What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-05-09 compared with 2023-11-08 · 126 added, 145 removed, 212 unchanged (56% of the section changed)

7 unchanged sentences

expectations regarding global economic trends;

the impact of rising global inflation and interest rates, expectations regarding recent and future acquisitions;

the impact of rising global inflation and increased interest rates, expectations regarding recent and future acquisitions;

current semiconductor industry trends;

3 unchanged sentences

the provision of technology and services prior to the execution of a final contract;

the continuing impact of macroeconomic conditions on the semiconductor industry and our operations or supply and demand for our products;

the continuing impact of macroeconomic conditions and other trends on the semiconductor industry and our operations or supply and demand for our products;

supply chain disruptions;

3 unchanged sentences

customers’ production volumes under contracts that provide Gainshare;

possible impacts from the evolving trade regulatory environment and geopolitical tensions and our ability to obtain additional financing if needed.

possible impacts from the evolving trade regulatory environment and geopolitical tensions;

our assessment of the sufficiency of our cash resources and anticipated funds from operations;

and our ability to obtain additional financing if needed.

These forward-looking statements are only predictions.

Forward-looking statements are based on current expectations and projections about future events and are inherently subject to a variety of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from those anticipated or projected.

All forward-looking statements included in this document are based on information available to us on the date of filing and we further caution investors that our business and financial performance are subject to substantial risks and uncertainties.

All forward-looking statements and other information included in this document are based on information available to us on the date of filing and we further caution investors that our business and financial performance are subject to substantial risks and uncertainties.

We assume no obligation to update publicly any such forward-looking statements.

1 unchanged sentence

“Business” and Item 7.

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10 K for the year ended December 31, 2022, filed with the Securities and Exchange Commission (“SEC”) on March 1, 2023.

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission (“SEC”) on February 27, 2024.

All references to “we,” “us,” “our,” “PDF,” “PDF Solutions” or “the Company” refer to PDF Solutions, Inc.

6 unchanged sentences

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 integrated device manufacturers (“IDMs”), fabless semiconductor companies, foundries, out-sourced semiconductor assembly and test (“OSATs”), capital equipment manufacturers and system houses.

4 unchanged sentences

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.

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 decreased over time.

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

5 unchanged sentences

Other trends may continue to affect our Characterization services business and Integrated Yield Ramp revenue specifically.

Semiconductor manufacturers have been experiencing lower wafer shipments, which has negatively impacted our Integrated Yield Ramp gainshare revenue.

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.

9 unchanged sentences

● Macroeconomy, inventories, and demand .

The worldwide economy has not recovered as strongly or quickly post-COVID as expected, and recession fears are growing in some locations.

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

The worldwide economy performance is uneven, and the possibility of a recession persists.

Inventories of semiconductor devices remain elevated in some instances.

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

For example, demand for GPU 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 example, demand for graphical processing unit products is strong, while demand for smart phones remains 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, with a major focus on the destinations of People’s Republic of China (“P.R.C.”), Russian Federation, and Belarus.

government continues to expand and intensify export controls and sanctions, with a major focus on the destinations of and/or entities in 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.

origin and are, thus, not subject to the U.S.

Export Administration Regulations (“EAR”).

origin and, thus, not subject to the U.S.

Export Administration Regulations.

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.

2 unchanged sentences

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

government issued interim final rules with additional export control restrictions.

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 issued an interim final rule in April 2024 making corrections and clarifications, expanding restrictions, and seeking further public questions and comments.

government policy and regulation remain fluid and uncertain, and could in the future impact segments of our business.

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.

3 unchanged sentences

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

government is renewing and amplifying its caution that visitors to

On April 12, 2024, the U.S.

government renewed 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 clarifications and proposals that are still in government development and open questions of interpretation leave much unknown.

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.

3 unchanged sentences

In 2022, the U.S.

Congress passed into law funding programs from the bipartisan Creating Helpful Incentives to Produce Semiconductors Act (the “CHIPS Act of 2022”), authorizing the Department of Commerce, Department of Defense, and Department of State to develop onshore domestic manufacturing of semiconductors considered critical to U.S.

Congress passed into law funding programs from the bipartisan CHIPS and Science Act of 2022 (the “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.

1 unchanged sentence

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 have current business.

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 general 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.

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 we 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.

1 unchanged sentence

Financial Highlights

Financial highlights for the three months ended September 30, 2023, are as follows:

● Total revenues were $42.4 million, an increase of $2.5 million, or 6%, compared to the three months ended September 30, 2022.

Analytics revenue was $39.5 million, an increase of $6.6 million, or 20%, compared to the three months ended September 30, 2022.

The increase in Analytics revenue was driven by increases in revenue from DFI and CV systems, including a sales-type lease of a DFI asset, 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 $4.1 million, or 59%, compared to the three months ended September 30, 2022, primarily due to a decrease in Gainshare from decreased customer wafer shipments at non-leading-edge nodes and a decrease in hours worked on fixed fees engagements.

● Costs of revenues increased $1.7 million, compared to the three months ended September 30, 2022, primarily due to an increase in hardware costs, software licenses and maintenance costs.

These increases were partially offset by decreases in personnel-related costs and third-party cloud-delivery costs.

● Net loss was $5.0 million, compared to a net income of $1.4 million for the three months ended September 30, 2022.

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

Financial highlights for the nine months ended September 30, 2023, are as follows:

● Total revenues were $124.7 million, an increase of $16.7 million, or 15%, compared to the nine months ended September 30, 2022.

Analytics revenue was $113.0 million, an increase of $18.5 million, or 20%, compared to the nine months ended September 30, 2022.

Integrated Yield Ramp revenue decreased $1.9 million, or 14%, compared to the nine months ended September 30, 2022, primarily due to a decrease in Gainshare from decreased customer wafer shipments at non-leading-edge nodes and a decrease in hours worked on fixed fees engagements.

● Costs of revenues increased $2.4 million, compared to the nine months ended September 30, 2022, primarily due to an increase in hardware costs, increases in travel expenses, third-party cloud-delivery costs, software licenses and maintenance costs and subcontractor fees.

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

● Net income was $2.2 million, compared to a net loss of $3.9 million for the nine months ended September 30, 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) sales and marketing activities, and general and administrative expenses, which were primarily related to increases in personnel-related costs, legal fees related to the arbitration proceeding over a disputed customer contract, travel expenses, third-party cloud-services related costs, business acquisition costs, software licenses and maintenance costs, facilities and IT-related costs, and (c) foreign currency transaction exchange losses.

● Cash, cash equivalents, and short-term investments at September 30, 2023, were $135.4 million, compared to $139.2 million as of December 31, 2022, a decrease of $3.8 million, primarily due to payments of accrued bonuses, payments to vendors and for income taxes, purchases of and prepayments for property and equipment, payments for business acquisition, repurchases of common stock, and payments of taxes related to net share settlement of equity awards, partially offset by cash collection from customers, proceeds from purchases under our employee stock purchase plan and exercise of stock options, and interest income from cash, cash equivalents and short-term investments.

Financial highlights for the three months ended March 31, 2024, are as follows:

● Total revenues were $41.3 million, an increase of $0.6 million, or 1%, compared to the three months ended March 31, 2023.

Analytics revenue was $38.5 million, an increase of $2.1 million, or 6%, compared to the three months ended March 31, 2023.

The increase in Analytics revenue was driven by increases in revenues from Exensio and Cimetrix software licenses, partially offset by a decrease in revenues from DFI and CV systems.

Integrated Yield Ramp revenue was $2.8 million, a decrease of $1.6 million, or 36%, compared to the three months ended March 31, 2023.

The decrease in Integrated Yield Ramp revenue was primarily due to a decrease in hours worked on fixed-fees engagements and Gainshare from decreased customer wafer shipments at non-leading-edge nodes.

● Costs of revenues increased $1.6 million, compared to the three months ended March 31, 2023, primarily due to an increase in hardware costs, third-party cloud-delivery costs and subcontractor costs.

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

● Net loss was $0.4 million, compared to a net income of $0.4 million for the three months ended March 31, 2023.

The decrease in net income was primarily attributable to increases in (i) costs of revenues, (ii) sales and marketing activities, and general and administrative expenses, which were primarily related to increases in personnel-related costs, general legal expenses, and third-party cloud-services costs, partially offset by a decrease in legal fees related to the arbitration proceeding over a disputed customer contract, partially offset by (a) an increase in total revenues, (b) an increase in interest income, (c) net favorable fluctuations in foreign currency exchange rates, and (d) a decrease in income tax expense.

● Cash, cash equivalents, and short-term investments as of March 31, 2024, were $122.9 million, compared to $135.5 million as of December 31, 2023, a decrease of $12.6 million, primarily due to payments of accrued bonuses, payments to vendors and for income taxes, purchases of property and equipment, repurchases of common stock, and payments of taxes related to net share settlement of equity awards, partially offset by cash collection from customers, proceeds from purchases under our employee stock purchase plan and exercise of stock options, and interest income from cash, cash equivalents and short-term investments.

Critical Accounting Estimates

See Note 1, Basis of Presentation and Summary of Significant Accounting Policies , to our unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q, for a description of recent accounting pronouncements and accounting changes, including the expected dates of adoption and estimated effects, if any, on our condensed consolidated financial statements, and to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 1, 2023.

There were no material changes during the three and nine months ended September 30, 2023, to the items that we disclosed as our critical accounting policies and estimates in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022.

There were no material changes during the three months ended March 31, 2024, to the items that we disclosed as our critical accounting policies and estimates in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2023.

The following is a brief discussion of the more significant accounting policies and methods that we use.

Our discussion and analysis of our financial conditions, results of operations and cash flows are based on our condensed consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America.

liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

Our preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances.

14 unchanged sentences

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.

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 the customer having to take possession of the 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.

For contracts with any combination of SaaS and related services, distinct performance obligations are accounted for separately.

For contracts with multiple performance obligations, the Company allocates the transaction price of the contract to each performance obligation on a relative basis using the SSP attributed to each performance obligation.

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.

1 unchanged sentence

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.

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.

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 ASC 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 accompanying condensed 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 and continue to be depreciated.

Assets subject to sales-type leases are derecognized from property and equipment, net 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 accompanying condensed consolidated balance sheets.

Integrated Yield Ramp Revenue

2 unchanged sentences

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.

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 contained in the 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.

5 unchanged sentences

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 DTAs, primarily driven by a cumulative loss incurred over the 12-quarter period ended September 30, 2023, and the likelihood that we may not utilize tax attributes before they expire.

The valuation allowance was approximately $59.2 million as of September 30, 2023, and December 31, 2022.

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.).

federal and state net DTAs, primarily driven by a cumulative loss incurred over the 12-quarter period ended March 31, 2024, and the likelihood that we may not utilize tax attributes before they expire.

The valuation allowance was approximately $64.2 million as of March 31, 2024, and December 31, 2023.

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.

10 unchanged sentences

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 condensed consolidated statements of comprehensive income (loss).

As of September 30, 2023, no deferred taxes have been provided on undistributed earnings from our international subsidiaries.

As of March 31, 2024, 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 September 30, 2023.

As such, we have not provided for any foreign withholding taxes on the earnings of foreign subsidiaries as of March 31, 2024.

The earnings of our foreign subsidiaries are taxable in the U.S.

4 unchanged sentences

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

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.

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.

1 unchanged sentence

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 plan 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 plan.

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 plan.

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 plan.

Valuation of Long-lived Assets including Goodwill and Intangible Assets

4 unchanged sentences

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 three and nine months ended September 30, 2023.

There was no impairment of goodwill for the three months ended March 31, 2024.

Our long-lived assets, excluding goodwill, consist of property, equipment, and intangible assets.

3 unchanged sentences

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 long-lived assets for the three and nine months ended September 30, 2023.

There was no impairment of long-lived assets for the three months ended March 31, 2024.

Recent Accounting Pronouncements and Accounting Changes

1 unchanged sentence

Results of Operations

Discussion of Financial Data for the Three and Nine Months ended September 30, 2023 and 2022

Discussion of Financial Data for the Three Months ended March 31, 2024 and 2023

Revenues, Costs of Revenues, and Gross Margin

Three Months Ended

Nine Months Ended

September 30,

Three Months Ended March 31,

(Dollars in thousands)

5 unchanged sentences

Analytics Revenue

Analytics revenue increased $6.6 million for the three months ended September 30, 2023, compared to the three months ended September 30, 2022.

Analytics revenue increased $18.5 million for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022.

Analytics revenue increased $2.1 million for the three months ended March 31, 2024, compared to the three months ended March 31, 2023.

The increase in Analytics revenue was driven by increases in revenues from Exensio and Cimetrix software licenses, partially offset by a decrease in revenues from DFI and CV systems.

Integrated Yield Ramp Revenue

Integrated Yield Ramp revenue decreased $4.1 million for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, primarily due to a decrease in Gainshare from decreased customer wafer shipments at non-leading-edge nodes and a decrease in hours worked on fixed fees engagements.

Integrated Yield Ramp revenue decreased $1.9 million for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily due to a decrease in Gainshare from decreased customer wafer shipments at non-leading-edge nodes and a decrease in hours worked on fixed fees engagements.

Integrated Yield Ramp revenue decreased $1.6 million for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, primarily due to decreases in hours worked on fixed-fees engagements and 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, 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 Analytics and Integrated Yield Ramp revenues may also fluctuate in the future and are dependent on a number of 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, and 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.

2 unchanged sentences

Service costs include material costs, hardware costs (including cost of leased assets under sales-type lease), 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 $1.7 million for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, was primarily due to (i) a $2.0 million increase in hardware costs and (ii) a $0.1 million increase in software licenses and maintenance costs.

These increases were partially offset by (i) a $0.2 million decrease in personnel-related costs due to lower compensation expense, partially offset by an increase in stock-based compensation expense, and (ii) a $0.1 million decrease in third-party cloud-delivery costs.

The increase in costs of revenues of $2.4 million for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, was primarily due to (i) a $2.3 million increase in hardware costs, (ii) a $0.3 million increase in travel expenses, (iii) a $0.2 million increase in third-party cloud-delivery costs, (iv) a $0.2 million increase in software licenses and maintenance costs, and (v) a $0.1 million increase in subcontractor fees.

These increases were partially offset by (i) a $0.3 million decrease in personnel-related costs due to lower compensation expenses, partially offset by an increase in worldwide salaries and increases in headcount and stock-based compensation expense, and (ii) a $0.2 million decrease in facilities and IT-related costs, including depreciation expense.

Gross margin decreased three percentage points for the three months ended September 30, 2023, to 66%, compared to 69% for the three months ended September 30, 2022.

The lower gross margin during the three months ended September 30, 2023, was primarily due to lower Gainshare revenue for the three months ended September 30, 2023.

Gross margin increased two percentage points for the nine months ended September 30, 2023, to 69%, compared to 67% for the nine months ended September 30, 2022.

The higher gross margin during the nine months ended September 30, 2023, was primarily due to higher total revenues when compared to the year-ago period.

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 $1.6 million for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, was primarily due to (i) a $1.7 million increase in hardware costs, (ii) a $0.1 million increase in third-party cloud-delivery costs and (ii) a $0.1 million increase in subcontractor costs.

These increases were partially offset by a $0.2 million decrease in personnel-related costs due to lower compensation expenses, partially offset by an increase in stock-based compensation expense.

Gross margin decreased four percentage points for the three months ended March 31, 2024, to 67%, compared to 71% for the three months ended March 31, 2023.

The lower gross margin during the three months ended March 31, 2024, was primarily due to higher cost of revenues and lower Gainshare revenue for the three months ended March 31, 2024.

Operating Expenses:

Research and Development

Three Months Ended

Nine Months Ended

September 30,

Three Months Ended March 31,

(Dollars in thousands)

2 unchanged sentences

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 $1.2 million for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, primarily due (i) to a $1.1 million decrease in personnel-related costs mostly resulting from lower compensation expenses, partially offset by worldwide salary increases and increases in headcount, and (ii) a $0.2 million decrease in subcontractor fees primarily related to DFI systems.

These were partially offset by a $0.1 million increase in travel expenses.

Research and development expenses decreased $3.3 million for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily due to (i) a $4.2 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 $0.3 million decrease in facilities and IT-related costs including depreciation expense.

These were partially offset by (i) a $0.6 million increase in subcontractor expenses primarily related to Cimetrix and Exensio software, (ii) a $0.3 million increase in third-party cloud-services related costs, and (iii) a $0.3 million increase in travel expenses.

Research and development expenses decreased $0.1 million for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, primarily due to (i) a $0.3 million decrease in subcontractor fees primarily related to DFI systems and (ii) a $0.1 million decrease in facilities and IT-related costs including depreciation expense, partially offset by (a) a $0.3 million increase in personnel-related costs mostly resulting from higher stock-based compensation and employee benefits expenses, partially offset by lower bonus expenses, and (b) a $0.1 million increase in third-party cloud-services costs.

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

Three Months Ended

Nine Months Ended

September 30,

Three Months Ended March 31,

(Dollars in thousands)

2 unchanged sentences

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 $3.6 million for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, primarily due to (i) a $3.7 million increase in personnel-related costs mainly resulting from increases in stock-based and other compensation expense, including commission, employee benefit costs, headcount and worldwide salary increases and (ii) a $0.2 million increase in travel expenses.

Selling, general, and administrative expenses increased $0.9 million for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, primarily due to (i) a $2.4 million increase in personnel-related costs mainly resulting from increases in stock-based and other compensation expense, including commission, employee benefit costs, headcount and worldwide salary increases, (ii) a $0.6 million increase in general legal expenses and (iii) a $0.2 million increase in third-party cloud-services costs.

These were partially offset by a $2.1 million decrease in legal fees related to the arbitration proceeding over a disputed customer contract.

Selling, general, and administrative expenses increased $13.4 million for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily due to (i) a $11.2 million increase in personnel-related costs mainly resulting from increases in stock-based and other compensation expense, including commission, employee benefit costs, headcount and worldwide salary increases, (ii) a $1.5 million increase in legal fees related to the arbitration proceeding over a disputed customer contract, (iii) a $0.6 million increase in travel expenses, (iv) a $0.3 million increase in facilities and IT-related costs including depreciation expense, (v) a $0.2 million increase in business acquisition costs, and (vi) a $0.1 million increase in third-party cloud-services related costs.

These 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.

Amortization of Acquired Intangible Assets

Three Months Ended

Nine Months Ended

September 30,

Three Months Ended March 31,

(Dollars in thousands)

Amortization of acquired intangible assets

Amortization of acquired intangible assets primarily consists of amortization of intangibles acquired as a result of certain business combinations and was consistent for the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022.

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

Interest and Other Expense (Income), Net

Three Months Ended

Nine Months Ended

September 30,

Three Months Ended March 31,

(Dollars in thousands)

1 unchanged sentence

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 $0.5 million for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, primarily due to a higher interest income resulting from higher interest rates, partially offset by net unfavorable fluctuations in foreign currency exchange rates which resulted in a lower net foreign currency exchange gain.

Interest and other expense (income), net increased $1.2 million for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily due to a higher interest income resulting from higher interest rates, partially offset by net unfavorable fluctuations in foreign currency exchange rates.

Interest and other expense (income), net increased $0.8 million for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, primarily due to higher interest income resulting from higher interest rates, and net favorable fluctuations in foreign currency exchange rates.

Income Tax Expense

Three Months Ended

Nine Months Ended

September 30,

Three Months Ended March 31,

(Dollars in thousands)

Income tax expense

Income tax expense increased for the three months and decreased for the nine months ended September 30, 2023, compared to the three and nine months ended September 30, 2022, respectively, primarily due to changes in the foreign and

state taxes and year-to-date recognition of worldwide pre-tax income (loss) in relation to their forecasted amounts for full years.

Income tax expense decreased for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, primarily due to changes in the foreign and state taxes and year-to-date recognition of worldwide pre-tax income (loss) in relation to their forecasted amounts for full years.

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 accounting principles generally accepted in the United States of America and the effectiveness of our tax planning strategies.

examinations with adverse outcomes, changes in accounting principles generally accepted in the United States of America and the effectiveness of our tax planning strategies.

Liquidity and Capital Resources

As of September 30, 2023, our working capital, defined as total current assets less total current liabilities, was $144.4 million, compared to $135.2 million as of December 31, 2022.

Total cash, cash equivalents, and short-term investments were $135.4 million as of September 30, 2023, compared to cash, cash equivalents, and short-term investments of $139.2 million as of December 31, 2022.

As of September 30, 2023, and December 31, 2022, cash and cash equivalents held by our foreign subsidiaries were $9.1 million and $8.8 million, respectively.

As of March 31, 2024, our working capital, defined as total current assets less total current liabilities, was $135.5 million, compared to $147.0 million as of December 31, 2023.

Total cash, cash equivalents, and short-term investments were $122.9 million as of March 31, 2024, compared to cash, cash equivalents, and short-term investments of $135.5 million as of December 31, 2023.

As of March 31, 2024, and December 31, 2023, cash and cash equivalents held by our foreign subsidiaries were $11.1 million and $10.0 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, other obligations for at least the next twelve months, and thereafter for the foreseeable future, however, we will continue to evaluate if we require additional funding to meet our longer term needs.

Repurchase of Company’s Common Stock

On April 11, 2022, the Board of Directors adopted a stock repurchased 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, including through Rule 10b5-1 plans, from time to time, over the next two years.

During the three months ended March 31, 2024, 201,561 shares were repurchased by the Company under the 2022 Program at an average price of $34.23 per share for an aggregate total price of $6.9 million.

In total, the Company has repurchased 937,501 shares under the 2022 Program at an average price of $25.96 per share for an aggregate total price of $24.3 million.

Cash Flow Data

The following table summarizes our cash flows for the periods presented:

Nine Months Ended September 30,

Three Months Ended March 31,

(In thousands)

5 unchanged sentences

Net change in cash and cash equivalents

Net Cash Flows Provided by Operating Activities

Cash flows provided by operating activities during the nine months ended September 30, 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 and net change in operating assets and liabilities.

Net cash flows provided by operating activities was $12.6 million for the nine months ended September 30, 2023, compared to net cash flows provided by operating activities of $8.0 million for the nine months ended September 30, 2022.

The $4.6 million increase in cash flows from operating activities between the periods was driven primarily by (i) collections from customers and (ii) a significant increase in net income compared to the same period in 2022, partially offset by payments

made to vendors and under the Company’s bonus plan.

Net income was $2.2 million for the nine months ended September 30, 2023, compared to a net loss of $3.9 million for the nine months ended September 30, 2022.

The major contributors to the net change in operating assets and liabilities for the nine months ended September 30, 2023, were as follows:

● Accounts receivable decreased by $1.2 million, primarily due to collections from customers, partially offset by contractual invoicing activity and an increase in unbilled accounts receivables due to the timing of billing and revenue recognition;

● Prepaid expense and other current assets increased by $7.0 million, primarily due to increases in contract assets, lease receivables, income tax receivable and deferred commission;

● Accounts payable decreased by $2.7 million primarily due to the timing of payments of vendor invoices;

● Accrued compensation and related benefits decreased by $5.3 million primarily due to the payments of accrued bonuses net of new bonus accruals, a decrease in accrued commissions, and exercise of purchase rights under employee stock purchase plans;

Net Cash Flows Used in Operating Activities

Cash flows used in operating activities during the three months ended March 31, 2024, consisted of 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, net accretion of discounts on short-term investments, and net change in operating assets and liabilities.

Net cash flows used in operating activities was $1.9 million for the three months ended March 31, 2024, compared to net cash flows used in operating activities of $1.0 million for the three months ended March 31, 2023.

The $0.9 million increase in cash flows used in operating activities between the periods was driven primarily by payments under the Company’s bonus plan, changes in net income (loss) between comparable periods, partially

offset by collections from customers.

Net loss was $0.4 million for the three months ended March 31, 2024, compared to a net income of $0.4 million for the three months ended March 31, 2023.

The major contributors to the net change in operating assets and liabilities for the three months ended March 31, 2024, were as follows:

● Accounts receivable increased by $2.4 million, primarily due to contractual invoicing activity and an increase in unbilled accounts receivables due to the timing of billing and revenue recognition, partially offset by collections from customers;

● Other non-current assets increased by $5.9 million primarily due to an increase non-current assets from sales-type leases, increases in costs capitalized to obtain revenue contracts and non-current unbilled accounts receivables due to the timing of billing and revenue recognition, partially offset by the amortization of non-current prepaid expenses and a decrease in non-current contract assets;

● Accounts payable increased by $1.8 million primarily due to the timing of payments of vendor invoices;

● Accrued compensation and related benefits decreased by $5.2 million primarily due to the payments of accrued bonuses net of new bonus accruals, and exercise of purchase rights under employee stock purchase plan, partially offset by an increase in accrued commissions;

● Deferred revenue increased by $1.5 million primarily due to the timing of billing and revenue recognition;

● Billings in excess of recognized revenues decreased by $1.6 million primarily due to the timing of billing and revenue recognition.

Net Cash Flows Provided by (Used in) Investing Activities

Net cash used in investing activities was $14.2 million for the nine months ended September 30, 2023, compared to net cash provided by investing activities of $83.4 million for the nine months ended September 30, 2022.

For the nine months ended September 30, 2023, cash used in investing activities primarily related to purchases of short-term investments of $32.3 million, purchases of and prepayments for property and equipment of $8.9 million primarily related to our DFI and CV systems, payment for business acquisition, net of cash acquired, of $1.8 million, partially offset by proceeds from maturities and sales of short-term investments of $28.8 million.

For the nine months ended September 30, 2022, cash provided by investing activities primarily related to proceeds from maturities and sales of short-term investments of $136.0 million, partially offset by purchases of short-term investments of $45.8 million, and purchases of and prepayments for property and equipment of $6.7 million primarily related to our DFI systems and CV systems.

● Billings in excess of recognized revenues increased by $0.8 million primarily due to the timing of billing and revenue recognition.

Net Cash Flows Used in Investing Activities

Net cash used in investing activities was $2.6 million for the three months ended March 31, 2024, compared to $2.3 million for the three months ended March 31, 2023.

For the three months ended March 31, 2024, cash used in investing activities primarily related to purchases of short-term investments of $19.6 million, purchases of property and equipment of $2.0 million primarily related to our DFI systems, partially offset by proceeds from maturities and sales of short-term investments of $19.0 million.

For the three months ended March 31, 2023, cash used in investing activities primarily related to purchases of short-term investments of $6.4 million and purchases of property and equipment of $2.9 million primarily related to our DFI systems and CV systems, partially offset by proceeds from maturities and sales of short-term investments of $7.0 million.

Net Cash Flows Used in Financing Activities

Net cash used in financing activities was $5.6 million for the nine months ended September 30, 2023, compared to $24.2 million for the nine months ended September 30, 2022.

For the nine months ended September 30, 2023, net cash used in financing activities primarily consisted of $9.1 million in cash payments for taxes related to net share settlement of equity awards, repurchases of common stock of $0.8 million, partially offset by $4.3 million of proceeds from our employee stock purchase plans and exercise of stock options.

For the nine months ended September 30, 2022, net cash used in financing activities primarily consisted of $22.5 million for the repurchase of shares of our common stock and $5.8 million in cash payments for taxes related to net share settlement of equity awards, partially offset by $4.1 million of proceeds from our employee stock purchase plans and exercise of stock options.

Net cash used in financing activities was $8.8 million for the three months ended March 31, 2024, compared to $2.1 million for the three months ended March 31, 2023.

For the three months ended March 31, 2024, net cash used in financing activities primarily consisted of repurchases of common stock of $6.9 million, $3.8 million in cash payments for taxes related to net share settlement of equity awards, partially offset by $1.9 million of proceeds from our employee stock purchase plan and exercise of stock options.

For the three months ended March 31, 2023, net cash used in financing activities primarily consisted of $4.1 million in cash payments for taxes related to net share settlement of equity awards, partially offset by $2.0 million of proceeds from our employee stock purchase plan and exercise of stock options.

Related Party Transactions

3 unchanged sentences

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-Q

Item 2. Management’s Discussion and Analysis