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Netlist Inc. - Investors Are Overlooking Significant Progress On Product Side. NLST Could Easily Triple On Short Notice


Most of the contents in this Instablog will be summarized/included/edited in a regular SeeekingAlpha article to be published this week. Stay tuned. Investors are encouraged to do their own due diligence prior to making an investment on NLST (or any other stock for that matter).

  • NLST stock price has fluctuated with legal victories and defeats alone having completely overshadowed progress being made on the product end of the business.
  • Netlist is poised to launch its next generation products starting in June 2015. The life-cycle of these products is expected to last at lest three years.
  • Some of the new products, like EXPRESSvault 3, are potentially blockbusters based on inherent superior performance, easy-of-use, and faster implementation than competing memory products.
  • Netlist will be back on court against Diablo on July 8. The company requested a new trial and a permanent injunction on Diablo's products in a JMOL filed in May.

Netlist Inc. (NLST) designs, manufactures and sells memory subsystems for datacenter server and high-performance computing and communications markets. Netlists memory subsystems consist of combinations of dynamic random access memory integrated circuits (DRAM ICs or DRAM), NAND flash memory (NAND), application-specific integrated circuits (ASICs) and other components assembled on printed circuit boards (PCBs). The Company primarily markets and sells its products to original equipment manufacturer (OEM) customers. Its solutions are targeted at applications where memory plays a key role in meeting system performance requirements. The Companys products include HyperCloud, NVvault and Specialty Memory Modules and Flash-Based Products.

Netlist has steadily invested in and grown its worldwide IP portfolio, which now includes 88 issued and pending patents in the areas of high performance memory and hybrid memory technologies.

The company develops technology solutions for customer applications in which high-speed, high-capacity, small form factor and efficient heat dissipation are key requirements for system memory. These customers include OEMs and hyperscale datacenter operators that design and build servers, storage systems and high-performance computing clusters, engineering workstations and telecommunications equipment.

NLST stock price has fluctuated widely in recent months almost exclusively due to positive and negative outcomes of its ongoing legal battles against Diablo Technologies and SanDisk (SNDK). But investors have failed to pay attention to significant progress the company has made on the product side. The new group of next-generation products, with a life-cycle expected to last at least three years, are on the launch pad and will have a significant positive effect on revenues and net income starting in June 2015.

During a recent conference call, Netlist's Chairman and CEO Chuck Hong indicated that the company is focusing on three game-changing initiatives, 1) proliferating the NVvault product line, including EXPRESSvault, 2) bringing to market the fastest next generation hybrid memory solution - the HyperVault, and 3) monetizing its rich memory IP portfolio through partnerships with major industry players.

Indeed, Netlist has been investing primarily in driving the next-generation NVvault product and the development of HyperVault.NVvault improves the performance and data preservation found in storage virtualization, RAID, cache protection, and data logging applications requiring high-throughput by combining the high performance of DDR3 DRAM with the non-volatility of NAND Flash. This NVDIMM utilizes Netlist's patented Vault cache-to-flash controller and works in conjunction with general purpose CPUs, RAID adapters, and other devices. Netlist has shipped almost half million NVDIMMs, more than all of its competitors combined, over the last seven years according to recent news.

HyperVault is a memory channel storage product currently under development. It greatly expands the performance and capacity of DRAM channel storage. It is expected to be targeted at the fastest tiers of storage where latency is a critical issue, such as online transaction processing, virtualization, big data analytics, high-speed transaction processing, high performance database, and in-memory database. For the mobile smartphone market, Netlist's HyperVault Mobile Memory Controller (HVMMC) adopts cache buffer to decrease DRAM density thus delivering cost savings in the manufacture of smart phones while maintaining or improving performance.

Analysts expect that the market that HyperVault will compete in will be multi-billion dollar market in years to come. Netlist's HyperVault product is expected to have significant performance advantages over the only product addressing this market today, the ULLtraDIMM.

Netlist owns the patent on key parts of Sandisk's UtraDIMM technology (licensed from Diablo Technologies). Netlist's legal battles with Diablo Technologies and SanDisk are ongoing as will be seen later in this article.

NLST is currently trading at cash value (the company had $21 million on March 31, 2015). This means that the market is not giving the company any credit for its extensive IP and for the significant growth that is expected to take place starting in the second half of 2015 as it will be discussed later in this article. NLST has been trading in a very narrow range for almost two months, but I believe that there are several short-term catalysts that could take the stock for a frequent trip from 50c to $2 as seen in the lower (weekly) chart.

One analyst covering the stock has a "Buy" rating with a $3 price target. The consensus revenue growth is estimated to increase from $11.7 million in 2015 to $35.9 million in 2016 as revenues for the next-generation products start to ramp up. Institutional investors appear to be bullish on the future of Netlist as their collective holdings have increased significantly during the last reporting period.

The recent apathy towards the stock is in stark contrast with Chairman and CEO Chuck Hong's bullishness about the future of Netlist - he recently stated:

"The future has never looked brighter for Netlist as our next-generation products will be addressing rapidly growing multi-billion dollar markets and our IP portfolio is becoming more valuable and getting strong validation on the patent front. In addition, many of the larger players in this industry are beginning to recognize and understand the value of our technologies and solutions and we look forward to working with them."

I will now discuss a few key next-generation product products that could generate 8-figure revenues in a few quarters. Some of these products are slated for mass shipping starting in June 2015.

The EXPESSvault 3

One of the potentially blockbuster new products is the EXPRESSvault 3 (EV3) which is scheduled to start shipments in June 2015.

Netlist, a pioneer of NVRAM, has introduced EXPRESSvault EV3 to help address the ever-increasing density of virtual infrastructures and the need for larger databases as a result of an ongoing need for faster storage.

To overcome the limitation of current NVDRAM which often requires customized motherboards to implement, Netlist's EXPRESSvault 3 is a plug-and-play card that conveniently fits into a standard PCIe 3.0 x8 lane slot. This eliminates the need for proprietary hardware and extra motherboard space. EXPRESSvault 3 is also designed to ensure that data in memory is immediately and reliably backed up without the use of expensive, inefficient UPS or battery technologies.

George Crump, a heavily sought after expert with 25 years of experience designing storage solutions for data centers across the US recently published the article "Briefing Note: Netlist Readies PCIe Based High Performance NVRAM."

Netlist's Chairman and CEO Chuck Hong commented during the 1Q/FY 2015 conference call:

"In April (2015) we introduced the EV3 at the DSI Show in San Jose and since then we have been invited to perfume product demonstrations and add dozens of customers. There's been an overwhelming response from the market to EV3 breakthrough performance. Simply put, in a server or storage system, EV3 provides the fastest medium to write data for indexing, journaling and cashing, critical functions in a data center.

At 400,000 IOPS EV3 delivers latency-performance, which is orders of magnitude superior in today's fastest SSDs. The EV3 is based on the industry standard of PCIe3 interface to enable plug-and-play connectivity, making the solution ready to use the day it ships. There are no motherboard or BIOS adjustments that are required and there is no need to rewrite any of the software applications. All of this simplicity will accelerate the products adoption into the market.

We are seeing strong interests from major hyper scale customers, storage appliance vendors and server OEMs. We believe EV3 could be $100 million revenue opportunity for Netlist over the next few years. We expect both EV3 (and NV4) to ship in volume starting in the second half of year"

CEO Hong mentioned Twitter and Seagate and other potentially large EV3 customers, and gave us an idea of the size of this business:

"I don't have the exact numbers for those opportunities but they are significant. And these are mostly sole-source positions. Twitter for their own data centers and Seagate for a company called Xyratex, which they acquired, I believe, last year. We believe they are going to be annually multimillion, pushing towards possibly tens of millions of dollars opportunities, following the second half of the year."

" ...and there are many others companies like SolidFire, which is a big storage manufacture, up-and-coming. We are working very closely with those guys. There are also a number of other storage box vendors, database accelerator systems. There are probably a dozen different opportunities that we are working on. We believe about half a dozen of those will kick in the second half."

LG to include HyperVault in next-generation cellular phones

On April 28, 2015 Netlist announced that it has signed a letter of intentwith LG to work on a mobile memory controller based on Netlist's HyperVault technology with the intention of using the controller (referred to as HVMMC) in a next generation mobile system. Netlist/LG assert that the solution will lower the density of DRAM (more expensive than NAND flash) without affecting performance. Netlist has also been targeting HyperVault at enterprise applications that could benefit from lower flash latency (by having flash directly on the memory bus), such as transaction processing, analytics, and in-memory databases.

During the 4Q/FY 2015 conference call Chuck Hong, Chairman of the Board, President, Chief Executive Officer commented on this opportunity:

"I think it's an enormous opportunity because these guys are among the top mobile phone manufacturers in the world and they are shipping tens of millions of units of phones and potentially it could be very large unit volume, dollar-wise starting in's a custom design in of the mobile version of the HyperVault chip into the handsets. It's a long design cycle, but we think starting in 2016, it will be a significant opportunity. This is potentially an eight-figures opportunity."

During the 1Q 2015 conference call CEO Hong added:

"We have been in development with HV for the past year and a half and we expect to sample this product at the end of the year. We are excited to welcome LG as a strategic partner and are pleased that other industry players are also starting to recognize the value of our IP. We look forward to creating additional alliances and remain committed and excited about the future of Netlist. "

The Microsoft opportunity

On Februray 13, 2015 Netlist announced that its NVvault NVDIMMmemory solution has been designed into a new server platform for Microsoft's cloud services infrastructure.

Netlist's co-founder Chris Lopes stated:

"This early work between Microsoft and Netlist has led to defining the specifications now being proposed for future generations of NVDIMMs, as well as customized features such as backup power option using the Netlist's Power Management Unit. We look forward to continuing to work with Microsoft and building off the design and development work to date."

In a recent conference call CEO Hong responded a caller's question about this opportunity as follows:

"Well, we are well-positioned. We are one of two suppliers. We believe we are in a lead-supplier position. But the timing of the PO is really function of how they roll out their new server and we don't control that. But currently we expect to see orders later this year, with a significant ramp in 2016."

Update on Netlist's legal front

Netlist has been unfairly categorized as a "patent troll" because of its legal battles against much larger competitors like SanDisk, Google, Inphi Corporation, and others. I believe that this is an unfair characterization. Netlist has invested hundreds of millions of dollars developing its memory products since 2000 and its has the right to protect its intellectual property. Typical patent trolls like Document Security Systems (NASDAQ: DSS), Vringo (VRNG), Spherix (NASDAQ:SPEX), ParkerVision Inc. (PRKR), VirnetX Holding Corp., acquire patents in the open market and then go after potential infringers of those patents.

There are several patent-infringement cases waiting for the conclusion of patent re-examinations. Those cases include Diablo Technologies, SanDisk, Google, Inphi and several other alleged infringers. Those fighting the validity of Netlist patents in this highly lucrative and competitive space are not having much luck as time after time these patents are being revalidated by the USPTO.

Investors should know that the adverse verdict in the trade secret case against Diablo Technologies (reason for the drop from $1.5 to 50c) has no effect on the patent cases against Diablo and SanDisk (NASDAQ: ). The company expects that the patent cases will move to trial later this year or early next year.

As expected, Netlist filed a JMOL (Judgment as a matter of law - a motion made by a party claiming the opposing party has insufficient evidence to reasonably support its case) on May 19, 2015 on the Diablo breach of contract case. The case is scheduled back in court on July 8, 2015 at 2:00 PM for a Motion Hearing.

In the JMOL Netlist is requesting a new trial as well as a permanent injunction on Diablo products. It should be noted that Judge Ivonne Gonzales Rogers who oversaw previews proceedings already ruled in favor of Netlist over Diablo in several occasions including an injunction on Diablo products on January 13, 2015.

The following are key excerpts of the 20-plus JMOL concluding remarks (Search Pacer case locator, case 4:13-CV-05962 Document 477):

The Court had already spoken before trial commenced: Diablo breached the contract. On that basis, the Court issued the Preliminary Injunction. The Court's March 9 Order affirmed that Diablo had no right to use the ID chips, and the trial confirmed that Diablo was in breach. The Court should therefore enter judgment for Netlist on its breach of contract and Section 17200 claims and issue a permanent injunction to remedy Diablo's resulting head start.

The Court should also order a new trial on Netlist's trade secret claim. The jury should have been instructed by the Court that Diablo had breached the Supply Agreement. That Diablo breached the agreement should have been the cornerstone, or certainly the starting place for the jury's deliberations. Instead, the opposite occurred.

Because the jury was not so instructed, and because the jury was ill-equipped to interpret the contract and resolve a question of law, the jury erroneously concluded that Diablo was not in breach. So, instead of the starting place being that Diablo was in the wrong, the jury started with the premise that Diablo was right. The deliberations, therefore, were infected. Under these circumstances, a new trial is necessary."


Netlist is entering a critical phase of new product launches, some of which are potentially blockbusters as mentioned above. The patent fights with Diablo Technologies have completely overshadowed the progress the company has quietly been making on the product front. With almost 50c/share cash and revenues about to ramp significantly starting in the second half of 2015, NLST is grossly undervalued and could easily approach the $3 target set by one of the analysts covering the stock. A positive outcome from the JMOL filed in May 19 and scheduled to be back on court on July 8, 2015 is another potentially huge upside catalyst.

Institutions have been increasing their positions on NLST even after the negative outcome of the Diablo jury-trial verdict, possibly expecting positive legal outcomes (new trial or reversal) and/or appreciating the upside offered by the revenue opportunities related to the new next-gen products.

Investors are encouraged to do their own due diligence on this or any other stock investment by carefully reviewing company filings with the SEC (10-Ks, etc). There are significant risks investing in NLST stock including: 1) Adverse legal outcomes, 2) delays in bringing products to market, 3) loss of talent to the competition, 4) not able to compete with larger competitors with better financial resources, 5) delisting issues, etc..

Disclosure: I am/we are long NLST.