Pdf Solutions Inc Q4 FY2025 Earnings Call

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. 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 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 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've not already seen our earnings press release and management report for the fourth quarter and full year, please go to the Investors section of our website where each has been posted. 2025 was a transformative year for PDF. 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. 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. IC manufacturing processes, both in the Wafer 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 gross margins from the mid-60s to the mid-70s and its operating margins from basically breakeven 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 Sapience Manufacturing Hub, including a contract in the fourth quarter. Sapience 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 8-figure contract with one of the leading equipment suppliers. We also began expanding applications with foundry customers, closing an 8-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 customers' challenges include aligning, storing and leveraging data to make decisions often driven by AI. We undertook reinventing three critical components of Exensio. First, we are enhancing our data model to support new use cases where the Exensio database would be used for applications beyond the native analytics it provides. Second, we are integrating an AI operations platform for data science within Exensio, so customers can use the PDF Solutions platform to build and deploy their AI pipeline. Third, we are releasing Exensio Scalable Analytics, which is designed to enable engineers to interact with data sets 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 8-figure contract for Exensio 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 cnvrg.io from Intel and began selling it as Exensio Studio AI. Exensio Studio AI is designed to enable AI scientists to use the data in Exensio 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 Exensio Scalable Analytics. We demonstrated the ability for engineers and algorithms to interact with data sets that were previously only possible to process in batch. Intel spoke about the advantages of Exensio Enterprise and Exensio 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 Cimetrix Connectivity business, achieving record runtime licensed revenues. Also, in the second half of the year, we shipped two eProbe inspection machines to a manufacturing site for one of our customers. In conjunction with our Fire and Exensio software, this enables customers to ramp and control production of advanced 3D products through an application we call DirectScan. This customer is now able to improve production control and yields by identifying new production issues in line using the DirectScan system. So while we started the decade as a provider of analytics platforms 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 and 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 gross and 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 DirectScan systems, including both in R&D and manufacturing. We expect to nearly double the number of eProbe 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 Exensio Scalable Analytics and Studio AI. Given our strong portfolio of secureWISE and Cimetrix products for equipment control, connectivity and remote access, we anticipate continued growth within our equipment customers. As a result, 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 I'll turn the call over to Adnan for more detailed comments on our results.

Thank you, John. Good afternoon, everyone. It’s great to be with you today. We are excited to discuss the financial results for the full year and the fourth quarter of 2025. As John mentioned, we have published our earnings release and a management report in the Investor Relations section of our website. We anticipate filing our annual report on Form 10-K with the SEC by the end of February once our 2025 audit is complete. Therefore, all financial results shared in this call should be regarded as preliminary and may change to accommodate any necessary adjustments or changes in accounting estimates that are identified before we file our 10-K. Please be aware that the financial results we will address in today’s call are on a non-GAAP basis, and a reconciliation to GAAP financials is available in the materials on our website. We are pleased to report record quarterly and annual total revenues once again. We closed the year strong with Q4 total revenues of $62.4 million compared to $50.1 million in the same quarter last year. Our total revenues for the quarter increased by 25% year-over-year, surpassing our long-term growth rate target. For the entirety of 2025, we achieved record total revenues of $219.0 million, up from $179.5 million in 2024, marking a 22% year-over-year growth and aligning with our full-year guidance. During our Analyst Day in December 2025, we previewed plans to present revenues in a new way, breaking them into Platform and Volume-based categories. Additionally, we also disaggregate total revenue into Recurring and Upfront categories. More information about these categories can be found in our 8-K filed today. Platform revenue for the fourth quarter was $52.5 million, reflecting a 20% increase compared to the same period last year, primarily due to contributions from new contract bookings mentioned by John. Volume-based revenue for the quarter reached $9.9 million, up 58% year-over-year, driven mainly by Gainshare and secureWISE. On an annual basis, our Platform revenue totaled $181.0 million, a 15% increase year-over-year, while Volume-based revenue was $38 million, up 70% year-over-year, following similar patterns to those seen in the last quarter of the year. Recurring revenue for the fourth quarter was $61.1 million, reflecting a 62% increase compared to the same period last year, and for the year, it totaled $205.1 million, a 41% increase year-over-year, largely driven by CV systems for the leading edge and secureWISE. Our Upfront revenue was down for both the quarter and the full year, primarily because we completed a CapEx DirectScan system sale in the fourth quarter of 2024. The year 2025 was significant for PDF Solutions in various ways. We successfully completed our largest acquisition of secureWISE and finalized the licensing of Tiber AI Studio to integrate with our recently announced product, Exensio Studio AI. We also shared our product developments and roadmap during the Users Group and Analyst Day conference. We are grateful for the many customers who highlighted PDF’s extensive product offerings and their strategic importance to their organizations. In terms of bookings, we were also pleased to secure new deals for Sapience Manufacturing Hub, a sizeable deal for Exensio Analytics, and a secureWISE deal with a new customer. We delivered four DirectScan systems throughout the year to our customers, enhancing their usage of these tools in manufacturing. We ended the year with a backlog of $254 million while achieving robust revenue growth of 22% for the full year. For the fourth quarter, our gross margin stood at 77%. Our operating margin was 24%, and we reported earnings per share of $0.30. For the entire year, our gross margin was 76%, with an operating margin of 21%, leading to earnings per share of $0.94. Notably, we exceeded our previous long-term targets of a 75% gross margin and a 20% operating margin for 2025 with a reported gross margin of 76% and an operating margin of 21%. As you may recall, we recently raised both of our margin targets to 77% for gross margin and 27% for operating margin at our Analyst Day in December 2025. Regarding operating expenses, we managed to increase our operating expenses at a slower pace than our revenue growth for both the last quarter and full year, enabling us to enhance our operating leverage. For the full year, we grew our R&D expenses by 23%, mostly due to new hires and subcontractor costs, while we controlled SG&A expense growth to 14%, focusing more effectively on presale spending. We remain confident that we can continue to invest in necessary R&D while managing SG&A expenses to expand our operating margins as we scale our revenue. For 2025, we reported earnings per share of $0.94, a growth of 12% compared to the prior year’s EPS of $0.84. Throughout the year, we generated positive operating cash flow of around $24 million and invested approximately $33 million in CapEx, mainly for our DirectScan systems, as well as $0.2 million on share buybacks. We also invested about $130 million in acquiring secureWISE, financed through a mix of $70 million in debt and cash from our balance sheet. We anticipate spending roughly the same amount on CapEx during 2026 as in 2025 and expect to generate higher levels of operating cash flows in 2026 compared to 2025 as we grow our revenues and improve our margins. On the balance sheet front, we ended 2025 with approximately $42 million in cash and equivalents and short-term investments. Our ending debt balance is around $68 million, which reflects the amortization payments made during the year. We are satisfied with another year of generating positive operating cash flow in line with our history, reducing our debt, and funding our CapEx while increasing our cash balance quarter-over-quarter. In summary, we take pride in our performance in 2025 and are committed to the long-term model we established at our Analyst Day, aiming for 20% year-over-year total company revenue growth, a 77% gross margin, and a 27% operating margin. Now, looking ahead at our financial outlook, we anticipate another year of growth in 2026. To reinforce John’s comments in our press release, we expect the annual growth rate of our total revenue for 2026 to be consistent with our target model of 20%.

Our first question comes from Blair Abernethy with Rosenblatt Securities.

Nice quarter. I wanted to start with the DFI. Adnan, you mentioned that four DirectScan systems were shipped in the year 2025. Is that correct?

Yes, correct. Consistent with what we have spoken throughout the year, you're absolutely right, four were shipped during 2025.

Okay. In John's comments about having double the number of systems in the field this coming year, is that eight? Or what is the current total field count?

Yes. Remember, we had also done a CapEx sale. So total in the field today is six. So when we think about next year, you should contextualize John's comment with that. And John said nearly that many. So that's the way I would think about it.

Got it. Okay. Regarding the CapEx spend, it appears from your supplemental information that it's approximately $32.8 million, just under $33 million in 2025. How has that amount changed for '26? Is it primarily allocated to the beginning of the year? I'd like some clarity on how you're planning to use these funds.

Yes, we'll try to manage it evenly during the year. This year, as you saw, there was a little bit of an uplift towards the end of the year. But next year, we think it's probably even. In between a quarter, is there a little bit of variation maybe towards the middle of the year? That's possible as we look to place some orders in advance. But give us some room towards the middle of the year.

Okay. Is this positioning you for 2027? I understand you can't provide guidance for 2027, but should we expect this level to remain stable for a while? Could you give us an idea of how much will be needed?

Yes. I'll take that one, Blair. A significant portion of the capital we invested in the second half of last year was intended for machines we expect to ship in the first half of this year. These machines are now primarily on subscriptions, and we aim to maintain this trend this year. When we modeled our long-term targets provided in December, we anticipated that even if we maintained this level of capital while keeping machines on subscriptions, we would gradually build an installed base of machines that would all contribute over time. We planned this assuming we could sustain our growth at the current capital level. We also intend to enhance our market penetration. However, due to the subscription model, this approach becomes feasible over time.

Got it. Got it. Great. Okay. And then just if I could, just over on the SAP relationship. I think you mentioned there's another deal there. Just how is that going? And just sort of what are your expectations for next year from that partnership?

We continue to see growing demand for orchestration during our meetings with customers. As I mentioned earlier, to truly implement more automation and AI in their operations, organizations need seamless connections between their major systems. It's unrealistic for anyone to create a flawless database that incorporates all information from financial, operational, and engineering systems. The goal of Sapience is to provide a consistent approach, for instance in how finance assesses machine time on equipment. This requires defining orchestrations that can effectively translate complex operational data for financial use, and vice versa. We're actively collaborating with SAP and are increasingly engaging with system integrators. Some of them presented at our Users Conference, showcasing ways we can co-market these solutions. This partnership offers an additional incentive for organizations to stay connected with us on the Exensio side. One of the speakers mentioned that if a portion of the organization is using Exensio, it makes sense to also implement Sapience, as a significant portion of the data is already integrated. Through our partnership with SAP and system integrators, we aim to expand our presence in engineering and reach other areas of our customers' organizations. Typically, contracts for Sapience fall under the finance team's budget, while Exensio contracts are associated with the engineering or operations teams. This enables us to engage with different parts of the organization. We anticipate continued sales activity throughout the year.

Okay. Great. Maybe just one quick question for you, Adnan. How should we think about your balance sheet and debt levels over the next couple of years? Are you comfortable with the current debt, or are you considering paying it down? What should we be modeling for capital allocation?

Good question. Yes, the debt is structured at favorable rates, and the interest rate cuts are beneficial. We have a proven track record of generating cash from our operations. We’ve been strategic about our investments. From Q3 to Q4, we increased our cash reserves. We intend to meet the required amortization payments on the debt, but we will also carefully manage our capital expenditures and aim to rebuild our cash balance before considering significant debt repayment. Our ultimate goal is to eliminate our debt. Historically, we have operated without debt, and we want to return to that state. We will prioritize reaching a healthy cash level before focusing on paying down the debt, and our improving margins position us well for this path.

Our next question comes from Clark Wright with D.A. Davidson.

First off, great quarter. Would love to understand a little bit more about the new methodology around describing revenue and partially around your expectations for growth on the Volume-based revenue going forward? And how should we think about the cross-selling opportunity of secureWISE as we think about normalized levels going forward in 2026?

Sure. Maybe I'll take the beginning part and have John jump in on the second piece. So look, many of you have been talking to us about trying to understand the business a little bit more. So that was partly the motivation for breaking it out into the Recurring versus the Upfront. And then secondly, on the Platform versus Volume-based, if you think back over the last five years, the business has evolved. Prior to when we did the Cimetrix acquisition, the business was probably more platform-based. So as we acquired Cimetrix and as we now have acquired secureWISE and over the years, we've also enjoyed and continue to enjoy the Gainshare. It made sense to count those three pieces of Cimetrix, largely the three pieces of secureWISE and Gainshare in our Volume-based revenue, which is another way to think about it as it's a revenue that will contribute to our benefit based on customers' own changes in their business, and we're happy to get that. So that's the Recurring versus Upfront and then the Platform versus the Volume.

Yes. So I think just also it kind of helps you think a little bit. The Volume revenue is typically not in our backlog. We don't have a backlog for Gainshare or on time licenses or the data usage on secureWISE. So we thought it would give some visibility on the part of the business that's really tied to our customers' success with our products, if you think about those three elements. And the other one gives you kind of an understanding about the part of the business that kind of is related to the backlog. Just we used to break out IYR and analytics, but then IYR became such a small percentage of the business. We felt it wasn't very instructive for the shareholders, like stockholders. So that kind of gives you the first answer, Clark, if that's adequate. And I can go on to your question about the cross-sell on secureWISE, if you like.

Yes. I mean that's helpful. Just would love to understand just going forward, just given the fact that it grew largely because of the secureWISE piece, how much of that should we be thinking about secureWISE versus what the organic growth rate is of that business?

Yes, we're not breaking out within those pieces. Look, I mean, if you go back and do the calculations, you'll see Platform revenue for us over the last many quarters even that we are sharing in the supplemental has been north of 80%. The Recurring revenue is north of 90%. So it's definitely above those levels. Overall, we'll continue to make sure that the business performs on an aggregate basis...

I believe part of the growth in volume, Clark, was due to a significant increase in Gainshare in 2025 compared to 2024. Additionally, secureWISE contributed to this growth, and as I mentioned earlier, we also achieved record licensed revenues for Cimetrix. Therefore, given that the industry is performing at a high level, all three factors contributed meaningfully to the overall growth, not just secureWISE. Regarding your second question about cross-selling, we're implementing several initiatives. For our Cimetrix business, we provide equipment companies with a development kit that allows them to integrate our libraries and software into their equipment for controlling screens and communication with factory execution and analytics systems, like Exensio. secureWISE also offers an agent that runs on the equipment, enabling remote communication and control over what data is shared between the factory and the equipment vendor. Factories can determine which engineer has access to certain data and when it is shared. The first step we’re taking is incorporating the secureWISE agent into the Cimetrix software development kit. To give you some context, in 2024, over 8,000 tools were shipped with Cimetrix Connectivity, which is a greater number than any single equipment vendor shipped, and this figure increased in 2025. This means the secureWISE agent will be accessible on a wide range of equipment, providing significant value to our fab customers, who prefer preconfigured equipment. In a contract we signed in the second quarter, worth eight figures, the fab indicated that they appreciated our collaboration with various equipment vendors, which ensures that new equipment arrives at their factory preinstalled, saving them time and effort. Secondly, we find that secureWISE is present in nearly every 300-millimeter factory globally, with a few exceptions in China—approximately 99.5% of the 300-millimeter fabs worldwide. However, many equipment vendors lack access to it, and many fab engineers are unable to utilize it. As our customers expand their fabs globally, there is a growing demand for the remote connectivity and auditing capabilities that secureWISE offers. We're renewing efforts to make it available to these fabs, creating cross-sell opportunities through new contracts. Lastly, as noted in my initial remarks, many of our equipment customers are beginning to sell into assembly facilities and OSATs as advanced packaging technology evolves. Fabless companies are seeking more data than just tester logs from OSATs, which are also using our operations globally while establishing factories in locations like Arizona and Japan. We are now integrating DEX into secureWISE, as secureWISE has advanced capabilities that DEX lacked, and we aim to offer this to that community as well. This is a longer-term initiative as it involves deploying at OSATs and integrating our two products. This overview highlights our ongoing product development efforts.

No, that's very helpful. My only follow-up question is regarding your comment during the prepared remarks about logic and memory and the role that PDF can continue to play amid significant bottlenecks that seem to have no end in sight. I would like to understand how PDF is enhancing its value proposition specifically for that client base.

Yes. We have long been engaged in advanced logic fabrication and will continue to do so. This year, we observe several activities, including some for test vehicles and DirectScan, eProbe, and even in slightly more mature logic nodes as companies strive to expand capacity. On the memory front, we are participating in a few pilots with customers on DRAM, expecting to see growth with at least one or two companies due to very positive results. As DRAM technology becomes increasingly 3D, the trend toward wafer-wafer bonding for both DRAM and flash is rising, leading to a growing need for electrical inspection. We see numerous opportunities in this area as well. Overall, the semiconductor manufacturing sector is becoming more strategic for countries, necessitating the establishment of factories globally due to substantial demand for semiconductors. The capabilities in characterization, DirectScan, secureWISE networking, and analytics will be increasingly vital to our customers. We have had many exciting discussions with customers this year about new opportunities for our systems.

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