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Item 7. Management’s Discussion and Analysis

2024-02-27 compared with 2023-03-01 · 130 added, 144 removed, 207 unchanged (57% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 offer products and services designed to empower organizations across the semiconductor and electronics ecosystems 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:

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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.

In some cases, especially on our historical Integrated Yield Ramp 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

Industry Trends

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.

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 information technology (“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.

In parallel, the cost per terabyte of data storage has generally decreases over time.

The combination of these two trends means that more data is collected and stored than ever before.

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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

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.

The combination of these latter two trends means that cloud-based, analytic 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.

For example, semiconductor manufacturers have recently been experiencing lower wafer shipments, which has negatively impacted our Integrated Yield Ramp gainshare revenue.

The logic foundry market at the leading-edge nodes, such as 7nm, 5nm, 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.

The leading foundry continues to dominate market share.

This trend will likely continue to impact our Characterization services business on these nodes.

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Compliance with changing U.S.

export restrictions limit our possible business with Chinese semiconductor manufacturers on advanced nodes with our electrical characterization offering.

export restrictions limit our possible business with Chinese semiconductor manufacturers on advanced nodes.

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

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.

● Macroeconomy, inventories, and demand .

The worldwide economy did not recover as strongly or quickly as expected after the COVID-19 pandemic, and recession fears persist.

As a result of the slow recovery, inventories of semiconductor devices remain elevated in many instances.

The strength of demand for semiconductor products has varied by region and product segment.

For example, demand for graphical processing unit products is strong, while demand for smart phones is weak.

With high inventories and soft demand, semiconductor fab utilization rates are also low and semiconductor capital equipment orders have been impacted for some vendors and market segments.

As a result of these trends, customers are being cautious with their spend and some purchase cycles are lengthening and other purchase decisions are being delayed, particularly with respect to larger deals.

● Changing export controls and sanctions .

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.

government continues to expand and intensify export controls and sanctions, with a major focus on the destinations of the People’s Republic of China (“P.R.C.”), Russian Federation, and Belarus.

After an internal evaluation, we determined that a large percentage of our software products are not of U.S.

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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.

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.

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.

government could potentially interrupt their ability to make use of our products or services, which has in some cases, and could in the future, negatively impact the demand for our products and services by these customers.

In October 2022 and October 2023, the U.S.

government issued interim final rules adding novel and complex export control restrictions, some exclusions, and requests for public comment.

In light of questions about some restrictions and guidance, the U.S.

government announced on November 6, 2023 that it was developing revisions to such rules to make corrections and clarifications.

We believe the government will issue these revisions in 2024, along with additional restrictions.

government policy and regulation remain fluid and uncertain.

Other countries and jurisdictions with important roles in our industry are updating some of their export control regulations to further align with those of the U.S.

government and, in some cases, to counter U.S.

For example, the P.R.C.

has imposed restrictions on imports of certain memory ICs offered by U.S.

companies and has been developing its legal authorities to counter foreign sanctions.

government is renewing and amplifying its caution that visitors to the P.R.C.

are subject to arbitrary enforcement of local laws and wrongful detention, a risk that could deter or hinder certain business activities.

Based on our current assessments, we expect the near-term impact of these expanded trade restrictions on our business to be limited, but revisions, clarifications, and proposals that are still in government development and open questions of interpretation leave much unknown.

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.

● Geopolitical tensions .

Geopolitical tension between the U.S.

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/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.

or foreign governments and any actions in response.

The uncertainty caused by these recent regulations and the potential for additional future restrictions could negatively affect our future sales in the P.R.C.

● Investments in semiconductor manufacturing .

In 2022, the U.S.

Congress passed into law funding programs from the bipartisan CHIPS Act, authorizing the Department of Commerce, Department of Defense, and Department of State to develop onshore domestic manufacturing of semiconductors considered critical to U.S.

competitiveness

and national security.

It is expected that U.S.

semiconductor companies, especially manufacturers, will increase spending as a result of receiving funds under these programs.

Recipients of funding under such programs may be required to agree to separate restrictions on certain commercial activity in the P.R.C., where we currently commercially operate.

If our customers engage us for projects funded by these programs, we will evaluate all restrictions, and their impact on our existing business, before entering into any contracts associated with these programs.

● Geopolitical tensions/conflicts .

Geopolitical tensions and conflicts in various locations around the world continue to increase, including on the issue of Taiwan in Asia, Ukraine and Russia, and most recently between Israel and Hamas.

These current situations have created volatility in the global financial markets and may have further global economic consequences, including potential disruptions of the global supply chain and heightened volatility of commodity and raw material prices.

This has increased fears of a global recession.

We have contractors located in the West Bank and in Israel, who are providing software development and customer technical support services, and have developed contingency plans to use alternative resources to continue serving customers, if needed.

Any escalations could lead to disruptions or reductions in international trade, deter or prevent purchasing activity of customers, and negatively impact our development timelines and customer support (with respect to the Israel-Hamas conflict) or China sales (with respect to U.S.-P.R.C.

tensions) and financial results in general (with respect to global tensions).

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Analytics revenue was $152.1 million, an increase of $21.6 million, or 17%, compared to the year ended December 31, 2022.

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

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.

The increase in Analytics revenue was driven by increases in revenue from DFI and CV systems, including sales-type leases of DFI assets, and an increase in revenue from Exensio software licenses, partially offset by a decrease in revenues from Cimetrix software licenses due to a decrease in orders for runtime licenses.

Integrated Yield Ramp revenue decreased $4.3 million, or 24%, compared to the year ended December 31, 2022, primarily due to a decrease in hours worked on fixed fee engagements and a decrease in Gainshare from decreased customer wafer shipments at non-leading-edge nodes.

● Costs of revenues increased $3.8 million for the year ended December 31, 2023, compared to the year ended December 31, 2022, primarily due to increases in hardware costs, travel expenses, subcontractor fees and software licenses and maintenance costs.

These increases were partially offset by decreases in personnel-related costs.

● Net income was $3.1 million for the year ended December 31, 2023, compared to a net loss of $3.4 million for the year ended December 31, 2022.

The increase in net income was primarily attributable to (i) an increase in total revenues, (ii) an increase in interest income, (iii) a decrease in research and development expenses and (iv) a decrease in income tax expenses, partially offset by increases in (a) costs of revenues, (b) selling, general, and administrative expenses, which were primarily related to increases in personnel-related costs, travel expenses, legal fees related to the arbitration proceeding over a disputed customer contract, third-party cloud-services related costs, property tax expenses, general legal expenses, trade conference-related expenses, and business acquisition costs, and (c) foreign currency transaction exchange losses.

● Cash, cash equivalents and short-term investments decreased $3.7 million to $135.5 million as of December 31, 2023, from $139.2 million as of December 31, 2022, primarily due to payments to vendors, payments of accrued bonuses and income taxes, purchases of and prepayments for property and equipment, payments of taxes related to net share settlement of equity awards, payments for a business acquisition, and repurchases of common stock, partially offset by cash collection from customers, interest income from cash, cash equivalents and short-term investments, and proceeds from purchases under our employee stock purchase plan and exercise of stock options.

Critical Accounting Estimates

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For contracts with any combination of licenses, support, and other services, distinct performance obligations are accounted for separately.

For contracts with

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.

For contracts with 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.

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The estimation of percentage of completion method is complex and subject to many variables that require significant judgment.

The Company also leases some of its DFI system and CV system assets to some customers.

The Company determines the existence of a lease when the customer controls the use of these identified assets for a period of time defined in the lease agreement and classifies such leases as operating leases or sales-type leases.

A lease is classified as a sales-type lease if it meets certain criteria under Topic 842, Leases;

otherwise, it is classified as an operating lease.

Operating lease revenue is recognized on a straight-line basis over the lease term.

Sales-type lease revenue and corresponding lease receivables are

recognized at lease commencement based on the present value of the future lease payments, and related interest income on lease receivable is recognized over the lease term and are recorded under Analytics Revenue in the Consolidated Statements of Comprehensive Income (Loss).

Payments under sales-type leases are discounted using the interest rate implicit in the lease.

When the Company’s leases are embedded in contracts with customers that include non-lease performance obligations, the Company allocates consideration in the contract between lease and non-lease components based on their relative SSPs.

Assets subject to operating leases remain in Property and equipment, net and continue to be depreciated.

Assets subject to sales-type leases are derecognized from Property and equipment at lease commencement and a net investment in the lease asset is recognized in Prepaid expenses and other current assets and Other non-current assets in the Consolidated Balance Sheets.

Integrated Yield Ramp Revenue

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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.

We record Gainshare as a usage-based royalty derived from customers’ usage of IP and record it in the same period in which the usage occurs.

We are required to assess whether it is “more likely than not” that we will realize our deferred tax assets.

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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

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.

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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.

As of December 31, 2023, no deferred taxes have been provided on undistributed earnings from our international subsidiaries.

We intend to reinvest the earnings of our non-U.S.

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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.

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 is intended to increase domestic competitiveness in semiconductor manufacturing capacity, increase research and development in computing, AI, 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.

We have begun to see some benefit from the CHIPS Act to our business, but the extent of future benefit is still unknown.

Stock-Based Compensation

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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.

The fair value of our stock options and purchase rights granted under employee stock purchase plans 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 and purchase rights granted under employee stock purchase plans.

The expected life is based on historical experience and on the terms and conditions of the options granted and purchase rights granted under employee stock purchase plans.

The interest rate assumption is based upon observed Treasury yield curve rates appropriate for the expected life of our stock options and purchase rights granted under employee stock purchase plans.

Business Combinations

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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.

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 Income (Loss).

Valuation of Long-lived Assets including Goodwill and Intangible Assets

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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

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.

Lease terms include 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.

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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.

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 dates of adoption and estimated effects, if any, on our consolidated financial statements.

Results of Operations

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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.

Analytics revenue was $152.1 million for the year ended December 31, 2023, an increase of $21.6 million, or 17%, compared to the year ended December 31, 2022.

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.

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.

Integrated Yield Ramp revenue was $13.8 million for the year ended December 31, 2023, a decrease of $4.3 million, or 24%, compared to the year ended December 31, 2022, primarily due to a decrease in hours worked on fixed fee engagements and a decrease in Gainshare from decreased customer wafer shipments at non-leading-edge nodes.

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 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.

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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 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.

Costs of revenues consist primarily of costs incurred to provide and support our services, costs recognized in connection with licensing our software, IT and facilities-related costs and amortization of acquired technology.

Service costs include material costs, hardware costs (including cost of leased assets under sales-type leases), personnel-related costs (including compensation, employee benefits, bonus and stock-based compensation expense), subcontractor costs,

overhead costs, travel expenses, and allocated facilities-related costs.

Software license costs consist of costs associated with third-party 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 $3.8 million for the year ended December 31, 2023, compared to the year ended December 31, 2022, was primarily due to (i) a $3.5 million increase in hardware costs, (ii) a $0.4 million increase in travel expenses, (iii) a $0.2 million increase in subcontractor fees, and (iv) a $0.2 million increase in software licenses and maintenance costs.

These increases were partially offset by a $0.4 million decrease in personnel-related costs due to lower compensation expenses, partially offset by an increase in stock-based compensation expense.

Gross margin for the year ended December 31, 2023, was 69% compared to 68% for the year ended December 31, 2022, or an increase of 1 percentage point.

The higher gross margin during the year ended December 31, 2023, was primarily due to higher total revenue when compared to the year ended December 31, 2022.

Operating Expenses:

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As a percentage of total revenues

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.

Research and development expenses consist primarily of personnel-related costs (including compensation, employee benefits, bonus and stock-based compensation expense), outside development services, travel expenses, third-party cloud-services related costs, IT and facilities cost allocations to support product development activities.

Research and development expenses decreased $5.4 million for the year ended December 31, 2023, compared to the year ended December 31, 2022, primarily due to (i) a $5.8 million decrease in personnel-related costs mostly resulting from a lower stock-based and other compensation expenses, partially offset by worldwide salary increases and increases in headcount, and (ii) a $0.5 million decrease in facilities and IT-related costs including depreciation expense.

These were partially offset by (a) a $0.3 million increase in third-party cloud-services related costs, (b) a $0.3 million increase in travel expenses, and (c) a $0.2 million increase in subcontractor expenses primarily related to Cimetrix and Exensio software.

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.

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As a percentage of total revenues

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.

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 and trade conference-related expenses, third-party cloud-services related costs, travel, IT, and facilities cost allocations.

Selling, general, and administrative expenses increased $16.9 million for the year ended December 31, 2023, compared to the year ended December 31, 2022, primarily due to (i) a $14.5 million increase in personnel-related costs mainly resulting from increases in stock-based and other compensation expense, commission, employee benefit costs, headcount and worldwide salary increases, (ii) a $0.8 million increase in travel expenses, (iii) a $0.7 million increase in legal fees related to the arbitration proceeding over a disputed customer contract, (iv) a $0.4 million increase in third-party cloud-services related costs, (v) a $0.3 million increase in property tax expense, (vi) a $0.3 million increase in general legal expenses, (vii) a $0.3 million increase in trade conference-related expenses, and (viii) a $0.2 million increase in business acquisition costs.

These increases were partially offset by a $0.4 million decrease in subcontractor expenses.

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.

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Amortization of acquired intangible assets

Amortization of acquired intangible assets primarily consists of amortization of intangibles acquired as a result of certain business combinations.

Amortization of acquired intangible assets primarily consists of amortization of intangibles acquired as a result of certain business combinations and was consistent for the year ended December 31, 2023 compared to the year ended December 31, 2022.

Write-down in value of property and equipment

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Interest and other expense (income), net

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.

Interest and other expense (income), net primarily consists of interest income and foreign currency transaction exchange gains and losses.

Interest and other expense (income), net increased $2.5 million for the year ended December 31, 2023, compared to the year ended December 31, 2022, primarily due to an increase in interest income of $4.0 million from cash, cash equivalents and short-term investments resulting from higher interest rates, partially offset by net unfavorable fluctuations in foreign currency exchange rates.

Income Tax Expense

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Income tax expense

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.

Income tax expense decreased $2.1 million for the year ended December 31 , 2023, compared to the year ended December 31 , 2022, primarily due to decreases 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.

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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.

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.

During the year ended December 31, 2022, 218,858 shares were repurchased by the Company under the 2020 Program at an average price of $26.40 per share for an aggregate total price of $5.8 million.

During the year ended December 31, 2021, 251,212 shares were repurchased by the Company under the 2020 Program at an average price of $18.01 per share for an aggregate total price of $4.5 million.

In total, 470,070 shares were repurchased under the 2020 Program at an average price of $21.91 per share, for an aggregate total price of $10.3 million.

During the year ended December 31, 2023, 21,340 shares were repurchased by the Company under the 2022 Program at an average price of $34.81 per share for an aggregate total price of $0.7 million.

During the year ended December 31, 2022, 714,600 shares were repurchased by the Company under the 2022 Program at an average price of $23.36 per share for an aggregate total price of $16.7 million.

In total, the Company has repurchased 735,940 shares under the 2022 Program at an average price of $23.69 per share for an aggregate total price of $17.4 million.

Consolidated Statements of Cash Flows Data

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Effect of exchange rate changes on cash and cash equivalents

Net increase (decrease) in cash, cash equivalents, and restricted cash

Net change in cash and cash equivalents

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-

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.

Cash flows provided by operating activities during the year ended December 31, 2023, consisted of net income, 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, net accretion of discounts on short-term investments and net change in operating assets and liabilities.

Net cash flows provided by operating activities was $14.6 million for the year ended December 31, 2023, compared to net cash flows provided by operating activities of $32.3 million for the year ended December 31, 2022.

The $17.7 million decrease in cash flows provided by operating activities between the years was driven primarily by payments made to vendors and employees, including under the Company’s bonus plan, partially offset by an increase in net income compared to the year ended December 31, 2022.

Net income was $3.1 million for the year ended December 31, 2023, compared to a net loss of $3.4 million for the year ended December 31, 2022.

The major contributors to the net change in operating assets and liabilities for the year ended December 31, 2023, were as follows:

● Accounts receivable increased by $2.7 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;

● Prepaid expense and other current assets increased by $7.3 million, primarily due to the timing of billing of contract assets related to fixed-price service contracts, an increase in lease receivable from sales-type leases, and an increase in income tax receivable, partially offset by a decrease in prepaid expenses related to third party software licenses and cloud-subscription costs;

● Other non-current assets increased by $4.2 million primarily due to non-current assets from sales-type leases, increases in non-current contract assets and costs capitalized to obtain revenue contracts, partially offset by the amortization of non-current prepaid expenses;

● Accounts payable decreased by $2.1 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;

● 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.

● Accrued compensation and related benefits decreased by $2.2 million primarily due to the payments of accrued bonuses net of new bonus accruals, a decrease in accrued commissions, partially offset by additional contributions to the employee stock purchase plan.

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.

Net cash used in investing activities was $29.0 million for the year ended December 31, 2023, compared to net cash provided by investing activities of $84.6 million for the year ended December 31, 2022.

For the year ended December 31, 2023, cash used in investing activities primarily related to purchases of short-term investments of $59.6 million, purchases of and prepayments for property and equipment of $11.3 million primarily related to our DFI and CV systems, payment for a business acquisition, net of cash acquired, of $1.8 million, partially offset by proceeds from maturities and sales of short-term investments of $43.8 million.

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 $5.9 million for the year ended December 31, 2023, compared to net cash used in financing activities of $24.3 million for the year ended December 31, 2022.

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.

For the year ended December 31, 2023, net cash used in financing activities primarily consisted of $9.5 million in cash payments for taxes related to net share settlement of equity awards and $0.7 million for the repurchase of shares of our common stock and, partially offset by $4.3 million of proceeds from our employee stock purchase plan and exercise of stock options.

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 of equity awards, partially offset by $4.7 million of proceeds from our employee stock purchase plans and exercise of stock options.

Related Party Transactions

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis