PDF Solutions, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. PDF Solutions provides semiconductor yield-improvement services and software, earning fixed-fee solution revenue and contingent Gainshare incentives.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $23.2M | $24.6M | $50.0M | $51.7M |
| Gross profit / margin | $13.3M / 57% | $15.8M / 64% | $31.3M / 63% | $33.1M / 64% |
| Operating income / margin | $3.7M / 16% | $7.8M / 31% | $13.1M / 26% | $17.1M / 33% |
| Net income | $2.1M | $4.7M | $8.1M | $11.0M |
| Diluted EPS | $0.07 | $0.15 | $0.25 | $0.34 |
| Operating cash flow | Not stated quarterly | Not stated quarterly | $16.8M | $18.4M |
For the six months, design-to-silicon-yield solutions revenue rose 15% to $32.3M, while Gainshare revenue fell 25% to $17.7M. Q2 revenue mix was $14.2M solutions and $9.1M Gainshare. Stock-based compensation was $4.6M for the six months.
Balance sheet and liquidity
At June 30, 2015, cash and cash equivalents were $131.7M, current assets $170.6M, current liabilities $14.1M, working capital $156.5M, total assets $191.8M, and total liabilities $17.0M. The company reported no debt or undisclosed borrowings. Cash increased $16.2M from year-end. Six-month investing cash outflow was $2.4M, primarily capital expenditures; financing cash inflow was $1.9M, including $5.6M used for share repurchases.
Changes, outlook, and risks
- Q2 revenue declined 6% year over year and net income fell to $2.1M. Lower Gainshare receipts from older 32nm and 28nm engagements, higher solution costs, and increased R&D and SG&A weighed on profitability.
- Six-month solutions revenue included $6.0M recognized upon signing two contracts with one customer; growth was partly offset by wind-downs of older engagements. Management said newer 20nm and 14nm engagements had not yet fully offset those declines.
- Management expects 28nm capacity utilization may remain low through the second half of 2015, potentially harming revenue. It cited continued foundry investment in leading-edge nodes as an opportunity. No specific revenue or earnings guidance was provided.
- Customer concentration is significant: one customer represented 54% of Q2 revenue and 49% for the first half; two customers together represented 70% and 62%, respectively. Management also warns Gainshare depends on customer production volumes, sustained yield gains, and contract terms.
- On July 17, 2015, the company completed its Syntricity acquisition for $5.0M cash, including $0.75M escrow, plus up to $2.5M in earnouts. Purchase-price allocation was not yet complete.
- Unrecognized tax benefits were $10.4M; $2.4M, including interest and penalties, was recorded as long-term tax payable. No material litigation or probable litigation loss was reported. Operating lease commitments totaled $5.1M.
- Management stated existing cash and expected operating funds should cover operations, capital expenditures, and other obligations for at least twelve months. Disclosure controls were assessed as effective, with no material change in internal control reported.
Important facts for investors to verify
- Whether newer-node engagements and fixed-fee work can replace lower volumes and Gainshare at older nodes.
- Revenue and receivables concentration: the two largest customers accounted for 68% of gross receivables at June 30, 2015.
- The sustainability of margins given higher solution delivery costs and increased R&D spending.
- Syntricity’s final purchase accounting, earnout conditions, and contribution to revenue or costs.
- Potential tax exposure and realization of deferred tax assets, including California R&D credits subject to a full valuation allowance.