PDF Solutions, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. The company provides semiconductor yield-improvement solutions, software and services, and contingent Gainshare performance incentives. Amounts below are in millions of dollars except per-share data.
Financial results and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $22.4 | $25.5 | $74.1 | $74.4 |
| Gross profit / margin | $10.8 / 48% | $15.0 / 59% | $43.9 / 59% | $44.5 / 60% |
| Operating income / margin | $2.9 / 13% | $7.7 / 30% | $20.1 / 27% | $21.5 / 29% |
| Net income | $1.8 | $4.8 | $12.7 | $14.1 |
| Diluted EPS | $0.05 | $0.15 | $0.40 | $0.45 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $27.8 | $20.9 |
- Q3 revenue comprised $10.9 million of Design-to-silicon-yield solutions, down 36%, and $11.5 million of Gainshare, up 36%. For the nine months, those categories were $38.9 million, down 17%, and $35.2 million, up 28%, respectively.
- Cash and cash equivalents were $116.1 million at September 30, up from $89.4 million at year-end 2013. Working capital was $140.0 million. Nine-month investing cash use was $3.1 million; financing provided $2.1 million.
- Total liabilities were $13.6 million, including $10.4 million current liabilities; the filing reports no debt or undisclosed borrowings. Management said existing cash and anticipated operating funds should meet requirements for at least the next 12 months.
Changes, outlook and material matters
- Q3 revenue fell 12% year over year as several 28nm engagements wound down before newer 20nm and 14nm work ramped. Higher customer wafer volumes lifted Gainshare but did not offset the decline in solutions revenue.
- Two anticipated contracts with one of the company’s largest customers did not close. PDF Solutions recorded a $1.9 million impairment of deferred pre-contract costs and said the lost contracts contributed to missing its Q3 expectations. It expected full-year revenue to be approximately flat year over year.
- Q3 net income declined to $1.8 million, primarily due to lower gross profit, including the impairment, and higher operating expenses. Nine-month net income was also lower, despite nearly flat revenue.
- Customer concentration is significant: in Q3, three customers represented 56%, 13% and 11% of revenue; one customer alone accounted for 50% of nine-month revenue. Management noted the risk of customer contract delays, renegotiations or loss. Gainshare also depends on customer production volumes, yield performance and customer-provided reports.
- The board authorized a new share repurchase program on October 21, 2014, for up to $25 million over two years. The prior $20 million program had $16 million remaining as of September 30 and was due to expire November 8, 2014.
- Other items: the nine-month effective tax rate was 36.44%; unrecognized tax benefits were $10.2 million excluding interest and penalties. One $6.7 million-notional foreign-exchange forward contract was outstanding. The company reported no material litigation or accrued litigation loss and no off-balance-sheet arrangements.
- Key risks include reliance on a small number of semiconductor customers, variability in Gainshare, lengthy contract negotiations, execution and cost-estimation risks on fixed-price projects, semiconductor-cycle volatility, foreign-exchange exposure, competition, and information-security and intellectual-property risks. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether new 20nm and 14nm engagements ramp sufficiently to replace the wind-down of 28nm projects, and whether the full-year flat-revenue expectation is achieved.
- Future contract wins and revenue dependence on the largest customers, especially the customer responsible for half of nine-month revenue.
- Whether Gainshare revenue and customer wafer volumes remain strong, and whether performance measurements and collections are timely.
- Whether the $1.9 million deferred-cost impairment is isolated or signals further contract-signing or recoverability issues.
- Cash generation, share-repurchase pace, tax-credit realizability and developments in uncertain tax positions.