Netlist, Inc. (PNK:NLST) Q4 2023 Earnings Call Transcript

Netlist, Inc. (PNK:NLST) Q4 2023 Earnings Call Transcript February 13, 2024

Netlist, Inc. beats earnings expectations. Reported EPS is $-0.05, expectations were $-0.07. NLST isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and welcome to the Netlist Fourth Quarter 2023 Earnings Conference Call and Webcast. [Operator Instructions] Please note, today’s event is being recorded. I would now like to turn the conference over to Mike Smargiassi of The Plunkett Group. 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’s 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 NAND 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 the normalization of customer inventory and the industry’s transitions to advanced technologies, which is driving a new server demand cycle.

A technician soldering a semiconductor chip, emphasizing the power of the company’s products.

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 from 2023 on its efforts to defend and fairly license its intellectual property including the Eastern District of Texas Jury award of $303 million in the case against Samsung, favorable rulings from German courts in 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 Gilstrap addresses Micron’s infringement through the sale of its DDR5 DIMMs and HBM components, some of the same patents and product types that were an issue in our successful April EDTX trial against Samsung. Heading into this trial, we received a favorable claim construction order that provides a strong foundation for Netlist’s ability to prove infringement and validity against Micron.

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Q&A Session

This case was reassigned from its original January start date, and Judge Gilstrap recently issued a limited stay, citing his limited judicial resources pending the IPR results of Netlist’s 060 and 160 patents. We expect the decision from the PTAB on those IPRs by or before April 12. Our team is ready and we look forward to presenting our infringement case to a jury. Netlist expects two additional Eastern District of Texas jury trials later this year. The second set of EDTX jury trials involve Netlist’s 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 15, 2024.

This consolidated case involves the infringement of large volumes and significant dollars, worth of DDR4 RDIMMs and LRDIMMs. The case is progressing despite Samsung and Micron’s renewed efforts to delay the proceedings with new stay motions. Netlist’s team secured 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 a joint trial on April 15, we expect the court to separate it into two cases that will each go to trial sometime in 2024. Netlist’s third case against Micron in the Western District of Texas was reassigned to the general Austin, Texas judicial docket number 2 last year upon the retirement of Judge Yeakel. It is not currently set for trial, but Judge Robert Pitman recently requested the parties to provide a status update by February 21, where we plan to highlight the fact that two of our asserted patents there were found patentable by the Patent Trial and Appeal Board.

As a reminder, this case involves Netlist’s patents covering Micron’s DDR4 LRDIMMs and was filed in 2021. Regarding the Samsung California contract breach case, this case was remanded to the U.S. District Court of the Central District of California, following the split decision — split ruling by the U.S. Court of Appeals. Central District Court Judge Mark Scarsi directed both parties to submit additional briefing in light of the Ninth Circuit remand and held a summary judgment hearing on February 5. At the hearing, Judge Scarsi set the matter for a fast jury trial date of March 26. As I’ve mentioned before, we haven’t yet been able to bring — fully bring all of Samsung’s past actions to light before a jury, so we are eager to be able to do so in this upcoming trial next month.

Turning to Netlist’s April 2023 win against Samsung in the Eastern District of Texas. Post-judgment issues have been fully briefed by the parties, and we are waiting for Judge Gilstrap to issue his final order. As noted previously, our jury verdict confirms Samsung’s willful infringement and set an implied royalty rate. Beyond the accrual of interest on our 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 the defined per-unit rate we obtained at trial. Related to this case, we have filed a request for rehearing before the PTAB on the results of the interparty’s 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’s April 2023 jury trial against Samsung. Netlist awaits reconsideration of these decisions, and if denied, we’ll have the option to file a notice of appeal within 63 days. Netlist’s 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’s asserted European patents in March 2024 for EP 735 and in July 2024 for EP 660. 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 are creating a huge demand for products that require Netlist’s technology. These market dynamics highlight the key role of Netlist’s technology that it will play in the future of the memory industry and underscore the importance of remaining vigilant and enforcing our IP rights. Now I will turn the call over to Gail for the financial review.

Gail Sasaki: Thanks, Chuck. For the 12 months ended December 30, 2023, total product revenues were $69.2 million compared to $161.6 million for the full year ended December 31, 2022. These comparative results reflected the industry downturn in demand for 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 a strong uptick during the fourth quarter of 2023, where 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 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.

The full year 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 right-sized sales and marketing, given the market downturn 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 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 our $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.

Operator: We have a question from Suji Desilva with ROTH Capital.

Suji Desilva: Congrats on the recovery here. Maybe you can talk about the revenue framework more broadly as we look at ’24. Your recovery here implies kind of a $120 million revenue run rate. In the past, you’ve done sort of $140 million, $160 million, so I’m just trying to understand how to think about the recovery shape here relative to historical revenue levels.

Gail Sasaki: Yes. I mean, as we’ve noted and the analysts have said that ’24 will be a revenue positive year and we expect to be in line with that. But I think due to the lack of our own visibility, we’ll take it quarter-by-quarter. We’ll continue to soft guide in that way, but we are positive.

Suji Desilva: Okay. I appreciate that, Gail. I understand it’s a recovering environment. And then more specifically, perhaps for Chuck, ’24, these AI platforms as they come online, 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, as a percentage of overall servers that are installed, is increasing. It’s probably in the teens to 20% penetration rate. Most of those systems require higher-speed DDR5. Virtually all require DDR5. And that — we have DDR5 products such as the DDR5 VLP, MRDIMMs and 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 think SSD demand will continue to grow and our high end SSD product lines, 32 terabytes and above, I think that they will benefit — that demand increase will benefit that part of our business as well.

Suji Desilva: And then my last question, Chuck and Gail, is thanks for all the litigation detail in the prepared remarks. Which of the top two or three sort of next dates or sort of events or milestones that you think are most important for Netlist should we watch more out of 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 postponed by Judge Gilstrap due to resource issues. And that — so that is pending the outcome of HBM’s IPR results — 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 15.

And those are, again, for past damages for RDIMMs and LRDIMMs that are of significant dollar exposure to both of those companies. Those will likely be separated out into two separate trials sometime second quarter or mid-2024. So we’re very busy preparing for these trials, and we’re working hard to win those trials and prove infringement and validity of these patents.

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.