PDF Solutions Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2023

Key Takeaways

  • Q2 financial highlights: Revenue was $41.6 million (up 20% y/y) with analytics revenue of $37.1 million (up 19%), backlog up 33%, a 74% gross margin and EPS of $0.19 versus $0.11 a year ago.
  • Cautious short-term outlook: Lower wafer volumes in China will reduce gainshare, Symetrics license growth remains modest, and some Exensio bookings were delayed, leading to full-year revenue guidance revised down from mid-teens to low-double-digit growth.
  • Strategic acquisition: Acquired Lantern Machinery Analytics to add its ML image-processing pipeline for battery manufacturing, targeting a forecasted $400 billion lithium-ion market, with customer pilots expected in early 2024.
  • eProbe 350 deployment: The second DFI eProbe 350 machine is qualified at the lead customer, a third unit will ship by year-end, positioning the tool for electrical inspection in advanced 3D node yield control.
  • Robust long-term drivers: Strong pipeline supported by accelerating ML, cloud adoption, smart devices and energy electrification, amplified by global government semiconductor investments and supply-chain diversification.
AI Generated. May Contain Errors.
Earnings Conference Call
PDF Solutions Q2 2023
00:00 / 00:00

There are 8 speakers on the call.

Operator

Thank you for joining us on today's call. If you've not already seen our earnings press release and management report for the Q1, please go to the Investors section of our website where each has been posted. The 2nd quarter was very similar to our Q1. Revenue remained strong as we experience continued adoption of our end to end analytics by our customers. Before Adnan discusses the financials in detail, I have some comments about our observations from the Q2 and our perceptions of the market for the remainder of the year.

Operator

Bookings in the Q2 were similar in magnitude to the Q1. Significant contracts that closed in the quarter included Customers deploying process control and front end fabs, a cloud customer deploying analytics for an internal chip design team and a chip company deploying analytics for complex 3 d packaging. With continued strength in Asia, Gain share improved in Q2 versus Q1 as shipments improved. Finally, bookings for Symetrics Connectivity runtime license showed modest improvements in Q2 versus Q1 as our customers' equipment shipments, particularly in China, started to increase. Overall, given our strong backlog and business model, where most of our revenue is typically ratably recognized, we continue to deliver strong results in revenue and earnings.

Operator

Beyond the business that we booked, we have experienced significant customer interest in our analytics and a number of pilots are underway with customers. We were pleased with the business results in the quarter as it demonstrates the strength of our business model. Subsequent to the Q2, we announced and acquisition of Lantern Machinery Analytics. Over the past year and a half, we have been evaluating with some battery manufacturers the ability to apply PDF's analytics platform to lithium ion battery manufacturing. Today, lithium ion battery manufacturing is under $100,000,000,000 in revenue and over the next 12 years is forecasted to be over $400,000,000,000 So there's going to be a tremendous increase in capacity.

Operator

Moreover, controlling variability of manufacturing to improve yields and product quality is becoming of interest. Through our work with manufacturers, we recognize that there is a need to collect and process images. This data, when combined with upstream equipment sensor data, has the potential to be used to improve yields and product quality. Section. Machinery Analytics had developed an ML pipeline for battery image processing.

Operator

This capability may also have applications for with early customers, but for the most part was a pre revenue company. We will incorporate their ML pipeline in our products as we develop applications for battery and IC of Manufacturing. We are excited to have them join the team. Turning to DFI and our eProbe machine, The customer we previously talked about has qualified our new eProbe 350 and now has 2 machines running at their facility. After a lengthy evaluation in our fab, we anticipate shipping another eProbe 350 by the end of the year for an on-site evaluation with a different customer.

Operator

We are very excited about the progress we are making with the DFI program. As our customers develop 3 d processes like gate all around and backside power, we believe electrical inspection will increasingly be important to ramp and control yields. Now let me turn to discuss our view of the environment and our perspective in the second half of the year. Midway into 2023, we are more cautious in our short term view. Our gainshare customers in China are reporting decreased wafer volumes, which will reduce gainshare in the second half of the year.

Operator

We anticipate continued increases in Symetrics runtime licenses, but a lower rate of growth rate of improvement than we initially anticipated as equipment suppliers, particularly outside of China, remain conservative on the increase in equipment shipments. Finally, for Exensio, in Q2, we saw customers delay some expected bookings to the second half of the year. Although some of those bookings already closed in July, we remain cautious about the timing of others. Early this year, we anticipated Revenue growth for the year approaching mid teens. Our expectation now is year over year growth will be in the low double digit percentage.

Operator

The core analytics growth is expected to exceed the overall growth, but it will be offset partially by a year over year decline in integrated deal ramp. While the short term environment is unsettled, the long term drivers for our customers, which include increased use of of ML, Cloud, Smart Devices and the Electrification of the Energy Economy remain in place. These drivers are being amplified by the various government investments of semiconductors we are seeing around the world and the increased diversification of supply chains that many of our customers are embracing. As a result, our pipeline of business is strong and remain confident on our customers' continued success and growth. We would also like to remind everyone that on October 24th to 26th, we will have the PDF users conference meeting at the Santa Clara Marriott.

Operator

As with our pre COVID event, we will combine one of those days with an Analyst Day, which will be on October 24. This gives our customers, strategic partners, analysts and stockholders a chance to see the latest capabilities from PDF and to learn from each other. The theme this year is applying AIML to transform manufacturing and technology R and D. The list of speakers is turning out to be the strongest we have ever of the conference. Sanjay Nataranjan, SVP and Co GM of the Intel Logic Technology Development, will talk about of the transformation they have made, which has enabled them to deliver 5 nodes in 4 years.

Operator

Other speakers include executives from SAP, of Siemens, Advent Test, Global Foundries and Analog Devices. We also expect Additional executive engineers will commit to speak at the event. Our attendees usually include executives and engineers from system companies, fabless, of IBM, OSATs, foundries and equipment companies, who all share a passion for analytics and ML that drive R and D and manufacturing. We are looking forward to the event this year after a multiyear hiatus after COVID. I want to thank all PDF employees and contractors for their efforts during the first half of the year.

Operator

Now I'll turn the call over to Adnan, who will review the financials and provide his perspective on our results. Adnan?

Speaker 1

Thank you, John. Good afternoon, everyone, and good to speak with you all again today. We are pleased to review the financial results of the Q2 and to bring you up to date on the progress of the business. Of our Form 10 Q has also been filed with the SEC today. Please note that all of the financial results we discuss in today's call will be on a non GAAP basis and and a reconciliation to GAAP Financials is provided in the materials on our website.

Speaker 1

Financial results for the Q2 of 2023 continued to be strong, coming after a solid Q1. Q2 total revenue was $41,600,000 up 20% versus the comparable quarter of last year. Analytics revenue was up 19 percent to $37,100,000 in Q2 of this year versus of $31,100,000 in the Q2 of 2022 and represented 89% of total revenue this quarter. The growth in our analytics revenues came from growth in Exensio and leading edge products, offset by decline in Symetrics runtime licenses. On a quarter over quarter basis, our analytics revenue was up $800,000 During the Q2, revenue contribution from integrated yield ramp was $4,500,000 up 26% from last year's comparable quarter, primarily due to increased level of gainshare from higher volumes at some of our Asian customers.

Speaker 1

We are very pleased with the various engagements we have currently ongoing, the deal sizes of bookings we are working to close and the strategic conversations we're involved in with our customers, strategic partners and major semiconductor governmental initiatives around the world. All of these factors evidence progress towards our goal to be the go to manufacturing data analytics platform for the global semiconductor and electronics ecosystems. Our ending backlog at the end of Q2 of this year was $244,900,000 which is 33% higher and then our prior year Q2 ending backlog. We reported gross margins of 74% for the quarter, up meaningfully versus 69% for Q2 of prior year. As we have said before, on a quarter over quarter basis, we may see some variations on this metric as we modulate the spend for our customer engagements and grow our cloud and people spend to support the growth of recurring revenues.

Speaker 1

We remain committed to our non GAAP gross margin target model of greater than 70%. On the operating expense spending side, Our R and D spend was down $600,000 versus the prior quarter as we continue to take advantage of our leverage and shift our resources to presales and new business initiatives. Our SG and A was up $900,000 versus the prior quarter, primarily driven by increased spend in presales and marketing efforts. Overall, within SG and A, we have invested faster into sales and marketing, while ensuring that on the G and A side, we can take advantage of our scale and have brought down G and A as a percentage of our revenue slightly versus both prior quarter as well as Q2 of prior year. For EPS, we reported a profit of $0.19 for the quarter, similar to last quarter level, but meaningfully higher than $0.11 for the same quarter a year ago.

Speaker 1

We are pleased about our year over year $0.08 positive swing in EPS compared to the same quarter of last year. We ended the quarter with cash and cash equivalents of $124,000,000 compared to $117,000,000 at the end of same quarter a year ago and $134,000,000 in the prior quarter, with the change versus the prior quarter, primarily driven by an increase in our accounts receivables at the end of the quarter due to timing of billings. Since the end of the quarter through today, we have already collected the majority of our quarter end billed receivables. During the quarter, we also spent approximately $1,900,000 of cash to close the acquisition of Machinery Analytics that John mentioned, with an excellent team based out of Canada and Poland to expand our analytics platform for EV battery manufacturing. We continue to believe that the strength of our balance sheet positions us well to consider strategic investments and acquisitions as they become available.

Speaker 1

Like John mentioned, as we look forward, we expect to grow our revenue for this year on a year over year basis at lower double digit percentage level instead of the approaching mid teens level we had previously guided. We're being careful based on 3 key observations of the rest of the year. First, our gainshare from some Asian customers is expected to slow down for the rest of the year as they face their own economic and demand challenges and volumes decreased. 2nd, our Symetrix runtime licenses was up versus prior quarter, are still facing a mix of increased demand from some regions, coupled with muted demand from other regions. 3rd, consistent with John's comments, the timing of bookings is less clear given the industry dynamics.

Speaker 1

As we become strategically important for our customers and partners, the size of our bookings is growing, with many approaching the high single digit or double digit millions of dollars. Overall, when we look at the longer term, we feel emboldened by 2 factors, the demand for our products that we can see in our sales pipeline and the strategic relevance of our analytics platform, which is taking hold with all three constituents, customers, strategic partners and the various government initiatives. We also believe that in our analytics platform, we have 3 strong elements that complement each other. The Exensio analytics platform, of the unique data collection capabilities of our leading edge products and our Symetrix connectivity products. We're excited about the future and the growth ahead for PDF.

Speaker 1

With that, I'll turn the call over to the operator to commence the question and answer session. Operator?

Speaker 2

Thank you, Mr. Our first question will come from the line of Blair Abernethy from Rosenblatt Securities. Your line is open.

Speaker 3

Thanks. Good afternoon, gentlemen. Just wanted to ask you about the acquisition of Lantern Machinery. Just Give a sense of what needs to be done to take this, I guess, package this

Operator

section. So a lot of the work early on in R and D is done with SEM images, scanning electron of images. We wanted to use optical images. The pilot we did with them before acquisition was to test that pipeline on optical images coming from section. Some of the manufacturers we have been working with, we feel very good about that and we expect about 6 months of development to package this appropriately and then begin pilots with customers.

Operator

So probably in early 2024, we expect to start seeing pilots begin with customers and revenue to follow from there.

Speaker 3

Section. Okay, great. And it looks like from your 10 Q, you paid just under $2,000,000 for it. How much Do you have any sense of how much money will be required to get it to market? Just sort of will we see that in the section of the question.

Speaker 3

How is the investment going to show up?

Speaker 1

Sure. Good question. So there's really two elements to that. One is the people spend, of course. The team is just under 10 people.

Speaker 1

And like I mentioned in my prepared remarks, It's based in Canada as well as in Poland. So there's a bit of balancing with the cost we're able to do there as well. The second piece of the cost is, of course, what we spend to your point on system improvements. We will, of course, go through the appropriate accounting treatment as far as P and L versus capitalizing. But given the small nature, it probably will hit our P and L.

Speaker 1

It's Going to be small, but keep it manageable, a couple of 100 ks is kind of what we're thinking on this acquisition when you look at for this year. So we'll continue to keep it manageable. It's kind of our perspective. I'll give you one other context. The machines themselves, the equipment that's used, It's basically off the shelf camera and then the structure that's used with it.

Speaker 1

So it's a lot of the value is in the AI ML pipeline and the software that we'll be coupling with it. So hopefully, once you get to the point that John is mentioning, the reason for the acquisition is that it hopefully is very accretive to our margins.

Speaker 3

Okay, great. Thank you. And then just shifting over, can you just highlight a couple of Things on the partnership side that stand out in Q2, whether it's with AvanTEST or some of the other partners you've been working

Operator

Sure. Yes. I think I prepared in my previous remarks on Q2, I had already talked about anticipating the Adventist user conference. We presented there, had tremendous turnout jointly with customers, announced a number of new product capabilities in partnership with AvonTest. At Semicon, we were in the AWS booth to highlight Exensio Cloud on AWS.

Operator

I think that generated quite a few leads as I saw the statistics. I think somewhere between 50 100 leads generated off of that activity. And then Also with SAP, we continued a number of selling activity in early section demonstrations with customers beyond the first customer on the PDF SAP pilot. Nothing to describe from a booking standpoint there. Section.

Operator

But again, I think we find that they're a very effective way of reaching out at a lot of the customer base. It's the same company that we already knew and a different entry point in the company, typically through the finance organization or C suite. Section. I would say that customer the partnership activity with those partners was quite heavy throughout the quarter. We do anticipate, You might have noticed at Semicon that we did we were quoted in a Teradyne press release of support of their Edgebox with Exensio applications.

Operator

And we have had a long standing relationship with Teradyne and supported their testers for close to a decade now. But this enhances our ability to provide the same machine learning capability on their Edgebox that we can provide on others and that also kicked off a whole set of customer dialogues as well as there's many customers on the Teradyne platform. We do believe that's an important incremental relationship.

Speaker 3

That's great. Thanks, Jeff.

Speaker 2

Section. And our next question will come from the line of Christian Schwab from Craig Hallum Capital. Your line is open.

Speaker 4

Hey, guys. Thanks for taking my question. So given the substantial backlog and kind of a lot of long term Positive growth drivers despite bringing guidance down for the back half of the year. What should we be paying most What would have to happen to return to the 20% plus growth rate and what would have to occur To kind of remain here in the low double digits.

Operator

Yes. So I think that's a great question, Christian. So Continued weakness on equipment creates a headwind for us. I mean, if you take out, as I said in my prepared remarks, If you take out the equipment weakness and the IYR weakness, the core analytics business actually the remaining pieces that are in control continues to grow pretty reasonably. And so we'd like to end that headwind.

Operator

Ending that headwind would get us back up pretty close to the 20% range. Then I think it comes down to bookings momentum on core analytics. I think that would get you back over, we've been growing more in the 30 plus range for a while. That would get us back into that range. I think section.

Operator

We have an as Adnan said in his prepared remarks, we have an awful lot of pilots going on. I think a large number of things that are in the double digit section 1,000,000 in terms of bookings value. In the past, it's been a small number that drove a lot of the growth. I'd say that the breadth of them has increased quite substantially. I think with those booking, you start seeing, obviously, return to more robust growth.

Operator

Section. And of course, that's on top of a larger base than it was in the past, right? Obviously, 30% of the small numbers harder than it's much harder to do 30% on a larger number. Section. But we do see that activity out there, that book that customer interest activity out there.

Operator

So I kind of want to unravel, so let me see if I can summarize that for you well, Christian. Let's get rid of the headwinds, stop declining on those things growth on the equipment shipments again would really help in terms of not creating a headwind. And then the bookings activity on the larger

Speaker 4

So just a quick follow-up on that. Thank you for that color. Let's just say that, wafer front end equipment is See the muted recovery next year. Do we have enough double digit million pilot businesses to take us 15% to 20% growth in a flat WFE market?

Operator

Yes.

Speaker 2

Our next question comes from the line of Tom Diffely section from D. A. Davidson. Your line is open.

Speaker 5

Thank you for letting us ask questions. This is Linda on behalf of Tom Diffely.

Operator

Section. Yes, sure, Linda. Thanks for the question. So I would say we continue to see if you look at kind of the DoubleClick where we saw the bookings happen in the quarter, The 2 strong areas, silicon carbide and a high voltage related area, that was some of the process control section, bookings that we saw, some of the analytics bookings that we saw and actually just usage statistics coming off our cloud sites for customers within our customers. We track within our customers what parts of the organizations are driving the most.

Operator

That definitely continues to be a strong part of the market. The site for the Exensio analytics deployment for a cloud customer. Obviously, it's data center related. Section. The analytics for an IC company that does complex system and package, again, high performance computing and data center related.

Operator

So the second area that we've seen quite a bit of strength and has been in the data center area, that's definitely where we see the second strength. We started seeing bookings for customers, I didn't talk about it in my prepared remarks, that were on the test floor for mobile and cellular. Yes, they did see we did see positive results in that area. So I think those customers are starting to feel a little bit confident they have been I think weaker in the past. And then lastly on the memory side, when we look at our pre sales activity, we do see section.

Operator

Fair amount of activity on the memory piece that was a little bit larger than we have in the past. And so I feel like they are also starting to see the end of the tunnel for them. When you look geographically, as I said in my prepared remarks, we saw a pretty steep fall off in the Q3 on wafer volumes because we measure section, the amount of wafers we test for our IYR customers. And we did see that drop off from the royalties. That's why we became cautious on the gainshare royalties out of China.

Operator

We saw that drop off in July relatively meaningfully compared to previous months. And when you look at our run time licenses though, we see factory activity, new equipment shipments section. For companies shipping into China, Chinese equipment companies as well as sector. Companies that are primarily in Europe but ship into China also being very strong. And when you look at what category of technologies.

Operator

They tend to be more mature nodes with an emphasis on high voltage again, silicon carbide and IGBT and things like that. Section. So, overall, what we see, I think, is very consistent with what you see reported in the market. When we look at the segments that we track, segment, equipment shipments, wafer volumes and buying characteristics from our customers.

Speaker 5

Thank you. That's very helpful. And then with respect to the forward pipeline, to what degree has it been influenced by the announcement of your 7 figure S and P booking last quarter. And can you see it any tangible effect on the developing interest of other from other customers?

Operator

Section. Yes, there's a number the partners continue to be a meaningful part of our presales activity with customers. It's very hard, Linda, to say, okay, will they come in faster than the others? We have found that their selling cycles are different than ours. Some are able to give us pretty strong predictability.

Operator

So we do anticipate them impacting our second half of the year, But the bulk of the selling in the second half of the year will come off pilots that are run directly in a two way relationship between an end customer and PDF, with most of the bookings being driven by Exensio and Leading Edge, substantial contracts for Exensio and Leading Edge.

Speaker 5

I see. And then a follow-up on that. Have you seen have you noticed any uptick maybe in conversations with The partners like SAP, where you compare Exensio with other platforms and drive more of those top floor to shop floor linkages?

Operator

Yes. Thank you for that question too. I mentioned the new relationship with Teradyne. That was one that we announced during semicon. We are also working on other section.

Operator

Some are engineering related and some are more shop floor related, engineering software related. We're not in a position to announce them yet, Linda, but I think Obviously, we have a user conference coming up. So you can anticipate us being in a position to make more announcements at our user conference around things that we are working on.

Speaker 5

We are looking forward to that. And then my last question on the model, Edmond. On a year over year basis, gross margins have improved from this level.

Speaker 1

Yes, sure. So I think a bunch of things. I think we're just as the business scales, we've been able to focus a little bit more into all of the different dimensions, right? Where it was on the symmetric side, taking a look at our prices and where they are positioned on the cloud side, okay, how do we charge versus markup on the AWS, What do we pay actually ourselves with our scale getting bigger, a combination of all of those things. And then on leading edge, we have talked about the enterprise level deals that we section.

Speaker 1

So a combination of those factors is what has allowed us frankly to be above the long term margin of 70%. And we hope to maintain that even in

Speaker 6

section. I

Speaker 5

appreciate that. Thank you for your time today.

Speaker 2

And our next question will come from the line of Gus Richard from Northland Capital. Your line is open.

Speaker 6

Yes. Thanks for taking the question. Good afternoon, John and Adnan.

Speaker 1

On DFI, I think you

Operator

said you shipped a system

Speaker 6

in the quarter and expect to section. Another one in the Q4, how many would you

Speaker 1

have in the field at this point? Yes.

Operator

What I said in my prepared remarks, we actually said in our last call that we had shipped in the 2nd quarter machine that was qualified actually in the Q3 recently as an existing customer. And then we would ship we anticipate being able to ship again in the Q4. That would put 3 in the field today,

Speaker 6

Okay. And then, the new systems that are going into the field, are they going to be used in lab or section. Are people sort of thinking about trying them out for fab?

Operator

Yes. That's a great question. If you look at how an e beam tool has been used conventionally, e beam inspection tool, most of the customers tell us once you're kind of done with R and D, The number of defects you can see in a 2 hour recipe isn't enough to continue to run section. So they typically are not using manufacturing. I think the customer base overall came into evaluating the eProbe assuming it was a similar situation.

Operator

And what they're finding now with the 350, given The machine's ability to scan a few 1,000,000,000 features per hour. So in a 2 hour recipe, measuring pretty close to 10,000,000,000 features, It's actually finding defects even as the note is maturing. And So now I think people are just starting to scratch their head saying, well, maybe this can actually be used in manufacturing, that would be a first. And as you know, for things like 3 d defects like via voice and shorts and gate all around structures, there's really no inspection technique other than an electrical test that can see them. So usually, eventually people give up on inspection and just try to control things with metrology.

Operator

We believe the ePRO has the potential of giving them a way of controlling it with an inspection technique. The roadmap will continue to improve the throughput of the machine over the next year. Section. And so we believe we can keep up with improving defect densities at our customers. I think the customers are encouraged by that.

Speaker 6

Got it. And the revenue model here is equipment as a service?

Operator

As of today, yes.

Speaker 6

Yes, okay. Got it. And then switching over to the acquisition,

Speaker 1

section. I just want to make

Speaker 6

sure I understand what you're doing here. It sounds like you've got a question on the line of Chris and You're looking at the battery, you're looking at wells and if you're going to move it into the back end, maybe it's wire bonding, and you're going to collect massive amounts of images and just use MLAL AI rather against those images to suss out fuel failures.

Operator

So the assembly and the back end, you said wireline, I think you mean for the IP production. There's a number of ways where it just captured in the back end, not just bonds, but chip finishing and other things like that. So there's many places to apply section of Pattern in Image Recognition Pipeline and Assembly. For the battery area, the information is really about the section. Great information on the cathode and anode as the different materials are applied.

Operator

Section. Customers want to take very high speed images because these things are on a roll that move at section. And I want to capture images of those grains that predicts the spaces in the grains and different things to give you a prediction about section. Is this battery what's this battery's lifelike going to be like? How stable is this battery?

Operator

Is it going to perform to spec? Section. So we have a partnership with Voltaic. They have end of line extraction of electrical behavior. This gives you an in line measurement and then our process control products give you the ability to collect data section.

Operator

The equipment that's rolling the material, the rollers, the pressure being pressed when you're applying the pace, section. The alignment of the film as it's running over rolls, etcetera, that data we already collect. So it's really tying those three pieces together to create an end to end like situation for battery as we've done for IC manufacturing. And you can think of the image as kind of like your in line inspection data collection point. What we're focusing on there is the MLP software.

Speaker 6

Right. No, absolutely makes sense. And then Just back to DFI for a second. Have you kept 1 in house for demos and are Building a couple more, what's that pipeline of assembly look like?

Operator

Yes. We look to have A few machines in house even after this to be able to do demos incremental software and hardware development. We have placed some purchase orders for long lead items on further machines and we've been doing that over this first half of the year as we've increased our confidence, you probably saw that in our capital spending in the first half of the year. We do feel like The industry has wanted to wait for you boys and varied shorts for as long as I've been in the industry and it's only exacerbated By the fact that you have 3 restructures now, we feel like it's a very useful capability if we can prove you can do this in section very high feature count. You can be measuring $20,000,000,000 on an inspection time.

Operator

You can see very small deviations in yield.

Speaker 2

Our next question will come from the line of Andrew Weier from Sanjay Capital. Your line is open.

Speaker 7

I just wanted to follow-up on DFI segment, correct?

Operator

Correct.

Speaker 7

And is that for an advanced logic application as well? Section. And maybe if we look out into 2024, how you're thinking about, if we section. Just expressed some increased optimism around DFI. We've obviously been waiting for a while for this to become a real commercial opportunity.

Speaker 7

So you now have 2 with your lead customer, you're adding a second customer. It sounds like As you said to Gus, you're ordering some more advanced parts. How do you look at the growth opportunity as you get out Next year, what has to happen and is it around penetrating these 2 lead customers Deeper or are there other, if you want to call them pilots where you're running wafers in house, where you think there's an opportunity to ship new tools to new additional customers in 2024?

Operator

Yes. So it's a great way to frame the question. Andrew, let me see if I can give you section as well organized answer. So first, as you know, because I've said this many times, to me the single most important thing was to get a second tool into the lead customers That means you've filled up the capacity of 1 and now they need to have a second. And so this was a really super big milestone for us that I think it's the first important thing that emboldened us.

Operator

Along the way, we started doing some pilots, as you referred to them, with customer sending us wafers on-site. We did that only with one other customer at the time, again, because we felt like 80% of our effort should be establishing that the REIT customer would need to, right? There's no point in going and spreading yourself thinly across many companies just to keep on doing the same thing. We've got to prove that we have a winning solution. We feel much more emboldened after the lead customer digesting a second.

Operator

Now, we're in a position that we feel like, okay, we can section, ship a third machine to that new customer. What that lets us also demonstrate is The uptimes and utilizations have been really remarkable for an e beam tool on the first machines. I think People were quite surprised by how strong they were. We want to be able to demonstrate that that really does work broadly across a couple of customers, while also increasing the aperture of taking on pilots from other customers and potentially other parts of the chip market. So We haven't really done much with memory yet.

Operator

We will go back and look at that. There are additional opportunities that we see. So in 2024, we would like to start seeing section. More success at the first customer is the most important thing. Secondly, starting to drive revenue in that second customer and getting for additional customers.

Operator

Some of that will expand the aperture outside of Leading Edge Logic.

Speaker 7

Maybe then switching gears for a second. You called out silicon carbide as an area of strength. I think historically you've talked about it as a significant opportunity longer term, But given the volumes relative to other parts of the semiconductor industry, despite the excitement around it, it was not material. Are you starting to see that become material? And we've seen obviously some very large commitments made to section.

Speaker 7

Sort of traditional Exensio PDF customers who are in provide Silicon Carbide solutions. Section. Would you expect that to grow materially as you look out into 2024 and 2025? And how would you think about that trajectory relative to sort of The trajectory of Silicon Carbide Industry as a whole.

Operator

Yes, thanks for that. Yes, a couple of data points there for you, Andrew. So when I was meeting with some of our early cloud site customers and reviewing with them cloud statistics, I do occasionally as section like drop in on some of our customer meetings. The customers have been telling me that they are a lot of the Driver for the existing cloud sites has been their silicon carbide business. So we are seeing that.

Operator

We started seeing customers on the process control side start to deploy for these new silicon carbide and other IGBT like technologies for our capability in this first half of the year, Q2 in particular. So we do anticipate silicon carbide being a driver for our business as we look out into 2024 and 2025. And part of that is because a number of the companies that are in the Silicon Carbide business happen to be historic PDF customers. So they're already natural it's natural for them to extend their Exensio deployment into these new facilities as they stand them up and start tooling them up. We do anticipate that.

Operator

And we do also anticipate this gives us an opportunity to go to companies that have not historically been a PDF customer, who are making a big investment in silicon carbide because in comparison to IGBTs and other high voltage The manufacturing challenges are very substantial as have been reported in the press. Section. And so, using an analytics platform and all the way down to the equipment control and equipment connectivity is more important for these customers than it has been for the conventional high voltage transistor production. It is a much, much more complex production as it's now becoming realized. We expect there to be 4 meaningful processing elements to these working flows as opposed to really just wafer flow package and test.

Operator

You have to grow the ingot, you need to use something like the soy tech smart cut technology, You have the front end processing and then you have packaging and system packaging. So it's quite a end to end analytics, we believe, will be important for that customer base. And so, yes, we do anticipate that being a growing part of our business in 2024 2025.

Speaker 7

Section in the ground or dollar invested in capacity expansion across, let's say, like advanced logic, silicon carbide and then Maybe either like mixed signal or mature notes. How do you think about what the revenue opportunity for PDF is across section. The different buckets and if one that's even quantifiable and 2 sort of maybe even on a relative basis.

Operator

Yes, that's a super great question. Andrew, we've been trying to understand that a little bit ourselves. It's hard because some of our customers are multi end market and customers. So, for example, we have IBM customers, they make silicon carbide transistors, they also embedded controllers, they do mixed signal analog parts, they do a lot of different things. And so, for For some of the enterprise class customers, sometimes it's hard to peel that out unless we know what sites they're logging in from specific sites and which sites those are or Data is getting loaded from certain sites so we can kind of get some understanding of kind of how they're using the system and what parts of their business are driving growth.

Operator

So we don't have a really easy way to quantify it just yet. What I can tell you is, section. For Exensio, we've always found there's as much business on the trailing edge and high voltage and silicon carbide as there is on the leading edge. In other words, a company like an On Semi or an ADI or section. And ST, they drive as much analytics as our high our leading edge customers drive.

Operator

And that's in part because the number of products tend to be a lot more. So while a leading edge company may have section 100 or a couple of 100 different products or maybe up to 1,000. Our customers on the trailing edge may have 70,000 products they need to keep track of in Exensio. Section. So, the characteristics are different.

Operator

We haven't figured out a way to kind of model it the way you're describing. I find it intriguing the way you've section broken it out, but it's not what we've done so far. We've looked at kind of just wallet share in customers and say, okay, how much Are they spending on manufacturing? What should the analytics spend beyond that? And frankly, it's still in the

Speaker 7

And then maybe last, I just wanted to follow-up on Christian's question and put like a little bit more of a fine point on it. You made comments about the ability to grow the analytics business. And putting IYR aside, I think You talked about even the potential to return to sort of the 30 ish percent growth rates that you had experienced over a number of years. If wafer equipment sales were to return to flat to modestly growing, Were you saying that the pipeline is robust enough that if you guys can execute against closing deals that you see a path to returning to that sort of 30 ish percent growth in analytics over Sort of a couple of year period.

Operator

Yes. I think you're maybe stealing the thunder for what we'll talk about on the user conference. Section. And we're still, I think, working that through. But I mean, in general, what we feel is the following, Andrew.

Operator

We do believe there is a very significant universe for our customer base. That is a big opportunity for Exensio and our overall platform for analytics. Section. As I said to Christian, if we can get a return of equipment sales Growing a little bit, at least not decreasing like it had, starting to grow a little bit more meaningfully, getting back to the levels they were before section and have a having the IYR return to the volumes they were at before. We do believe we can achieve over the 20% growth.

Operator

To get back to of 30% growth. We're going to go back and do sharper pencils and say what needs to return in the overall environment because as I said in my prepared remarks, we did see a couple of things slide out from Q2, one of which already a couple of which already closed in the early part of Q3. Section. We want to see that robustness and bookings return on the overall analytics business. And I think, as I said, there's an awful lot of activity out there.

Operator

So we do believe that demand is there. We'll just see how customer confidence happens in the second half of the year.

Speaker 7

And my last question, apologize. Both you and Adnan called out as one of the constituents where you're seeing strong interest Our activity is obviously around government, either subsidized or sponsored investment in New semiconductor capacity and sort of enhanced supply chains. Are you seeing direct opportunities there or is that all going to be indirect? And has that shown up in pipeline yet or is that more

Operator

Yes, that's starting to show up in pipeline, Andrew. It's mostly through the companies the governments are funding, some of which are existing companies, some of which are new companies. But you can also imagine, given PDF's pretty unique perspective in the industry. Our footprint across the world And our experience with everybody else that's tried to get into this industry over the last decade or so, the governments themselves From time to time, do reach out to us and we do have dialogues with them to understand what they should be thoughtful about. We have not really put in our pipeline business directly with them and we really don't focus on it, but it does help us understand what their intention and motivations are.

Operator

And since in effect, in many of these cases, they are the owners, right? They are the ones writing the checks. It's good to understand what ownership wants. Section. So, we do see those as an opportunity for us to be educated on their vision and their drive and then for them to understand our perspective section what it's taken in the past to be effective at introducing creating a new entrant in semiconductors.

Operator

It's not an easy activity at all.

Speaker 2

Section. And at this time, there are no more section. Ladies and gentlemen, this concludes the program. Thank you for joining on today's call. Everyone have a great

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