Good day and thank you for standing by. Welcome to the PDF Solutions’ Second Quarter 2021 Conference Call. At this time, all participant’s line are in a listen only mode. After the speakers presentation, there will be a question-and-answer session for which instructions will be given at that time. I would now like to hand the call over to Joseph Diaz of Lytham Partners. Please go ahead, sir.

Thank you, Donna. And thanks to all of you for joining us today on this 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 do not yet have a copy of today’s press release, it is available on the Company’s website at 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, 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 the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 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 has no obligation to update them. With that said, I would 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. At the conclusion of management’s prepared remarks, we will open the call for your questions. Let me now turn the call over to John Kibarian, President and CEO of PDF Solutions. John.

Thank you for joining us on our call today. If you have not already seen our earnings press release and management report and 10-Q for the second quarter, please go to the Investor Section of our website, where each has been posted. We appreciate your taking time to join us today. I will start the discussion by providing commentary on our Q2 highlights. From there, I will provide our impressions of the semiconductor industry and conclude with our expectations for PDF business in the second half of the year, before handing it over to Adnan for more detailed financial update. Highlights for the second quarter show progress towards our long-term objective of being the go-to manufacturing data analytics platform for the semiconductor electronics industry. Building on Q1, business activity in the second quarter was very strong. For the first half of the year, bookings are up 60% more, compared with the first half of 2020 and total backlog as of June 30, 2021 has more than doubled compared to June 30, 2020. As we said before, we believe that a successful manufacturing analytics platform requires the right data, data quality and analytics of the equipment edge. Increasingly customers are requiring the platform to be on the cloud, where they can benefit from both SaaS model and supply chain wise use of the analytics platform, which fosters collaboration between them and their suppliers. In the second quarter, we demonstrate our ability to bring the customers the right data with strong bookings for leading edge solutions, applied to customers, developing and ramping processes from 28 nanometers to three. In particular, there were two contracts of note. The first is a multi-year, multi node integrated DRAM contract for an existing Chinese customers. The second is a quick start agreement with the customer to…

Thank you, John. Good afternoon, everyone. Good to speak with you all again today and I hope all of you and your families are keeping safe. We are pleased to review the financial results for the second quarter and to bring you up-to-date on the progress of the business. Our form 10-Q has also been filed with the SEC today. Please note that all of the financial results we discuss in today’s call will be on a non-GAAP basis and a reconciliation to GAAP financials is provided in the materials on our website. Financial results for the second quarter of 2021 continued to be strong coming after a solid first quarter. Q2 total revenue was 27.4 million up 28% from the comparable quarter last year. Analytics revenue was up 29% to 19.6 million in Q2 of 2021 versus 15.2 million in the second quarter of 2020 and represented 71% of total revenues this quarter. On a dollar basis as well as a percentage basis, we expect analytics revenue to grow further in the coming quarters. We are making great progress towards a goal to be the largest manufacturing data analytics platform for the global semiconductor and electronics industry. During the second quarter, revenue contribution for integrated yield ramp was 7.8 million, compared to 6.2 million in last year’s second quarter, an increase of 26%. We saw strength in our revenue from fixed fee services, as a result of a large booking for a Chinese customer that John spoke about. Overall our businesses gaining momentum. You may recall that full-year 2020 bookings increased by two and a half times that of 2019. In the first half of 2021, total bookings increased by more than 60% from that comparable high growth period last year. So, bookings continue to be very strong, which…

[Operator Instructions] And your first question comes from John McPeake from Rosenblatt Securities. Your line is now open, sir.

Okay. What I was saying when I hung, nice job. And I’m going to kick off with a somewhat dull question. But my calculations right here looks like DSOs, which have been kind of a thorn here come down nicely. Is that right?

Yes, our AR balances is, yes. We did really well with tax collections this quarter compared to the last quarter. We had some work to do and to be honest with you, we put in some new processes this quarter and the team did a fantastic job. I think half for some of our customers this quarter.

Yes, I mean, I’m not doing the exact days, to the day of the quarter using 90-days, it would figure from one from 129 to 99. Can it stay down here, do you think, Adnan.

I think, yes, look, I mean, we will continue to stay focused on this metric, obviously, it is important for us to continue building cash, depending on the customer and the region where they are located. And sometimes it will execute the result one way or the other. But I can tell you that over the last few quarters, we have increased focus on this and hopefully to -.

Nice work on that. And then I guess, last kind of open ended question a little bit, there has been an increased focus on domestic production, particularly trying to get leading edge production in the United States, not just a couple of 100 miles from nuclear missiles of an adversary potential adversary of cars. And is that affecting your bid business at all guys it is just kind of a - open ended question, but I would love to hear what you are saying?

Sure, yes, I will take that one John. So I think, specifically there is I know the acts that the U.S. government’s policy, which is about $52 billion, should that pass, and we anticipate what it would probably create additional opportunities for us. We do have customers that are locating factories, United States, and also customers that are expanding development across multiple modes, not just the leading edge in the U.S. And that is impacting in partly in my prepared remarks. I think that is happening almost irrespective of the government activity, but it probably being enhanced by the government activity. That is impacting, as we said, in my prepared remarks, anticipated continued strong bookings on the leading edge, because we do see customers and as I said, I’m not prepared remarks, who like the integration of the characterization vehicles, Exensio and DFI, for bringing up these very complex 3D technologies.

But what has worked for the leader there? So, I will pass it along and get back in the queue if I had any another question, thanks, guys.

Thank you. And your next question comes from the line of Tom Diffely from DA Davidson. Your line is now open, sir.

Yes, good afternoon. John, I was hoping to get a little more color. I think you made a comment about how the customers are looking at DFI, with more of an analytic solution than to it than before. Just a little more color on what you are seeing in DFI, and what that opportunity looks like?

Yes, sure Tom. Chinese customers came to us with a series of issues they were seeing in manufacturing in particular and our team figured out ways of using the system to inspect the product, by using a combination of our part of Exensio called Fire that analyzes product layouts. This is going to be a little technical on products to be careful how deep I go. But identifying what looks like a DFI fill so on a given - one of the process, even if it was just part of the active circuit, and then analyze all of that. What you find is, there is tremendous amount of data you create, literally you are measuring tens of millions of these things on the wafer, and you are seeing lots of different dependencies in the layout, which they can go back and use to tune how they do design. And it would turn it to be very helpful for calculating some of the key issues on designs and bring up. And it kind of gets to the question of John asked too, we are seeing, as customers are trying to bring up these complex 13D processes. This capability of combining the ability to analyze the product layout with the Fire capability, drive the machine to all of those spots, take that data and really have a huge machine learning problem of all the different layout styles that we are in and then failure rates, because you are collecting tremendous statistics you really can’t see any other way. And it is a very unique capability and one that helps to learn a lot of these process design interactions very efficiently.

Okay. So is the thought though that would you use more service going forward to do the big data analysis or would they want to keep that data internally and try to -.

No. The typical - the machines always go end up being onsite, that machine plus the cloud deployment of Exensio would all be part of an overall subscription. And there is a big advantage of using Exensio in the cloud for this, because you need to scale up and down the computing quite substantially to look at these dependencies, and that is why it is an overall bundle of basically hardware and software. As the cloud deployment is also a hardware software combination.

Yes. Okay. That is helpful, thank you. And then when you look at the mix of business in the second half, your gain share coming down, but, the analytics doing quite well, does that meaningfully impact the margin structure, do you think over the next couple of quarters?

Yes. I think it is early to say. I think, look, we have said in our prepared remarks is we feel confident about heading towards 70%. How many quarters it takes? We are not being precise on. To your point, it will depend a little bit on the mix between those deals as well, obviously larger deals. We hope that it will come with a little bit better margin. I think for the rest of the year, it is fair to say that, it stays flat maybe incrementally up at best.

Okay. And then you also mentioned that, obviously the biggest adder or to the costs over the last year have been personnel. Are there expected increases in personnel expenses over the next couple of quarters as well?

Yes. So, it is a great question. So seminar do our revenue, talks as well, what we will be doing, yes, we will be investing a little bit more, but I think our goal is going to be that we are spending at a slower rate than the revenue is growing. So, on a combined spend basis, then you look at cost of sales with OpEx together, we should be spending less than the revenue growth, which should hopefully trickles a bit more to the bottom line.

Okay. And then finally for the backlog, obviously a nice impressive backlog. Can you give us some sense of what the duration or what the average length of the backlog is?

Yes. Majority of the contracts, within the next two years, majority of the realization of that backlog and the rest of them kind of up to the five-year timeframe, but majority over the next two years.

Okay. And then maybe just one more for you, John. When you look at your customer interactions recently, have they changed much over the last two, three quarters? Are you still in a position where it is a little harder to close some of the deals that traditionally been done in person?

Yes, I got the question. Tom, I had a number of calls last week with customers, I did one in-person visit. And the calls are now becoming pretty natural. One executive said, Hey John we are used to doing business this way. Now, this is way to go. And so I think that we are figuring out how to work in this way better and better, our confidence on the second half of the year is probably because I do see us making great progress working this way. And I anticipate that, even larger, complex contracts are starting to close, the one we did in China last quarter, was pretty amazing to me -- sizeable contract with data that goes out over 10 years past the deployment date for this will carry us into sometime into the middle of 2030s. For a customer who are already generating gain share from and we are seeing their gain share trick circling up on the nodes that they have already deployed. So, the customer that we had some confidence and yet we are able to close that contract remotely. And I think that was probably the most difficult, right, just some language barriers and many other things. So, we do feel good about our ability to close more complex contracts in the second half of this year.

Great. that is good to hear. Thanks for your time today.

Thank you.

Thank you. [Operator Instructions] Your next question comes from the line of Christian Schwab from Craig Hallum Capital. Your line is now open.

Hi. Good quarter guys. In fact, at the Chinese large customer that you ramped to - drove strengthen IYR. And it sounds like you have a 10-year contract? Can you give us an idea of, A, potentially how big that customer could get over that timeframe and secondly, how many other, new potential Chinese manufacturers are you talking to about using your products?

Okay, sure. I will be thinking reverse order, Christian. So, there has been a number of customers in China, we generally don’t take them on a game share basis, because we deploy them on us, basically, on a system basis the gain share means we are going to provide teams with the technology and help them ramp yields. And that is a big invest on our part two. So, we have been very selective on where we have taken off and prices, always seen good potential as customers we have been working with for a number of years in the early nodes, they did take longer to get to a gain share than we would have liked. But we did start seeing their gain share numbers trickle up through the second half of last year and into this year that gave us some confidence that they would be a good partner on gain share basis. This contract, the solutions part of it, the booking is, in the eight figure range, and there is a deployment period, which is, on the order of a few years, and then there was gain share period, which is 10-years. So, the title of the contract is actually longer than 10-years. But it is quite a substantial activity. In terms of how much the contract is eventually worth Christian that is still hard for us to estimate. We have very little history with our Chinese customers in terms of how much volume they get to historically they have been very, very slow to ramp volumes, but we are seeing some improvements there. I think as the technology as they started advancing their ability to manufacture more semiconductor technologies than they have in the past.

Okay. And is there - I guess my second question is, could you give us an update on any other potential meaningful new customers and where you sit, if there is anything you could share, even with other manufacturers and partnering with the likes of another Advantest or any type of update on anything that can happen with some large manufacturers out there, who decided that they were going to - need to get more efficient that manufacturing and kind of make the data Foundry switch, any updates there would be great.

Yes, of course. It is super - it is like the old running joke of consulting for a large catch-up manufacturer in the greater Pittsburgh area. We everyone pretty much knows you mean when you say that. So, we are always super careful about, how we talk about customers, potential customers, Chris and I know that you understand, why. That said, we both with existing customers and customers that have historically not been big customers with PDF in the past, we have a tremendous level of activity, the bookings in the first quarter, the first half of the year already reflect some those opportunities. And as I said, in my prepared remarks, we expect both companies that have been historically PDF’s customers as well as ones that have not, just to have increased bookings with their broader community in the second half of the year.

Great. No other questions.

Thank you. [Operator Instructions]. Your next question comes from the line of Andrew Wiener from Samjo Capital. Your line is now open.

Hi. Good afternoon, John. One pretty quickly, I just wanted to make sure I heard it correctly. Is the Chinese multi-node deal, is that included DFI tool?

There are other contracts that customer says have the DFI tool onsite and that is they had the right to use some of that in part of this contract as well.

Okay. And then you also referenced a quick-start contract, that I think you said was DFI and Exensio. So, is that a contract that -.

And Exensio vehicle as well.

So that contract contemplates the shifting of a DFI tool to that customer.

Both correct. You actually get that machine shipped up there while we negotiate in terms of a settlement.

Okay. And so, again if I heard that correctly, the quick-start contract had meaningful revenues associated with it. But you are in discussions about much more significant contract that would be a broader deployment of your technology is that fair?

That is correct.

Okay. Okay. Secondarily, I just wanted to talk, you didn’t mentioned it on this call, but we have talked in the past about your DEX Networks. Maybe you can talk about, how the deployment of that is going, how DEX Networks fit in around some of the industry issues about sort of supply chain transparency and reliability and maybe some goals that you have set for this year, as far as driving either commercial deployments or driving broader adoption that would ultimately lead to commercial revenues.

Sure. Yes, so just obviously we always have three letter acronyms here with PDF. So let me – DEX is Data Exchange Network. These are these are outposts that we put up the, factories primarily right now was that test facilities where, they run a series of things communications with our software that lives resident on the equipment and the facilities, our cached database, you can think of that as like a short-term database. And then an element to run business logic for evaluating rules, for quality screening on chips as they are produced. This proportion, this has been done for those customers, as they want to be able to get to the ultimate product quality, running more and more advanced models and screening. But they don’t actually run the testers. Those are run by third party suppliers for them, refer to those. And we have got under 10 of those out of the sets now growing number and we haven’t, we expect to grow that substantially as we get to the second half of this year, we have more and more flawless customers who like the ability to see their production in real time be able to establish more complex models and rules. Some of the edge compute is all about. And this is also very much involved with our activity with Advantest, who have an edge compute box, that they are shipping on the equipment and now communicating between that edge compute element. And the cloud is becoming important as that kind of application is being accepted in the test community. And our goal for this year, I think, to over double our deployments that we have already, I said it is under 10. Now we would like to see that about double.

Are you generating meaningful revenue from that today or do you need to get to a certain scale? And what, what sort of transitions is to be a commercial driver of Exensio sales?

That is a great question, Andrew. So, and as I might have communicated in many prepared remarks with past quarter, a lot of our rollout has been deploying these DEX nodes, it is a relatively meaningful fix cost to deploy the nodes out there. And they are owned and operated by PDF. And they are multi tenant in the way that they shift data around for multiple customers. So yes, as you get more and more to scale, i.e. more customers that there is some incremental capacity that we have to do. It shows that if they were to grow quite substantially, but it is kind of a Y plus and X plus B and B is kind of fixed cost of deploying that system there. And that is a big piece of that costs. So yes, as we get to scale, that becomes a more and more important part of our overall Exensio cloud offering. It is generating revenue for us today. And we anticipate generating more in the coming years.

Okay great. Alright, perfect thank you.

Thank you. And your next question is comes from the line of Mr. Gary Schnierow from RiverPark. Your line is now open, sir.

Hey, guys, I want to follow-up on the DFI and it looks like your CV and DFI revenue was down, as you said, like, I think it was 4.6 million year-over-year. Can you put that in context of how big that is today, and it also sounds like the DFI and the eProbes businesses moving positively. So, kind of explain those two issues and give a little bit more color on where you are on the DFI equipment that you were talking about a minute ago.

Sure Gary. Yes. So, I will try to handle that. So we have, these are very large lumpy contracts that have in the past have been relatively short duration. This quick-start is in parts of deploy those systems in the second half of this year. The value of the quick-start from a booking standpoint was substantially larger than the revenue rec in the quarter. And as a result you can see that, revenue in the first half of the year was lower than the bookings would, give you a belief. When we look at our model for the year, we anticipate DFI and Characterization revenues to be up substantially in the second half of the year versus the first half of the year. And overall like if you look at over a kind of a four quarter rolling time period, we expect that to be a meaningful part of the analytics revenue. As we described in Adnan’s prepared remarks, this is really a bundle of Exensio Characterization vehicles, characterization vehicle infrastructure, which includes the hardware type capabilities, as well as the DFI infrastructure, which is also a combination of software and IP and hardware our capability. So, I think when you look back out, let’s say this time next year, you are going to see quite a substantial growth in that piece of the revenue stream we anticipate over the first half of year, and this was a little bit just timing on contract bookings on with a very decent business at this point.

Okay, great. On the IYR, it sounds like you had a bump to that in the quarter from six feed business that was weighed down by a continued decline in gain share. At the same time, you expect the IYR line to be lower in the second half of the year than the first half. So, is that just a, it is the way to think of that the fixed fee business is pretty consistent at that point and the gain share continues to drop off?

Roughly, that is a reasonable way to think about it. It is the building up of some unique opportunities you see in China. We think there is real opportunities there while some legacy older contracts that have been around for many, many years are starting to come to their end-of-life.

Got it. Okay. Makes sense. And so, if I look at IYR that why are and then offset it by continued growth in analytics to get to your annual guidance, if I’m doing the math, right, it seems that analytics should be comfortably greater than 30% growth. Am I doing that right?

Yes. You must have been a high math to take score. Yes.

And so, and whenever the growth rate is for analytics this year, given the recurring nature and the fact that, bookings and billings are so much higher than revenue growth, I assume fair to say that, analytics growth next year should be, it is not accelerating from this year, at least relatively consistent with this year.

Yes. So, I think, when you did that first set of Matthew asked that question too, and I think from our perspective right now, we are kind of got our heads down and executing this year. As we get to through second half of the year, we are going to refine our model a little bit more and understand how we are going to go in your forecast because we have gotten lots of question number of times, how we are going to go and forecast 2022. And then we will come back with a where we feel the long-term growth numbers look like for analytics and overall business. We have been very happy with the growth this year, we always like to always make it better. And we are still tuning to try to make it better. So, as we get to this height this year, we will come back to you with some more thoughts around that for next year.

Okay. Sounds great. Thanks so much for the time.

[Operator Instructions] You have a follow-up question comes from the line of Mr. John McPeake from Rosenblatt Securities. Your line is now open, sir.

Again, a lot of these calls are dominated by component constraint. We would have had this revenue number, or we could have this revenue number, but we weren’t able to get components, you guys only have a relatively small percentage of revenues coming from that, but I just want to get on the record that, in customer base that is taking delivery of, in some cases, equipment that may be running, symmetric, or connecting into the infrastructure that connects them to Exensio, you are not seeing that as any kind of a risk. You are you are pretty much divorced from that, particularly in the analytics part of your business, right.

On the analytic side, on the DFI side, from most probably we are divorced from all of that on some Cimetrix, of course every time, our equipment, companies ship equipment, and they generate the runtime licensing of both companies were to be short of components and they could not shift, then that would impact the impact of Cimetrix, we have not seen that so far in our runtime license revenue, we do watch it. And I think, greatly I have had a number of dialogues with our partners that are in the test equipment business, and in semiconductor capital equipment business. They sell equipment to chip companies who also provide them critical pieces of chip, I think everybody and I was meeting with as VP of Operations of one of the largest chip manufacturers and a customer of ours. Because, yes, we know very fully well, that we need to ship chips to our test equipment, providers otherwise that we can’t get the equipment we need to test our chips. So, I think there is an understanding within the industry so far, to make sure that we don’t eat the seed corn. And that has not been so we haven’t seen that impact on the Cimetrix business yet. That will be the one place we may see it on runtime licenses. Frankly, it has been very, very substantial year-over-year, and we don’t expect it to impact us in the second half of the year.

Makes sense. Thank you.

Thank you and no questions on queue. I would like to turn the call over to Mr. John Kibarian for closing remarks. Sir.

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

This concludes today’s conference call. You may now disconnect.