PDF Solutions, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; comparisons are to the corresponding 2022 periods. Amounts are in U.S. dollars unless noted. PDF Solutions provides software, analytics, hardware and services to the semiconductor and electronics industries.
Financial results and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $41.6m | $34.7m | $82.4m | $68.2m |
| Gross profit / margin | $29.2m / 70% | $22.6m / 65% | $58.1m / 71% | $44.6m / 65% |
| Net income (loss) | $6.8m | $(1.1)m | $7.2m | $(5.3)m |
| Diluted EPS | $0.17 | $(0.03) | $0.18 | $(0.14) |
| Operating cash flow | Not reported separately for quarter | Not reported separately for quarter | $(6.6)m | $6.6m |
- Q2 Analytics revenue was $37.1m, up 19%; Integrated Yield Ramp revenue was $4.5m, up 26%. For the first half, the respective amounts were $73.5m, up 19%, and $8.9m, up 34%.
- At June 30, cash and cash equivalents were $100.4m and short-term investments were $23.7m, totaling $124.0m, versus $139.2m in cash and investments at December 31, 2022. Working capital was $152.3m, up from $135.2m.
- The company reported no debt or off-balance-sheet borrowing arrangements. Total liabilities were $66.1m; operating lease liabilities were $6.8m.
- First-half investing cash outflow was $9.7m, including $6.0m for property and equipment, mainly DFI and CV systems. Financing cash outflow was $2.5m; there were no common-stock repurchases in the first half of 2023.
Material changes and management commentary
- Revenue rose 20% in Q2 and 21% in the first half year over year. Management attributed Analytics growth to Exensio licenses and CV/DFI systems; lower Cimetrix runtime-license orders partly offset growth. IYR growth primarily reflected higher Gainshare from customer wafer shipments at non-leading-edge nodes.
- Gross margin improved by 5 percentage points in Q2 and 6 points in the first half, which management attributed primarily to higher revenue, including Gainshare.
- First-half R&D expense declined 8% to $25.3m, while SG&A rose 48% to $30.4m. SG&A increases included personnel and stock-based compensation, bonuses and commissions, and $1.8m of additional legal fees related to the SMIC arbitration.
- Net income includes a substantial income tax benefit: $3.9m in Q2 and $3.5m for the first half, compared with tax expense in 2022. The first-half effective tax rate was negative 94.7%; the company maintains a $59.2m valuation allowance against U.S. federal and state deferred tax assets.
- First-half operating cash flow was negative despite reported net income, primarily due to a $19.3m increase in receivables, bonus payments and other working-capital movements. The company said it collected more than half of the $44.9m billed receivables outstanding at June 30 after quarter-end.
Outlook, risks and contingencies
- No numerical revenue or earnings guidance is provided. Management believes available cash resources and anticipated operating funds will meet requirements for at least the next 12 months.
- Remaining performance obligations were approximately $244.9m at June 30; more than half is expected to be recognized over the next two years. Timing and amount may change with contract modifications, variable consideration and delivery schedules.
- Management cautions that Gainshare revenue depends on customer production volumes and yield performance. Other risks include semiconductor inventory and fab-utilization cycles, lower runtime-license demand, supply-chain and cost pressures, and evolving export controls and U.S.-China geopolitical tensions that could affect sales in China.
- The company is pursuing arbitration against SMIC for unpaid contractual fees. A hearing occurred in February 2023; final written submissions were due at the end of August, and a decision was expected approximately within 2023. The filing reports no material legal proceeding with a probable accrued loss.
- Outstanding supplier purchase obligations totaled $24.5m, mostly due within 24 months. On July 5, 2023, the company acquired Lantern Machinery Analytics for approximately $1.9m in cash.
- One customer accounted for 33% of Q2 revenue and 36% of first-half revenue. That customer represented 40% of gross receivables at June 30.
Key facts for investors to verify
- Whether the reported post-quarter collections materially reduce receivables and support cash conversion.
- How much of earnings improvement reflects recurring operations versus the unusually favorable income-tax benefit, and whether the valuation allowance changes.
- Whether revenue growth and gross margins continue, particularly given lower Cimetrix runtime-license orders and Gainshare’s dependence on customer production.
- SMIC arbitration outcome, related legal costs and any effect on expected payments or future revenue.
- Customer concentration, deferred-revenue conversion, and execution against the $244.9m remaining performance obligations.
- Integration and financial contribution of the Lantern acquisition, as well as the effect of export restrictions and geopolitical developments on China-related business.