PDF Solutions, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; filed August 6, 2019. PDF Solutions provides semiconductor and electronics yield-improvement solutions, including software, services, hardware, and usage-based Gainshare incentives. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial results and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $20.6 | $21.1 | $41.1 | $45.9 |
| Gross profit / margin | $12.7 / 62% | $10.2 / 48% | $25.4 / 62% | $23.5 / 51% |
| Operating loss | $(1.7) | $(2.9) | $(4.5) | $(3.4) |
| Net loss | $(0.7) | $(2.1) | $(3.4) | $(2.5) |
| Net loss per diluted share | $(0.02) | $(0.07) | $(0.10) | $(0.08) |
| Cash from operating activities | Not separately reported for the quarter | $5.0 | $9.7 |
- Revenue mix: Q2 Solutions revenue was $13.4 million, down 12%; Gainshare revenue was $7.1 million, up 22%. For the first half, Solutions revenue declined 10% to $30.1 million and Gainshare declined 11% to $11.0 million.
- Expenses and margins: Q2 operating expenses were $14.4 million, versus $13.1 million a year earlier. First-half operating expenses were $29.9 million, versus $26.9 million. Q2 margin improvement reflected higher Gainshare revenue and lower yield-ramp headcount costs. First-half gross margin benefited from a $3.3 million Solutions revenue recognition following a customer contract amendment; management stated margin would have been about 3.5 percentage points lower without it.
- Cash flows, first half: Operating cash flow was $5.0 million; investing cash use was $6.7 million, including $4.1 million for property and equipment and $2.7 million for an acquisition; financing cash use was $7.6 million, primarily share repurchases and equity-award tax withholding. Cash declined $9.3 million from year-end to $86.8 million.
- Balance sheet at June 30: Cash and cash equivalents were $86.8 million; current assets $148.0 million; current liabilities $21.4 million; working capital $126.7 million; total assets $229.7 million; and total liabilities $34.8 million. The company reported no debt or undisclosed borrowings. Operating lease liabilities totaled $10.0 million, including $1.9 million current.
Changes, outlook, and risks
- Q2 revenue fell 3% year over year, while first-half revenue fell 10%. Lower yield-ramp activity and fewer hours worked across customer contracts weighed on Solutions revenue. Exensio big-data revenue increased. Gainshare trends differed by period: Q2 growth from 14nm was offset in the first half by lower 28nm incentives.
- Management said existing cash resources and anticipated operating funds should meet operating, capital expenditure, and other obligations for the next 12 months. The filing provides no quantitative revenue or earnings guidance.
- Industry risks include changes in leading-edge foundry investment, delayed or suspended technology-node programs, suppressed 28nm utilization, customer production levels, and uncertain expansion of semiconductor manufacturing in China.
- Customer concentration is significant: one customer represented 33% of Q2 revenue and 34% of first-half revenue. Two customers together represented 53% of gross receivables at June 30. DSO rose to 172 days from 135 at year-end; management said it would have been 105 days excluding three slow-paying Asian customers. A customer subject to a payment dispute represented 37 DSO days; two other customers with administrative payment issues represented 67 combined DSO days. The company said unresolved dispute could proceed to binding arbitration and stated it believes it would prevail.
- A $1.0 million amount associated with a significantly delinquent customer in China was deferred; the company expects to recognize it when near-term payment becomes more likely. Collection risk, potential receivable write-offs, and customer relationship effects are disclosed risks.
- The April 2019 StreamMosaic asset acquisition cost $2.7 million and added AI and machine-learning technology, intangible assets, and $0.4 million of goodwill. The company also continued a share repurchase program: $7.7 million spent in the first half, with $17.3 million remaining authorization at June 30.
- Purchase obligations were $11.0 million, primarily due within 12 months. No material legal proceedings or probable litigation losses were reported. Management assessed disclosure controls as effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the concentrated, past-due receivables are collected, including the disputed customer balance and the $1.0 million China amount, and how collection affects DSO and cash flow.
- Whether revenue and Gainshare incentives recover amid lower yield-ramp activity, technology-node shifts, and customer production uncertainty.
- The sustainability of reported margin improvement, given the $3.3 million contract-amendment revenue and lower headcount costs.
- Execution and commercial contribution from the StreamMosaic acquisition and ongoing DFI and laboratory investments.
- Future cash use from capital spending, operating leases, purchase commitments, and share repurchases; the filing provides no formal quantitative earnings or revenue outlook.