PDF Solutions, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited results; amounts below are in millions except per-share data and percentages.
Business context
PDF Solutions provides software, analytics, services, and measurement systems to semiconductor and electronics companies. Revenue is reported in Analytics and Integrated Yield Ramp. Analytics includes software, SaaS, and DFI/CV systems and services; Integrated Yield Ramp includes fixed-fee engagements and, in some cases, yield-based Gainshare royalties.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Total revenue | $34.7 | $27.4 | $68.2 | $51.6 |
| Analytics revenue | $31.1 | $19.6 | $61.5 | $39.0 |
| Integrated Yield Ramp revenue | $3.6 | $7.8 | $6.6 | $12.6 |
| Gross profit / margin | $22.6 / 65% | $16.6 / 61% | $44.6 / 65% | $30.2 / 58% |
| Net loss | $(1.1) | $(4.5) | $(5.3) | $(12.1) |
| Net loss per diluted share | $(0.03) | $(0.12) | $(0.14) | $(0.33) |
| Operating cash flow | Not separately stated for Q2 | $6.6 | $(0.2) |
Revenue rose 26% in Q2 and 32% in the first half, driven by higher Analytics revenue from DFI and CV systems and Cimetrix and Exensio software licenses. Integrated Yield Ramp revenue fell 55% in Q2 and 48% in the first half, principally because certain Gainshare periods ended. Gross margin improved year over year as higher revenue increased scale and certain costs declined relative to revenue.
Q2 operating costs included $12.0 million of cost of revenue, $13.4 million of R&D, and $9.8 million of SG&A. First-half R&D was $27.5 million and SG&A was $20.6 million; increases were primarily associated with personnel, stock-based compensation, subcontractors, and cloud services. Q2 interest and other income was $1.0 million, primarily reflecting foreign-exchange gains and higher interest income. First-half income tax expense was $2.5 million, despite a pretax loss, driven in part by foreign withholding taxes and geographic income mix.
Liquidity, capital and balance sheet
At June 30, 2022, cash and cash equivalents were $81.3 million and short-term investments were $35.9 million, totaling $117.2 million, compared with $140.2 million at year-end 2021. Working capital was $122.0 million, down from $144.7 million. The company reported no debt or off-balance-sheet borrowing arrangements. Management said available resources and anticipated operating funds were expected to cover requirements for at least the next 12 months.
First-half operating cash flow was $6.6 million. Investing cash flow of $72.0 million largely reflected maturities and sales of short-term investments, offset by investment purchases and $4.6 million of property and equipment purchases/prepayments. Financing used $24.4 million, including $22.5 million for share repurchases and $4.2 million of taxes on net share settlements. Total liabilities were $51.3 million at June 30.
Outlook, risks and unusual items
- No numeric revenue or earnings guidance is provided in the supplied filing text. Management noted that R&D and SG&A may fluctuate and that revenue depends on customer demand, timing of purchases, market acceptance, and customer retention.
- Management identified Gainshare revenue as inherently variable, depending on customer production, yield achievement, and new contracts. Remaining performance obligations were approximately $184.4 million; most was expected to be recognized over the next two years, subject to contract changes and other factors.
- Risks discussed include COVID-19-related travel and customer-engagement limitations; semiconductor supply constraints; the Russo-Ukrainian war’s supply-chain and component effects; and U.S.-China/Russia trade tensions and export controls, which could affect customer purchasing and China sales. Management said the global semiconductor shortage had not materially affected the business to date.
- Customer concentration is notable: one customer generated 29% of Q2 revenue and 31% of first-half revenue. The largest customer represented 43% of gross receivables at June 30.
- The company is pursuing arbitration against SMIC over unpaid contractual fees; SMIC denies liability and the proceeding was ongoing. No material loss was accrued for this matter in the filing.
- Unrecognized tax benefits were $15.2 million, excluding interest and penalties; the company maintained a $51.6 million valuation allowance against U.S. federal and state deferred tax assets. A full valuation allowance reflects uncertainty about realizing those tax assets.
- The company repurchased $22.5 million of shares in the first half and adopted a new $35 million, two-year repurchase authorization in April. A prior $3.2 million write-down of first-generation e-beam tool assets, recorded in Q4 2021, was attributed to weak market demand and customer needs.
Most important facts for investors to verify
- Whether Analytics growth, especially DFI/CV systems and software licenses, is sustained and converts to cash.
- How quickly Integrated Yield Ramp revenue and Gainshare royalties decline or recover as contracts and customer production change.
- The concentration and collectability of customer revenue and receivables, including exposure to the largest customer and the SMIC arbitration outcome.
- Cash deployment: share repurchases, capital spending, and remaining authorization, alongside the decline in cash and investments.
- Potential effects of export controls, geopolitical and supply-chain conditions, and the $15.2 million of unrecognized tax benefits and deferred-tax valuation allowance.