Good day, ladies and gentlemen, and welcome to the PDF Solutions Incorporated conference call to discuss its financial results for the first fiscal quarter ended Thursday, March 31, 2012. [Operator Instructions] As a reminder, this conference is being recorded. If you have not yet received a copy of the corresponding press releases, they have 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 10 through 16 of PDF's annual report on Form 10-K for the fiscal year ended December 31, 2011, and similar disclosures in subsequent SEC filings. The 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. Now, I'd like to introduce John Kibarian, PDF's President and Chief Executive Officer, and Michael Shahbazian PDF's Vice President and Principal Financial Officer. Mr. Kibarian, please go ahead.

Thank you and welcome, everyone. PDF Solutions started off 2012 making strong progress toward our goal of being pervasively applied to leading edge logic manufacturing and generating gain share from our client successful yields. In the first quarter of 2012 we achieved revenue of $20.6 million non-GAAP profit of $0.16 per share and GAAP profit of $0.12 per share. On the new business side, we successfully closed contracts for the following: all with existing clients, a 40 nm yield ramp with a foundry client and extensions to a 28 nm DFM engagement with a fabless client and a 28 nm DFM engagement for a Japanese integrated device manufacturer which is starting to use foundries for production. These contracts continue to trend on both fabless and fabs using PDF Solutions' characterization vehicle technology across the IC process life cycle to improve the yields and manufacturability of their designs and processes. Considering the recent activity in the chip industry once that challenges and achieving strong yields in production volume meaning that logic fabs need to invest more and characterizing their process. While inspection provides a visual of the defect, circuits work on electrical signals. Our characterization vehicle infrastructure provides a comprehensive electrical characterization of the defects, both the hard defects which are often seen at inspection as well as the parametric defects which are undetected by visual inspection. Ultimately what works or fails electrically is what matters. This explains why both fabs and designers continue to expand the use of our Characterization Vehicle Technology across the life cycle of their processes. PDF Solutions CV infrastructure is now applied to yield ramps at a large number of processes than ever ranging from 65 nm to 40 nm. As the industry moves to thin fabs and other complex structures to improve their parametric performance,…

Thanks, John. As a reminder in addition to using GAAP results when evaluating PDF's business, we believe it is also useful to consider our results using non-GAAP measures. In this case non-GAAP measures exclude stock-based compensation expenses, amortization of expenses related to acquired technology and other intangible assets, restructuring charges and their tax related effects as applicable. You can access the earnings press release that contains a reconciliation of non-GAAP to GAAP results in the investor section of our website located at pdf.com. Now let's turn to a review of the financial results. Let me cover some of the highlights of the quarter. Total revenues were $20.6 million with a GAAP net income of $3.5 million. This resulted in an EPS of $0.12 for both basic and diluted shares. Net income on a non-GAAP basis totaled $4.6 million or $0.16 per diluted share. Cash decreased by approximately $500,000 during the quarter. Cost of sales and operating expenses were $16.8 million, an increase of $1.4 million from last quarter. We are pleased with the strong improvement in revenues and earnings for the quarter. Now moving on to revenues. Total revenues of $20.6 million for the first quarter were up 17% as compared to $17.6 million in the prior quarter and up 37% compared to $15 million for the same period in the prior year. Total revenues were comprised of design to silicon yield solutions revenues of $13.4 million and gain share revenues of $7.2 million. Gain share revenues for the quarter increased by $3.8 million or 111% sequentially and yield solutions revenue for the quarter decreased by approximately $770,000 or 5% sequentially. As John has indicated the significant improvement in our gain share revenues was due to increases in 45 nm and 32 nm volumes and yields. Our gain share revenues…

[Operator Instructions] Our first question comes from Tom Diffely.

First a couple of questions on just the model itself. You talked about some of the costs going up sequentially. I am just kind of curious with the design to silicon yield revenue going down, what drove the increase in the direct cost of that segment?

Well, overall we have continued to add headcount in our cost-to-sale organizations. So if you look at in period over period. So that something we did see some increase primarily due to increases in terms of our headcount increases. Also we did increase our variable compensation. Because of the higher profitability, we did make a larger accrual for our employee bonus programs. So I think those are 2 of the most significant factors regarding our cost-to-sales. And then also when we are talking about SG&A, we did end up with some favorable impacts in the fourth quarter regarding lower legal expenses that we are not repeated in the first quarter. So the reversal of that or the non-recognition of that in the first quarter plus we had higher year-end audit fees caused our expenses to go up in that category.

So kind of on a go forward basis, would you expect this to be a good starting point and then just some incremental adds for headcount going forward?

Well, we hesitate in giving you guidance but I think the expenses for the quarter do reflect a pretty good reflection of our current expense trends and they do not reflect any offsets or one-time impacts like we had in the fourth quarters. So I think the first quarter is a very clear reflection of our current expense base related to our employee population and the level of activity that the company is experiencing today?

And then, John, when you look at the gain share during the quarter, does that represent just kind of ongoing business or is there any one-timers that could possibly be in that?

No, it’s pretty much ongoing business at this point.

Okay. And you mentioned obviously it could be volatile on a quarterly basis but if you assume that just the demand and the growth of these advanced notes continues to be strong then you would expect this time too to be stronger and growing as well?

We always like looking at on kind of a 4 quarter rolling average because there's always quarter-over-quarter stuff and products going out. So there is always we’re going but generally speaking, yes.

Alright. And then I guess question to you. You had mentioned that the customer accepted your beta software. Does that mean that that was revenue during the quarter or is it revenue later?

There was revenue in the quarter. It’s mostly ratable. So I think there was a modest revenue this quarter. I think there were also some expenses that might have driven some other costs of goods sold expenses on hardware that we shipped with beta. That was also recognized in the quarter which probably drove up the cost in Q1 a little bit too.

Okay. And then finally when you look at just the market or the industry right now and the 20 nanometer ramp, does it look to you if is it’s just progressing as a normal ramp or is there something about 20 nanometers that makes it perhaps a lot more difficult than the ramps you've seen in the past at 32 and 40.

Yes, we looked pretty closely, thought that our customers as well as we have a lot of response customers. So by and large we are running vehicles at all the Logic facilities or Logic foundries in the world either directly or indirectly. What we see here are a few things. We see the start of the 40 ramp, if you go back and look at that everyone says the 40 ramp was bad and the first one or 2 quarters the leaders basically said yes its bad but it’s behind us and it’s going to be fixed on the next quarter. They did that for 2 or 3 quarters actually, almost 4 quarters if you really listen to their conference call scripts and we see similar things in the 28 where the first quarter bring up in the cross over win. In the foundry business, 28 nanometer represents one or 2% of foundry revenue, half in Q4. Q1 was improving from a revenue stand point but if you look at the amount of capital that’s gone into the note versus what should represent in terms of volume output versus what volume actually came out, there’s still an ineffectiveness of that capacity due the difficulties in control in controlling the process and I think the reflection of that would be the increase you are seeing on the metrology and inspection as people try to control these technologies. And I think you will see that over the next few quarters, as folks try to control the 28 node, the capital intensity will be relatively high and relatively inefficient until the control improves. And that’s of course good for us too because I mean the characterization, not just with inspection, metrology but actually electrically will be more important.

Okay so you expect to see the top line growth continuing just because of combination of both the software plus this increased intensity of the yield issues differences. And then finally when you look at the potential to go into the IDMs that are outsourcing the foundries, do you see that as a growing part of your business where even though bulk of which you earn ultimately is spend on the gain share for the foundries, just this upfront business with the IDM is being more and more important?

Yes, it is a good question. If we go back to 2007 or 2008, the Japanese IDMs were a very significant part of our business and as you know, the recession started in the middle or end of 2008, we recognized that the Japanese as integrated device manufacturers on leading edge. We are really going to move away from that model. I think early on, when we met with them in the 2009 -- 2010 timeframe and said, “Hey, look our leading tablet customers.” All see the importance of running our vehicles and we can be very, our systems can be very instrumental to you as you try to break up your products in the foundries. I think they had very idealistic almost, maybe immature expectations of what it would take actually to bring up complex associates in the foundries. In this past couple of quarters, we started talking with them again and we see a lot of activity in Japan, last quarter being the first, I think, the most vanguard of the Japanese IDMs but we expect more of that and they have are all reflected upon us no matter who they selected as the foundry supplier. If they don't do some characterization of their IP and designs ahead of production achieving the performance in the yield targets is expected to be quite difficult no matter who they talk to.

And I guess finally here anything to do on the adjacent market front?

Well, we did mention that giving the sign off from the image sensor we are quite pleased with and we continue to kind of make our forays. And if you look at the broader inspection and use KOI as a good proxy for the investment in metrology and inspection, the bulk of your business was logic last quarter and I think they projected that to be the case for a good part of the year, as I listen to their call. And I think that kind of is a good proxy for the overall interest level and process controlling, inspection, metrology and our electrical characterization. So we, in general, expect Logic to still be the driver of the business and we are still dabbling in trying to understand the adjacent markets to make sure we make good profitable investments in them.

Our next question comes from the line of Adam Fisher [ph] with Sanchez [ph].

So can you talk, there's been a lot of industry discussions this quarter about kind of TSMC capacity shortages, some of their major clients having to move away to other fabs. Can you talk about the implication of that on our business as well as TSMC’s decisions to accelerate 20 nanometers spending, how that might affect not only relationship with TSM but investments that some of your other partners might be making?

Sure, sounds good, if I can answer that question. The first part is that, of course, we work with most heavily with their partners and by far the largest alternative to TSM in terms of leading-edge logic foundry manufacturing. So the large, fables company expresses desire to move their products to outside of TSM, then of course, the partners are probably the net beneficiary of that should they execute. And of course our role to help them execute. So that’s a great thing for us. It’s another driver of potential incremental volume. In terms of the overall 28 nanometer challenge, I kind of answer a little bit on that question with Tom, but the efficiency, the capital efficiency, or in other words, the amount of output wafers for the amount coming in, is a quite difficult the 28 node. I think that’s why the ramp up is challenging for everybody, even the most confident foundries. And our process control or process windows are quite difficult. That why we’ve been putting so much investment in our YieldAware solution we call Ascensia. We believe that’s very critical to future control.

I am sorry. I thought there had also been some discussion by TSMC on increasing their 20 nanometer.

I was going to come to that. The third part of your question is of course the 20 nanometer. That’s a very interesting one because the industry overall if they are looking the effectiveness of the 20 nanometer solution in terms of staying on Moore’s Law with respect to what the industry always expects is I can get that same case for roughly almost half the cost as previous node and incrementally about 25% of the performance. Due to the incremental cost and multi-patterning which is required for 20 nanometer less than the usual amount of increased performance versus power in terms of the transistors on 20 nanometer. A lot of the fabless companies have been looking at the 20 nanometer printer solution saying, okay, is that going to be incrementally beneficially enough over 28; it’s clearly beneficial. The question is how much beneficial is it relative to the previous node or should I wait for some kind of same technology. TSMC is also interesting because what that basically says is much like persistent dilemma none of the fabless guys want to be left behind at 28, if their competitors are moving on 20. So well they may all kind of wring their hands and say, 20 node doesn’t look that effective, maybe I should wait. I think TSMC is at least communicating with this that maybe enough players are moving on to 20 that probably it’s going to drive a lot of the industry can move on to 20 anyway, because you don’t want to be left behind. So I suspect that’s going to increase the number of incremental nodes. TSMC also said they are going to decrease the number of versions of nodes available at 20 nanometer. Frankly, I’ve seen every supplier that we have ever worked with always say that at the beginning of the node and by the end of the node, we are providing vehicles for more derivates than we did the previous node. That clearly happened to 28 nanometer; they cancelled the 32 nanometer node to decrease the number of versions but in the end they ended up being more; I suspect the same will happen on 20; there will be more flavors than the suppliers who won’t admit.

And as it correlates to that, how are other fabless customers reacting to the TSMC shortages and is that creating some opportunity for PDF to work with some new fabless customers who may not have been available to us?

Yes, last quarter the one kind of newly minted fabless as we refer to them, Japanese IDM, I think they are starting to use our technology for their 28 nanometer products in part is because they recognize they need to be agile, the availability of the capacity is the question. The challenge is they are just making their products work with whomever they select is difficult. So I think that drives some, they need to be as efficient and effective as possible with the silicon they are going to get.

On the new Yield product it [indiscernible] now that it’s out of beta, is your intention to kind of start selling it more broadly within the next couple of quarters?

These are not fast things, so I know there is a sale cycle on this is not quick. We are much more aggressive in terms of bringing it out. We really wanted to do a bang up job on the first installation; I mean obviously people are trusting a very expensive fab to the system. So you want to make sure that the results are quite stable and the performance is quite strong. And we really did fly through the success criteria well ahead of our original plan. So we feel quite good about the performance of this system and that will probably make us more bold as we go out and bring it to other potential customers. But like going to the dance, you may want to dance and she may not want to, so you have to work through the challenges of selling a very complex system to a very sophisticated customer that will take time.

And on the Japanese customers, how traditional capacity would potentially, would they add to kind of the foundries if the majority of those kind of move from -- to a fabless model?

I think that’s a tough point for me to handicap; what we’ve been seeing -- we’ve done a lot of work with them over the years is as they went through the shrinks their capacity was going down. In other words, they couldn’t find good uses for the incremental transistors that Moore’s Law would provide them and so dye sizes were coming down in Japan from about the 90 nanometer node on. So I don’t know in general how much volume they represent for the foundries; it is probably the last bastion of integrated device manufacturers that are going to the foundries and they’ll probably go there over a long period of time. So we’re not forecasting that this is going to be a super huge opportunity; we’ll look incremental at wafers; but it’s not insignificant item; maybe it’s collectively less than a single factory.

Your next question comes from Gary Schnierow with Riverpark Funds.

When you mention that you expect volatility in your gain share; is that a market comment or a customer specific comment?

We have a small number of customers, they are marketing customers; in general we don’t know quarter-over-quarter volumes can go up and down, some yield sensitivities as we get towards end of -- if we’re still on a deployment phase and we’re collecting gain share. So it’s specific to our customers, but our customers kind of basically go up and down in terms of the overall volumes in the industry. It’s not that we have any specific knowledge that we think the yields are going to go -- the gain share is going to go up or down from here; it’s just that we want to caution folks from taking Q4 and Q1 putting a line to it and extrapolating out.

So obviously, Q1 was a great gain share number, about when did you know how good that would be; what kind of visibility do you have on that timing wise?

Well, as we went into Q1, we had a pretty good idea that it was going to be good. We had some idea about a range of where it was going to be; as we got towards the middle of the quarter we saw that it was probably going to be above the higher end of the range that we expected and it turned out to be around by March growth. I mean the March 1st what we expected but it was March 5th or something like that around there and it ended up being what we expected it to be.

And when you look at the gain share for the rest of the year; is that simply volume from existing contracts or would you expect another contract or 2 to come in the gain share?

The 32, 28 contracts have been fine and been executed for a while; but those are all starting to hit their measurement points and starting to contribute gain share. So throughout the remainder of 2012 and into 2013 we expect incremental nodes and facilities to come online on 28 and 32; the timing of when they come on and how significant their volumes are that’s always very difficult for us to predict. So that’s why we’re trying to caution everyone, we are not are here trying to predict timing, but there is more facilities on this generation are not contributing to gain share now that we anticipate to contribute to gain share in the future over the next year or 2 and whenever the customers basically complete their ramps and go into volume.

And the last thing is, at the beginning of the call, you mentioned 2 new contracts and the one extension. Can you just -- I missed that can you just review that quickly with any color you had?

We just had one was 40 nanometer yield ramp of the foundry. It’s always an extension to the 28 nanometers fabless companies’ DFM engagement and one was DFM engagement for Japanese which we referred to as newly minted fabless company, it’s really an IDM.

So the foundry contract, that's a new foundry?

That's an existing client. New facility or actually a new node.

You have a follow-up question from Tom Diffely of D. A. Davidson.

John, just a quick follow-up on the nodes themselves. How does the number of flavors per node and perhaps the number of intermediate nodes impact your view of the length of the gain share tail, I mean in the past you've talked about you cannot afford the 6 year tail for some of these foundries, is that impacted by these different flavors?

Yes, to some extent; I think first of all, the 32, 28 node there is 2 real nodes there, 2 half nodes, it depends on how you look at it. So obviously, in our commentary we said 45 and 32 are contributing to gain share now, we didn't mention, we made mention of 28, that wasn’t an omission, but I think that was an omission because 28 is not contributing. 28 would then start up so that collective 28, 32 node is obviously going to in total be longer than what the 32 period would be, because you are going to get the 32 period plus the 28 period that comes on. So it’s overall, yes, but if you look at kind of that node, that's kind of a major node plus its half sister. the total length, the number of years that will contribute gain share to PDF will probably be longer than you would expect because it’s kind of 2 half nodes and there's a lot of flavors in it and we will start off with different periods.

So kind of the way to look at as you get more of the -- I guess the solutions work along the way if there's more flavors and at least as much on the gain share side?

We would hope to see that they represent gain share tails, of course but we don't control the market.

At this time there are no more questions. Ladies and gentlemen this concludes the program. Thank you.