PDF Solutions, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Unaudited consolidated financial statements. Dollar amounts below are in millions except per-share data.
Business context
PDF Solutions provides yield-improvement solutions, software and services to semiconductor companies. Revenue comes from Design-to-silicon-yield solutions, including services and software, and contingent Gainshare performance incentives.
Financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $26.7 | $23.2 | $51.8 | $50.0 |
| Gross profit / margin | $16.0 / 60% | $13.3 / 57% | $30.9 / 60% | $31.3 / 63% |
| Operating income / margin | $3.8 / 14% | $3.7 / 16% | $7.1 / 14% | $13.1 / 26% |
| Net income | $2.2 | $2.1 | $4.3 | $8.1 |
| Diluted EPS | $0.07 | $0.07 | $0.13 | $0.25 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $1.0 | $16.8 |
- Revenue mix: Q2 Design-to-silicon-yield solutions revenue rose 45% to $20.6; Gainshare fell 32% to $6.1. For the first half, the respective changes were +21% to $39.2 and -29% to $12.6.
- Cash and liquidity: Cash and equivalents were $122.2 at June 30, versus $126.2 at year-end 2015. Working capital was $145.1, down from $148.8. The company said existing cash and anticipated operating funds should meet requirements for the foreseeable future.
- Cash flows and investment: First-half investing cash outflow was $5.1, primarily capital expenditures for test equipment; financing cash inflow was $0.1. Cash declined $3.9 over the period. The filing reports no debt or off-balance-sheet borrowings.
- Balance sheet: Total assets were $202.2 and total liabilities $19.5 at June 30. Property and equipment increased to $16.1 from $11.3 at year-end; the filing attributes capital spending mainly to test equipment.
Changes, outlook and risks
- First-half revenue rose 3%, but net income fell 47%. Management attributed the decline principally to a $5.6 increase in operating expenses, including increased development investment in its Design-For-Inspection (DFI) initiative, and a less favorable revenue mix; lower taxes partly offset the decline.
- Management said higher fixed-fee project activity and Exensio big-data revenue supported Design-to-silicon-yield growth. Lower reported volumes at 28nm engagements reduced Gainshare revenue. Although customer capacity utilization had improved late in 2015 and in the first half of 2016, management cautioned that 28nm utilization might not rise further in 2016, creating downside risk to Gainshare.
- R&D spending increased 57% in the first half to $13.4; management expected the DFI-related investment to continue during 2016. The filing provides no numerical revenue or earnings guidance.
- Customer concentration is material: Customer A generated 39% of Q2 revenue and 44% of first-half revenue, and represented 50% of gross receivables at June 30. The company also cautioned that Gainshare depends on customer production, sustained yield improvements and contract terms.
- First-half operating cash flow was pressured by working-capital movements, including a $8.9 increase in prepaid expenses and other assets, primarily from long-term unbilled amounts on two contracts. Long-term unbilled receivables were $8.0, versus $0.1 at year-end.
- A revision to estimates on one project, following customer-directed scope changes, increased reported net income by $0.9 in both the quarter and six-month period, or $0.03 per diluted share, according to the filing.
- The company reported $11.3 of unrecognized tax benefits, excluding interest and penalties, and a New York audit of 2012–2014 returns. It reported no material litigation and no litigation accrual. Operating lease commitments totaled $4.4; uncertain tax-position liabilities of $2.6 were excluded from the contractual-obligations schedule.
Important facts for investors to verify
- Whether 28nm utilization and customer production levels sustain or further reduce Gainshare revenue.
- Customer A concentration, collections, and conversion of substantial unbilled contract amounts into billings and cash.
- Whether DFI development spending produces commercial growth while operating margins remain below the prior-year first-half level.
- The project estimate revision’s final financial effect and the assumptions underlying percentage-of-completion revenue recognition.
- Potential outcomes of the New York tax audit and realization of deferred tax assets subject to a valuation allowance.