PDF Solutions, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise.
Business context
PDF Solutions provides yield-improvement solutions to integrated-circuit manufacturers, combining services and software or hardware licenses with contingent Gainshare performance incentives. It reports one operating segment.
Financial results and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $26.5 | $27.3 | $75.1 | $79.0 |
| Design-to-silicon-yield solutions revenue | $19.2 | $18.6 | $55.4 | $57.7 |
| Gainshare revenue | $7.3 | $8.7 | $19.7 | $21.3 |
| Gross profit / margin | $14.1 / 53% | $15.8 / 58% | $39.9 / 53% | $46.7 / 59% |
| Operating income (loss) | $0.4 | $3.1 | $(0.6) | $10.2 |
| Net income | $0.6 | $2.0 | $1.3 | $6.2 |
| Diluted EPS | $0.02 | $0.06 | $0.04 | $0.19 |
- Research and development expense rose 12% year over year in Q3 and 10% for the nine months, primarily reflecting continued DFI solution development.
- Cash and cash equivalents were $100.8 at September 30, down from $116.8 at December 31, 2016. Working capital was $141.7, versus $151.8.
- Nine-month operating cash flow was $6.3, compared with $1.8 in 2016. Investing used $10.8, including $6.9 of capital expenditures and $3.8 for an acquisition; financing used $11.7, including $13.4 for share repurchases. Cash declined $16.0 overall.
- The filing reports no debt or undisclosed borrowings. Current liabilities were $18.4 and total liabilities $23.7 at quarter-end.
Changes versus prior periods
- Q3 revenue declined 3%; nine-month revenue declined 5%. Q3 Design-to-silicon-yield revenue grew 4%, but nine-month revenue decreased 4%.
- Gainshare revenue fell 16% in Q3 and 8% for the nine months. Management attributed declines mainly to the end of a Gainshare period on an older 28nm node.
- Profitability weakened: gross margin fell five percentage points in Q3 and six points for the nine months. Nine-month operating results shifted from $10.2 income to a $0.6 loss.
- Revenue growth in DFI and Exensio partly offset lower yield-ramp revenue. Higher delivery costs and development spending also pressured margins and earnings.
Outlook, risks and notable items
- Management expected leading-edge foundries to continue investing in capacity and technology through 2018, and anticipated increased 28nm utilization and 14nm production in coming quarters. It expected Gainshare trends to reflect the market but emphasized that Gainshare revenue can fluctuate; no quantified company revenue or earnings guidance is provided.
- Customer concentration is significant: Customer A generated 38% of Q3 revenue and 41% of nine-month revenue, and represented 44% of gross receivables at quarter-end. Slow collections from Asian customers contributed to the increase in receivables and constrained operating cash flow.
- On July 11, 2017, the company acquired certain assets from Realtime Performance Europe (formerly Kinesys) for $4.3, including ALPS and GEMbox products. Up to $0.6 of contingent consideration may be payable through July 2019 based on milestones.
- The nine-month income tax benefit was $2.2, including effects from excess tax benefits related to employee stock compensation; the reported effective tax rate was 236.7%. Unrecognized tax benefits, excluding interest and penalties, totaled $12.7. The filing also reports a $7.5 valuation allowance against certain California tax assets.
- The company had $8.3 of purchase obligations, primarily due within 12 months, and $3.8 of future minimum operating lease payments. No material legal proceedings or litigation accruals were reported. Management said existing cash and anticipated operating funds should cover requirements for the next 12 months.
- The company intended to adopt the new revenue recognition standard using the modified retrospective method, but was still evaluating its impact. Management reported effective disclosure controls and no material change in internal controls during the quarter.
Important facts for investors to verify
- Whether DFI and Exensio growth can offset ongoing yield-ramp declines and higher operating costs.
- Customer A’s concentration, customer payment timing, receivable collectability, and the impact of customer or Gainshare contract changes.
- Gainshare performance and semiconductor utilization trends, particularly for 28nm and 14nm nodes.
- Cash use from capital investment and buybacks, and the achievement of milestones tied to the acquisition’s contingent consideration.
- The eventual effects of revenue-standard adoption and the recoverability of deferred tax assets and uncertain tax positions.