Release Date: July 30, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Netlist Inc (NLST, Financial) secured two significant legal victories, validating their intellectual property protection efforts.
- The company won a $303 million patent infringement award against Samsung, with the court confirming Samsung's willful infringement.
- Netlist Inc (NLST) also won a $445 million damages award against Micron for willful patent infringement.
- Second quarter 2024 revenue was $36.8 million, nearly four times greater than the same period last year.
- The company expects a moderate increase in revenue for the third quarter of 2024, indicating continued growth.
Negative Points
- Netlist Inc (NLST) faces ongoing legal expenses, although these are expected to decrease by the end of the year.
- The company is involved in multiple IPR appeals, which can take several months to resolve, adding uncertainty.
- Patent litigation and the PTAB landscape remain hostile to patent owners, posing challenges for Netlist Inc (NLST).
- Gross margins are relatively low, with target product margins around 5% to 6%.
- The CXL market, a key area for future growth, is still in its infancy and may take another year or two for significant adoption.
Q & A Highlights
Highlights of Netlist Inc (NLST) Q2 2024 Earnings Call
Q: Can you provide an update on the Samsung appeal and the timeline for Samsung paying the damages now that the appeal has been denied?
A: (Chun Hong, CEO) The appeal for the breach of contract/license case in California led to a remand back to district court, where we prevailed again in May. This established that Samsung does not have a license to our patent portfolio. Based on this verdict, the judge in the Eastern District of Texas finalized the $303 million damages award. The case will now move to the appellate court, likely next year. If we prevail, interest on the $303 million ruling will continue to accrue until the appeal is resolved.
Q: What is the status and timeline for the Samsung Eastern District of Texas II case?
A: (Chun Hong, CEO) The Samsung Eastern District of Texas II case was stayed for a while but now has a trial date set for September 9. This case includes the same patents as the Micron case, plus one additional patent (608) related to LRDIMM technology. The court was waiting for the outcome of the California license case before setting this trial date.
Q: What are the drivers for gross margin expansion, and what is the target gross margin level?
A: (Gail Sasaki, CFO) Inventory churn has dramatically improved, and we are working through inventory sold at lower margins. Pricing is increasing from Q2 to Q3 for resale products, which will help margins. Target product margins are around 5% to 6% on average, with some portions of our product revenue being much higher.
Q: Can you provide an update on Netlist's product roadmap and its alignment with AI memory and SSD trends?
A: (Chun Hong, CEO) AI memory comprises high bandwidth memory (HBM), DDR5 memory, and CXL. We have seminal technologies patented in HBM but do not manufacture it. Our DDR5 products include VLPs and MRDIMMs, which are high-capacity and specialized. CXL acts as the second level of memory for AI systems. We have been working on a flash-based CXL product for six years and expect to have a controller out in the next year or so. The CXL market is still in its infancy and will likely see significant adoption in the next year or two.
Q: What are the implications of the Micron finding on the Samsung Eastern District of Texas II case?
A: (Chun Hong, CEO) The Samsung II case will cover the same products as the Micron case, including DDR4 and DDR5 RDIMMs and LRDIMMs. The case includes the same patents as the Micron case, plus one additional patent (608) related to LRDIMM technology.
Q: What is the current status of Netlist's financial flexibility and liquidity?
A: (Gail Sasaki, CFO) We ended Q2 2024 with $36.4 million in cash and cash equivalents. We have 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. We manage the operational cash cycle carefully, with days in inventory improved by 72 days over last year's Q2.
Q: How is Netlist addressing the challenges in the patent litigation and PTAB landscape?
A: (Chun Hong, CEO) We are committed to defending our patents through the existing framework. We currently have seven IPR appeals in process and expect to add three more soon. The appeal process can take several months, and we expect Federal Circuit appellate rulings on some IPR final written decisions and district court judgments later next year. We are also working with lawmakers to support patent reform bills that address abuses by big tech and protect patent holders.
Q: What are the expected trends in legal expenses for the remainder of the year?
A: (Gail Sasaki, CFO) Legal costs are expected to be flat for Q3 and then decrease as we exit the year. The decrease in operating expenses for Q2 compared to Q1 was primarily due to elevated legal expenses related to preparation for the May trials.
Q: What is the impact of the recent legal victories on Netlist's strategic objectives?
A: (Chun Hong, CEO) The legal victories validate our actions to protect our intellectual property and advance our objective of entering into long-term licensing agreements with implementers of our IP. These wins highlight the tremendous value of the technology Netlist created, especially in memory for AI computing. The awards address relatively short infringement periods, and the dollar exposure to our patents will continue to accumulate in the months ahead.
Q: What are the key milestones and timelines for the ongoing patent litigation cases?
A: (Chun Hong, CEO) The Eastern District of Texas case against Samsung is set for a pretrial conference on August 23 and trial on September 9. The post-trial stage of the Micron case is ongoing, and we expect Micron to file an appeal. The Federal Circuit Court of Appeals will likely consider the patent infringement final order and IPR decisions together sometime next year.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
