PDF Solutions, Inc. — Q1 2016 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2016, compared with the same 2015 period. PDF Solutions provides yield-improvement solutions, software and related services to integrated-circuit designers and manufacturers. Revenue includes service/software solutions and contingent Gainshare performance incentives.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $25.1 million | $26.8 million |
| Design-to-silicon-yield solutions revenue | $18.6 million | $18.2 million |
| Gainshare revenue | $6.5 million | $8.7 million |
| Gross profit / margin | $14.9 million / 59% | $18.0 million / 67% |
| Operating income / margin | $3.3 million / 13% | $9.5 million / 35% |
| Net income / diluted EPS | $2.1 million / $0.07 | $6.0 million / $0.18 |
| Operating cash flow | $3.7 million | $15.6 million |
| Capital expenditures | $1.8 million | $1.1 million |
- Cash and cash equivalents were $129.4 million at quarter-end, up $3.2 million from December 31, 2015. Working capital was $147.6 million.
- Total liabilities were $17.6 million; the company reported no debt or undisclosed borrowings. Current assets were $162.2 million versus current liabilities of $14.6 million.
- Income tax provision was $1.0 million, with a 33.2% effective tax rate, versus $3.6 million and 37.3% a year earlier.
Material changes and drivers
- Revenue declined 6%, as a 25% decrease in Gainshare more than offset 2% growth in solutions revenue. Management attributed lower Gainshare mainly to reduced net volumes at 28nm engagements, partly offset by a 14nm engagement. Solutions growth was primarily driven by the Exensio big-data product.
- Net income fell to $2.1 million from $6.0 million. Lower Gainshare reduced gross profit, while operating expenses rose $3.0 million, including a $2.2 million increase in R&D and a $0.7 million increase in selling, general and administrative expense.
- R&D investment increased as development activity ramped for the Design-For-Inspection (DFI) initiative. Direct solution costs also increased 15%, partly reflecting higher personnel costs and headcount.
- Operating cash flow fell to $3.7 million from $15.6 million, reflecting working-capital timing, including increased prepaid and other assets and lower billings in excess of recognized revenue. The company also reported $6.2 million of long-term unbilled receivables, up from $0.1 million at year-end, related to one contract.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management expects DFI-related R&D investment to continue during 2016 and believes existing cash and anticipated operating funds will cover requirements for at least the next 12 months.
- Management said 28nm capacity utilization improved late in 2015 and in Q1 2016, but may not increase substantially, or at all, during 2016; this could weigh on Gainshare revenue. Gainshare is also exposed to customer production levels, sustained yield improvements and the ability to secure new incentive-bearing contracts.
- Customer concentration is significant: one customer represented 50% of Q1 revenue and 51% of gross receivables; a second represented 14% of revenue. Changes in major customers’ business or contract commitments could affect results.
- Foreign-exchange movements affected other income/expense; one forward contract had $7.2 million notional value. A 10% currency move was estimated to change its fair value by approximately $0.7 million.
- Unrecognized tax benefits were $11.0 million, excluding interest and penalties. New York was auditing prior income tax returns. Operating lease commitments totaled $4.8 million. The company reported no material legal proceedings and no litigation accrual.
Important facts for investors to verify
- Whether Gainshare revenue stabilizes, particularly in relation to 28nm volumes, and whether newer-node engagements offset declines.
- Progress, commercial prospects and continuing cost implications of the DFI initiative and Exensio growth.
- Collection and billing timing for the large long-term unbilled receivable, and the resulting effect on operating cash flow.
- Customer concentration, contract renewal or renegotiation exposure, and the status of the New York tax audit and uncertain tax positions.