Pdf Solutions Inc (PDFS) Q2 2026 Earnings Call Transcript

Good day, everyone, and welcome to the PDF Solutions, Inc. conference call to discuss its financial results for the second quarter conference call ending Tuesday, June the 30th, 2026. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during the session, you will need to press star 1-1 on your telephone. As a reminder, this conference is being recorded. If you have not received a copy of the corresponding press release, it has been posted to the 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 solution. PDF's actual results could differ materially. You should refer to the section entitled Risk Factors on pages 16 through 30 on PDF's annual report on Form 10-K for the fiscal year ending December 31, 2025, and similar disclosures and 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 Kabarian, PDF's President and Chief Executive Officer, and Adnan Raza, PDF's Chief Financial Officer. Mr. Kabarian, please go ahead.

Thank you for joining us on today's call. If you've not already seen our earnings press release and management report for the second 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 next quarter and the remainder of the year. The second quarter built on a strong Q1, providing great 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 bookings, customer activity, and our product development during the quarter. From a bookings perspective, SecureWise and DirectScan systems led the way, with eight-figure contracts for each. We achieved a number of seven-figure contracts for Accenture products and services, including with hyperscalers and photonics companies, as the growth in the AI ecosystems continues to be strong. Finally, Symmetrics bookings were at a record high, on top of a very strong Q1, as the equipment industry continues to be robust. Overall, Well, across all products, the strong bookings resulted in building backlog while supporting meaningful revenue growth for the first half of the year compared with the previous year. Adnan will provide revenue details in his prepared remarks. During the quarter, we placed three new e-probe e-beam inspection machines with customers. This includes two with new customers, one of which is an evaluation and the other of which is a five-year subscription. The third is to a new factory for an existing customer as part of a previously signed contract. These three machines, along with the machine shipped in Q1, means we are two-thirds of the way to our goal for the year. The new customer is using DirectScan on a more mature process node compared to the other DirectScan customers and for five years, carrying them well into mass production. We feel this contract is important as it demonstrates the value of direct scan approach and mature nodes. We believe the large SecureWise booking with an existing customer reaffirms SecureWise's availability in virtually all 3-millimeter fabs around the world and for many more years. While it was an eight-figure contract and the largest in the history of SecureWise that we are aware of, The contract value is a minimum, and both the customer and we anticipate building from the space. With this contract in place, we have now refreshed the largest SecureWise contracts, as well as expanded the business to provide SecureWise services to front-end fabs and back-end test and assembly facilities. Our industry thrives from collaboration between suppliers and customers. In the future, more of that collaboration will be AI agent-driven. SecureWise is well-positioned to be the cornerstone of an agentic collaboration across the industry. 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 direct scan systems as customers looked to develop advanced processes and nodes. We anticipate that this activity will result in strong bookings in this category as the year progresses. Overall, it was a strong Q2 in first half of the year, both in terms of our traction with customers and our product development. Now let's turn to our perspective on the environment. The investment in semiconductors continues to be driven by the unprecedented build-out of AI data centers. The unique element of this cycle is how AI is transforming not just the demand for semiconductors, but also how engineering and production is being executed. While it's debatable where we are in the semiconductor demand cycle, it is clear to me that we are in the very early stages of AI transformation of semiconductor manufacturing and engineering. All participants in the semiconductor supply chain will need to leverage AI agents to be more nimble, innovative, and cost-effective. As the semiconductor industry continues to evolve, opportunities for open dialogue and peer-to-peer learning are more important than ever. PDF Solutions Connect Conference is designed to bring together members of the community to share insights, discuss challenges, and explore technologies and innovations shaping our industry's future, including recent developments from PDF Solutions. The event will be held October 15th and 16th in San Francisco during Semicon West Week. Looking toward the second half of the year, we see increased opportunities across the entire product portfolio. With that optimism and our progress in the first half of the year, we reconfirm 20% year-over-year revenue growth for this year. I want to thank all of you of customers, employees, and contractors for their efforts during the quarter. Now I'll turn the call over to Adnan, who will review the financials and provide his perspective on our results. Adnan.

Thank you, John. Good afternoon, everyone, and good to speak with you all today. We're happy 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 discussed 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 $61.5 million, up 19% on a year-over-year basis. For the first half of this year, our revenues grew 22% on a year-over-year basis versus the comparable first half of last year due to contributions from multiple products. We are pleased with the revenue growth we saw compared to last year and remain committed to our long-term revenue growth rate target of 20%. Our platform revenue this quarter were $49.1 million, up 14% versus Q2 of last year and up 24% for the six-month year-to-date period versus comparable period of last year. We benefited this quarter from the direct scan booking that John talked about, which is with a new non-leading edge customer. Our ending backlog includes a meaningful amount of revenue left in this contract, which will be recognized over the years to come. Our volume-based revenue increased 45% versus Q2 of last year, driven by strong gain share and the strength in Symmetrix runtime licenses. From a bookings perspective, John spoke about the multiple 8-figure and 7-figure deals booked during the quarter, which were across multiple products in the PDF platform. Our business activity with the equipment customers was strong, including both Securewise and Symmetrics. Our total backlog grew to $271 million this quarter, up 10% versus last quarter, and up 16% versus Q2 of last year. Based on what we can see in our pipeline, we anticipate strong bookings momentum for the second half of the year and expect to grow our backlog as we exit this year. It is worth noting as a reminder that we do not include potential future symmetrics, runtime licenses, or gainshare revenues in our backlog, and our backlog would be even higher if we included some estimates of these highly probable future amounts. We reported gross margin of 73% for Q2, which was lower versus Q1 of this year, due in part to the higher perpetual software licenses in Q1. We expect our gross margin to increase next quarter towards the higher levels we have seen during the prior quarters, and we have line of sight to our long-term gross margin target model of 77%. Our operating expense for the quarter were up only 5% versus the same quarter of last year, mainly to support the increases on R&D expenses offset by better management in our SG&A resources. We delivered operating margins of 22%, or about 300 basis points higher than same quarter of last year due to disciplined spend even with the lower gross margins this quarter. We remain committed to our 27% target operating margin model communicated in December. For EPS, we reported profit of $0.27 for the quarter, which was up 42% versus the same quarter of last year, and up 49% for the year-to-date comparable period. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $114.9 million, compared to $31.2 million of prior quarter, and outstanding debt of $67.5 million. During the quarter, we helped Adventist exit their equity stake at a more than 2x return for their investment in PDF shares via a follow-on equity offering. and we are thankful to them for their continued partnership. As part of the equity offering, we sold approximately 1.9 million primary shares and added 81.8 million to our balance sheet. During the quarter, we generated operating cash flow of 16.4 million and utilized $14.1 million towards CapEx, mainly for eProb tools to meet the demand we are seeing and to order some of the longer lead time items as we look to future shipments. For each of the next two quarters, we expect to spend incrementally higher CAPEX than Q2. For the full year, we expect the average quarterly CAPEX similar to Q2. The increased CAPEX year-over-year is in part due to higher component costs we're seeing to meet the customer demands that John spoke about for the direct scan systems. Given the strength of our business, we expect to grow our cash balances this year and end the year at higher-ending cash balance compared to Q2, while we also bring down our debt balance via scheduled payments. 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 to 20% for full year 2026 compared to the prior full year 2025. With that, let me turn the call over to the operator for Q&A.

Thank you, Mr. Raza. Ladies and gentlemen, if you have a question at this time, please press star 11 on your telephone. If you're using a speakerphone, please lift the handset before asking a question. Please wait one moment for our first question. Our first question comes from the line of ClockWright with DA Davidson. Your line is open.

Thank you. Roughly a year ago, you noted that the target audience for direct scan systems was five to ten customers. Based on the conversations you are having today with prospects, has that group expanded?

Yeah, it's a good question, Clark. Thank you. We do think it's expanding. In my prepared remarks, I mentioned that we saw value for a customer that was developing a more mature node. and we do see other customers like them that are developing more mature notes and we had been working with them for a while. This contract was a significant contract for us. It kicked off in the second quarter and we do see, besides them, expansion there as well as expansion with other customers. It does increase the aperture. How much broader it is, I don't know, but it's definitely bigger than what we thought.

Got it. And then it was great to see the acceleration and backlog growth this quarter, can you talk about the source of growth and if this is primarily coming from your large existing customers or if there's a broadening across the customer base?

Yeah, so some of it's from the new customers, as I alluded to on that direct scan contract, which contributed to backlog, as Adnan said in his prepared remarks. But also, usually a good chunk of it is existing customers. As I said, the large eight-figure SecureWise contract was with an existing equipment company extending out for a number of years their use of the system at the minimum level with growth on top of that.

Got it. And then last one for Adnan, could you help me better understand just the components that drove the gross margin contraction this quarter? if we should think about current levels being the run rate for the rest of the year, or if we should think about expansion back to more of the 1Q levels?

Yeah, absolutely. So I think I said this in the prepared remarks, but really Q1 has some perpetual software licenses, and that is really what drove the difference for this quarter. I also mentioned in the remarks that for the next quarter, we expect the margins to be reverting back to the levels that we're historically used to. I think more important than anything, If you'll remember when we raised our course margin and operating margin targets, we said that we expect this new target to be achieved at a faster pace than what we took us for the last ones. And recall, the last ones took us two years. So as long as we're inside of that time window, that remains our goal. And a last comment I made on the call and the prepared remarks was that we have a line of sight to the 77% target model. So stay tuned. Got it. Thank you.

Thank you. please stand by for our next question our next question comes from the line of Blair Abinetti with Rosenblatt securities your line is open hi nice quarter guys thank you just jump John I'm just wondering on the on the first off on the secure wise to get an eight-figure contract there's this is pretty impressive how are you thinking about you know the the the market opportunity now for secure wise that you you've had it for a year or so and and And just, you know, how big do you think that TAM could be?

Yeah, you know, when we acquired it, our thesis was that they had really only monetized the equipment vendors. They fundamentally installed it all the front-end fabs and then charged the equipment vendors for access. You saw last year we did, and it came out at our user conference, a large contract with Intel that's standardized on SecureWise. And they spoke at our user conference that they would make SecureWise available to any equipment vendor that wanted to have remote access at Intel, and they continue to talk about that at their events with equipment vendors about the importance of getting remote connectivity and superior support. They provide a minimal level through that contract, and then if the customer wants to transmit lots of data, the equipment vendor wants to transmit lots of data and provide more AI-driven solutions, then they direct the equipment vendor to us. So this has been a great way to us to convince every equipment vendor remote access is possible, because Intel has made that possible. Now, with this contract we signed this last quarter, took a very significant customer of ours on the equipment side and commit across all three millimeter fabs for a number of So that communicates to the equipment industry and SecureWise will be available at any front end fab that you're going to. Intel also, as well as other customers, started making it available in the back end test and So if you look at what we've done, we've started to demonstrate that there is a secure life application with the fabs themselves. That was in the Intel contract for their own internal use. There is, of course, an expanding capability at the equipment vendors because we're demonstrating that it is becoming a standard that you can count on most places. And we're extending it into the back end because the production is getting more complex. We think, you know, as I said in my preparer marks, ultimately more and more of that activity on the SecureWise network will just be agents. It won't necessarily be humans. Already, the majority of the revenue comes from data transmission, you know, across the network, which is really a key part of the AI pipeline. So, you know, how much bigger we think, you know, it can grow at least at the company growth rate over these next few years. at least at that level.

Okay, great. And then just turning over to the DFI, just maybe talk about the pipeline there, how it's shifted, and there's an eval, you said, in one of the machines that was shipped this quarter.

How are you thinking about the ramp there in terms of getting to contracted revenue? yeah so we um i think we've had a very good dialogue with that customer we know what kinds of things they want to see the machine do they selected the machine because they thought it had some very unique capability um it is um this is getting us into the memory market which is an important uh step you know expansion into the more mature nodes expansion to memory we'll look at geographic expansion as we get further through this year early next year you know so how quickly it converts I think you know these things typically take you

know close to a year to convert so I thought I'm not going to go and speculate on when it will convert but you know or if it will convert but we do see this as an important beachhead for us okay and then in terms of your CapEx that you're just I don't know what if you I didn't catch all of that did you say that you sort of felt that the run rate we're seeing for Q2 is going to be the average for the year?

Let me clarify that.

So two comments, two parts.

One, that we expect for Q3 and Q4 to CapEx to incrementally be higher compared to where it was for Q2. And then when you look at the whole year CapEx and just look at an average quarterly amount, the math would say it's similar to where we were in Q2 of this year. So net spending a little bit more. But I think the key thing to takeaway is, look, with the strength of bookings, with the strength in the business, even with this capex, we're looking to grow cash on the level of Q2. So that's something we feel good about.

Thank you. As a reminder, ladies and gentlemen, that's star one one to ask the question. Please stand by for our next question. Our next question comes from the line of Christian and Schwab with Greg Hallam. Your line is open.

Hey, guys, it's Ben. It's Ben Taxol on for christian here um a lot of my questions were answered but just one on on the e-probe is you know we're on target to hit six this year it seems like um is there what's the visibility looking like into 27 and you know could we ship you know another six or or you know how how can i kind of think about that yeah well it's a little i mean we are having dialogues with customers about that Now, Ben, I don't know that we're ready to go and communicate what we think 2027 would look like.

We have been working with our supply chain to both optimize time that it takes to bring things up so we have more flexibility. Capacity, we feel pretty good about. We think that they're able to build at a level higher than this. So we feel like we're not limited from a capacity standpoint yet. And a little bit on supply, you know, the biggest issue has just been around timeline and supply chain. You know, we alluded to costs, you know, particularly around the computing element of the solution keep going up on the computing side. So we're doing some things there around how we drive our cost to be a little bit more effective given, you know, where memory prices are going and other things like that. So, you know, I hopefully by later this year, we'll be able to communicate our targets for 2027. in terms of what we think production will be. But, you know, there's potential that we could produce more if we needed to. For sure, there's the leverage there.

Perfect. That's all I got.

Thank you. As a reminder, ladies and gentlemen, that's star 1-1 to ask the question.

At this time, there are no more questions.

Ladies and gentlemen, this concludes the program. Thank you for joining us on today's call. You may now disconnect.