Highlights from Memory Subsystem Developer Netlist's IPO Filing

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Includes: NLST, SANM, SMOD, STEC
by: Evelyn Rubin

Memory subsystem developer Netlist filed for a Nasdaq IPO on Friday. Below are highlights from the company's S-1 filing:
Proposed Ticker: (NASDAQ:NLST)

Underwriters:
Thomas Weisel, Needham & Company, WR Hambrecht

Maximum Offering:$57.5 million

Business Overview (from S-1):

We design and manufacture high performance memory subsystems. We sell our subsystems to original equipment manufacturers, or OEMs, in the server, high performance computing and communications markets. Within these markets, we target applications in which memory plays a key role in enabling overall system performance. Our memory subsystems are incorporated into multiple platforms at International Business Machines Corporation, or IBM (NYSE:IBM), Dell Inc. (NASDAQ:DELL), Gateway, Inc. (GTW), Lenovo Group Limited, or Lenovo, and Hewlett-Packard Company (NYSE:HPQ).

Electronic systems of all types are continually evolving to keep pace with user demands for higher performance, as measured by speed, functionality or smaller physical size. In order to meet these performance expectations, OEM designers rely on increasing amounts of memory to take advantage of the latest advances in processor technology and operating system functionality. Dynamic random access memory, or DRAM, represents the most common type of memory used across these electronic systems today. In memory-intensive applications, OEMs often seek memory solutions which integrate multiple DRAM integrated circuits, or ICs, into a subsystem that delivers high memory density in a small form factor. These memory subsystems are available in both standard and application-specific configurations. Standard memory modules have proven generally inadequate to meet the demanding customer requirements in our target markets. Our memory subsystems are primarily designed and manufactured to specifically address the high performance needs of our customers' systems more completely than is possible using standard memory modules.

Financial Highlights:
2005 net sales were $79.9 down 44% ($63.8 million) from 2004. According to the S-1, "This decrease was due to a $72.6 million decrease in net sales to one key customer, partially offset by the commencement of shipments of our very low profile subsystem during 2005. The decrease in net sales to the key customer was attributable to its shift in memory technology from DDR to DDR2." Gross margins grew from 7.1% to 7.5% in the period, and net loss grew from $970k to $2.3 million. For the first six months of the year, net sales grew 81% between 2005 and 2006 to $65.9 million. The company attributes the bulk of this growth to higher unit sales of its very low profile memory subsystems. Gross margins grew from 5.9% to 12.9% in the period, and the company moved from a net loss of $1.8 million to a net income of $1.3 million. At the end of H1, the company had $27k in the bank, and just under $15 million of debt.

Use of Proceeds:
Cash raised will go towards building a manufacturing facility in China, repaying debt, and general corporate purposes.

Competition: The company lists memory module providers as its key competitors. These include SimpleTech (NASDAQ:STEC), SMART Modular Technologies (NASDAQ:SMOD), and Viking Interworks, a division of Sanmina-SCI (NASDAQ:SANM) Corporation.

Concentrated Customer Base:In a concentrated market with very few potential customers, the company's three top customers (Dell, IBM, and Lenovo) comprised 81% of the company's 2005 sales, and 61% of H1 06 sales.

Employees: The bulk (49) of the company's 88 employees are in operations; 16 are in R&D.

Management:
Chun K. Hong as been President and CEO since inception:

From September 2000 to September 2001, Mr. Hong served as President and Chief Operating Officer of Infinilink Corporation, a DSL equipment company. Mr. Hong assisted us on a part-time basis until his departure from Infinilink, at which time he assumed full-time responsibilities with us. In the third quarter of 2001, Infinilink filed for bankruptcy under Chapter 7. From July 1998 until September 2000, Mr. Hong served as Executive Vice President of Viking Components, Inc., a memory subsystems manufacturing company. From November 1997 to June 1998, he was General Manager of Sales at LG Semicon Co., Ltd., a public semiconductor manufacturing company in South Korea. From April 1992 to October 1997, Mr. Hong served as Director of Sales at LG Semicon America, Incorporated, a subsidiary of LG. From December 1983 to March 1992, Mr. Hong held various management positions at LG subsidiaries in South Korea. Mr. Hong received his B.S. in economics from Virginia Commonwealth University and his M.S. in technology management from Pepperdine University's Graduate School of Management.


Ownership:
Chun Hong currently owns 45.2% of the company; the VP R&D and VP S&M hold 7.5% each.