PDF Solutions, Inc. — Q2 2013 Form 10-Q
Business and period: The company provides semiconductor design-to-silicon-yield services and software, earning fixed fees and contingent Gainshare performance incentives. This unaudited report covers the quarter and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods. Dollar amounts are in millions unless noted.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $24.8 | $22.5 | $48.9 | $43.2 |
| Gross profit | $15.0 | $13.6 | $29.5 | $25.5 |
| Gross margin | 60.7% | 60.5% | 60.3% | 59.2% |
| Operating income | $7.4 | $5.5 | $13.7 | $9.3 |
| Net income | $4.6 | $4.8 | $9.3 | $8.3 |
| Diluted EPS | $0.15 | $0.16 | $0.30 | $0.28 |
- Q2 revenue rose 10%: design-to-silicon-yield solutions revenue increased 8% to $15.0 million and Gainshare revenue increased 12% to $9.8 million. For the first half, revenue rose 13%, with solutions revenue up 10% and Gainshare up 19%.
- Q2 operating income increased 36%, but net income fell about 6%, chiefly as the income tax provision rose $2.0 million to $2.8 million. Q2 operating margin was about 30%; net margin was about 18%.
- First-half operating income rose about 48%; net income increased about 12% despite a $3.7 million increase in tax provision. First-half effective tax rate was 33.32%, versus 10.51% in 2012.
- Management attributed revenue growth to more billable hours on fixed-fee integrated solutions, more projects meeting Gainshare targets, and higher customer wafer volumes. It cited favorable product mix as a key contributor to gross-profit growth.
Cash, liquidity and capital
- Cash and cash equivalents were $76.8 million at June 30, 2013, up from $61.6 million at year-end 2012. Working capital was $100.5 million, compared with $82.9 million at year-end.
- Six-month operating cash flow was $14.3 million, versus $5.5 million in 2012; capital expenditures were $2.5 million, primarily for test equipment. Financing provided $3.4 million, mainly from employee option exercises and the stock purchase plan.
- Total liabilities were $16.6 million, including $13.4 million current liabilities; the filing reports no debt or undisclosed borrowings. Cash and cash equivalents exceeded current liabilities substantially.
- The company said existing cash and expected operating cash flows should fund operating activities, capital expenditures and other obligations for at least 12 months. It also noted potential cash uses including share repurchases and acquisitions. $19.5 million remained under its $20 million repurchase authorization at June 30.
Changes, outlook and key risks
- Customer concentration is significant: three customers accounted for 73% of Q2 revenue and 72% of first-half revenue. The same three customers represented 70% of gross accounts receivable at June 30.
- Gainshare revenue is inherently variable and depends on customer production, sustained yield improvements, wafer volumes and achievement of contractual operating targets. Fixed-fee project profitability also depends on accurate cost and scope estimates.
- Management described continued investment by leading foundries in advanced nodes and new manufacturing technologies as supportive of demand, but provided no numerical revenue or earnings guidance. It said results may fluctuate with customer purchasing, project timing, hiring and spending.
- Tax matters warrant attention: unrecognized tax benefits were $9.5 million, excluding interest and penalties; $2.9 million, including interest and penalties, was recorded as long-term taxes payable. California R&D credits remained subject to a full valuation allowance. A retroactively reinstated federal R&D tax credit benefited 2013 tax results.
- Foreign currency exposure includes local-currency payables; the company estimated a $0.7 million loss from an immediate 10% adverse exchange-rate move and had no hedging contracts outstanding. A 100-basis-point interest-rate increase was expected to have an immaterial effect on investment fair value.
- Operating lease commitments totaled $7.4 million. A former employee’s lawsuit was resolved in the company’s favor, with the appellate affirmance final April 22, 2013; no loss was accrued. The company reported effective disclosure controls and no material change in internal control over financial reporting.
- After quarter-end, on July 22, 2013, the board amended the Employee Stock Purchase Plan’s purchase-price calculation and clarified participation termination provisions.
Important facts for investors to verify
- Whether revenue growth and Gainshare attainment continue, given the high customer and receivables concentration.
- Whether improved operating performance can translate into net-income growth if the tax provision remains elevated or changes materially.
- How project execution, customer wafer volumes and advanced-node investment affect future margins and contingent revenue.
- The realizability of deferred tax assets and the timing or outcome of uncertain tax positions.
- Cash deployment, including capital spending, stock repurchases and any acquisitions, relative to the company’s stated liquidity needs.