Netlist Inc

Good day, and welcome to the NETLIS fourth quarter 2024 conference call. All participants will be in 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 a touch-tone phone. 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 Mike Smerjasi. Please go ahead.

Thank you, Wyatt, and good day, everyone. Welcome to Netlist's fourth 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 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. NETLIS assumes no obligation to update forward-looking statements. I will now turn the call over to Chuck.

Thanks, Mike, and hello, everyone. Excuse me for my voice here. A bit under the weather, but I'll try to speak loudly. So I would like to start today's call with the breach of contract case against Samsung, which was held in federal court for the Central District of California. The trial ended on Monday with what is now the second unanimous jury verdict. confirming that Samsung materially breached the joint development and license agreement. It entered into Netlist with Netlist in November of 2015. And the third time, Netlist has won the case on the facts. This verdict confirmed that Netlist's termination of Samsung's license in May 2020 was proper and thus Samsung has been without a patent license for five years. We have engaged in a lengthy legal battle with Samsung over the past five years and three federal district court cases involving five trials. NetList has prevailed in each case. We believe these results reflect the real-world value of our patents as well as the resolve and the legal skills necessary to protect them against unauthorized use by large entities like Samsung. Turning now to 2024 results, Nutlist delivers strong growth with revenue more than doubling to $147 million. The top line performance reflects the recovery in the overall memory market from a year ago period. The start of 2025 has seen some short-term softness in the market, primarily driven by reduced consumer demand. That said, the outlook for the rest of this year and 2026 remains robust, specifically in the high-end AI server market. Two major trends that will continue to drive memory market growth are HBM or high bandwidth memory, which enable AI processing and the industry's transition to DDR5. Netlist remains well positioned to capitalize on both of these trends through new product development and its IP portfolio. On the new products front, we introduced in Q4 of last year, the Lightning brand of ultra low latency memory solution. Lightning delivers double digit percentage improvements in memory performance without any changes to ADM or Intel based systems at minimal additional costs. Customer's qualifications are ongoing and the product line will benefit from the growth of big data and high frequency trading applications. Also in Q4, we introduced a line of high capacity, high performance MR-DEM products for the AI memory market. MR-DEM is a next generation memory module, which replaces the LR-DEM at the high end of the market. LR-DEM was a technology invented by Netlist some 15 years ago, and MR-DEM incorporates some of the LR-DEM architecture. and then adds power management and MUX features, which results in the highest performing DIMM in the history of memory. MRDM market is expected to start this year and grow from about a billion dollars in 2025 to over a five billion dollar market in 2027. Netlist has been investing in R&D in the CXL area for the past five years, and we are seeing tangible progress in the next generation CXL NVDEM. We've started to see the market with proof of concept CXL NVDEM samples to customers for enterprise and data center applications. CXL will be used as a persistent memory solution on next generation platforms and replace an Intel product called Optane, which is end of life as of the end of this year. In addition to the new product development work, Netlist remains at the forefront of IP innovation in HBM, DDR5, and AI-related memory technologies. In 2024, Netlist increased the number of patents in its portfolio by more than 10%. Moving to intellectual property in our organization. We're pleased to announce two recent appointments to the NETLIS in-house legal team. Rich Kim joins NETLIS as Vice President of Intellectual Property Strategy. Rich was previously a partner at Duane Morris and at Morrison Forster and has spent the last 30 years in patent prosecution, post-grant proceedings, and IP licensing, he's been consistently ranked as one of the top attorneys in his field. In addition, Raymond Chan has joined us as Vice President of Patents. Raymond has more than two decades of experience in patent prosecution and post-grant proceedings. He was most recently a patent litigation partner at Procopio. We're excited to have two highly experienced IP experts join our team. 2024 was a successful year in terms of our ability to enforce our IP against unauthorized use as we secured three federal court trial wins. The two patent verdicts rank among the top five damages awards in the semiconductor industry last year. Over the past two years, we've secured a combined total damages of $866 million for the willful infringement of our patents. These verdicts validate the significant and growing value of Netlist IP and they advance our objective of entering into licensing agreements with unauthorized implementers of our patents. Over the past 25 years, Netlist has invested hundreds of millions of dollars in our research and development. And the value of that hard work is reflected in the broad adoption of our technology by the memory industry and the implementation of our IP in the field of AI memory by some of the largest entities in the semiconductor industry. It is a business reality that large implementers of IP owned by smaller companies do not voluntarily license. The system provides them ample opportunities to delay and hold out. Understanding this, we pursue litigation to create the forcing mechanism necessary for large implementers to license and stop their illegal use of our IP. This past November, the jury in our second Eastern District case, Eastern District of Texas case against Samsung, delivered a unanimous decision ordering Samsung to pay netless $118 million. And that brings the total damages award to Netlist against Samsung to $421 million. In December, the court issued a final judgment in this case that validates the jury verdict, the damages award, and confirms that Samsung willfully infringed Netlist's patented technologies and that none of the asserted claims are invalid. Shortly after the final judgment was issued, Netlist's 608 patent, which reads on DDR4-LR-DEM and was asserted against Samsung in the November trial, was upheld by the Patent Trials and Appeals Board and found not to be invalid. This is the second time the PTAB has upheld the validity of the 608 patent, the first being in the IPR file by Micron in the currently state Western District of Texas case. With the breach of contract win this week, We will continue to vigorously pursue collection of these damages awards from SAMHSA. As the patent infringement trials and IPR decisions move into the appellate process, we are entering the final phase of litigation for these actions. These cases have moved to the Federal Circuit Court of Appeals, after which an appeal to the U.S. Supreme Court is the only recourse. However, given the very high hurdle to secure a hearing at the Supreme Court, a First Circuit ruling will likely be the final, final for these cases. This makes the Court of Appeals rulings critically important. In March, we secured our first win of the year before the Court of Appeals. The Court, the First Circuit, issued a judgment affirming the US PTAB's inter-parties review decision upholding the validity finding of Netlist's 523 patent. This IPR resulted from a preemptive suit Samsung initiated in Delaware against Netlist. And by Samsung's own actions, they now face significant exposure based on billions of dollars of potentially infringing sales of their DDR4 LRDM products. The case in Delaware was stayed pending the outcome of the breach of contract dispute with Samsung. And with the verdict this week, we look forward to the case moving forward and presenting the facts to a jury in Delaware. There are currently seven additional IPR appeals involving 10 netless patents pending before the Court of Appeals. We expect oral hearings for five more appeals to be conducted in 2025. This includes net list patents 314, 035, 506, 339, which read on DDR4 LR DEMS, and the 918 and the 054 patents, which read on DDR5 DEMS in general. We are awaiting the assignment of oral hearing dates in all of these cases. All of these patents are now in the appellate pipeline. Finally, this past January, we participated in the IP Watchdog Conference in Washington, DC. Most attendees are looking forward to what appears to be a more favorable environment for protection of IP rights going forward. This optimism is largely due in part to the new leadership at the U.S. PTO and their approach to intellectual property policy. The new Commerce Secretary who oversees the USPTO is a prolific inventor himself with hundreds of patents to his name, and both the new USPTO Director Nominee Mr. Squires and the Deputy Director, Ms. Stewart, have long experiences working with small inventors and startups that depend on the government's protection of intellectual property. Their perspective in the IP domain appears to be more balanced and fair compared to the pro-big tech, big law perspective of the previous administration. We are already starting to see tangible changes in terms of new policies coming out of the PTO. Combined with the steady progress we're making over the past few years in our enforcement campaign and the plans that we have going forward, and the new pro-innovation policies in the government, we hope that those combined will help us, propel us to positive outcome in the coming months and years. Now I'll turn the call over to Gail for the financial review.

Thanks, Chuck. For the 12 months ended December 28, 2024, revenue was $147.6 million, an increase of 113% compared to the full year ended December 30, 2023. The strong top line results reflected the recovery in the overall memory market from the year-ago period. While we do not formally guide, we currently expect first quarter revenue to be moderately down from the first quarter of 2024 due to the short-term softness and consumer demand that Chuck alluded to earlier. However, we do anticipate growth in revenue for the full year of 2025 as the outlook from industry analysts remains strong. Operating expense for the full year 2024 declined 9.44%, driven by reductions in IP legal fees and SG&A. We currently expect a further reduction in legal costs in 2025 as we enter the final phase of litigation for current actions and a reduction in trials. We enter 2024 with cash and cash equivalents and restricted cash of $34.6 million compared to approximately $29.8 million at the end of Q3 2024 with minimal debt. During the fourth quarter, we strengthened our cash position, raising $15 million through a registered direct offering. In addition, with a $10 million working capital line of credit with Silicon Valley Bank, we continue to maintain significant financial flexibility and liquidity going forward. As always, we manage the operational cash cycle very carefully. With days in inventory improved by 27 days over 2023, and days in sales improved by seven days year over year. Operator, we are now ready for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. Our first question will come from Suji Da Silva with Roth Capital. Please go ahead.

Hi, Chuck. Hi, Gail. Congrats on the verdict this week. So, yeah, so, Chuck, maybe the California jury verdict, does this in any way change the steps or timelines in pursuing collecting damages from Samsung? I know the appellate process is going on now. Is that impacted by this case and the verdict at all? And if not, just what's the timeline? Remind us the timeline for the appellate case.

Yeah, Suji, no, it doesn't affect the appellate timeline at all. The appellate process for the $303 million, I believe, that the jury damages from 2023, that is... The appellate process has already started on that a few months back, sometime late last year. So that's going to come to a head sometime end of this year or early next year. There will be a ruling and that will be it. will not impact what happened this you know it to us it opens the the door however for you know for the the remainder of the term of our patents all of these patents that'll go out till mid 2030s and beyond so samsung is now now fully exposed the uh the appellate process for the 300 plus million dollar win Really, those damages were only for past damages through the date of trial. What this win last week does is opens up anything from 2023 going forward all the way out to the mid-2030s.

Got it. Very helpful. And separately with the announcement this week, I think you mentioned that the Google case may become unstayed. Can you confirm that, if that's true, and the potential timeframe there for any proceeding?

Well, the Google case, which – so Samsung, their rationale for preemptively suing us, we did not sue them. They sued us first on Unbelievable, but that's what they do. So that was based on their – claim that they have to indemnify Google as one of their biggest customers, but effectively that is Samsung doing the bidding for Google. So the Google case involves the same patent, the 912. which is on appeal. So we will see the result of that, you know, sometime this year, the 9-12 appeal. And once that's decided, then I think it's upon that decision the Google case will reopen. That has currently stayed in the Northern District of California.

Okay. Great. And then lastly, on the product revenue, Chuck, Your new product lineup sounds very strong here and has opportunity. When would you think that new products contribute a material percent of the product revenue versus the resale revenue you have now? And what might be the margin profile in the newer products?

The margin profiles for MR Dems and CXL and V are going to be in the 20s and 30%. So those will be very good. In terms of the volumes or actual, you know, traction at the customer, MR Dems probably later this year. CXL NV, it is, that is about a, that's a very, it's a pseudo custom product. So it will take a long time to test and qualify. And that probably is starting next year. It's about a year's worth of qualification work, although we're already sampling some big OEMs and a hyperscaler. It's a long design-in qualification, but we've been working on that CXLNV for now five years, so we're in a good leadership position on that. And then the Lightning brand of ultra-low latency products, we're starting to see revenues out of that already. So those two product lines kicked in at the end of last year.

Thanks, Chuck. Appreciate it. Sorry to push your voice there. Thanks.

No, no problem.

This will conclude our question and answer session. The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.