AI models. For instance, utilizing AI to improve efficiency for testing complex packages for AI chips necessitates knowing where materials are shipped, which OSAT is involved, and when they will be on the tester. This information is typically found in your ERP or MES systems. We observe that customers deploying models at scale often realize they need to reassess how they connect their engineering operations with others. Currently, many are interacting through conventional internet connections to their OSAT suppliers. Our acquisition of secureWISE is driven by the expectation that they will ultimately want to establish these connections securely. One feature of secureWISE allows factories to determine which virus scans are performed on software before installation when a software update is sent to equipment. We believe factories will become increasingly cautious, especially when fabless customers send down models, as that resembles code that should be scanned. Therefore, secureWISE is becoming more significant. This is why we emphasized our work with SAP and secureWISE; we anticipate that early adopters integrating AI into their operations will encounter greater needs. This trend is reflected in our numbers and selling activities, and it builds on our efforts with tools like those we've been developing with Advantest and Exensio regarding AI and comprehensive data alignment.

Our next question comes from Blair Abernethy from Rosenblatt Securities.

I wanted to follow up on your 10-Q report regarding the revenue from China. It seems that this quarter it was just over $12 million, which is a significant increase from $7 million in Q1 of last year. Year-to-date, the revenue from that market is almost double. John, you mentioned some changes in the China environment, but could you provide more details on what has changed? Do you believe this growth is sustainable, and have we reached a low point there?

Yes. It is up this quarter. It will probably not stay at this level in the next couple of quarters; it will come down a little bit from this. In part, it's really coming up for two reasons. One is just volume shipments on customers; and two, increased deployments of CVs, characterization vehicle infrastructure in Exensio. In part, what we think is going on is folks bought a lot of equipment. There are always rumors about, well, some of it's not being used yet. We see them starting to run vehicles and put things to use. I kind of touched on this a little bit, I think, with Christian's question. We believe they are starting to put up capacity at meaningful volumes, and that means they've got to get to decent yields and so test vehicles and eventually, it does mean gain share in royalties.

Okay, great. Could you provide some insight into the renewal landscape for the Exensio platform in the latter half of the year? I'm also curious about how the addition of modules and the expansion of existing implementations are progressing.

Yes, we expect a number of significant expansions in the second half of this year, often involving additional modules. We have several pilots underway with customers for our guided analytics AI, which analyzes data trends and has shown positive results. We emphasize to customers using our cloud that we can track the data engagement of their engineers, which is usually a small fraction of the total data collected for testing. Guided analytics allows AI to sift through all datasets, ensuring that engineers focus on the most crucial aspects of manufacturing. We anticipate a strong renewal and expansion situation for Exensio in the second half of the year, driven by AI advancements, particularly in guided analytics and testing operations. These elements will significantly contribute to our core renewals and expansions.

Okay. Great, John. And you haven't touched on MLOps at all. How is that doing?

Yes. When I refer to AI for testing, I mean the MLOps capability. Stay tuned for more significant announcements regarding our MLOps efforts in the next month or so. MLOps is essential to this. Guided analytics is derived from our MLOps, but it is an ML that we deploy. In contrast, MLOps for testing is something the customer creates and implements on their own.

At this time, there are no more questions. Ladies and gentlemen, this concludes the program. Thank you for joining us on today's call.