PDF Solutions, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. PDF Solutions provides software, hardware, and services to help semiconductor companies improve design and manufacturing yields. The filing is unaudited.
Key financial results
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $20.5 million | $24.7 million |
| Gross profit / margin | $12.7 million / 62% | $13.3 million / 54% |
| Operating loss | $2.8 million | $0.5 million |
| Net loss | $2.7 million | $0.4 million |
| Diluted loss per share | $0.08 | $0.01 |
| Cash from operations | $(0.2) million | $3.3 million |
Revenue mix: Solutions revenue was $16.7 million, down 8%; Gainshare performance incentives were $3.9 million, down 41%. Research and development expense rose 14% to $8.2 million, and selling, general and administrative expense rose 10% to $7.0 million.
Cash, liquidity and debt: Cash and cash equivalents were $90.4 million at March 31, versus $96.1 million at year-end. Working capital was $131.2 million. The company reported no debt or undisclosed borrowings. Capital expenditures were $2.4 million; share repurchases used $3.9 million. Management said existing cash and anticipated operating funds should cover operating activities, capital expenditures, and other obligations for the next 12 months.
Changes and management commentary
- Total revenue declined 17%, reflecting lower yield-ramp services activity and reduced Gainshare revenue, partly offset by growth in Exensio big-data solutions.
- Gross margin increased to 62% from 54%, although gross profit fell 4%. Management cited lower yield-ramp costs and $3.3 million of Solutions revenue recognized following a customer contract amendment; the benefit was partly offset by lower Gainshare revenue.
- Net loss widened amid lower revenue, higher R&D and SG&A expenses, and a smaller income tax benefit. Operating cash flow shifted from positive to negative.
- A major customer’s decision to suspend development and production of a 7nm node affected prior-period Solutions revenue and Q1 2019 Gainshare revenue. An amendment enabled Q1 Solutions revenue, but management does not expect related Gainshare revenue in the long term absent future production.
- The company adopted lease accounting on January 1, 2019, recognizing $8.7 million of right-of-use assets and approximately $10.5 million of lease liabilities at adoption. The filing says adoption did not affect operating results or cash flows.
Outlook, risks and unusual items
- No numerical revenue or earnings guidance was provided. Management described industry opportunities in manufacturing analytics and process control, while noting that changes in leading-edge foundry investment and delayed or suspended node development may weigh on yield-ramp business.
- Revenue is concentrated: one customer contributed 36% of Q1 revenue and represented 35% of accounts receivable at quarter-end. Gainshare revenue depends on customers’ production, yields, and reported usage, and may fluctuate.
- Accounts receivable increased; management attributed this mainly to slower payments from some Asian customers and higher days sales outstanding. The filing reports no significant receivable write-offs in the quarter.
- Purchase obligations totaled $8.2 million, primarily due within 12 months. The company had $13.8 million of unrecognized tax benefits, excluding interest and penalties; $3.2 million, including interest and penalties, was recorded as long-term taxes payable.
- The 2018 share repurchase program had $21.1 million remaining at March 31. The company reported no material legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the customer contract amendment and the $3.3 million of recognized Solutions revenue are nonrecurring, and whether further production could support any related Gainshare revenue.
- Whether the decline in Gainshare and yield-ramp activity persists, given customer concentration and semiconductor node investment trends.
- Whether cash generation improves as receivables are collected and investment in DFI assets, facilities, and research continues.
- The assumptions behind percentage-of-completion revenue estimates and estimated Gainshare accruals, which may be adjusted when actual customer data becomes available.
- The potential effects of tax uncertainties and the company’s continued share repurchases on liquidity and shareholder value.