PDF Solutions (PDFS) is an underfollowed and unloved stock trading at $12.65/share with $4.15 in cash
and $.84 in ttm FCF/share ( EV/FCF= 10x). While this is attractive, based on expect cash balances at the end of
2016 investors can buy a business with a highly incentivized management team (CEO owns 8% of
company, all NEOs own 16%) for 4x consensus 2016 EBITDA. Additionally, PDF is in the early stages of
commercializing its technology in a new way (Design for Inspection) which represents a call option that
if successful would lead to a very significant increase in revenue and free cash flow. Alas, this seems too
good to be true, so you are right there is a catch--
PDF has missed 2 of the last 3 quarters, and has massive customer concentration issues with its top two
customers, GloFo and Samsung comprising ~80% of revenue. Despite these issues I believe PDFS
presents a compelling risk reward with downside protection based on the value of already contracted
royalty streams (Gainshare) over the next 5 years, significant cash balance, and intellectual property.
PDFS was founded in 1991 by CEO John Kibarian and Kimon Michaels. PDF Solutions helps fabless and
foundry semiconductor companies accelerate process development.
Design for Manufacturability (DFM).
DFM is PDF’s current core business model. Simply put PDF helps its foundry customers achieve higher
yields faster which is very important in the foundry business. PDF gets paid in two ways, through
consulting work (Design for silicon yield solutions) and on a per wafer royalty fee based on achieving
yield targets (Gainshare). Gainshare revenue is 100% gross margin revenue paid 1 quarter in arrears of
In the DFM business PDF signs 5-6 year contracts with foundry customers for specific nodes. In 2013
PDFS hit $26/share as Gainshare from 28nm started to ramp. In late 2014 PDF shares collapsed from the
low $20s to $12 upon news that Samsung had failed to sign a contract for 14nm production. Eventually
this contract was signed, and PDF shares rallied to $19, before falling back to $12 after reducing
guidance on the Q1’15 CC. Weakness at major customers (particularly GloFo) due to excess chip
inventory in the low end of the handset market and some movement of leading edge volume to
20nm/16nm/14nm led to the shortfall. While the DFM business model has significant earnings power as I
will discuss below, it suffers from customer concentration issues.
Design for Inspection (DFI)
DFI presents optionality to PDF shareholders. The idea here is that optical inspection and process control
have limitations at advanced nodes. There is unused space on chips and PDFS has a patent on using this
space for test structures. The technology provides measurements that can monitor the semiconductor
manufacturing process that in theory at should be superior to optical inspection. PDFS currently has
placed its test chips at several large fabless companies including QCOM. DFI is not currently producing
revenue, nor is the business model defined. That said, I believe it has the capacity to significantly expand
PDF’s customer base and revenue over time. Given the uncertainty around DFI, I am not putting
numbers around it, although it is safe to say that if successful it is a transformative development for PDF
and has the potential to make the stock worth multiples of the current price.