PDF Solutions, Inc.
Q4 2007 Earnings Call Transcript

Published: 8 Feb 2008

[Operator:]

Good day ladies and gentlemen and welcome to the PDF Solutions Incorporate conference call to discuss its financial results for the fourth fiscal quarter ended Monday, December 31, 2007. At this time all participants are in a listen only mode. Later we will conduct a question and answer session for which instructions will be given at that time. (Operator Instructions) As a reminder this conference is being recorded. If you have not yet received a copy of the corresponding press releases they have been posted to PDF’s website at www.PDF.com. Some of the statements that will be made in the course of this conference are forward-looking 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 page 11 through 19 of PDF’s annual report on Form 10K for the fiscal year ended December 31, 2006. A similar disclosure and subsequent SEC filings or forward-looking statements and risk stated in the conference call are based on information available to PDF today. PDF assumes no obligations to update them. Now, I’d like to introduce John Kibarian, PDF’s President & Chief Executive Officer and Keith Jones, PDF’s Chief Financial Officer. Mr. Kibarian please go ahead sir.

[John K. Kibarian:]

Welcome everyone. Today I’m going to discuss the results of the fourth quarter 2007, summarize key achievements for the year 2007 and discuss our outlook for 2008. For the fourth quarter 2007 PDF Solutions is reporting total revenue of $24.6 million and non-GAAP net profit of $0.21 per share. Gain share was $6.5 million. All of these results are in the ranges we provided in October. Keith will talk more about these results and our guidance going forward in a few minutes. Let me start by sharing some highlights of the fourth quarter. Overall, we had a good bookings quarter for new and extended engagements. We signed a letter of agreement for a 45-nanometer DFM engagement with a fabless company. A letter of agreement for a DRAM engagement with an existing client and a contract for a yield aware FDC prove out engagement at 65 nanometer logic with the new client. We also signed further extension to two engagements one in logic and one in DRAM. These contracts, extensions and LOAs were in Europe, Japan, US and Asia again highlighting the strength of our account teams around the world. In addition to good bookings we achieved the high end of our guidance for gain share. Q4 was our second largest quarterly gain share revenue in the history of our company. We are proud of our accomplishments in 2007. It was a year in which we made significant progress in our growth strategy focusing on transforming the semiconductor process life cycle from R&D yield ramp to mass production. In 2007 we continued to invest in our world class solutions to address the needs of our customers. For example, for our 45-nanometer clients we released a new characterization vehicle infrastructure that provides 10 times the information in the same test time while minimizing operating costs included those associated with emersion lithography. We gained more customer adoption of our yield aware FDC solution. Yield aware FDC is the combination of our CV infrastructure, yield know how and FDC systems. It is being evaluated and adopted by our clients to solve process control challenges of 90 nanometer, 65 nanometer and 45 nanometer production. During 2007 we added two customers and extended contracts with customers who adopted this new technology in 2006. We acquired new IP design technology and known how from fabrics and launched our PD Brick solution which will transform how manufacturability will be integrated into early stages of design. We also signed contracts with customers in 2007 for this technology demonstrating that our clients realize its significance. In 2007 we drove significant strategic engagements in memory demonstrating that we are successfully expanding beyond our traditional logic manufacturing customer base. Although logic and memory differ significantly in terms of design complexity and manufacturing process the fundamental challenges in characterization of the nano technologies are the same. In fact, we demonstrated that our solutions met the needs of our memory customers with very little additional investment. We were able to help one memory client exceed industry benchmark yields allowing them to obtain superior cost structure and therefore greater competitiveness despite the down turn in the memory market. With such positive impact this customer proceeded to expand their relationship with PDF into the deployment of our other solutions. They also proactively introduced us to another DRAM customer with whom we signed an initial contract in Q3. Our investments in new technologies and markets continue to be valued by our clients. In 2007 PDF grew revenues 24% over the previous year slightly ahead of our four year compound annual growth rate of 21%. Moreover, the projects that entered the measurement phase in 2007 have achieved the maximum performance targets set with the client. This establishes strong gain share potential for the future. More importantly, this means our clients are getting great value from PDF’s technology. Clients that get great value tend to be repeat clients who broaden the use of our technology which bodes well for our future growth. As we look forward to 2008, PDF is well positioned to address the evolving needs of our customers. Both the breadth of our solutions offering and our business model will prove to be advantageous as we navigate what are admittedly difficult market conditions for logic and memory customers. For logic customers there is an increasing focus on streamlining the entire process life cycle whether making your designs more manufacturable with PD Bricks or ramping their yield with our IYR solutions or improving production controls with yield aware FDC. For memory customers the need to transition cost effectively to new nodes will drive the adoption of PDF’s yield ramp solution and yield aware FDC and of course, in general our gain share model allows us to continue to reap the benefits of customer investments made in previous years. Overall, as customers are increasingly concerned about the cost of using new technology both from a design and production perspective PDF’s offering will adjust their concerns and are designed to provide immediate returns on their investments. So, how does this translate into our expected performance in 2008? We expect design to silicone solutions to be up quarter-over-quarter in Q1 as well as for the year. This is driven by continued adoption of logic yield ramp, memory yield ramp, yield aware FDC, PD Bricks as well as improvements in our software business. We expect modest growth for gain share in 2008. For Q1 we expect gain share to be down quarter-over-quarter due to volumes but overall expect gain share to grow for the year. We expect our operating income to improve significantly in 2008 over 2007 as we improve the efficiencies in our business and leverage the investments we have made over the last few years. However, EPS will somewhat be offset during 2008 as we move to paying taxes in contrast to the tax benefits we received in 2007. Overall, PDF is well poised to help semiconductor companies negative a turbulent economy. Our solutions help manage costs and increase the results of cost of process life cycle. We look forward to 2008 with confidence in the value we will create with clients as we deliver those solutions to challenging technical and business problems. Now, we’ll turn the call over to Keith who will discuss in detail our financial results for the fourth quarter and our guidance going forward.

[Keith A. Jones:]

Good afternoon everyone. Let me again state that this presentation and our press releases issued earlier today include references to certain non-GAAP financial measures. The press releases contain a reconciliation of such measures to the most directed comparable GAAP measures and you may access the press releases and reconciliation in the investor section of our website located at www.PDF.com. Revenue for the fourth quarter ending December 31, 2007 totaled a record $24.6 million an increase of 30% and 2% when compared to the fourth quarter of last year and last quarter respectively. These results were in the range we provided in October. Compared to the fourth quarter 2006 improvement was a result of increases in both design to silicon solutions and gain share. Compared to last quarter the improvement was a result of increase in design to silicon yield solutions more than offsetting a small decline in gain share. We are pleased that gain share was at the upper end of guidance provided in October. Design to silicon yield solutions revenue totaled $18.1 million for the fourth quarter an increase of 28% and 5% from the comparable period last year and last quarter respectively. Services revenue increased 53% from the comparable period last year and 8% from last quarter. Standalone software license sales continue to show weakness and evidence of volatility declining 84% and 57% from last year and last quarter respectively. As John discussed, bookings for the quarter were solid. We closed two LOAs with existing customers which should lead to new full engagements. One was for a memory node and one was for a DFM project at a fab less customer. We also signed two extensions to existing engagements and lastly we signed and kicked off a yield aware FDC evaluation with a new logic customer at 65 nanometers. Expectations are for a full favorable outcome for this evaluation leading to a full engagement before the end of the second quarter. During the fourth quarter 15 integrated solution engagements from 13 customers each contributed $150,000 or greater in revenue. This represented a net increase of one engagement during the quarter. Gain share revenue for the fourth quarter totaled $6.5 million, a 33% increase versus the comparable period last year and an expected 5% decrease from last quarter. Gain share revenue was generated from six customers and nine engagements, a net decrease in one engagement and one customer during the period. Gross margin for the fourth quarter of 2007 excluding stock-based compensation and amortization of core technology was 64% of total revenue and increase from 62% during the fourth quarter of 2006 and a decrease from 68% last quarter. The increase from last year was a result of improved service margins on integrated solutions while the decline from Q3 2007 resulted from the decrease in gain share and software licenses, coupled with higher material costs on certain engagements. Gross margins for the year ended December 31, 2007 improved slightly to 68% from 67% for the year ended December 31, 2006 and we expect to see a rebound during the fourth quarter into the upper 60s in the first quarter 2008. Total operating expenses excluding stock-based compensation expense, the amortization of acquired intangible assets and a write off to end process research and development were $14.5 million for the quarter up approximately $2.8 million or 24% from the fourth quarter of 2006 and up approximately $938,000 or 7% from last quarter. The increase from last year was due to increases across all functional areas primarily the result of a full versus partial quarter of expenses resulting from our acquisition of Si Automation on October 31, 2006, the acquisition of Fabbrix, Inc. in May, 2007 and expansion in France, China and Korea plus increase legal and accounting services, the additional use of subcontractors for developed initiatives and variable compensation. The increase from last quarter is a result of increases in legal and accounting fees, greater utilization of outside development resources and variable compensation across all functional groups. Research and development expenses excluding stock-based compensation totaled $9 million for the fourth quarter, an increase of approximately $1.5 million or 21% from the fourth quarter of 2006 and an increase of approximately $556,000 or 7% from last quarter. The increase from last year was primarily the result of a full versus partial quarter of engineering expenses resulting from our acquisition of Si Automation, the acquisition of Fabbrix, Inc. and the use of outside development resources and increased variable compensation costs. The increase from last quarter was primarily the result of increased use of outside develop resources and increased variable compensation cost. Selling and general administrative expenses excluding stock-based compensation were $5.5 million during the fourth quarter 2007, an increase of approximately $1.2 million or 29% from the fourth quarter 2006 and an increase of approximately $382, 0000 or 7% from last quarter. The increase from the comparable period last year was the result of a full versus partial quarter of SG&A expenses resulting from our acquisition of Si Automation and increases in legal and accounting expenses, variable compensation costs, and outside sales commissions. The increase from last quarter was primarily a result of increases in legal accounting expenses both domestically and associated the statutory audit in Sarbanes-Oxley implementation program in France and variable compensation costs. In 2007 expenses grew at the same rate as our revenue. As we made many investments to facilitate our growth such as expediting the integrations of the technology acquired from Si Automation, expansion of our presence in Korea and China and the use of outside resources for development initiatives. Many of those expenses are one time in nature or variable and we do not expect them to continue in 2008. Reiterating the statement we made in our press release in addition to using GAAP results in evaluating PDF’s business management also believes it is useful to measure its results using a non-GAAP measure of net income which excludes stock-based compensation expense, amortization of acquired intangible assets, the write off of in process research and development and the related tax effects. Non-GAAP net income for the fourth quarter ending December 31, 2007 totaled approximately $5.8 million or $0.21 per share in the middle of the range provided in October. This compares with non-GAAP net income of approximately $2.3 million or $0.08 per share for the comparable period last year and non-GAAP net income of approximately $5.3 million or $0.19 per share during the third quarter of 2007. On a GAAP basis including stock-based compensation and the amortization acquired intangible assets we reported net income for the fourth quarter of approximately $1.1 million or $0.04 per share. This net income includes $3.8 million in stock-based compensation and the amortization of acquired intangible assets. Turning to our balance sheet at December 31st, total cash decreased to $45.3 million a decrease of approximately $4.7 million during the quarter. Operating activities use approximately $3.5 million in cash during the fourth quarter, primarily the result of increased accounts receivable. Capital expenditure used approximately $528,000 during the quarter. Employee stock plans generated $813,000 in cash and $1.5 million was used to repurchase a total of 201,000 company shares in the open market at an average price of $7.55. Our accounts receivable increased $5.9 million to $38.5 million as timing of invoices and payment terms in most recent contracts negatively affected our ability to collect accounts receivable before year end. Despite this effect and the increase in balance, the aging and collectability of our receivables remains very healthy. Before turning to guidance I’d like to reflect a moment on our results from 2007. Total revenue for the year was a record of $94.5 million, up 24% from the $76.2 million in 2006. Gain share revenue for the year was also a record $24.1 million up 20% from $20 million last year andnon-GAAP earnings per share was $0.71 up 61% from $0.44 in 2006. Our growth illustrates the value we deliver to our customers and their confidence in our solutions and technology. Now turning to our guidance, I will state again that some of the statements made in the course of this conference call including the ones that were about to make with respect to Q1 fiscal 2008 are forward-looking. These statements include expectations about our future financial results and performance, growth rates, the success of any business objectives, product and service features and introduction, client products and demand for PDF design to silicon solutions. PDF’s actual results could differ materially. You should refer to our current SEC filings and understand the forward-looking statements made during this conference call are based upon the information available to PDF today. We assume no obligation to update them. For the first quarter of 2008 we reiterate the guidance we provided in our outlook press release earlier today. Total revenue is expected in the range of $23.5 to $24.5 million. Gain share revenue in the first quarter is expected in the range of $5.3 to $5.8 million as current customer volume projections reflect a decline in gain share from last quarter. Non-GAAP revenues per share for the quarter, is expected in the range of $0.08 to $0.10 per share and includes an estimated annual tax rate from 20 to 25%. Despite the negative effect of a significant move in our 2008 tax rate we anticipate operating income to grow materially over 2007. As John mentioned, we expect to grow design to silicon yield solutions revenue over both last quarter and total year 2007. However, we enter 2008 against a fairly strong headwind in the semiconductor industry, affecting our estimates for the first quarter gain share although our clients tell us production volumes and hence gain share will increase throughout the remainder of the year. We believe that we have invested in the right places during 2007 to accelerate the expansion of our technology and broaden our service offerings, as a result. We believe that we are well positioned to continue to grow our business in 2008 as our new offerings take hold and we tighten control over our variable expenditures. With that I’d like to turn the call back over to the operator to open the floor for questions.

[Operator:]

(Operator Instructions) Your first question comes from the line of Tim Fox with Deutsche Bank.

[Tim Fox:]

Just digging into the fourth quarter results for all of this, first the operating income and margins were sort of well below where we had anticipated and obviously you’ve reached your target EPS number on a non-GAAP basis primarily from tax benefits. Just wondering in the quarter what was it that really drove the higher operating expenses? You mentioned use of outside development and the variable compensation costs and as a follow on to that how are you intending to grow the operating income meaningfully in 08, given the recent trends and some of these extra costs?

[Keith A. Jones:]

Regarding the operating expenses what we saw is a spike, and as I mentioned during my script and John alluded to as well, that we did have some kind of nonrecurring costs. In particular as we see the acceptance and the excitement in the marketplace for our PD Bricks technology and our yield aware FDC technology we really did accelerate the spending that we had there so there was some one off sub-contractor costs that we incurred just to help bring those products to market and make them more robust sooner rather than later to make sure that we capitalized on that opportunity. Secondly, what we have is with our corporate funds program, if you will, it is based on an annual result so thus by default you tend to have a little bit more of a back loaded expense when it hits to the extent you have to wait until the end of the year before we tally up and see how we did compared to our expectations. So in line to what you might have expected, those are two anomalies that you probably would not have known to necessarily predict from us. Then in general, as we go into 2008 as I said during my discussion, we did make a lot of investments in 2008 to expand into these new areas that I just talked about and then I think that really set a good platform of where we’re going to move with our products and our offerings going forward. And just like all companies we’re looking at areas where we can become more efficient and we see a lot of opportunities to become more efficient and focus on those areas that gave us the greatest amount of opportunity and with that instead of being in 10% of operating income, we expect that to be substantially higher as we go to 2008.

[Tim Fox:]

Okay and just maybe to help us model a little bit in thinking about, you obviously haven’t given a full year revenue guidance number, but are you thinking in terms of growing expenses at some percentage rate lower than the top line, sort of half the rate of the top line or anything directionally like that to help us think about how the year may shape out?

[Keith A. Jones:]

I think half is a good way to kind of look at it and how we kind of look at it ourselves internally. Obviously, to grow the business we do have to spend as we take on new customers and our R&D spending has to stay ahead of the curve of the industry but having a growth rate as the same as revenue just doesn’t make sense and candidly, it’s not necessary for us at this stage either.

[Tim Fox:]

I guess for John just in looking around the industry obviously you mentioned some headwinds from customers, can you talk a little bit more specifically about some of the discussion you’re having with customers as it relates to moving to new process nodes? Just exactly how cautious are they being? Do you think it’s affecting your rate of being able to close deals at this point or is it more just cautionary in general?

[John K. Kibarian:]

On the DRAM side I think the customers are really totally focused on moving to the new nodes. They realize that operating improvements in the trailing edge nodes like 90 nanometer for them are just - there isn’t enough you could do to make it work at $1.80 or now $2.10 spot price for the ER2 chip. So we’re seeing a lot of activity on - it’s actually helping us quite a bit on flying into the newer nodes on the DRAM side. That is their only card to play per say. We did see customers when we looked at the volumes, our gained share is primarily logic. The headwind that I was referring to is what we see as the logic volumes, for us in the first quarters with the gain shares. We did see stuff tail off throughout the quarter and our estimates for Q1 coming down which is why we said our gain shares number down I think measurable from where probably you and the owners had modeled it for Q1 of this year. That was what I was really speaking about. As far as Logic customers are concerned you know I have thought for quite a while that if I were a logic designer either IDM or fabless I would look quite a bit at what am spending on doing a new design and what nodes make sense to use and clearly I think that why we made the investment in bricks. The customers need to do something to make their design cost more manageable so they can take advantage of the future that the newer nodes provide to them. I think that’s why we’re seeing activity on the brick side. With the Logic customers we saw that at the end of 2007 and we expect that more in 2008.

[Tim Fox:]

Okay. Just lastly can you give us an update on the IBM relationship and the coalition that they’ve developed and whether or not that’s been able to provide you any opportunity to expand your relationships or footprints across there, and could we see some benefit from that partnership in 2008?

[John K. Kibarian:]

Yes so as you know we’re always really careful about talking about any specific relationships with any customers. I know that we’ve at times had to declare IMB as a greater than 10% customers so it’s obvious that we do business with them and we’ve also said many times that partnerships and alliances are very good selling opportunities for us because partners need to share results to get the benefits of being partners and our infrastructure really provides that. Alliances have been, in the Logic business, have been very good for PDF business historically, the one you allude to is a good example. We see some of that happening on the memory side as well in the future as their R&D challenges are going to become more and more substantial. We don’t speak specifically about the IBM alliance but you know but charter does refer to us on their web sites and you can kind of already see some of those side benefits of the IBM alliance and what it may do for our business and will continue to do. I think you can expect that logic is going to consolidate down to a small number of developers with a fair number of licensees and that is a really good environment for PDF to sell into.

[Operator:]

Your next question comes from the line of Matt Pekun with DA Davidson.

[Matt Pekun:]

I don’t know if I caught it be Keith did you mention the number -I think you said you had 15 active IYR engagements in the quarter. Did you say how many customers were represented by that number?

[Keith A. Jones:]

Actually we said we had 15 integrated solution engagements and we had 13 customers that each contributed greater than $150,000 in revenue.

[Matt Pekun:]

Okay so flat sequentially?

[Keith A. Jones:]

Actually we’re up one in the number of integrated solutions we were at 14 last quarter.

[Matt Pekun:]

But the number of solutions for the customer count was the same?

[Keith A. Jones:]

Relatively yes.

[Matt Pekun:]

Okay. And then, you know from my perspective at least and I hope you guys would echo this, it seems like the last couple of quarters we’ve seen a nice pick-up in the engagement activity and deal closures. When you look out at your solutions revenue in kind of the service business throughout 2008 would you expect to see relatively linear growth as a result of the recent engagements and extensions that you’ve signed up? Or, do you think that there could be some lumpiness?

[Keith A. Jones:]

I think the integrated solution is going to probably - the mix in and of its self is going to be pretty lumpy. I think the opportunities that we see are very exciting and are going to prevail us with a lot of opportunities. However, what we’re seeing is that with a lot of our technology in terms of how we wrap it and package, it we can add a lot of value to our customers. But it will be a little bit lumpy, year-over-year growth for sure and that mix between particular categories will kind of change as we go throughout the year.

[Matt Pekun:]

Okay and then on the gain shares side obviously next quarters down a little bit, some of that I’m sure seasonal and this quarter you had fewer customers and fewer deals contributing. Does that number continue to erode, kind of reflecting the soft patch of engagement activity we saw in the past? Or, do you think that this is near the bottom when it comes to the number of contributing deals?

[Keith A. Jones:]

I don’t see it decreasing more than what we have right now and to be clear, it was one customer net change of one contract and that customer that we had lost actually was not a significant contributor for gain share for us so it didn’t really impact our revenue number greatly.

[Matt Pekun:]

And do you see, I think you said that - or John said that gain share would be up slightly this year. Is that correct?

[Keith A. Jones:]

Yes.

[Matt Pekun:]

No are you attributing that slower growth to the overall environment? To fewer new gain share contracts coming on? To what would you attribute the slower growth this year?

[John K. Kibarian:]

If you look at the middle of our range 5.3 to 5.8 that’s 5.5, our Q1 07 was a 5.5 gain share quarter. So for it to be up modestly we need to see a faster growth rate quarter-over-quarter in the year then we saw in 2007. We have a lot of contracts that have finished or are finishing their measurement periods and we hit very good target, basically we hit max or high percentage of the target which means theoretically they should be able to come on line sometime in 2008 as they cross their volume threshold. We don’t always know and we can’t very well predict where they are. The numbers that we put together for ourselves as we looked out over the year, were over the contracts that we felt we understood why they we’re going to go to volume in 2008 and put those into our estimates for what we said was then modest growth throughout the year.

[Matt Pekun:]

Okay and then I don’t think I’ve seen for several quarters now a new yield aware FDC deal with gain share. Has there been any?

[John K. Kibarian:]

Yes there was in Q3 a yield FDC deal that had gain share associated with it.

[Matt Pekun:]

In Q3?

[John K. Kibarian:]

In Q3, this Q4 one is a short prove out contract. One of the things we like about yield aware because it’s like your traction control on your car, we can demonstrate it, turn it off and you’re back to the usual driving habits you had before we turned it on, which is a great way for us to be able to sell. And during that little trial period, we can charge a reasonable amount of money so it’s not like it’s a free evaluation, it’s a paid evaluation and they get to see the benefits, we get to turn it off and still charge for it and establish the gain share value.

[Matt Pekun:]

Is that the new Logic customer eval you’re talking about?

[John K. Kibarian:]

That is correct.

[Matt Pekun:]

Okay and then secondly you had two extensions and then two new LOA, one with the memory customer and one a DFM contract. Is that correct?

[John K. Kibarian:]

That is correct.

[Operator:]

Your next question comes from the line of Mahesh Sanganeria with RBC Capital Markets. Analyst for Mahesh Sanganeria – RBC Capital Markets A couple of quick questions, the you guys showed a fairly significant growth in the DOI segment ’07 versus ’06. is it possible to break that down between your personal products versus the newly acquired FDC and PD Bricks.

[Keith A. Jones:]

Actually, not to be evasive it is actually difficult to do so because in the earlier question that we had when I talked about some of the lumpiness that we reported there’s a combination of offering that we have so you can’t easily break out PD Bricks because we have sold a PD Bricks with a yield ramp engagement and likewise with some of our other offerings there actually comingled. So our focus is really more so on the customer penetration versus that particular offering at least it doesn’t make, it’s not a easy way to kind of break it out.

[John K. Kibarian:]

So I was just speak a little bit on that KC. So especially if it is yield aware FDC it’s a combination of the software that Si has previously provided, RCV’s service teams etc, that’s really the, that’s was the raison d’etre that we made the purchase of that company. That really is an integrative piece of the business, that’s the growing and important part of the business that was really facilitated by that acquisition. But it’s hard to say how much of that comes from either one of the prior companies. Analyst for Mahesh Sanganeria – RBC Capital Markets Speaking to the DOI segment given the headwinds that you folks were talking about, is it reasonable to expect a growth that is much slower in 08 than what you saw in 07?

[Keith A. Jones:]

Well we anticipate and John had mentioned that we were historically been at a 20% comp and annual growth rate. At this point in time we do – we’re very excited about the opportunity but we don’t anticipate to continue to grow at that same rate but we do something obviously in the double digits in terms of what the growth rate will be for 2008. Analyst for Mahesh Sanganeria – RBC Capital Markets Are you folks finding that your customers are taking longer to sign contracts? Are you finding pricing pressure from the customers because of the obviously difficulties those guys are facing?

[John K. Kibarian:]

That’s a good question. I think when Keith discussed the growth rate, that number that he provided is really muted by what we get out of gain share. Gain share growth is off past engagements so we’re projecting a relatively modest growth in gain share. That’s really not reflective of the selling environment but more reflective of our customers production environment. As far as selling is concerned, our solutions really go to address customers ability to get a more effective cost structure so this kind of environment is a very good environment from a customer needs perspective,it is at times challenging for them from a budgetary perspective. So, our business model really works quite well in this situation because the customers going to pay for the value really as they get to production volumes and generally speaking that means production volumes at good yields which means that’s more cost effective. So, we have to always think about our fixed fees during this period and make sure we’re doing the things that are going to set us up for the right long term with the customer. But, this kind of environment is a very good environment for our business model. Analyst for Mahesh Sanganeria – RBC Capital Markets How is the imaging business that you folks talked about a couple of quarters ago doing?

[John K. Kibarian:]

So, we’ve sold some engagements to CMOS image sensor customers. We’ve implemented those, we’ve achieved gain share targets on those, we’re waiting for gain share volumes on those. We are out talking with more customers in that area. I think the customer excitement in that area has been more muted this year than it was I think two years ago and we continue to see how we can add value to them. But, I don’t think that’s as big an opportunity as the DRAM market has turned out to be and as we expect flash to be. Analyst for Mahesh Sanganeria – RBC Capital Markets When I look at your past couple of quarters your total revenues has stayed reasonably flat, going back to first quarter of 07. Now, should I read something into that?

[Keith A. Jones:]

I think if you take a look at it we’ve actually posted four quarters consecutively revenue growth and candidly, we’ve actually reported four consecutive quarters of record revenue growth. So I think what you read into that is that with our acquisitions and our new technologies they are taking hold and its real business opportunities. I think if you take a look as John said, that our gain share is a reflection of our past business in terms of how well we achieved our targets and the actual production is a bit out of our control. So as I said, what we see the design in silicon yield solutions revenue team to grow from 2007 to 2008 is going to grow at a faster rate than our gain share which happens to be affected by some of the early feedback that we get from our customers from wafer volumes in the first half of 2008. If I take a look at it and I can bifurcate between gain share and design to silicone solution I think you’d see a nice steady growth rate. Analyst for Mahesh Sanganeria – RBC Capital Markets Okay. And a couple of questions on the balance sheet. The accounts receivable has shown a fairly significant uptick in ’07 versus ‘06. Any comments on that?

[Keith A. Jones:]

Yes in some of our contracts that we had signed in 2007 the milestones in terms of calling out when we were able to build for those particular contracts happened a little bit closer in the back end of some of those contracts. But our customers are really just a world class list of customers. We actually have no problem in terms of collections on those receivables. In 2008 I think you’re going to start to see a pretty dramatic swing of it going the other way when those items start to catch up for those contracts that are in place. So there were probably some past contracts we were delivering on and we’re substantially a way through and as I kind of said during the call, it’s just a matter of the timing being at the yearend where everyone has their yearend budgets and they time things accordingly; the difficulty in kind of collecting that so as we go throughout 2008 you will see that growth to accounts receivables to reverse itself. Analyst for Mahesh Sanganeria – RBC Capital Markets One last question, regarding your taxes why has the taxes now turned positive and is it possible that they do turn negative later in the year?

[John K. Kibarian:]

We’d expected throughout the year to have a tax expense. The benefit that we got in 2006 and 2007 in particular was really through some taxpaying strategies that had some fairly large catch ups and also when you take a look at operating income we were able to hold those credits on an absolute basis. But, as we go to 2008 the amount of profitability that we talked about and as we said, we do plan to grow our operating income significantly, it’s going to yield a tax expense by default even with those credits we developed. So, throughout the year you would anticipate a tax expense.

[Operator:]

Your next question comes from the line of Jeffrey Meyers – Cobia Capital.

[Jeffrey Meyers:]

My first question is on gain share, looking out to the second half of 08, how much of your increase in gain share that you expect is coming from increased volumes with the same guys who were decreasing volumes in Q1? And, how much of the expected increase in gain share is coming from new contracts coming on line?

[John K. Kibarian:]

I’ve got to go back and look at the numbers, but I know of a couple of customers that were making shrinks of transitions at the end of last year after they got through their Christmas build. What typically happens then is you get one quarter lull and then a build up so a lot of the expectation is a build up throughout the year on a transition to a new node is very typical, we’ve seen that before with comps. We have some modest expectations of other contracts also coming on line but we tend to discount those very heavily then we do fabs that are kind of already full running and we know how they work.

[Jeffrey Meyers:]

I guess my main question is how much are you guys expecting the semiconductor market to come back in the second half of 08? Is that why you’re expecting increases or are you expecting things not to significantly come back but for other reasons you’re expecting the gain share to come back.

[John K. Kibarian:]

There are a couple of product transitions that are really, I think, muting the first part of this year especially the first quarter more than we would expect and we’re not expecting that 2008 is going to be a great production year and that’s why overall we have relatively modest expectations for gain share growth this year.

[Jeffrey Meyers:]

My other question is on the software revenue I guess you guys did about $6.5 million in 07, any way to think about that in 08? Is that going to be flattish, or is it hard to tell at this point?

[Keith A. Jones:]

I think for 08 we’re going to see an uptick in that number, but also I did caution that how we plan on selling that because us wrapping that around some of our services and in particular tying that to some of our CV infrastructure and whatnot could add a lot of value which would cause us to up charge more but also to account for it a little bit differently. But, year-over-year our software sales I would expect it to increase, but also as I said in my script, that we expect some volatility quarter-over-quarter and we just continue to see that because the deals can be kind of large in one particular period and you do get a bit of lumpiness.

[Operator:]

At this time there are no more questions. I would like to turn the call back over to Mr. Kibarian for closing remarks.

[John K. Kibarian:]

Thank you for joining our conference call we look forward to talking to you again. Good bye.

[Operator:]

Ladies and gentlemen this concludes the program. Thank you.