Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We offer products and services designed to empower organizations across the semiconductor ecosystem to connect, collect, manage, and analyze data about design, equipment, manufacturing, and test to improve the yield and quality of their products. We derive revenues from two sources: Analytics and Integrated Yield Ramp. Our offerings combine proprietary software, professional services using proven methodologies and third-party cloud-hosting platforms for SaaS, electrical measurement hardware tools, and physical IP for IC designs. We primarily monetize our offerings through license fees and contract fees for professional services and SaaS. In some cases, especially on our historical IYR engagements, we also receive a value-based variable fee or royalty, which we call Gainshare. Our products, services, and solutions have been sold to IDMs, fabless semiconductor companies, foundries, OSATs, capital equipment manufacturers, and system houses.
Industry Trend
Certain trends may affect our Analytics revenue specifically. In particular, the confluence of Industry 4.0 (i.e., the fourth industrial revolution, or the automation and data exchange in manufacturing technologies and processes) and cloud computing (i.e., the on-demand availability of computing resources and data storage without direct active management by the user) is driving increased innovation in semiconductor and electronics manufacturing and analytics, as well as in the organization of IT networks and computing at semiconductor and electronics companies across the ecosystem. First, the ubiquity of wireless connectivity and sensor technology enables any manufacturing company to augment its factories and visualize its entire production line. In parallel, the cost per terabyte of data storage has continually decreased year to year. The combination of these two trends means that more data is collected and stored than ever before. Further, semiconductor companies are striving to analyze these very large data sets in real-time to make rapid decisions that measurably improve manufacturing efficiency and quality. In parallel, the traditional practice of on-site data storage, even for highly sensitive data, is changing. The ability to cost-effectively and securely store, analyze, and retrieve massive quantities of data from the cloud versus on-premise enables data to be utilized across a much broader population of users, frequently resulting in greater demands on analytics programs. The combination of these latter two trends means that cloud-based, analytic
32
Table of Contents
programs that effectively manage identity management, physical security, and data protection are increasingly in demand for insights and efficiencies across the organizations of these companies. We believe that all these trends will continue for the next few years, and the challenges involved in adopting Industry 4.0 and secure cloud computing will create opportunities for our combination of advanced analytics capabilities, proven and established supporting infrastructure, and professional services to configure our products to meet customers’ specialized needs.
Other trends may continue to affect our characterization services business and Integrated Yield Ramp revenue specifically. The logic foundry market at the leading-edge nodes, such as 10nm, 7nm, and smaller, underwent significant change over the past few years. The leading foundry continues to dominate market share as other foundries started later than originally forecast in some cases. This trend will likely continue to impact our characterization services business on these nodes. We expect most logic foundries to invest in derivatives of older process nodes, such as 28nm and 14nm, to extract additional value as many of their customers will not move to advanced nodes due to either technological barriers or restrictive economics. Foundries that participate at leading edge nodes are expected to continue to invest in new technologies such as memory, packaging, and multi-patterned and extreme ultraviolet lithography, as well as new innovations in process control and variability management. We expect China’s investment in semiconductors to continue. Compliance with changing U.S. export restrictions limit our possible business with Chinese semiconductor manufacturers on advanced nodes with our electrical characterization offering. As a result of these market developments, we have chosen to focus our resources and investments in products, services, and solutions for analytics.
There are other global or business trends that may affect our business opportunities generally as follows:
● Continuing impact of the COVID-19 pandemic . Although COVID-19 pandemic restrictions are being eased worldwide, the pandemic continues to affect how we and our customers operate our businesses. We continue to closely monitor the COVID-19 situation with a focus on our employees’ safety as our employees who were working in-office prior to COVID-19 have continued to return to working in-office for a certain number of days each week, subject to any current and future local restrictions. In addition, our personnel worldwide have in the past been and, in the future, may become subject to various country-to-country travel restrictions, which limits the ability of some employees to travel to other offices or customer sites. We believe the lack of an ability to meet in person during most of 2020, 2021 and to some degree the first half of 2022 made it harder for us to sell complex or new technologies to some customers during these periods. As we continue to meet with these customers in person, we believe we may improve traction with them. To date, we have been able to provide uninterrupted access to our products and services due to our globally distributed workforce, many of whom were working remotely prior to the pandemic, and our pre-existing infrastructure, which supports secure access to our internal systems. The total duration and full extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the ultimate severity and transmission rate of the virus and its variants, the extent and effectiveness of containment actions and vaccinations, and the impact of these and other factors on our employees, customers, partners, and suppliers. To date, one effect of the COVID-19 pandemic is a global shortage in semiconductors due primarily to supply chain disruptions and some market segments, including automotive semiconductors, continue to have shortages in production. Although COVID-19 related shortages have not materially affected our business, this trend may affect our future business opportunities, particularly future Gainshare and Cimetrix run-time licenses, if our customers’ production volumes decrease.
● Continuing demand for consumer electronics . For instance, the demand for consumer electronics, communications devices, and high-performance computing continues to drive technological innovation in the semiconductor industry as the need for products with greater performance, lower power consumption, reduced costs, and smaller size continues to grow with each new product generation. In addition, advances in computing systems and mobile devices continue to fuel demand for higher capacity memory chips. To meet these demands, IC manufacturers and designers are constantly challenged to improve the overall performance of their ICs by designing and manufacturing ICs with more embedded applications to create greater functionality while lowering power and cost per transistor. As this trend continues, companies will continually be challenged to improve process capabilities to optimally produce ICs with minimal random and systematic yield loss, which is driven by the lack of compatibility between the design and its respective manufacturing process. We believe that these difficulties will continue to create a need for our products and services that address yield loss across the IC product life cycle. For further instance, the ongoing Russo-Ukrainian war is negatively impacting the global supply chain
33
Table of Contents
and global energy markets, which has resulted in inflation, supply chain shortages and rising prices. Ukraine and Russia are both top suppliers of neon gas that is used in lasers and chip manufacturing, and Russia is a major producer of palladium, a rare metal used in computer components, sensors, and fuel cells. Limitations on the supply of these two elements can severely affect the global supply chain, which is already scarce. Russia also supplies much of the world’s premium nickel, which is used by electronics manufacturers to make batteries. If these trends continue or worsen, we or our customers may face a shortage of critical components and our business may suffer. Rising prices of semiconductors may mean increased royalties to us and increased Integrated Yield Ramp revenue. We are also actively monitoring the macroeconomic environment, including the potential impact of inflationary pressures and increasing global interest rates, for impacts on our material, labor and other costs.
● Changing export controls and sanctions . The U.S. government continues to expand and intensify export controls and sanctions. This includes the addition of many People’s Republic of China (“P.R.C.”) and Russian companies to the U.S. Export Administration Regulations (“EAR”) Entity List or Unverified List. These listings restrict supply to designees of items that are subject to the EAR. After an internal evaluation, we determined that a large percentage of our software products are not of U.S. origin and are, thus, not subject to the EAR. Our standard operations include development, distribution processes, software download sites, and professional service centers and processes located in various geographies around the world to better serve our customers. Some customers in the P.R.C., in particular, have nonetheless expressed concerns to us that continued action by the U.S. government could potentially interrupt their ability to make use of our products or services.
In October 2022, the U.S. government issued an interim final rule (87 Fed. Reg. 62186) with additional export control restrictions. Among several changes, the U.S. government imposed restrictions on supply to any P.R.C. fabrication facility that produces certain advanced logic or memory ICs, when the supply involves a commodity, software or technology (“Item”) that is “subject to the EAR” or when the supply involves a “U.S. person” even if the Item is not “subject to the EAR.” Another change is a restriction on supply of an item “subject to the EAR” destined for use in the development or production of certain IC manufacturing equipment and certain parts and components of such equipment in the P.R.C. Industry members, including our Company, continue to generate questions and evaluate the effects of the new regulations. The U.S. government has committed to “rolling guidance” to resolve issues and answer questions in the coming months. In addition, the U.S. government expanded the “foreign direct product rules,” and thus EAR jurisdiction and restrictions, to additional foreign-produced Items and in connection with additional restricted parties in the P.R.C. Based on our current assessments, we expect the impact of these expanded trade restrictions on our business to be limited. We will continue to monitor for any further trade restrictions, other regulatory or policy changes by the U.S. or foreign governments and any actions in response, and remain committed to complying with applicable law. The uncertainty caused by these recent regulations and the potential for additional future restrictions could, nonetheless, negatively affect our future sales in the P.R.C. market.
● Geopolitical tensions . Geopolitical tension between the U.S. and P.R.C. continues to increase, with both governments taking actions and making statements that lean in the direction of confrontation, including on the issue of Taiwan. Growing tension also increases risk of unintended mishap, mistake, or accident leading to escalation and global supply chain disruption. The continuing tension between the U.S. and P.R.C. and/or Russian governments in trade and security matters or the perception of that tension could lead to disruptions or reductions in international trade, deter or prevent purchasing activity of customers, and negatively impact our China sales (with respect to U.S.-P.R.C. tensions) and financial results in general (with respect to global tensions).
Financial Highlights
The following are our financial highlights for the year ended December 31, 2022:
● Total revenues were $148.5 million, an increase of $37.5 million, or 34%, compared to the year ended December 31, 2021. Analytics revenue was $130.5 million, an increase of $37.1 million, or 40%, compared to the year ended December 31, 2021. The increase in Analytics revenue was driven by increases in revenue from CV and DFI systems and increases in revenues from Exensio and Cimetrix software licenses. Integrated Yield Ramp revenue increased $0.4 million, or 2%, compared to the year ended December 31, 2021, primarily due to
34
Table of Contents
an increase in hours worked on fixed fee engagements, partially offset by the end of Gainshare periods on certain contracts.
● Costs of revenues increased $3.7 million for the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to increases in personnel-related costs, subcontractor costs, third-party cloud-delivery costs, and software licenses and maintenance costs. These increases were partially offset by decreases in facilities and information technology-related costs, including depreciation expenses, and hardware costs.
● Net loss was $3.4 million, compared to a $21.5 million net loss for the year ended December 31, 2021. The decrease in net loss was primarily attributable to an increase in total revenues, other income from net foreign currency exchange gain and interest income, a decrease in write-downs in value of property and equipment, decreases in property tax expense and depreciation expense, partially offset by increases in costs of revenues and operating expenses related primarily to our research and development, sales and marketing activities, and general and administrative expenses, which were primarily driven by increases in personnel-related costs, cloud-services related costs, subcontractor costs, and legal expenses, and an increase in income tax expense.
● Cash, cash equivalents and short-term investments decreased $1.0 million to $139.2 million at December 31, 2022, from $140.2 million at December 31, 2021, primarily due to cash used to repurchase shares of common stock and payment for taxes related to net share settlement of equity awards, and for the purchase of property and equipment, partially offset by cash provided by operating activities, proceeds from the exercise of stock options and proceeds from purchases under our employee stock purchase plans.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires us to make judgments, assumptions, and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Notes 1 and 2 of Notes to the Consolidated Financial Statements describe the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. We consider the accounting policies described below to be our critical accounting policies. These critical accounting policies are impacted significantly by judgments, assumptions, and estimates used in the preparation of the Consolidated Financial Statements and actual results could differ materially from the amounts reported based on these policies.
Revenue Recognition
We derive revenue from two sources: Analytics and Integrated Yield Ramp.
Analytics Revenue
Analytics revenue is derived from the following primary offerings: licenses and services for standalone Software (which consists primarily of Exensio and Cimetrix products), SaaS (which consists primarily of Exensio products), and DFI and CV systems (including Characterization services) that do not include performance incentives based on customers’ yield achievement.
Revenue from standalone software is recognized depending on whether the license is perpetual or time-based. Perpetual (one-time charge) license software is recognized at the time of the inception of the arrangement when control transfers to the customers, if the software license is distinct from the services offered by us. Revenue from post-contract support is recognized over the contract term on a straight-line basis, because we are providing (i) support and (ii) unspecified software updates on a when-and-if available basis over the contract term. Revenue from time-based-licensed software is allocated to each performance obligation and is recognized either at a point in time or over time as follows. The license component is recognized at the time when control transfers to customers, with the post-contract support component recognized ratably over the committed term of the contract. For contracts with any combination of licenses, support, and other services, distinct performance obligations are accounted for separately. For contracts with
35
Table of Contents
multiple performance obligations, we allocate the transaction price of the contract to each performance obligation on a relative basis using the standalone selling price (“SSP”) attributed to each performance obligation.
Revenue from SaaS arrangements, which allow for the use of a cloud-based software product or service over a contractually determined period of time without taking possession of software, is accounted for as subscriptions and is recognized as revenue ratably, on a straight-line basis, over the subscription period beginning on the date the service is first made available to customers.
Revenue from DFI systems and CV systems (including Characterization services) that do not include performance incentives based on customers’ yield achievement is recognized primarily as services are performed. Where there are distinct performance obligations, we allocate revenue to all deliverables based on their SSPs. For these contracts with multiple performance obligations, we allocate the transaction price of the contract to each performance obligation on a relative basis using SSP attributed to each performance obligation. Where there are not discrete performance obligations, historically, revenue is primarily recognized as services are performed using a percentage of completion method based on costs or labor-hours inputs, whichever is the most appropriate measure of the progress towards completion of the contract. The estimation of percentage of completion method is complex and subject to many variables that require significant judgment.
Integrated Yield Ramp Revenue
Integrated Yield Ramp revenue is derived from our yield ramp engagements that include Gainshare or other performance incentives based on customers’ yield achievement.
Revenue under these project–based contracts, which are delivered over a specific period of time typically for a fixed fee component paid on a set schedule, is recognized as services are performed using a percentage of completion method based on costs or labor-inputs, whichever is the most appropriate measure of the progress towards completion of the contract. Where there are distinct performance obligations, we allocate revenue to all deliverables based on their SSPs and allocate the transaction price of the contract to each performance obligation on a relative basis using SSP. Similar to the services provided in connection with DFI systems and CV systems that are contributing to Analytics revenue, due to the nature of the work performed in these arrangements, the estimation of percentage of completion method is complex and subject to many variables that require significant judgment.
The Gainshare royalty contained in yield ramp contracts is a variable fee related to continued usage of our IP after the fixed-fee service period ends, based on the customers’ yield achievement. Revenue derived from Gainshare is contingent upon our customers reaching certain defined production yield levels. Gainshare royalty periods are generally subsequent to the delivery of all contractual services and performance obligations. We record Gainshare as a usage-based royalty derived from customers’ usage of intellectual property and record it in the same period in which the usage occurs.
Income Taxes
We are required to assess whether it is “more-likely-than-not” that we will realize our deferred tax assets. If we believe that they are not likely to be fully realizable before the expiration dates applicable to such assets, then to the extent we believe that recovery is not likely, we must establish a valuation allowance. Based on all available evidence, both positive and negative, we determined a full valuation allowance was still appropriate for our U.S. federal and state net deferred tax assets (“DTAs”), primarily driven by a cumulative loss incurred over the 12-quarter period ended December 31, 2022, and the likelihood that we may not utilize tax attributes before they expire. The valuation allowance was approximately $59.2 million and $51.6 million as of December 31, 2022 and 2021, respectively. We will continue to evaluate the need for a valuation allowance and may change our conclusion in a future period based on changes in facts (e.g., 12-quarter cumulative profit, significant new revenue, etc.). If we conclude that we are more likely than not to utilize some or all of our U.S. DTAs, we will release some or all of our valuation allowance and our tax provision will decrease in the period in which we make such determination.
We evaluate our DTAs for realizability considering both positive and negative evidence, including our historical financial performance, projections of future taxable income, future reversals of existing taxable temporary differences, tax
36
Table of Contents
planning strategies and any carryback availability. In evaluating the need for a valuation allowance, we estimate future taxable income based on management approved business plans. This process involves significant management judgment about assumptions that are subject to change from period to period based on changes in tax laws or variances between future projected operating performance and actual results. Changes in the net DTAs, less offsetting valuation allowance, in a period are recorded through the income tax provision and could have a material impact on the Consolidated Statements of Comprehensive Loss.
Our income tax calculations are based on the application of applicable U.S. federal, state, and/or foreign tax law. Our tax filings, however, are subject to audit by the respective tax authorities. Accordingly, we recognize tax liabilities based upon our estimate of whether, and the extent to which, additional taxes will be due when such estimates are more-likely-than-not to be sustained. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. To the extent the final tax liabilities are different than the amounts originally accrued, the increases or decreases are recorded as income tax expense or benefit in the Consolidated Statements of Comprehensive Loss. At December 31, 2022, no deferred taxes have been provided on undistributed earnings from our international subsidiaries. We intend to reinvest the earnings of our non-U.S. subsidiaries in those operations indefinitely. As such, we have not provided for any foreign withholding taxes on the earnings of foreign subsidiaries as of December 31, 2022. The earnings of our foreign subsidiaries are taxable in the U.S. in the year earned under the Global Intangible Low-Taxed Income rules implemented under 2017 Tax Cuts and Jobs Act.
The Inflation Reduction Act of 2022 (the “Act”) was signed into U.S. law on August 16, 2022. The Act includes various tax provisions, including an excise tax on stock repurchases, expanded tax credits for clean energy incentives, and a corporate alternative minimum tax that generally applies to U.S. corporations with average adjusted financial statement income over a three-year period in excess of $1 billion. While the details of the computation of the tax and implementation of some of the incentives will be subject to regulations that have not yet been released by the U.S. Department of the Treasury, the Company does not expect the Act to materially impact its financial statements.
The Creating Helpful Incentives to Produce Semiconductors Act (the “CHIPS Act”) was signed into U.S. law on August 9, 2022. CHIPS Act is intended to increase domestic competitiveness in semiconductor manufacturing capacity, increase research and development in computing, artificial intelligence, clean energy, and nanotechnology through federal government programs and incentives over the next ten years. The CHIPS Act includes an advanced manufacturing tax credit equal to 25% of qualified investments in property purchased for an advanced manufacturing facility. We are evaluating the potential benefits of CHIPS Act to our business.
Stock-Based Compensation
We account for stock-based compensation using the fair value method, which requires us to measure stock-based compensation based on the grant-date fair value of the awards and recognize the compensation expense over the requisite service period. As stock-based compensation expense recognized is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The fair value of our restricted stock units is equal to the market value of our common stock on the date of the grant. These awards are subject to time-based vesting which generally occurs over a period of four years.
The fair value of our stock options is estimated using the Black-Scholes-Merton option-pricing model, which incorporates various assumptions including volatility, expected life and interest rates. The expected volatility is based on the historical volatility of our common stock over the most recent period commensurate with the estimated expected life of our stock options. The expected life is based on historical experience and on the terms and conditions of the stock options granted. The interest rate assumption is based upon observed Treasury yield curve rates appropriate for the expected life of our stock options.
37
Table of Contents
Business Combinations
We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values at the date of the business combination. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require us to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, estimated replacement costs and future expected cash flows from acquired customers, acquired technology, acquired patents, and trade names from a market participant perspective, useful lives and discount rates. The estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Allocation of purchase consideration to identifiable assets and liabilities affects our amortization expense, as acquired finite-lived intangible assets are amortized over their useful life, whereas any indefinite lived intangible assets, including IPR&D and goodwill, are not amortized. During the measurement period, which is not to exceed one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings in the Consolidated Statements of Comprehensive Loss.
As part of a prior acquisition, we recorded at the time of the acquisition acquired IPR&D for a project in progress that had not yet reached technological feasibility. Acquired IPR&D is initially accounted for as an indefinite-lived intangible asset and tested annually for impairment. Once the acquired IP R&D asset becomes available for use, it will be amortized over the estimated useful life or will be written off upon abandonment.
Valuation of Long-lived Assets including Goodwill and Intangible Assets
We record goodwill when the purchase consideration of an acquisition exceeds the fair value of the net tangible and identified intangible assets as of the date of acquisition. We have one operating segment and one operating unit. We perform an annual impairment assessment of goodwill during the fourth quarter of each calendar year or more frequently, if required to determine if any events or circumstances exist, such as an adverse change in business climate or a decline in the overall industry demand, that would indicate that it would more likely than not reduce the fair value of a reporting unit below its carrying amount, including goodwill. If events or circumstances do not indicate that the fair value of a reporting unit is below its carrying amount, then goodwill is not considered to be impaired and no further testing is required. If the carrying amount exceeds its fair value, an impairment loss would be recognized equal to the amount of excess, limited to the amount of total goodwill. There was no impairment of goodwill for the years ended December 31, 2022, 2021 and 2020.
Our long-lived assets, excluding goodwill, consist of property, equipment, and intangible assets. We periodically review our long-lived assets for impairment . For assets to be held and used, we initiate our review whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset group may not be recoverable. Recoverability of an asset group is measured by comparison of its carrying amount to the expected future undiscounted cash flows that the asset group is expected to generate. If it is determined that an asset group is not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the asset group exceeds its fair value. There was no impairment of intangible assets for the years ended December 31, 2022, 2021 and 2020. In fiscal 2021, we wrote down the value of property and equipment aggregating $3.2 million pertaining to our first-generation of e-beam tools for DFI™ systems where carrying values may not be fully recoverable due to lack of market demand and future needs of our customers for these tools.
Leases
We have operating leases for our administrative and sales offices, research and development laboratory and clean room. We recognize our long-term operating lease rights and commitments as operating lease right-of-use assets, operating lease liabilities and operating lease liabilities, non-current, respectively, on our Consolidated Balance Sheets.
We determine if an arrangement is, or contains, a lease at inception. Operating lease right-of-use assets, and operating lease liabilities are initially recorded based on the present value of lease payments over the lease term. Lease terms include
38
Table of Contents
the minimum unconditional term of the lease, and may include options to extend or terminate the lease when it is reasonably certain at the commencement date that such options will be exercised. The decision to include these options involves consideration of our overall future business plans and other relevant business economic factors that may affect our business. Since the determination of the lease term requires an application of judgment, lease terms that differ in reality from our initial judgment may potentially have a material impact on our Consolidated Balance Sheets. In addition, our leases do not provide an implicit rate. In determining the present value of our expected lease payments, the discount rate is calculated using our incremental borrowing rate determined based on the information available, which requires additional judgment.
Recent Accounting Pronouncements and Accounting Changes
See our Note 1, “Description of Business and Summary of Significant Accounting Policies” of “Notes to Consolidated Financial Statements” included under Part II, Item 8 of this Form 10-K for a description of recent accounting pronouncements and accounting changes, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements.
Results of Operations
Discussion of Financial Data for the years ended December 31, 2022 and 2021
Revenues, Costs of Revenues, and Gross Margin
Year Ended December 31,
%
$ Change
%
% Change
%
$ Change
%
% Change
(Dollars in thousands)
2022
2021
2020
2021 to 2022
2020 to 2021
Revenues:
Analytics
$
130,480
$
93,415
$
57,232
$
37,065
40
%
$
36,183
63
%
Integrated Yield Ramp
18,069
17,645
30,814
424
2
%
(13,169)
(43)
%
Total revenues
$
148,549
$
111,060
$
88,046
$
37,489
34
%
$
23,014
26
%
Costs of revenues
47,907
44,193
36,765
3,714
8
%
7,428
20
%
Gross profit
$
100,642
$
66,867
$
51,281
$
33,775
51
%
$
15,586
30
%
Gross margin
68
%
60
%
58
%
Analytics revenue as a percentage of total revenues
88
%
84
%
65
%
Integrated Yield Ramp revenue as a percentage of total revenues
12
%
16
%
35
%
Analytics Revenue
Analytics revenue was $130.5 million, an increase of $37.1 million, or 40%, compared to the year ended December 31, 2021. The increase in Analytics revenue was primarily driven by increases in revenues from CV and DFI systems and from Exensio and Cimetrix software licenses.
Integrated Yield Ramp Revenue
Integrated Yield Ramp revenue was $18.1 million for the year ended December 31, 2022, an increase of $0.4 million, compared to the year ended December 31, 2021, primarily due an increase in hours worked on fixed fees engagements, partially offset by the end of Gainshare periods on certain contracts.
Our Integrated Yield Ramp revenue may continue to fluctuate from period to period primarily due to the contribution of Gainshare royalty, which is dependent on many factors that are outside our control, including among others, continued
39
Table of Contents
production of ICs by our customers at facilities at which we generate Gainshare, sustained yield improvements by our customers, and whether we enter into new contracts containing Gainshare.
Our revenues may also fluctuate in the future due to other factors, including the semiconductor industry’s continued acceptance of our products, services and solutions, the timing of purchases by existing and new customers, cancellations by existing customers, our ability to attract new customers and penetrate new markets, supply chain challenges and further penetration of our current customer base. Fluctuations in future results may also occur if any of our significant customers renegotiate pre-existing contractual commitments, including due to adverse changes in their own business.
Costs of Revenues
Costs of revenues consist primarily of costs incurred to provide and support our services, costs recognized in connection with licensing our software, information technology (“IT”) and facilities-related costs and amortization of acquired technology. Service costs include material, personnel-related costs including compensation, employee benefits, bonus and stock-based compensation expense, subcontractor costs, overhead costs, travel, and allocated facilities-related costs. Software license costs consist of costs associated with cloud-delivery related expenses and licensing third-party software used by us in providing services to our customers in solution engagements or sold in conjunction with our software products.
The increase in costs of revenues of $3.7 million for the year ended December 31, 2022, compared to the year ended December 31, 2021, was primarily due to (i) a $2.6 million increase in personnel-related costs due to worldwide salary increases, increases in benefit costs, stock-based compensation expense, and bonus expense, (ii) a $1.6 million increase in third-party cloud-delivery costs, software licenses and maintenance costs, and (iii) an $0.8 million increase in subcontractor costs. These were partially offset by (i) a $1.0 million decrease in facilities and IT-related costs including depreciation expense and (ii) a $0.4 million decrease in hardware costs.
Gross Margin
Gross margin for the year ended December 31, 2022, was 68% compared to 60% for the year ended December 31, 2021, or an increase of 8 percentage points. The higher gross margin during the year ended December 31, 2022, was primarily due to higher total revenue and decreases in certain costs of revenues, as discussed above, which decreased the costs of revenues as a percentage of total revenues, when compared to the year ended December 31, 2021.
Operating Expenses:
Research and Development
Year Ended December 31,
%
$ Change
%
% Change
%
$ Change
%
% Change
(Dollars in thousands)
2022
2021
2020
2021 to 2022
2020 to 2021
Research and development
$
56,126
$
43,780
$
34,654
$
12,346
28
%
$
9,126
26
%
As a percentage of total revenues
38
%
39
%
39
%
Research and development expenses consist primarily of personnel-related costs including compensation, employee benefits, bonus and stock-based compensation expense, outside development services, travel, third-party cloud-services related costs, IT and facilities cost allocations to support product development activities.
Research and development expenses increased 28% for the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to (i) a $9.9 million increase in personnel-related costs primarily resulting from increases in stock-based compensation expense, headcount, bonus expense, benefit costs, and worldwide salary increases, (ii) a $1.5 million increase in subcontractor expenses primarily related to Cimetrix and Exensio software, and DFI and CV systems, (iii) a $0.4 million increase in facilities and IT-related costs including depreciation expense, and (iv) a $0.4 million increase in travel expense.
40
Table of Contents
We anticipate our expenses in research and development will fluctuate in absolute dollars from period to period as a result of the size and the timing of product development projects.
Selling, General and Administrative
Year Ended December 31,
%
$ Change
%
% Change
%
$ Change
%
% Change
(Dollars in thousands)
2022
2021
2020
2021 to 2022
2020 to 2021
Selling, general and administrative
$
45,338
$
37,649
$
32,677
$
7,689
20
%
$
4,972
15
%
As a percentage of total revenues
31
%
34
%
37
%
Selling, general and administrative expenses consist primarily of personnel-related costs including compensation, employee benefits, bonus, commission and stock-based compensation expense for sales, marketing and general and administrative personnel, legal, tax and accounting services, marketing communications expenses, third-party cloud-services related costs, travel, IT and facilities cost allocations.
Selling, general, and administrative expenses increased 20% for the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to (i) a $7.3 million increase in personnel-related costs mainly resulting from increases in stock-based compensation expense, headcount, bonus and commission expense, benefit costs, and worldwide salary increases, (ii) a $1.2 million increase in facilities and IT-related costs including cloud-services related costs, (iii) a $0.4 million increase in general legal expenses, and (iv) a $0.3 million increase in travel expense. These were partially offset by (i) a $0.9 million decrease in subcontractor expenses, (ii) a $0.4 million decrease in property tax expense, and (iii) a $0.2 million decrease in accounting and auditing fees.
We anticipate our selling, general and administrative expenses will fluctuate in absolute dollars from period to period as a result of cost control initiatives and to support increased selling efforts in the future.
Amortization of acquired intangible assets
Year Ended December 31,
%
$ Change
%
% Change
%
$ Change
%
% Change
(Dollars in thousands)
2022
2021
2020
2021 to 2022
2020 to 2021
Amortization of acquired intangible assets
$
1,270
$
1,255
$
741
$
15
1
%
$
514
69
%
Amortization of acquired intangible assets primarily consists of amortization of intangibles acquired as a result of certain business combinations.
Write-down in value of property and equipment
Year Ended December 31,
%
$ Change
%
% Change
%
$ Change
%
% Change
(Dollars in thousands)
2022
2021
2020
2021 to 2022
2020 to 2021
Write-down in value of property and equipment
$
—
$
3,183
$
—
$
(3,183)
(100)
%
$
3,183
100
%
In fiscal 2021, we wrote down the value of property and equipment aggregating $3.2 million pertaining to our first-generation of e-beam tools for DFI™ systems where carrying values may not be fully recoverable due to lack of market demand and future needs of our customers for these tools.
41
Table of Contents
Interest and Other Expense (Income), Net
Year Ended December 31,
$ Change
%
% Change
$ Change
%
% Change
(Dollars in thousands)
2022
2021
2020
2021 to 2022
2020 to 2021
Interest and other expense (income), net
$
(2,562)
$
(683)
$
1,269
$
(1,879)
275
%
$
(1,952)
(154)
%
Interest and other expense (income), net primarily consists of interest income, gains, and losses from foreign currency forward contracts, and foreign currency transaction exchange gains and losses.
Interest and other expense (income), net increased for the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to higher interest income due to increased interest rates and a higher foreign currency exchange gain resulting from a net favorable fluctuation in foreign exchange rates.
Income Tax Expense
Year Ended December 31,
%
$ Change
%
% Change
%
$ Change
%
% Change
(Dollars in thousands)
2022
2021
2020
2021 to 2022
2020 to 2021
Income tax expense
$
3,899
$
3,171
$
22,303
$
728
23
%
$
(19,132)
(86)
%
Income tax expense increased 23% for the year ended December 31 , 2022, compared to the year ended December 31 , 2021, primarily due to increases in state tax expense, foreign withholding taxes and changes in the geographic mix of worldwide income, which is subject to taxation at different statutory tax rates.
Any significant change in our future effective tax rates could adversely impact our consolidated financial position, results of operations and cash flows. Our future tax rates may be adversely affected by a number of factors including increase in expenses not deductible for tax purposes, new or changing tax legislation in the United States and in foreign countries where we are subject to tax jurisdictions, the geographic composition of our pre-tax income, the amount of our pre-tax income as business activities fluctuate, our ability to use tax attributes such as research and development tax credits and net operation losses, the tax effects of employee stock activity, audit examinations with adverse outcomes, changes in general accepted accounting principles and the effectiveness of our tax planning strategies.
Discussion of Financial Data for the years ended December 31, 2021 and 2020
For a discussion of our results of operations for the years ended December 31, 2021 and 2020, please see our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 1, 2022.
Liquidity and Capital Resources
As of December 31, 2022, our working capital, defined as total current assets less total current liabilities, was $135.2 million, compared to $144.7 million as of December 31, 2021. Cash, cash equivalents and short-term investments, on a consolidated basis, were $139.2 million as of December 31, 2022, compared to $140.2 million as of December 31, 2021. As of December 31, 2022, and 2021, cash and cash equivalents held by our foreign subsidiaries were $8.8 million and $5.3 million, respectively. We believe that our existing cash resources and anticipated funds from operations will satisfy our cash requirements to fund our operating activities, capital expenditures, and other obligations, for at least the next twelve months.
Cimetrix Acquisition
On December 1, 2020, the Company completed the acquisition of Cimetrix with total payments made in fiscal 2021 and 2020 of $31.6 million, net of cash acquired. The net cash payment for this acquisition, which also included the settlement of the adjusted Holdback Amount, as discussed below, was funded from the available cash of the Company.
42
Table of Contents
In 2020, the Company held back $3.5 million of the purchase price (the “Holdback Amount”) to satisfy adjustments and claims for indemnity arising out of breaches of certain representations, warranties and covenants, and certain other enumerated items in the merger agreement. During 2021, the Company recorded a measurement period adjustment that reduced the Holdback Amount to $3.1 million. The measurement period adjustment did not have an impact on the Company’s Consolidated Statement of Comprehensive Loss during the year ended December 31, 2021. The Holdback Amount, as adjusted, was paid to the participating equity holders in December 2021. See Note 4 of “Notes to Consolidated Financial Statements” (Item 8 of Part II of this Annual Report) for further discussion.
Repurchase of Company’s Common Stock
On June 4, 2020, the Company’s Board of Directors adopted a stock repurchase program (the “2020 Program”) to repurchase up to $25.0 million of the Company’s common stock both on the open market and in privately negotiated transactions, including through Rule 10b5-1 plans, over the next two years. During the year ended December 31, 2021, the Company repurchased 251,212 shares under the 2020 Program at an average price of $18.01 per share for an aggregate total price of $4.5 million. During the year ended December 31, 2022, the Company repurchased 218,858 shares under the 2020 Program at an average price of $26.40 per share, for a total price of $5.8 million. In total, the Company repurchased 470,070 shares under the 2020 Program at an average price of $21.91 per share, for a total price of $10.3 million. On April 11, 2022, the Board of Directors terminated the 2020 Program, and adopted a new program (the “2022 Program”) to repurchase up to $35.0 million of the Company’s common stock both on the open market and in privately negotiated transactions, from time to time, over the next two years. During the year ended December 31, 2022, the Company repurchased 714,600 shares under the 2022 Program at an average price of $23.36 per share, for a total price of $16.7 million.
Consolidated Statements of Cash Flows Data
Year Ended December 31,
%
$ Change
2022
2021
2020
%
2021 to 2022
%
2020 to 2021
(In thousands)
Net cash flows provided by (used in):
Operating activities
$
32,298
$
4,243
$
21,783
$
28,055
$
(17,540)
Investing activities
84,599
(4,667)
(150,502)
89,266
145,835
Financing activities
(24,307)
(5,525)
64,798
(18,782)
(70,323)
Effect of exchange rate changes on cash and cash equivalents
(650)
(182)
131
(468)
(313)
Net increase (decrease) in cash, cash equivalents, and restricted cash
$
91,940
$
(6,131)
$
(63,790)
$
98,071
$
57,659
Net Cash Provided by Operating Activities
Cash flows provided by operating activities during 2022, consisted of a net loss, adjusted for certain non-cash items which primarily consisted of depreciation and amortization, stock-based compensation expense, amortization of acquired intangible expense, amortization of costs capitalized to obtain revenue contracts and net change in operating assets and liabilities.
Cash generated from operating activities increased by $28.1 million for the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily driven by a $18.1 million decrease in net loss, a $7.8 million increase in net change from operating assets and liabilities, and a $2.2 million increase in non-cash adjustments to net loss, which mainly resulted from an increase in stock-based compensation expense of $6.7 million and an increase in amortization of costs capitalized to obtain revenue contracts of $0.9 million, partially offset by a decrease in loss on disposal and write-
43
Table of Contents
down in value of property and equipment of $3.2 million, a decrease in deferred taxes of $1.4 million and a decrease in depreciation and amortization of $0.7 million.
The major contributors to the net change in operating assets and liabilities for the year ended December 31, 2022, were as follows:
● Accounts receivable increased by $2.1 million, primarily due to an increase in sales, an increase in unbilled accounts receivables due to timing of billing and revenue recognition and higher contractual invoicing activity, partially offset by collections from customers;
● Prepaid expense and other current assets increased by $5.8 million, primarily due to the timing of billing of contract assets related to fixed-price service contracts, and increase in deferred costs to obtain contracts with customers, partially offset by a decrease in prepaid expenses related to third party software licenses and cloud-subscription related costs and a decrease in income tax receivable;
● Other non-current assets decreased by $2.3 million primarily due to the amortization of non-current prepaid expenses and lower unbilled accounts receivable;
● Accounts payable decreased by $1.4 million primarily due to the timing of payments of vendor invoices;
● Accrued and other liabilities increased by $1.7 million primarily due to the timing of vendor invoices, accrued legal fees and accrued income taxes;
● Accrued compensation and related benefits increased by $7.7 million primarily due to accrued bonuses and unused vacation; and
● Deferred revenues increased by $1.8 million and billings in excess of recognized revenues increased by $1.9 million, primarily due to the timing of billing and revenue recognition.
Net Cash Provided by (Used in) Investing Activities
Net cash provided by investing activities was $84.6 million for the year ended December 31, 2022, compared to net cash used in investing activities of $4.7 million for the year ended December 31, 2021.
For the year ended December 31, 2022, cash provided by investing activities primarily related to proceeds from maturities and sales of short-term investments of $151.5 million, partially offset by purchases of short-term investments of $58.3 million, and purchases of and prepayments for property and equipment of $8.4 million primarily related to our DFI systems and CV systems.
For the year ended December 31, 2021, cash used in investing activities primarily related to (i) purchases of $168.6 million short-term investments, (ii) a $3.1 million payment of the Holdback Amount related to the acquisition of Cimetrix, (refer to above discussion on Cimetrix Acquisition for further details), and (iii) $4.1 million for equipment purchased and prepayment for the purchase of property and equipment, primarily related to our DFI systems, partially offset by $171.0 million proceeds from maturities of short-term investments.
Net Cash Used in Financing Activities
Net cash used in financing activities was $24.3 million for the year ended December 31, 2022, compared to net cash used in financing activities of $5.5 million for the year ended December 31, 2021.
For the year ended December 31, 2022, net cash used in financing activities primarily consisted of $22.5 million for the repurchase of shares of our common stock and $6.5 million in cash payments for taxes related to net share settlement
44
Table of Contents
of equity awards, partially offset by $4.7 million of proceeds from our employee stock purchase plans and exercise of stock options.
For the year ended December 31, 2021, net cash used in financing activities primarily consisted of $4.5 million for the repurchase of shares of our common stock and $4.0 million in cash payments for taxes related to net share settlement of equity awards, partially offset by $3.0 million of proceeds from purchases under our employee stock purchase plans and the exercise of stock options.
Related Party Transactions
Refer to Note 3, “Strategic Partnership Agreement with Advantest and Related Party Transactions” of the Notes to Consolidated Financial Statements (Item 8 of Part II of this Annual Report) for a discussion on related party transactions between the Company and Advantest.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debt.
Contractual Obligations
The following table summarizes our known contractual obligations as of December 31, 2022 (in thousands):
Payments Due by Period
2028 and
Contractual Obligations
2023
2024
2025
2026
2027
thereafter
Total
Operating lease obligations (1)
$
1,570
$
1,633
$
1,547
$
1,357
$
979
$
171
$
7,257
Purchase obligations (2)
18,386
5,948
6,016
—
—
—
30,350
Total (3)
$
19,956
$
7,581
$
7,563
$
1,357
$
979
$
171
$
37,607
(1) Refer to Note 7 of “Notes to Consolidated Financial Statements” (Item 8 of Part II of this Annual Report) for further discussion.
(2) Purchase obligations consist of agreements to purchase goods and services entered in the ordinary course of business.
(3) The contractual obligation table above excludes liabilities for uncertain tax positions of $2.6 million, which are not practicable to assign to any particular years due to the inherent uncertainty of the tax positions. See Note 11 of “Notes to Consolidated Financial Statements” (Item 8 of Part II of this Annual Report) for further discussion.