PDF Solutions, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited results; amounts below are in U.S. dollars unless noted. The company sells semiconductor yield-improvement software, hardware, and services, including Exensio and performance-based Gainshare arrangements.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $21.9m | $20.2m | $63.0m | $66.1m |
| Solutions revenue | $16.2m | $14.0m | $46.3m | $47.4m |
| Gainshare revenue | $5.7m | $6.2m | $16.7m | $18.6m |
| Gross profit / margin | $13.2m / 60% | $9.5m / 47% | $38.6m / 61% | $33.0m / 50% |
| Operating loss | $1.4m | $2.8m | $5.9m | $6.2m |
| Net loss | $0.7m | $2.1m | $4.1m | $4.6m |
| Basic and diluted loss per share | $0.02 | $0.06 | $0.13 | $0.14 |
Q3 revenue rose 8% year over year, led by higher Exensio platform activity; Gainshare declined 9%, primarily with lower wafer volumes at 14nm and 28nm. Nine-month revenue fell 5%: lower yield-ramp activity and Gainshare at 28nm more than offset Exensio growth. Gross margin improved in both comparisons, reflecting lower yield-ramp personnel costs and, for the nine-month period, $3.3m of revenue recognized from a customer contract amendment in Q1. Management said margin would have been approximately 2 percentage points lower without that amendment.
Operating expenses increased: research and development rose 25% in Q3 and 14% year to date, while selling, general and administrative expense rose 9% and 12%, respectively. The company cited continued product, cloud-delivery, and commercial investment. Q3 net loss improved mainly because of higher revenue and lower solution costs, partly offset by higher operating expenses.
Cash, liquidity, and obligations
- Cash and cash equivalents were $100.3m at September 30, up from $96.1m at December 31, 2018. Working capital was $122.2m, down from $137.7m.
- For the first nine months, operating cash flow was $23.0m, investing cash outflow was $9.5m, and financing cash outflow was $9.2m. Operating cash flow benefited substantially from $16.9m of accounts-receivable collections, including significant past-due balances collected from three Asian customers.
- Investing included $6.9m of property and equipment purchases, primarily for DFI development and laboratory/clean-room expansion, and $2.7m for the StreamMosaic asset acquisition. Financing included $9.6m of share repurchases.
- The filing reports no debt or undisclosed borrowings. Operating lease liabilities totaled $9.6m, including $1.8m current. Outstanding purchase obligations were $14.9m, primarily due within 12 months.
- Management said existing cash and anticipated operating funds should meet operating, capital expenditure, and other obligations for the next 12 months.
Other material items, outlook, and risks
- In April 2019, PDF Solutions acquired StreamMosaic’s Stream.AI product line and related assets for approximately $2.7m in cash to expand semiconductor and electronics analytics offerings. The acquisition was not material enough for pro forma results.
- Remaining performance obligations were approximately $35.5m; most were expected to be recognized over the next two years, with the remainder over the following five years. This amount excludes certain short-term, cancellable, and usage-based arrangements.
- No quantified revenue or earnings guidance was provided. Management described potential opportunity from Industry 4.0, cloud computing, and semiconductor analytics, while noting that leading-edge foundry shifts and subdued 28nm utilization may weigh on yield-ramp opportunities. Gainshare revenue depends on customer production, yields, and other factors outside the company’s control.
- Customer concentration is significant: Customer A represented 22% of Q3 revenue and 30% year to date; Customer B represented 16% of Q3 revenue. Customer A and B accounted for 30% and 14% of gross receivables at quarter-end.
- Unrecognized tax benefits were $13.5m, excluding interest and penalties; $2.8m, including interest and penalties, was recorded as long-term taxes payable. The company also maintained a $10.4m valuation allowance on certain deferred tax assets.
- No material legal proceedings or probable litigation losses were reported. The company said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Exensio growth can offset continuing weakness in yield-ramp and Gainshare revenue, including exposure to specific process nodes and wafer volumes.
- How sustainable the improved gross margins are, particularly given the one-time $3.3m customer contract-amendment revenue and ongoing expense investment.
- Whether operating cash generation remains strong after the benefit from large receivable collections, and how customer concentration affects collections and future revenue.
- Execution and returns from DFI investment, laboratory expansion, and the StreamMosaic acquisition, alongside the $14.9m purchase commitments and lease obligations.
- Potential outcomes of tax uncertainty, including the $13.5m of unrecognized tax benefits, and any changes in customer contracts or reported remaining performance obligations.