Good day, ladies and gentlemen and welcome to the PDF Solutions, Inc. Conference Call to discuss the company's financial results for the first quarter ended March 31, 2020. [Operator instructions] As a reminder, this conference is being recorded. I will now turn the call over to Joe Diaz of Lytham Partners.

Thank you, Rochelle and thanks to all of you for participating on today's call. We appreciate your time and your ongoing interest in PDF solutions. As the operator indicated, my name is Joe Diaz. I'm a managing partner at Lytham Partners. We are the investor relations consulting firm for PDF. If you have not yet received a copy of today's press release, it is available at the company's website at www.pdf.com. Some of the statements made during the course of this conference call will be forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995, 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 PDF's annual report on Form 10-K for the fiscal year ended December 31, 2019 and similar disclosures in subsequent SEC filings. The forward-looking statements and risks stated on this conference call are based on information available to PDF today. The company assumes no obligation to update them. Now I'd like to introduce John Kibarian PDF Solutions' president and chief executive officer, who will be followed by Adnan Raza, executive vice president and chief financial officer. John, please proceed.

Thank you for joining us on today's call. If you've not already seen our earnings press release, management report and 10-Q for the first quarter, please go to the investors section of our newly updated website where each of them posted. We hope you and your families are staying safe and we appreciate your time to join us today. Given the circumstances, I will start today with some commentary on how we are approaching the COVID-19 pandemic and our commitment to our long-term strategy. Then I will provide commentary on our Q1 highlights and conclude with our impressions of the semiconductor industry before handing over the call to Adnan for the financial update. The COVID-19 situation remains very dynamic globally and the health and safety of our employees continue to be a top priority. Over the past three months, our team has responded swiftly to the evolving landscape. We first experienced COVID-19 around the Chinese New Year holiday for our team in Greater China. Our team in Shanghai extended their time away from the office. Our team in Taiwan executed a number of procedures to assure safety while continuing to serve our customers. We implemented work-from-home for a majority of our global employees. And so far, a high level of productivity has been maintained. We have also adapted our communications and interactions with customers and employees to ensure we remain connected, even while we are physically apart. While the lasting impact of COVID-19 on the work style and operations of the semiconductor industry remains unclear, the core strengths of PDF Solutions remain very clear. Our Exensio platform, particularly on the cloud, allows our customers to keep on top of their manufacturing, even with their teams working remotely. In addition, our unique electrical and EV measurement systems, coupled with continuous innovation…

Thank you, John. Good afternoon, everyone. It is very nice to be speaking with you on my first earnings call as CFO for PDF Solutions and I'm delighted to be here. I have personally enjoyed meeting those of you whom I've already met and look forward to meeting the rest of you. I hope you and your families are all keeping safe and in good spirits during the current environment. The first quarter of 2020 was a record analytics bookings quarter. We closed a strong first quarter with record year over year and quarter-over-quarter bookings. We believe these times of uncertainty present opportunities for us to accelerate our strategic priorities. Indeed, some of our key products were developed as a result of strategic initiatives we embarked on during prior global crisis. We have adapted well to the current environment and remain connected while apart, including online team meetings for our current employees and remote on-boarding of new employees, we continue to add to support business momentum. You will have seen our financials in our earnings release. In addition, we have posted a management report in the investor relations section of our website. The report has financials and comments regarding the results of PDF for the quarter. To provide you with complete information, we have also filed our quarterly 10-Q today. I will focus my comments on a few key metrics and areas that are also summarized in the press release and management report in the investor relations section of our new website. All of the financial results that we provide on this call, except for revenue, are on a non-GAAP basis, which excludes stock-based compensation, amortization of intangibles, restructuring charges and other noted adjustments. Please refer to our press release for our GAAP results and GAAP to non-GAAP reconciliation. We…

[Operator instructions] Okay. Thank you. For our first question from the line of Tom Diffely from D.A. Davidson. Your line is now open.

Yes. Good afternoon. So John, first, I'm curious where you think you are on your move to the cloud. From a product and tool point of view, it seems like you keep adding people and resources over time. Just kind of curious where you are in that?

Yes. Thanks for the question, Tom. We've already supported a number of customers on our cloud deployment. We do have incremental features that we're building into our cloud, for example, tiered storage, incremental features, so they can monitor more closely who is using pieces of data in the system, et cetera, things that they typically don't have when they're on-premise that when you go on the cloud, you can really take advantage of. So we continue to add development features. But the majority of a lot of the spending right now, while the increased spending has been bringing up new customers on the cloud and an awful lot of pilot activity. I think when Adnan made the point about the SG&A expenses being up. A lot of that is pilot cloud deployments, demonstration cloud deployments and presale support of Home Cloud. As you can imagine, in this environment, we're getting an awful lot of customers to ask us about cloud, maybe ones that we're not asking a few months ago.

Okay. And then obviously, with strong bookings, it sounds like the sales wasn't a huge problem. But just curious, over the last month, have you seen any kind of impact in your ability to close deals because of COVID?

We've been monitoring this quarter quite closely. It's already started out pretty strong. Typically, our contracts often come in toward the end of the quarter. And this is a lot more linear. So April was pretty much where we would expect it to be, if you just linearize the quarter, which is very unusual for us. So it was a good April. We'll continue to watch how we progressed throughout the remainder of the quarter. But so far –

Okay. Good. And then finally, you mentioned DFI was down, but it sounds like there was a contract signing at the beginning of this quarter that would turn things around?

Yes. So the biggest change for us was not senior folks from the U.S. to Greater China, Taiwan and Mainland China in post February and March, right? And so contracts that we expected to close in the quarter slid to the very end of the quarter and early April, that one was one that's led into the first few days of April. And we've adjusted how we go through the contracting and really shifting more responsibility to the salespeople in the region. And having the folks that used to do a lot of the travel work remotely. So yes, we seem to have figured out how to execute on that in the last part of the quarter. We're continuing that through this quarter.

Okay. Great. And then I should add, you talked about bookings being up threefold or three times versus the fourth quarter. The fourth quarter wasn't a normally small quarter, was it?

It was is on the lower end, but it wasn't unusually small.

Okay. Thank you. Thanks for your time.

All right. Thank you. For our next question from the line of Christian Schwab from Craig-Hallum. Your line is open.

This [indiscernible] on for Christian. Thanks for letting me ask a couple of questions. So first question, understanding that your business is difficult to predict quarter to quarter and this environment, probably even more so. But with the strong bookings you highlighted in Q1, I was wondering if maybe that gave you any extra visibility. Do you think Analytics could grow the 20% this year, kind of, in line with that longer-term target?

Yes. We still feel very good about our overall analytics growth for the year. Of course, we're going to monitor the situation closely. I think so far, if you look at the semiconductor universe, Q1 was, I think, good for many companies. And yet, we all sit inside the environment of greater global economy. So first quarter look, as I said, April was a good month. We expect it to stay strong at this point, but we'll keep on monitoring how does the global economy affect semiconductors. So far, it's been, I think, fine. And as a bigger portion of the business is Analytics, we go into each quarter with a higher and higher percentage of our business coming out of backlog. And going into the second quarter, that percentage is up over what the first quarter was and we expect that to continue.

Okay. All right. Fair enough. That's helpful color. My second question, it seems like a lot of your comments about the current environment and how it's impacting your customers and their engagements with you, which makes a lot of sense. I think it was kind of more focused on the foundry customers. Any color specifically on kind of the fabless guys and maybe how this current environment is changing how they engage with you or not?

Yes, great point. So I gave two examples of cloud. One was an IBM, right? And that was the contract that was the eight-figure contract doctor. The second one was really someone who's managing test assets that are not always inside their own organization. And again, it's a more fabless entity that's trying to manage how their engineers can keep track of their production. We have had last quarter as well as this quarter, a number of fabless customers book and typically booking [indiscernible] in the cloud. It's always been easier for the fabless customers to rationalize putting their data on the cloud because they use foundries for their wafer manufacturing. They use OSATs for test and assembly. So the chips never go inside a building that has their name on it. So why does their data need to reside on the building that got their name on it. So that part of the market has always been easier to move to the cloud. In my prepared remarks, my discussions with executives. There, we felt that everything we did on AI needs to be on-premise for our customers foundries and our IDMs that have facilities that are their own. And now they realize that, hey, wait a minute, I need to use more AI to more predictively identify, which equipment are going to go bad. And I better do that in the cloud because it's actually more resilient for me. I can scale up and down computing easier. My engineers can get access to it. And it's more secure from a data security standpoint than being on-prem. So that change that we've -- in our dialogues with customers in the last couple of months has really been for that class of customer. The fabless class of customer, it's a relatively easy sell that you don't own any of the factories that make your chips, why do you need to own the place that stores your data? That's always been a relatively easier conversation to have.

That's great color there. And my last question kind of a little bit on the model. So opex is a little higher than we were expecting in Q1 as we kind of made these target investments that you outlined. So I'm just wondering if kind of uncertain environment, maybe expense is something we can control a little bit better. How do we see that trending from Q1 levels kind of going forward through the year?

Yes. So of course, we've been re-planning ourselves. And as I said in my prepared remarks, we normally would spend quite heavily on travel and we flew a lot of people around and thought we had to do everything face-to-face with customers. We've been quite pleased that we've been able to maintain a high level of engagement with customers with our local team and then video conferencing with our remote exec. So we do expect things like travel to come down, a number of expenses that we typically had that were quite substantial for a company like PDF to be more managed. We will see, as you get to [indiscernible] travel come back. We are telling our teams right now for the remainder of the year, you can pretty much forget about international travel or almost not a very de minimis amount. So there are other areas like that where we're driving costs more efficiently. And you'll see us continuing to shift our spend, as Adnan said in his prepared remarks, taking costs out of things that we feel we are in a good position, adding more investments in places where we're having a lot of traction, a lot of sales related expenses on presales activity for our cloud solution, we do anticipate. And taking out costs in areas where we don't think we need to make further invests. So overall, it should moderate down a little bit our expending.

Okay. So moderate down in the coming quarters with some acceleration as the world gets back to normal travel. Okay, perfect but that's all for me. Thank you.

All right. Thank you. For our next question from the line of Jon Tanwanteng from CJS Securities. Your line is now open.

Hi. Good afternoon guys. Thank you for taking my question. And I everyone safe and then working fine out there. First one for me. Maybe to build on a prior question. Your ability to grow Analytics revenue this year, you said you feel pretty good about it, maybe in line with your long-term targets. But do you actually feel better now about that growth rate, given all the influx of cloud and remote opportunities? Or is it more of a push, given what you may see as a headwind from pandemic and kind of recessionary concerns?

Yes, it's a great question, John and thank you for asking it. So if I were to look kind of myopically at the semiconductor industry, I feel better now than I did going into the quarter. Because our activity has been high, the dialogue with customers on cloud and the number of pilots we've been starting keeps increasing and customers that we didn't even have in the forecast for this, we're now engaged on pilots. So that piece [indiscernible] pre me would feel, I would say, incrementally better. Now yes, I turn on CNN like everybody else does. And been told about a 20% down GDP and blah blah blah. So you say, Okay, well, will this eventually affect semiconductors and how will it affect semiconductors. And that's the part that puts the question mark. And if I look at all the data, our momentum in the first part of the second quarter, our customer engagement on cloud pilots, it feels very good for us. But I'm mindful of the fact that even the semi industry as big as it is, is part of a much larger global economy in that part, it's hard for us to understand our forecast.

Got it. And Adnan, are you willing to share the bookings and backlog that you booked in the quarter compared to last year?

Yes. I think what we're planning to do is just to be at the directional level right now. As you know, things tend to move around. I mean, I think earlier question was, how does this compare to the Q4? And John mentioned how it compared to Q4 and that Q4, yes, was not unusually small, but it was neither small or too big. So the real question comes out there are we're going to provide it. No. I think for the moment, we are enjoying the fact that it was three times bookings compared to the historical both, as I mentioned, compared to Q4 as well as Q1. It's an internal metric we will continue to use in track, but I think it will probably take us a few more quarters before we get comfortable with the point of wanting to share it in a public setting.

Okay. Fair enough. Understood. The large $10 million contract for the cloud opportunity that you booked in the quarter, you said that that was a perpetual license customer. Does that change the run rate of revenue that you're receiving from them or the margin from that customer? Kind of what was the upsell if there was any?

Yes. So we did this back in 2009, too, where you have customers that really wanted to get a lot more capability from PDF, but we're a very, very long time analytics customers. And they have perpetual licenses. And this customer has had some of those licenses since before we acquired the original data power company, right? So the trade we make is they turn in their perpetual licenses. However, they get then the system on the cloud. The run rate goes up. Our total dollars go up. We are quite substantially. As we've discussed in our Analyst Day, well over two times the historical run rate. And they get access to then more capability as a result of it. This then allows us to provide or demonstrate to them the value of additional AI and ML on top of that. Test control, factory control. So it helps you build a lot more. When they're on the cloud, it's easier to show them more features than when they've got an on-premise deployment. And so the -- beyond, I think, giving us a big step-up and the revenue that we're generating from them. And the margin dollars that come from that, it also gives us an ability to demonstrate more of the Exensio platform and what they could get from Exensio by expanding even beyond that. And those have already begun with that customer.

Got it. And how long does that cloud license lasts for?

I think it's close to five years on that order. It's multiple years.

Got it. Okay. One last one, if I may. You said you signed a DFI contract after the quarter close. How many machines are out there generating revenue now? And kind of what's your expectation for revenue-generating machines in the field by year-end?

There's a couple generating revenue right now and we expect to expand that as we get through this year. As I said in my prepared remarks, the activity for DFI on the leading-edge logic is quite high. And we're engaged with a very small universe of companies, but pretty much everyone that would be relevant to DFI in the logic side. And we feel pretty good about the state of those pilots and where we are moving on those customers.

Great. Thanks for your call, John.

All right. Thank you. Just a moment. There are no more questions over the phone. So I will now turn -- I'm sorry, we have one more from Andrew Weiner from Samjo Capital. Your line is now open.

Hi. Good afternoon John. I was wondering if you could maybe sort of qualify the increase in bookings, but it sounds like the pilot activity increased as well. How would you compare that to either what you saw last year, either year-over-year or in Q4?

Well, I don't have like specific financial metrics while I was looking when we presented to the board earlier this week, the team presented a lot of pilots. And I would say it's substantially larger. I don't know exactly what multiple is up over last year, but the number of pilots are up pretty substantially.

Okay. And Adnan do you have, because I know you specifically, you talked about converting this perpetual deal into a cloud deal. Within the Analytics business, do you have the ratio of recurring revenue streams or subscription streams versus perpetual license or pilot revenues that would fall in analytics versus either Q4 or year over year?

Yes. I don't think we have that number at our fingertips, Andrew, the vast majority of the revenue and analytics now is recurring. There's very little perpetual license left. There are some fabs that still deploy perpetual license on tool. But that's about it.

Okay. And then I guess my last question was going to be related to the DFI renewal. How did that compare dollar-wise versus the prior contract? And were you able to expand in providing either CV or some other services around DFI to expand that customer relationship?

Yes. So the customer relationship expanded, that contract itself, specifically a similar size of the previous one, but they tacked on a number of -- couple of additional contracts, one which closed in Q1 when we anticipate closing in the subsequent quarters. And the overall relationship with that customer is growing as a result of DFI. The second contract that closed in Q1 is additional vehicles, which will be measured both electrically and I believe, with the DFI machine as well. So the total business [indiscernible] multiple contracts.

Terrific. Thank you.

All right. Thank you, at this time, there are no more questions. I will now turn the call back to Mr. John Kibarian, president and chief executive officer of PDF Solutions for any closing remarks.

Thank you for participating in our Q1 call. We look forward to talking with you again soon. Stay safe and have a great day. Goodbye.

Ladies and gentlemen this concludes today's program. Thank you for joining us today.