PDF Solutions, Inc. (PDFS) Q4 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the PDF Solutions Inc. Conference Call to discuss its financial results for the fourth quarter and full year end December 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. Should you 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, 2012, 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 Greg Walker, PDF's Chief Financial Officer. Mr. Kibarian, please go ahead

Thank you, and welcome, everyone. 2012 was a successful year for PDF Solutions. This was the year where PDF Solutions and its clients started to reap the benefits of the investments that we made in our yield solutions for 32-nanometer and 28-nanometer foundry production. This was evident in our total revenue growth for the year, and particularly our gainshare revenue growth which, due to its high margin, disproportionately grew profits. In the fourth quarter of 2012, we achieved revenue of $23.8 million, non-GAAP profit of $0.24 per share and preliminary GAAP profit of $0.13 per share. For the full year, we achieved revenue of $89.5 million, a non-GAAP profit of $0.82 per share and a preliminary GAAP profit of $0.58 per share. The GAAP income results are preliminary today because, as Greg will explain in more detail, we are still completing an analysis that we believe will result in the release of a significant portion of our deferred tax asset valuation allowance. This adjustment will have a significant positive impact on our final GAAP income numbers. As we stated at the beginning of 2012, we expected to outgrow the industry reserve, and we did. Our foundry revenues were up over 10% during the year, our revenue growth was up over 30%. As our investments with our client continue and they grow share in the marketplace, we expect to be able to continue to outgrow the logic manufacturing industry. On the new business side, activity in the fourth quarter was strong. Some examples of the new engagements that we closed during the quarter are: an extension to a multi-node contract, previously covering up to 20-nanometer to include 14-nanometer; a 28-nanometer yield map, a contract for 10-nanometer process R&D with an integrated device manufacturer, a contract with a fabless company for a 20-nanometer DFM solution and a DFM contract for fabless LCD display company. The business results for the fourth quarter, as with all of 2012, were the product of the strategic direction that the company embarked on in 2009. We see this reflected not only in our new solutions engagements that we booked into the year, but also in the step up engagement revenues versus 2011. This year was the first full year of gainshare revenue based on the contract signed since we charted this new strategic path. Let us reflect on what happened these past few years and tell you what we believe it means for PDF over the next year. Four years ago, we anticipated that the competition for logic production at foundries would intensify, with well-funded new players entering the market to challenge the long-time leader. Additionally, all foundries would require significantly more advanced materials, processes and structures to meet the rapidly expanding demands of mobile computing. Given these market forces, we believe that the most effective way to rapidly achieve high yields across multiple foundry processes would be to augment optical defect characterization provided by companies like KLA, with new electrical characterization capabilities, focused on parametric performance and design process interactions. Developing and delivering these capabilities became our strategic goal. We believe that PDF's proprietary electrical characterization infrastructure would become critical to the clients we serve. We begin implementing the strategy first by working closely with IBM Alliance and its founding members such as GLOBALFOUNDRIES and Samsung. Our gainshare model was particularly well aligned with this transition, as the industry moved leading-edge logic production from integrated device manufacturers, where yield is a cost advantage to foundries, where yield is critical for customer acquisition. In this model, our gainshare revenues are directly related to our client's technical and market successes. As a result, PDF's goals were aligned with those of our clients. Interestingly, this past month, the new foundry rankings for 2012 were reported in e-Times. And these 2 key clients, GLOBALFOUNDRIES and Samsung, were rated as the fastest-growing foundries, making them second and third largest foundries in the world. We are proud of the success of our clients, and we'll continue to ensure that our solutions, characterization vehicles, tools, software and services will help them ramp products and yields timely and efficiently, maintain and monitor manufacturing line control and seamlessly introduce new customer designs into manufacturing. With new vibrancy in the foundry market, the roadmap for leading-edge logic and the technology that it supports has greatly diversified. For example, at 20-nanometer, foundries are offering both plain or CMOS at the SOI and fitting [ph] the technology. With both more technology choices as well as more foundry choices, fabless companies have seen the need to both use our electrical characterization to better predict, better design to perform and yield in any given foundry and use the resulting analysis to improve their DFM. In 2012, we experienced strong growth with leading fabless companies, as they used PDF Solutions for design for manufacturing. We ended 2012 with PDF Solutions characterization on the path to becoming the link up software between fabless and foundries. Our characterization vehicle test chips are running in all major foundries and being used by many of the top 10 fabless companies. Fabless and foundry clients tell us that they are more effective at bringing up processes and new products when they use PDF's electrical characterization base solution. We refer to this collaboration as enabling virtual IDM, in other words, using electrical characterization to better couple design to manufacturing. This is good for both foundries and fabless customers. We see that the more innovative foundries are rapidly embracing this new model for collaboration. GLOBALFOUNDRIES, for example, now refers to this collaborative model as Foundry 2.0. In summary, PDF Solutions positioned itself to lead in the evolution of the foundry fabless interface and it's critical to both designers and manufacturers to successfully meet the challenges of 28-nanometer, 20-nanometer and below technologies. In fact, with each successive nodes, the need for successful foundry-fabless interface will intensify and will dictate the pace at which designs can be ramped in high volume manufacturing. As a result, we believe that PDF is strategically [Audio Gap] positioned at a key leverage point for the overall industry. Looking at 2013. Specifically, we expect multiple foundries to employ our characterization vehicle technology for FinFET double patterning and other key process choices at the 20, 14 and even 10-nanometer nodes. Additionally, while our 28-nanometer yield ramp projects are mostly reaching the final stages and moving into high volume production, we see increasing interest for manufacturers for our YieldAware FDC process control solution. We also maintain and monitor their high volume manufacturing execution. Accordingly, we expect to grow the business for this capability in 2013. At the same time, we also expect to expand our activities with fabless as they use PDF technology to optimize their design and production. Our fabless activity will likely span 28 nanometer to the 16 and 14-nanometer nodes in 2013. As the year progresses, we will continue to opportunistically explore new business in image sensor, LCD, LED, memory and other adjacent markets. Finally, at PDF Solutions, we know that core to our entire business is enabling our foundry clients to achieve great yield ramps. As in past years, this will be the most critical goal again in 2013. Looking at the overall market, industry analyst reports for the growth of the IC revenues in 2013 are mixed. With estimates for the foundry industry showing growth but potentially more muted than last year. In most cases, the majority of 2013 growth is projected for the second half of the year. In 2012, our business grew faster than the overall foundry industry. Adoption of leading-edge nodes, where PDF is particularly well-positioned, will continue to be the most exciting part of our logic manufacturing business. And these nodes, yield ramps DFM and process control will be critical issues for IC manufacturers in fabless. As a result, we expect to continue to grow our revenue in 2013 at a level that is faster than the overall logic manufacturing industry. While industry forecasts for 2013 look reasonable, we know the industry we serve always has surprises. So we will remain careful with our spending to protect our earnings as much as possible, should the unexpected happen. I want to think our stockholders, clients and employees for their efforts in 2012, to make it a great year. I look forward to working will all of you to make 2013 and beyond better. Now I'll turn the call over to Greg to discuss in detail our financial results for the fourth quarter and fiscal 2012. Greg?

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 EBITDAR and other non-GAAP measures. In this case, other 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. You can access the earnings press release that contains direct conciliation 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. First, let me point out that for the quarter and full year, whenever I mention tax expenses, after tax income and EPS, they are preliminary numbers. I will discuss the reasons for this at the end of my comments. To begin with, however, let me cover some of the highlights for the quarter and the year. Total revenues for the quarter, as John mentioned, were $23.8 million, with a GAAP net income of $4 million. This resulted in an earnings per share of $0.13 per fully diluted share. Net income on a non-GAAP basis totaled $7.3 million for the quarter or $0.24 per fully diluted share. Cash increased by $10.7 million during the quarter. Cost of sales and operating expenses were $19.3 million on a GAAP basis and $16.1 million on a non-GAAP basis, an increase of $161,000 over last quarter. Overall, we are pleased with the continued strength in revenues, earnings and cash for the quarter and the year. Moving on to revenue details. Total revenues of $23.8 million for the fourth quarter were up $1.3 million as compared to $22.5 million in the prior quarter. Total revenues were comprised of design to silicon yield solutions revenue of $16.6 million, up from $15.3 million in the prior quarter, and gainshare performance incentives or gainshare revenue of $7.2 million, which was flat as compared to prior quarter. Total number of customers contributing to gainshare revenue in the quarter was 9, 1 more than in the previous quarter. For the year, total revenues were $89.5 million as compared to $66.7 million in the prior year, a year-over-year growth rate of 34%. Of the $89.5 million of total revenue, $30.5 million was gainshare revenue, which compared to $15.1 million of the gainshare revenue in 2011. This reflects a year-over-year growth rate of 102%. As John mentioned, this growth in gainshare revenue was primarily driven by our 32 and 28-nanometer engagements with our customers moving into volume production. Additionally, revenue from extended production during the gainshare periods for 65-nanometer and 45-nanometer engagements also contributed to the growth rate. As John commented, during the quarter, we added 2 DFM engagements, 1 new 10-nanometer technology development engagement, and 2 new solutions engagements and 3 extensions to existing contracts. In the quarter, 9 engagements with a total of 9 different customers each contributed at least $150,000 of solutions revenue. Our top 10 customers on a consolidated basis represented 91% of total revenues in the current quarter, 3 of these customers contributed revenues greater than 10% each for a total of 73% as compared to 71% in the prior quarter. On a geographic basis in the quarter, North America accounted for 38% of total revenues, Europe represented 30%; and Asia accounted for the remaining 32%. For the year, North America was 40% of total revenues, with Europe representing 33% and Asia accounted for the remaining 27%. Looking at expenses. Cost of sales for Q4 was $9.4 million on a GAAP basis, which was flat compared to the prior quarter. For the full year, GAAP cost of sales was $36.5 million, an increase of 21% over 2011. This increase was primarily driven by performance-based variable compensation accrued during the year and a cost of additional headcount hired to support the increase in solutions revenue. For the fourth quarter and for the year, GAAP gross profit was approximately 61% and 59%, respectively, compared to 58% in the prior quarter and 55% in the prior year. Our total GAAP operating expenses for the quarter were $9.9 million, or approximately 42% of total revenues compared to $7.8 million or 34% of total revenues in the prior quarter. This increase was primarily the result of the restructuring we announced at our last call and the related actions we undertook during the quarter as I will explain in more detail in a minute. R&D expenses totaled $3.6 million or 15% of total revenues for the quarter compared to $3.2 million or 14% of total revenues in the prior quarter. SG&A expenses totaled $4.5 million or 19% of total revenues compared to $4.6 million or 20% of total revenues in the prior quarter. Our total GAAP operating expenses for the year were $33.9 million or approximately 38% of total revenues compared to $32.4 million or 49% of total revenues in the prior year. R&D expenses totaled $13.3 million or 15% of total revenues for the year, compared to $14 million or 21% of total revenues in the prior year. SG&A expenses were $18.6 million or 21% of total revenues compared to $18.4 million or 28% of total revenues in the prior year. Restructuring charges recognized during the quarter were $1.8 million. This expense reflects cost associated with headcount and overhead reductions related to the reorganization of the company's volume manufacturing systems organization. Items included in restructuring consist primarily of mandatory and negotiated separation cost and related legal and accounting expenses. Restructuring for the year, in addition to the $1.8 million I just described, also included $83,000 of expenses related to facilities reorganizations. Looking at total operating expenses and cost of sales together, non-GAAP spending for the quarter and the year were $16.1 million and $63.2 million, respectively, versus $15.9 million in the prior quarter and $57 million in the prior year. Other income and expense for the quarter was in excess of $83,000 compared to $178,000 in expense in the previous quarter. This was the result of reduced foreign exchange losses in the quarter. For the year, other income and expense was an expense of $248,000 compared to an income of $73,000 in the prior year. Earnings before interest, tax, depreciation, amortization, stock compensation and restructuring, otherwise referred to as EBITDAR, was $7.9 million for the quarter and $26.6 million for the year. This compares to $6.6 million for the prior quarter and $10.3 million for 2011, a year-over-year growth rate of 159%. EBITDAR per fully diluted share for the year was $0.89 compared to $0.36 in 2011. Our preliminary income tax provision increased quarter-to-quarter by approximately $213,000 to a total of $383,000. For the year, the preliminary tax provision was $1.5 million compared to $2.4 million in 2011. Once again, on a preliminary basis, quarterly net GAAP net income of $4 million resulted in an EPS of $0.13 per fully diluted share. On a full-year basis, GAAP net income of $17.4 million resulted in EPS of $0.58 per fully diluted share as compared to $0.07 per fully diluted share in the prior year. On a non-GAAP basis, EPS was $0.24 for the quarter and $0.82 for the year. For 2011, non-GAAP EPS was $0.26. Total cash for the quarter was $61.6 million, an increase of $10.7 million compared to September 30 ending balances. This increase was primarily driven by cash flow from operations of $11.1 million, offset by purchases of property plant equipment. During the quarter, the company repurchased approximately 36,000 common shares for $477,000. Year-over-year, cash increased by $15.6 million, net of cash spent on stock repurchases of $4.4 million during the year. As of December 31, cumulative cash repurchases on the balance sheet totaled $27.8 million. DSO for the quarter, including unbilled receivables, was 130 days as compared to 138 days in the prior quarter. Of the total accounts receivable of $34 million at the end of the quarter, 15% or approximately $5.1 million was more than 30 days past due. As of today, more than 80% of the $5.1 million balance has been collected. Trade accounts receivable DSO, which excludes unbilled receivables for the quarter was 101 days compared to 102 days in the prior quarter. Headcount at the end of Q4 was 345 people worldwide compared to 353 at the end of Q3 and 319 at the end of 2011. Almost all of the headcount reduction in Q4 was related to the restructuring activity I previously discussed. The overall financial results for the quarter reflect continued strength in our core business and our ongoing attention to spending levels. The company has effectively managed its spending while significantly growing revenues, providing increased income leverage and a stronger balance sheet position. Finally, based on the company's recent financial performance, the company is considering reversing a significant portion of its deferred tax asset valuation allowance prior to its 10-K filing. The company expects that this reversal will be within a range of $18 million to $22 million, which could result in $0.58 to $0.71 of additional GAAP earnings per diluted share for the fourth quarter, and $0.60 to $0.74 additional earnings per diluted share for the year. The results of this analysis will not impact the company's revenues or cash balances for 2012. We expect to complete this analysis and record the reversal prior to filing our Form 10-K for the year ended December 31, 2012. As a result of this reversal, the company expects its 2013 effective tax rate to be in the 35% to 40% range. This concludes the review of the financial results for the quarter. Now I will turn the call over to the operator for questions and answers.

[Operator Instructions] Our first question comes from the line of Andrew Wiener.

I hope may be you could give us some additional color on the impact that the transition of many of you -- your 3-year 2 key customers and your number of line transition from your 45-nanometer to 32 and, to the second half of the year, to 28-nanometers while that demand began to ramp. How the timing of yield ramps and was getting to actual volumes impacted gainshare in 2012 despite the fact that gainshare had very good growth. And to the extent that perhaps, provides a tailwind for 2013.

Sure. Yes, so at the beginning of 2012, primarily the growth in gainshare was at 32-nanometer node. As some facilities transitioned from 32 to 28, you did see a dip in the gainshare, if you noticed that numbers in Q3 and Q4 were a little bit below the Q2 number for gainshare a little bit. And we expect as we get through 2013, early 2013, that transition will have worked itself through and we expect growth in the 28-nanometer volumes, and also actually some return growth in the 32-nanometer volume that facilities actually grow back out, and that will come probably at the expense of 45 and 40-nanometer wafers. In general, we expect the wafer amounts per wafer to be that on the 28 and 32-nanometer production than it is on the 40, 45-nanometer production because those wafers sell for more and generally that results in a better wafer fee for us. So I think as we go through 2013, we expect that the mix to better, more advanced nodes will result in better wafer fees for us on a program per basis. And, of course, we remain mindful of the capacity situation in the industry. We expect that overall, it should be pretty good. It will be, might be quarter-over-quarter at different times, but overall, expect it to be pretty good for 2013.

All else being equal, we should see a return to sort of normal utilizations at those foundries as they ramp their 28 and to some extent 32-nanometer line so we should see the benefits at some point in '13 of both the higher volumes and higher wafer fees?

That's our expectation.

Secondly, when you talked about how our interests being aligned with the foundry partners and how some of the capabilities we provide them can be used to help them secure customers and where you spoke specifically early in the call, some of that share gains that our 2 largest customers have experienced. Can you maybe provide some more sort of anecdotal evidence or description of how the customers are using us as a advantage in securing tablets?

Sure. I think we have to be careful about the proprietary information with the customers. One example that was public was towards the end of 2011, I think one of the first places we really saw this was AMD was struggling for a while at GLOBALFOUNDRIES. GLOBALFOUNDRIES have been vocal about this at their last common platform meeting. And starting in Q3 of 2011, AMD was quite vocal about not just employing GLOBALFOUNDRIES, but also PDF and IBM at that time to help them address the product process interactions. I think the companies work quite well together and by Q1 of 2012, AMD entered into a take-or-pay agreement for a relatively large sum for GLOBALFOUNDRIES, and I think that shored up, and I think really changed the nature of the interaction between the 2 companies, much more geared around using electrical characterization to identify what the designers can do to make the products more manufacturable, as well as what's critical for the foundries to work on before the tape outs come in to the facilities. So they're not learning on customer silicon, but rather learning on PDF silicon, which obviously, has a lot less impact for that fabless customers online. That generally work, we've now seen that repeated across many other customers. Not just the GLOBALFOUNDRIES, but elsewhere as well. Certainly global is a leader, I think, in this capability, which they refer to as Foundry 2.0. Our part of the Foundry 2.0 activity. I think that's a very public. You can go back on the conference call transcripts with AMD, where they're quite vocal about this capability. I think in general, this is something that fabless wants; just clear visibility about the process design interaction before they take in, and the ability to address them before they are committing to volume ramps. And we're now exploring that, I think, across many other customers.

Typically, when you see -- this year was a strong year for the company against your fabless engagements. To what extent was that a direct marketing effort or was that a function of the fabless seeing the value our technology could bring at the foundries, and then us being able to leverage of that to explore how we can work our technology directly into the fabless and create sort of a pull environment.

Yes, it was a little bit of a -- we always refer to it as the ping-pong strategy. So we work closely with some foundries early on, especially the IBM alliance partners, Samsung and GLOBALFOUNDRIES. And then fabless companies that used to are seeing our Characterization Vehicle data, and then started bringing, asking us to provide them specific CDs and not just the CDs, but our template technologies allowed the design for manufacturability more broadly across their other manufacturing partners. And that then resulted in contracts directly with fabless in some cases. In other cases, the marketing efforts to the fabless, we were able to identify places where they want to use our CDs at foundries that we're not really deeply engaged with. And as a result, if you look at my conference call script, you can say "our vehicles run in all the major foundries in the world," even not the ones that we already kind of referred to by name. Sometimes on behalf of the fabless company. We're trying to create a platform across all the technology partners to understand how they can best design to these very complex processes.

And then last question is, you talked about the difference between an increasing importance of electrical characterization versus optical inspection? And, I think, in some of your presentations, you've specifically sort of shown how there's sort of a dollar amount per wafer spend on optical inspection versus your electrical and some of the advantages from how the capital is deployed. As we keep shrinking in nodes and sort of complexity, can you talk a little bit about how much from an economic perspective sort of share we can -- you think what you think is available to electrical characterization, meaning are -- do we think we can target the growth and the spend on optical inspection or can we actually key it in to when reduced with the current need?

Yes, so I think if you look at -- the industry, the 20-nanometer node, it depreciates, not just optical inspection but all inspection technology is roughly a little over $500 a wafer of depreciation cost from metrology inspection on a logic technology for 20-nanometer node. And this has come up, in reference to questions, while you're charging a wafer fee that's tens of dollars per wafer for characterization. Aren't customers going to see that as an awful lot of money? And my point for bringing this up was to contrast what's already being spent on metrology and inspection. That is the second fastest growing cost in the factory after lithography. And when you look at their challenges of these very complex 3 dimensional structures, printing and observing with the very large wave lengths, yet printing very small feature sizes, there is a need to augment that; otherwise the growth of that number will just be astronomical and be unsupportable. So electrical characterization is really a great complement to what folks are doing with the metrology inspection. And clearly , when you look at the dollars that we are charging per wafer, it is a small fraction of what's being spent on just depreciation and I always like to tell the customers, you buy your capital up front, on your hope for yield and your expectation of peak capacity. You pay us a wafer fee after achieving yields and on your actual production volume. So our model is actually quite friendly to the customer, and I think folks always think that a wafer fee is -- because royalties always have this negative connotation in the chip industry, we specifically called our model gainshare because we didn't really see it as a royalty. We thought it's very customer-friendly, and when you contrast it to what's being spent on just the depreciation portion of metrology inspection, it's quite a small number. When you that overall wafer cost, 35% of the wafer cost is process control, not just metrology inspection, but nonproductive wafers, downtime on equipment to deal with checking the stability of the equipment, et cetera, and that speaks to the overall opportunity that our YieldAware FDC and our yield ramps can bring on the characterization, can bring to the industry. There's a tremendous amount of value that's not optimally spent in the industry that we think we can help bring some rationalization there. But this is a very, very long and very slow process to get manufacturers to see different ways they can use the kinds of technology that we bring. We've made some progress, and we'll continue to make more progress. But it will ultimately augment what they are ready spending money on in terms of metrology and inspection.

But we only sell them to our testers; we see, just place them at the customers, right under, while they're under their engagements and then, the engagement ends, we take them back. Is that the accounting if my understanding is correct?

Yes. This is Greg. That's correct. Went we went to this accounting treatment last January, coinciding with the release to the marketplace of our new advanced testers. And basically, you are correct. We do not sell the testers to the customers, they are our capital equipment that we place at the customer’s site. We call it for collaborative usage, but it's primarily during the yield ramp, collecting data that we use, working with the customer to improve their yield. Then during the gainshare period, we continue to collect data for both parties, for process control purposes and excursion analysis. At the end of the gainshare period, then the equipment comes back to us for either redeployment or refurbishment and for new deployment. So the useful lives on these testers are very, very long. For accounting purposes, we've reduced that down to a 5-year useful life very much like our normal capital equipment and amortize that over the length of the useful life period. So that was the change we put in place last January, part of which was driven by its more appropriate accounting concerning how the testers are used and the fact that they are not commercially sold. But also, the fact that the new testers have significantly higher levels of technology and cost in them and value, and also their useful life is much longer. So that's what drove that.

Your next question comes from the line of Tom Diffely. Thomas Diffely - D.A. Davidson & Co., Research Division: Maybe a couple of questions on the tax rate first. You said it was 35% to 40% on a go-forward basis?

Yes, that is correct. Thomas Diffely - D.A. Davidson & Co., Research Division: And is that a GAAP tax? Is there a gas tax level as well for non-GAAP or...

Yes. The tax impact will be very, very little of this go forward, of the release of the allowance. But you're right, the GAAP taxes will be more on a 35% to 40% tax rate, pre-tax income. And then what well determine where we fall in that range will be how much of the allowance we actually release, and the timing of that release, whether it's all upfront or whether it's done in stages. And then secondary, any -- secondarily, any new corporate structure-based tax savings that we decide to deploy. And these are pretty well-known processes that you go through. We're evaluating them to see what, if any, actually makes sense for us to go do, but we haven't made any decisions yet. Thomas Diffely - D.A. Davidson & Co., Research Division: And is then, when you do these -- It's my understanding it takes a while to get in place and up and running?

That's correct. Thomas Diffely - D.A. Davidson & Co., Research Division: That probably wouldn't impact 2013 in anyway?

Not dramatically. That's why we have the range of 35% to 40%. Once you put them in place and you have the full effect, which would probably, most likely be in '14 or sometime during '14, then you get much bigger rate effects dropping your average rate more by 10% to 12%. Thomas Diffely - D.A. Davidson & Co., Research Division: Okay, so if you...

And this is why we're actually trying to focus the measurement of the company on EBITDAR because it ignores those tax effects whatever they may be downstream and looks at the true performance, operating performance of the company. Thomas Diffely - D.A. Davidson & Co., Research Division: Because I don't think we expect write somebody a tax check coming in.

No, no, we're talking about reported tax expense as opposed to actually, the actual tax cash payments, which are not really affected by this. As long as we still have the deferred assets on our books, we will have limited actual cash payments for taxes. Thomas Diffely - D.A. Davidson & Co., Research Division: So you're reporting the cash taxes on a quarterly basis as well for the pro forma?

Yes. Thomas Diffely - D.A. Davidson & Co., Research Division: All right. And then what's the balance sheet impact of this?

It has very little impact on the balance sheet because, without going into too much details, generally, your deferred tax assets depending on your decisions that you made in the past, you have something approaching 100% allowance against. So the actual net reported levels on the balance sheet are very small. And then as you release that allowance, which we expect to be -- that reversal to be in the $18 million to $22 million effect, then you actually would have real deferred tax assets left on the books. So going forward, you'll see a step up in deferred tax assets versus what you've seen in the past as we release that allowance. Thomas Diffely - D.A. Davidson & Co., Research Division: So looking at the gainshare part for the business, I think, last quarter, you mentioned that 28-nanometer, specifically, was less than, I think, maybe quite a little bit less than $1 million. Are we still kind of that same category where you're very, very low on 28 and it's something that still to ramp coming in quarters?

Yes, I think it was a little bit better in Q4 over Q3. And stronger in 2013 and 2012. Thomas Diffely - D.A. Davidson & Co., Research Division: And so you said there might be another quarter until it kind of bounces back here. What determines that? Is that actually what you've already done and just waiting for the gainshare portion of a ramp that's already happened or is it we can for certain ramp-up production to start up?

I think we are very mindful of what our customers' loads are, we're trying to see what the loads are going to look like in the first half of this year. Some of the 28 were tied to the mobile computing platforms; you want to see how volumes will look like in the first part of the year. And mostly... Thomas Diffely - D.A. Davidson & Co., Research Division: I know the March quarter of last 2012 there's a pretty big step function in gainshare with some of the 40 and 32 came on board. Do you think that the 28 is going to be more steady ramp or you're going to be a step function at some point at some future quarter?

We think it's going to be a steady ramp. So that the 28 parts are secondary parts; some of the 32 parts were sold for its parts, so you don't have to worry about share between multiple suppliers. So once the product is there, the volume will go to one factory the next year. We think 28 because it's a common node across multiple manufacturers. We think that there will be share shifting across the manufacturers the as the fables picks what they want to build and at what levels. So we think it will be smoother. We're being a little bit cautious because we know that node there's choices, whereas 32 there was pretty much no choice. Thomas Diffely - D.A. Davidson & Co., Research Division: So I couldn't tell if you actually said what you thought the industry was going to this year from a growth point of view. Sounds like just modest growth?

I think if you look at the Morris Chang [ph], it's a good bellwether, his forecast was single-digit growth in the foundry with them being in the higher end of the growth rate. I think that's a little bit more muted that what he said last year. I think last year, he said low double-digit, so he's obviously forecasting a little bit less growth in '13 over '12. I think that's as good a barometer as any. We did outgrow 12 foundry industry relatively significantly, and we expect to outgrow these guys again. So I don't know if there's any better measure out there than what TS&T [ph] thinks with respect to that. Thomas Diffely - D.A. Davidson & Co., Research Division: But if you look at your leverage to the leading-edge nodes. It seems like those nodes in general are going to outpace the industry quite a bit, and with you having leverage with the 2, 3 strongest players, there could be a significant outperformance.

Yes, how do we get up and make that statement? That's -- what you're giving is the exact logic behind how we come up in making that statement and feeling pretty comfortable. Thomas Diffely - D.A. Davidson & Co., Research Division: Okay. So it sounds like this year, all said and done, that top line of your revenue, the solutions business is still doing quite well with, I think 8 more assignments this quarter. So really this year just comes down to just more of a timing issue on the gainshare portion; when that 28-nanometer really starts to ramp.

Yeah, how to get [indiscernible]. Thomas Diffely - D.A. Davidson & Co., Research Division: And then, I guess, in general, when you look at your customers, and just look at the foundry customers, does it matter to you whether or not they serve a couple of really big large run product lines or if it's just a multitude of smaller products? Is there...

We don't care as long as the number gets, as long as the number of wafer it takes. This a very leveraged business model; we want them to run a lot of wafers. We don't care if that's on 10 parts or on 2 parts or in 50 parts, it doesn't really matter for us which way. It ends up to our first order. Thomas Diffely - D.A. Davidson & Co., Research Division: I didn't know if there was any kind of a dynamic as far as, when you run a lot of smaller products, you're doing more kind of yield ramping of those smaller products as you go along, and if you have a large product you yield ramp it once and then it's continuous.

You get into - Like I said, so the first order doesn't really matter. So the second quarter, pricing is sometimes better on smaller volume guys than larger volume guys. Sometimes, there's more specific ramp requirements on those guys that you've got to deliver additional CDs. So it is -- For the first order, it's volume is all that matters. So volume is all that matters. Thomas Diffely - D.A. Davidson & Co., Research Division: Yes. So if you look the 9 engagements, 9 customers you have this quarter, I guess, based on the 8 new engagements that you're discussing now, does that engagement count for the quarter go up quite a bit in the first quarter here?

No, I think those in terms of the how many -- on the fixed seed [ph] side, do we expect more accounts to contribute $150,000 in cost or not? I think, some of those were extensions. Some of them will -- it will go up a little bit. So I think 3 were extensions, so those are probably already in the count. That means 5 more, so some of those will kick into $150,000 or greater category. And we've been booking a fair amount of business on the 65, and if you look at the growth rate in the revenue, we've been very careful to not see a lot of revenues, so we've booked a fair amount of backlog, in effect. Thomas Diffely - D.A. Davidson & Co., Research Division: And then finally, you mentioned an LCD display piece of business. Can you give us a little more information on that and how you participate?

Yes, sure. So we started a couple of years ago with a customer -- maybe 1 or 2 years ago, 1.5 years ago. They are trying to do a system on glass, in other words, put circuits on the glass substrate of the display to enhance the performance of the display in a number of different ways. And for that you need a PDK or a design kit, process design kit, PDK is that kind of abbreviation that all engineers like a 3-letter abbreviation for everything. And so PDK is what we call it. Of course, to do that, you need test vehicles and you need electrical characterization data. And just like all those things you did in the logic world. The interesting thing the engineers showed me recently, that was kind of cool, is if you look at the amount of variability, you think "Oh, the feature size is huge." And these are not tiny transistors like in logic. But the variability as a percentage of the nominal performance of the transistor is as much as the 40, 45-nanometer node. So it's not as variable as the 20 or 28-nanometer node, but it's a lot more variable than the 65 and 90-nanometer nodes, for example. So this need for statistics and variability seems to be there. This was the first then we find a significant contract dollar amount line for us, and it's very much like our DFM engagements with logic as we see customers, we call this SOG or system on glass, customer. And now we've gone off and started talking to the factories or foundries that make these things to see where there's an opportunity to help them ramp-up these technologies and process control them. It's intriguing; we're certainly not putting this in our 2013 forecast. There's going to be lots of repeat business here; that's why I think the words we chose were opportunistic. But there is data here that suggests it has a lot of the characteristics of business that's like our main system on chip business, variability matters, system complexity is high. A foundry fabless interface where people want to design on these things, because there's a lot of variety in the way transistors are being used. So characterization becomes important, variability is significant, production control becomes important. So it has a lot of the same characteristics. It seems intriguing, it was a significant contract, that's why we talked about it, but we're using the words opportunistic because we're going to all of a sudden go and start a bunch of R&D around how to view better CDs and testing of this stuff, and we're going to use what we've got in the ways that we can and see if there's more there.

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

Goodbye. Thank you.