PDF Solutions, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Dollar amounts below are in millions unless stated otherwise. The company provides semiconductor yield-improvement solutions, software and related services, as well as usage-based Gainshare incentives.
Financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $20.2 | $26.5 | $66.1 | $75.1 |
| Gross profit | $9.5 | $14.1 | $33.0 | $39.9 |
| Gross margin | 47% | 53% | 50% | 53% |
| Operating income (loss) | $(2.8) | $0.4 | $(6.2) | $(0.6) |
| Net income (loss) | $(2.1) | $0.6 | $(4.6) | $1.3 |
| Diluted EPS | $(0.06) | $0.02 | $(0.14) | $0.04 |
- Q3 revenue declined 24% year over year: Design-to-silicon-yield solutions revenue fell 27% to $14.0 million, while Gainshare revenue decreased 14% to $6.2 million. For the nine-month period, revenue decreased 12%; the two revenue streams fell 14% and 5%, respectively.
- Management attributed lower solutions revenue mainly to fewer hours worked across multiple customer contracts, partly offset by stronger Exensio software revenue. Lower 28nm Gainshare revenue was partly offset by higher 14nm incentives in the nine-month comparison.
- Operating expenses were $12.4 million in Q3 and $39.2 million for nine months. Lower revenue and gross profit drove the period’s losses despite lower R&D costs. Nine-month stock-based compensation was $7.8 million.
Cash, liquidity and capital resources
- Cash and cash equivalents were $96.8 million at September 30, 2018, versus $101.3 million at December 31, 2017. Working capital was $139.8 million, down from $144.3 million. The company reported no debt or off-balance-sheet borrowing arrangements.
- Nine-month operating cash flow was $9.0 million, compared with $6.3 million in 2017. Investing cash use was $8.7 million, primarily capital expenditures; financing cash use was $4.7 million, including $5.2 million for share repurchases. Cash decreased $4.5 million overall.
- Property and equipment purchases were $8.7 million. Management said cash resources and anticipated operating funds should cover operating activities, capital expenditures and other obligations for the next 12 months.
- At September 30, contractual obligations included $11.8 million of operating lease payments and approximately $10.0 million of purchase obligations. No material legal proceedings or accrued litigation losses were reported.
Material changes, outlook and risks
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method. Adoption increased revenue recognized in 2018 by approximately $0.5 million for both the quarter and nine-month period versus prior guidance. It also produced a $4.4 million cumulative-effect decrease to accumulated deficit at adoption, net of related tax effects. Gainshare revenue is now accrued in the period of customer usage using estimates, with later true-ups when customer reports arrive.
- A major customer informed the company during Q3 that it would discontinue development and production of its 7nm node. This is expected to hurt related solutions and future Gainshare revenue; the company said discussions regarding the noncancelable contract’s resolution were ongoing. Gainshare depends on customer production and yield performance and may fluctuate materially.
- Customer concentration is significant: one customer accounted for 38% of Q3 revenue and 39% of nine-month revenue. Management cited semiconductor-node investment shifts, utilization levels and customers’ ability to reduce or suspend work as business uncertainties.
- After quarter-end, notifications began for a workforce reduction approved September 27. The company expects $1.2–$2.3 million of pretax cash restructuring charges, primarily severance and transition assistance, in Q4 2018 and Q1 2019.
- No specific revenue or earnings guidance was provided. Management expects expenses to vary with cost-control actions, product development and selling activity. The company had $38.7 million of remaining performance obligations at quarter-end, with most expected to be recognized over the next two years; this excludes certain short-term and usage-based arrangements.
- Income tax assets and liabilities remain subject to estimates and uncertainty. Unrecognized tax benefits were $12.9 million, and the valuation allowance was approximately $9.4 million. The company was still evaluating certain Tax Cuts and Jobs Act effects.
Most important facts for investors to verify
- Progress and financial consequences of the 7nm customer contract discontinuation, including the effect on future Gainshare revenue.
- Whether revenue and margins stabilize after the sharp Q3 decline, and how much growth in Exensio software can offset lower project activity.
- Customer concentration, customer production levels, and the accuracy of estimated Gainshare accruals and subsequent true-ups.
- Actual timing and amount of restructuring costs and expected savings.
- Cash use for DFI investment, capital spending, lease commitments and any further share repurchases.
- Potential changes to deferred tax asset recoverability, tax valuation allowances and uncertain tax positions.