PDF Solutions, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited; amounts below are in millions of dollars except per-share data. PDF Solutions provides semiconductor-industry analytics software and services, design-for-inspection systems, and Integrated Yield Ramp engagements.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $21.4 | $20.6 | $42.6 | $41.1 |
| Analytics revenue | $15.2 | $12.0 | $28.4 | $23.4 |
| Integrated Yield Ramp revenue | $6.2 | $8.6 | $14.1 | $17.7 |
| Gross profit / margin | $12.5 / 58% | $12.7 / 62% | $25.1 / 59% | $25.4 / 62% |
| Net loss | $(3.7) | $(0.7) | $(4.2) | $(3.4) |
| Net loss per diluted share | $(0.11) | $(0.02) | $(0.13) | $(0.10) |
- Operating costs: Q2 costs of revenue were $8.9 million, up 14%; R&D was $7.8 million, up 6%; and SG&A was $7.7 million, up 11%. First-half costs of revenue were $17.4 million, R&D $16.3 million, and SG&A $15.6 million.
- Cash flow: First-half operating cash flow was $10.6 million, versus $5.0 million a year earlier. Capital expenditures were $3.9 million; net cash used in financing was $0.8 million. Cash increased $5.8 million to $103.4 million.
- Liquidity and obligations: Working capital was $118.9 million. Total assets were $233.7 million and total liabilities $36.0 million. The filing reports no debt or undisclosed borrowings; operating lease liabilities totaled $8.9 million. Purchase obligations were $12.7 million, mostly due within 24 months.
Changes versus prior comparable periods
- Revenue rose 4% in both Q2 and the first half. Analytics grew 27% in Q2 and 21% year to date, mainly from increased Characterization Vehicle services and, for the half year, Exensio licenses and services.
- Integrated Yield Ramp revenue fell 27% in Q2 and 20% in the first half. Q2 declines reflected lower service hours and reduced Gainshare royalties from 14nm and 28nm nodes. First-half comparison was also affected by $3.3 million of nonrecurring contract-amendment revenue in Q1 2019.
- Gross margin declined to 58% in Q2 and 59% for the half, from 62% in each comparable 2019 period. The filing cites higher cloud delivery costs, test-equipment depreciation, and certain third-party royalties and licenses.
- Q2 net loss widened to $3.7 million from $0.7 million, including higher operating costs and a smaller income tax benefit; first-half net loss widened to $4.2 million from $3.4 million despite a larger tax benefit.
- First-half operating cash flow improved, primarily due to collections of receivables. Accounts receivable decreased to $28.7 million from $40.7 million at year-end.
Outlook, risks and unusual items
- No numerical revenue or earnings guidance is provided. Management said existing cash resources and anticipated operating funds should meet operating, capital expenditure, and other obligations for at least the next 12 months.
- COVID-19 restrictions disrupted offices and travel, limiting on-site customer services. The company said it had maintained product and service access through remote operations, but warned that employee productivity, customer purchasing decisions, delivery, bookings, and financial performance could be affected. It reported no significant liquidity impact to date.
- On July 29, 2020, after quarter-end, PDF Solutions entered a strategic partnership with Advantest. The arrangement includes development and commercial agreements, a five-year cloud-based license and services arrangement, and Advantest’s purchase of 3,306,924 shares at $19.7085 per share for $65.2 million gross proceeds. This financing is not included in June 30 cash.
- Customer concentration is material: Customer A represented 24% of Q2 revenue and 25% of first-half revenue. An arbitration commenced against SMIC in May 2020 seeking unpaid contractual fees and other relief; no material litigation loss was accrued at June 30.
- Unrecognized tax benefits, excluding interest and penalties, were $14.3 million at June 30. The company recorded a $2.2 million tax benefit from federal NOL carrybacks under the CARES Act during the first half.
- A new stock repurchase program authorized up to $25 million over two years; no shares were repurchased under it through June 30. The employee stock purchase plan expired for new offering periods in May 2020, while existing periods continue.
Investor verification priorities
- Track whether Analytics growth offsets continued Integrated Yield Ramp and Gainshare volatility, including customer and node-level trends.
- Verify the Advantest transaction’s closing, proceeds, share issuance, and commercial contribution after quarter-end.
- Monitor COVID-19 effects on customer demand, service delivery, bookings, and collection timing.
- Assess Customer A concentration, SMIC arbitration developments, and collectability of receivables.
- Review margin trends and the returns expected from ongoing cloud, DFI equipment, R&D, and sales investments.
- Monitor realization of deferred tax assets, uncertain tax positions, and the timing of contractual and lease obligations.