PDF Solutions, Inc. (NASDAQ:PDFS) Q4 2022 Earnings Call Transcript

PDF Solutions, Inc. (NASDAQ:PDFS) Q4 2022 Earnings Call Transcript February 16, 2023

Operator: Good day, everyone, and welcome to the PDF Solutions, Inc. Conference Call to Discuss its Financial Results for the Fourth Quarter and Year-End 2022 Conference Call ending Saturday, December 31, 2022. At this time, all participants are in listen-only. After the speakers' presentation, there will be a question-and-answer session. 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 17 through 30 of PDF's annual report on Form 10-K for the fiscal year ended December 31, 2021, and similar disclosures in subsequent SEC filings. The forward-looking statements and risks stated in this conference call are based upon 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.

John Kibarian: Thank you for joining us on today's call. If you've not already seen our earnings press release and management report for the fourth quarter and the full year, please go to the Investors section of our website where each has been posted. As Adnan will discuss in more detail, 2022 was another record year for total revenue in a year where our analytics business achieved tremendous growth, growing 40% year-over-year. That on top of 63% growth in 2021, which benefited from the inorganic growth associated with our Cimetrix acquisition. Beyond the strong growth, we laid the foundation for continued success in 2023 and beyond. Today, I'll provide a summary for the fourth quarter and 2022. Our perspective on the market in 2023 and then conclude with remarks about our growth for 2023.

During 2022, overall in Q4 specifically, PDF was increasingly recognized by our customers as critical to their success in developing, ramping and controlling new products and processes. During the year, more than 20 companies booked over $1 million in business with PDF, representing just under 90% of total bookings. These companies span the IC supply chain from equipment makers to foundries to IDMs to fabless companies. They've been most end markets also from advanced computing to RF to microcontrollers to memory and into analog chips. Our customers serve virtually all major markets that consume integrated circuits, such as automotive, industrial, consumer and computing. Beyond customers committing to PDF, partner activity in 2022 was at an all-time high as leading equipment, ERP, analytics and cloud partners appreciate the strategic relevance of PDF and the opportunities that we can jointly provide our mutual customers.

Building on our successful dynamic parametric test. In 2022, we announced numerous applications available on Advantest ACS Edge that leverage Exensio's analytics, AI/ML and real-time control. In the summer, we announced our first products available on the SAP application store. Our collaboration has been well received and evaluations picked up pace throughout 2022. In each case, whether it's Advantest, SAP, Siemens, K&S, IBM or AWS, we could €“ not just marketing effort, but R&D to fully integrate the partner's data and capabilities so it's aligned with the Exensio semantic model. This allows for our joint customers to have benefits in their manufacturing that are not possible before. We anticipate in 2023 and beyond, we will see increased contributions of these collaborations to our revenues.

2022 was a strong year in our product development, the result of continued and persistent R&D investments. to find defects and as a result, ramped faster. We also released our guide analytics module for Exensio, which leverages AI/ML to direct engineers to focus on the part of the manufacturing data that is important to their success. With our customers storing hundreds of terabytes of data and moving to petabytes of data in Exensio, they need to leverage ML to make sure they find the needles in the haystack and control production to achieve the highest yield and liability with the highest throughput. Speed to detect and control for our customers will increasingly benefit from our ML solution offerings, such as guide analytics, and there will be more to come.

We made big advances in tool communication and data collection with our Cimetrix offering, supporting and leading new standards for single die traceability, tool data collection and efficient and secure transfer of the data to the cloud. As a result of customer partner commitments to PDF and our strong product development, analytics revenue grew 40% year-over-year in 2022 to over $130 million. This is over double the $57 million we reported in 2020. With that rapid growth in analytics, which is obviously more than the 20% per year that we committed, came impressive €“ came improvements in gross margin and operating margins. We exited the year with over $270 million in backlog. I would add that we also track shadow backlog, which represents our expectation of future gain share, shipments of Cimetrix's runtime licenses and overage charges for Exensio Cloud usage beyond committed levels.

When factoring reasonable expectations for these we believe that the company is in a very strong financial position, further bolstered by the positive impact of our products and services are having on our customers' businesses. Q4 in 2022 demonstrate the success of PDF's products and solutions in the market. I want to thank our customers, partners, employees and contractors for their commitment to the company. As we begin 2023, the semiconductor environment is very different than it was when we started 2022. Today, our customers are slowing capacity expansions, and in some cases, suffering from oversupply. Offsetting those headwinds, we find that customers are continuing to invest in process and product development. Moreover, the significant shift in supply chain is increasing investments in new capabilities around the world.

Geopolitical factors are increasing government support for restoring capacity. As an Economist magazine article pointed out recently, over $380 billion in government support including the U.S. CHIPS Act, has been committed around the world. Underpinning this increased activity in development and government support for R&D and capacity, we believe are two growth factors that are beyond the usual increased use of silicon in conventional markets such as phones, computing and Internet of Things. First, we believe that technologies such as silicon carbide, high-voltage transistors and semiconductor like processing for EV battery manufacturing will benefit from the shift of the energy economy from carbon-based sources to electrification over the next 10 years.

Production of these products will increasingly need advanced analytics and process control, such as what we provide. Second, the increased use of AI/ML comes at the cost of exponentially increasing amounts of computing. And again, PDF's capabilities to enable our customers to build these ever-increasingly complex systems and high volumes will be critical. As we look to 2023, our outlook factors in both the caution associated with the oversupply and the opportunities that these longer-term trends provide. With respect to caution, we know that our run-time licenses for equipment connectivity track with our customers' equipment sales, our gainshare attracts with our foundry customers wafer shipments, and our overage charges for Exensio Cloud depend on the volume of chips processed.

Hence, we do expect that some of our revenues could be negatively impacted by business corrections. With respect to opportunities, we anticipate continued increased demand in 2023 for our analytics platform, particularly to super product and process development and reassuring production capacity. This demand will increasingly benefit from our collaboration with partners, which we believe will contribute more significantly in 2023 than in the past. As a result, on balance and even against the backdrop of over 30% growth in 2022, we expect to grow revenue in 2023. Now I will turn the call over to Adnan who will provide more detailed comments on our results. Adnan?

Adnan Raza: Thank you, John, and good afternoon, everyone. Good to speak with you again today, and I hope all of you and your families are keeping safe. We are pleased to review the financial results for the full year and the fourth quarter of 2022. We posted our earnings release and a management report in the Investor Relations section of our website. Our Form 10-K with final results will be filed with the SEC in early March after review by our auditors. Please note that all the financial results we discuss in today's call will be on a non-GAAP basis and a reconciliation to GAAP financials is provided in the materials on our website. As John indicated in his comments, 2022 was a year of solid performance for PDF Solutions. We generated record revenues of $148.5 million versus $111.1 million in 2021, a 34% year-over-year increase.

While 34% year-over-year revenue growth is remarkable in of itself, it is worth noting a few highlights. First, the growth in 2022 was entirely organic. After we completed the Cimetrix acquisition in 2020 and delivered 26% revenue growth for 2021. Second, the Analytics business grew in 2022 at a 40% year-over-year rate. Third, we saw positive customer momentum in all our analytics product families of Exensio, Cimetrix and leading edge. Our bookings for the year were strong at over $200 million and grew faster than our revenue growth rate. While we are pleased with the strength of bookings, we are even more pleased with the strong and healthy backlog at the end of the year, exceeding $0.25 billion. Our backlog of $278 million grew 55% year-over-year and gives us a solid foundation for predictability and longevity of the business.

The strong bookings and backlog are a testament to the value customers see in the PDF platform, including data collection, connectivity and powerful analytics. For the full year 2023, we expect to grow total revenues at rates approaching mid-teens percent on a year-over-year basis. Over the longer term, we continued to remain committed to our 20% or better growth rate target for the analytics business. For the fourth quarter of 2022, our total revenue was $40.5 million, up 36% versus Q4 of 2021. Our analytics revenue this quarter also grew 32% versus the same quarter of prior year. We also saw strength in our IYR business with 69% growth versus the comparable quarter of prior year, primarily driven by an increase in gain share. Our gross margin was 74% and we reported EPS of $0.19 per share for the fourth quarter.

Turning back to the full year 2022 results, I will now provide detailed comments. For the full year analytics revenue increased 40% to 130.5 million versus 2021. Our progress to become the leading analytics software provider for the global semiconductor supply chain continues to be strong. Analytics is now the dominant component of our overall business at 88% of total revenues. Our extensive product revenues are now starting to benefit from renewal uplifts of cloud deals we originally signed a few years ago. Software sales for new fab site installations and multiple module utilizations by our customers. Our leading edge solution has established once again its unique value proposition for customers with advanced node where we provide the unique data collection and fast powerful analysis of manufacturing related data to improve yields for their next generation advanced products.

For our Cimetrix products, we are emboldened by the number of new equipment design win certifying PDF Cimetrix products as the connectivity software for multiple new equipment platforms giving us further confidence in our shadow backlog as these equipment products go to market and become more successful. As another data point worth noting, our full year analytics revenue for 2022 was more than the total company revenue for the prior year 2021. This is the second year in a row. We have achieved this milestone. For 2022, IYR revenue comprised 12% of total revenues at $18.1 million and was essentially similar to our IYR revenue last year. Even though this year we did not have the benefit of a legacy gain share contract from a long tenured customer.

We are also pleased that gain share from some new customers grew this year, which we will continue to watch carefully. Gross margin for 2022 increased to 71% up from 64% in 2021 or an expansion of approximately 700 basis points. We were able to grow the gross margin because we carefully managed costs to not grow faster than our revenue growth. In particular, we managed our cloud spend and focus the efforts of our people and resources. It feels good to have now achieved for the full year 2022, the gross margin target of 70%, which we had set as our long-term target. Turning to the operating expenses. We also control the growth of our R&D and SG&A expenses to stay below our revenue growth, thereby expanding our operating margins for the year.

Our main expenses in the R&D and SG&A category were related to headcount as we invest in highly talented and geographically distributed workforce and ensure we build a sales, marketing and G&A infrastructure to support our growing business. All while benefiting from economies of scale. Our R&D and SG&A expenses as a percentage of revenue came in at 31% and 24% respectively, both less than last year's comparable levels. For the year 2022, we reported EPS of $0.60 a share demonstrating a meaningful growth compared to the $0.08 per share we reported for the year 2021. CapEx for the year totaled $8.4 million versus $4.1 million in full year 2021 as we invested primarily in data collection systems for our leading edge business. For the year 2022, we generated positive cash flow of $32.3 million compared to $4.2 million for the prior year 2021.

We are pleased with another year of positive operating cash flow generation consistent with our history. During the year, we also bought back 22.5 million of PDF stock at an average price of just over $24 per share, which we believe was an effective way of returning cash flow stockholders and which allowed us to keep our weighted average diluted shares essentially flat for 2022 compared to 2021. Turning to the balance sheet. We ended a year 2022 with cash and equivalent of $139.2 million compared to $140.2 million at the end of prior year . And we carry no debt. Our cash was essentially flat year-over-year, even after 8.4 million of CapEx and 22.5 million of stock buyback due to strong operating cash flow generation. We are proud of the performance of 2022, remain committed to our long-term business fundamentals and are pleased with the fortunate position we are in with our backlog of over $0.25 billion all coupled with a healthy balance sheet.

For 2023, we look forward to another growth year on top of the strong growth delivered in prior year with year-over-year growth rates approaching mid-teens percent. With that, I'll turn the call over to the operator to commence the Q&A session. Operator?

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