PDF Solutions, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unaudited results; dollar amounts below are in millions unless otherwise noted. PDF Solutions provides yield-improvement solutions to semiconductor manufacturers, earning revenue from Design-to-silicon-yield solutions and contingent Gainshare incentives.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $24.3 | $26.7 | $48.6 | $51.8 |
| Gross profit / margin | $12.9 / 53% | $16.0 / 60% | $25.8 / 53% | $30.9 / 60% |
| Operating income (loss) | $(0.7) | $3.8 | $(1.1) | $7.1 |
| Net income | $0.2 | $2.1 | $0.7 | $4.2 |
| Diluted EPS | $0.01 | $0.07 | $0.02 | $0.13 |
Q2 Design-to-silicon-yield revenue declined 20% to $16.5 million, mainly from delayed purchases by new and existing customers. Gainshare increased 27% to $7.8 million, reflecting higher 14nm volumes partly offset by lower 28nm volumes. For the first half, Design-to-silicon-yield revenue fell 8% to $36.2 million and Gainshare declined 2% to $12.4 million.
Operating costs increased while revenue and gross profit declined. Q2 operating expenses rose 11% to $13.6 million; R&D investment included continued development of the Design-For-Inspection (DFI) solution. The income tax benefit was $0.8 million in Q2 and $2.0 million for the first half, including excess tax benefits related to employee stock compensation. The first-half effective tax rate was 155.6%, which management attributed primarily to those stock-compensation benefits and lower income.
Cash, liquidity and capital
- Cash and cash equivalents were $109.0 million at June 30, down from $116.8 million at year-end. Working capital was $152.3 million.
- First-half operating cash flow was $1.0 million, versus $2.8 million a year earlier. The company cited a $6.0 million increase in accounts receivable, primarily from slow payments by Asian customers, and a $3.4 million increase in prepaid and other current assets.
- Capital expenditures were $5.0 million, primarily for test equipment. Financing used $3.9 million net, including $4.8 million for share repurchases.
- The filing reports no debt or undisclosed borrowings. Current liabilities were $19.5 million; total liabilities were $25.0 million. Management said available cash and anticipated operating funds should meet requirements for the next 12 months.
- The board’s $25 million repurchase program had $20.2 million remaining at quarter-end. The company repurchased 276,279 shares during the first half at an average $17.27 per share.
Material changes, outlook and risks
- Revenue decreased 9% in Q2 and 6% in the first half year over year; net income fell to $0.2 million and $0.7 million, respectively. Lower gross profit reflected weaker revenue and higher direct delivery costs. Operating expenses also rose, including higher R&D and SG&A.
- Management described continued investment by leading foundries in advanced nodes and expected 28nm utilization to increase during the remainder of 2017, with additional Chinese production, and 14nm production to increase. It expected Gainshare trends to track the market generally, while emphasizing that quarterly results can fluctuate. No specific company revenue or earnings guidance is provided in the filing.
- Customer concentration is significant: Customer A represented 36% of Q2 revenue and 42% for the first half; Customer B represented 15% of Q2 revenue. Customers A and B accounted for 41% and 19% of gross receivables, respectively. Delayed purchases, customer financial difficulties, and variable Gainshare factors may affect results.
- On July 11, 2017, after quarter-end, the company acquired certain assets of Kinesys Software for approximately $4.5 million plus assumed liabilities; up to $0.6 million of additional cash earn-out may be payable upon milestones.
- Purchase obligations were $8.1 million, primarily due within 12 months; total disclosed operating lease and purchase obligations were $11.6 million. No material legal proceedings or accrued litigation losses were reported. Management said there were no material changes to the risks described in its 2016 Form 10-K.
- Unrecognized tax benefits were $11.5 million, excluding interest and penalties; $6.9 million would reduce the effective tax rate if recognized. Adoption of the new revenue standard was required for fiscal years beginning after December 15, 2017, but the company had not selected a transition method or determined the impact.
Most important facts for investors to verify
- Whether delayed customer purchases resume and how customer concentration affects upcoming revenue.
- Whether 14nm Gainshare growth can offset weaker 28nm volumes, and how wafer volume and selling prices affect incentives.
- Whether receivables convert to cash promptly, particularly amounts due from Asian customers; unbilled receivables included $21.0 million current and $9.7 million non-current.
- Progress, costs and commercial contribution of DFI development, alongside the impact of rising operating expenses and stock-based compensation.
- The Kinesys acquisition’s final purchase accounting, assumed liabilities, milestone earn-out and expected contribution.
- The eventual impact and transition approach for the new revenue recognition standard, and resolution of tax uncertainties.