PDF Solutions, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; filed May 10, 2018. PDF Solutions provides semiconductor yield-improvement services and software, earning revenue from Design-to-silicon-yield solutions and performance-based Gainshare incentives. Financial amounts below are in millions unless noted.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Total revenue | $24.7 | $24.3; up 2% |
| Design-to-silicon-yield revenue | $18.2 | $19.7; down 8% |
| Gainshare revenue | $6.5 | $4.6; up 43% |
| Gross profit / margin | $13.3 / approximately 54% | $12.9 / approximately 53% |
| Operating income (loss) | $(0.5) | $(0.4) |
| Net income (loss) | $(0.4); $(0.01) per diluted share | $0.5; $0.02 per diluted share |
| Operating cash flow | $3.3 provided | $0.4 used |
| Cash and cash equivalents | $98.5 at March 31 | $101.3 at December 31, 2017 |
| Working capital | $148.1 | $144.3 at December 31, 2017 |
Operating expenses were $13.7 million, including $7.2 million of R&D and $6.4 million of SG&A. The net loss, despite higher revenue and gross profit, primarily reflected a $0.8 million smaller income tax benefit year over year. The tax benefit was $0.4 million versus $1.2 million.
Cash used in investing activities was $2.4 million, chiefly capital expenditures for test equipment and DFI development. Financing activities used $3.6 million, including $4.1 million in share repurchases. The company reported no debt or off-balance-sheet borrowing arrangements. Current liabilities were $18.5 million against current assets of $166.6 million.
Material changes and accounting
- Revenue mix shifted toward Gainshare: its share of revenue rose to 26% from 19%, while Design-to-silicon-yield solutions fell to 74% from 81%. Management attributed the solutions decline mainly to fewer hours worked across contracts, partly offset by Exensio growth; higher 14nm Gainshare and newly qualifying engagements drove incentive growth, partly offset by lower older-node incentives.
- PDF Solutions adopted ASC 606 on January 1, 2018, using the modified retrospective method. Adoption reduced opening accumulated deficit by $4.4 million, principally from accelerated revenue recognition and capitalization of sales commissions. Its Q1 impact on revenue, cost of revenue, net income, and EPS was reported as not significant. Prior-period comparisons were not restated.
- Under ASC 606, Gainshare revenue is recorded in the period of customer usage based partly on estimates and then trued up when customer reports arrive. Management expects 2018 revenue under ASC 606 to be slightly lower than it would have been under the prior standard.
- The company repurchased 338,207 shares in Q1 at an average $12.19 per share, for approximately $4.1 million. At quarter-end, $7.5 million remained under the $25 million authorization.
Outlook, risks, and contingencies
- Management expects existing cash resources and anticipated operating cash flows to cover operating activities, capital expenditures, and other obligations for at least the next 12 months. No formal revenue or earnings guidance is provided.
- Management cited continuing semiconductor investment in leading-edge and derivative process nodes, China’s growing investment, and new technologies as potential industry opportunities. Results remain exposed to semiconductor investment cycles, customer purchasing and production levels, yield performance, and the timing of projects.
- Customer concentration is significant: one customer accounted for 38% of Q1 revenue, down from 48% a year earlier, and 39% of gross receivables at March 31. Gainshare revenue can fluctuate with customer usage, production, and yield improvements; estimates may be revised when actual reports are received.
- Purchase obligations totaled $14.7 million, primarily payable within 12 months. In April 2018, the company entered a new Santa Clara office lease expected to begin around July 1, with an approximately ten-year term and stated total obligation of $7.0 million, less a $0.4 million abatement allowance; a $1.3 million tenant-improvement allowance is included in the terms.
- Unrecognized tax benefits were $13.4 million, excluding interest and penalties; $3.0 million including interest and penalties was recorded as long-term taxes payable. Tax accounting under the 2017 Tax Act remained provisional. The company reported no material legal proceedings and accrued no litigation loss.
- Foreign currency movements affected other income and expense. A forward contract had an $8.6 million notional amount; a 10% exchange-rate move was estimated to change its fair value by approximately $0.8 million. Management said interest-rate exposure was not expected to materially affect results.
Important facts for investors to verify
- Whether revenue growth and the higher Gainshare contribution persist, particularly given customer concentration and estimated usage-based accruals.
- Whether lower service hours, project timing, or customer production changes affect Design-to-silicon-yield revenue and margins.
- Cash generation and capital spending for DFI, alongside continued repurchases and the new lease commitment.
- Final Tax Act accounting and the potential realization of deferred tax assets, including the approximately $9.0 million valuation allowance.
- The assumptions behind the $45.0 million of remaining performance obligations; the filing expects most to be recognized over the next two years, subject to contract changes and other conditions.