Good day, everyone, and welcome to the PDF Solutions, Inc. conference call to discuss its financial results for the first quarter and year-end 2023 conference call ending Saturday, 31st December , 2023. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you'll need to press star one one on your telephone. As a reminder, this conference is being recorded. If you have not yet received a copy of the corresponding press release, it has been posted to PDF's website at www.pdf.com. Some of the statements that will be made in the course of this conference are forward-looking, including statements regarding PDF's future financial results and performance growth rates and demand for its solutions. PDF's actual results could differ materially.
You should refer to the section entitled Risk Factors on pages 15 through 29 of PDF's annual report on Form 10-K for the fiscal year ended 31st December , 2022, and similar disclosures in subsequent SEC filings. The following forward-looking statements and risks stated in this conference call are based on information available to PDF today. PDF assumes no obligation to update them. I'd like to introduce your host, John Kibarian, PDF's President and Chief Executive Officer, and Adnan Raza, PDF's Chief Financial Officer. Mr. Kibarian, please go ahead.
Thank you for joining us on today's call. If you've not already seen our earnings press release and management report for the first quarter, please go to the investor section of our website, where each has been posted. The first quarter was a good start to our year. Revenue remained strong, and we benefited from our newer strategic partnerships as we experienced continued adoption of our end-to-end analytics by our customers. Before Adnan discusses the financials in detail, I have some comments about the events in the first quarter and our perceptions of the market in the second quarter and the remainder of the year. Bookings were light in the first quarter, following a record bookings in Q4. This is a similar pattern to Q2 of last year, which also followed a strong quarter. Despite the bookings level, activity with customers remained very strong.
In the quarter, we started benefiting from our collaboration with SAP. We experienced our first large seven-figure booking for our products that integrate SAP's HANA ERP data with manufacturing analytics data, enabling more accurate and timely applications for operations and finance organizations. Our solutions are designed to enable customers to react more quickly to changing business environments. This product is a result of our collaboration with SAP, as well as our acquisition of Cimetrix that we completed about three years ago. The solution provided to the customer includes our Sapience Manufacturing Hub, which enables near real-time connection between ERP manufacturing and engineering data, as well as extensive applications that leverages financial, operational, and engineering data. More than this being an important first proof point for our collaboration with SAP, many of our customers are expressing interest in this application.
While SAP-generated business was the largest strategic partner-related booking in the quarter, our other collaborations also resulted in bookings and important leads. In total, over 40% of bookings in Q1 were via our strategic partners. This speaks to the value of our collaboration strategy. As the largest independent end-to-end analytics SaaS provider to the semiconductor industry, we are a natural partner. Other significant bookings in the quarter include contracts for leading-edge infrastructure for advanced development, including one with the memory customer. Our memory customers are experiencing strong correction this year, we were encouraged to see this customer investing with PDF Solutions. Gainshare remained nearly unchanged from Q4 of last year as customers, particularly in China, shipped at similar volumes. Finally, bookings for Cimetrix connectivity runtime licenses decreased meaningfully in Q1 versus Q4 as our customers' equipment shipments decreased.
This is not surprising given the weakness in the capital equipment market. Overall, with our strong backlog and business model, where most of our revenue is ratably recognized, we continue to deliver strong results in revenue and earnings. We were pleased with the business activity in the quarter as it demonstrates the strength of our business model and partnership strategy. Let me turn to discuss product development. Beyond the Sapience Manufacturing Hub, we have other new products and capabilities coming out this year. This includes the next advancement in our eProbe DFI tool. As part of the large contract we signed last year, we shipped the first of these advanced tools in April. It is designed for customers ramping three and two-nanometer technologies, which often include backside power and gate-all-around structures. We are very excited about this milestone.
Customers are building more systems and packaged products targeting end markets where quality is key, such as automotive and data center. For these customers, it is critical to use more advanced test screening at more test insertion points. We have built Exensio Test exactly for this emerging need. This week at Advantest VOICE Developer Conference, we will demonstrate the next set of applications for their ACS Edge Box. These applications are designed for customers to deploy ML models at scale and benefit from our DEX data exchange network and Exensio Cloud platform in managing the required data feed forward and feedback, as well as model building and model quality monitoring.
Overall, from a product release standpoint, we expect the first half of this year to be very fruitful, which we believe will position us to have strong results this year and in the future. One quarter into 2023, this, the semiconductor environment is unsettled. There has been an inventory correction affecting many of our fabless and IDM customers. This has also generally impacted the foundries, OSATs, and equipment companies that we serve. While the short-term environment is unclear, the long-term drivers for our customers, including increased use of AI/ML, cloud, smart devices, and the electrification of the energy economy remain in place.
These drivers are being amplified by the various government investments in semiconductors we are seeing around the world, and the increased diversification of the supply chain that many of our customers are embracing. We remain confident in the outlook we provided earlier this year of overall annual revenue growth for the year approaching mid-teens. We would also like to announce that on October 24th through the 26th, we will have the PDF Solutions Users Group meeting at the Santa Clara Marriott. As with our pre-COVID event, we will host an Analyst Day on 24th October . This gives our customers, partners, analysts, and stockholders a chance to see the latest capabilities from PDF and also learn from each other. We hope that you'll be able to attend. I want to thank all the PDF employees and contractors for their efforts this quarter.
I will turn the call over to Adnan, who will review the finances and provide his perspective on our results. Adnan?
Thank you, John. Good afternoon, everyone. Good to speak with you again today. I hope all of you and your families are well. We are pleased to review the financial results of the first quarter of 2023. As mentioned, our earnings release. A management 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. A reconciliation to GAAP financials is provided in the materials on our website. We're off to a good start with the first quarter of 2023. Total revenues for the first quarter were $40.8 million, up 22% over last year's first quarter. Up slightly on a sequential basis as well.
Analytics revenue came in at $36.3 million, an increase of 19% year-over-year, and also up slightly on a sequential basis. Our year-over-year strong performance is a result of the trends from leading edge and Exensio business, offset by some of the equipment shipment trends we saw recently. For our Exensio products, we are benefiting from the recent large deals we spoke about over the last few quarters, utilizing the Exensio platform across manufacturing operations. For our leading-edge solutions, we continue to engage strongly with multiple customers and see opportunities to expand this business. For our Cimetrix products, while we saw meaningful impact due to the downturn in capital equipment spend, we benefited from our investments in new products such as Sapience Manufacturing Hub.
Taken as a whole, we believe our analytics business continues to be strong, exhibiting near or in line growth to our long-term growth targets. IYR revenue came in at $4.4 million and was up 44% over last year's first quarter. We are pleased that we have been able to rebuild this business over the last year and a half to meaningful levels. Our backlog for the quarter ended at a strong $261 million level, though down from $278 million a quarter ago. As John mentioned, our bookings will vary in size from quarter to quarter, and we are encouraged by what we see in our pipeline for the rest of the year. On a year-over-year basis, our backlog at the end of Q1 is up over 30%.
Our gross margin for the first quarter came in at 75%, versus 69% for Q1 last year and 74% for Q4, as we benefited from incrementally higher revenues and were able to realize savings from lower expense accruals and some cloud spend optimization. Our operating margin for the first quarter came in at 19% versus 11% of a year ago, same period, and 20% of prior sequential quarter. On a year-over-year basis, the operating margin expansion was driven primarily by stronger revenue growth coupled with lower expense growth from a cost of sales and operating expenses. We have improved our margins compared to last year as we reap the benefits of scale in our cloud business, allowing us the ability to apply engineering resources efficiently and more effective cloud spend.
Net income for the quarter totaled $7.3 million or $0.19 per share, both essentially similar to Q4. Meaningfully higher compared to Q1 last year's net income of $3.7 million or $0.09 per share. For year-over-year, our EPS increased by $0.10 per share. Turning to the balance sheet, we have carefully managed our cash position and carry 0 debt. We ended the quarter with cash and equivalents balance of $133.5 million compared to $139.2 million at the end of prior quarter, with the change driven primarily due to timing of payment of accrued employee bonuses and CapEx spend to support the opportunities ahead of us.
As we look to the next quarter and the rest of the year, we expect to moderately increase costs for ramped investment to meet the bookings opportunities and customer pilots for a stronger second half of the year. For the full year 2022, we continue to be comfortable with our previously stated revenue growth rates approaching mid-teens on a year-over-year basis. All in all, it was a solid first quarter and positions us well for the rest of the year. We are pleased with the resilience of our business model and the realized and potential value from our strategic partnerships. We also look forward to hosting you all during our planned Analyst Day and PDF Users Group Conference starting on Tuesday, October 24th. Please look for a save the date press announcement later this week. Let me turn the call over to the operator for Q&A.
Thank you. Ladies and gentlemen, if you do have a question at this time, please press star one one on your telephone. If you're using a speakerphone, please lift the handset before asking your question. Please wait one moment for our first question. Our first question comes from the line of Blair Abernethy from Rosenblatt Securities. Your question, please.
Thanks. Great quarter, guys. John, I wonder if you could just give a little more color around the manufacturing execution systems solution with SAP, and just in terms of, you know, this seven-figure deal, you know, how long, what's sort of the selling cycle here, and maybe some sense of what the pipeline looks like going forward?
Sure. Thank you, Blair. The selling cycle, you know, we've been in discussion... We've been working, I think, with SAP on this now for a couple of years. I wouldn't say that was a selling cycle, but that was definitely our work with them on defining out this application, building out the software for it, showing it to a number of early potential customers, of which this first customer is one of them. And, you know, it closed actually relatively quickly, with them, I think, helping us quite a bit to understand how to, you know, participate in that part of the market. 'Cause it's obviously working with parts of the organization, companies, customers, companies that have been our customers in some cases for years, but a different part of their organization.
The applications take advantage of the real-time information that Exensio has, how much consumables are used for each way, for how much time is the way for going through each tool, what are the yields at different insertion points. When you combine that with the ERP data and also the data to the manufacturing execution system, the operations organizations can have a very accurate costing model to understand really truly what their costs are on a per product basis, on a per route basis. A number of other applications that enhance their ability to look at field returns and understand the economic analysis. In this first contract, we sold the costing module and the base platform that connects data together, de-deployed to a customer that is doing a large SAP deployment.
We talked with, you know, as I said, a number of other customers, probably a handful at this point, that SAP have brought to us of other companies that are also interested in the same application. We see that it's got, you know, before we embarked on this, we felt there was a pretty good demand for this. As we talked to other customers beyond the ones SAP have brought to us, we do hear a constant desire from companies. They want to be more nimble. As the supply chain gets to be more and more sophisticated, having all of these feeds handled in a very automated real-time, you know, near real-time way becomes increasingly important for the customer base.
It really is a new way to use Exensio data, and the Exensio connection, and we're super, you know, happy that SAP have worked with us to help us understand this application and build out this capability.
That's great. Thanks, John. Adnan, if I could just ask, just from your perspective, could you just clarify the, you said some of your spending areas are gonna be going up this year. Could you just go through that again? In terms of your sales and marketing spend in 2023, you know, how are you feeling with respect to, you know, the spending levels for partners, the rep count, and so forth? What are your sort of plans there to continue to drive growth?
Yeah, sure. Look, I mean, number one goal for us is to continue to grow the business. As we focus on that growth from time to time and not necessarily matching the revenue that we may realize just because of 606 and function of where the bookings come in, you will see us ramp up the investments. This was true a few years ago, right before we were getting ready for the Advantest engagement. This was true last year and the year before when we were doing some of the leading edge engagements. This comment is just similar to those past events that we have seen as well. You're also hearing from us how we feel about the rest of the year in terms of some of the booking in the pipeline and how that makes us feel good.
Some of the comments with regards to increasing some of that spend are related to getting ready to do some of those bookings. As to the sales and marketing spend, look, it is again, another area we try to optimize. With the increased revenue and the increased scale that we have, we hope that those margins will improve over time. We take a close look at that from a quarter to quarter. Most of our increase, I think we expect would be, you know, on the kinda R&D development areas, as we ramp up the capabilities of our solution set and platform for serving the customers.
Okay, great. Thanks, Adna.
Thank you. One moment for our next question. Our next question comes from the line of Tom Diffley from D.A. Davidson. Your question please.
Yes, good afternoon. Thanks for taking a few questions. John, I would thought I'd ask you a little bit more about the memory customers. I mean, historically, memory's not been a huge portion of your business. I'm just curious, you know, what's driving an increased activity level there?
Sure. Thank you, Tom. Yeah. We've seen this with this customer as well as others. When you look at futures of computing, it involves memory moving from being a commodity, you know, separate subsystem, kind of through some very standard interfaces to the processing elements to more and more memory as an integral part of the compute system. Customers are wanting to get better statistical characterization of the logic portion of the memory elements to design more sophisticated interface capabilities, be able to characterize them, then control them in manufacturing. In the past, you know, historically, the logic portion of memory was really kind of built with legacy or relatively relaxed design rules, are typically not very aggressive in terms of performance and, you know, kind of an afterthought.
What we see customers, this one and others increasingly looking at is how do we really integrate memory with logic? How do we get more performance there? Of course, some of this is coming in because, you know, memory technologies are moving, like if you look at the Xtacking technologies, with the flash element on one wafer, the logic element on another wafer, and then you bond them together, certainly gives you a lot of ability to use more advanced nodes, more sophisticated logic. This is a, you know, not an insignificant contract. It kind of demonstrates in-early interest in the customers.
As we, you know, alluded in my comments, this is kind of like what we saw, you know, a couple of years ago as we started putting our toe on the water with some other new customers, where they start out with a characterization around this PDK area, and it generally expands into a more broader characterization if we're successful. Of course, we have to, you know, demonstrate the value of our systems to them. I think the broader trend that you're, you know, asking about, Tom, is really this idea that memory subsystems are gonna increasingly become important as you get more performance per watt, per dollar for future computing systems. Hence, you know, with or without PDF, I think the world is gonna have an awful lot more use of advanced logic in memory subsystems.
Okay. It sounds like it's a lot more complicated than just going from DDR4 to DDR5 and increased logic, but it's just a lot-
Correct.
of the heterogeneous packages that are being put together.
Correct. Yeah.
All right. Great. On the automotive side, are you seeing the strength on the power side with silicon carbide or the control side with just the silicon?
You know, in terms of the places where the most sophisticated test operations are being applied, I think your kind of re-reference to my comments around customers looking for the most sophisticated test screening. We do see that on a lot of the ADAS because the chips are quite sophisticated. They're trying to use, you know, FinFET and below technologies in cars, which, you know, historically, cars, the, the controllers that go into cars would be very, very relaxed geometries relative to the leading edge. The time between when, let's say, you would see seven nanometer in your phone and you would see seven nanometer in your car, you know, if on the historical timescale, that would have been measured in decades, now it's measured in years. The screening sophistication we're seeing first happening there.
We are seeing an increased use of analytics for silicon carbide. Silicon carbide primarily still is in a lot of the bring up stages in the sophistication and end-to-end analytics is, I think, really still just getting there. I'd say the first place we see this more advanced capabilities on the leading edge, where they're trying to use technologies that are not that far behind the other phone companies, which tend to use them first. You know, and we expect it to kind of spread across the majority of the automotive market over time. Test sophistication will go up across the automotive market.
Okay. Makes sense. When you see some strength in the data center side, are you starting to see, kind of the next generation silicon photonics as well?
We do have some, small number of silicon photonics customers on Exensio. I think I alluded to that on one of our previous calls. That part of it's still very, very nascent, really still in the R&D stages with folks using the system to look at R&D silicon. The data center side, we see an increased number of application-specific chips designed by a broader set of companies than your conventional, you know, processor vendors that are driving more use of Exensio. We anticipate that trend continuing, as, you know, you're seeing the workloads being moved to more and more specialized logic that is driving both, you know, more system and package and, you know, more complex assembly flows, as well as, you know, analytics being performed by a class of companies that historically didn't really design their own silicon.
Okay. Thanks, still very helpful. Maybe just a quick clarification question. The seven-figure deal with SAP, is that, you know, for PDF alone or is that a joint venture? How would you describe that?
That's... Yeah, that's the, you know, that's the booking for the PDF technology. I think, you know, frankly, when SAP books business with customers, it's probably got a couple more zeros on it than us. You know, that's just for our product. We are available, if you looked at, the Sapience Manufacturing Hub is on the SAP website. It is a product on the SAP Store, when sold to the Store, they do get a commission on that. You know, it does drive revenue for them from time to time. It is primarily our product.
Okay, great. Then final question: When you look at the Cimetrix installed base, what is the opportunity for upsell with new products in that installed base?
Yeah, that's a great question, Tom. One of our, you know, really two direct ideas we had when we did the Cimetrix merger. The first was ways of bringing new data types and new connectivity to analytics. This SAP opportunity, not one we had really originally imagined, but really is kind of in the spirit of that first, you know, really bringing new data types into analytics, was the first piece. The second piece of it was bringing our analytics products to equipment companies. You know, most of the larger equipment companies generate recurring revenue from their equipment by making analytics available to improve the uptime for equipment, the functionality of the equipment, the use of consumables. These are usually over large service contracts.
When you look at the Cimetrix install base, we do have a couple of the top five companies using Cimetrix connectivity, a lot of the customers are equipment company number five through 50. For them, they wanna generate recurring revenue with analytics or with some services too that are analytics-based. We've been actively working in development, making new analytics products that leverage the equipment company's ability to create new service products, leveraging our analytics, their incremental data types, and the infrastructure and platform that the combined Cimetrix-Exensio bring. We're hoping to engage with customers on that as we get through this year into next year. That is the second leg of the relationship. The E142 was kind of the first one of those, the traceability. We've already released that.
There's some others that we are working on that would enable the equipment companies to generate a recurring revenue stream, which is a desire for most of our customers.
Yeah, great. Well, I appreciate your time today, John.
Thank you, Tom.
Thank you. As a reminder, ladies and gentlemen, if you have a question at this time, please press star one one on your telephone. We'll pause briefly. One moment for our next question. Our next question comes from the line of Christian Schwab from Craig-Hallum Capital Group. Your question please.
Hey, good quarter, guys. I've just one quick question around backlog. I mean, I know the vast majority of that should be done, you know, over the next couple of years, which gives you great visibility. Is this something that we think over time as, you know, as it's worked through, is gonna move down materially, or do you expect, you know, to have that type of visibility continue to be layered on, say, like, you know, where should we expect backlog to be exiting, you know, calendar 2023, John?
Yeah, I mean, I know that we've, you know, can give you kind of a specific number on a specific quarter. On a year-over-year basis, we generally expect it to grow, Christian. How it exactly does on any given quarter versus the previous quarter, of course, that's always like this quarter, right? It's down a little bit. We do see a lot of significant deals out there for us. Timing is always difficult. Is it a Q3, Q4, Q1? That could affect where you are at the end of the year. On a year-over-year basis, we generally expect it to increase.
Like John mentioned in his prepared remarks, if I could add, you know, similar pattern to what we saw last year. If you looked at our backlog at Q2 of 2022, it was down compared to Q1. It's more a function of timing of the bookings. We'll always look to annual performance and how we can exceed that year-over-year.
Great. I guess I do have one quick follow-up. You know, can you give us an update on Advantest and, you know, how much pull-through is, you know, or new opportunities have come from them? You know, what type of level that customer is, business is ramping to or where you would expect it to ramp, you know, the next year or two?
Yeah. That's a great... you know, our first product that we announced with them was Dynamic Parametric Test, or DPT. We've come up with a derivative of that. That continues to book, you know, I would say two times a year. We see incremental bookings from that. That continues to grow. It's an all ratable business. Obviously every time we book incrementally more, it's layering on more. We've announced five additional products, I think, in Q3 of last year, when they announced their Advantest ACS Store. Those products are out. We're out doing demos with them on those products with customers and entering in some pilots. We anticipate some point, you know, over the next few quarters, Christian, they should start also like Dynamic Parametric Test, start driving, you know, incrementally ratable revenue.
We announced we're announcing at this demonstrating at this VOICE this week, their user conference, which is going on today, actually, additional products that really leverage our AI/ML capability. Those first set of products released were primarily statistical and rule-based tool applications. These are all ML model-based applications, allowing for data feed forward, data feedback. Customer can bring their own model or leverage the PDF modeling environment. We anticipate having those on their store, you know, over the next quarter or so. They are releasable now. We would anticipate by then we would have somewhere north of eight apps on their store. We anticipate those going through the same kind of eval selling cycle.
Hopefully over the next year or so that these products will start driving incrementally more revenue. In the meantime, I think both for Advantest and PDF, our commitment to bringing more advanced analytics to the marketplace, we've helped each other in the market, I would say, at different accounts where, you know, their vision with their Edge Box and our vision with advanced modeling has been point for them to sell Edge Boxes and the point for us to sell modeling capability, even if it's not directly through their store.
That's great. Thank you. No other questions. Thank you.
Thank you, Christian.
Thank you. At this time, there are no more questions. Ladies and gentlemen, this concludes the program. Thank you for joining us on today's call.