PDF Solutions, Inc. (NASDAQ:PDFS) Q4 2022 Earnings Call Transcript

PDF Solutions, Inc. (NASDAQ:PDFS) Q4 2022 Earnings Call Transcript February 16, 2023

Operator: Good day, everyone, and welcome to the PDF Solutions, Inc. Conference Call to Discuss its Financial Results for the Fourth Quarter and Year-End 2022 Conference Call ending Saturday, December 31, 2022. At this time, all participants are in listen-only. After the speakers’ presentation, there will be a question-and-answer session. As a reminder, this conference is being recorded. If you have not yet received a copy of the corresponding press release, it has 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 Pages 17 through 30 of PDF’s annual report on Form 10-K for the fiscal year ended December 31, 2021, and similar disclosures in subsequent SEC filings. The forward-looking statements and risks stated in this conference call are based upon information available to PDF today. PDF assumes no obligation to update them. Now I’d like to introduce John Kibarian, PDF’s President and Chief Executive Officer; and Adnan Raza, PDF’s Chief Financial Officer. Mr. Kibarian, please go ahead.

John Kibarian: 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 the full year, please go to the Investors section of our website where each has been posted. As Adnan will discuss in more detail, 2022 was another record year for total revenue in a year where our analytics business achieved tremendous growth, growing 40% year-over-year. That on top of 63% growth in 2021, which benefited from the inorganic growth associated with our Cimetrix acquisition. Beyond the strong growth, we laid the foundation for continued success in 2023 and beyond. Today, I’ll provide a summary for the fourth quarter and 2022. Our perspective on the market in 2023 and then conclude with remarks about our growth for 2023.

During 2022, overall in Q4 specifically, PDF was increasingly recognized by our customers as critical to their success in developing, ramping and controlling new products and processes. During the year, more than 20 companies booked over $1 million in business with PDF, representing just under 90% of total bookings. These companies span the IC supply chain from equipment makers to foundries to IDMs to fabless companies. They’ve been most end markets also from advanced computing to RF to microcontrollers to memory and into analog chips. Our customers serve virtually all major markets that consume integrated circuits, such as automotive, industrial, consumer and computing. Beyond customers committing to PDF, partner activity in 2022 was at an all-time high as leading equipment, ERP, analytics and cloud partners appreciate the strategic relevance of PDF and the opportunities that we can jointly provide our mutual customers.

Building on our successful dynamic parametric test. In 2022, we announced numerous applications available on Advantest ACS Edge that leverage Exensio’s analytics, AI/ML and real-time control. In the summer, we announced our first products available on the SAP application store. Our collaboration has been well received and evaluations picked up pace throughout 2022. In each case, whether it’s Advantest, SAP, Siemens, K&S, IBM or AWS, we could €“ not just marketing effort, but R&D to fully integrate the partner’s data and capabilities so it’s aligned with the Exensio semantic model. This allows for our joint customers to have benefits in their manufacturing that are not possible before. We anticipate in 2023 and beyond, we will see increased contributions of these collaborations to our revenues.

2022 was a strong year in our product development, the result of continued and persistent R&D investments. to find defects and as a result, ramped faster. We also released our guide analytics module for Exensio, which leverages AI/ML to direct engineers to focus on the part of the manufacturing data that is important to their success. With our customers storing hundreds of terabytes of data and moving to petabytes of data in Exensio, they need to leverage ML to make sure they find the needles in the haystack and control production to achieve the highest yield and liability with the highest throughput. Speed to detect and control for our customers will increasingly benefit from our ML solution offerings, such as guide analytics, and there will be more to come.

We made big advances in tool communication and data collection with our Cimetrix offering, supporting and leading new standards for single die traceability, tool data collection and efficient and secure transfer of the data to the cloud. As a result of customer partner commitments to PDF and our strong product development, analytics revenue grew 40% year-over-year in 2022 to over $130 million. This is over double the $57 million we reported in 2020. With that rapid growth in analytics, which is obviously more than the 20% per year that we committed, came impressive €“ came improvements in gross margin and operating margins. We exited the year with over $270 million in backlog. I would add that we also track shadow backlog, which represents our expectation of future gain share, shipments of Cimetrix’s runtime licenses and overage charges for Exensio Cloud usage beyond committed levels.

When factoring reasonable expectations for these we believe that the company is in a very strong financial position, further bolstered by the positive impact of our products and services are having on our customers’ businesses. Q4 in 2022 demonstrate the success of PDF’s products and solutions in the market. I want to thank our customers, partners, employees and contractors for their commitment to the company. As we begin 2023, the semiconductor environment is very different than it was when we started 2022. Today, our customers are slowing capacity expansions, and in some cases, suffering from oversupply. Offsetting those headwinds, we find that customers are continuing to invest in process and product development. Moreover, the significant shift in supply chain is increasing investments in new capabilities around the world.

Geopolitical factors are increasing government support for restoring capacity. As an Economist magazine article pointed out recently, over $380 billion in government support including the U.S. CHIPS Act, has been committed around the world. Underpinning this increased activity in development and government support for R&D and capacity, we believe are two growth factors that are beyond the usual increased use of silicon in conventional markets such as phones, computing and Internet of Things. First, we believe that technologies such as silicon carbide, high-voltage transistors and semiconductor like processing for EV battery manufacturing will benefit from the shift of the energy economy from carbon-based sources to electrification over the next 10 years.

Production of these products will increasingly need advanced analytics and process control, such as what we provide. Second, the increased use of AI/ML comes at the cost of exponentially increasing amounts of computing. And again, PDF’s capabilities to enable our customers to build these ever-increasingly complex systems and high volumes will be critical. As we look to 2023, our outlook factors in both the caution associated with the oversupply and the opportunities that these longer-term trends provide. With respect to caution, we know that our run-time licenses for equipment connectivity track with our customers’ equipment sales, our gainshare attracts with our foundry customers wafer shipments, and our overage charges for Exensio Cloud depend on the volume of chips processed.

Hence, we do expect that some of our revenues could be negatively impacted by business corrections. With respect to opportunities, we anticipate continued increased demand in 2023 for our analytics platform, particularly to super product and process development and reassuring production capacity. This demand will increasingly benefit from our collaboration with partners, which we believe will contribute more significantly in 2023 than in the past. As a result, on balance and even against the backdrop of over 30% growth in 2022, we expect to grow revenue in 2023. Now I will turn the call over to Adnan who will provide more detailed comments on our results. Adnan?

Adnan Raza: Thank you, John, and good afternoon, everyone. Good to speak with you again today, and I hope all of you and your families are keeping safe. We are pleased to review the financial results for the full year and the fourth quarter of 2022. We posted our earnings release and a management report in the Investor Relations section of our website. Our Form 10-K with final results will be filed with the SEC in early March after review by our auditors. Please note that all the financial results we discuss in today’s call will be on a non-GAAP basis and a reconciliation to GAAP financials is provided in the materials on our website. As John indicated in his comments, 2022 was a year of solid performance for PDF Solutions. We generated record revenues of $148.5 million versus $111.1 million in 2021, a 34% year-over-year increase.

While 34% year-over-year revenue growth is remarkable in of itself, it is worth noting a few highlights. First, the growth in 2022 was entirely organic. After we completed the Cimetrix acquisition in 2020 and delivered 26% revenue growth for 2021. Second, the Analytics business grew in 2022 at a 40% year-over-year rate. Third, we saw positive customer momentum in all our analytics product families of Exensio, Cimetrix and leading edge. Our bookings for the year were strong at over $200 million and grew faster than our revenue growth rate. While we are pleased with the strength of bookings, we are even more pleased with the strong and healthy backlog at the end of the year, exceeding $0.25 billion. Our backlog of $278 million grew 55% year-over-year and gives us a solid foundation for predictability and longevity of the business.

The strong bookings and backlog are a testament to the value customers see in the PDF platform, including data collection, connectivity and powerful analytics. For the full year 2023, we expect to grow total revenues at rates approaching mid-teens percent on a year-over-year basis. Over the longer term, we continued to remain committed to our 20% or better growth rate target for the analytics business. For the fourth quarter of 2022, our total revenue was $40.5 million, up 36% versus Q4 of 2021. Our analytics revenue this quarter also grew 32% versus the same quarter of prior year. We also saw strength in our IYR business with 69% growth versus the comparable quarter of prior year, primarily driven by an increase in gain share. Our gross margin was 74% and we reported EPS of $0.19 per share for the fourth quarter.

Turning back to the full year 2022 results, I will now provide detailed comments. For the full year analytics revenue increased 40% to 130.5 million versus 2021. Our progress to become the leading analytics software provider for the global semiconductor supply chain continues to be strong. Analytics is now the dominant component of our overall business at 88% of total revenues. Our extensive product revenues are now starting to benefit from renewal uplifts of cloud deals we originally signed a few years ago. Software sales for new fab site installations and multiple module utilizations by our customers. Our leading edge solution has established once again its unique value proposition for customers with advanced node where we provide the unique data collection and fast powerful analysis of manufacturing related data to improve yields for their next generation advanced products.

For our Cimetrix products, we are emboldened by the number of new equipment design win certifying PDF Cimetrix products as the connectivity software for multiple new equipment platforms giving us further confidence in our shadow backlog as these equipment products go to market and become more successful. As another data point worth noting, our full year analytics revenue for 2022 was more than the total company revenue for the prior year 2021. This is the second year in a row. We have achieved this milestone. For 2022, IYR revenue comprised 12% of total revenues at $18.1 million and was essentially similar to our IYR revenue last year. Even though this year we did not have the benefit of a legacy gain share contract from a long tenured customer.

We are also pleased that gain share from some new customers grew this year, which we will continue to watch carefully. Gross margin for 2022 increased to 71% up from 64% in 2021 or an expansion of approximately 700 basis points. We were able to grow the gross margin because we carefully managed costs to not grow faster than our revenue growth. In particular, we managed our cloud spend and focus the efforts of our people and resources. It feels good to have now achieved for the full year 2022, the gross margin target of 70%, which we had set as our long-term target. Turning to the operating expenses. We also control the growth of our R&D and SG&A expenses to stay below our revenue growth, thereby expanding our operating margins for the year.

Our main expenses in the R&D and SG&A category were related to headcount as we invest in highly talented and geographically distributed workforce and ensure we build a sales, marketing and G&A infrastructure to support our growing business. All while benefiting from economies of scale. Our R&D and SG&A expenses as a percentage of revenue came in at 31% and 24% respectively, both less than last year’s comparable levels. For the year 2022, we reported EPS of $0.60 a share demonstrating a meaningful growth compared to the $0.08 per share we reported for the year 2021. CapEx for the year totaled $8.4 million versus $4.1 million in full year 2021 as we invested primarily in data collection systems for our leading edge business. For the year 2022, we generated positive cash flow of $32.3 million compared to $4.2 million for the prior year 2021.

We are pleased with another year of positive operating cash flow generation consistent with our history. During the year, we also bought back 22.5 million of PDF stock at an average price of just over $24 per share, which we believe was an effective way of returning cash flow stockholders and which allowed us to keep our weighted average diluted shares essentially flat for 2022 compared to 2021. Turning to the balance sheet. We ended a year 2022 with cash and equivalent of $139.2 million compared to $140.2 million at the end of prior year . And we carry no debt. Our cash was essentially flat year-over-year, even after 8.4 million of CapEx and 22.5 million of stock buyback due to strong operating cash flow generation. We are proud of the performance of 2022, remain committed to our long-term business fundamentals and are pleased with the fortunate position we are in with our backlog of over $0.25 billion all coupled with a healthy balance sheet.

For 2023, we look forward to another growth year on top of the strong growth delivered in prior year with year-over-year growth rates approaching mid-teens percent. With that, I’ll turn the call over to the operator to commence the Q&A session. Operator?

Q&A Session

Operator: Thank you, Mr. Raza. Our first question comes from the line of Blair Abernethy from Rosenblatt Securities.

Blair Abernethy: Hi. Good afternoon, gentlemen.

John Kibarian: Good afternoon.

Blair Abernethy: Hi. Great quarter, a great way to finish the year. Just want to ask you a little bit about €“ some more about the partners. You sort of touched on SAP in the quarter or in the prepared remarks, but maybe you just expand upon how you’re progressing with some of the major partner opportunities you’ve been working on the last two years?

John Kibarian: Sure. Thanks, Blair. So I kind of run through them all. Let’s say three of them. Advantest, I said in my prepared remarks, we’ve released, I think four or five apps in the app store. We expect over the next couple of months to release a number more taking advantage of Exensio feed forward and feedback and ML capabilities. So customers at different test insertions can use data from previous test points to make better control screening choices very important for our customers, particularly they’re doing system and package and they want to make sure they match the right chiplet with the right chiplets and the right package. You’ll see those coming out more or less coming out this year and more announcements about customer adoption that capability.

Secondly, Siemens, really €“ Siemens software is used to generate test vectors and then at the end when the tests are complete to do fault diagnostics to localize where in the chip the fault might be. You do that after you get the chip. It’s tested at the final metal layer, maybe metal 15 or metal 17 these days on that fault diagnostics. You would like that fault diagnostics to look at every other piece of information about that chip. It’s Parametric Test data, inline factory data, data from other test insertion points and Exensio stores all of that. So by integrating Exensio, our layout software for systematic models, customers can do a better job on fault diagnostics and a better job localizing faults. We are now working with early customers on that capability in an early access program.

The extensions to that will also come out over the next couple of years that take more advantage of the capabilities on from both companies. The third one is SAP that I also talked about in my prepared remarks, and then if you just €“ I think the way they’ve talked about it and they put out a very nice white paper on it. You really want to attach the top floor to the shop floor as they call it and that shop floor being PDF, where we store an awful lot of engineering data that’s inside a factory or for a fabulous company from the factories where they operate. We communicate with most of the major manufacturing execution systems, so our systems know where the material is in line. And so and they know how much consumables cost, they know how much parts sell for, they know where parts end up going in the end market.

So by combining the data in Exensio with the competitor that’s in €“ the data that’s in S/4 HANA you’re able to €“ be able to answer questions for customers on field return analysis, accurate costing by product, monthly changes in deviations in costing due to product variances better insights on yield prediction and supply. So those applications we’re building with SAP are really how do you use engineering data with financial data to be able to have a more agile manufacturing environment. And that’s the third category of applications that we’re rolling out and we’ll expect to see all three of these make significant progress in 2023.

Blair Abernethy: That’s great John. And just on the SAP, the go-to-market there, I assume they’re taking it to their install base as an add-on product. Is that how they’re approaching it and is there a what do you think sort of a trial period or ramp period here is on the customer kicking up this solution?

John Kibarian: So we’re in discussions with customers on this capability right now, and the way it’s worked is it’s a joint sale. So we sell our capability and of course they sell their capability. But they €“ obviously their reach and the part of the whole reason why we did this partnership program is our partners reach into accounts as far, far deeper and broader than ours, right? Our sales capacity is really small relative to our product portfolio. So we need their help to find the relevant customers, even sometimes customers that we know well, but they know the right part of the organization, a part of the organization that we don’t have access to today. So they are really the lead. They bring us in. They of course benefit financially from that.

And we right now in these early stages, we are the contracting capability for each of the customer opportunities. It’s a little bit different with Advantest where they are the front door and they are selling in their case and we are secondary backup support. But in the case of SAP right now we’re going in jointly.

Blair Abernethy: Okay, great. Thanks. I’ll jump back in the queue.

Operator: Thank you. One moment for our next question. Our next question comes from the line of Thomas Diffely from D.A. Davidson.

Thomas Diffely: Yes, good afternoon. Thank you for taking my questions. So first wanted to kind of jump in on the revenue outlook. It sound like you said low teens, what the expectations were for this year. And I’m curious, when you look at the IYR businesses, average about 4.5 million a quarter for the last year or so, is that our new baseline there or were there’s some one-offs this year that caused to be a little higher, meaning that most of the growth this year will come from analytics?

John Kibarian: Yes, that’s a great point Tom, and in my prepared remarks, I said that we are watching the utilizations at our customer foundry factories because the baseline did seem to settle in around $4.5 million on gain share. We believe that may be in the first half of this year, there may be some pressure on that number as volumes will be lower than they were in the second half of 2022. 2022 also benefited a little bit from gain share catch ups for some of our customers. And we felt that the COVID impact in China may be increased at fair amount of capacity in the second half of 2022, that we are questioning whether we’ll sustain catch up capacity that was not possible in 2021 due to COVID restrictions. So, we’re being a little mindful on the IYR number, thinking it’s a little bit, last year maybe high water market may be a little bit lower this year than it was last year.

I think in terms of overall growth, as Adnan said, we said approaching mid-teens, so we do believe it’s better than lower teens. We don’t think it’s on the higher end of mid-teens. So we’re trying to kind of directionally get some perspective there. Again, not just because but as I said in my prepared remarks, our customers that ship equipment, we expect runtime licenses to be down. This year capital equipment companies are reporting about a 20% decrease in unit ship this year over last year. We do expect that we’ll do a little better than that because the attach rate with the software is a little higher as they use more of the communication standards on the newer equipment than on the older equipment. But we’re being a little bit cautious on what we think those shipments will be.

And similarly, some of our customers when they go into overages on data storage and data volumes on Exensio then pay for additional storage as they’re churning through more silicon. We think some of our customers will be a little bit down in 2023 volumes over 2022 volumes and that may put a little bit of consumption charges in Exensio a little bit lower. And as it’s offset the kind of core growth in analytics, which we still believe is quite strong and will continue on very well.

Thomas Diffely: Okay. I know several years ago, there used to be a little bit of seasonality in the IYR business where you had the occasional €“ I’m not sure if it was a budget flush, but you had fourth quarters that were sometimes packed pretty high. And then you had a little bit of a muted first quarter off of that. But it sounds like the customer base because it’s different today, your view is much more of just the run rate of chip production as opposed to a fourth quarter budget flush?

John Kibarian: Yes. That’s correct, Tom.

Thomas Diffely: Okay. And then that leads me to the analytics side. Obviously, a nice sequential jump in analytics, was there any kind of a onetime issue or a budget flush in that as well?

Adnan Raza: I think part of it also I think part of it. And just to connect the prior comments as well on the Gainshare, to your point about Q4, expecting some seasonality. If you were to look at just Q4 or Q3, you’ll see a little bit of a dip but part of that was also because Q3 and of itself had some catch-up. If I go back into discussion from that point. No, I think some of the effects that you’re seeing in Q4, we talked about the large bookings we were able to garner during Q4. So some of it is also early 606 related impacts during the quarter that we generally experience but nothing is difficult to remain confident about the business and our long-term growth targets for analytics of 20%.

Thomas Diffely: Okay. And maybe one last question on the IYR business. Is there anything you can do during the quarter to track that? Or is this really you just got a report and a payment from your customer at the end of the quarter saying this is what they produced?

John Kibarian: Yes. We do track it quite closely because for a lot of our customers that run through our scribe cost structure so we can measure unit volumes as they go through. It’s not representative of all the wafers they run. It is a representative of some of the wafers they run, so we can look at those trends, gives us some indication. And of course, we have our engineers have daily dialogues with some of the customers that they’re in there quite frequently. But to be clear with you, Tom, sometimes we feel like our customers don’t always have the best visibility themselves. So they’ll be more bullish and then you talked about a month later and the sky is falling. So we have a pretty broad perspective across the customer base these days.

So we look at things up and down because Exensio cloud data, we can look at what storage loading looks like there. So what the end customer is doing, et cetera. So we play our own little judgment on these things, similarly with the capital equipment folks. I think November, December, some of our smaller €“ quite capital equipment customers were quite bullish when we met with them, and we were looking at signals that were less robust than they were. We try to take a balanced look at it overall, but we do watch quite a bit of data throughout the quarter.

Thomas Diffely: Okay. Thank you. Last question then, I hope just to get a quick update on DFI and maybe the accelerated ramp you’re working on?

John Kibarian: Yes, it’s a great question. And I did put something in my prepared remarks. I think the past year, the application we released and brought up for a customer with this direct scan application, really €“ and it’s very related to what we’re doing with Siemens. You’re taking that same software that digests all of the critical elements of a product and identifying what is inspectable at each layer and what should you see. So you can find a unique systematic defects and other problems, scanning billions of features per hour, many billions of features per hour at this point on the wafer, so you just get a meaningful fraction of the wafer in the typical two-hour budget that our customers give us. We saw tremendous uptake when we got that installed in the first quarter of 2022 €“ Q2 and beyond, we saw the customers use it quite meaningfully.

We started doing pilots with other customers by them sending us wafers, really starting in the fourth quarter. I think I kind of alluded to that in my prepared remarks in November, and we were anticipating that. We’ve been seeing positive results from that customer activity as well. And we expect to see a pickup of the business as we go throughout this year. And our perspective on the business, we’ve been very cautious about the revenue impact this year, but we do feel it’s going to impact our bookings, incremental bookings this year.

Thomas Diffely: Okay. Maybe just a quick follow-up on that. Some chips these days have 500 steps in producing them. When you look at your tools, how many insertion points are between how many different steps are you €“ are they going to your system to evaluate?

John Kibarian: That’s a great question. So when we first came up with this, right, with the filler cells, we were really only €“ only to use the system at Metal 1. Now you can use it earlier with this direct scan approach as early as the contact layer. So once you started making the contacts in the middle of line through all of the metal layers in the back because the software figures out what the patterns are. And I just saw the results from a customer where scan Metal7 added yield issue. And the software is able to tell them which of the defects at Metal7 are really caused by Metal7 or via below it and which ones are caused by layers below that based on the patterns of the failures. So it’s quite sophisticated in the way it post process of the information.

And as a result, you can really look at any layer after you’ve built the first context. So you typically start with isolation and the fins and the gate and the polysilicon or gate. Those three layers, you can’t really use this approach. But after that, on every layer above, you can use it.

Thomas Diffely: Great, all right. Well, I appreciate your time today. And I’ll jump back in the queue.

John Kibarian: Thank you.

Operator: Thank you. Our next question comes from the line of Gus Richard from Northland Capital Markets.

Gus Richard: Yes. Thanks for taking the question. And by the way, great quarter guys. I was wondering if you could just talk about €“ you touched on the $380 billion of government support likely benefiting from that spend in the U.S. because it’s a little bit ahead of other countries, but India, Japan and Europe are three regions that have big buckets of money. And I was wondering, are you engaged with programs in those regions? And what might €“ what stage is that in? Is it a ways away or near end?

John Kibarian: Yes, I think that’s a good question, Justin. You’re right. You picked other geographies where we do see significant activity. PDF is pretty well known in our business for our leading-edge capability. So generally speaking, when someone’s going off and doing some of this, we do get contacted and we’ve been contacted by a number of new entities. Of course, I can’t say like which ones and when, but around the world. We suspect that maybe it impacts bookings a little bit in 2023 at the max, it’s really more of a 2020 and 2025 business perspective. . But we do see those very high visibility ones like the ones you mentioned and a number of partnerships and joint ventures going on where folks are coming together for high-voltage transistors, not just leading edge, 28-nanometer and other kind of automotive applications and some of the leading applications like you mentioned in Japan, the United States, Taiwan and Korea.

So it’s very broad in terms of the capabilities. And what we call that our capability leading edge because the majority of our customers are doing things like 2-nanometer and gate all around, we do find that we get contacted by customers doing 28-nanometer and high-voltage transistors because you need the same capability that our customers need on the leading edge. Maybe it’s a different mix of vehicles and machines and software, but you need that same capability typically.

Gus Richard: Got it. Got it. That’s helpful streaming that up. And then this is a little bit off the wall, I apologize. Clearly, there has always been a market for black market chips. And there’s been some concern that some of the chips that shouldn’t places they’re going there, making weapons and doing AI. And of all the software that tracks the semiconductor industry, you track it from one end to the other. And I’ve heard of some efforts to try to rein in the black market. And I was wondering, again, is that an opportunity for you? Or is that something you’ve been anybody reached out to you on?

John Kibarian: Yes. We’ve had conversations with government entities around that. We also are very active in the semi organization on standards. We put the standard for single die traceability, which is the E142 standard and our team really €“ the company we acquired Kinesis really innovated in that area and put that capability as a standard document. We support it in our Cimetrix software and Exensio but it’s freely available. We’ve also extended that in the way that we’ve written standards with semi to propose using hyper ledger technology like blockchain technologies and have looked for partners in that area, too, around making sure that whenever Exensio logs information about a chip as it goes to a test point or wafer processing tool.

You put in the ledger in an immutable way. information about that chip that’s very valuable, not just for the counterfeit issue that you bring up, but also because whenever you have an RMA situation, and the chip comes back from the field, there’s always a tension between the buyer of the chip and the seller of the chip about what was the root cause and did you recall enough of the chips. And so having clearly non-safe data is valuable for all parties in that situation. In a no trust environment, this kind of information is very important. And firsthand, we had experiences with this as we were trying to build some of our fast testers for customers in 2022. We purchased some critical chips, mixed-signal analog chips, 30% of them were failures, and we went back it turns out the suppliers also an Exensio user.

So I sat back with the leadership team there and said, hey, we just bought a bunch of your stuff. And it was bad and said, yes, we have leaks in our supply chain. We know about that. And we know it typically is in the assembly area and system board manufacturer where there’s risks that chips that were bad are labeled good and get out. So this is an area that we do see as an opportunity for us. It’s hard to make it move economically for us quickly because you need adoption by the industry. And today, I think people are intrigued by it. The engineers that share those standards bodies are very passionate about how important it is, but we get modest interest from the customer so far.

Gus Richard: Okay. Got it, got it. Thanks so much. I think that covers it for me.

Operator: Thank you. One moment for our next question. Our next question comes from the line of Blair Abernethy from Rosenblatt Securities.

Blair Abernethy: Hi, again, guys. Just two things. I just wanted to ask about a little more about the DFI. And in the past, you’ve given sort of DFI tape-outs per year, it’s on your website. I don’t know if you’ve got any up-to-date stats on that to sort of show us how volumes have been progressing with the system? And then also another year has passed here and you’re getting more traction in the market. How are you looking at the €“ how are you currently view the market size, market opportunity for DFI over the next five years?

John Kibarian: Yes. Thanks. I’ll answer that. So first of all, Blair, it’s a really good point. When you went back a few years ago, we tried tape outs because you needed to put our structures inside the design in order for the whole machine to work. And what the team innovated at end of 2021, and then we installed for the customer in early 2022 with the ability to look at a product even if it didn’t have our structures in it. And that’s what we call the direct scan ability. The software and looks at the design and figures out at that point of the process, whether it’s metal 2 or metal 4 or metal 0 or whatever where are all the features that look like a test structure at that point. So that €“ we stopped tracking filler cell insertion because we didn’t need it anymore for the application to take off.

We’ve been checking recipes set up and usage at the early customers. And that’s actually picked up and been quite strong. Number of recipes set up, I think we’re setting up a handful of recipes every week. So in the last, let’s say, six or eight months, you can say probably 40 or so recipes set up just off of early adoption. In terms of the market opportunity for this, we feel very bullish about it, particularly more bullish as we went through 2022. And the reason for that is twofold, this first ability to be able to look at any product even if it doesn’t have our filler cells in it really greatly opened up the market opportunity. Number €“ and the ability to look at any layer as opposed to just the metal 1 layer, as Tom alluded to in his question, means that instead of it being one pass for inspection, literally, you would have it’s 10 or 15 or 18 potential layers you could use the machine.

So it’s number of insertion points is much larger. Secondly, as we’ve met with customers, there seems to be an increasing growing understanding that you need to use voltage contrast and electrical inspection as customers are trying to bring up things like gate all around and other complex 3D structures. And so that pilot we did in Q4, the early work that we’ve done with existing and other customer in Q1, a lot of it is around sending us way for specifically for these 3D problems where really the voltage contrast approach is the only way you can see it. And the reason why people haven’t done it in the past is the throughput typically on an EV machine is so poor, you can’t see a change a deviation in yield once the yield gets to be relatively good.

So once you’d say a 1 square centimeter chip is yielding 70%, you’re not going to see anything on a conventional e-beam machine yet with a 2-hour inspection on an E-Pro, you can still see yield attractors and customers have given us that feedback. So I think that’s really the kind of inflection point for e-beam as an inspection tool. I think we will see more proof points as we come through 2023 on that.

Blair Abernethy: That’s great. Thanks for the color, John. And then just on the backlog, $278 million, do you have a current amount of that backlog, i.e., what you expect to recognize in the next 12 months and the duration of the overall backlog?

Adnan Raza: Yes, great question. And I know it’s a data point of interest to yourself and many. Right now, we’re not disclosing it. We’re still going to put the color that we do it normally in our filings that the majority of that is going to be within the next two years. But I can give you this perspective that every year as we do the annual operating plans, just like we finished and cost on this year, same time as last year, our confidence and the demonstrated number from what percentage of the next year’s revenue is going to get contributed into the forecast that we have continues to be higher. And that was a trend that we saw this year. And so a larger portion than last year of the revenue coming into the following year is spoken for as a function of the strength in the backlog that we have.

I think as we get ready for future sharing of the metrics, we’ll be thinking about when is the right time to share this. I can assure you, we’re certainly tracking it inside, and this is one we find very comforting as whenever we do the annual operating plan.

Blair Abernethy: Great. Great. Understood. Thanks very much guys.

Operator: At this time, there are no more questions. Ladies and gentlemen, this concludes the program. Thank you for joining us on today’s call.