Q4 2023 Netlist Inc Earnings Call

Participants

Mike Smargiassi; Investor Relations; Netlist Inc

Chuck Hong; Co-Founder, President, Chief Executive Officer and Director; Netlist Inc

Gail Sasaki; Executive Vice President and Chief Financial Officer; Netlist Inc

Suji Desilva; Analyst; Roth Capital Partners LLC

Presentation

Operator

Good day, and welcome to the Netlist's fourth quarter 2023 earnings conference call and webcast. (Operator Instructions) Please note, this event is being recorded. I would like now to turn the conference over to Mike Smargiassi of Investor Relations. Please go ahead.

Mike Smargiassi

Thank you, Rocco, and good day, everyone. Welcome to Netlist's fourth Quarter 2023 conference call. Leading today's call will be Chuck Hong, Chief Executive Officer of Netlist; and Gail Sasaki, Chief Financial Officer.
As a reminder, you can access the earnings release and a replay of today's call 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 today's press release. Netlist assumes no obligation to update forward-looking statements.
I will now turn the call over to Chuck.

Chuck Hong

Thanks, Mike, and hello, everyone. We saw a promising uptick in the fourth quarter as product revenue improved to $33 million, an increase of 100% on a sequential basis and a 54% increase over Q4 2020. The memory market continues to rebound and Netlist is benefiting from the improved demand environment.
Pricing has strengthened for DRAM and products, including SSDs, with price increases of more than 100% since the fall of 2023. For some products, these market dynamics are continuing into this year, and we expect to see further gains in product revenue throughout 2024.
Fueling this growth is normalization of customer inventory and the industry transitions to advanced technologies which is driving a new server demand cycle. This includes volume, production of DDR5 memory based platforms and the need for high bandwidth memory or HBM to power the explosive rise in AI applications.
These trends are fundamentally transforming the memory landscape, setting the stage for a new cycle of growth and presenting Netlist with major opportunities from both a product and IP standpoint, as you know, Netlist has been at the forefront of the industry, developing next-generation memory technology and backing its innovations with a strong patent portfolio.
This approach is complemented by the strategic supply agreement with SK Hynix, which enables us to meet growing customer demand. Together, these product and licensing strategies put Netlist in a strong position to continue to benefit from the memory market turnaround.
On the legal front, Netlist made significant progress in 2023 on its efforts to defend and fairly license intellectual property, including the Eastern District of Texas jury award of $303 million in the case against Samsung, favorable rulings from German courts and cases against Samsung and some mixed results at the PTAB.
2024 is set to be another active year with what we expect will be multiple patent infringement jury trials, the case in the Eastern District of Texas before Chief Judge Gale strap addresses Micron's infringement through the sale of its DDR five dams and HBM components, some of the same patents and product types that were at issue in our successful April EDITH trial against Samsung.
Heading into this trial, we received the favorable claim construction order that provides a strong foundation for Netlist has ability to prove infringement and validity against Micron. This case was reassigned from its original January start date and judge Gale scrap recently issued a limited stage citing his limited judicial resources pending.
The IPR results of Netlist's 060 and 160 patents. We expect a decision from the PTAB on those IPRs by or before April 12th. Our team is ready and we look forward to presenting our infringement case to adjourn.
Netlist's expects to additional Eastern district of Texas jury trials later this year. The second set of EDITH jury trials involve net losses, consolidated case against Samsung and Micron under our 912 patent and multiple LRDIMM patents. This consolidated case continues to move forward with a pretrial conference set for March 11 and a jury trial start date currently set for April 15th, 2024.
This consolidated case involves the infringement of large volumes and significant dollars worth of DDR4. Our dams and LRDIMMs. The cases progressing despite Samsung and Micron renewed efforts to delay the proceedings with new stay motions that lesser scheme secure favorable claim constructions at the end of last year. In this case, winning arguments for almost every term in dispute.
While the case is currently consolidated and set for joint trial on April 15th, we expect the court to separated into two cases that will each go to trial sometime in 2024. Netlist's historic case against Micron in the Western District of Texas was reassigned to the general Austin, Texas traditional Bucket number two last year upon the retirement of Joe Giamichael.
It is not currently set for trial, but Judge Robert Pittman recently requested the parties to provide a status update by February 21st, where we plan to highlight the fact that two of our asserted patents there were found patentable by the Patent Trial and Appeals Board. As a reminder, this case involves Netlist patents covering Micron's DDR4 LRDIMMs and was filed in 2021.
Regarding the Samsung California contract breach case, this case was remanded to the US District Court of the Central District of California. Following the split decision split ruling by the US Court of Appeals central district court judge Marc Schorr, and he directed both parties to submit additional briefing in light of the Ninth Circuit reman and held a summary judgment hearing on February five at the hearing, just Skyrizi set the matter for a fast jury trial date of March 26th.
As I've mentioned before, we haven't yet been able to both bring fully bring all of the Samsung pass actions to light before a jury. So we are eager to be able to do so in this upcoming trial next month Turning to net losses, April 23rd, April 2023 went against Samsung in the Eastern District of Texas.
Post judgment, issues have been fully briefed by the parties. We are waiting for judge will strive to issue his final order. As noted previously, our jury verdict confirm Samsung's willful infringement and set an implied royalty rate beyond the accrual of interest on our ag judgment, we hope to see a favorable outcome from the court on our motion for an ongoing royalty, which would confirm that Samsung's ongoing infringement would be automatically subject to this to the defined per unit rate we obtain at trial.
Related to this case, we have filed request for rehearing before the P tab on the results of the inter partes review of Netlist's 339, 918 and 054 patents that read on LRDIMM and DDR5 power management. These three patents were asserted as part of Netlist as April 2023 jury trial against Samsung Netlist awaits reconsideration of these decisions and is denied will have the option to file a notice of appeal within 63 days.
Netlist action in Germany against Samsung Micron and Google continue to move forward. The German Federal Patent Court is expected to hold oral hearings on the validity of Netlist has asserted European patents in March 2024 for EP735 and in July 2024 for EP60. As a reminder, Netlist needs a favorable ruling on only one of these patents to move forward with its request for an injunction before the German Dusseldorf court.
Looking ahead to 2024, we see a memory market that is going to have an exceptional year driven by growth in demand and a strong pricing environment. The transition to new DDR5 based servers and high bandwidth memory for AI or creating a huge demand for products that require Netlist's this technology.
These market dynamics highlight the key role of Netlist's this technology and that it will play in the future of the memory industry and underscore the importance of remaining vigilant in enforcing our IP rights.
Now I will turn the call over to Gail for financial review.

Gail Sasaki

Thanks, Chuck. For the 12 months ended December 30th, 2023. Total product revenues were $69.2 million compared to $161.6 million for the full year ended December 31st, 2022. These comparative results reflected the industry downturn in demand from memory during the first several quarters of 2023, combined with the oversupply in the market during most of the year. As noted by Chuck, we saw strong uptake during the fourth quarter of 2023. We generated close to 50% of our total 2023 revenue.
Highlighting the rapid improvement taking place in the market year over year fourth quarter product revenue increased by 54% with a 100% increase consecutively. We do not formally guide but given booking and shipping for the first quarter of 2024 to date plus the industry outlook for continued growth in both memory demand and pricing, we currently expect another moderate increase in product revenue for the first quarter compared to the fourth quarter.
Full year of 2023 increase in operating expense compared to 2022 was driven mainly by legal expenses due to a more active legal trial calendar in 2023 and also in preparation for 2024. This was partially offset by cost savings as we rightsize sales and marketing given the market downturn in the late in late 2022 through the first half of '23.
With multiple upcoming trials currently scheduled, we expect investment in these active campaigns to remain elevated during the first half of 2024 and then moderate as we move through the rest of the year. We also expect to expand on the sales and marketing team to meet the growth in demand.
We ended 2023 with cash and cash equivalents and restricted cash of close to $53 million compared to approximately $51 million at the end of the prior quarter and approximately $44 million at the end of 2022. In addition, with a $10 million working capital line of credit with Silicon Valley Bank and approximately $34 million available on the equity line of credit through Lincoln Park Capital.
We continue to maintain significant financial flexibility and liquidity going forward. As always, we manage the operational cash cycle very carefully, which improved by 25 days in Q4 23 compared to last year's Q4.
Operator, we are now ready for questions.

Question and Answer Session

Operator

Suji Desilva, ROTH Capital.

Suji Desilva

Hi, Chuck. Hi Gail. That's under the cover here and maybe you can talk about the revenue framework more broadly, as we look at '24, your recovery here implies some kind of $120 million revenue run rate. In the past you've done sort of $140 million to $160 million of understand how to think about the recovery shape here relative to historical revenue levels?

Gail Sasaki

Thanks, Suji. Yes. I mean, as we've noted and the analysts have said that '24 will be a revenue positive year, and we expect to on the in line with that. But I think due to the lack of our own visibility, we'll take it quarter by quarter, and we'll continue to fight soft guide in that way so that we are positive.

Suji Desilva

Okay. I appreciate that, Gail. Understand it's a recovering environment and then more specifically Chuck, perhaps for Chuck on point for these AI platforms as they come online, what is it what are the upside opportunities for Netlist in terms of products, the timing of that just to understand how that can flow to your opportunity here?

Chuck Hong

Yes, Suji. So I think the AI platforms are there as a percentage of overall servers that are installed is increasing it's probably in the 10s to 20% penetration rate. Most of those systems require higher speed, DDR5, virtually all require DDR5 and that that we have DDR5 products such as the DDR5 VLP, and our other higher capacity at the very high end of the product line. We offer those that are not offered by the major DRAM manufacturers.
So I think we'll see good opportunities in that high end. In general I guess as the demand will continue to grow and our high end SSD product lines 32, their terabytes and above. I think that they will benefit that demand increase will benefit and that part of our business as well.

Suji Desilva

Okay, great. And then my last question Chuck goes on and thanks for all the litigation detail in the prepared remarks, which are the which are the top two or three sort of the next dates or sort of events or milestones that you think are most important for Netlist? Should we watch for out of them all the things that are happening?

Chuck Hong

Yes, we have in the coming three months three to four months. We've got a number of trials. Obviously, we've prepared for the last couple of years invested in these cases, and the trial is a culmination of that investment the first trial that was set out for January.
Unfortunately, that was some postpone by Judge Gale strapped due to resource issues and that so that is pending the outcome of HBM.'s IPR results, HP's IPR results of the HBM final IPR final written decision. So we hope to have that trial upon those results coming out.
We've got a trial set for, as I said, March 26 against Samsung. That is a major trial on breach of contract. And then there are two trials in a combined case against Samsung and Micron that are currently set for April 15th.
And those are, again for our past damages for our dams and all our dams that are of a significant dollar exposure to both of those companies, those will likely be separated out into two separate trials some time in our second quarter or mid.
So we're very busy preparing for these trials, we were working hard to win those trials and prove infringement and validity of these patents.

Suji Desilva

Thanks, Chuck. Thanks, Gail.

Gail Sasaki

Thanks, Suji.

Operator

Thank you. And this concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.