Good day, ladies and gentlemen, and welcome to the PDF Solutions, Incorporated conference call to discuss its financial results for the second fiscal quarter ended Monday, June 30, 2014. [Operator instructions.] 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 11 through 17 of PDF’s annual report on Form 10-K for the fiscal year ended December 31, 2013 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. The results of the second quarter were mixed, with lower solutions revenue partially offset by continued strong gain share performance. For both the quarter and the first half of the year, gain share revenues were stronger than originally expected. We always remind you that we will likely experience quarter to quarter volatility in revenues, in this case, Q2 results were lower than Q1. Our business model, which aligns PDF revenue to customer wafer volumes, is designed to offset this technology bookings variability on a long term basis. Despite the softness in Q2 revenues, we have reason to remain optimistic about our projections that we would outgrow the overall logic market on an annual basis. During the quarter, we closed the following engagements and orders, with both existing and new clients: a 10 nanometer DFM engagement with a fabless client, an amendment to a 14 nanometer engagement adding additional capability, and a significant software contract for data power, part of our [Acensio] yield management solution, with an analog integrated device manufacturer. While the quarterly bookings were adversely affected by timing and contract executions, the technical challenges presented by advanced nodes continues to drive the growing need for PDF Solutions’ technology at our customers, both fabless and foundry. This is evidenced by our first 10 nanometer engagement with a fabless company, as compared with our previous 10 nanometer engagements, which have been with process R&D organizations. We now have had multiple 10 nanometer tape-outs across several customers, further extending PDF’s leadership in electrical characterization. The quarter over quarter solutions revenue decrease was due to delayed signings of two contracts. We look at this as a bookings timing issue, since for both contracts we have been delivering characterization vehicles and systems prior to signings. These systems are being…

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 other non-GAAP measures. For internal purposes, the company focuses on non-GAAP net income and EBITDAR. Non-GAAP net income excludes stock based compensation expenses, amortization of expenses related to acquired technology and other intangible assets, restructuring charges and their related tax effects, as applicable. Additionally, the income tax provision has been adjusted in our non-GAAP income to reflect cash tax expenses only. EBITDAR is equal to earnings before income tax adjusted to exclude depreciation, amortization, restructuring, and stock based compensation. You can access the earnings press release that contains a reconciliation of EBITDAR and non-GAAP income 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. Total revenues for the quarter were $24.6 million, with a GAAP net income of $4.7 million. This resulted in GAAP EPS of $0.15 per fully diluted share. Net income on a non-GAAP basis totaled $9 million, or $0.28 per fully diluted share. Total cash increased by $5.9 million during the quarter. Cost of sales and operating expenses together were $16.9 million on a GAAP basis, and $14.5 million on a non-GAAP basis, which is a decrease in non-GAAP spending of approximately $1.5 million from Q1. Moving on to revenue details, total revenues of $24.6 million for the second quarter were $2.5 million less than in the prior quarter. Total revenues were comprised of design to silicon yield solutions, or solutions revenue, of $13.1 million and gain share performance incentive or gain share revenue of $11.5 million. Our top 10 customers represented 93% of total revenues in the current quarter. Three of these customers contributed revenues greater…

[Operator instructions.] Your first question comes from the line of John [Chenoweth]. John [Chenoweth]: Can you provide some more detail on the relative size of the two contracts that got pushed out?

We can’t disclose the detail, but if you look at the deferred cost and our normal margins, you can get kind of to an estimated size. John [Chenoweth]: Do you still expect the solutions business to be kind of that single digit growth over a four qua rolling basis that you mentioned last call?

Yeah, that still remains our full year expectation. John [Chenoweth]: And just a little more clarity on the transitions that have occurred with Samsung and Apple. What can we expect there over the next three or four quarters in terms of gain share impact? And do you expect other customers, other foundries, to kind of backfill that capacity?

You know, we can never talk about specific customers and their end customers, just due to confidentiality agreements that we’ve signed. I think this quarter was kind of indicative of one customer’s volumes going down at 28 and others picking up volume and muting out some of the impact of that transition at that particular customer. You know, as I said in my prepared remarks, we know that there’s a lot of jockeying between the individual big consumers of silicon and the producers of silicon, and we expect that to continue back and forth over the next couple of years. John [Chenoweth]: And maybe just in terms of the next couple of years, what do you see past the 28 nanometer node, especially at 14? How confident are you that maybe your customers can gain share in that node?

You know, I think if you look at the comments that TSMC made about the node transitions, I think they were very vocal about their share being eroded in 2015 timeframe. They think they’re going to come back with share in 2016. Obviously our customers are the beneficiaries of that share degradation, so I think they’re probably a better indicator of how share shifts and what they say, because they obviously track this very closely too.

And your next question comes from the line of Tom Diffely.

I guess first, John, maybe give us a little bit more on just the software business you’re starting to do more of now, the software contract? You know, customer types you’re attracting, and what the long term possibilities are for that business?

We’ve had over the years, a management system that was primarily based on data power and FDC solutions. We integrated those, and really pretty much built them from the ground up, again, in 2009/2010 timeframe. Started releasing it in 2011 and 2012, a package we called [Acensio]. We started with some customers outside [unintelligible] was one of the first customers, and we’ve been going out systematically to logic customers and now non-logic customers and demonstrating the capability or the ability to use these types of systems to drive variability. They are systems that allow for big data, in other words non-relational databases, as well as relational database information in them. We believe that this is an important part of process control for anything that’s electrically sensitive to electrical behavior, electrical parametric behavior. [unintelligible] analog, image sensor, even advanced logic is becoming greatly electrically controlled. And you know, the business models, in this case it really was a part of the solution. It was a TBL. So the revenue impact in the quarter was pretty de minimis if anything. But over time, it provides a nice piece of business for us.

And when you look out for the next few years, is there a benefit to merging the electrical data that you provide with optical or [e-beam] data that other people provide? More interworking between the two?

Yeah, you know, when you try to look at things in line, the modes that people have to provide are becoming very sophisticated. The ability to see a defect is very difficult. You’re using pretty advanced signal processing algorithms after you shine the laser on the wave at some point. So you need to know what’s electrically really a short or an open, or how it behaved electrically, because that ultimately is what affects circuit behavior. So really most of the customers that use our characterization vehicles and collect electrical data, one of their key applications is to calibrate and correlate that with their inspection data, to get an inspection recipe that will let them see what they see electrically. Almost all our customers use their vehicles to tune their inspection systems. And going forward, we see more and more applications of combination CVs, or characterization vehicles, with inspection. It’s been a big part of our R&D over the last year and we expect it to be kind of a growing part of the value we can bring our customers.

And then when you look at the big expected ramp here of 14 nanometer FinFET over the next couple of years, and every time we go to a new node, there’s always a lot of challenges, but it seems like people are talking more about how these challenges may be a little tougher than we’ve seen in the last couple of node transitions. That being said, do you think that there is potential risk that perhaps your gain share portion gets pushed out as yields take a little longer to achieve, in this node versus previous nodes?

You know, we always build models based on when we expect the industry to achieve each of its targets. If you look at the 20 nanometer node, just based on where we expect customers to be, they’re about on our schedule. Our schedule that we build internally is probably a little bit more conservative than what the foundries go out and communicate. We are tracking the FinFET nodes pretty closely. You know, they are about on the schedule that we expected them to be on, which again, as I said, would be probably further behind where we expect the customers to be. We, as we’ve said, many times we expect 2014 to be a 28 nanometer volume year for us. It has been so far this year, and we expect it to continue to be. 2015 will be a 20 nanometer node in terms of gain share production as well as 28. And we expect really FinFET production to impact gain share most materially in the 2016 timeframe. And we still have that expectation, the tail end of 2015, mostly 2016.

So would you also expect further growth in 28 in 2015 as well, in addition to the new emerging growth of 20?

We do expect volumes to grow in 28 over the next couple of years. We are watching closely how wafer pricing goes as 28 matures. So far, pricing has been pretty reasonable. We don’t know how it’s going to change over time.

And then do you expect any seasonality in the gain share part of the business on a go forward basis, as you get more exposed to a couple of large customers? Does that impact how normal seasonality typically reacts?

We had expected, as we said back in February or January, that we thought that the first half of the year would be weaker, and the second half of the year would improve. As I said in my prepared remarks, actually the first half of the year was better than what we had modeled. So it’s been less seasonal than we expected it to be. We’ve not really changed our estimates for the second half of the year in our own modeling, so if that were to hold up, it would be less seasonal than we had expected. In general, 28 nanometer is broadening out in terms of the number of customers that are consuming that node, and as a result, it’s seemingly becoming more flat.

Do customers typically add capacity in the first half of the year? Or is it really just when the yields get to certain levels and it just so happens it was first half loaded this year?

Yeah, I don’t know that we have real insight on that one.

Okay, I was just curious if your seasonality is based on actually when your customers produce chips, or just some other dynamics as far as no transitions and when you attain certain yields.

Pretty much when they ship wafers.

And then Greg, you’re starting to build a pretty nice cash balance here. I’m curious what you think the necessary level of working capital is, and what some plans are beyond that.

Yeah, you know, we talk about this with most of the investors, and we certainly talk about it with the management team and the board. I think not much has really changed in our view of the cash position, even though we are building. We do have a board-approved shareholder repurchase plan. We will go execute against that to the extent that we can, given volume restrictions and market opportunities. But you know, our full goal there is to try to offset to the greatest extent possible the dilutive effects of our employee compensation programs. Beyond that, we are still evaluating potential uses for our cash and any parts of our balance sheet as we move into some more investment phases around long term R&D. So we’re looking at potential licensing, all the away to potential acquisitions, although we don’t really have any specific acquisitions on the table at this point in time. But those types of things get reviewed all the time. We’ve been approached by multiple investors on potentially looking at other ways to return cash to investors, and we do evaluate that. So these are activities that get talked about at every board meeting, but at this point in time, we haven’t launched any specific activity, other than the stock repurchase program.

And do you foresee any kind of bump in any of the capital spending, or people investment over the next few quarters or year, that would require a little extra money?

We have been working on some things over the last four or five quarters that may result in an increase in capital spending on some new types of hardware, and the impact that would have on our customers’ ability to control their line. So we have nothing that we could communicate in terms of what it would be, and it seems to be relatively modest right now, but that’s one of the avenues that we are looking at. In the end, it’s ways of growing the value that we can bring our customers and hence the residual value of gain share in the contracts.

And then finally, Greg, when you look at the model and there’s times when you have to push out revenue a quarter or two based on timing of contracts, does that have any impact at all on the model itself? Are there any inefficiencies that are more time sensitive or… End of the year, would that model be the same with or without those push outs?

Yeah, that’s our sense right now, is that this really is just timing. Now, what will be interesting, assuming these contracts go into place, and we get caught up there. Going forward, I think that all of the customers are going to be under pressure, particularly at 14 and some of the 10, to push schedules. So we may see some of the workloads get more front-end loaded than the original estimates of the contracts. So that may push revenue a little more forward. But overall now, we haven’t really changed our expectations on a full year basis at all.

Your next question comes from the line of Steve [Bogleman]. Steve [Bogleman]: Greg, I just wondered if we could return to this deferred contract cost. I want to make sure I got the numbers right. Can you just walk us through, again, or walk me through, again, what the deferral was, what the total amount was?

Yeah, what we said was our total deferred project cost on the balance sheet at the end of the quarter was $1.9 million. The vast majority of that is related to the two specific engagements I talked about. Steve [Bogleman]: And so it sounds like if we just take the normal gross margin on service engagements, call it low 30s or mid-30s, then that sort of implies that there was roughly $3 million of revenue that was deferred in the quarter?

Actually, if you look at the margins, it’s probably higher than that, but you’ve got to model that for yourself. Steve [Bogleman]: I guess the next question would be just you obviously talked about kind of what you guys are doing with the cash. I think you were a little bit more aggressive last quarter in buying back stock. Am I remembering correctly? Can you just remind me where you bought stock back last quarter?

Yeah, we bought stock back last quarter. I don’t remember the number of shares. I’d have to get back to you on that. But yeah, it was larger buybacks at slightly higher prices. So, 170,000 shares last quarter, approximately. So it’s opportunistic. We look at the market, we look at what’s going on in the trading, we look at the short interest. We look at all those things, and basically it’s at John’s discretion with my advice as to when we go into the marketplace. And you know, we also have to be careful not to trade over the top of any of our board members or things like that. So when we have windows, we will go forward, if we think it’s the right time. Steve [Bogleman]: The last question, and John, this comes up all the time, and I’m going to ask you to go through it again, you frequently made reference to you guys’ growth relative to the overall growth of the logic industry, and it sounds like you still think you can outgrow the logic industry in 2014. What kind of bogey are you using for the overall industry when you make that comment?

Can you define what you mean by bogey? Steve [Bogleman]: Just hurdle rate. What are you saying that the overall industry is growing at?

I think the logic business is in the mid to upper single digit numbers. We believe that means we will outgrow that. That means we expect to be in the double-digit growth rates. How much above that depends a little bit on our customers’ minds. Steve [Bogleman]: And obviously I know that your math skills are far superior to mine, so you fully understand that implies that you have a really big sequential growth in the second half, at least from where you guys were in the second quarter.

That’s correct.

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

Just wanted to clarify a couple of things. Following up on the prior question, when you talk about outgrowing logic industry, we’re talking about total company revenues, correct?

Yes.

And Greg, when you earlier said that the expectation was that solutions for the full year would still grow based on current expectations?

Yeah, in the low single digits.

Which, just doing the math, would require sort of averaging around $17 million quarters and solutions. You did $61 million last year, you did $28 million year to date. So you would need at least $33.7 million just to break even in the back half of the year.

Correct.

The other question, John, I wanted to clarify, is you said that the gain share exceeded your expectations for the first half of the year, but you haven’t seen anything that has made you change your expectation for the back half of the year? Did I hear that correctly?

That’s correct.

So if I looked at the year as a whole from a gain share perspective, if the back half were to play out as you see it today, it would be sort of, as a whole, ahead of what you would have expected coming into the year?

Correct.

Okay. And my last question, I guess I was hoping to get an update on some of the advanced R&D we’re doing in process controls, sort of where that stood, and sort of how you’re thinking about it from a potential timeline for commercialization.

Yeah, Andrew, we do expect to make more meaningful communications about that in the second half of the year. We just didn’t feel we’re ready to do that on this call.

[Operator instructions.] And there are no more questions in queue.