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spk02: Good day and welcome to the NETLIS first quarter 2022 earnings conference call and webcast. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. And to withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Mr. Mike Smarjasi, with the Plunkett Group. Please go ahead, sir.
spk01: Thank you, and good morning, everyone. Welcome to NetList's first quarter 2022 conference call. Leading today's call will be Chuck Hong, Chief Executive Officer of NetList, and Gail Sasaki, Chief Financial Officer. As a reminder, the earnings release and a replay of today's call can be accessed on the Investors section of the NetList website at netlist.com. Before we start the call, I would note that today's presentation of NETLIS 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. NETLIS assumes no obligation to update forward-looking statements. I would now like to turn the call over to Chuck.
spk04: Thanks, Mike. And hello, everyone. First quarter was highlighted by solid momentum across the business as product revenue more than tripled over Q1 2021 and gross profit dollars more than doubled over last year's first quarter. The expansion of revenue and profitability is helping to support targeted investments, which will help drive future growth of the business. As an example, we increased headcount by 40% compared to last year's quarter to support our strategic initiatives across our business, including R&D, licensing, and sales and marketing. Before I get into the product update for the quarter, I would like to provide some context on the current market environment. which may help inform the outlook for our business in the quarters ahead. The memory market is relatively stable with both positive and negative factors weighing in and in some cases offsetting one another. PC and mobile demand have softened due in part to the slowdown in consumer demand for IT, particularly in China. On the other hand, Server demand from enterprise and data centers remain robust, and analysts expect this to continue through the end of the year. On the supply side, the recent Keoxia FAB contamination, the COVID-related shutdowns in China, and the war in Ukraine have impacted the supply chain for memory products. Despite this, the current supply of DRAM and NAND components remain relatively stable for mainstream computing markets. In the long run, we believe that the scaling of DRAM technology will be more difficult and expensive, and the limited availability of high-end equipment such as EUV will keep DRAMs from reverting to the boom and bust cycles of the past. NAND, on the other hand, with six global suppliers and with more technical headroom to scale, is likely to experience greater volatility. We are closely all of these variables, but remain cautiously optimistic given the supply chain relationships we now have in place. Turning now to the product discussion, in Q1, the bulk of revenue and gross profit dollar growth was the result of the expanded relationship with SK Hynix. During the first full year of the Hynix product supply agreement, we have gained a meaningful understanding of their product line and operations and have begun to capitalize on this knowledge to further broaden NETLIS' product offerings. We are particularly optimistic about the growing customer base in military, aerospace, and industrial segments, which we can more readily address with access to Hynix's raw materials. We also continue to expand the markets for NETLIS-branded enterprise SSD products executing on key qualifications with OEMs and ODMs. Netlist SSD products, together with product supply from SK Hynix and Samsung, enables us to consistently serve and supply a broad array of markets and customers. Moving now on to intellectual property, we are making steady and methodical progress in enforcement actions. Netlist's action against Micron recently moved to the Austin Court in the Western District of Texas with a tech tutorial and claim construction hearing set for May 12th. This will be an important milestone in the case as the court will determine the definitions of key patent claims as it relates to infringing products. We also filed a suit in March against Micron in Germany, asserting our European patents, EP735 and EP660, which read on the Micron LR demo. Netlis' patent infringement action against Samsung in the Eastern District of Texas. Samsung filed its response to Netlis' complaint on April 12th, and we now have a scheduling conference set before the court on May 18th. upon which the court will set key dates, including those for trial. In Delaware, we are waiting for the court to respond to Netlis' request for an oral hearing on our motion to dismiss Samson's petition. The Delaware court may grant Netlis' request or may issue an order from the bench. In the Google case, we found Chief Judge Seaborg's questions and comments during the March 3rd hearing on intervening rights to be encouraging. The judge was thorough and gave netlist time to explain its position and entertain arguments regarding the pendency of all claims in dispute under the 912 patent. We await the court's ruling where we also expect to receive an order calling for another case management conference that will set a concrete schedule for this case to proceed to a jury trial. Our enforcement actions should make clear that NETLIS is taking a broad, multi-pronged approach designed to bring the largest industry implementers into compliance with the law. We are working both domestically and internationally, pursuing actions involving broad array of patents across various jurisdictions against multiple parties, all in an effort to promote fair licensing of METLIS' unique technologies. Finally, we remain active on the patent prosecution front, and in January were awarded a new patent, the 054, that relates to power management on DDR5 modules. We believe that this patent covers a very important technological improvement for DDR5 memory. I'll turn the call over to Gail for the financial review.
spk00: Thanks, Chuck. During the three months that ended April 2nd, 2022, total revenue increased 237%, growing to $50.2 million from $14.9 million in the prior quarter. Gross profit dollars improved by 124% to $3.4 million from $1.6 million in the year earlier quarter. Gross margins were 6.7% for Q1 2022, an improvement from 5.6% in the fourth quarter of 2021. The gross margin percentage variance between quarters is primarily due to the change in product sales mix. The increase in operating expense for the first quarter was due to increased global investment in the sales, marketing, and engineering teams necessary to support sales and R&D acceleration and to increase legal fees related to IP enforcement actions. As a reminder, we do not formally guide, but given the uncertainties within the supply chain that Chuck noted earlier, we currently expect Q2-22 product revenue to be similar to Q1-22, although we are targeting moderate growth. We continue to believe the long-term memory and storage industry trends remain favorable, and we remain well-positioned to drive significant growth in year-over-year 2022 financial performance. We ended Q1 2022 with cash and cash equivalents and restricted cash of $58.3 million compared to $58.6 million at the end of 2021. We opportunistically raised approximately $1.8 million under the equity line of credit and maintained significant financial flexibility and liquidity going forward, with $62 million remaining on the line. As always, we continued to very carefully manage the operational cash cycle, which for Q122 included a 70% improvement in day sales outstanding. and a 35% improvement in days in inventory, offset by a decrease in days payable, resulting in a cash conversion cycle of minus eight days, an improvement of 25 days compared to last year's Q1, and 14 days improvement compared to last quarter. This cash cycle improvement was key to the zero cash burn between quarters. In addition, we recently increased the working capital line of credit with Silicon Valley Bank to $10 million to support future revenue growth. Operator, we are now ready for questions.
spk02: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Suji De Silva with Roth Capital. Please go ahead.
spk03: Hi, Chuck. Hi, Gail. Good to see the 200 million run rate here. Great progress. So, yeah, no problem. So the Hynex and the other guys that are supplying you, are there any constraints here, Chuck, to you guys? Are you able to get the quantity is your customers demanding?
spk04: Hi, Suzy. I think they've been fairly amenable to most of our requests. There are certain specialized components that I think that are facing more supply constraints. I think in general, As I mentioned, for the computing market, the flow of DRAM and NAND, the mainstream products, have been fairly stable and available. Certainly, our agreement with Hynix, the formal legal agreement that we have, makes that more reliable, stronger. you know, higher confidence of supply. But overall, it's, you know, outside of certain specialized products, you know, things, the supply constraints are loosening up actually a little bit.
spk03: Okay. That's good to get that color. And then on the litigation front, is all the Google pretrial activity, is that proceeding too sketchy? to your plan, or is that taking longer? I know this is a more complex trial, so I'd imagine this old pretrial activity is necessary to kind of unwind the last 10 years. Maybe you can give some color there.
spk04: Yeah. You know, there's obviously a lot of interest, including ourselves, as to... As to the communication from the court, I don't think this is unusual. You know, we held that call now going on a couple months. But it is the Chief Judge Seaborg. He is new to the case. He took over the case, you know, relatively recently, over the last two to three months. And he's going through, you know, a decade of records. So there is a lot to hash through, but, you know, I think we will hear a decision, a decision on intervening rights, you know, whether we get to go back a couple years or whether we go back a decade or more on the, you know, on the infringing activity with Google. I think we'll get that answer relatively in short order, right? And, you know, the term relative is relative to the judicial system. But, yeah, I think we'll hear from the court. And along with that decision, I think we will hear a firm committed schedule. He recognizes in his words that this is the oldest case, and he manages and responsible for that docket. He says it is the – he said – in the hearing, that it is the oldest case by light years, and he'll do everything in his power to take that into consideration and expedite this. But it's more important to get the right decision for us.
spk03: Absolutely. Good to hear the prioritization as well. Switching over to the Micron case, for the claim construction there, do the recent cases you've had – Does that benefit the Micron claim construction in terms of kind of building momentum there around your recent findings?
spk04: Somewhat. Yeah, I think against Micron, we currently have LRDEM patents and the NBDEM patent. And to the extent that we, if you recall back to the Hynix case, the LRDEM, the patents that were that went through claim construction in the western district of Texas under Judge Albright were related LRDEM patents so there is the history is there so I think that certainly is helpful for us and perhaps you know helpful for the court although it is a different Judge, it is the same Western District of Texas we're in front of.
spk03: Got it. And then a couple of questions. I'm sorry. Go ahead, Chuck.
spk04: Yeah, I was just going to say it's the same venue that we were in front of with Hynex with the same family of patents. Got it.
spk03: Okay. Good to know that. And then a couple of questions on the product business. Okay. You're increasing your employee base. I know it sounds like it's across the board in the areas you cited, but I'm wondering if you could peel that back. Is there a particular area of greater focus that's causing you to increase your employee base so aggressively? Any color would be helpful.
spk04: Yeah, you know, I think percentage-wise it is a big, you know, it is a big number. But I think you have to take into consideration we're a relatively small company headcount-wise, you know, especially in the U.S. We've got a, you know, fairly decent-sized crew out in China for manufacturing and engineering. number for headcount. So it is aggressive. We've hired on in-house attorneys, patent experts, quite a bit of chip engineers for R&D for both chip design and firmware, and then sales marketing as well. So, yeah, we believe there's – you know, quite a bit of opportunities for us, and especially with the Hynex agreement now, that we want to be able to take advantage of that supply and the access that it gives us into certain opportunities. But we need, yeah, we need talent to be able to do that.
spk03: Okay, I'll understand. And the last question for me, I'll jump out of line after that. Can you help us frame the Intel server opportunity with CXL? It sounds like an important opportunity for you. We just want to understand the timing and how to think about that growth for you as Intel ramps their newer, I guess, Sapphire Rapids or whatever platform is most impactful for you. Thanks.
spk04: Yeah, it's the entire industry, not just Intel. It's Intel and AMD. It's actually Intel's Granite Rapids. is the timing where CXL will get implemented, you know, in full scale. It's still out there. I mean, it's, you know, they're talking about end of 23 when those systems will be available, but it may, you know, it may move into early 24. But, you know, it is... it's not a simple add-on type of a product. It is a, it's almost like a PCIE 30 years ago when that came about and that created, you know, an entire, that new bus and created an entire market, you know, tens of billions of products that go on to the PCIE. So we see it as a new, the first new bus in a, in a computer in an enterprise grade server computer in 30 years. And that's, you know, it's going to open up a lot of, and our approach is different. It's NAND based approach, taking advantage of, you know, the huge price disparity between NAND and DRAM. So yeah, we're, you know, it's steady as she goes, but we need engineers and we continue to invest and continue to work on the chip design and the software and the firmware that go along with the chip design.
spk03: Okay, great. We'll keep an eye on that space. Thanks for addressing all the questions, Chuck, Gail. Sure. Thank you, Suzy.
spk02: This concludes our question and answer session as well as our conference call for today. Thank you for attending today's presentation. You may now disconnect.
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