PDF Solutions, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports unaudited fourth-quarter results. PDF Solutions provides software, hardware, intellectual property and services to help semiconductor companies improve yield, quality and manufacturing efficiency.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $85.8 million | $101.9 million |
| Gross profit / gross margin | $43.0 million / 50% | $54.4 million / 53% |
| Operating income (loss) | $(10.0) million | $0.2 million |
| Net income (loss) | $(7.7) million | $(1.3) million |
| Diluted EPS | $(0.24) | $(0.04) |
| Cash from operations | $13.3 million | $10.5 million |
| Cash and cash equivalents at year-end | $96.1 million | $101.3 million |
| Working capital at year-end | $137.7 million | $144.3 million |
FY2018 revenue comprised $60.1 million of Design-to-silicon-yield solutions and $25.7 million of Gainshare incentives. Investing cash outflow was $13.1 million, primarily capital expenditures; financing cash outflow was $5.2 million, primarily share repurchases and taxes on equity awards. Cash declined by $5.2 million during the year. The company reported no undisclosed borrowings or debt; total liabilities were $26.1 million, including $6.6 million of long-term obligations as presented in selected financial data.
Q4 2018: Revenue was $19.7 million, gross profit $10.0 million and net loss $3.1 million, or $(0.10) per share. Q4 2017 revenue was $26.8 million, gross profit $14.5 million and net loss $2.6 million, or $(0.08) per share.
Material changes versus prior year
- Annual revenue fell 16%; Design-to-silicon-yield solutions revenue declined 19%, mainly from fewer hours across contracts and the suspension of a major customer’s 7nm program. Exensio and DFI activity partly offset the decline.
- Gainshare revenue declined 6%, with lower 28nm incentives partly offset by higher 14nm incentives.
- Gross margin fell to 50% from 53%. Lower revenue drove the operating loss despite reduced costs and expenses.
- Operating cash flow improved by $2.8 million. Capital expenditures rose to $13.1 million from $10.3 million, including spending on DFI equipment and new and expanded facilities.
Outlook, risks and unusual items
- Management said cash resources and anticipated operating funds should cover operating activities, capital expenditures, restructuring and other obligations for the next 12 months. The filing provides no quantified revenue or earnings guidance.
- GlobalFoundries represented 37% of FY2018 revenue, down from 40% in 2017. Its indefinite suspension of 7nm development and production reduced Q4 solution revenue; the company said the contract’s eventual resolution was uncertain and related future Gainshare revenue was not expected long term.
- Management cited industry uncertainty: leading-edge foundry changes, subdued 28nm utilization, semiconductor cyclicality and dependence on customer production volumes. It also highlighted customer concentration, competition, long sales cycles, contract-estimation uncertainty, international and China exposure, cybersecurity and IP risks, and the execution and qualification risks of DFI.
- A restructuring plan announced in September 2018 resulted in $0.6 million of employee separation charges; $0.2 million remained payable in 2019, and further charges could be significant.
- Adoption of ASC 606 increased FY2018 reported revenue by approximately $1.2 million versus prior accounting rules. The adoption also produced a $4.4 million increase to opening accumulated deficit, net of related tax effects and capitalized commissions.
- The 2017 Tax Cuts and Jobs Act affected tax accounting; the company completed its analysis in 2018 and recorded immaterial final adjustments. FY2018 included a $1.7 million income tax benefit.
- 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.
Most important facts for investors to verify
- Whether the 7nm customer suspension changes contract revenue, renewal prospects or future Gainshare payments.
- Whether Exensio and DFI adoption can offset declines in yield-ramp work, and whether DFI qualification and customer expansion progress as intended.
- Whether customer concentration, wafer volumes and 28nm/14nm production trends continue to affect revenue and cash conversion.
- Whether the restructuring delivers expected savings and what additional charges, if any, are incurred.
- How operating cash flow, capital spending, share repurchases and lease-related obligations affect liquidity; management’s 12-month liquidity assessment is not a longer-term forecast.
- How ASC 606 estimates for Gainshare and contract progress are trued up, and whether tax attributes, unrecognized tax benefits and future tax rates change materially.