Good day, ladies and gentlemen, and welcome to the PDF Solutions Inc. Conference Call to discuss its financial results for the second fiscal quarter ended Saturday, June 30, 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 performances, growth rates and demand for its solutions. PDF's actual results could differ materially. You should refer to the section entitled Risk Factors on Page 10 through 16 of PDF's annual report on Form 10-K for the fiscal year ended December 31, 2012 -- 2011, and similar disclosures and subsequent SEC filings. The forward-looking statements and risks statements 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 President and Chief Executive Officer; and Greg Walker, PDF Chief's Financial Officer. Mr. Kibarian, please go ahead.

Thank you, and welcome, everyone. PDF Solutions continued making strong progress towards our goal of being pervasively applied to leading-edge logic manufacturing and generating gainshare from our clients' successful yields. In the second quarter of 2012, we achieved revenue of $22.5 million, non-GAAP profit of $0.22 per share and GAAP profit of $0.16 per diluted share. On the new business side, we successfully closed contracts for the following, all with existing clients: An enterprise-wide agreement covering 32-nanometer, 22-nanometer and 14-nanometer to use PDF's technology across the process life cycle from R&D through production control; an extension to an existing enterprise agreement to expand technology applied to additional derivative nodes for 28-nanometer and a ramp for 20-nanometer as it transfers from R&D; a contract for 28-nanometer DFM engagement for our foundry; 2 contracts for existing 32-nanometer yield ramp client that allow for additional manufacturing facilities to deploy our characterization vehicle infrastructure. These contracts demonstrate foundries are using PDF Solutions characterization vehicle technology across the IC process life cycle to improve the yields and manufacturability of their designs and processes. The enterprise-wide agreement demonstrates the value PDF Solutions can provide in R&D, transfer and ramp and manufacturing, as well as later stage manufacturing. This is the second such agreement PDF has entered into during the last year. The extension of the enterprise agreement that was signed in a prior quarter and the 28-nanometer DFM engagement speak to the opportunity that clients have to benefit from PDF Solutions for ramp and characterizing DFM rules and process design kits for each customer's specific version of a node. Finally, the last 2 agreements point to how our characterization vehicle infrastructure is increasingly being used beyond the initial achievement of yields to match those results across multiple facilities. Collectively, these agreements increase our future gainshare opportunity.…

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 related tax effects as applicable. You can access the earnings press release that contains the reconciliation of non-GAAP to GAAP results in the Investor section of our website located at pdf.com. Now let's turn to the review of the financial results. First let me cover some highlights for the quarter. As John stated, total revenues were $22.5 million with a GAAP net income of $4.8 million. This resulted in EPS of $0.17 per share for basic shares and $0.16 per share for fully diluted shares. Net income on a non-GAAP basis totaled $6.4 million or $0.22 per share, per diluted share. Cash increased by approximately $4.6 million during the quarter. And on a GAAP basis, cost of sales and operating expenses were $17.1 million, an increase of $225,000 from last quarter. Overall, we are very pleased with the strong improvement in revenues, earnings and cash for the quarter. Now let's look at revenues in a little more detail. Total revenues of $22.5 million for the first quarter were up 9% as compared to $20.6 million in the prior quarter. Total revenues were comprised of design-to-silicon-yield solutions or solutions revenues of $13.8 million and gainshare revenues of $8.7 million. Gainshare revenues increased for the quarter by $1.5 million or 20% sequentially and solutions revenues for the quarter increased by $406,000 or 3% sequentially. Our gainshare revenues for the quarter as a percentage of total revenues increased to 39% from 35% in the prior quarter. As John has indicated, the…

[Operator Instructions] And our first question comes from Tom Diffely.

Quick question on the gainshare side first. Did you say the strength was both the leading edge and the trailing edge? Or was one of those in particular stronger than the other?

Yes. They were both actually strong in the quarter, Tom. We expected the leading edge to be strong, a little bit surprised that the trailing edge was as strong as it was.

Yes, I know. We were hearing from other companies that there's a bit of softness right now for just -- and of course any market. So has that -- I mean did that trail off at all during the -- towards the end of the quarter or the start of this quarter as well?

Did not seem to be, and we've been monitoring it this quarter, so far. It looks pretty reasonable. But it's -- yes, we were quite surprised. We thought it would be soft, and it wasn't. So, as you know, the general sentiment is the third and fourth quarter are supposed to be relatively soft in terms of utilizations in our factories. Hence, Greg's comments at the end of his prepared remarks that we don't fully -- if that could happen for us as well, we haven't seen that yet. It's been actually quite goods. Obviously the gainshare number was good this past quarter. So -- and It wasn't just the leading-edge guys.

Okay. And that business is typically one quarter in arrears? Does that match up with just one quarter? Or is it little more or little less one quarter?

It can be less than one quarter in arrears because of the production -- depends on when the production quarter ends relative to the representing -- the reporting quarters.

Okay. And then you talked about how the leading edge, obviously the volume in yields, but there's no reason to believe that on the yield front, things wouldn't be progressively getting even better. So it's really just volumes that would impact it?

Generally speaking, yes, that's true.

Okay. And then you talked a little bit about increasing the headcount for the growing solutions engagements. How do you view the design-to-silicon portion? Is that kind of a slow growth avenue over the next year or so, while really the most of the meat comes from the gainshare acceleration?

That would be yes. That's how we look at it.

Okay. And then I was kind of curious what the scalability of that business is if it's purely headcount or if it's just a combination.

It's a really good question, Tom. If you look at -- my prepared remarks really talk about electrical characterization. When we sit down and talk with the accounts, what they really value is the characterization vehicle infrastructure. So it's the test vehicle, the testers and the software that gets all that information out of there. But people are really kind of -- they help the customers get value out of it, much like the way an inspection company would have field application engineers helping their customers get information off of -- by a field inspector. And they really fill that role greatly for PDF. Over the last year or 2 -- 1.5 years, we've seen the number of testers, the number of vehicles, the number of wafers the customers have been running on our infrastructure go up really substantially. I mean, we had customers, we had 2 or 3 testers as part of the engagement have 8 or 9 or 10 of these things to characterize just the incremental, what we say, CVs, as a shortcut for characterization vehicle to keep up with the CVs that the customers are running to characterize their process windows. So we -- what the customers, I think, value is the overall solution. The people are very instrumental in getting information out of that system, I think much the way for the inspection folks. That said, we hire on kind of annual cycle. So in Q3 is when we hire -- we tend to hire for our back office in Japan, in China. We had anticipated a certain level of attrition in China because the market has been -- employment market had been relatively high, we've seen very little attrition in this past year. So we will see hiring grow in this quarter, in the third quarter. That's really generally speaking more about kind of the cycle in which we hire relative to the overall employment market that we work in both in China and the States, but disproportionately China.

Okay. And if you assume that the number of customers remains constant, what is the node-to-node growth you typically see in the design-to-silicon line item?

That actually gets to my prepared remarks about the incremental engagements. The customers used to just use characterization vehicles for the first version or flavor of the node. So 28-nanometer, most of the foundries have 3 or 4 or 5 flavors these days. They all say they're going to have -- every time they introduce a node, they say we're going to have fewer flavors. And by the node time, the node gets to volume they have more than they had the previous generation or at least as many. And in the past, you would do a vehicle set for that initial node, and then they would use that for all the derivatives as well. The processes are getting so subtle, the customers are coming back and asking for CVs for the derivative nodes as well. And that was a couple of the engagements that we referred to in one of the extension enterprise agreement. And that's what we've been putting in place, these enterprise agreements, because it gives the customer the ability to come back and request incremental CVs. And then that improves, then we charge them incrementally fixed fees for that. Generally speaking, we get already kind of all of the flavors in a node under the base contract from a gainshare perspective. It does help the customer, though, get better yields on those derivatives and add some more volumes, so it does have a secondary or knock-on effect on gainshare. And from our standpoint, what we saw kind of at the 40 nodes was our cost on the 60s were going way up because customers were asking for derivatives and we needed a mechanism to be able to charge for that. And that's what these enterprise agreements have really been helping with.

Okay. I mean, the fact that these enterprise agreements essentially lock up these customers over a multi-node period, did you have to give up something, kind of a package deal to get them to sign these agreements? Or is it in their best interest as well?

Generally speaking, I mean, if you look at the kind of overall improvement in our financials, enterprise agreements have kind of started to generate and contribute to our business. I mean, I think you can infer from that, that these are obviously strong contracts for PDF. We're always careful about -- or mindful about making sure we provide tremendous value for the account relative to what we charge. I think you recognize that our wafer fees are in the tens of dollars per wafer, typically the gainshare contracts when you work it all out. 20-nanometer, just the depreciation of metrology and inspection is expecting to be somewhere around $530 or $540 per wafer. So when you look the number of yield points the customer can find on our solution and effectively what they're paying per wafer on a price per yield point, we think it's a very, very strong value for the accounts, and I think the accounts are recognizing that. And that's probably creating the umbrella under which we're selling these enterprise agreements, more than it is somehow us finagling or being flexible around terms of the agreement. We really can't afford to do that. We need to get paid for the value we deliver.

Okay. And then another question on the yields, on the gainshare side. So typically when you get to a certain yield, then you start to get a royalty after that. Does the yield percentage go down from that node because it gets a lot more difficult? Or are they pretty stable, get above 85% or whatever the number is.

So the defect densities that we typically target to are relatively stable. There is some -- the number of complex layers goes up, so sometimes there's some relief there in terms of the actual yields. But in the end, I mean, what we've learned about in this business is the customers need to be node-over-node competitive with respect to the previous node. So if you have a node that is not cost competitive compared to -- 20-nanometer isn't cost competitive relative to 28-nanometer, you can be as clever as you want in terms of the wafer fee calculation and the volume won't show up there. So ultimately, we need to work with the accounts to get to economics that makes sense node over node, and the volume will show up. And then we need to make sure that we then participate in that fairly for the delivery of the value.

Okay. And the last question is there any 28-nanometer in the gainshare at this point? Or is it still 32 and above?

Primarily 32 and above.

And your next question comes from the line of Steve Ballman [ph].

I want to just talk a little bit more about kind of the gainshare commentary that you guys made on a forward-looking basis. And I understand that you don't want to give guidance. And you made some -- I think the words that you used about expecting volatility in gainshare revenue, but expecting year-to-year growth. "If my nodes were good," That was similar language to what you used last quarter and you obviously had a very, very good quarter of gainshare. Is my recollection correct?

Yes. Thanks, Tom -- Steve. Probably I didn't actually edit the words when I took last quarter's [indiscernible] used it to be candid. So you might find that they're exactly identical actually.

Okay, that's helpful in thinking about it. So I understand the sentiment, but it's somewhat close to boilerplates, almost. Though, I understand that you guys are superb [ph] saying that it's not going to be a smoother ramp in gainshare.

Yes. I mean, look, last quarter, what we were thinking was, "Geez, if it was flat or went down a few hundred k, would people all of a sudden get upset?" And our model showed it going up actually last quarter, right? We thought Q2 will be greater than Q1. I put those commentaries in there. But it's still surprised us it was up, and that's why our words here were "it's surprising." Because I find management tends to take credit for every time it goes up and then of course distance themselves from any time something goes away, right? And that wouldn't be genuine, right? If you think about our business on that part of it, we can control the long term because it's about how well we execute, but the quarter-over-quarter stuff, there's just a level that if it's up $500,000 over our model, we really can't take credit for that because it's not us. And when it's under $500,000, it's easy to get blamed and kicked to the side of the road because investors tend to do that to you. But at the end, I don't really feel all that badly about that level of volatility in the number when it's at this level of total contribution to the business's revenue. It'd be a different story if it was for $2 million, I would give a s*** about plus or minus -- oh, I shouldn't have said that, but plus or minus $500,000. But I think you understand that what we're trying to communicate. Because we -- you generally expect it to go up, we can't tell. Please don't get overly excited about it, an extra $500,000 above where you thought it would be, or an extra $500,000 below where you thought it would be. Don't infer too much from it.

Good. Yes, I hear you and I understand that. Just to ask another question on gainshare quickly, the number of customers that went up, I think, 2 in the quarter, so 2 more customers contributed to gainshare? Do I have that correct?

Yes, that's correct.

Okay. And those are presumably then the new customers, so those will be customers at the leading-edge nodes rather than customers at the trailing-edge nodes?

One was actually a relatively trailing-edge customer, but it was new node for them. But it was an engagement that we had worked on in the past. It was a more mature node, but for them it's a leading-edge node.

Okay. But they're still ramping there, right? So, John, if I understand your guys' business correctly, things ramp up over time, right? So the first quarter that a customer contributes at a given node is likely not to be their greatest quarterly contribution, it should go up over time?

Generally speaking, correct.

And your next question comes from the line of Andrew Wiener.

So focusing a little more on the gainshare component. At the leading edge, it's been well reported that some of your customers and subsequently their customers are ramping a series of new products where they've been arguably capacity constrained or will be capacity constrained at the leading edge for second -- or fall or winter product releases. So what expense do you think you saw that strength in the second quarter results? Or is that something that you're seeing ramping sort of throughout the year?

Yes. I think generally the shortage of the 28 -- that's a good question. Tom touched on this, too. We expect the 28 to start contributing to us in the second part of this year and early next year. And there's some other products that have been announced that are on 32 that we expect to contribute in the second part of the year that we would hope would provide some additional benefits to us, especially as you get out into 2013, right? We're always a bit skeptical because of the way we recognize revenues on arrears and some of these things, as well as people's timing on ramps can slip for the quarter. So when we build our models for the second half of the year, we've been very conservative internally about our estimates about when those start contributing meaningfully. So that's the positive piece that would tend to make the number go up. We are concerned about the general utilizations at the, let's say, 65-nanometer node, and could that put some pressure on some of the older contracts to come down in the second half of the year. And therefore, you have to backfill that loss if that were the case, if the utilizations came down. That's why we put the commentary in Greg's script about, "Hey, look, there's a volatility and certainly a sentiment out there that second half is going to be soft." As you are alluding to, we don't expect that softness to be very much at the 28-nanometer node.

Okay. Secondly, sort of along those same lines, one of the large fabless companies publicly disclosed the plan to use 4 different foundries at 28 nanometers. And in past calls you've talked a little bit more about what's been sort of an expanding opportunity to work directly with the fabless. Can you perhaps elaborate on the strategy there?

Yes. So what we're seeing -- and this is actually little bit from my prepared remarks, too. These derivative versions of the process, a lot of the larger fabless really want specials or slight modifications to the general foundry offering. Those have subtle but significant impacts on yields and the effective performance that they can achieve from the technology. So characterizing those derivatives and the way the design uses those derivatives is becoming a bigger and bigger opportunity for us and for the industry, overall. Each part of that equation, the fabless and the foundry take responsibility for some of the results there. So if you listen to my remarks, I said that one of the customers who was to validate the PDK and the design, well that's really about supporting one of this customer's specific versions of the node and the promise that the manufacturer makes about being able to achieve performance of transistors and interconnect elements. On the other side of that, we're seeing and we've had in past quarters and we expect to talk about it in the future, on one of our next quarters. Design organizations are using our vehicles to look at how their design is using that PDK and really validate that they can build -- that their parts are stable in that technology. And we've had a number of those over the past couple of quarters. We expect Q3 actually to be a very good quarter for us from DFM standpoint. And those DFM contracts with the fabless, those have been growing year-over-year with us. We expect 2012 to be kind of a record year in terms of the number of those engagements we'll sign. And those run across almost all the foundries in the world that's leading edge -- I think all the foundries in the world with leading edge.

Okay, great. Second -- the third question I had was the process control manufacturing sort of solution or software platform that we had sort of installed the beta on and sort of have some initial results, can you update us on sort of the progress with that as well as sort of the opportunities for commercializing that product more broadly?

Yes. Thank you. So yes, it's a good follow-up question. So we achieved our first beta. We have that customer now asking us for more on that, and we will work through that with them throughout the remainder of the year. We believe that there is up 5% there. And in fact they're asking for an integrated solution, coming back and saying, "Gee, we really like it when it's integrated with the overall solution business and maybe have some more elements that are like the gainshare portion of it." We also had been doing a couple of other things, taking our very strong relationships with customers and using it in our yield ramp engagements to help find signals. Now we've been doing that in a couple of the leading-edge 32 and 28s. And as we visited with accounts, certainly I was out seeing some accounts for the last month or 2. I heard really positive feedback from them about what they're able to find in terms of yield signals. One of the customers told us, "Hey, 40% of what you showed us turned out to be real." And I know that in academics that would be an F. But in the land of inspection, if 5% of what you show on defects turns out to be real, that's a home run. So at 40%, it's so much better than what people find off in line capabilities, it's not even close. And we have a road map to make that better, right? So they were very impressed with what they see. We believe this is an incremental opportunity for us, where it has already paid off. In 2008 and '09, if you remember those conference calls, and certainly I do as I have some scars around them -- from them, we…

[Operator Instructions] And at this time, there are no more questions. Ladies and gentlemen, this concludes the program. Thank you.