U.S. Markets closed

Edited Transcript of NLST earnings conference call or presentation 15-May-18 9:00pm GMT

Q1 2018 Netlist Inc Earnings Call

Irvine May 23, 2018 (Thomson StreetEvents) -- Edited Transcript of Netlist Inc earnings conference call or presentation Tuesday, May 15, 2018 at 9:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Chun K. Hong

Netlist, Inc. - Co-Founder, President, CEO & Executive Chairman

* Gail M. Sasaki

Netlist, Inc. - VP, CFO & Secretary

* Michael Smargiassi

Brainerd Communicators, Inc. - MD

================================================================================

Conference Call Participants

================================================================================

* Richard Cutts Shannon

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Sujeeva Desilva

Roth Capital Partners, LLC, Research Division - Senior Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, everyone, and welcome to Netlist's First Quarter 2018 Earnings Conference Call and Webcast. (Operator Instructions) And please note that today's event is being recorded.

And I would now like to turn the conference over to Mike Smargiassi of Investor Relations. Please go ahead.

--------------------------------------------------------------------------------

Michael Smargiassi, Brainerd Communicators, Inc. - MD [2]

--------------------------------------------------------------------------------

Thank you, William, and good afternoon, everyone. Welcome to Netlist's First Quarter 2018 Conference Call. Leading today's call will be Chuck Hong, Chief Executive Officer of Netlist; and Gail Sasaki, Chief Financial Officer.

As a reminder, our earnings release and a replay of today's call can be accessed on the Investors section of the Netlist website at netlist.com.

Before we start the call, I would note that today's presentation of Netlist's results and the answers to questions may include forward-looking statements, which are based on current expectations. The actual results could differ materially from those projected in the forward-looking statements because of the number of risks and uncertainties that are expressed in the call, annual and current SEC filings and the cautionary statements contained in the press release today. We assume no obligation to update forward-looking statements.

During this call, non-GAAP financial measures will be discussed. Reconciliations for those directly comparable GAAP financial measures are included in the press release, which was filed on Form 8-K.

I would now like to turn the call over to Chuck.

--------------------------------------------------------------------------------

Chun K. Hong, Netlist, Inc. - Co-Founder, President, CEO & Executive Chairman [3]

--------------------------------------------------------------------------------

Thanks, Mike, and good afternoon, everyone. First quarter revenue performance was in line with our internal plan. Revenue reflected steady sales of enterprise-grade memory modules and growing demand for NV and specialty DIMMs. Our bottom line results reflects cost controls across the business despite increased legal expenses, which we expect to reduce in future quarters.

Starting with our product business, while it's only been 6 weeks since our last call, we continue to see solid activity around NVvault. Year-to-date, we have more than 50 new customer qualifications initiated. Our collaboration with partners such as Nyriad, TYAN and others are ongoing as we work to open up new opportunities.

Qualification units showed healthy growth in the quarter, and we expect to see further momentum for NV as we move through the year. Our HybriDIMM commercialization efforts continue to make progress as well. There is significant interest throughout the industry in regard to Storage Class Memory and the performance and cost benefits of HybriDIMM.

In addition, there is broad support for multiple architectures ramping in data centers. Our discussions with multiple OEMs, memory and ecosystem partners remain active. This includes potential partners for the conversion of our controller to an ASIC chipset and the exploration of opening up the technology through industry standardization.

Finally, our specialty module business with legacy and custom DRAMs continues to grow. And while we don't provide specific guidance, we currently anticipate moderate growth in product revenue for Q2 as compared to the first quarter of 2018.

Turning now to licensing. We continue to press forward with a campaign to defend our intellectual property against SK Hynix. The infringement suit against Hynix' LRDIMM products in Germany is proceeding according to schedule. We filed the latest briefs with the German Court at the end of April.

The parties will file another round of briefs over the next few months in preparation for trial in December, where the court will address infringement and other related issues. We remain optimistic about our position and look forward to the court's decision expected in early 2019.

If the court decides in our favor, an injunction would go into effect at that time for Hynix' products sold in Germany.

On the first ITC action, we are preparing an appeal of the final determination, or FD, received in January to the U.S. Court of Appeals for the Federal Circuit. Our opening brief in June will challenge the ITC's findings of noninfringement, which we believe were wrongly decided. We anticipate that briefings from both parties will be complete by the end of the summer, with oral arguments being heard by Federal Circuit sometime in the first half of 2019. We look forward to having appellate court carefully review the ITC's findings and are hopeful that the errors in the FD will be corrected and the patents found to be infringed.

In the second ITC action against Hynix on April 12, the Administrative Law Judge granted Hynix' motion for summary determination of noninfringement and issued an initial determination, or ID, terminating the investigation. This was an unexpected and very disappointing ruling as the ID came less than 2 weeks before the scheduled Markman hearing, and did not take into consideration the substantial briefing submitted by the parties as part of the Markman process.

We believe the Administrative Law Judge erred by roughly terminating the investigation without the benefit of a Markman hearing, which led to numerous fundamental errors in the ID. We filed a petition for review on April 23, asking the ITC commission to reconsider the ID and correct these errors.

The commission will issue an FD at the conclusion of its review, likely in the next few months, which will either affirm the findings in the ID or remand the case back to the judge for further proceedings. If the ID is affirmed, we will appeal the FD to the Federal Circuit.

The campaign to defend our IP is a methodical worldwide effort with multiple enforcement actions in different venues in the U.S. and abroad. With the licensing strategy, we remain committed to as we seek fair compensation for our IP.

In summary, we remain focused on the execution of our strategic initiatives, including building demand for NV and specialty modules and the continued commercialization of HybriDIMM.

We also remain committed to defending our IP with a goal of entering licensing agreements that fairly compensate Netlist and its shareholders.

I'll now turn the call over to Gail for the financial review.

--------------------------------------------------------------------------------

Gail M. Sasaki, Netlist, Inc. - VP, CFO & Secretary [4]

--------------------------------------------------------------------------------

Thanks, Chuck. On the top line, we delivered solid performance. Revenues for the first quarter ended March 31, 2018, were $8.9 million compared to revenues of $9.4 million for the 2017 period with a modest improvement consecutively over the fourth quarter of 2017.

First quarter 2018 gross profit was $379,000 and net loss was $4.7 million. Operating expenses were $4.9 million in the first quarter compared to $3.9 million in last year's first quarter. We delivered an absolute dollar reduction in R&D and SG&A expenses equating to a 21% decrease year-over-year through ongoing proactive cost management.

Legal fees during Q1 '18 reflect increased costs associated with the preparation for the ITC 2 Markman hearing.

Moving forward, we expect legal fees to decline given the work that is now behind us and the current litigation calendar.

Before turning to the balance sheet, I would like to update you on the company's NASDAQ listing. Last week on Thursday, May 10, we attended a hearing of the NASDAQ panel in Washington, D.C., and requested the grant of a second 180-day grace period for the minimum bid price deficiency. We expect to receive the panel's decision within the next week or so, and are hopeful we will receive an additional grace period.

We ended the first quarter with cash and cash equivalents and restricted cash of $8 million as compared to $9.5 million at the end of the fourth quarter, a net cash decrease of $1.5 million.

We continue to proactively manage operating expenses as discussed earlier and the overall cash cycle, and continue to access the working capital line of credit with Silicon Valley Bank, which provides borrowing of up to 80% of eligible accounts receivable up to $5 million to support revenue growth.

Our cash position at the end of the quarter, including -- included $1.8 million in net proceeds from the at-the-market facility during the first quarter. As of May 11, we have received total proceeds of $5.3 million on the ATM facility, with a balance of $3.7 million to utilize under the facility through November 2019.

Thank you for listening. Operator, we are now ready for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first questioner today will be Suji Desilva with Roth Capital.

--------------------------------------------------------------------------------

Sujeeva Desilva, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [2]

--------------------------------------------------------------------------------

So can you talk about the NV product and the HybriDIMM products? Whether there would be a steady ramp as the customers start to take them on? Or whether there would be an inflection point in a couple of quarters based on some platform that's in the marketplace?

--------------------------------------------------------------------------------

Chun K. Hong, Netlist, Inc. - Co-Founder, President, CEO & Executive Chairman [3]

--------------------------------------------------------------------------------

Yes, Suji, the NVDIMMs are being qualified mostly on Intel platforms, some on AMD. And I think the market is finally starting to adopt, and we're seeing growing activities on qualifications. And so I think we should see an uptick of revenues from NV in the second half of the year. On the HybriDIMM, we are in discussions with a number of parties regarding getting the controller converted into an ASIC chipset, which will allow it to go to mass production. So that's the first step. But there is quite a bit of interest. We're also exploring the possibility of getting the -- getting HybriDIMM standardized in the industry standards body.

--------------------------------------------------------------------------------

Sujeeva Desilva, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [4]

--------------------------------------------------------------------------------

Okay. And Chuck, along those lines, a follow-up, is there any update on the Samsung JD? I know it's one of the people that -- one of the potential partners you have for HybriDIMM?

--------------------------------------------------------------------------------

Chun K. Hong, Netlist, Inc. - Co-Founder, President, CEO & Executive Chairman [5]

--------------------------------------------------------------------------------

Right. We -- they've been a partner. We're in this 5-year JDLA agreement. And yes, we are in discussions about the possibility of having them convert the current FPGA into an ASIC chip?

--------------------------------------------------------------------------------

Sujeeva Desilva, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [6]

--------------------------------------------------------------------------------

Okay. Terrific. A question on the financials. Can you talk about what the ongoing litigation costs will be versus what you have today? And what kind of run rate it could come down to as you try to whittle that expense line down?

--------------------------------------------------------------------------------

Gail M. Sasaki, Netlist, Inc. - VP, CFO & Secretary [7]

--------------------------------------------------------------------------------

Sure. Yes, I think we will see a definite decline in Q2, probably something like 50% of what we have in Q1. And then after that, a much smaller number, probably something closer to 20% of what we had in Q1.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

And our next questioner today will be Richard Shannon with Craig-Hallum.

--------------------------------------------------------------------------------

Richard Cutts Shannon, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [9]

--------------------------------------------------------------------------------

Maybe a follow-up on the NV topic here. I think you talked about 15 qualifications and processes. My notes showed you had 12 of them last quarter, which is good to see some progress there. Chuck, I wonder if you can give us any sense of timing here, especially relative to any larger wins here? Sounds like you're talking about second half, any way you can and be a bit more specific on that? And just any other details about RAM processes here?

--------------------------------------------------------------------------------

Chun K. Hong, Netlist, Inc. - Co-Founder, President, CEO & Executive Chairman [10]

--------------------------------------------------------------------------------

Yes, Richard, I think the qualification activities have picked up across the board for us and with other suppliers of NV in the industry. I think it's the adoption of the technology across Intel platform gen with the AMD's Zen processors starting to increase, and people are seeing the benefit of the technology. Some of this is optional, and in other meaning that the NV is qualified, but it's an optional attachment in the server. And with other applications, there is -- the entire system is filled with NVDIMM. So I think we'll have to monitor which of those systems takeoff in terms of volume production. And -- but we -- in general, I think in the second half, we'll see some volume production and uptick in demand.

--------------------------------------------------------------------------------

Richard Cutts Shannon, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [11]

--------------------------------------------------------------------------------

Okay. To follow up on one of your threads, Chuck. Do you have any sense of how the machines are being marketed that are qualifying you in? And are they broader applications or more specific vertical ones?

--------------------------------------------------------------------------------

Chun K. Hong, Netlist, Inc. - Co-Founder, President, CEO & Executive Chairman [12]

--------------------------------------------------------------------------------

There are, I think one in particular, Nyriad, a company that we've worked with now for several quarters of getting our product designed in. We're the sole source of NV there. They are in the blockchain environment. And it's a highly NV-intensive application. For example, 16 units of NV to each system. So something like that is very much a specific vertical. Others are more generic server appliances, server storage appliances, where it could be anywhere from 1 to 4 NVs per system.

--------------------------------------------------------------------------------

Richard Cutts Shannon, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [13]

--------------------------------------------------------------------------------

Okay. And maybe last just quick question on this topic, Chuck, do you get a sense of whether you are in general a sole source for design or first source or second source? Or any color you're hearing from your partners on your positioning?

--------------------------------------------------------------------------------

Chun K. Hong, Netlist, Inc. - Co-Founder, President, CEO & Executive Chairman [14]

--------------------------------------------------------------------------------

NV is generally one source for most of these customers. Because it is quasi custom, there is a lot of technical issues to work through a lot of handshaking between the system and the components. There are software and firmware considerations as well. So it's not an easy product. Once you have it compatible with one source, it's very difficult for a customer to -- it will take enormous amount of work and technical hurdles for them to overcome to bring on a second source. So whether it's our customers or other vendors' customers, we're generally in a sole-source position.

--------------------------------------------------------------------------------

Richard Cutts Shannon, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [15]

--------------------------------------------------------------------------------

Okay. Good to hear. A couple other questions, probably for Gail here. Gail, you talked about your thought process for the second quarter revenues, talking about some product growth here. Is this coming from some -- from new products like NVvault or the Samsung-branded products? Or can you, Gail, help us understand where that's coming from? And any way you can quantify the magnitude of the growth?

--------------------------------------------------------------------------------

Gail M. Sasaki, Netlist, Inc. - VP, CFO & Secretary [16]

--------------------------------------------------------------------------------

Sure. I think it's probably even percentage growth. We get about 70 -- 76% of Samsung resale for Q1 and 24% was specialty DIMMs and other. I think we'll see growth in both of those areas. There was NV as well, but I think that will happen more in the second half of the year as Chuck indicated.

--------------------------------------------------------------------------------

Richard Cutts Shannon, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [17]

--------------------------------------------------------------------------------

Okay. Fair enough. And then the last quick question for me is on cash burn. Any way you can help us think about that in hard terms or relative to what you did in the first quarter before the ATM?

--------------------------------------------------------------------------------

Gail M. Sasaki, Netlist, Inc. - VP, CFO & Secretary [18]

--------------------------------------------------------------------------------

Sure. Well, in terms of the cash decrease from Q1 to Q2, I think it'll be similar. That's in our -- that's our plan.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

And this will conclude our question-and-answer session and today's conference call. Thank you for attending today's presentation, and you may now disconnect your lines.