PDF Solutions: Lowly Valued, with Net Cash and Growing SaaS Business

John Barr of Needham Funds presented his in-depth investment thesis on PDF Solutions (US: PDFS) at Best Ideas 2019.

Thesis summary:

PDF Solutions is a semiconductor data analytics company emerging from a period of investment in new products. It supplies software and other services to improve manufacturing yield for semiconductor manufacturing companies. PDFS has a market cap of $275 million, about $100 million of cash, and annual revenue of nearly $100 million. The company’s SaaS offering for big data analytics, Exensio, has ~$40 million of annual revenue and is growing 30% annually. Its solution for next-generation chip inspection and control, Design-for-Inspection, is in use at a leading semiconductor manufacturing company. At $200 million of revenue, the business could earn $1.50-2.00 per share. Risk exists with regard to new products and their effect on revenue and earnings.

PDF has cash of $3 per share and $50-60 million of royalties expected over the next few years, which could be worth another $1.50-1.80 per share. Exensio could be valued at 3-5x revenue, or $3.50-6.00 per share. These elements total $8-11 per share. Should the company’s lead Design-for-Inspection customer not come to terms on a next order, this part of the business might not have much value in the short term. VIEX Capital Advisors recently disclosed a 6% equity stake. Should the company fail to execute, VIEX might push for structural changes or a sale.

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About the instructor:

John Barr is a Co-Manager of the Needham Growth Fund (NEEGX). He has been its Co-Manager since January 2010. He also manages the Needham Aggressive Growth Fund (NEAGX). John started on Wall Street in 1995 with Needham as a sell-side analyst following technical software companies, including electronic design automation (EDA) companies. John rejoined Needham in 2009 because of the culture, which lives and breathes growth companies and long-term investing.

From 2000 – 2002, John was a managing director and senior analyst at Robertson Stephens, following semiconductor technology companies. He was an Institutional Investor All-Star and was ranked by Reuters as leader of one of the top software teams. In 2002 John moved to the buy-side and joined Buckingham Capital Management where he served as a portfolio manager and analyst for their diversified industry long/short domestic equity hedge fund.

John’s first career was outside of Wall Street, where he spent 14 years in sales, marketing and management, primarily in the EDA industry. Working in these small companies makes him think like an owner and to look for that trait in his investments. John loves the challenge of identifying businesses with compounding characteristics and getting to know the companies over the course of years. From his industry experience, he looks to invest in companies that he would have liked to have been part of.