Good day, ladies and gentlemen, and welcome to the PDF Solutions, Inc. Conference Call to discuss the company's financial results for the Second Quarter Ended June 30, 2020. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the call over to Mr. Joe Diaz of Lytham Partners.

Thank you, Maria, and thanks 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 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 Mr. John Kibarian, PDF Solutions' President and Chief Executive Officer; who will be followed by Mr. 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 second quarter, please go to the Investors section of our website where each has been posted. We hope you and your families are staying safe, and we appreciate you taking time to join us today. With the continued impact of COVID-19, I will start with an update on how we have adjusted the business given the present governmental restrictions, then I will provide a commentary on Q2 highlights. Many of you have probably seen our announcement about our partnership with Advantest. I will use sometime today to provide more details and explain why we are excited about this development. I will conclude with our impressions of the semiconductor industry, before handing it over to Adnan for the financial update. The COVID-19 situation remains very dynamic globally, and the health and safety of our employees continues to be a top priority. We have been fortunate that our employees remain healthy and able to maintain a high level of productivity. In the U.S., employees are mostly working from home. Our teams in Asia have been able to, for the most part, returned to the office and traveled for customer visits. In the EU, employees are primarily working from home, but our customers are returning to their offices. Towards the end of the third quarter, we will assess whether our European employees can travel to visit customers. Overall, for planning purposes, we expect little travel across the oceans for the remainder of the year. Highlights for the second quarter validate our long-term strategy. While the second quarter bookings were lower than the exceptionally high Q1, they were meaningfully above Q2 of last year. Moreover, the booking strength was in analytics,…

Thank you, John. Good afternoon, everyone, and nice to be speaking with you again. I hope all of you are keeping safe in the current environment. As I mentioned in the last call, we, at PDF, continue to operate in this period connected while apart with some of our offices around the globe reopening this quarter, while other employees continue to work from home, closing deals and growing the business. We will share some of that progress with you today. As John mentioned, we're – we announced a significant partnership last week with Advantest, the leading test equipment company in the semiconductor industry. We're very excited about the transaction and look forward to developing joint opportunities that will serve both companies and our customers in the coming years. Now turning to the financial results of the just completed second quarter of 2020. Please note that all of the financial results we discuss on today's call will be on a non-GAAP basis and the reconciliation to GAAP financials is provided in the materials on our website. We have posted our earnings release, a management report and the quarterly 10-Q filing in the Investor Relations section of our website. Starting with bookings. Our bookings for the second quarter came in at just under 2 times our bookings for Q2 of 2019. To reiterate John's comments, our bookings for the first six months of 2020 were more than our bookings for the entire calendar year of 2019. We believe this is a result of our focus and continued investment in the growing segment of our business and the strong recognition that the PDF Solutions name carries as a leading provider of differentiated data and analytics solutions. Turning to revenues. Total revenues for Q2 were $21.4 million, up 1% versus the prior quarter and…

Okay. [Operator Instructions] Your first question comes from the line of Christian Schwab from Craig-Hallum. Your line is open.

Hi. Thanks. This is Tyler on behalf of Christian. Thanks a lot, a couple of questions. First question, I guess, the first part is a little bit of clarification on the Advantest partnership. The $50 million you expect over the next five years, is that just with the Exensio that's going to Advantest? Or is that including the Advantest – the license that is also going to Advantest customers?

Yes. Tyler that is just the minimum commitment of licenses to Advantest. There are joint products we're developing with Advantest that would be revenue on top of that.

So I guess the obvious follow-up then is just Advantest is $50 million, it would seem that the joint products that you're developed them to all of Advantest customers could be a very significant piece of business. Any framework on what that could look like?

It's a little early for us to say exactly how big it would be. But as we were working through this with Advantest, we both felt that the opportunity at the customer base and they always remind us as we were going through the terms of this contract. But the opportunity that this would create for PDF was much larger than this direct contract we would have with Advantest. And we certainly hope that to be the case, and we're working towards that. But yes, that's the intention.

Okay. Great. That sounds very exciting. Another question, shifting base a little bit. Intel has, I'm sure everybody's aware, announced their 7-nanometer process being moved out six months. I guess first, can you remind us what engagement you have with that customer? And then obviously, besides just indicating how challenging when these things are to ramp. Any direct benefit that has to you?

Yes. So it's a great question, Tyler. Unfortunately, we're never able to say customers – yield ramp customers, who is a customer and who is not. So I really have to refrain from talking about any specific customer. What is – I always jokingly say that when yield becomes an issue that's on the front page, there's really only one company you can call and that is PDF. We are probably the only place out there that you can get independent characterization capability for the industry. So obviously, in my prepared remarks, I tried to highlight the fact that while there's the stuff that's visible, it's in the news about yield challenges. Generally speaking, it's really not so much about a single company, typically, but really about the physics and the fundamentals of the limitation of the technology. The industry is shifting, where the driver for leading edge is high-performance computing from mobile. Mobile is still there, not as much of the driver as high-performance computing is becoming, and it is very challenging to get those parts to function on leading-edge silicon. We believe that problem will grow across many suppliers, IDMs, foundries and fabless. And that is a meaningful opportunity for PDF across the broad industry.

All right. Great. That’s helpful. That’s all for me. Thanks guys.

And our next question comes from Tom Diffely from D.A. Davidson. Your line is open.

Yes. Thank you and congratulations on the Advantest partnership. John, I'm curious, is there some reason or there some characteristics by Advantest became your first big customer here? Is it because of back-end, because of tests that made them more applicable? And then also curious what the other equipment OEMs are doing right now for this type of solution?

Yes. Thanks, Tom. Test generates a lot, a lot of data. And I think all of the test vendors sit there and see the opportunity to create applications and platforms that help customers make sense of that data. Understand whether that data is valid or not because you can combine sensors on the machines to say, okay, is the test data really valid or not valid because the machine is running a little hot or there's something a little bit unusual about the machine. So there's a lot of ways they can add value for the customers. But we see that opportunity, and we are engaged with other equipment vendors on other parts of the supply chain, where they're also creating a lot of data that the customers can use to make better decisions about product quality, about product yield, improve equipment efficiencies. And so particularly in the back end, where the back end is getting much more complex, the processing is becoming more sophisticated and historically, those tools have been less sophisticated than, let's say, an ASML lithography system. We see a lot of opportunity in up and down the supply chain here. Test was obvious because test is where you collect historically the most data, but we believe there's a broader opportunity, as I said in my prepared remarks.

Okay. And then when you look at test specifically, a lot of the OSATs have multiple testers from different vendors. The analytics you create with Advantest, is that going to be applicable to the other test companies as well?

We create a broad class of analytics and already support, I think, from over 50 tool types from many vendors in the test space, all the major test vendors. There is an Exensio agent that communicates with them, collects data and issues control commands. And applications we deliver for the test market, which we already have many, are applicable across all those platforms. There are some things we're doing specifically for Advantest as they're making additional signals available on the tools. That will make Advantest tools through some things because they have some unique capability they're working on. But those kinds of things are a small part of the overall Exensio test platform.

Okay. And then finally on this, can you give us a sense of what type of effort it takes on your side and whether or not you have the bandwidth to do another one of these deals any time soon?

Yes. That's a good question. There was a tremendous effort throughout the first and second quarter of this year as we were rolling up to this contract on demos and stuff we were doing in the early product development, et cetera. So it's meaningful, and we were able to absorb that while still putting up a very strong first half of the year as well. We anticipate that as we bring this up, so much of the value is in the Exensio platform and we are committing resources to work with them to make sure they get great use and great development out of it. We do believe we have the bandwidth over time to support others. The selling cycle is quite long on these things, Tom, so you can't really count on these things every quarter, but we do believe we can do more, and the market wants us to do more of these.

Great. Okay. And then just two more quick questions. First on the IYR business, a little lower than it has been. Is this the new baseline? And would you expect it to kind of trend down from here, albeit lumpy on a quarterly basis?

We do expect some lumpiness up as we sign new engagements that will pop up from time to time. There's only really one or two customers we're still engaged in this way for historical reasons. So it's – it may be safe to assume that that's what going to happen, but it won't be smoothly down. There'll be some bumps popping in, generally.

Okay. And then finally, when you look at the R&D, up a bit year-over-year, but it is down a bit from the last three quarters. Is that just lumpiness as well? Or is that – is it down at this level? Is this a good baseline going forward?

Yes. I mean it's been a little bit bumping around a bit. Tom, like a third-party R&D contracts that we have with suppliers that do some development for us on one thing or another. I think this – for now, it's reasonable. As we get through this year and into next year, we're going to reassess what our baseline on R&D will be. But for now, I think they will come into this year.

Okay. So the Advantest deal doesn't require you to staff up then or make significant changes?

There's some direct R&D we will do with them. That will be part of cost of goods sold as that would be funded work. We will continue to invest in the Exensio platform kind of naturally. We have been making a consistent shift of more R&D in Exensio and cutting R&D in other areas that we feel appropriate. So we will continue on that path, but the item test doesn't require us to make additional investment at an accelerated rate. We may choose to do that as we get through these next few quarters because we do see some opportunities, but it's not anything that's contractually required.

Okay. Well thanks for your time and congratulations on a nice partnership.

Thank you, Tom.

[Operator Instructions] Your next question comes from Jon Tanwanteng from CJS Securities. Your line is open.

Hey guys. Thank you for taking my questions, and congratulations on the deal. It seems to be a pretty big contract going forward. And really, I guess, the question I have is, does this open the door for new customers and relationships, maybe legitimize what you do in the eyes of potential customers who may not have picked up the phone before or been on the fence, bought test equipment, but didn't really see the value in Exensio, but now they're forced to do it because they have Advantest under the roof? Just a little color on the potential there for this to improve sales outside the contract.

Yes. Thank you, Jon. Yes, so I don't think any customers of ours is forced to do anything. They're very large and generally pretty – they always have a lot of choice. But that said when we built Exensio, we built – it started from a lot of point tools, a yield management point tool, a process control point tool, a test point tool. And we have competitors in test, in control and in yield management. We – starting way back around 2009, 2010, started saying we're going to build an integrated platform that integrates it all together. Because we saw the advantages of the database technologies that the Facebooks and Googles were using the consolidated database, we thought we could make a database that really scaled across end-to-end analytics for the industry. And we felt that the need was developing as manufacturing processes then primarily in the front end, we're getting more complex. We think with this Advantest – because Advantest could have looked and said, we want to just buy a platform that does test. And Advantest felt the connections up and down the supply chain were quite valuable for them to build solutions that leverage test, combining that data with other types of data for their customers. And what we think this contract says is that the industry is starting to validate the need of a platform that spans the entire manufacturing flow, so that chips can achieve higher – yield higher performance, factories can be more productive by sharing the data you need in order to be able to make the trade off. It's a very integrated – technically, a very integrated manufacturing process that builds a system and package, but it is a very disaggregated supply chain that builds the equipment, the consumables, the factories, runs the factories that make that chip possible. So we feel like the Advantest contract is a validation that this platform approach is needed and that working in a collaborative fashion is also needed. And we do believe that this means other customers will say, "Gee, if Advantest is behind us, we can get behind this, too." And it opens the door to much larger contracts across our customer base in the future.

Got it. And just to follow-up on that side and maybe one of the previous questions. Are you currently speaking to other equipment vendors who may want to be doing – want to do something similar at this scale?

We have a number of activities going on with other equipment vendors to use Exensio, to make value out of their data that they could then use internally to improve their customer support as well as offer solutions like what we're doing with Advantest to help customers get more value out of their data and their tools.

Okay. Fair enough. And then in terms of the run rate costs and ramp-up costs associated with ramping up the contract, can you give us just a ballpark, what is going to increase your OpEx or your [indiscernible]? Is it just a normal standard extensive deployment type margin? Or should we expect something different?

We – I think I'm not going to answer this, but we expect margins to be roughly in line with corporate margins.

Yes. I would say, kind of consistent with what we've been reporting last quarter, this quarter, somewhere between that. And our long-term gross margin is kind of the way to think about it. As John mentioned, we were careful in crafting the agreement as well to make sure that some of the costs are appropriately taking care of, the margin calculation that we did. But yes, thinking of something between this quarter, last quarter and our corporate gross margin, that would be appropriate.

Okay. Great. And then – and you're putting a lot of cash on the balance sheet, it's more than you would use in operations. What are the plans for that cash? You mentioned, I think, some investments in technology and acquisitions. But just what are the opportunities you're seeing out there?

Yes. Jon, we've kind of – maybe we're not so bright, but somewhere around the mid-2015 time frame, 2014/2015 time frame, you kind of woke up and say, wow, we're the only public company building a platform focused on semiconductor and a little bit more electronics and keep on acquiring these – we see a lot of things we can acquire that make this platform very rich. But once we got this end-to-end database, it made a lot of sense to acquire incremental companies who collect data or provide a unique control or unique pieces analytics for the customer base, but it would be a lot more valuable as part of a larger platform. And we see a number of little companies out there that either create unique data, analyze somethings very uniquely or integrates with parts of the supply chain that are very important for our customers. And they're all in that vein, right? We're very much sticking to our knitting, but that we think there's a lot of companies in that space that would add to the platform and mean that a customer that picked Exensio as their platform would get a richer and richer experience, both from our organic investments as well as inorganic.

Got it. Thank you. And just switching gears a little bit, there's been more chatter and more investment or potential investment in domestic semiconductor production. Just wondering what your thoughts are on potential investments in, say, global foundries or at Intel to increase capacity here locally and how that flows through to you?

Yes. I mean I think – yes, as you know, as someone who has loved semiconductor manufacturing since I was an undergrad in the early 1980, I'm very happy to see that the U.S. government is starting to realize the importance of domestic manufacturing. But I'm a little bit skeptical, but this in itself will be enough to make a difference for our manufacturing base has eroded over many years. And there's – there are structural issues in the way that the manufacturing bases start in the United States that having just first glance looked at this, I don't think it goes far enough to address. That said, it is a real – it will create more investment in the U.S. and things like the TSMC Foundry in Arizona and further investments in domestic suppliers, all create opportunities for PDF, for Exensio and characterization.

Got it. Thanks, guys.

[Operator Instructions] Your next question comes from Jeff Bernstein from Cowen. Your line is open.

Yes. Just a clarification. Before this deal with Advantest, was there base of tools that are out there sort of closed to you guys from connecting to Exensio, and this now opens that up? Or were they already – you had an interface to tools of theirs in the field?

Yes. Great point, Jeff. Yes. So just like every tester company, we have agents that communicate with those testers and have worked with their main – one of the most popular products is a 93K tester. We've interfaced with that tester for very many, many years. But like every equipment company, there are additional data sources that they don't make available to their customers, right, or to other software vendors like us. They know those other variables are very useful for customers to improve their use of the tools, productivity of the tool, the quality of the data that comes off the tool, et cetera. And they wanted to partner with someone who they could trust to make those data sources available so that together we could provide more value-added services. That's what this is really about. We still connect to all sorts of tools, including theirs, using all the standard data ports that everybody – anyone can write, code to.

Got you. And when you talk about other guys who are interested, again, it would be sort of opening up a deeper capability to get data out of their tools as well?

Yes. Exactly, Jeff. And they're saying we need to create ratable recurring revenue sources in ways that we can make our machine valuable to our customer, not just on a one-time sale. And that's what Exensio helps them do.

Understood. And once one really big guy does it, it's kind of hard to say, we're not going to allow that, right?

Right.

Okay. And then just one other question on DFI. You talked about hitting some benchmarks. I thought there was some rev rec on an eProbe 250 that was waiting on some – hitting some milestones or something. Where are we on that? Was there some rev rec in the quarter?

No. That's great question, Jeff. That was the first – in the second quarter, we hit the milestones that was what I was referring to.

So there was some rev rec there.

There was rev rec there. That's correct.

And there are no further questions at this time. I will turn the call back to Mr. John Kibarian for closing remarks.

Thank you for participating in our Q2 call. We look forward to talking with you again soon. Stay safe, and have a great day.