PDF Solutions, Inc. (NASDAQ:PDFS) Q4 2023 Earnings Call Transcript
PDF Solutions, Inc. (NASDAQ:PDFS) Q4 2023 Earnings Call Transcript February 15, 2024
PDF Solutions, Inc. misses on earnings expectations. Reported EPS is $0.15 EPS, expectations were $0.16. PDFS isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
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 2023 conference call ending Sunday, December 31, 2023. [Operator Instructions] 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 statements, 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 Risks Factors on Pages 17 through 30 of PDF's Annual Report on form 10-K for the fiscal year ended December 31st, 2022, 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.
John Kibarian: Thank you for joining us on today's call. If you have 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. Today, I will start with a review of 2023 with a particular focus on Q4. I will provide our perspective of the semiconductor market and then conclude with our outlook on PDF solutions prospects for the year and beyond. Adnan will then provide an overview of our financial results and his perspective on the business before we turn the call over for questions. Looking back on 2023, the company made great strides in our goal of being the end-to-end analytics platform for the semiconductor and electronics industries.
This progress was particularly visible at our users conference in October. First, attendance was fantastic, with over 300 people registered from over 100 companies, which represents two times the turnout of our last conference. We had presentations from many of our customers and partners, including Intel, Analog Devices, Renesas, SAP, Advantest, and others. Second, our developers and application engineers and product managers revealed our road maps and demonstrated our new products. Customers described how they've used our products and platform to revolutionize their technology development, manufacturing operations and product quality. Talks included their use of our design aware inspection to accelerate bring up of new products and processes, guided analytics AI solution for product engineering to find yield issues faster, our test cell automation to enable 25% reduction in operator overhead and our Sapience Manufacturing Hub to enable manufacturing digital transformation by connecting to the enterprise.
We also provided updated information for investors. Turnout from our investors and analysts was substantially above our previous meeting. Overall, we received positive feedback from our community of customers, partners, investors, and analysts. 2023 was also a year for significant progress in our product development. Our eProbe DFI team was able to ship two machines this year, one to an existing customer, and in the fourth quarter, a machine for a manufacturing evaluation by a new customer. The eProbe model, shipped in 2023, has two times the throughput of the previous generation, and it was optimized to find yield issues at both the middle of line and the metallization layers. Our Exensio and Sapience product teams worked together to deliver our Sapience Manufacturing Hub and other analytics applications to link SAP's ERP system to the factory information.
We signed a contract for the first customer for this solution in 2023. Finally, we released our ML Ops product. Customers tell us that the complexity of test is increasing due in part to advanced packaging. They have a desire to apply AI ML to improve product quality, yield, and operations. Building AI models is one thing, putting them online and them operating properly while producing millions of chips is another. The challenge is to get data from the entire supply chain available at the right machine so the AI models can be applied in real time to the chips in manufacturing and tests. PDF's ML Ops enables customers to solve this challenge in putting AI models on the production floor by orchestrating the movement of data, the management of models, and the monitoring of the model's execution and production flow.
Customer interest in our ML OPs has been fantastic. We are on pilot deployments with customers this quarter. While interest in our ML OPs has been great, the fact is there are not enough ML OPs engineers in the industry that are both familiar with AI and semiconductor manufacturing. Teaming with Intel and Carnegie Mellon University, we pioneered a new master's course this past fall. The students were able to work with real world data to develop new AI models using Exensio software. Feedback has been great and we look forward to expand this course offering in the future. All of our marketing, product development, and field applications effort resulted in positive growth in the business. For the year, we grew revenue 12% against a backdrop of the industry that contracted 10%.
As I said earlier, Adnan will comment on the financials in depth. While bookings in the first three quarters were muted, Q4 bookings were strong and we again built backlog. Bookings in Q4 were driven by Exensio as customers deployed our process control, manufacturing analytics, and test solutions. The strong bookings helped our revenue performance despite weakness in gain share and run time licenses, due to equipment customers in wafer fabs shipping less product than we originally expected for the second half of the year. Finally, in the quarter, we booked our first contract as part of a DoD Me Commons program. The Southern California universities and defense contractors wanted to leverage Exensio to connect advanced labs with contractors fabs to smooth the transfer of new technologies to products.
We are proud to be included in this program and work is already underway. In summary, with progress we made in 2023, PDF is driving a reinvigoration of the IC manufacturing and technology development by bringing AI and ML to the factory floor. Turning to our view of 2024, many of our fabless foundry and equipment customers are reporting relatively weak first half of 2024, and in many cases, customers are reporting Q1 will be down. They generally expect now that the second half of the year will return to growth. While some customers are experiencing near-term weakness, the long-term trends driven by increasingly intelligent semiconductor products that make AI possible, the electrification of the energy economy, and the geographic diversification of manufacturing are only accelerating.
Our outlook for the year reflects both the short-term weakness in the IC industry and the longer-term macro trends that can drive significant growth. Overall, we expect bookings for the year to be up significantly versus last year, and we expect to build backlog meaningfully. Our revenue model for the year suggests the first half of the year will be roughly flat when compared to the last year and growth returning to 20% on a year-over-year basis in the second half of the year. Overall, we expect double-digit growth for the year similar to last. When we look to the progress we made in 2023 and consider the opportunities we see in front of us in 2024, we truly appreciate the effort of our employees, contractors, customers and partners that have positioned the company for the future.
Now we'll turn the call over to Adnan for more details and comments on our results. Adnan.
Adnan Raza: Thank you, John. Good afternoon, everyone. We're pleased to review the financial results of the full year and the fourth quarter of 2023. As John said, 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 by the end of February after the annual audit is complete. 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. Like John, I'm also pleased that we ended the fourth quarter of 2023 by growing our backlog versus the third quarter of '23. Our backlog at the end of the year was $230 million.
For the full-year 2023, we generated record revenue of $165.8 million versus $148.5 million in 2022, a 12% year-over-year increase. Two items are worth highlighting here. First, our analytics revenue grew 17% for the full-year '23 on a year-over-year basis. Second, we delivered the 12% total company revenue growth rate for the full year against the backdrop of a 24% decline in IYR revenues. And as John pointed out, an industry that contracted 10%. For the fourth quarter of '23, our total revenue was $41.1 million, up slightly on a year-over-year basis, with analytics revenue growing 9% and IYR revenue declining 55%. For the fourth quarter, our gross margin was 72% and we reported EPS of $0.15 per share. Turning back to the full year '23 results, I will now provide detailed comments.
On a full-year basis, our gross margin was 73% and we reported EPS of $0.73. For the full year, analytics revenue increased 17% to $152.1 million versus the prior year, despite the fact that Cimetrix Connectivity run time licenses, which generate revenue when customers ship their equipment, were down double-digit percentage due to decline in end market equipment shipments. We are making solid progress on our mission to become the leading analytics software provider for the global semiconductor supply chain. Analytics has solidified as the dominant component of our overall business and is now 92% of total revenue revenues for the full year. Important contributions to analytics revenue came from Exensio product deals we signed during the year, particularly some large double-digit-million-dollar deals signed in the fourth quarter, adding to our recurring revenues.
Analytics revenue also saw contributions from continued adoption of our eProbe DFI systems by key customers. We are pleased that a second leading edge customer now has our eProbe DFI machine at their facility for manufacturing evaluation. With respect to Cimetrix products, we continued to see weakness in equipment shipments affecting the contribution to revenue which declined on a year-over-year basis for the full year. We stay engaged with our equipment software customers to watch for signs of growth in tool shipments. Just as we highlighted last year on our earnings call with the full-year 2022 results, it is worth noting for this year 2023 as well that our full-year analytics revenue for 2023 was more than the total company revenue for the prior year 2022.
This is yet another year in a row for this noteworthy achievement. For the full-year 2023, IYR revenue comprised 8% of total revenues at $13.8 million and was down 24% on a year-over-year basis, driven by completion of some fixed-fee engagement projects and reduction in revenues from gain share, primarily from reduced production volumes at key gain share customers. Gross margin for the full-year '23 increased to 73%, up from 71% for 2022, chalking another year of expanding gross margins. Despite the fact that gain share, which is 100% gross margin, decreased, we were able to grow gross margins in part due to better optimized spending on cloud infrastructure as we improve the business scale. Turning to operating expenses, we also controlled the growth of our expenses to expand the operating margins to 17% for the full year '23, compared to 15% for the full year 2022.
During the year, we managed our resources to better distribute use between R&D and pre-sales activities, while funding the growth of our sales team to engage in the opportunities we are seeing in our pipeline. For the year 2023, we reported EPS of $0.73 a share, a meaningful growth of more than 20% compared to the $0.60 per share we reported for the prior year 2022. During the year, we generated positive operating cash flow of $14.6 million, of which we spent $11.3 million on CapEx for data collection systems for our leading-edge business, $1.8 million on the acquisition of Lantern Machinery Analytics for our EV battery initiative, and about $0.7 million on share buybacks. We are pleased with another year of positive operating cash flow generation consistent with our history.
Turning to the balance sheet, we ended the year '23 with cash and equivalents and short-term investments of $135.5 million, compared to $139.2 million at the end of 2022. And we continue to carry no debt. We're proud of the performance of '23 against the macro environment and remain committed to the long-term targets we set at our Analyst Day in October last year, of 20% year-over-year total company revenue growth rate, 75% gross margin, and 20% operating margin. Now, turning to our financial outlook for 2024, we look forward to another growth year. As John said and stated in our earnings release, our outlook for the year reflects both the short-term weakness in the semiconductor industry and the strength of our pipeline, bolstered by the macro trends of distributed manufacturing, energy electrification, and AI, which can drive significant growth.
As a result, we expect revenue for the first half of 2024 to be flat over the comparable period of the prior year, and for revenue for the second half of the year to grow by 20% over the comparable period of the prior year. With that, I'll turn the call over to the operator to commence the question and answer session. Operator.
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