Pdf Solutions Inc Q1 FY2026 Earnings Call

Good day, everyone, and welcome to the PDF Solutions, Inc. conference call to discuss its financial results for the first quarter ending Tuesday, March 31, 2026. 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 call 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, 2025, 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've not already seen our earnings press release and management report for the first quarter, please go to the Investors section of our website where each has been posted. For today's call, I will provide a summary of the past quarter, our perspective on the environment and outlook for the remainder of the year. The first quarter was a good start to the year as we made solid progress on our objective to position PDF Solutions as the leading commercial data analytics and mission-critical platform for the semiconductor industry. This was visible in the nature of the bookings, business activity and our product development during the quarter. From a bookings perspective, Exensio and Cimetrix products were particularly strong. Exensio's strength was primarily from larger deployments, including an enterprise-wide deployment for Exensio Test at a large IDM. Cimetrix booking strength came in part from our larger customers placing orders for runtime licenses in anticipation of additional machine shipments in future quarters. Total revenues were up 26% compared to Q1 of the prior year. Adnan will provide revenue details in his prepared remarks. We shipped one eProbe in the quarter and anticipate that machine to begin contributing to revenue in Q2. Our capital investments in eProbe were meaningful in the quarter as we build additional machines to support our goal of shipping six machines this year. Selling activity was very high across all aspects of the semiconductor industry, from hyperscalers to equipment vendors. We did see significant activity in our characterization and DFI business as customers look to develop advanced processes and products. We anticipate that this activity will result in strong bookings in this category as the year progresses. Development of our new AI-enabled Exensio analytics systems that we announced at our users' conference in December 2025 remained on track in Q1, and we anticipate a beta release in the third quarter. Customer interest has been very high for this capability. In the quarter, we celebrated our first anniversary with secureWISE as a part of PDF Solutions. Our secureWISE system provides secure end-to-end remote access and monitoring for manufacturing equipment, enabling the equipment companies to provide better support and advanced services for the equipment installed at fabs all over the world. During the past year, we invested in R&D to improve the product and services, expanded the customer base to include fab owners, not just equipment makers and now we're expanding the network into the OSATs and fabless. As collaboration in the chip industry moves from being driven by humans to being led by AI, we believe that remote connectivity enabled by secureWISE will increasingly be important. Customer enthusiasm for our stewardship of secureWISE has been very strong. Overall, it was a strong start to the year, both in terms of our traction with the customers and our product development. Now let's turn to our perspective on the environment. I believe this is my 100th quarterly conference call with investors. And as I reflect on my tenure having the honor and opportunity to serve our stockholders, customers and employees, I realize that this is the most interesting time that I've ever seen for the industry and PDF in particular. I don't say that lightly. And in fact, I've never said that before. Over the years, we have experienced many semiconductor cycles. Each time we are told this one is different. I have little doubt that this cycle can overshoot like all the past ones. What is different this time is how AI is changing so dramatically the way engineering is being performed everywhere. A recent business trip in Asia this past quarter highlighted that for me. What I found interesting was that in eight of the nine customer meetings, the CEO attended, and he was very interested in learning how AI is being used in R&D and manufacturing across the industry from PDF's vantage point. The inference that I drew from this is that executives realize that AI is having the most profound effect on how companies operate and may result in changing the nature of the industry and hence companies. These CEOs see PDF as a leader in bringing AI to manufacturing, and they want to understand our perspective on the transformation that is happening and our vision for manufacturing, product and test engineering and yield ramp as a result of AI. What this means for PDF is that this is the most interesting business environment we have experienced in our 25 years as a listed company. As the PDF platform transitions from a system used within the company to increasingly an AI and analytics platform used across the industry, we believe we can deliver and capture more value as we help our customers seize on the opportunities that our platform can provide them. This is resulting in deeper collaborations with our customers and ultimately can result in larger engagements with them. Given our progress in Q1, we reconfirm our total year-over-year revenue growth for this year to be consistent with our 20% long-term target. I want to thank all the PDF customers, employees and contractors for their efforts during the quarter. Now I'll turn the call over to Adnan, who will review finances and provide his perspective on our results. Adnan?

Thank you, John. Good afternoon, everyone. Good to speak with you again today, and I hope all of you and your families are well. We're pleased to review the financial results for the first quarter of 2026. As mentioned, our earnings release and a management report are posted in the Investor Relations section of our website. Our Form 10-Q was also filed with the SEC today. Please note that all of the financial results we discuss in today's call are on a non-GAAP basis, and a reconciliation to GAAP financials is provided in the materials on our website. We are pleased with the results of Q1 with multiple large bookings during the quarter. We secured a double-digit million-dollar Exensio Test Operations booking to help our customer manage geographically distributed operations, an Exensio renewal with a large fabless customer for better analytics, and a booking for fab control software for a large fab customer in Asia. We ended the quarter with a backlog of $246 million, up 9% versus the same quarter of last year. Total revenue for the first quarter were $60.1 million, up 26% versus the same quarter of last year. Our platform revenue was $50.9 million for the quarter, up 36% versus the same quarter of last year, driven by strength in our leading edge solutions, Exensio software and one complete quarter of secureWISE revenues. Volume-based revenue for this quarter was $9.2 million, down 12% versus the same period of last year, primarily due to lower gain share. Our gross margin for the first quarter came in at 76% versus 77% last quarter, driven by a small increase in cost of revenue with a smaller revenue base as expected. Our operating margin for the first quarter came in at 25% versus 24% for the prior quarter and 18% for the same quarter a year ago. We are pleased that on a dollar basis, we generated approximately $15 million of operating profit this quarter, slightly higher than operating profit during last quarter and 75% higher than the $8.6 million operating profit in the same quarter of last year. We remain cognizant of our long-term target operating margin of 27% and continue to make meaningful progress towards that goal. Before we updated our long-term targets in December 2025, we had achieved our prior long-term targets set in 2023 within two years of setting those prior targets. As we reflect on our current target model of 27% operating margin and achievement of 24% during Q4 of 2025 and 25% for Q1 of 2026, we are happy to note that we are making faster progress towards our long-term target than the last time. Net income for the quarter totaled $12.6 million or $0.31 per share compared to $8.1 million or $0.21 per share in the same quarter a year ago, or up 56% for net income and 48% for EPS on a year-over-year basis. We anticipate improvements in EPS as we approach the long-term model due to the scale the business is achieving as our costs to operate the business are rising slower than our revenues. Turning to the balance sheet. We ended the quarter with cash, cash equivalents and short-term investments of $31 million, compared to $42 million at the end of the prior quarter, with the change primarily driven by approximately $10 million used for CapEx needs related primarily to building eProbe systems and fulfilling the customer demand we have spoken about. Given the demand we are seeing, we expect to increase our CapEx spend for this year versus last year, balanced by customer collections such that we expect to grow our cash balance over the coming quarters, particularly the second half of the year. After the quarter closed, we also expanded our revolving credit facility and have $30 million of unused revolver credit facility now available for use by the company as needed. As we look to the rest of the year, we reiterate our expectation that 2026 revenue will grow year-over-year, consistent with our 20% long-term revenue growth target and that we will make meaningful progress towards our long-term target operating margin of 27% with gross margin of 77%. With that, let me turn the call over to the operator for Q&A. Operator?

Our first question comes from the line of Blair Abernethy from Rosenblatt Securities.

Nice quarter. I just wanted to—John, maybe if you could give us a little more color on how you're doing with the eProbe, particularly around new customers. What's that pipeline looking like? And you said you're on track for about six shipments this year. How much of that is net new customers?

We expect about one-third of them to end up at net new customers and the others to be repeat orders from existing customers. And maybe not all of them will directly contribute to revenue this year; one of them may end up being a demo machine. So probably five of the six will be revenue-generating, one will be a demo, two will be at new customers. The other four should be at existing customers, at least as it looks now.

Okay. And looking ahead to 2027, I know it's only May here, but how are you thinking about how the pipeline is developing for next year?

Yes, it's a great question. We do see quite a bit of interest. We are trying to build as many additional machines as we can. We've committed to six. We are looking to see what we can do about additionals. We do have interest to be able to ship additional demo machines and it is gated by our ability to execute. But what we don't get to this year, we will start serving next year.

Okay. Great. And then just on secureWISE, how is that pipeline developing on that side of the business now that you've had it for a year?

A couple of things have happened. First, as I mentioned in my prepared remarks, we started providing service directly to the fabs. What we found was fabs also have people all around the world. The security features that secureWISE provides, the ability to have a log of who was looking at what data, when and what machine, auditable for a couple of years, is very valuable even when it's within the same company. So starting last year, we started selling to the fabs. At our user conference, Intel talked about how they standardize on secureWISE. What that's also done is it has gotten a number of other equipment vendors to realize this was going to become more available. When we bought the company, the largest equipment vendors of the world were the heaviest users of data for secureWISE and also the biggest customers because they had developed the most services, usually related to AI, that provided value by taking the data from the machines, analyzing it at headquarters and providing back updated models and value-added capabilities. Every equipment customer wants to be able to do that. I think the Intel announcement gave a number of other equipment companies the realization that this was going to become more available. We have started picking up and have quite a deep pipeline to expand the business with secureWISE classic, the business with equipment vendors. Also, we've been picking up more business with the fabs. As I said in my prepared remarks, as we look at the OSATs and the fabless and even the foundries as they go out to those facilities, we start getting interest in people connecting front-end to back-end as advanced packaging becomes more important, and back-end packaging to the fabless as the testing and production is becoming more important. So we've got pilots ongoing to bring secureWISE out to that part of the community too, leveraging the fact that we already had DEX services there, which was our historical system, to many of the OSATs as well. So it's been a natural extension to bring the additional secureWISE capabilities out to that part of the market. And now we're going into that. That's our big activity for the second year of our stewardship of the product.

And our next question comes from the line of Clark Wright from D.A. Davidson.

Awesome. Well, I would just like to start maybe the question for Adnan here around the CapEx guidance that you provided with the step-up that we saw in Q1. Could we maybe parse through if that's demand-driven, where you're seeing CapEx upfront in order to supply eProbe systems later this year? Or if there's anything that's more related to the long-term objectives of that business?

I think as you have heard in our prior remarks and us confirming today, one out of the six machines that we targeted for this year got shipped. If you look at our installed base that we've spoken about, six machines through the end of last year and then shipping six this year, that's a meaningful step-up that we're trying to get to this year. That spend is to make sure that we are positioned well to meet that demand. Somewhat of it is starting to think about the future, but it's mostly related to the current demand that we need to meet for this year.

Got it. And then additionally, last year, 53% of revenue came from the top three customers based on your disclosures in the 10-K. Can you provide any color on the conversations you're having right now? You referenced numerous times points around demand and interest. How do you expect these large relationships to grow this year? And if there's any upside potential opportunities within that customer base?

Always in our business, the largest bookings follow an 80/20 pattern. The top 20% drive a high percentage of the bookings volume typically. We expect that again this year. It is broadening in terms of the number of types of customers. Before we had secureWISE, very few of the equipment companies were in our top 20 list. Now we have equipment companies in the top five list, and that is growing quite meaningfully. Also, we see with what we're doing with Exensio a lot of opportunity to expand in the core fabless and merchant semiconductor IDM list. So we do expect this year the bookings to broaden out. We do have a couple of customers that are very large—significant customers that we do expect renewal bookings with this year too. So the exact ratio, Clark, I'm not so sure about, but I think the volume of bookings this year will have a mix of maybe weighted a little bit more in terms of numbers of newer significant customers. In terms of dollars, probably the repeat customers may be some of the bigger dollar amounts.

Got it. That's helpful. And then one last thing, as I was going through the 10-Q, I just wanted to kind of understand the margin implications. It looks like Gainshare and Advantest revenues were down year-over-year. I'm trying to understand if the margins we see today would benefit from increased share there or if you're not expecting any additional Gainshare revenue going forward, at least on the growth side?

The volume-based part of the business is at least partially out of our direct control—how customers ship volumes, how much data they use and how many wafers they ship. That is relatively volatile. We don't put that in our backlog yet, but we know it's always going to be there. When that is significant, it really helps with our gross margin. To achieve the 76% gross margin this quarter while that number was down speaks to the overall scale of the business and why our confidence remains that we can meet or exceed the 77% long-term target, perhaps in shorter time than the typical three-plus years that people would typically set for a long-term target. We know volumes will come back up as supply and demand normalize. As they increase, along with scale in the rest of the business, we do expect to meet and possibly exceed our gross margin targets.

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

This is Ben Taxdahl on for Christian Schwab. Great quarter. I just want to go back to those targets and tracking a little bit earlier than expected. I know you just mentioned it's early still, but could we expect getting to those targets to be a 2027 event? Or could it be a little bit longer?

If you look at our 2023 targets, they were 20% revenue growth, 75% gross margin and 20% operating margin. Within two years by 2025, we exceeded all those numbers in Q4 of 2025. We then set new targets: 20% revenue growth on a bigger base, 77% gross margin and 27% operating margin. People were surprised at the big jump in operating margin going from 20% to 27% while gross margin went from 75% to 77%. As we start getting scale, R&D leverage and G&A leverage become significant. Looking at the first couple of quarters, we're now at roughly 24%–25% on operating margin, so we've made reasonable progress toward 27%. We're at 76% gross margin, so we've made progress toward 77% as well. We think we can get there sooner than a typical three-year timeframe, likely sooner than last time. How much sooner? We're not ready to specify exactly yet. We'll see how the remainder of the year progresses, but we're highly confident this will come in strong and quickly. It will not take the typical three years for a long-term model.

Okay. Great. And then one more on eProbe. You talked about six this year. Where could that be in 2027, 2028? How big of an opportunity could this be over a multiyear period? A little bit more color on that.

It's a question we're working through. Right now, the majority of the machines are subscribed, and we expect them to stay subscribed. That means it's not like a capital purchase where we start from zero every quarter; we build from that base. Our base exiting last year was six machines, but five of the six were on subscription. We expect to end this year with approximately double that on a subscription basis—about ten of twelve, one in demo and one that was purchased. That means we keep building that foundation. If we can sustain modest growth in the number of machines we ship each year, we can get substantially more revenue growth because the previous machines continue contributing revenue. As you look out over 2027 and 2028, even if all we do is maintain this level, eProbe continues to be a very important and growing part of the business. The total market for e-beam has been discussed by others and is the fastest-growing inspection product category in the front end because many defects are three-dimensional in nature, and e-beam is an efficient way to examine 3D defects. We feel we have a unique capability there. The overall market is substantial—on the order of a billion dollars, depending on the source. You'd need to consider subscription versus perpetual models in modelling that, but it would accumulate over time and is a meaningful market.

And our next question is a follow-up question from the line of Clark Wright from D.A. Davidson.

Hi there, just wanted to jump back in and ask one on the leading-edge players and your relationships with those. I know during the Investor Day that was a point of emphasis from a go-to-market perspective. Could you provide any update on the initiatives you're putting in action to gain share with those fab players in the broader ecosystem?

A few things. First, the eProbe tie-in to design is increasingly important for our customers. We want to understand exactly when the eProbe finds things, what about the design made that interact with the process. We're building AI capabilities into the eProbe for that. Customers appreciate that because the eProbe has to understand the entire design, not just the layer it's looking at, but how that layer is connected to every other layer. Second, I mentioned AI integration with Exensio and the releases we're making this year. One targeted area is the ability to interpret and understand the data coming off our test vehicles. Our test vehicles are among the most widely used and very detailed in the industry and contain thousands of experiments. Engineers must go through this data in depth, and AI can play a very important role to find critical signals, interpret them and tie them into layout. We're integrating AI with the Exensio Characterization module to interpret CV data and characterization vehicle data. Lastly, partnerships and collaborations remain important. Our systems are valuable where customers need to share data and analytics and collaborate—whether that's secureWISE, the characterization vehicles or Exensio itself. As collaboration increases in the industry, our capabilities are increasingly in demand on the leading edge.

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