Good day, ladies and gentlemen, and welcome to the PDF Solutions, Incorporated Conference Call to discuss its financial results for the Second Fiscal Quarter ending Thursday, June 30, 2016. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session for which instructions will be given at that time. [Operator instructions] As a reminder, this conference is being recorded. If you have not yet received a copy of the corresponding press release, it has been posted to PDF's Web site 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 and solutions. PDF's actual results could differ materially. You should refer to the section entitled Risk Factors on Pages 12 through 19 of the PDF's Annual Report on Form 10-K for the fiscal year ended December 31, 2015 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 Mr. John Kibarian, PDF's President and Chief Executive Officer and Greg Walker, PDF's Chief Financial Officer. Mr. Kibarian. You may begin.

Thank you and welcome everyone. Today I will start our discussion with a brief summary of our second quarter results. Then I will provide more detail on our business activity in the quarter. Next I will turn the call over to Greg, who will talk you through the financial results in detail. We will then take your questions. Consistent with the past several quarters, we drove strong bookings in the second quarter. We engaged with new customers for both our integrated yield ramp and our Exensio big data solutions. We also broadened and extended many existing agreements. However, our Q2 Gainshare revenue of $6.1 million declined by 6% when compared with Q1 2016, primarily driven by lower 14 nanometer production volumes. We believe this volume weakness was primarily the result of product transition at one of our major customers, as well as softness in the smartphone market. At the 28 nanometer node, we did see mild recovery in the production volumes, and we believe that Q1 may have been the trough for 28 nanometer Gainshare. As a result, we expect total Gainshare for the second half of the year to be materially higher than the first half of the year. The overall weakness in Gainshare revenue was offset in the quarter by strong solutions revenue, which increased by 10% over the prior quarter to $20.6 million. I will provide more details on the business that drove us in a minute. From an overall spending standpoint, during the quarter we continue to step up R&D expenses related to our DFI initiative. This increased level of investment reflects acceleration in the activities related to the production of our eProbe 150 series systems and the continuing development of our second DFI system, the eProbe 250 series. Now, turning to our solutions business in…

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 nonrecurring items, stock-based compensation expenses and amortization of expenses related to acquired technology and other intangible assets, their related tax effects as applicable. Additionally, the income tax provision has been adjusted in our non-GAAP net income to reflect cash tax expenses only. EBITDAR is equal to earnings before income tax adjusted to exclude nonrecurring items, depreciation, amortization and stock-based compensation. You can access the earnings press release that contains a reconciliation of EBITDAR and non-GAAP net income to GAAP results in the Investors section of our website located at pdf.com. Now let's turn to over to the financial results. Total GAAP revenues for the quarter were $26.7 million, resulting in GAAP net income of $2.2 million, and GAAP EPS of $0.07 per fully diluted share. Revenues on a non-GAAP basis also totaled $26.7 million, with non-GAAP net income of $5.3 million, and $0.17 per fully diluted share. Cost of sales and operating expenses together were $22.9 million on a GAAP basis, and $20.4 million on a non-GAAP basis. Moving onto the revenue details. As stated earlier, total GAAP revenues for the quarter were $26.7 million. This was higher than the previous quarter by approximately $1.6 million. Total non-GAAP revenues were also $26.7 million, and were approximately $1.5 million higher than in Q1. Total non-GAAP revenues were comprised of Design-to-silicon-yield solutions or solutions revenue of $20.6 million, and Gainshare performance incentive or Gainshare revenues of $6.1 million. Our top 10 customers represented 86% of total revenues in the quarter. Two of these customers contributed revenues of…

[Operator Instructions] And your first question comes from Jon Tanwanteng.

You guys mentioned pulling forward the 250 series DFI product. When do you expect that to launch now and what do you think potential market size is or annual run rate might be for that product to after it launches?

This is John. So, we are pulling forward some R&D. We still expect it to be available in scanning wafers in our facility in early 2017 and shipping in the second part of 2017, which is on our original plan. In terms of the market opportunity, we do believe, and as we've talk with our fabless customers, they see the opportunity for new product introduction when you bring in a new product into a fab to more quickly bring that product up. As well as, we believe there will be process control on applications. We don’t know what fraction of the process control market this represents. We believe it will be a meaningful part of it. But we don’t know exactly what [indiscernible] where customers can put this in a flow. It's not really replacing -- it's a very different type of inspection right. So it's really allowing for new information. So just probably don't fully know how people will use it. Just like we didn't expect people to really use the eProbe 150 in the way that they are using, the found applications for it that -- where in process R&D, that we had anticipated, and that's why we're meaningfully spending on eProbe 150 this year and expect to deploy more of them than we have so far.

Okay. Great, thanks. Greg you mentioned engagement with a major Taiwanese foundry when you talked about the solutions business this quarter. Is that a new customer or is that an existing one?

That would be a new customer.

Okay, great. And then there's only a couple of major Taiwanese foundries, right?

That is correct.

Okay, great. Another question just on when you talk about the solutions business, are you ever going to break out the DFI or software portion of that? And I guess the following question is what is the trend and the traditional yield or portion of that Gainshare after you pack those up?

Yes, so our current plan is to not break that out. The reason for that is in many of the engagements, these will be sold as either a direct part of an ongoing yield ramp deal or be merged with several of our other components of our business, like Exensio big data. So it would be hard to kind of break out the elements. So, you won't see that, although we will give you color on the scale of the business and the growth rate as we proceed through. And what was the second part of your question?

I was just wondering what the trend is in the traditional yield ramp portion of the business?

We actually saw quite a number of engagements get booked this quarter, particularly in both the DFM side of the traditional business, but also across all the nodes 14, 10 and 7. As we said, we're seeing some early interest in 5 nanometer also.

And our second question comes from Tom Diffely.

So, Greg I missed your comments on expense side. What's your expense side for this year?

Yes, so we're expecting R&D expense, driven by the DFI program to increase from Q2 to Q3 and Q4 by 3% or so per quarter.

Okay. Great, thanks. All right. So, when you look at -- I think John you mentioned the 46 tape outs, is that with multiple customers and what are they doing, how are they testing that if you've only sent out one system so far?

Yes, Tom it's a great question. So, yes, it is on multiple fabless and fabs. I've lost track of the number now, but it's over five or so fabless companies that have similar number of fabs at this point. And now there's two machines out there that can measure. We also have capability in our clean rooms here at Silicon Valley and at this point wafers do come back to us and other fabs are scheduling to shift fabs and fabless -- are scheduling to ship wafers to our facility, where we can demonstrate the kinds of information that you can generate from these instruments. Remember that's really what drove these first two systems, was in the summer time of 2015, we had wafers come from those first two fabs to our facility here in California. And we showed them what kinds of information we could get. So some of those tape outs will go through. Most of the tape outs will go through one of those few machines, the ones that are in our facility as well the ones that are in the existing customers. Also, for our fabless customers, once they put this into the design flow, then it becomes the standard operating procedure, and every tape out has these instruments in there. And they recognize -- when we talk with our fabless customers, and we recognize that in order to get fabs to adopt -- if you tell us out by every new inspector and they can just use regular wafers that -- they can make a decision about an inspector and not worry about what the fabless do. But our approach is as you put something on the wafer to make the inspection problem much easier. So when we go back to the fabs, we need to be able to point to a community of designs and wafers that have these instruments. And now what we've got with a couple of customers now doing this on all of their tape outs built into their flow, foundries can get comfortable with the fact that there will be tape outs that are coming into their factories that are fully instrumented. And therefore this methodology [Indiscernible]. So this is a chicken and egg problem right, Tom and we are actively doing fabless to adopt and then turning back to fab, showing that what benefits they could get. And the fabless are healthier for their business after this.

Okay, so if a fabless potential customer decides not to do this, is it because of cost or complexity or just time?

If someone says [indiscernible], does my fab have a machine to it, does my foundry partner have a machine today? And in many chances [Indiscernible]. Right so am I going to do it? A response you get from the fabless company. What we see with the leading edge fabless, and they are very enlightened about this. Hey, we know that it is very hard to see the problems that limit our new product introduction. We think we know what product layout patterns are tricky to build. We want to give instruments for our foundry companies who can make this problem easier for them. So that's how the dialogue starts, and they put those instruments down, and then literally they go to their foundry partners and say we have done this work, we'd like you to work with PDF to inspect these. And we've had that happen with numerous fabless now across multiple foundries. And the first two foundries are a result of those fabless companies bringing this up to their foundry partners.

And I assume your hit rate is pretty good for say 14 nanometers and below?

Because we run electrical test vehicles on every flavor of 10 and 14 that's out there, we have a lot of insight about what instruments you would like to put on a wafer to make the process control problem easier. And we also -- our layout software runs thorough most -- for our fabless customers runs through most of the major tape outs on application processors and graphics chips et cetera. So it's a good handle on what patterns are tricky in their layouts. So when you marry those two datasets together, you can build an orange chip instrument that has good sensitivity to customer specific problems.

Okay, it sounds very compelling. So you've also talked a lot about how China is just a really fast growing market for you. When you do your engagements there, is most of that at the 28 and above level, or is it really and moving quickly to 14 and below?

Yes, what we've seen on the fabless side and we talked about one of the engagements signed in the last quarter was 10 nanometer for Chinese fabless. So on the system and the design company side, we see a very accelerated use of advance nodes. Now of course when they are designing a 10 nanometer or seven, they are not using foundries inside China that are Chinese on foundries in China. They are working primarily with our customers in the U.S. and the rest of Asia. And again, part of the value that PDF can bring them as we run vehicles in those facilities all the time. So we have a lot of expertise about helping them characterize their overseas suppliers. Now, what's happened in the last couple of quarters is those fabless companies are also trying to use their 28 nanometer, and soon I think on future nodes internal capacity inside China. And again because PDF has business with many of those companies, we're able to provide them an infrastructure to make that a more smooth onboarding process as well.

Okay. Great. And then just finally, when you think about Gainshare kind of recovering I guess from trough levels right now, is the bigger driver the 20 -- the new 20 nanometer customers or is it a ramp up of a second 14 nanometer customer?

We expect the ramp up of 14 nanometer in 2016 and early 2017 to be the big driver, and as you get out to 2017 the second wave 28 nanometer customers could become also become an important factor.

And your next question comes from Brian [indiscernible]

Good. I think my questions have mostly been asked. I just wanted to follow up with what Tom was saying on what was going to drive the back half Gainshare improvement. So you guys have sort of touched on that. Is there anything more you'd like to discuss?

No, I think we do believe and we've seen in our foundry partners and uptick in volumes and that would drive the third and fourth quarter Gainshare.

Okay. And then forgive me if not having my [indiscernible] PhD as well. It was my impression path that sort of the e250 was much more sort of the fab level and the 150 was kind of the lab to make it simple. Is that in fact correct? And so is this -- are you guys thinking that some of your customers are going to bring the product down to the fab floor versus just keeping it in the labs?

Yes, so generally your description is right Brian. I don't think you need a double E degree. You're doing just fine. But what happened was our original thought was the 150, we were going to put a couple of them in the world for collecting data to verify the on chip instruments worked, and to give -- because Tom brought up a very good question for fabless right. People will ask hey, are there machines out there that can measure these things. We knew it would take a while to develop the 250 platform, and so we thought while we're doing that, we get one or two of these out there to create some data sets for our fab and fabless customers to gain confidence in the instruments and learn how to use the data. And that's why we said if you remember on our previous calls, we think there will be a small amount of revenue at the end of 2016. And what's happened is as the data sets tended to be more valuable for our foundry partners than we thought, fabless customers are also putting more of them on their test vehicles than we had initially anticipated, and they are seeing good applications for the data. And its still R&D. So say you're moving a little bit from the lab to kind of the R&D process inside the fabs. And we are starting to find some applications that could leverage the 150 even for production, although it's still very early in proving those out. And we started to realize that the 150 has a place separate than the 250, for a different set of applications. And it's a very -- we were able to strengthen the relationships with customers that were very compelling for them and for us a profitable business that was something that we could afford to bring out. And now we see other customers wanting that same capability. So now we're making plans, and this is part of the reason why the expenses have gone up, to continue to develop applications and a capacity for the 150s while we continue to develop and accelerate the development on the 250. And we think they are going to complement each other in the field rather than our original intention, which was to replace the 150s with 250.

I guess there is indications for orders on the 250s. Are those from customers that have the 150s or is that a new different set of customers?

So we've not gone out and asked for orders or solicited orders on the 250. But we have gotten folks to express their interest that if it could do what we said, that we do, and primarily there are different applications, as I kind of alluded to in my prepared remarks. For our fabless customers that express interest in the 250, they are quite interested in the new product ramp up, because being able to scan billions of on chip instruments in an hour is kind of an out of the imagination capability, at least 100x faster than what you could do alternatively. And they think that that would greatly shorten their learning. And so that is a little bit different than the 150 application, which really is geared around process window verification, and more IP pattern development as opposed to full product bring up.

And your next question comes from Christian Schwab.

So after this quarter, can you just give us a quick update on what you think the pipeline is for additional DFI orders? Do you have any insights there you could share with us?

Christian. The pipeline is really those tape outs that are out in I think at this point five different foundries. We anticipate generating -- getting wafers in our facility in Q3, and early Q4 from other foundries as well as the existing to kind of digesting what the initial capability can be. We are not looking to push it so hard that we trip over ourselves. So we would be excited if we had an additional system in the second half of 2016 with kind of an on ramp or off ramp in early 2017. But we don’t need to get through a big number in this year. And also remember that the model that we used for this is a ratable revenue model. It's almost like us time based license on software. So the machines that we ship are still generating revenue. When you are in the capital equipment model, once you ship and recognize the revenue, you start again from zero on your revenue for machines for the next quarter, whereas for us we build off the base what's already been established. So we don't need to ramp them up very quickly in order to sustain ourselves and we will ramp up them up at a rate that we feel comfortable we can meet customer's expectations and exceed them. So if we can get one more in this year, that would be super, and then a ramp into early 2017 will be great and that would meaningfully impact our revenue.

Yes. Aare you still thinking about incremental revenue and DFI year-over-year in the $5 million to $10 million range and 2017 versus 2016? Is that still fair?

Yes, it's reasonable.

Okay. And given a lot of the excitement that's going on for you guys in bookings in particular on the Exensio side as well as a lot of activity in China, is it fair to assume that we could see a similar type of improvement from those two areas in 2017 versus 2016 as well?

Yes.

And your next question comes from Gary [indiscernible]

I wanted to follow up on your CapEx. I think you said it was $10 million incremental to last year. Can you give a little color on that? And maybe what that implies for 2017? Right now you said it was -- it's probably like good news that you are spending money, but what does that look like the next year?

Yes, so if we think about 2016 maybe being into mid to high teens level is probably rational. When you look at 2017, it's hard to call because as John pointed out, we may be expanding and ramping additional machines on the 150 series, overlapping with going to early plate development, early production on the two series which is a significantly more expensive capability. So we've got a variety of potential projections depending on timing of those things, but I would expect a similar to slightly more spending in 2017 than in 2016 at least.

Okay. So, simply if business is good, CapEx is going to stay high in 2017?

Yeah and that's driven by the fact that our plan is to not actually sell any of the machines associated with this business. They will be treated as capital goods and then depreciated over probably five years.

Got it. And I just want to make sure I heard it correctly at the beginning of the call. I think you said you either added or extended contracts in like 20 something customers, which sounds like an awfully big number. What's the number and what would it have been say last quarter to put it in context?

Yes, I believe the number was 23, although we're going backwards and looking. I'm sorry. It was 27 that we booked new or extended deals with in the quarter, 27 customers. That number can vary quite a bit quarter-to-quarter because of the software business, but it has been growing is a good way to think about it. I can go off line and get you last quarter's number. [Multiple Speakers]

And your final question comes from Jon Tanwanteng.

Just two quick follow ups. Can we expect some margins trend in the solutions businesses to be through that second half?

Yes, I think Jon, you and I have talked about this before. I think you would continue to see the solutions margin improve slightly quarter-over-quarter. Now there is some timing that will fall in there, but on a half year basis, if you are thinking up a point or two, driven -- the good news side being driven up by increasing mix of the software business, and now even some of the 150 series business. Offsetting that will be -- as we ramp up business in China, it takes a while for those margins to get back to full levels.

Okay, but in general we expect some [Multiple Speakers]

Overall you think. Yes, margins should go but only by a point or two I think.

Okay, got it. And the second question just on the DFI side. Do these fabless customers who put the instruments on their designs, how do they pay you for that? It is the part of the software package you offer as an additional module? Just wondering what the model is there?

It's good question Jon. We right now charge nothing to fellows who want to put instruments on their wafers. They then generate a key in effect which is where the instruments are located with the design and PDF has the right to distribute the key to the foundries. So really the strategy here is to -- the fabless put these on as a way of making their designs easier to bring up and control, and right now monetize the foundries. And then that will be the model for the near term.

And we do have one more question from Eugene Box [ph]

John, I apologize, I got on the call very late. Did you -- I know you commented on the Gainshare for the second half. Any thoughts on the global foundries agreement with AMD and sort of where they stood as of the end of Q2?

Thank you so much for the question. Unfortunately, we really can't comment on our customers' contracts with their customers' intent and intent to not have much visibility into that. We'll probably see those things when the customers require to follow their SEC documents. We've opportunistically [ph] see it other than hearsay.

At this time there are no more questions.

Thank you everyone. We look forward to talking with you at the end of Q3. Have a good day.