PDF Solutions, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013. The company provides semiconductor design-to-silicon-yield improvement services and software, earning both fixed fees and contingent Gainshare incentives. Financial statements are unaudited; amounts below are in U.S. dollars.
Key financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $25.5m | $22.6m | $74.4m | $65.7m |
| Gross profit | $15.0m | $13.1m | $44.5m | $38.6m |
| Gross margin | 58.8% | 58.1% | 59.8% | 58.8% |
| Operating income | $7.7m | $5.3m | $21.5m | $14.6m |
| Net income | $4.8m | $5.0m | $14.1m | $13.3m |
| Diluted EPS | $0.15 | $0.17 | $0.45 | $0.45 |
| Operating cash flow | Not separately stated | Not separately stated | $20.9m | $4.6m |
Gross and operating margins are calculated from reported figures and rounded. Q3 revenue comprised $17.0m of design-to-silicon-yield solutions and $8.5m of Gainshare; nine-month revenue comprised $46.8m and $27.6m, respectively.
Financial position and liquidity
- Cash and cash equivalents were $85.2m at September 30, 2013, up from $61.6m at December 31, 2012. Working capital was $110.4m, versus $82.9m.
- Total liabilities were $15.1m, including $11.5m current liabilities. The company reported no debt or undisclosed borrowings and no off-balance-sheet arrangements.
- Nine-month investing cash use was $3.4m, primarily capital expenditures, including test equipment. Financing provided $6.0m, mainly from option exercises and employee stock purchases.
Changes versus prior comparable periods
- Revenue increased 13% in both Q3 and the first nine months. Management attributed growth in fixed-fee solutions to more billable project hours and higher business activity; Gainshare growth reflected more projects meeting performance targets and higher customer wafer volumes.
- Operating income rose 45% in Q3 and 47% year to date, with gross profit growth and lower operating expenses contributing. Gross margin improved in both comparisons.
- Q3 net income declined 3% despite higher operating income, primarily because the income tax provision increased by $2.5m to $2.6m. Nine-month net income increased 6%, while the tax provision rose $6.1m to $7.3m.
- Nine-month operating cash flow increased to $20.9m from $4.6m, reflecting stronger collections and working-capital movements; accounts receivable fell $6.0m in the 2013 period versus a $12.7m increase in 2012.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expected demand support from investment in advanced semiconductor manufacturing nodes and stated that existing cash and anticipated operating cash flows should meet requirements for at least the next 12 months.
- Revenue and Gainshare can fluctuate with customer production, sustained yield improvements, wafer volumes, customer purchasing timing, and the ability to win contracts containing Gainshare terms. Three customers each contributed over 10% of revenue; together they represented 76% of Q3 revenue and 74% of nine-month revenue.
- Management highlighted estimation risk in fixed-price project scope and costs, and judgment in allocating bundled contract revenue. Customer renegotiations or suspension of work could affect results.
- Unrecognized tax benefits were $9.6m, excluding interest and penalties; $2.9m including interest and penalties was recorded as long-term tax payable. California R&D tax credits remained subject to a full valuation allowance. The effective tax rate was 34.04% for the nine months, versus 7.93% in 2012.
- A hypothetical 10% adverse foreign-exchange move on foreign-currency payables would result in an estimated $0.7m loss; no hedging contracts were outstanding. The company reported no material legal proceedings or litigation accrual. Customer IP indemnities exist, but the maximum potential impact could not be estimated.
- The company had $7.2m of future minimum operating lease payments. A $20m share repurchase authorization remained in place, with $19.5m available at quarter-end.
Important facts for investors to verify
- Whether growth in Gainshare and fixed-fee work continues, particularly given customer and project concentration.
- Whether operating cash flow remains strong as billing milestones, collections, deferred revenue and accrued expenses change.
- How the higher tax provision and uncertain tax positions affect future net income and cash taxes, including realization of California R&D credits.
- Whether customer production, yield performance, currency movements, and advanced-node investment trends support the company’s stated outlook.
- Future capital spending, stock-based compensation and share issuance, and use of the remaining repurchase authorization.