Good day ladies and gentlemen and welcome to the PDF Solutions Conference Call to discuss its Financial Results for the Third Quarter ended Friday, September 30, 2017. 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 the PDF 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 for its solutions. PDF's actual results could differ materially. You should refer to the section entitled Risk Factors on Pages 10 through 17 of PDF's Annual Report on Form 10-K for the fiscal year ended December 31, 2016 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. If you have not already seen our earnings press release and financial results presentation for the quarter, please go to the Investors section of our web site, where they are posted. The third quarter was a busy one for PDF Solutions, with significant progress on all four of our 2017 strategic objectives. Moving from a company whose technology is primarily used by foundries, when they bring up new leading edge nodes to a company whose products and services are broadly used across the semiconductor industry, throughout the life of the products and processes. First, we have had a goal of being a critical component to the entire Chinese IC industry, from manufacturing to system companies. In this quarter, we signed two contracts, taking a big step towards this objective. A fabless entity that is part of a larger system company, selected our Exensio platform for its yield and test management solution. We believe we were selected because, first; Exensio is unique in the marketplace, with a strong position in test, fab yield analysis, fab process control, packaging and control and analysis. Second, this customer has a history of using our characterization vehicle data from foundries that have multiple nodes around the world. Using Exensio, the customer can leverage the unique proprietary CB data to increase insight and learning from their product test data. And finally, our strong engineering team in China provides them world class support locally. Besides this strong win for Exensio, we also signed a yield ramp contract for a 28 nanometer foundry in China, that is deploying both polysilicon high K versions of the process. We have been working with this customer in early R&D, and after making strong progress, they committed to a new factory and production ramp. This Gainshare contract…

Thank you, John. As you may have seen in our earnings release, we have posted in the Investor Relations section of our web site, a management report, with detailed comments regarding the financial results of PDF for the quarter. In that, I am going to focus my verbal comments for the quarter on a few key highlights reflected in those results. First with revenue, total revenue is at $26.5 million for the quarter, were up $2.2 million as compared to 2Q 2017. Solutions revenue at $19.2 million, increased by $2.7 million from Q2, while Gainshare revenues at $7.3 million decreased by $500,000. As John said, Gainshare volumes increased during the quarter, primarily driven by a continuing 14 nanometer ramp at one of our major customers, and 28 nanometer volume increases across multiple customers. This Q3 over Q2 improvement in volumes and related revenue however, was offset by the one time performance bonus recognized in Q2 related to achievement of R&D milestones at a 14 nanometer customer, that was not repeated in Q3. During the quarter, the increase in Solutions revenue was primarily related to closing two contracts that we originally expected to close in the prior quarter, and higher activity levels related to a large memory project booked in Q2. Additionally, DFI revenues increased during the quarter, due to the conversion to a standalone agreement of an eProbe 150 system previously deployed as part of our yield ramp project. This is the same project that John was referring to. Finally, Exensio revenues increased during the quarter, based on strong bookings, including several repeat customers increasing the user counts or tool license counts in their applications. GAAP net income for the quarter was approximately $600,000, up by $400,000 over Q2. Non-GAAP net income for the quarter was $3.6 million, up $900,000…

[Operator Instructions]. And the first question comes from Jon Tanwanteng with CJS Securities.

Good afternoon guys. Thank you for taking my question.

Sure.

John, can you clarify the e-beam with the 250 series demo push that you mentioned earlier in your prepared remarks? Is it adding more capabilities or are you needing more time to do what you originally thought you could? And kind of second, are you still on track to generate revenue from that 250 series machine in the first half next year?

Yeah. We still believe we are on track to be able to ship machine first half in 2018. We are adding slightly more capabilities or different capabilities, that's the data we have seen off the 150, and also finishing up some capabilities that we wanted to have bogged up [ph] a little bit tighter for the demo itself. It's a little bit of both Jon.

Okay, got it. And then, Greg, you mentioned expenses are going to stay elevated for the R&D portion on the 250. How long is that going to stay elevated for, [Indiscernible] drops off after you start shipping them, or are you going to keep adding capabilities, does that mean R&D stays high?

I think by the time we get to the middle of next year, we should probably see a decline in R&D expense, but we will see a pickup in cost of sales, as we start to ship. But there will still be an elevated level of R&D expense, but just probably not at the peaks we are seeing now.

Okay, got it. And just from a customer basis, what has been the response so far to what you have been telling them about the 250? Are they excited, are they -- how should we think about the pace of orders in the next year, once you start delivering the first one?

What we first started showing customers was the data they could get off the 150. In the spring, when I mentioned about the 250 to one of the customers, the guy said well gee, we have got great data out of the 150, what do we need additional measurement data for? Then as they started designing all of their vehicles for 7 nanometer, and they say how much area they could consume up, they were very intrigued with the idea of 250 and the ability to be able to look inside the die with the area 3, which we can't do on the 150. And even the substantially faster scribe line, as we started finding customers were using up the scribe line area in ways that we hadn't anticipated and some of the incremental capability we are putting in the 250 to make it even superior in the scribe line. Far enough ahead of the scribe line could be [indiscernible] for that application too. So I think we have had very strong response from the fabs and fabless customers about the 250 and the 250 demos. And then, on the 150, incrementally additional information or measurement types that they are very intrigued with and some of the changes they are making to the 250, are to be able to meet the incremental data types and information they want off the systems. I mean, the customer is really seeing this as a logical test data, and so they are asking for more and more logical test information of these systems.

Okay, great. And then finally, you mentioned that your foundry customers are having a hard time filling their factories, especially with electrical [ph] contracts? Have you considered any other changes to the proportion of what you charge up front, versus the back end Gainshare royalties that kind of minimize that risk?

We have Jon, from our perspective, it would be a good thing to do it. That doesn't specifically help the customers though, and over the longer term, they won't be viable customers at some point. And I think, particularly with the investments that the industry is making in China, those factories have to fill up at some point, and because of just the geopolitical situation out there. So we are looking at ways on how to become important to them for that aspect for their business. We just -- we will adjust it both ways, but we particularly see finding ways to make it a win-win, though longer term, more viable way.

Got it. Thank you very much.

And your next question comes from Tom Diffely with D.A. Davidson.

Yeah, good afternoon. Following up on the DFI tools, what are the prospects for additional sales on the 150? Earlier this year, you thought that it could be a few more going out the door by the end of the year. Is that still the plan, or are customers now waiting for the 250 to be ready?

We are still in a position to be able to ship additional 150s, and we plan for that either at the end of this year or early next year, and we still have pilots and demos going on with customers on 150 capability. We believe they will have a life and value in the manufacturing facilities, for a time -- particularly for test vehicles. Over the longer term, though 250 we believe is [indiscernible] things we added in R&D this past quarter, could even do that -- even more cost effectively than the 150. And so we probably may shift to simplify both [ph] the customer and ours balance of machines in the world. But we do believe at least -- and our plan has been for quite a while, that for a good chunk of 2018, even though we would be bringing out 250s and selling them in the marketplace, a sizable fraction of the revenue we generate on DFI in 2018, has always been expected to be of the 150 platform.

Okay. And then when you look at the next few sales, potentially of the 150; is it more likely to be the new customers or repeat orders to existing customers?

We have both discussions going on with customers right now, Tom, that's hard for me to forecast what would happen first.

Okay. And then, when you look at the spending going forward, you said it was going to be roughly flat quarter-over-quarter. What kind of increase in spending or OpEx is there from the acquisition?

It's very minor. We primarily did in asset acquisition, and we brought a few people on board, but it's a very small number, and we expect that acquisition to be accretive almost instantly.

Okay. And then when you look at the Gainshare part of your business, coming up a little bit on a core basis and then looks like it's going to be flat in the fourth quarter. Is it still a situation where the 20 nanometer is going to continue to be weak? And I thought there would have been a little bit of a ramp in the 40 nanometer; has that business essentially maxed out at this point?

We don't believe it's maxed out. Tommy [ph] did believe the 40 nanometer business will improve in 2018 as well, as it improved in the second half of this year, the first half of this year. We thought the second half of the year was roughly flat, Q3, Q4, due to different customer seasonality and some were up and some were down. As we got into 2018, we think there will be more 40 nanometer Gainshare revenue than it was in 2017. Overall in the 28 nanometer customers, particularly the newer customers, the customers that are newer in the node, they are still struggling to get meaningful and sustained volumes. The ones that have been in the node for a while, I would say that their volumes are a mixed bag, some are having decent quarters and some are not.

Okay. And then, just to clarify, of the four 150 tools that are in the field, are three of them now in the subscription model?

Two on a subscription model, one is part of an overall IYR engagement. And so it's -- revenue was part of the overall purchase the customer made. And the fourth one is used primarily for R&D on a JDP related to a specific electrical measurement.

Okay. And then finally, when you look out to 2018, do you think there will be more growth coming from kind of core business in Exensio or from the new DFI tools?

Exensio is a ratable bookings business, and so it tends to build out over time, so is DFI. But it has had a couple of years of -- 2016 and 2017 of very strong bookings. So even with relatively modest incremental bookings in 2018, it will still build revenue. And DFI is coming off a smaller base. So on a percentage basis, that's going to grow faster than Exensio will. In terms of absolute dollars, we still expect Exensio to be a bigger contributor in 2018.

Okay. Great. Thanks for your time.

Your next question comes from Tom Sepenzis, Northland.

Hi. Thank you for taking my question. Just wondering if you could talk about some of the capabilities that you want to add to the 250 that's causing this push up?

Yeah. So the customers -- in particular, one of our foundry customers, is very interested in being able to relate what the eProbes do, what we call the logical response index. And the electrical value that that actually represents are for structures that measure leakage between spins, they want to be able to understand, for a given, what we call ERI value, I know that sounds very technical, what would be the current -- how much leakage current would be there roughly in certain buckets, if you would actually be able to probe that electrically. And that's the same for resistances, they want to be able to understand specifically, not just that there is a high resistive contact, as opposed to a short. But what is that resistance value in a bucket. So the customers want us to be able to get more fidelity around the resistance buckets. We are not able to do that on the 150. We think there are some things that we are adding to the 250 to improve its sensitivities that we are trying to be able to get to.

Great. Thank you. That's helpful. And then, just in terms of modeling purposes, I know you don't want to give specific guidance; but directionally, 2018, should we be thinking about some of the newer products adding growth to the top line? Or how should we be looking at that?

Yeah, I think that you can expect an 2018 that we would see growth in the Exensio business, the DFI business, once again off a small base. So the absolute dollars are now at the same scale. And then also, we are expecting some level of recovery in Gainshare.

Great. And then lastly, if you could just provide any kind of update on 3D-NAND progress? I know that you have built one customer, but any additional customers on the horizon that we should be thinking about? Or how is that first customer going?

Yeah, it's going quite well. We have been able to demonstrate a lot of interesting information to them, that's helped them accelerate their program. We have also been able to talk or have discussions with other customers in 3D NAND go over the capability. Both that we are able to see on DFI as well as we are able to see in electrical tests. And we will release, starting the first quarter of this year an updated pdFasTester system specifically for non-volatile and 3D memory and Cross Point memories to allow for even better characterization with that -- of those processes and technologies.

Thank you very much.

And your next question comes from Andrew Wiener with Samjo Capital.

Hi. With respect to the new Chinese 20 nanometer customer, can you give us a sense of when you'd expect to gain share from that customer, to see our first Gainshare?

Yeah, I believe, Andrew, that would be late 2019.

Okay. And do we have any timings -- what percent or what the initial wafer capacity they are planning to build?

Yeah. They are building a facility. I think it's a 40,000 wafer startup facility, it's relatively large. What the [indiscernible] handle for a capacity and what they tool a lot, but we will wait and see. They have almost completed the [indiscernible] now.

Okay. Then secondly, when you think about the guidance for Q4 for Gainshare, does that include -- is there an expectation of any milestone payments similar to what you achieved in Q2?

No there is not.

Okay. With respect to the arrangement with Global Foundries, one of their large customers disclosed that under the terms of the wafer supply agreement that they purchased certain wafers from a foundry other than Global, do we benefit from that in any way?

I didn't get a chance to read that customer's WSA agreement or in disclosure, so sure I can comment. I know that Global Foundries has on their 40 nanometer technology, technology alignment with Samsung. And of course, both of those foundries, we benefit from. I don't know if that disclosure would have been bigger customer buying wafers from a foundry other than Samsung. And it's like, if that were the case, then we would not benefit.

Okay. And with respect to the sort of the tweaks or whatever -- however you want to call it on the 250, given that we are sort of responding in large part to serving things customers are asking for, how do we think that will delay getting sort of a first tool in the customer, and do you think [indiscernible] the time to commercialization, given the sort of level of interaction at this point?

Yeah. This has been -- that's a good question Andrew. This is part of the calculus that we made in the third quarter. We have a really tight ongoing working relationship, particularly with one of the customers on exactly what things they want to be able to characterize. That's part of the reason why we have a JDP going on with them, on specific electrical mechanisms they think are critical to advanced products. And we have had a dialog with them about what we are able to see with the 150, what we can see with electrical characterization itself and what we think we could do for the 250 capability, and they are very vocal about what things they are interested in. So we are trying to adjust to what we think they need, and we believe that that would help us on the commercialization and time to revenue, hence [indiscernible] we took this additional pause.

Okay. Does that put then [ph] getting the first beta tool into a customer into Q1 of next year, is that the thinking currently?

The first half of the year for sure. I think, depends on how successful we are with the beta. We have actually designed with them, a relatively detailed beta. They are sending multiple wafers to us across different conditions, to see what we are able to do. So I think it depends on how long it takes us to complete all of those wafers they want to look at.

Okay. That's all I have for now. Thank you.

At this time, there are no more questions. Ladies and gentlemen, this concludes the program. Thank you for joining us today.