Good day, and thank you for standing by. Welcome to PDF Solutions' First Quarter 2022 Conference Call. At this time, all participants' lines are in listen-only mode. After the speaker presentation, there will be a question and answer session for which instructions will be given at that time. I would now like to hand the call over to Joe Diaz of Lytham Partners. Sir, please go ahead.
Thank you, Christian, and thanks to all of you for joining us today on the call. We appreciate your time and your ongoing interest in PDF Solutions. As the operator indicated, my name is Joe Diaz. I'm with Lytham Partners. We are the investor relations consulting firm for PDF. If you do not yet have a copy of today's press release, it's available on the company's website at pdf.com. Some of the statements made during this conference call will be forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding PDF's future financial results, performance, growth rates, and demand for its solutions. PDF's actual results could differ materially. The forward-looking statements and risks referred to on this call are based on information available to PDF today. The company has no obligation to update them.
You are advised to refer to the section titled Risk Factors on the company's annual report on Form 10-K for the fiscal year ended December 31, 2021, and similar disclosures in subsequent SEC filings. With that said, I'd like to introduce John Kibarian, PDF Solutions President and Chief Executive Officer. He'll be followed by Adnan Raza, Executive Vice President and Chief Financial Officer. At the conclusion of management's prepared remarks, we will open the call for your questions. Let me now turn the call over to John Kibarian, President and CEO of PDF Solutions. John.
Thank you, Joe. The first quarter was a great start to our year. Before Adnan discusses the financials in detail, I have some comments about the nature of our business in the quarter and our perceptions of the market. The first quarter bookings built on a strong trend in 2021, with many of the same themes that we experienced last year continuing. For the industry in the first quarter, supply constraints, COVID lockdowns, and sanctions as a result of the Ukraine war made for uneven availability of equipment, wafers, and consumables. Customers expressed to us increased uncertainty in meeting shipment requirements, and increasingly we noticed our customers' executives spending effort to assure supply. Despite this backdrop, and in some cases because of these trends, we had a very strong bookings quarter.
We did see some customers ship fewer tools than we had anticipated, which impacted the contribution from runtime licenses to analytics revenue in the quarter. At the same time, the contribution from gain share to integrated yield ramp revenue was improved modestly as a result of increased wafer shipments. We also experienced uptick in Exensio Process Control perpetual licenses as customers built out new capacity. Overall, in the first quarter, the macro trends, while not all positive for our business, tended to break in our favor from a revenue perspective. Beyond these puts and takes that were a function of the macro challenges and opportunities, our business activity and results were very strong in the quarter. I will briefly touch on some highlights in bookings and partnership activities.
First, building on the Quick Start contract that was signed with the leading-edge customer in the fourth quarter of last year, and as anticipated, we signed a large follow-on contract. This makes it possible for this customer to use PDF's Characterization Vehicle test chips, DFM software, and Exensio analytics to optimize its PDKs and foundry interface for a broad range of chip designs. Second, and consistent with recent history, the largest Exensio contract in the quarter was for a cloud deployment. This contract was for one of our first cloud renewals, as the customer was one of the early adopters of Exensio Cloud in 2019. The re-renewal grew ARR from this customer well over 50% as they took advantage of tiered storage and expanded usage. There were other Exensio Cloud contracts in the quarter, as well as contracts for Exensio Process Control and test modules.
These were at both new and existing customers. Third, we continue to experience strong customer adoption of our SDKs for Symmetrics connectivity products, and while impacted by supply chain, still strong shipments of runtime licenses on an absolute basis. We ended the quarter with record runtime license backlog, which speaks to our customers' challenges in making equipment shipments but also gives us confidence in the future contribution from runtime licenses. Finally, collaborating with other industry leaders continues to be an important part of our business. As we discussed last quarter, we announced our partnership with Siemens EDA to link Exensio with test and diagnostic products. Our first webinar in Q1 was highly attended, and the follow-up customer interest is high. In April, we announced a collaboration with Kulicke & Soffa to link Exensio with their assembly manufacturing equipment.
This partnership builds on our existing OEM relationship, where K&S includes our Exensio analytics for assembly operations to enable traceability. Like our Siemens collaboration, this expanded engagement starts off with an early customer access program. Our relationships with Advantest, Siemens, and K&S all speak to our customers' desire to add more analytics to the back-end assembly and test. This is particularly true for chip and system companies employing system and package processes to implement 2.5D and 3D chip systems. Advantest VOICE Developer Conference is coming up next week, and we anticipate announcing new products as a result of our continued collaboration in conjunction with this conference. IBM's SiView User Group Conference is also soon, and we'll be working with IBM to outline our collaboration for SiView customers. Overall, customer and partner activities in the first quarter were strong and consistent with our expectation entering the year.
Now one quarter into 2022, the semiconductor environment remains robust and demand for integrated circuits is broad-based. We anticipate continued demand for our analytics platform, particularly on the cloud, from a broad cross-section of customers. Given the industry tailwinds I just summarized, and in spite of the macroeconomic uncertainty, we remain confident in the outlook we provided earlier this year. Before I turn the call over to Adnan, I would like to thank all of the PDF employees and contractors for their efforts during the first quarter. We managed to work in tight concert, navigating many of the challenges to have the strongest revenue quarter in the history of the company. Now I'll turn the call over to Adnan, who will review the financials and provide his perspective on the business. Adnan?
Thank you, John. Good afternoon, everyone. Good to speak with you again today, and I hope all of you and your families are doing well. We're pleased to review the financial results of the first quarter of 2022. As mentioned, our earnings release and 8-K report are posted in the Investor Relations section of our website. Our Form 10-Q was also filed with the SEC today. Please note that all of the financial results we discuss in today's call are on a non-GAAP basis, and a reconciliation to GAAP financials is provided in the materials on our website. We are off to a strong start in 2022. Total revenues for the first quarter came in at $33.5 million, up 38% over last year's first quarter and up 12% versus the prior quarter of Q4 2021.
Analytics revenue came in at $30.4 million, an increase of 57% year-over-year and 12% quarter-over-quarter. The increase versus prior quarter was driven primarily by the start of a new leading-edge booking, which John spoke about, and increased Exensio software license sales. Analytics represented 91% of total Q1 revenues. For the quarter, integrated yield ramp revenue was $3.1 million, a year-over-year decrease versus $4.8 million, and a quarter-over-quarter increase versus $2.6 million. This quarter-over-quarter improvement was primarily due to higher wafer volumes driving gain share. We believe that our transition to a leading analytics provider to the global semiconductor supply chain is progressing well and is widely recognized within the industry.
John also spoke about the progress of our ongoing and future plans for collaborations via announcements with Advantest, Siemens, Kulicke & Soffa, and IBM, all important influential leaders in our industry. We are pleased that non-GAAP gross margin for the first quarter came in at 69% versus 61% year-over-year and 65% quarter-over-quarter. We improved our margins as we started to reap the benefits of scale in our cloud business, allowing us more efficient cloud spend and the ability to apply application engineering resources to pre-sales and product management rather than customer support. We also benefited from increased perpetual software license sales during the quarter, both of which together contributed to getting closer to our 70% long-term gross margin target.
Bookings for the quarter increased more than 90% year-over-year, and our backlog at the end of the quarter grew to a healthy $196.8 million. Non-GAAP net income for the quarter totaled $3.7 million or $0.09 per share, versus a non-GAAP net loss of $1.9 million or $0.05 per share loss in the year-ago period, a year-over-year increase of $0.14 per share. Turning to the balance sheet, we have carefully managed our cash position and carry zero debt. In Q1 2022, we purchased approximately $5.8 million worth of shares. After the conclusion of the quarter, we purchased an additional $16.7 million worth of shares in a privately negotiated transaction when a block of approximately 715,000 shares became available.
The total number of shares purchased this year totals 933,458 at an average price of $24.07 per share for total year-to-date buybacks of $22.5 million. Our latest share count of 36.9 million shares as of May 6, 2022, as noted on the cover of our 10-Q, is now lower than the number of shares outstanding when we filed our Form 10-K for the year 2020. As we look to the next quarter and the rest of the year, we expect to increase costs in Q2 as we ramp investment again to continue delivering on the increased interest in our products and solutions.
We expect Q2 total revenue to be similar to Q1 levels, and for the full year 2022, we expect total revenue growth to be between 20%-25% on a year-over-year basis. All in all, it was a solid first quarter. We are pleased with the organic growth of our analytics business and are making good progress to meet or exceed our target model gross margin of 70%. With that, let me turn the call over to the operator for Q&A. Operator?
Thank you, sir. Ladies and gentlemen, if you have a question at this time, please press star and then the number one key on your touchtone telephone. Again, that is star one on your telephone keypad. If you wish to withdraw your question, simply press the pound key. We'll pause for just a moment to compile a Q&A roster. Your first question is from Christian Schwab from Craig-Hallum. Your line is open.
Hey, guys. This is Tyler on behalf of Christian. Thanks for letting us ask a few questions. First, I guess I wanted to ask, you know, the announcement of the partnership with Kulicke & Soffa during the quarter, that's, you know, multiple back-end customers we're partnering with now. I was wondering, you know, is that what we should expect going forward, more back-end equipment partnerships? Or how do you feel about the possibility of partnerships more on the front end?
Yeah, sure, Tyler, this is John. We are engaged with customers on the front end as well. There's just, you know, the back end was something where there was very little analytics historically and very simple processes. Complexity has gone up. The desire to have more automation and more analytics we hear across our customers that are doing, you know, analog and sensor systems to the most complex computer systems chips. We see a lot of opportunity there. There's a lot of need. Probably it's more balanced to the back end and the front end, but we do have front-end customers moving also.
That sounds great. Maybe a little bit on the model. The gross margins, obviously, really strong in Q1. That's great to see. It sounded like, I just wanted to confirm, I guess, that there wasn't anything one-time in nature in that and, you know, would it be fair to expect that kind of 69% to go forward as you trend towards the 30% target?
Yeah, I think that's fair. We've become increasingly confident in the way we've been able to manage our business, getting comfortable with the scale we're achieving and also what we're seeing in the outlook for the rest of the year. I think you can pick that up also in our comment that we expect the revenue to be 20%-25%, which is, a little bit of a more positive change compared to the last earnings release as well.
All right. Perfect. That's all for us. Thanks, guys.
Again, as a reminder, that is star and then the number one on your telephone keypad to ask a question. Your next question is from Tom Diffely from D.A. Davidson. Your line is open.
Yes. Thank you for letting me take a question or give a question today. I guess on the collaborations with Advantest, K&S, Siemens, IBM, John, maybe just talk a little bit about, you know, what is your investment going into those collaborations? You know, what are your projected timelines before they drive your end market revenue and just kinda how you view those collectively?
Sure. Yeah. I mean, I think we're learning as we go, Tom. For sure they take a few quarters at least. I mean, generally, before we announce them, we've been working on them for quite a while. You know, in the case of K&S, for over a year on early analysis and prototypes of you know, Exensio modules to take advantage of their data, leveraging our traceability, looking for what kinds of things machine learning can pick up on manufacturing. By the time you folks see them, there's already been a good solid year of investment, typically, sometimes longer. Then, you know, we, as I said in the prepared remarks, we look to do early access customer programs. They may have some small amount of revenue associated with them.
There really the revenue is mostly to make sure we've got some level of commitment on the part of the customers early deploying. Then those will take some, you know, months to quarters, and then they start kicking in revenue. If you look at Advantest, it was about nine months after the contract was announced when we started getting revenue above the minimum level there. We expect similar, maybe sometimes six months, but in that range.
Okay. Are these contracts that, you know, these four plus companies are gonna have with their customers, and, you know, you'll get a percentage of that? Or how do you think the contracts will be ultimately structured?
Yeah, that's again something that's a work in progress, Tom. Some of them are sell-throughs. Customers wanna sell it to the customer. Our partner wants to sell to the customer directly and manage the contract. We've done that with Advantest, and then specific customer situations when IBM is then the front, and they've done the selling and then the contract between them and the customer for a bundle of Exensio and their software systems, and then they pass through to us certain amounts of revenue. There are also ones where we are in these early access programs, each selling our part.
As we see the pattern that develops through those early access programs, we may choose to continue to sell separately and just have connectors or choose to leverage the channel. One of our interests, of course, is to leverage our partners channels. As you know, because of PDF's history, we've never built out a very, very large selling channel, yet we think there's an awful lot of latent interest in our platform. We like to leverage their channel as much as possible, and sometimes that does mean having them have the direct relationship with the customer.
Okay, great. That's helpful. And then, Adnan, when you look at the cost of these programs, is there any dramatic change to your cost structure once they start to produce revenue in the sense that are there certain costs that, like non-recurring engineering costs that, you know, get lumped in at a later date?
No, I mean, the perspective we take on all these engagements is like John said, right? Either they're incremental revenue contribution that we're getting from the revenue that they're getting, or it's revenue directly to us. In all those cases, we want these to be positive marginal contributions. No, nothing that would tend to make our model head in a regressive direction. We feel pretty good about some of the engagements. Frankly, some of these have also been yielding results and are already part of our results, you know, over the past couple of periods. We feel pretty good about these engagements.
Okay. John, just finally, maybe a little update on the progress on the DFI tool in the field.
Yeah. We feel very good about that. In full manufacturing, running now basically tens of wafers a week. We don't get time on it to do any R&D related work. It's, I think, moving along quite well. We at the SPIE conference, some semiconductor engineers that had first-hand experience with the capabilities were presenting on keynotes and talked about what they saw in the machine and what it was capable of doing and the overall approach, and we were really pleased with the comments made in a public setting.
Great. Do you think this is essentially augmenting, I guess you call it the optical inspection, work?
Yeah
Are they working closely together or is this one, you know, set up to replace it ultimately at lower nodes?
You know, I think it's, I mean, generally, the advice I'd gotten many, many years ago when we got involved in this whole thing was, focus on the things you can't see. I think, the one of the technology leaders from NVIDIA, when he spoke at our user conference said, you know, "Inspect the invisible." If you look at the early applications, it's a lot to look at open contacts and vias, which you can't see optically because the surface of the wafer looks great. You know, the machine's capable of scanning billions of those per hour.
When you look at a complex chip, even a 50-sq-mm chip, there's you know so many billions of those features on a chip that you need to have visibility to you know 5 billion or 10 billion minimum per wafer to just you know see if you're at your target yields. We feel we have the only ability to see opens on an inline inspection case. That's very much dependent on all the analysis the system does on the design database. Our DFM software for that, and then all the analysis on the back end with Exensio to look for the trends and the layout features that are there. I think it's quite complementary to optical inspection and you know our industry for decades has had a problem of not being able to see opens.
Now that we're trying to do more and more with 3D, opens across layers is an increasingly important problem. We feel like, you know, the DFI program is, you know, skating to where the puck is going in terms of inspection problems.
Great. Well, I appreciate your time today. Thanks, John.
Thank you, Tom.
Your next question is from Gus Richard, from Northland. Your line is open.
Yes, thanks for taking my question this quarter. Just on the top line, you know, 90% is now the analytics business, which I would imagine is pretty predictable. You know, can you give me a sense of, you know, how much your, you know, your guidance between 2020 and 2025 is sort of already in backlog, if you will?
Yeah. The color we give on our backlog, that we put in our 10-Q as well, consistent with the last two quarters, is of this backlog, more than half is within the next two years. I think within that, it's also fair to say that, you know, majority of that half is within this next year. Look, we're starting to get increasingly confident every year. We don't break out the specifics, but I will tell you in our internal board deck over the last two years, we've been putting every year as part of our annual operating plan, what percentage of next year is spoken for. I can tell you that percentage has been going higher. It's all a function of having this recurring revenue across the variety of streams of our business.
We keep working on other areas today, for example, on the Symmetrics side that are runtime, to also explore how to make those recurring as well. Parts of that are, you know, headed there. Again, very small and lots of opportunity, but-
Yeah.
Increased confidence.
Yeah, from a product standpoint side, the Exensio and the leading-edge stuff, Gus, is all ratable, right? There's some perpetual licenses on the Exensio side, but it's, you know, in any given quarter, it's, you know, under 10% of the, of the analytics revenue. The piece that we're still working on, it's the runtime licenses on, Symmetrics, comes down to when customers ship. As I said in my prepared remarks, we had anticipated them shipping a little bit more this quarter than they actually shipped. We saw our backlog go up, to records, I mean, really super level, which gives us some predictability about runtime licenses over the next couple of quarters. We're still learning that piece of the business, Gus, and that piece, you know, it's kind of a shadow backlog.
We know they're gonna ship something, but we don't really know each quarter how much it's gonna be.
Okay. That was super helpful. You know, R&D came in a lot higher than I thought, and gross margins came in a lot higher than I thought. You know, depending on, you know, what an engineer is doing there, they're either allocated to COGS or R&D. Was there a little bit of that in the quarter? You know, do we think about, you know, R&D at this run rate or, you know, is that gonna go up a little bit more?
Yeah. It's a couple of comments. All right, one that I think Tyler already asked. We feel pretty good about our gross margin targets going forward. That should be a, you know, proving point about how we're feeling about the cost and the management of cost. Second, specifically within the quarter, look, it's also that time of the year, starting with Q1, where we start to accrue some personnel-related bonuses and things like that. That's part of the reason why you're seeing a little bit of jump as well. Most of our jump was related to some of these accruals and some one-time things related to the headcount. Overall, on the R&D, as a percentage of margin and our gross margin targets, feeling pretty good about the rest of the year where we are.
And if I could-
Got it. Very helpful.
I'll-
Oh, sorry.
A little bit of color on that. Yeah, just, you know, a lot of the improvements was the first, when we first got Exensio on the cloud, we didn't take advantage of a lot of the features that were in the cloud systems themselves. As I talked about tiered storage in our prepared remarks, we're taking advantage of features that are available on the hardware on the cloud that our on-premise customers just don't have. So now we're able to go back and say to customers, "Well, why manage backups? Backups cost you a lot of money, and it's a pain, and you never can find them when you need them.
The engineers always go back and ask for them when you have a field return. We now offer a feature called tiered storage in Exensio, and we're offering another tier this year, where they can effectively just let the software manage, push the data to colder and colder and cheaper storage. To the engineer, it still looks like an SQL query, so he or she never has to go and ask IT for, you know, getting an RMA off a backup tape. It's always there. But it's from a cost standpoint, extremely cost-effective for the customer. These are ways we're improving the margin on the Exensio cloud deployments by giving customers more features that let them manage their total cost of doing analytics lower while growing what they spend with us.
That's why that ARR was up so much on that account. It's features like that. You'll see us do more and more of those things.
Got it. All right. Very, very helpful. I think my last one is, you know, the Quick Start contract, you know, expanded to a full-blown contract. You're talking about helping your customer develop PDKs. I'm just wondering if you could talk a little bit more about that. I don't believe I've ever heard you know, work in that arena before, and I'm just kind of wondering what it is you're doing for the customer and, you know, so how you're helping them along, you know, with their customer enablement.
Yeah. You know, so with any of these technologies at the leading edge, the interaction between foundation IP, the modeling support, all needs to be validated with silicon across a very, very broad layout usage. You know, nowadays, you can say this is your design rule, but that design rule will behave differently in different density environments with different neighborhood environments. As you know, we've always had the highest density of information per unit time and per unit area in the industry. We feel, you know, when you look at what you can get off of PDF Solutions and just the analytics that we provide.
You know, one time when an engineer was asked by an executive, "What's the difference with PDF?" It's like, well, we test maybe 30% of the test chips that we design, and we analyze 30% of that, so we're looking at 10% of our data. The PDF systems, we look at all of it, right? That exhaustiveness is really important as you try to go from supporting a very narrow set of IP to supporting a very broad set of designs in IP as you broaden out a number of designs that are going into a leading-edge technology, which typically happens as you look at moving away from a single product family to multiple product families or opening up factory availability.
That capability had always been there, and it was effectively given away as part of gainshare, Gus. As we've unbundled, you know, what was the gainshare, we've been able to create a series of applications that we're able to license on a subscription. It was embedded in the you know, it's like, well, we're on the hook for hitting a yield target. We gave away a lot of that stuff to help the customer with the yield target. In hindsight, probably, we undercapitalized or undermonetized it. Now we can sell it directly to the organization, part of the organization that wants that benefit, and charge for it separately and deliver, therefore, additional capability over time with that application.
Okay. I understand what you're doing. Does this, you know, signify, i s this, you know, capability, you know, per node? Is it, you know, a time-based licensing, and you can use it any way you want? You know, how is that construction?
It's a time-based license. I mean, it's a subscription across a node or a family of nodes, depending on the way the contract's structured. It comes with a set of vehicles, a set of Exensio Cloud, you know, analytics and, it, you know, it, part of that is additional vehicles. As they bring on new products, new product families, sometimes associated with third-party customers, they're able to use the vehicles in conjunction with those IP families. It's really around that design manufacturing interface.
Got it. If they need additional CVs, is that, you know, incremental charge for them, or is it just, you know-
Yeah. Of course, there's incremental charges on top of a base level. There's an assumption associated with, you know, MPWs for a certain amount of, you know, customers that are coming into the product, to a technology node. There's upcharges if they wanna use more than that as it's designed.
Got it. If you could help me out, is this the size of an old IYR contract, or is it smaller? You know, can you size it relative to prior opportunities or business models?
Yeah. You know, these contracts tend to be in the. You know, as you can see from our announcements, you know, the Quick Start was in the single-digit millions dollar range. These tend to be in the double-digit millions dollar range, recognized over a couple of years, so they're relatively sizable. You know, obviously, what we wanna do is extend the subscription period and make sure that the system is adding value over a longer time period. The renewal, how these renew is gonna be very important for us to watch. I mean, the more we see these renew, the happier we'll be. We're in the early innings on this.
Great. Thank you for your patience with me. I appreciate you.
No problem.
All right, have a good one.
Sure.
Again, if you would like to ask a question, please press star and then the number one key on your touchtone telephone. Again, that is star one. Your next question is from Blair Abernethy from Rosenblatt Securities. Your line is open.
Thanks, nice quarter, guys.
Thank you.
Thank you.
Just a couple of follow-ups here. John, I just wonder if maybe on the DFI, I guess two things really. One is, are you seeing any or experiencing any supply chain issues with components going into your end of the product that may be slowing or you know, delaying you in any way now or in near term? Just in terms of the backlog, the growth, the sequential growth of 10% is very healthy. Is that all really Exensio driving that or is DFI part of that as well? Just kinda wanted to get some color into that backlog growth.
Sure. First, to answer your question on supply chain. For sure, when we do go and order things, we've had some customers, even on computers, who wanted to deploy some Exensio Process Control on-premise, and they've asked us to purchase the computing configured for Exensio. We found the lead times for everything to, of course, be up like everybody else's. There's always abilities to buy your way to the front of the line in many cases. You know, there are always ways to ameliorate those concerns should you need to. We feel very good about our availability of what we need on the DFI ePro program for the remainder of this year.
Certainly, embedded in our expectations for the remainder of this year, as Adnan said, 20%-25% growth. It is not gated by an availability of any single part for anything. We don't see that as being really a factor for us. You know, if you keep on extending shortage and unavailability of components out over a multi-year time period, yes, it would affect, it could impact us. For the remainder of this year, that will not be a limiter on our business that we see. You know, greatly for our cloud customers, and one of the things I always like pointing out to customers when they're considering putting Exensio on-premise or Exensio on cloud, we can spin them up on cloud tomorrow, right?
If they want us to order equipment and ship it on-premise, it could be six, eight, 12 weeks, right? Availability on cloud is always much more immediate. For the DFI programs, we've got enough capacity for what we need to do for the remainder of this year. I think that's the answer on the supply chain. I think I'll turn it over to Adnan for the second question you asked.
Yeah. I think on the second question, look, I mean, if you look within the analytics business, again, as others have pointed out, 90%+ of revenue. We feel pretty good. I mean, within that, when we look at the three components that John also talked about, right? The Exensio piece or the leading-edge piece or the CCG piece, we track progress of each one of them within our businesses. We're pretty pleased with how they did quarter-over-quarter and obviously year-over-year as well. In terms of a booking color, which you asked about as well, yes, when we do sign these larger deals, leading-edge deals will contribute to the total booking growth, of course.
At the same time, we're also pleased with the booking that we saw in the Exensio business and then as well as the CCG business. I'll give you two colors, right? John already talked about the leading-edge. Within Exensio, it's the type and the quality of the booking that we're starting to focus much more on. The comment that John made about the ARR growth for that customer that came up for renewal of greater than 50% ARR, that's precisely the kind of thing we like to drive. In the CCG business, yes, it is, you know, mostly perpetual, and we book and we ship, but what's important is how much more growth in booking there is that we weren't able to ship or might be for booking in the future.
The backlog, even for that business, you know, starting to reach very strong levels is another positive indicator. All in all, feel pretty good. You know, of course, focusing on making sure that we continue to deliver growth from all these three components of analytics.
Okay, great. Thanks for the color. Just shifting to your, I mean, margins, gross margins were solid this quarter. You know, as you look at, Adnan, as you look at sort of these partnerships that you're supporting, you're taking on, versus your R&D, internal, R&D spend, you know, how are you looking at, capital allocation, if you will, or, you know, you have limited resources, so how are you sort of deciding where you're gonna spend this year and, you know, what's sort of your hiring outlook, for the rest of this year?
Yeah. Yeah, good question. Look, I mean, part of the reason, you know, as I think it was Gus who was asking about some of the headcount or spend increases as well, particularly on the R&D side, and also in the total OpEx side. If you look at it's really some of the headcount hiring we did. You know, we actually were surprised that we were able to add, you know, headcount higher than what we were even thinking. We were able to kinda, you know, get some of the hiring done faster than we thought, which in this environment we're pretty happy about. That's part of what drove the R&D increase. Second piece is when the business is doing strong, you know, obviously with the sales, there's gonna be sales bonuses and commissions.
That was the second piece there. The third piece is what I alluded to earlier in terms of this time of the year start to accrue some of the bonuses. In terms of capital allocation for the new businesses, look, we think of them in two ways. Either is it a business that's gonna contribute to us, revenue coming through that partner, or it is gonna be new deal. In both of those cases, we look at it like we do for other deals on a deal by deal basis to see what resources we have. Sometimes we'll get contractors. We obviously use a meaningful number today, and we expand or contract that elastic need with the needs of our business. We will continue to manage that.
The goal is going to be making sure that we deliver on the margins and incrementally improve, from where we are.
Great. Thanks very much, guys.
All right. I'm showing no further question at this time. I would now like to turn the call back to CEO of PDF Solutions, Mr. John Kibarian, for closing comments.
Thank you for participating in our Q1 call. We look forward to talking with you again soon. Have a great day.
Ladies and gentlemen, this does conclude PDF Solutions' first quarter conference call. Thank you for participating. You may now disconnect.