PDF Solutions - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered $47.8M revenue (+16% y/y, -5% q/q) and non-GAAP diluted EPS of $0.21; GAAP diluted EPS was -$0.08. Non-GAAP gross margin expanded to 77% (from 72% in Q4 and Q1 last year), aided by stronger Gainshare and lower cost of sales following the Q4 eProbe sale.
• Results modestly beat S&P Global consensus: EPS $0.21 vs $0.1825 and revenue $47.78M vs $47.52M. Bolded beats reflect estimate outperformance. Values retrieved from S&P Global.*
• Management reaffirmed full-year 2025 revenue growth guidance of 21–23% y/y, up from “approaching 15%” communicated in February before the SecureWise acquisition; long-term margin targets of 75% gross and 20% operating margin remain intact.
• Operational catalysts: two eProbe systems shipped (logic customers), record Sapience Manufacturing Hub bookings, and SecureWise integration plans across equipment vendors, foundries, OSATs; tariffs cited as minimal impact to demand or operations to date.

What Went Well and What Went Wrong

What Went Well

• Non-GAAP gross margin reached 77% on stronger Gainshare and lower cost of sales versus Q4’s eProbe sale; operating margin of ~18% and non-GAAP EPS up ~40% y/y to $0.21.
• Platform momentum: “Sapience Manufacturing Hub saw record bookings,” with broad traction across analytics, AI/Model Ops, enterprise connectivity, and supply chain tools; management “reaffirm[ed] our 21–23% annual revenue growth prior guidance range for this year”.
• Product execution: “we shipped 2 [DFI] eProbe tools” in Q1 and expect to meet or exceed DFI goals for 2025; SecureWise acquisition closed and integration plans with Cimetrix and DEX nodes resonating with customers.

What Went Wrong

• Sequential revenue fell 5% q/q to $47.8M due largely to the absence of the one-time Q4 eProbe sale; analytics revenue declined q/q (-11%) despite y/y growth (+10%).
• GAAP net loss of $3.0M (diluted -$0.08) driven by integration and legal costs, amortization, and debt issuance costs tied to SecureWise; notable non-GAAP adjustments include $4.345M of “non-recurring legal, finance, integration and other costs”.
• Management acknowledged digestion and sales execution challenges in scaling enterprise analytics (SMH/Exensio) as deployments grow in complexity; spending in sales and marketing stepped up to support presales conversions.

Transcript

Operator (participant)

Good day, everyone, and welcome to the PDF Solutions conference call to discuss its financial results for the first quarter, conference call ending Monday, March 31st, 2025. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. 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 16 through 30 of PDF's annual report on Form 10-K for the fiscal year ended December 31st, 2024, and similar disclosures in subsequent FCC filings. The forward-looking statements and risk stated in this conference call are based on 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 (President and CEO)

Thank you for joining us on today's call. If you've not already seen our earnings press release and management report for the first quarter, please go to the investor section of our website where each has been posted. As we enter 2025, we expected a customer environment where some would be recovering from a relatively weak 2024, while others would be continuing momentum into this year. Given our strong products, which align well with the trends of 3D processing and advanced nodes, complex packaging and test flows, and increased use of AI to streamline operations, we anticipated growth of 21%-23% for the year, albeit with growth being lumpy quarter over quarter due to eProbe sales model driving more variability in revenues.

Consistent with our expectations, the first quarter was a strong start to our year, with the second-largest revenue quarter in our history topped only by Q4 of last year, which benefited from an eProbe sale. Significant bookings in the quarter were primarily for enterprise-wide solutions. Sapiens Manufacturing Hub Enterprise, which is designed to connect enterprise applications such as SAP, MES, and engineering analytics, drove a meaningful percentage of bookings as a large customer moved from a pilot that began in 2024 to a contract for full deployment. Extensive bookings were driven primarily by Fabless and OSATs for offline analytics and test operations. The trend of more complex test flows and advanced packaging are strong drivers for the solution. Symmetrics bookings were strong as equipment vendors utilized more runtime licenses as they increased shipments, particularly of our more advanced tool control and communication modules.

SecureWISE, which closed late in the quarter, contributed less than one month of revenues. GainShare drove the IYR revenue growth as new fabs and process nodes under contract began to deliver revenues. We expect IYR revenues to continue to improve during this year overall based on this trend. With respect to DFI, we previously talked about shipping at least four eProbe tools this year, with some of them contributing to revenue in the year. In fact, this past quarter, we shipped two tools, which was a great start to exceeding our goal of four systems shipped. We anticipate one of those shipped systems has the potential to contribute incremental revenue growth this year. Overall, demo, install, and engineering activity with customers is at a very high level, and we anticipate meeting or exceeding our goals for DFI this year. In the quarter, we also completed the acquisition of secureWISE.

Now, with just about two months operating together, things are going well. We have been meeting with equipment companies, Fabless, Foundries, and OSATs to discuss secureWISE and how we believe it fits into our overall platform. Based on these meetings and our internal discussions, we are refining plans for integration with our platform. In particular, customers see benefits of integrating secureWISE with our DEX nodes at the OSATs as advanced packaging and tests require more collaboration between OSATs, Fabless, Foundries, and equipment vendors. Customers also want to see tighter integration between Symmetrics and secureWISE so equipment vendors can more easily enable collaboration and manage AI/ML systems in the field. Overall, it's a strong start to the year, both in terms of our traction with customers and our product development. Now, I'd like to make a few comments about our view on the industry and opportunities for our business going forward.

Since the start of April, tariffs have taken center stage. Semiconductors have been a focus of many governments all over the world for the last few years, so the industry leaders have become accustomed to adjusting to frequent shifts in the regulatory environment. So far, we have not seen any noteworthy change in customer behavior with us as a result of tariffs. Most of our software business, including SaaS, is generally not impacted by tariffs. For the eProbe, tariffs could impact the cost of components shipped into the U.S. However, at this point, we believe it will have only a modest impact on our financial results. Given our progress in Q1 and despite the macro uncertainty, we reconfirm our revenue growth estimate for the year to be in the range of 21%-23% when compared with 2024.

I want to thank all the PDF customers, employees, and contractors for their efforts during the first quarter, including our new secureWISE colleagues. Now, I'll turn the call over to Adnan, who will review the financials and provide his perspective on our results. Adnan.

Adnan Raza (CFO)

Thank you, John. Good afternoon, everyone. Good to speak with you again today, and I hope all of you and your families are well. We are pleased to review the financial results for the first quarter of 2025. As mentioned, our earnings release and a management report are posted in the investor relations section of our website. Our Form 10-Q was also filed with the SEC today. Please note that all of the financial results we discuss in today's call are on a non-GAAP basis, and a reconciliation to GAAP financials is provided in the materials on our website. We are pleased with multiple important milestones achieved during the quarter. We announced and closed the $130 million acquisition of secureWISE and signed a large deal for Sapiens Manufacturing Hub Enterprise platform with a new customer as a result of our continued partnership with SAP.

As John said, on the Exensio side, our bookings this quarter also came from many customers spread across multiple Exensio software modules. On the equipment side, Symmetrics' products continue to be strong, and we benefited from less than one month of secureWISE revenues as well. Our backlog ending this quarter was approximately $227 million, growing slightly compared to the prior quarter. Total revenues for the first quarter were $47.8 million, up 16% versus the same quarter of last year. Analytics revenue came in at $42.5 million, an increase of 10% year-over-year, and was lower compared to the prior quarter, mainly due to the eProbe sale in Q4. On a year-over-year basis, our Q1 IYR revenue was up meaningfully by 86%, or $2.5 million, driven by the start of a new GainShare from a customer engagement we completed during the quarter.

Overall, when we think about our business over the last few years, we are pleased with the progress towards establishing us as the leading independent data analytics platform optimized for the semiconductor industry. Our customer base is spread across three key areas of Fabless, Fabs, and equipment companies. We serve these three customer groups with optimized solutions respectively mapped to a product portfolio addressing existing nodes, leading-edge nodes, and connectivity software. We have built our offerings on top of a robust, scalable, and secure analytics platform specifically designed for the semiconductor industry and are making the platform smarter with machine learning and AI offerings such as MLOps. Our gross margin for the first quarter came in at 77%, versus 72% in the prior quarter and 72% for the same quarter of last year, driven this quarter by increased strength in GainShare.

Our cost of sales this quarter were also lower compared to the prior quarter wherein we sold an eProbe machine. Our operating margin for the first quarter came in at 18%, versus a similar 18% for the prior quarter and 12% for the same quarter a year ago. We are pleased that on a dollar basis, we generated $8.6 million of operating profit this quarter compared to $8.8 million in the prior quarter that had the benefit of the eProbe machine. Compared to the last quarter, we grew our R&D slightly by 1% and our SG&A by 6% this quarter, with the increase in SG&A driven by increased sales and marketing from customer pre-sales activities.

Net income for the quarter totaled $8.1 million, or $0.21 per share, compared to $5.7 million, or $0.15 per share in the same quarter a year ago, or up approximately 40% for each of net income and EPS on a year-over-year basis. Turning to the balance sheet, we ended the quarter with cash, cash equivalents, and short-term investments of $54 million, compared to $115 million at the end of the prior quarter, with the change primarily driven by approximately $61 million for the secureWISE acquisition, $8 million for CapEx, primarily for eProbe machines, and offset by positive operating cash flow of $9 million for the quarter, even after the annual bonus payout, which happens during Q1.

In terms of balance sheet changes to finance the secureWISE acquisition, besides the aforementioned approximately $61 million of cash from our balance sheet, we took on bank debt of approximately $70 million via a combination of a revolving credit facility and a term loan, both structured for a five-year term. As we look to the rest of the year, we remain committed to our prior guidance of revenues for this year to grow in the range of 21%-23% on a year-over-year basis, which is ahead of our long-term growth rate target of 20% annual revenue growth. With that, let me turn the call over to the operator for Q&A. Operator.

Operator (participant)

Thank you, Mr. Raza. Ladies and gentlemen, if you have a question at this time, please press star 11 on your telephone. If you are using a speakerphone, please lift your handset before asking a question. Please stand by for our first question, which comes from the line of William Jellison of D.A. Davidson & Company. Please go ahead, William.

William Jellison (Senior Research Associate)

Great. Thanks for taking my question. It was great to see the overall revenue guidance maintained for the year. I was wondering if you could give some more detail as to the moving pieces potentially between IYR and analytics, or even within analytics, or if expectations are across the board pretty in line with where we last published them.

John Kibarian (President and CEO)

Sure. Thank you, Will. Yeah, overall, it's pretty in line with where we started the year. We do expect a meaningful growth in IYR just because it was off a very small base and had been declining for the last couple of years. A jump of a couple million dollars, really, on a percentage basis is a big deal. In terms of the total business, it's just under 10%. Overall analytics growth, there's a few things that are going on. In general, we do see increased effort from our customers on the advanced node capability. We do expect that to be growing this year from a booking standpoint, and that will be impacted also by eProbe sales. On the analytics, as I said in my prepared remarks, it's more and more the customers on the enterprise side.

Sapiens Manufacturing Hub, larger deployments of Exensio, Exensio with the test and ML capability. We will be announcing our user conference at the end of this year, and some of that's going to really just show how this is really all one integrated platform. More and more, Sapiens Manufacturing Hub uses the Exensio database and the data schema, common MLOps capability across the entire platform. We'll start showing how these are really all just different components of the same platform. As Adnan said in his prepared remarks, we do target the Fabless, the Foundries, and the equipment vendors, but they all, more and more, what each of them experience is different parts of that platform brought out to them for their applications.

That enables the collaboration that we think the industry overall needs, which is where secureWISE and the things we're doing with DEX come into play because increasingly, Fabless companies need to know what equipment companies are doing, and collaboration across that entire supply chain is necessary, particularly with respect to complex packaging.

William Jellison (Senior Research Associate)

Great. Thanks, John. Then, Adnan, in your prepared remarks, you mentioned the step-up in sales and marketing expense, both in dollars and in percent of revenue due to higher pre-sales activity. I'm wondering if you could give, you or John, could give any more detail about where you're putting that money to work and where you're expecting growth to come from those investments.

Adnan Raza (CFO)

Yeah, I'll take the first answer at it, and of course, John can add. Look, I mean, I think the beauty of the product portfolio that's becoming wider and wider for us is that we see continued engagement across a wide variety of product offerings with the customers, right? It's not just the three themselves, but it's also the cross-correlation, like John said, the equipment guys versus the Fabless guys all wanting to exchange or know data from the other side as well. Look, we're finding opportunities across the board, and therefore, we have spent over the last few years on sales and marketing, and we'll continue to align it with the opportunities that we are seeing.

John Kibarian (President and CEO)

A little bit on top of that, just I think with whether it's the eProbe or SMH, Sapiens Manufacturing Hub, we've done a lot of R&D over these last couple of years. Now, as evidenced by the large enterprise contract last quarter for Sapiens, the activity with the eProbe activity with Exensio Test and MLOps, we've got a lot of ongoing pilots with customers, some of which are starting to convert into bookings, like we saw with the SMH enterprise last quarter. That's where some of this, like the digestion of your previous year's R&D.

William Jellison (Senior Research Associate)

Great. Thank you both.

Operator (participant)

Thank you. Our next question comes from the line of Blair Abernethy of Rosenblatt Securities. Please go ahead, Blair.

Blair Abernethy (Managing Director and Senior Research Analyst)

Oh, thanks. Nice quarter, guys. Just wondering if you can give us a little more color on the secureWISE integration plan, sort of from a technical standpoint, vis-à-vis what are sort of the, what's the low-hanging fruit, and where do you kind of see this, I guess, longer term, particularly in light of the Symmetrics product you have? Also from a go-to-market standpoint, where do you see sort of maybe some of the best potential revenue synergies or cross-selling opportunities with the new product line?

John Kibarian (President and CEO)

Sure. Okay. That's a great question, Blair. First of all, as we met with customers, I would say number one, customers really love the security it provides, its adherence to the standards like the ISO standards and emerging standards in Europe, and the fact that it can operate around the world. PDF has an even bigger footprint, a much bigger footprint in Taiwan, in Korea, in China, all around Asia than secureWISE did. I think leveraging PDF's infrastructure in Asia is a value to the customers.

Combining PDF's attention to security, which is always, as you can imagine, from a database and system side because of the kinds of data customers store in our systems and their ability to transit data and engineering activity around the world in a secure manner, putting those two things together is a big interest for the customers, number one, on security. Number two, as I said in my prepared remarks, secureWISE is used by the most sophisticated equipment companies in the world with the most challenging equipment, bring-up, and production control, etc. The assembly world was always kind of like an afterthought in our industry. As more and more process complexity is going in there into assembly and advanced packaging, the equipment vendors see value in the secureWISE platform being out there.

Moreover, if you look at our engagement with these OSAT facilities, it's primarily on the test floor for AI/ML models and rules at the test edge. When we talk to our Fabless customers, they would like to ship more than rules and data around. They would like engineers to be able to collaborate with their equipment and OSAT vendors interactively with the engineering. Moreover, one of the applications secureWISE supports is when an equipment vendor wants to upgrade software on an equipment tool, it can be done in a secure manner, and the fab can run the proper virus checks and scans on it as it comes in.

If you remember six or seven years ago, there was a large Foundry that had a huge problem where someone brought in on a memory stick an upgrade to an equipment, a piece of equipment, I think it was an Etcher, and caused a huge virus in a fab and took down an entire fab for a chunk of time. secureWISE has handled that very well in fabs. Now, if you just think about the OSAT world, more and more your Fabless customers want to bring models, AI models, into your facility. You'd like those virus scanned and checked out, and secureWISE has that infrastructure as well. The first thing we did was demonstrate we could put secureWISE on a DEX network, add an OSAT, and you could interact with it. This is something we'll expand on.

Technically, that interaction of PDF's AI modeling, PDF's connections to the tools, and secureWISE's myriad of ways of enabling communications and collaboration, much richer than what we provided with DEX, is always a big low-hanging fruit that you described. Business-wise, low-hanging fruit, obviously, additional equipment vendors, helping equipment vendors get to the advanced packaging world where they all want to get connectivity. Even we've had dialogue with customers within Foundries and IDMs, collaboration between the equipment teams. Everyone's, especially in a world of the geopolitical situation where everyone's standing up fabs all around the world. A lot of our customers are needing to support fabs in many parts of the world. Equipment expertise, whether it's at the equipment vendor or it's at the Foundry or IDM, is scarce.

You really want to be able to have a secure way an engineer in one location can also interact with a tool in a different location. We're starting to have dialogues with customers around that as well. Overall, it's just a great fit with the platform we're building out. We do think with the trends of additional ML and AI, it enables a number of security features that customers will really want. I think we're very excited to see that we're bringing to our MLOps capability.

Blair Abernethy (Managing Director and Senior Research Analyst)

That's great, John. Thanks for the explanation. That's really helpful. I just wanted to ask, on the Sapience side of things, how is the pipeline building there? It's great to see a deal this quarter, but how is this kind of, is it starting to pick up? I know you've been working with SAP for a couple of years on this, but just kind of wondering if you're starting to see a bit of a shift in adoption.

John Kibarian (President and CEO)

Yeah, we do see additional, we do expect to close additional contracts this year for SMH enterprise. Again, some of that new capability enables new workflows, and we'd like to make sure we help the customers with new workflows. An AI workflow is a big motivator for moving to something like this because the more accurate data from the facilities is important to enable better AI at the enterprise level. Yeah, we do expect more business this year on SMH, and we do think that there's a growing set of ways that we can help customers get more value out of it, which will create, I think, incrementally, beyond this year, additional opportunities.

Blair Abernethy (Managing Director and Senior Research Analyst)

Great. Thanks very much.

Operator (participant)

Thank you. As a reminder, to ask a question, please press star 11 on your telephone. Our next question comes from the line of Gus Richard of Northland Capital Markets. Your line is open, Gus.

Gus Richard (Managing Director)

Yes, thanks for taking the question. John, you mentioned you shipped two DFI systems in the quarter, one potential revenue. I was just wondering if you could provide a little bit of color on that. Is that a new customer? Is that an existing customer? Was it Logic, DRAM, and the other system? Any color on where that one went?

John Kibarian (President and CEO)

Yeah. These are both Logic customers, both existing customers. As I said in the last call, we do anticipate shipping for DRAM applications as we get through this year, and we remain committed about that. We do see that opportunity as well. Maybe this is, we're going to take a digestion pause as we digest these machines and the other ones that we've stood up recently, but we do expect in the second half of the year to ship again and exceed our goals for the year.

Gus Richard (Managing Director)

Okay. And just out of curiosity, on the hope to recognize some revenue, if this is existing customers and an additional tool, what's the hesitancy or what's the delay in rubric?

John Kibarian (President and CEO)

One of them, basically new capability that we're demonstrating for the customer. It's a new configuration of the machine that does some new things.

Gus Richard (Managing Director)

Okay. Understood. You were very popular at a recent event and made an appearance on stage. I'm just wondering, is that signaling a strengthening of that relationship and perhaps an opportunity for additional DFI or other services at that customer or any sort of color around a potential opportunity?

John Kibarian (President and CEO)

Yeah. Yeah. I guess it's very, we never really speculate on specific customers, Gus. I mean, we were very honored to be able to be on the stage and talk about our collaboration with them over the years. We hope to be able to extend that. I mean, we think that there's a lot we can do together. Their roadmap is very interesting for a lot of our customers too, but it would be speculative for me to kind of go on and say what that meant other than it was just a nice opportunity to get up on stage.

Gus Richard (Managing Director)

Okay. I understand. Last one for me, the analytics business grew 10% year-on-year. The growth rate appears to have slowed a bit. I'm just wondering, what are the challenges to picking up the growth rate of analytics?

John Kibarian (President and CEO)

Yeah. So overall, Gus, I think we've done a lot on R&D. It kind of comes to that sales and marketing spend that I think was maybe Blair that asked us about. New innovation takes a while to get digested. That's, I think, an effort for us. Things like our SMH product, it's quite a complex deployment, right? That pilot we did last year was very small, on the order of a couple million dollars, right? That just, it takes a year to then get to the point where they can go and say, "Well, this is useful. I think I'll make a more substantial booking and actually deploy." A lot of it for, I think, as the Exensio overall analytics platform becomes more and more an enterprise-wide system, I do think that the way we sell needs to evolve.

We're spending more money to get better at that. Yeah, I wouldn't give us an A. I don't think I'd give us a B yet. I think we're still a C student. We'll work at it and try to become a better student at it. I still think our effort is, as we get new technology out, how do we get it into hands of customers and show it really works and show them the value? To us, that's what's most critical to drive growth.

Gus Richard (Managing Director)

Got it. Adnan, just with the acquisition, can you give us a little bit of color on how would you think about gross margin and OpEx going forward? What is the incremental spend and which lines?

Adnan Raza (CFO)

Yeah, absolutely. Look, I mean, I think we announced the acquisition as well. We talked about how we expect the acquisition to be accretive to our earnings. We still believe that. It should also be accretive to our operating margins as well. Although there, as you acquired the company, you also had some thoughts around the additional spend it might need, given that it is a carve-out situation and it was not a fully functioning organization by itself. There are pieces of spend that we would add to this. I would say overall, think of us as a combined company still marching towards our long-term gross margin targets and the operating margin targets that we had set in the fall of 2023. What we need to see is, do we get all the way there or are we just under?

That's the math that we will continue to study as the year goes on. Overall, very pleased with the acquisition and the results that we're seeing already, like John said, in the two months of working together and the less than one month of results that are incorporated into our numbers.

Gus Richard (Managing Director)

Okay. That's it for me. Thanks so much.

John Kibarian (President and CEO)

Thanks, Gus.

Operator (participant)

Thank you. Our next question comes from the line of Christian Schwab of Craig-Hallum Capital. Please go ahead, Christian.

Christian Schwab (Senior Research Analyst)

Thanks. Guys, it's good to see that previous announced partnerships such as SAP has led to contracts in hand. Could you give us an update? You have numerous partnerships, and I'm thinking of Advantest in particular. Is there any other pilots that have been ongoing that we should anticipate could turn into contract revenue over the next year?

John Kibarian (President and CEO)

Sure. Yeah. You're right about we have a number of other partnerships. With respect to Advantest, we have ongoing revenue from the Advantest engagement. That includes both mutual selling, joint selling at customers where customers use our product integrated with, so it works with some of their hardware, enabling more dynamic testing, more model-based testing. They also are a customer of using our systems on-premise. We anticipate that relationship continuing, and pieces of it will grow over time. Some of it will, some of it will not grow. Some of it will stay relatively constant. Some may shrink a little bit. Overall, we expect to have a relationship with Advantest on an ongoing basis. Yeah, there's numerous other ones, but whether that's Siemens or IBM, most of them we're involved with some joint selling. A lot of times it's we show how our stuff works with their stuff.

We sell our stuff. They sell their stuff. That's like in the case of SAP. Even most of the work we do with Advantest is like that as well. I would say overall, we've learned a lot about how to run partnerships effectively. We still believe in the activity of integrating our solution with theirs. We think customers want that. A lot of times we will do the selling of our solution, our part of the solution on our own, like we do with SAP, as we're better able to speak to its specific value and, in effect, capture the opportunity that's there, working in collaboration with them.

Christian Schwab (Senior Research Analyst)

Great. No other questions. Thanks, guys.

Adnan Raza (CFO)

Thanks, Christian.

Operator (participant)

Thank you. Our next question comes from the line of William Jellison of D.A. Davidson & Company. Please go ahead, William.

William Jellison (Senior Research Associate)

Thanks for taking the follow-up question. I wanted to ask, John, at the very beginning of the call, you mentioned how this year started with some of the industry who was relatively soft last year, hoping for better performance this year. You mentioned in the Q&A that advanced nodes would likely remain strong this year as well. With that in mind, I'm curious how you think about your trailing-edge customers and where they sit right now and your perspective on their relative strength or perhaps still waiting for their recovery.

John Kibarian (President and CEO)

Yeah. I mean, what I've noticed about the customers that I call refer to mostly as the merchant semi-reg customers, they're some of the most aggressive at reforming their business operations, driving more AI in the way they operate, trying to get more productive on the way they respond to the market. The SAP activity, the MLOps opportunity, some of the things we're doing on the enterprise-wide Exensio database capability, we find a lot of interest from the customers in that part of the world. I think in part because our industry is, as I said in my prepared remarks, we've always been very good at dealing with an uncertain environment, whether that was due to just supply and demand or regulatory issues or otherwise. They want to get to a higher degree of nimbleness or flexibility.

I think that some of what PDF can offer is a value to that customer base right now. For our leading-edge customers, the train for 2-nanometer or 1.4-nanometer or the 1X or the 1Y layer of DRAM, that train leaves no matter what. They need to either be on that train or not on that train. That always is an impetus for customers making a decision fast for the stuff on the leading edge. When it comes to kind of enterprise-wide business process evolution, obviously that can always take an extra quarter for them to make a decision to some extent. There are always timing issues that are harder to predict. I think for that merchant customer, really, nimbleness is the name of the game. They're all looking to achieve more of it.

We hope to help them with that and what we're bringing with our enterprise-wide solutions. That's kind of what we see in the space right now.

Gus Richard (Managing Director)

Great. Thanks, John.

Operator (participant)

Thank you. Our next question is a follow-up from Blair Abernethy of Rosenblatt Securities. Please go ahead, Blair.

Blair Abernethy (Managing Director and Senior Research Analyst)

Thanks. Just Adnan, just a quick question on capital allocation. You've taken on $69 million-$70 million in debt. You haven't bought back any shares this year.

John Kibarian (President and CEO)

Blair, are you still there?

Blair Abernethy (Managing Director and Senior Research Analyst)

Yeah. I'm here.

John Kibarian (President and CEO)

You're very faint.

Blair Abernethy (Managing Director and Senior Research Analyst)

Can you hear me? Is that better?

Adnan Raza (CFO)

Yeah. Perfect. Yeah.

Blair Abernethy (Managing Director and Senior Research Analyst)

Okay. Just in terms of capital allocation, how should we think about over the next couple of years, your prioritization vis-à-vis debt reduction, share buyback, and so forth, given that you should be cash flowing fairly strongly?

Adnan Raza (CFO)

Yeah. Good. First of all, thanks for that confidence in the last part of your question. Yes, we certainly believe so as well, particularly with the businesses. We said in our prepared remarks and John said in the Q&A answers as well that the business is starting to show diversity now finally for the GainShare side as well. Look, I mean, debt is a necessity when we were looking at the acquisitions. Hence we put in place. Obviously, with John and Kimon as the founders of the company, you've seen us not carry any debt. Our objective high up on the list is going to remain how fast and how soon can we start to pay off that debt. That said, when the opportunities arise, are we going to look at buybacks? Yes, we absolutely will as well.

At the same time, it's going to be the balance of how much mint cash we want to carry on the balance sheet. I would think of it as debt and then coupled with some buyback. Obviously, the last couple of quarters, as you can imagine, with the announcement of the deal, it puts you in a situation where you can't really go and buy in the market. A few years ago, you saw us buy back larger chunks of shares when the large blocks become available. We'll remain opportunistic and balance it with the desire number one of reducing the debt amount as well as then when the opportunities arise to buy back the stock.

Blair Abernethy (Managing Director and Senior Research Analyst)

Okay. Great. Just one other one if I could on secureWISE. Adnan, what's the gross margin profile look like of that business? Is it mostly a subscription revenue base or is it a maintenance base? What does the revenue side look like?

Adnan Raza (CFO)

Yeah. Great question. I'll answer in the flip order just to put the context around it. The business is highly recurring, in fact, nearly all recurring. It has multiple pieces of it that constitute to the recurring nature. As we have explained the business at the time when we did the acquisition, as John has also explained it today, there's obviously a license component that the end customers will pay to have access to the secure system. That's one. Second, you also get an opportunity for some of the contracts to bill them on the data usage that's flowing through the system. Both of those together, along with other pieces, tend to make this business a highly recurring nature business. In terms of gross margin, look, that was one of the attractive things for us.

We don't break it out separately, but let me just say it is accretive to our gross margin. Over the long term, particularly balanced with some of the spend that we alluded to earlier that we do need to make because it's a carve-out situation, we net-net still expect it to be a positive for us for the year. Hence our earlier comments as well that we remain committed to our target margin model that we had set of gross margin of 75% and 20% in the long term. I mean, back to the question that I think Will had asked also on the increased spend on sales and marketing. Look, yes, we will optimize that spend and sometimes increase it, sometimes decrease it. Rest assured, we remain committed to making sure to solve for the 75% gross and 20% operating margin as our North Star.

Blair Abernethy (Managing Director and Senior Research Analyst)

Great. Thanks very much.

Operator (participant)

Thank you.