This article is authored by MOI Global instructor John Barr, Portfolio Manager at Needham Funds, based in New York.

PDF Solutions (PDFS) 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 near $100 million. PDF’s SaaS offering for big data analytics, Exensio, has about $40 million of annual revenue and is growing 30% year over year.

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, PDF could earn $1.50 to $2.00 per share, which could result in a $20 to $30 stock price. Of course, there is risk in these new products and revenue, earnings and stock price appreciation may not happen.

Downside Protection

PDF has cash of $3 per share and $50-60 million of yield ramp royalties expected over the next few years, which could be worth another $1.50 to $1.80 per share.

Exensio could be valued at 3-5x revenues, or $3.50-$6.00 per share. These elements total $8-11 per share. Should PDF’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% stake in PDF. Should PDF fail to execute, VIEX might push for sale of the company or structural changes.

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Portfolio holdings subject to change. Needham Funds’ ownership as percentage of net assets in PDFS as of 9/30/18: NEEGX: 5.02%; NEAGX: 5.97%; NESGX: 5.02%. The information presented in this commentary is not intended as personalized investment advice and does not constitute a recommendation to buy or sell a particular security or other investments. This commentary is not an offer of the Needham Growth Fund, the Needham Aggressive Growth Fund and the Needham Small Cap Growth Fund. Shares are sold only through the currently effective prospectus, which must precede or accompany this report. Please read the prospectus or summary prospectus and consider the investment objectives, risks, and charges and expenses of the Funds carefully before you invest. The prospectus and summary prospectus contain this and other information about the Funds and can be obtained on our website, Investment returns and principal value will fluctuate, and when redeemed, shares may be worth more or less than their original cost. Past performance does not guarantee future results and current performance may be higher or lower than these results. Performance current to the most recent month-end may be obtained by calling our transfer agent at 1-800-625-7071. Total return figures include reinvestment of all dividends and capital gains. Short sales present the risk that the price of the security sold short will increase in value between the time of the short sale and the time the Fund must purchase the security to return it to the lender. The Fund may not be able to close a short position at a favorable price or time and the loss of value on a short sale is potentially unlimited. All three of the Needham Funds have substantial exposure to small and micro capitalized companies. Funds holding smaller capitalized companies are subject to greater price fluctuation than those of larger companies. Needham & Company, LLC, member FINRA/SIPC, is the distributor of The Needham Funds, Inc.