Netlist , Inc. (OTC:NLST) reported a substantial revenue increase in the second quarter of 2024, reaching $36.8 million, driven by two significant legal wins and a robust product roadmap focused on AI memory technologies. The company secured a $303 million patent infringement award against Samsung (KS:005930) and a $445 million verdict against Micron (NASDAQ:MU), both of which are expected to influence future earnings positively. Netlist ended the quarter with $36.4 million in cash and anticipates a moderate revenue rise in the next quarter, alongside expanding gross margins due to higher pricing on resale products.
Key Takeaways
- Netlist won a $303 million patent infringement case against Samsung and a $445 million case against Micron.
- Q2 revenue increased to $36.8 million, with expectations of continued moderate growth.
- The company concluded Q2 with $36.4 million in cash and equivalents.
- Netlist is advocating for patent reform and expects certain Patent Trial and Appeals Board decisions to be reversed or remanded.
- The product roadmap includes AI memory technologies like high bandwidth memory, DDR5 memory, and CXL.
- Gross margins are projected to expand in the third and fourth quarters due to increased product pricing.
Company Outlook
- Netlist anticipates moderate revenue growth in the third quarter.
- The company is focusing on AI memory products, including DDR5 memory and CXL, to drive future growth.
- Gross margins are expected to increase in the upcoming quarters as a result of higher pricing on resale products.
Bearish Highlights
- Despite recent legal victories, Netlist expects Micron to appeal the $445 million verdict.
- Significant market adoption of Netlist's flash-based CXL product may still be one to two years away.
Bullish Highlights
- The company has patented technologies in the high bandwidth memory (HBM) space and is set to introduce DDR5 MRDIMMs.
- Netlist's AI memory technologies are expected to cater to the needs of advanced AI systems, positioning the company in a rapidly growing market segment.
Misses
- There were no specific misses mentioned in the earnings call summary provided.
Q&A Highlights
- Gail Sasaki highlighted the improvement in inventory turn and the expectation of increased pricing contributing to margin growth.
- Chuck Hong emphasized the company's focus on AI memory and SSDs, indicating that these products will be key to Netlist's future success.
In summary, Netlist's second quarter of 2024 has been marked by significant legal achievements and a positive revenue trajectory. The company is placing a strategic emphasis on AI memory technologies and patent protection, which are expected to contribute to its financial performance and market position in the coming quarters.
InvestingPro Insights
Netlist, Inc. (NLST) has demonstrated a notable quarterly revenue surge, a testament to its strategic litigation outcomes and product innovation in the AI memory technology sector. The company's financials and market performance, as reflected in the latest InvestingPro data, provide additional context to its growth narrative and investment potential.
InvestingPro Data:
- The adjusted market capitalization of Netlist stands at $353.28 million, showcasing the company's size and relevance in the technology sector.
- A notable quarterly revenue growth of 296.93% for Q1 2024 underscores the company's significant increase in sales, aligning with the reported revenue rise in the second quarter.
- With a PEG ratio of 0.17 for the last twelve months as of Q1 2024, Netlist presents a potentially attractive growth trajectory relative to its earnings.
InvestingPro Tips:
- Netlist's P/E ratio, although negative at -10.74 for the last twelve months as of Q1 2024, reflects the company's current lack of profitability. Investors should consider this metric in the context of Netlist's recent legal victories and their potential long-term impact on earnings.
- The company's Price / Book ratio of 35.57 for the same period indicates a premium market valuation relative to its book value, which may be influenced by investor confidence in Netlist's future prospects, particularly in the AI memory space.
Investors can find an additional 15 InvestingPro Tips for Netlist, providing deeper insights into the company's financial health and investment potential, exclusively on InvestingPro. These tips could offer valuable guidance for those considering Netlist as part of their investment portfolio, especially in light of its recent legal successes and product developments.
Full transcript - Netlist BATS (NLST) Q2 2024:
Operator: Good day and welcome to the Netlist Second Quarter 2024 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Mike Smargiassi, Investor Relations. Please go ahead.
Michael Smargiassi: Thank you, Betsy, and good day, everyone. Welcome to Netlist second quarter 2024 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 investor section of the Netlist website at netlist.com. Before we start the call, I would note that today's presentation of Netlist 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. In the second quarter, Netlist secured two significant legal victories that further validate the actions we have taken to protect our intellectual property. These wins advance the company's objective of entering into long-term licensing agreements with implementers of our IP that fairly compensate Netlist and its shareholders. First, in May, the jury in Netlist's case in the federal court for the Central District of California found unanimously that Samsung materially breached the joint development and license agreement entered into in November 2015. This trial brought to light Samsung's misconduct and bad faith actions, which were designed to harm Netlist. Accordingly, the jury rendered a verdict which confirms what we have been asserting all along, that Samsung intentionally and materially breached the agreement and no longer has a license to Netlist patents. Given this verdict, the Eastern District of Texas moved forward last week with a denial of Samsung's post-trial motions in the $303 million patent infringement jury award against Samsung. The court entered a final judgment in this case, and a denial of post-trial motions brings this case to a close in the U.S. District Court. With these actions, the court has upheld the jury's verdict and damages award, confirmed that Samsung willfully infringed Netlist's patented technologies, and that none of the asserted patents claims is invalid. Netlist's patents in this case covered both High Bandwidth (NASDAQ:BAND) Memory or HBM and DDR5 memory, technologies foundational to generative AI computing. Second, in May, Netlist won a $445 million damages award against Micron in the Eastern District of Texas. The unanimous jury verdict found that Micron willfully infringed Netlist's patents 9-12 and 4-1-7. Earlier this month, Judge Gilstrap entered the final judgment, and so we have now moved on to the post-trial stage of this case. After all post-trial motions are addressed by the court, Micron will have 30 days to file an appeal to the Federal Circuit Court of Appeals, and we fully expect that Micron will appeal this verdict. I want to underscore that in just over a year, two separate juries have awarded Netlist nearly three-quarters of a $1 billion in damages for willful patent infringement by two of the largest semiconductor manufacturers in the world. These are some of the largest patent damages award historically in our industry and highlight the tremendous value of the technology Netlist created, especially in memory for AI computing. It's also notable that the award addresses relatively short infringement periods, mostly between 2022 and 2023, at the beginning stages of the AI memory adoption. In the months since the two verdicts, both Samsung and Micron have each shipped exponentially larger volumes of the infringing memory products for AI, and their dollar exposure to our patents have piled up and will continue to accumulate in the months ahead. In the Eastern District of Texas, the case against Samsung is set for pre-trial conference on August 23rd and trial on September 9th. In this case, which we call Samsung Eastern District of Texas II, Netlist is asserting the 912 patent along with LRDIMM patent 417, both of which relate to the infringement of large volumes of DDR4 RDIMMs and LRDIMMs. In addition to these same patents that were asserted in the Micron case, for Samsung case two, the 608 patent, which reads on a different aspect of LRDIMM technology than the 417, is being asserted as well. I would note that the 608 was not instituted in the IPR file by Micron in the Western District of Texas case. On the last call, I commented on the Patent Trial and Appeals Board, the IPR process, and specifically the history of Netlist's 912 patent. Patent litigation and the PTAB landscape remain hostile to patent owners and innovative companies like Netlist. This can be seen in IPR statistics over the last few years, as well as the extreme proposals coming out of the USPTO today. We share investors' frustration with the current process, but we are committed to defending our patents through the Patent Office's existing framework. We currently have seven IPR appeals in process and expect to add three more in the near future. After receiving final written decisions from the PTAB, parties have 30 days to file a request to challenge the result at the PTO itself. This appeal process can take several months. If these appeals are denied, the PTAB will enter a final decision and denial. The Senate opens the window to file an appeal with the Federal Circuit Court of Appeals. For each appeal, we expect the process to take around 18 months, and so we expect to see Federal Circuit appellate rulings on some of the IPR final written decisions and the district court judgments later next year. Although, we will not point to specific IPRs, based on a thorough expert analysis of all of the final written decisions, we are confident that some of these decisions will be reversed or remanded on appeal due to clear legal and procedural errors made by the PTAB in rendering its decisions. On the legislative front, during the second quarter, members of the Netlist legal team spent time in Washington, D.C., meeting with elected representatives and their staff to raise awareness on the status of the U.S. patent system. Netlist's 912 patent is well known among the IP community in general, as well as with the Federal officials. At 14 years, we believe it is the longest-running reexam of any patent in history. The 912 has become the poster child for the excesses of the AIA, the IPR process, PTAB abuse, and a proof point for a need for patent reform. There are three proposed bipartisan bills, the PREVAIL, the RESTORE, and the PARA. Each would address different aspects of the process, make critical reforms to curb abuses by Big Tech, protect patent holders, and restore balance to the U.S. patent system. We will continue to work with lawmakers to help support their efforts to enact these bills into law. I will now turn the call over to Gail for a financial review.
Gail Sasaki: Thanks, Chuck. Second quarter 2024 revenue was $36.8 million, compared to $10 million in the year-ago period. This was close to four times greater than last year's second quarter revenue, a reflection of the recovery in the demand environment from the year-ago period. While we do not formally guide, given booking and shipping for the third quarter of 2024 to-date, plus the industry outlook for continued growth, we currently expect a moderate increase in revenue for the third quarter compared to the second quarter of 2024. The decrease in operating expenses for the second quarter compared to the first quarter was primarily due to elevated legal expenses during the first quarter related to preparation for the May trials. We expect legal costs to be flat for the third quarter and then to decrease as we exit the year. We ended the second quarter of 2024 with cash and cash equivalents and restricted cash of $36.4 million. We continue to maintain financial flexibility and liquidity going forward with a $10 million working capital line of credit with Silicon Valley Bank and approximately $31 million available on the equity line of credit through Lincoln Park Capital. As always, we manage the operational cash cycle very carefully with days and inventory of 21 days improved by 72 days over last year's Q2. Inventory turn increased to 18 times compared to four times from last year's quarter. Operator, we are now ready for questions.
Operator: The first question today comes from Suji Desilva with ROTH Capital. Please go ahead.
Suji Desilva: Hi, Chuck. Hi, Gail. Congratulations on the progress in the quarter on the litigation front. Well deserved. So the Samsung appeal, Chuck, failing, can you just give a sense maybe at what point in time perhaps something like interest is accruing on those damages or when the clock starts there or just any other milestones in the timeframe of Samsung kind of paying those damages now that the appeal has been denied?
Chuck Hong: Well, Suji, thanks. The appeal for the license case, the breach of contract/license case that was held in the Central District of California that appeal led to a remand back to the district court. And that is where we prevailed once again in May. So that established that Samsung does not have a license to our patent portfolio. And based on that verdict, the judge in the Eastern District of Texas moved forward to finalize the verdict and his final order confirming the willful infringement and the $303 million in damages that we're owed. So now that that case, which was -- was held in April of last year, so it was held up from being confirmed until this license issue got resolved in California. So now that that case will move to appeals to the appellate court and it will hit their -- the appellate court, the federal circuit sometime next year. And the circuit will likely consider that that case, the patent infringement final order, along with the IPR decisions related to the patents in that case. They will likely look at all of that together sometime next year and render what effectively would be a final, final decision. So if we were to prevail and we believe we've got a good chance, then the interest from the $303 million ruling will -- will continue to accrue through today and then through to the time of appeal. So hopefully that long answer addresses your question.
Suji Desilva: It did, Chuck. Thank you. And then separately on the -- what you're calling East Texas 2 for Samsung, was that waiting on the Micron finding or is that a separate timeline? And what are the implications of the Micron finding on that or the Samsung East Texas 1 on the East Texas 2 opportunity with the patents?
Chuck Hong: So the Samsung Eastern District of Texas 2 case. Was stayed for a while and the court confirmed now a trial date of September 9th. And the court was also waiting for to -- waiting on the outcome of the California license case, the breach of contract case before it fixed the date for the trial for September 9th. So that's the relationship with the license case. As to the relationship with the prior Micron case, it contains the Samsung 2 case that's coming up in September. That trial will have the same patents that were in the Micron case. And then there's one more patent, 608 that reads on the LRDIMM. So we'll have three patents, one more patent than the Micron case. But it will cover the same products that Samsung makes, that Micron makes, which are the DDR4 and DDR5, RDIMMs and LRDIMMs.
Suji Desilva: Got it. Okay, good. Switching to the financial side, Gail, what are the drivers for gross margin to expand here? Help me understand the relationship there to maybe what's happening in the memory market demand pricing-wise. And what can be the target gross margin level as things improve from here?
Gail Sasaki: I think during the first half of the year, we were -- I mean, I did mention that the inventory turn has dramatically improved. We were working through some inventory, which we had sold at some lower margins. And going forward, the pricing is continuing to increase from Q2 to Q3 on much of the resale products that make up a large portion of our revenue today, which will be helpful, not in huge percentages, but will be helpful to our margin going forward in Q3 and Q4. Target (NYSE:TGT) margin, product margins, still I'd say around 5% to 6% on an average. Certainly, there are portions of our product revenue which are much higher than that. So it will be -- our target is going to be better than Q1 and Q2 for those reasons.
Suji Desilva: Got it. Okay, that helps, Gail. Maybe last, Chuck, maybe you can kind of step back and talk about the Netlist product roadmap and the update there for timeframe of product sales beyond Hynix, the resales, and maybe tie that to the trends in AI memory and SSDs. Where is Netlist most levered to in the trends going on in the market today? Thanks.
Chuck Hong: So AI memory is comprised of really three areas. One is high bandwidth memory, and those products sit right next to the GPU in the Nvidia (NASDAQ:NVDA) and AMD (NASDAQ:AMD) GPUs. And those are manufactured, obviously, by Samsung, Micron, and Hynix, Hynix as the leader. We have -- as we've stated, some of the seminal technologies that we patented on HBM years ago. We don't manufacture HBMs, but we've got technologies there that are reflected in our patent. And then you have DDR5 memory, which is standard server memory, but you need a lot more of high-capacity DDR5 memory to support AI. And our products there comprise of VLPs and MRDIMMs, products that are more high-capacity and specialized among the DDR5 product lineup. And then finally, CXL. And so on the VLPs, and so we've got a line of VLP products, we also will be introducing DDR5 MRDIMMs. And then finally, CXL acts as the second level of memory for these AI systems. There is a lot of demand today on the NSSDs because of AI memory. And that, over time, with the emergence of CXL, should be supplanted by CXL, because CXL is faster and is memory semantics versus the SSDs. And we've been investing, we've been working on a flash-based CXL product for the last six years. And we have invested a lot of time and money there, and we will have a controller coming out in the next year or so. But that CXL market is still in its infancy. It will probably be another year or two before there is a significant adoption in the market. So those are the three areas of AI memory that we participate in.
Suji Desilva: Very helpful overview, Chuck. Thanks, Chuck. Thanks, Gail.
Chuck Hong: Okay, thank you.
Gail Sasaki: Thank you, Suji.
Operator: This concludes our question-and-answer session and concludes the conference call. Thank you for attending today's presentation. You may now disconnect.
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