PDF Solutions, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Financial statements are unaudited. PDF Solutions provides data analytics software, systems, and services to the semiconductor and electronics industries. Revenue is reported in Analytics and Integrated Yield Ramp (IYR).
Financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $42.4M | $39.9M | $124.7M | $108.0M |
| Analytics revenue | $39.5M | $32.9M | $113.0M | $94.4M |
| IYR revenue | $2.9M | $7.0M | $11.8M | $13.6M |
| Gross profit / margin | $28.1M / 66% | $27.3M / 69% | $86.2M / 69% | $71.9M / 67% |
| Net income (loss) | $(5.0)M | $1.4M | $2.2M | $(3.9)M |
| Diluted EPS | $(0.13) | $0.04 | $0.06 | $(0.10) |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $12.6M | $8.0M |
Q3 revenue rose 6% year over year: Analytics grew 20%, while IYR fell 59%. For the first nine months, revenue increased 15%, with Analytics up 20% and IYR down 14%. Analytics growth reflected DFI and CV systems, including a DFI sales-type lease, and Exensio licenses; lower Cimetrix runtime-license orders partly offset growth. IYR was pressured by lower Gainshare as customer wafer shipments declined at non-leading-edge nodes, and fewer hours on fixed-fee engagements.
Q3 gross margin declined three percentage points, primarily due to lower Gainshare; nine-month gross margin improved two points. Q3 operating expenses included R&D of $13.1M (down 8%) and SG&A of $15.6M (up 30%). Nine-month R&D was $38.4M (down 8%) and SG&A was $46.0M (up 41%). SG&A increases were driven mainly by personnel and stock-based compensation; nine-month expense also included higher arbitration-related legal fees.
Balance sheet, liquidity, and cash flow
- At September 30, 2023, cash and cash equivalents were $111.6M and short-term investments were $23.7M, totaling $135.4M, versus $139.2M at December 31, 2022. Working capital was $144.4M, up from $135.2M.
- Total assets were $282.5M and total liabilities $60.9M. The balance sheet reports no borrowings or debt; the company also states it has no undisclosed borrowings or off-balance-sheet arrangements.
- For the first nine months, operating cash flow was $12.6M; investing cash flow was $(14.2)M, including $8.9M of property and equipment purchases and $1.8M net cash for an acquisition; financing cash flow was $(5.6)M. Cash and cash equivalents declined $8.0M.
- Management said existing cash resources and anticipated operating funds should meet operating, capital expenditure, and other obligations for at least the next 12 months.
Material developments, outlook, and risks
- Q3 net loss followed pretax income of $1.0M and income tax expense of $6.0M. For nine months, the effective tax rate was 53.1%; the company maintains a $59.2M valuation allowance against U.S. federal and state deferred tax assets. Unrecognized tax benefits were $15.9M, excluding interest and penalties.
- Remaining performance obligations under customer contracts were approximately $218.3M; more than half was expected to be recognized over the next two years. This estimate excludes certain contracts and variable usage- or sales-based royalties and may change.
- In July, the company acquired Lantern Machinery Analytics for $1.8M net of cash acquired. Its AI/ML inspection software is intended to extend Exensio into battery manufacturing; the acquisition was not material to reported results.
- Customer concentration is significant: Customer A accounted for 38% of Q3 revenue and 36% of nine-month revenue, and 44% of gross accounts receivable at September 30.
- A decision was expected potentially during 2023 in the company’s arbitration against SMIC over unpaid contract fees; SMIC disputes liability. No material legal proceeding with a probable, accrued loss was reported.
- Outstanding purchase obligations were $24.6M, mostly due within 15 months. IYR and Gainshare may fluctuate with customer production and yields. Management also cited cautious customer spending, semiconductor inventory and utilization conditions, export controls and geopolitical tensions as uncertainties. No numeric revenue or earnings guidance is provided in the filing.
- Disclosure controls were deemed effective, and the company reported no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether Analytics growth can continue and offset falling IYR/Gainshare revenue, and whether the Q3 gross-margin decline persists.
- The drivers and sustainability of the large Q3 tax expense, the U.S. deferred-tax valuation allowance, and outstanding uncertain tax positions.
- Customer A concentration, collection exposure, and the timing and convertibility of the $218.3M remaining performance obligations into revenue and cash.
- The SMIC arbitration outcome, potential recovery or costs, and the status of $24.6M in purchase obligations.
- Lantern integration and commercial contribution, alongside capital spending and liquidity relative to management’s 12-month cash sufficiency assessment.