PDF Solutions, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports unaudited fourth-quarter results. Amounts are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context
PDF Solutions provides semiconductor and electronics companies with analytics software, SaaS, measurement hardware and intellectual property, and related engineering services. Revenue comes from Analytics offerings and Integrated Yield Ramp (IYR) engagements, which can include yield-based Gainshare royalties. GlobalFoundries accounted for 31% of 2019 revenue, down from 37% in 2018. International customers represented approximately 58% of revenue.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Total revenue | $85.6 | $85.8 |
| Analytics revenue | $49.6 | $38.5 |
| Integrated Yield Ramp revenue | $36.0 | $47.3 |
| Costs of revenue | $33.5 | $42.8 |
| Research and development | $32.7 | $28.0 |
| Selling, general and administrative | $26.3 | $23.9 |
| Net loss | $(5.4) | $(7.7) |
| Net loss per diluted share | $(0.17) | $(0.24) |
| Cash from operating activities | $24.6 | $13.3 |
| Cash and cash equivalents at year-end | $97.6 | $96.1 |
- FY 2019 costs of revenue were 39% of revenue, versus 50% in 2018. The filing changed its income statement presentation and does not present a gross profit or gross margin measure.
- Fourth-quarter 2019 revenue was $22.6 million and net loss was $1.3 million, compared with $19.7 million revenue and a $3.1 million net loss in Q4 2018.
- Year-end working capital was $119.6 million, compared with $137.7 million a year earlier. Total assets were $239.5 million and total liabilities were $43.4 million.
- The company reported no undisclosed borrowings or debt and no off-balance-sheet arrangements. Reported long-term obligations include operating lease and tax liabilities; operating lease liabilities totaled $9.5 million at year-end.
- Operating cash flow improved partly because receivables declined by $10.9 million, mainly from collection of overdue balances. Investing cash outflow was $13.2 million, including $10.6 million for property and equipment and $2.7 million for an acquisition. Financing cash outflow was $9.8 million, primarily reflecting share repurchases.
Material changes versus the prior period
- Analytics revenue rose 29%, driven by software licenses and SaaS, DFI systems, and Characterization Vehicle activity. IYR revenue fell 24%, primarily due to fewer service hours and lower Gainshare from 28nm nodes.
- Costs of revenue fell 22%, mainly because of lower personnel costs associated with reduced, labor-intensive IYR work. R&D rose 17% and SG&A rose 10% as the company shifted resources toward analytics and increased investment.
- Cash from operations increased by $11.3 million. Cash and cash equivalents increased by $1.5 million over the year.
- PDF Solutions acquired certain StreamMosaic assets, including its Stream.AI product line, for approximately $2.7 million in April 2019.
- The company adopted the new lease accounting standard in 2019, recognizing right-of-use assets and lease liabilities. It also recast revenue categories as Analytics and IYR; these presentation changes did not alter total revenue or loss before taxes.
Outlook, risks and unusual items
- Management expects existing cash resources and anticipated operating funds to meet operating, capital expenditure, and other obligations for at least the next 12 months. No quantified revenue or earnings guidance is provided.
- Management is prioritizing analytics products and services. It identifies growth opportunities in large-scale data analytics, cloud computing, and semiconductor investment, including in China, while noting weaker leading-edge IYR prospects and subdued 28nm utilization.
- COVID-19 disruptions were described as a risk after year-end: China temporarily restricted movement of people and goods, the Shanghai office temporarily closed, and employee travel to customer sites was limited. The filing cautions that customer plant closures or broader economic disruption could adversely affect business.
- Customer and Gainshare concentration are significant risks. Gainshare depends on customer production volumes, yield performance, and reporting; estimates may be revised when actual customer data arrives. The indefinite suspension of a customer’s 7nm development had already reduced expected future IYR and royalty revenue.
- Other disclosed risks include long sales cycles, execution and commercialization of DFI, fixed-fee project estimates, competition, international and currency exposure, customer payment delays, cybersecurity and data privacy, and tax uncertainty. Three customers represented 53% of gross receivables at year-end.
- The company reported a first-quarter 2020 intrusion at one cloud installation stemming from a vulnerability in a third-party Citrix ADC component; the filing text does not provide a clear value for any resulting loss or a quantified impact.
- Purchase obligations were $16.7 million, largely due within 24 months; operating lease obligations were $10.2 million in the contractual-obligations schedule. No material legal proceedings or probable litigation losses were reported at year-end.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The company reported effective disclosure controls and internal controls.
Important facts for investors to verify
- Whether Analytics growth and SaaS adoption can offset continuing declines or volatility in IYR and Gainshare revenue.
- GlobalFoundries’ future production, customer concentration, and the timing and collectability of significant receivables.
- DFI qualification, customer adoption, commercial performance, and the return on related equipment and R&D investment.
- The duration and financial impact of COVID-19-related operational or customer disruptions, and the scope and outcome of the cloud security incident.
- Cash conversion and committed cash uses, including purchase obligations, lease payments, capital spending, and share repurchases.
- Potential effects of tax audits, uncertain tax positions, and deferred tax asset valuation allowances.