Good day, ladies and gentlemen and welcome to the PDF Solutions, Inc. Conference Call to discuss the company's financial results for the fourth quarter and the full year ended December 31, 2019. [Operator instructions] As a reminder, this conference is being recorded. I will now turn the call over to Joe Diaz of Lytham Partners. You may begin.

Thank you operator and thanks to all of you for participating on today's call. We appreciate your time and your ongoing interest in PDF Solutions. As the operator indicated my name is Joe Diaz, I am managing partner at Lytham Partners, we are the investor relations consulting firm of PDF. With us on the call today are John Kibarian, President and Chief Executive Officer of PDF Solutions, Kimon Michaels, Co-Founder and Executive Vice President and Christine Russell, Chief Financial Officer. If you have not yet received a copy of today's press, it is available at the company's website at www.pdf.com. Before we begin with prepared remarks, please be aware that some of the statements that will be made during the course of this conference call forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding PDF’s future financial results and performance, growth rates and demand for its solutions. PDF’s actual results could differ materially. You should refer to the section entitled risk factors on PDF’s annual report on Form 10-K for the fiscal year ended December 31, 2018, and similar disclosures and subsequent SEC filings. The forward-looking statements and risks stated in this conference call are based on the information available to PDF today. The company assumes no obligation to update them. Now I would like to introduce John Kibarian, PDF Solution's President and Chief Executive Officer, who will be followed by Christine Russell, Chief Financial Officer. John, please proceed.

Thank you for joining us on today's call. If you’ve not already seen our earnings press release and management report for the fourth quarter and full year please go to the Investors section of our website, where each has been posted. As we head into 2020 I believe we started the new decade with clear and focus strategy and the potential for significant revenue growth and bottom line results. We continue to make progress on our revolution to become the leading analytic company focused on delivering improved profit efficiency and product reliability to the global semiconductor supply chain. Going forward our focus will be to grow our analytic business where we can increasingly deliver our solutions via the cloud to generate consistent recurring revenue and a higher gross margin that will bring increased level of profitability to our revenue. Today's press release started reporting two revenues components; analytics, and integrated yield ramp or IYR. IYR composes of revenue from our engagements that include performance based incentives on customers yield achievement such as gain share royalties. Analyst complies all other revenue including from our Exensio software, deifying characterization vehicles without performance based incentives. We believe that reporting revenue in this manner will provide you with better visibility into the business. The financial results of 2019 reflect our ongoing transition to predominantly analytics business. For the quarter and for the full-year analytics comprised 60% and 58% of total revenue respectively. It's worth noting that Q4, 2019 analytics revenue grew 31% compared with Q4, 2018 and full year 2019 analytics revenue grew 29% compared to 2018. These results are in line with our internal expectations as we de-emphasize the [ERM] business. We are pleased with the progress achieved to this point and look forward to greater momentum in the coming years. We believe…

Thank you John. Most of you will have seen our financials in our earnings release. In addition, we've posted a management report in the Investor Relations section of our website. The report has financials and comments regarding the results of PDF for the quarter and year. So I'll focus my comments on a few key areas. All of the financial results that we provide on this call are on a non-GAAP basis which excludes stock based compensation, amortization of intangibles and restructuring charges. Please refer to our press release for our GAAP results and GAAP to non-GAAP reconciliation. As John mentioned starting with our fourth quarter and yearend financial results, we began reporting our revenue as analytics and integrated yield ramp. IYR reporting comprises revenue from our engagements that include performance incentives based on customers yield achievement such as gain share royalty. Analytics reporting comprises all other revenue including from our Exensio software platform designed for inspection solution DFI and characterization vehicle solutions. We believe this presentation provides our investors better insight into our business and the path ahead in the coming years. Our former revenue reporting segments were solutions which included all products and services revenues and gain share which represented our royalty revenues. Fourth quarter’s total revenues of $22.6 million, was up 3% sequentially. In general revenues were as we anticipated given that our model is still in an evolution towards analytics. In the fourth quarter analytics was a majority of total revenues at 60%. We'll continue to be very selective and strategic in generating future IYR business that can contribute to our top and bottom line results. Although we expect to generate IYR revenue for a number of years going forward primarily as a result of gain share royalty payments for legacy engagements looking ahead to 2020…

Now we're ready to take questions. [Operator Instructions] We have a question on queue from Jon Tanwanteng from CJS Securities. Your line is now open.

Good afternoon. Thank you for taking my questions.

Hi John.

John, can you talk about the Corona virus impact on your Chinese businesses and prospects in the near term? I know you said you don't expect it to have a significant impact but is that just a timing thing? Are you seeing a slowdown now and expect to pick back up later? In that context has there been any change in the timing of signings or gain shares through Q1 so for? Any color or context will be appreciated. Thank you.

Sure Jon. Yes. So I think there is obviously a couple of layers to what's going on in China. First of all our Chinese national customers we have been working with them many of them we are working with them with our folks remotely but we see vehicles continuing to run, data being tested and analyzed and we continued to engage with them primarily for the customers that are outside of the Wuhan area. We know our software is being used at factories all around the country and our cloud-based offering is continuing to be used and we continue to engage with customers primarily remotely though. Then we also have international customers who have significant operations in China as well and for those customers we have less direct access to those facilities. They're mostly assembly and test facilities at this point. Our software runs in those facilities with less of our insight about what's going on. Places where we run vehicles we tend to know a little bit more about what's going on. However, I would say that the multinationals are slower to bring backup their facilities in some of the local companies. That said we don't really foresee at this time a substantial impact in our business. Our customers tell us that there will be more back to full steam as we get into the next few weeks and we continue even on contracting, having contracting discussions with our customers in that location. Obviously it's a very dynamic situation. So things can change that we don't foresee at this point but we see the customers over there being very-very resilient in finding ways to continue to maintain activity and we are trying to support them the best way we can.

Great. Thanks for the color and then could you talk a little bit more about the traction with the eProbe and DFI products and if you have any updates on the series 250 performance and any updates on the expectations for more shipments this year perhaps to the same or different clients?

Sure. Yes, so we extend the customer we have a customer one existing machine we extended this year and in a customer and we began as the second half of 2019 a paid pilot with a second customer taped out that vehicle at the end of 2019 and expect those wafers to come to our facility in the first part of this year. We also had another pilot going on with another leading-edge logic company. So this point we're engaged with three leading-edge logic manufacturers for DFI capability virtually all looking for the same benefits. We anticipate as we get through this year to have expanded activities inside those facilities. So shipping machines at a combination of those customers exactly we have a limited capacity in what we could ship so exactly where it goes to who first and when it's hard for me to predict right now.

Okay. Great. And then any color on what gain ship did in the quarter and if you released that at all and kind of if there was any commentary around that?

It's primarily 14 nanometer gain share and it was comparable to what we see typically in Q4 over the past few years.

Okay. Thanks. Just looking at the SG&A line you mentioned there was a couple of one times costs, Christine, are those, does that mean SG&A will come down and Q1 as we come through Q4?

Well, there are some permanent costs and there are some one-time costs. First of all hiring a director of marketing and business development will be ongoing especially as we pursue the analytics business that really is what you need to put wood behind your arrow to grow the business. So that part of the cost will continue. Obviously the user conference is a one-time thing. The patent filings are part of G&A and so those will be ongoing. So I would say, I would be thinking about SG&A as staying at about the level we are right now.

Got it. Thank you and then just one more thing I think resides on moving on to whatever's next. It wasn't clear are you going to be on the board of the company after that from the press release? Is that what you are going to be?

No. I am on the board of three publicly traded companies but not PDF.

Got it. Okay understood. And then John what priorities will Adnan be having as CFO and kind of what made him interesting to you guys as a candidate?

Sure. Yes. So I think Adnan has a very strong background both on the operational side and before that on the banking side. As we transition the business from being a yield ramp business to being more and more the Exensio Software platform, we see ways that we can bring metrics in the way we run the day-to-day operation that are much more consistent with other software and SaaS entities and Adnan’s strong analytic skills can help us with that as well as the fact that every time [he’s] made kind of these tuck-in acquisitions there's a number of additional benefits we're able to drive in terms of expanding our footprint in the accounts as well as connecting our customers internally we say that our first goal right now is to expand the landed accounts. We have 130 accounts. None of whom spend as much as they can with PDF and so we're expanding that revenue but as customers realize that a lot of their partners also use Exensio. We see lots of ways to collaborate. So M&A becomes a way of us driving a larger and larger footprint and our accountant and Adnan's background in M&A will also help us there as well.

Great, I do have one more but I'll jump back in the queue, so others have questions first. Thanks.

[Operator Instructions] We have a question from Christian Schwab from Craig-Hallum Capital. Your line is now open.

Great. Thanks for taking my questions. I'm just wondering if you have any updates regarding the IYR business with potential new customers in China and have I know actually Corona virus but have we had increased dialogue there as different manufacturers begin to try to ramp up different technology nodes there or is there nothing new to report?

No, actually it's a good point Christian. We have seen an increased dialogue in the second half of 2014 with a number of leading edge logic manufacturers in China and we anticipate in the first half of the year converting some of those to licenses, we know of a handful of companies all engaged on FinFET technology nodes and so when we go back to our own forecasting for the year we are a little bit cautious on how much of that we forecast. Hence part of our reason for saying we don't anticipate much impact is most of those factories are not in the affected area and number two we've been a little bit cautious about how we've forecasted that into our bookings plan. I think our team is tracking something like for ongoing FinFET Technologies all of which were engaged with at some level. So that's a lot for a single country.

Right. Okay.

We have modeled it a little bit [indiscernible].

Okay. Perfect. I don't have any other questions. Thank you.

Thank you, Christian.

And we have a follow-up from Jon Tanwanteng from CJS Securities. Your line is now open.

Thank you. John, you usually run down then the list of new deals signings in the quarter. Not sure if there's anything of note that you want to talk about. But maybe more specifically but what are the expectations of projects or signings or licenses in your pipeline for 2020 whether it's a lot of deals from penetration of existing customers, think your large engagements on your horizon or maybe new clients, whatever you force to.

Yes. So yes, as we transition the business with Exensio, the deal flow in a given quarter ends up becoming much larger, right, though well over 50 contracts signed in the quarter typically. And so, I -- we have very little. And to plus to -- it's hard to so usually now I just select if you'd to tell a story rather than when it was primarily your end business and you get exhaust fully describe the contracts signed in the quarter and four or five thoughts, next. And so, as we look into this year, it's kind of my prepared remarks. We have been and part of the reason why we increase spending in Q4, as we completed a number of cloud pilots with customers and we're told that they like the cloud performance. We anticipate those findings in the first half of this year and we expect to expand our number of customers on the cloud. As I said generally that means the ARRs well over 2x, the run rate when they're on premise. At our user conference, we had had one of the guest speakers were AWS, an executive from AWS because a lot of our customers we are bringing them to the Exensio cloud that is on Azure on AWS. We expect the first half to be out to be a substantial part of the bookings activity. Moreover, we kept, we concluded a couple of AI deployments and this pilots in the second half of 2019. And already have approval from customers to roll out, at least one of the customers on a production roll out and anticipate the other as well. And we believe that will also drive substantial growth. So, there's a number of what we call expand the land in accounts that have…

Great, thanks, John. I appreciate it.

And our next question is from Gus Richard from Northland. Your line is now open.

Yes, thanks for taking the question. In terms of gainshare, I think you have still a few big contracts. When did those particularly 14-nanometer contracts will or how many more years do you have on them.

Yes. Some of the early ones we'll have over the next couple of years and then there's others that are just starting up that will have many years past that. There were gainshare contracts that run out. I mean, primarily once you got through the first half of the 2020, so the 2022 timeframe, the majority of the non-Chinese facilities will have. And as you go from 2022 to 2030, primarily it's China and to a less extent Taiwan entities that will drive in the drive the gainshare.

Got it, thank you. And then on in terms of sort of what you're thinking about in terms of M&A, you did the Kinesys acquisition a while back, was very successful. Are you, why don’t you have a number of companies that you're looking at? Are you looking at more data sources, can you just sort of give any color around what the M&A pipeline might look like?

Sure, Gus. It's actually relatively robust. There are additional datatypes that typically outside of the fab at this point as we have most of the fab datatypes included in even though sort of the test and assembly datatypes. So, our additional datatypes that we're looking at and there are also what we found, if you look at the Syntricity acquisition. Syntricity was a cloud based while your mentioned system that had a subset of functions that we had with Exensio manufacturing analytics module. But there were a handful of customers that were very relying on that product. When we acquired that and then integrated it, we were able to increase a footprint of those accounts because they needed some of the base capability that Exensio had. Yet, when you were going itself from the outside, they already had deployed an existing product. So, we do find sometimes consolidation of companies that are in the same category as us helps us expand the revenue inside those accounts. In my prepared remarks I allude to the fact that we're the only company that really has the scale. A lot of these companies tend to be smaller private entities. And as these semiconductor companies and system companies, see manufacturing analytics as a strategic activity in their business. And I would say many of CTOs had the manufacturing CIOs that meet with, I'll say that digitization of the manufacturing is becoming a strategic activity. They need to have a supplier that they can actually count on. And so, a lot of those companies are really kind of hit the end of their road in terms of what they're able to do for the customer. But the customer has a huge investment of that software being integrated in to their facilities. It's just like our retention rate is quite high, their retention rate is also quite high. So, by acquiring those companies, integrating their product onto Exensio platform, we give a lot of these customers a path towards a greater platform without needing to wrap-up and replace the investment that those companies have made in those company. So, there is a lot of activity in little companies like that.

Got it. And then I know this is a tough question. Can you size the Exensio you saw for opportunity at this point and then perhaps entry guess is to what the growth will be over the next few years?

Yes. So, at our Analyst Day we said that we anticipated the growth rate for the business to be on or of 20% a year. If you look at our analytics business this year, it grew at over last year grew at 30% roughly 30%. And obviously that's why primarily driven by Exensio and nearby analyst business. So, we anticipate the growth rate staying very robust over these next few years for Exensio and the analytics business overall. In terms of what the serviceable market, I we reported that on our Analyst Day as well and I feel at the top of my head because I don’t remember the specific number. I'm more being much larger than we are now, so it's like a way to down from a tech but this one is a little much smaller than what I'm having my checkbook I was okay. So, I do see that we are trying a good runway in front of us for the analytics business overall. And as it's gotten larger as I alluded to in the cloud rate, we see ways that we think overtime time the business opportunity extend as customers start relying on analytics more and more to control their manufacturing.

You're right, okay. And then, last one from me. At this point on DFI, do you have any more significant investment that's going to be required to get let's say half a dozen systems out in the field.

Yes. And from a development standpoint, the majority of investment is done or some incremental that's being for doing on this specific features. Any others, always a level of software investment that's going on particularly look at new applications. And our spend so far, recently it's been around building early purchasing of components that we need for deployment of systems at our core customers. While we're very mindful of the fact that we told customers that we -- if they were to order [131 on the next 102] machine that will be quite a lead time for them. Even if we rewarded some long lead items as well. So, we feel like we're in a good position here, we have a number of companies interested in the next capability and a limited amount of capability out there.

Got it. And that's it from me. Thanks so much.

Thank you.

And there are no more questions on queue. I'm now turning the call over to Mr. Kibarian for closing remarks.

Thank you for participating on our Q4 call. We look forward to talking with you again soon. Have a great day.

This concludes today's conference call. Thank you for your participation, you may now disconnect.