Netlist's (NLST) CEO Chuck Hong on Q2 2016 Results - Earnings Call Transcript

| About: Netlist, Inc. (NLST)

Netlist, Inc. (NASDAQ:NLST)

Q2 2016 Earnings Conference Call

August 3, 2016 17:00 ET

Executives

Mike Smargiassi - Investor Relations

Chuck Hong - Chief Executive Officer

Gail Sasaki - Chief Financial Officer

Analysts

Richard Shannon - Craig-Hallum

Operator

Good day and welcome to the Netlist Second Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mike Smargiassi. Please go ahead sir.

Mike Smargiassi

Thank you, Alison and good afternoon everyone. Welcome to Netlist second quarter 2016 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 www.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.

Chuck Hong

Thanks, Mike and good afternoon everyone. The financial results of our second quarter reflect positive movements on multiple fronts as we deliver significant growth in revenue, margins, and earnings year-over-year. We are pleased to report that we have successfully completed the initial milestones under our joint development agreement with Samsung and remain on schedule to introduce our first generation storage class memory product.

We will also discuss progress against Netlist’s other core initiatives including increased traction in our product business as well as the positive momentum and the campaign to monetize our patent portfolio. We will start with the products. The increased product revenue for the second quarter was mainly attributable to Netlist’s partnership with Samsung under our joint development agreement. Outside of the product development work, the partnership with Samsung provides Netlist with unique access to the Samsung product offering. As such during the quarter, we added a select group of Samsung products to the Netlist product portfolio, we are now selling these companion products into existing accounts as well as target customers for our new storage class memory product.

This new product category is synergistic with Netlist’s current and future offerings and has a quick path to revenue as it requires shorter qualification cycles. It’s an area of incremental revenue opportunity for the company and provides our customers enhanced product breadth and value add when working with Netlist. During the quarter, we also identified new use cases for our EV3 and NV4 products as we continue to expand our customer and partner engagements. This week, we received our first purchase order from Inspur, one of the top five vendors – servers in the world and the largest provider of call computing in China. And after having worked together for almost a year for software and hardware enablement, Inspur formally selected Netlist as a strategic supplier of non-volatile memory. The storage group within Inspur plans to use our EV3 PCIe based non volatile memory solution as a right buffer for their high performance media streaming customers.

They have found that the EV3 is at least five times faster than solid state drives in a sustained write environment allowing their customers to cost effectively upgrade performance from traditional storage systems. We expect this will convert to volume orders during the year. We are also encouraged by the ongoing signs from OS, operating system and system providers and industry wide efforts to enable broader adoption of non-volatile memory. We look forward to making announcements with new partners in this space in the near future.

Now, turning to IP monetization, as you know we have an extensive portfolio of patents related to fundamental architectures of high speed modules operating on the memory channel, this includes the only LRDIMM portfolio in the industry with patents surviving re-examination, interparty reviews, and federal pellet [ph] court reviews as well as growing RDIMM portfolio. As registered DIMMs continue to adopt the high speed enabling technologies cover under our portfolio, we believe there will be growing monetization opportunities for us in this product area as well.

The strength and proven track record of our patent portfolio place us in a very strong position to pursue licensing opportunities in large and growing markets. We continue to pursue these opportunities and are presently engaged in substantive negotiations. And while this is our preferred approach, we have in the past taken action to protect our IP through the legal system and will continue to do so as the need arises in the future.

DDR4 LRDIMM and RDIMM products are now being shipped in volume and will continue to grow in coming years as more and more big data processing is pulled in from external storage into server memory. We believe our IP will only increase in value as the explosion in data and a desire to quickly extract insight from this data drives the demand for faster and higher density memory. We are focused on making sure that industry recognizes Netlist’s innovative contribution to high performance server memory and that our shareholders receive appropriate compensation for the patented technologies.

Now turning to storage class memory, during this quarter the initial part of our five year joint development agreement for standard based storage class memory solution with Samsung was completed and culminated in a private showing for their engineering team. Our solution unites Samsung’s industry proven DRAM and NAND components with Netlist’s controller and software IP into a single storage architecture. We believe that this is the first unified DRAM NAND solution that scales memory to terabyte storage capacities and accelerate storage to nanosecond memory speeds. Using an industry standard LRDIMM interface, HyperVault is the only storage class memory designed to operate on current x86 server platforms without BIOS and hardware changes. We envision that HV will be the first practical cost effective storage class memory product to be widely adopted in the marketplace, a true game changer for the industry. The next step in our commercialization efforts will be to publicly demonstrate the capabilities of our SCM product and establish critical performance benchmarks as we start sampling with key customers later this year.

Now, let me turn the call over to Gail for the financial review.

Gail Sasaki

Thanks Chuck and good afternoon everyone. Revenues for the second quarter ended July 2, 2016 where $6.9 million compared to revenues of $1.4 million for the second quarter ended June 27, 2015. Total revenues include $3.4 million in NRE [ph] from our strategic agreement with Samsung. To date, we have recognized $8 million in NRE and have now completed the product development work under the initial phase of the partnership.

Revenue from sales of our product was $3.5 million in the quarter as we benefited from the addition of Samsung specialty flash to our product offering. As noted earlier, we view this product line as highly complementary and strategic to our overall plan. Gross profit for the second quarter ended July 2, 2016 was $3.7 million compared to 100,000 for the second quarter of 2015. This significant increase reflects the profit earned from the Samsung NRE plus lower factory cost during the most recent quarter. Net loss for the second quarter was $1.5 million or $0.03 loss per share compared to a net loss in the prior year period of $4.4 million or $0.09 loss per share. These results include stock-based compensation expense of $0.3 million for the second quarter of 2016 and $0.4 million for the second quarter of 2015. Adjusted EBITDA loss after adding back net interest expense, income taxes, depreciation, stock-based compensation and net non-operating expense was a loss of $1 million for the 2016 second quarter, compared to an adjusted EBITDA loss of $4.9 million for the prior-year period.

Operating expenses were $5 million in the second quarter compared to $5.5 million in last year’s second quarter, a 9% decrease year-over-year. During the quarter, we continued to make strategic investments in the development and marketing of our storage class memory solution and our licensing and enforcement effort and in our sales and marketing teams focused on our expanded product portfolio. We ended the quarter with cash and cash equivalents and restricted cash of $11.4 million, as compared to $15.3 million at the end of the first quarter. We will remain disciplined in managing our expenses, while continuing to invest in future growth and plan for a continued decline in the cash burn during the second half of the year. Our working capital line of credit with Silicon Valley Bank remains fully available to us with a total capacity of $5 million limited by 80% of our accounts receivable balance.

Finally, we remain virtually debt free due to the nature of the $50 million convertible debt from Samsung which has no principle or interest payment and will automatically convert to equity at the end of the six-year term in December 2021. I will now turn the call back over to Chuck for concluding remarks.

Chuck Hong

Thanks Gail. Our partnership with Samsung is a significant recognition of our fundamental technology and IP and is opening the door to new business and to new discussions with our other partners in the industry. We remain encouraged by the growing awareness of our technology and the engagement and interest of potential customers and partners. On top of this, our core initiatives comprised of a base product ramp introduction of the industry’s first pragmatic storage class memory solution with strategic partners and IP monetization focus are each on track to hit their predetermined milestones and start to materialize and positive reasons for the company and our shareholders.

We look forward to reporting on tangible progress in the months ahead. Thank you for listening and we are now ready for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question will come from Richard Shannon of Craig-Hallum. Please go ahead.

Richard Shannon

Well Chuck and Gail, how are you guys doing?

Chuck Hong

Good, hi, Richard.

Richard Shannon

Great. Well, it sounds like you got, you made some good progress on a number of fronts here, let me touch on a few of them here. Chuck maybe following up on your comments related to Samsung, if you could, can you help us kind of detail the next one or two steps in terms of milestones you need to hit and what’s your expected results of that whether it would be a centered license agreement or otherwise your – what are the possible steps going forward?

Chuck Hong

Richard, as we indicated in the prepared remarks, we have pit all of the milestones that were planned out as of the end of last year in terms of this phase of the product development. And also as stated, we – our next step is for a public demonstration of the technology, and launch of the product and some of that will be together with Samsung and other parts of that will be with Netlist alone and maybe with other partners. In terms of the next step with Samsung, the joint development agreement calls out for potential second phase whereby we can cooperate further as the product is commercialized and goes into full volume production. That is still left to be decided on precisely how that’s going to materialize. But so far, we are progressing quite nicely in this relationship and under the agreement.

Richard Shannon

Okay. Maybe a couple of follow-ups to that description, thanks for that, Chuck. So I guess with Samsung here as you call for your second phase here, what’s the potential timeframe for getting to a commercialization and potentially getting to some sort of a second phase of a commercial license agreement, is it something that’s in a matter of weeks or months of quarters. Can you give us some scope of understanding here?

Chuck Hong

Well, the product as we stated this quarter and in previous quarters that our target is to sample select customers this year, it will happen and from there you will have an evaluation design and qualification process that will take a few months. And then really depending on the demand that can be generated, I think we’re not too far off then to take this into mass production. So, during that period, as we get this product out into the market, I’m sure we will be talking with Samsung.

Richard Shannon

Okay. You mentioned doing a public demonstration of the product, is this something we can expect to see next week at Flash Memory Summits or sooner after can you help us understand the timing for that?

Chuck Hong

Yes, I don’t think I can speak to that right now, but suffice it to say that you know we have made good progress and I think the investor base and the public will see something in short order.

Richard Shannon

Okay, fair enough. Maybe jumping over to your discussion of the storage class memory product here, it sounds like you are going to be sampling shortly, is the customer base more of kind of equipment guys, are you sampling directly with cloud providers and over what timeframe do you expect the sampling to occur and to get to the next step?

Chuck Hong

We made very good progress Richard in terms of engaging a variety of different potential partners for this from the traditional global OEMs to ISVs and then to end-users. For example in the financial, in the trading arena who could benefit from real-time in memory processing of trades so that they could have immediate feedback in the intra-hour trading versus what they’re getting today which is they consolidate everything and they do their analytics and then reflect the results back into the next day trading strategy. So we are talking to and partnering with a variety of different players in the industry that could benefit from real-time in memory, big data analytics processing.

Richard Shannon

Okay fair enough. Maybe one more question on the product side. Maybe I will jump on a couple of questions for Gail. Actually, I am turning out on the product side on IP monetization. Chuck, I know that sometimes negotiations are sensitive topics here but we would love to understand how many targets you have in mind overall here in the monetization efforts, what kind of timeframes we could expect to see any sort of agreement and/or potentially if you have to go into the courts to settle things? How should we think about your thought process there?

Chuck Hong

You’re right Richard, as you said, this is a topic that we can’t get into too much details because of the sensitive nature, the legal nature of it. But as I stated in our prepared remarks that we are in substantive negotiations, today, there are multiple targets as you know in the area of LRDIMMs and now RDIMMs, there are people that, there are manufacturers, major manufacturers that build this in high volume as well as consumers of server memory that manufacture their own RDIMMs and LRDIMMs. But we are in detailed negotiations today. So we are making what I think is good progress in those efforts certainly much further along than we were last quarter and the quarter before.

Richard Shannon

Okay, I certainly understand your difficultly in talking about that so I guess we will look for some announcements in future months and quarters, so maybe I will jump to a couple of more on the financial side for Gail. Gail in your second quarter, you know significant improvement in product revenue and you are describing as most of it coming from Samsung related products, I guess if you can help us understand the type of products here, what’s the path going forward and if my calculations on gross margins for those products are appropriate kind of in the mid to high single digit ranger is that about right?

Gail Sasaki

Mid to high, yes that’ correct, so…

Richard Shannon

I am sorry, go ahead Gail.

Gail Sasaki

Go ahead, Richard, sorry.

Richard Shannon

Sorry, I was going to repeat my question related to the product you are reselling from Samsung, what’s the breadth of the product here. How bigger the business can that be, what you are targeting and what’s the synergies look like your current self?

Chuck Hong

Yes, perhaps I can take that Richard. We are really at the entrance and you know that first of all I think that was part of the partnership and agreement that we have with Samsung to have access to their raw materials as well as their – some of their selected product lines and we are seeing the benefit of that. And but it is just starting out. We think it has very good potential. We are building out a sales organization and you know we are taking advantages of our existing customers as well as future customers for HyperVault and so we think it is synergistic and complementary with our existing product line as well as the customer base. But I think we are going to be working very hard and try to maximize the potential of it. But I think it’s too early to say having you know essentially quarter under our belt as to you know how big it’s going to be next quarter or the quarter after. But I think it’s got good potential nevertheless.

Richard Shannon

Okay. My last question, I will jump the line if there are other people in the queue here. But just related to any qualitative or quantitative comments you can make regarding the third quarter outlook. I guess this is my understanding that you should see more licensing or at least explicitly no more Samsung NRE in the third quarter, bit curious if you have any outlook on what kind of impact we could see from EV3 in the third quarter and just any basic thoughts on the Samsung products here, could we see a similar level of revenues or what as you are saying broad strucks would be great here?

Gail Sasaki

Yes. So you know, as you know, Richard, we don’t provide quarterly guidance and you did remind everyone that we did fully recognize the NRE at the end of the second quarter. We do expect and you know the revenue for Q3 to be mainly product related and a piece of that will be on the Samsung new product portfolio, some of it may come from Inspur.

Richard Shannon

Okay. And anything related to the EV3, I think last quarter you talked about getting some initial purchase orders, something, say that is that going to fall through in the third quarter?

Chuck Hong

That’s possible. You know, they are high volume server manufacturer and but we do expect volume orders certainly before the end of the year and we have other smaller EV3 and NV4 customer opportunities as well that we believe will start to materialize in volume orders before the end of the year.

Richard Shannon

Okay, I think it’s all my questions. Thanks for taking all those, guys, appreciate it and we will talk soon, thank you.

Chuck Hong

Alright, thanks.

Operator

Ladies and gentlemen, this concludes our question-and-answer session and we will conclude today’s Netlist conference call. Thank you for attending today’s presentation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!