Netlist's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Netlist (NLST)

Q2 2012 Earnings Call

August 14, 2012 5:00 p.m. ET

Executives

Mike Smargiassi – IR, Brainerd Communicators

Chuck Hong – Chairman and CEO

Gail Sasaki – CFO

Chris Lopes – VP, Sales

Analysts

Rich Kugele – Needham & Co.

Mark Kelleher – Dougherty & Co.

George Santana - Ascendiant

Richard Shannon – Craig-Hallum Capital Group

Presentation

Operator

Good day everyone and welcome to the Netlist second quarter 2012 earnings conference call and webcast. [Operator instructions.] I would now like to turn the conference call over to Mr. Mike Smargiassi. Mr. Smargiassi, the floor is yours, sir.

Mike Smargiassi

Thank you, operator, and good afternoon ladies and gentlemen. Welcome to Netlist’s second quarter 2012 conference call. I'm here today with Chuck Hong, chief executive officer of Netlist; and Gail Sasaki, chief financial officer; and Chris Lopes, vice president, sales.

As a reminder, our earnings release and a replay of today’s call can be accessed on the Investors section of the Netlist website at www.netlist.com.

Before we start the call, I would note that today’s presentation of Netlist’s 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 a 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. We assume no obligation to update forward-looking statements.

During this call, non-GAAP financial measures will be discussed. Reconciliations for those directly comparable GAAP financial measures are included in the press release which was filed on Form 8-K.

I would now like to turn the call over to Chuck.

Chuck Hong

Thanks, Mike. During the second quarter, we saw an initial and steady stream of ordering of our two new flagship products, 16 GB HyperCloud, and 16 GB VLP and our OEM customers IBM and HP.

With the qualification of 16 GB HyperCloud at HP on the day of our last call, HyperCloud became available to ship with the three highest-volume enterprise servers in the world, just a few months ago. We have the only 16 GB density load-reduced memory currently offered by IBM and HP on these highest-volume servers.

Recent third party benchmarking from industry thought leaders like Deopli, and key vertical markets, provides insight as to why the OEMs have selected HyperCloud over LRDIMM, as HyperCloud delivers a huge gain of 54% in memory bandwidth improvement. HP benchmarking has also shown a significant benefit to using HyperCloud when running 3DPC 1333, which basically [plates] to a two speed grade advantage over LRDIMM in comparison to equivalent products. I’d like to note that this benchmarking result is available on the HP website on their white paper.

In a moment, I will provide an update on how we’re expanding our footprint for our 16 GB HyperCloud along with our progress in launching 32 GB HyperCloud, 32 GB VLP, 32 GB Planar-X, as well as our next-generation of NVvault systems.

But first, before turning the call over to Gail, I would like to comment on our financial results. As we noted on our last call, our business is undergoing a major transition, which is marked by a reduction in the shipment of our products associated with previous server generations, primarily [PERC] and [NV2] and a ramp up in our new product line, including HyperCloud, NV3, and VLP. We remain confident in the market potential of these three products and believe our operations are well-positioned to grow over the long term.

During this transition phase, we have focused on maintaining a disciplined approach to managing our expenses with the goal of maintaining adequate liquidity and positioning our business for sustainable profitability as our revenues begin to expand with the ramp up of our new products. To that end, we are aggressively streamlining our business through various strategies including SKU optimization and increasingly shifting a larger portion of our operations to China.

We plan to reduce operating expenses by 30% before the end of the year. These initiatives will have no impact on our new product rollout strategy, and in fact we have continued to prudently invest in our resources and successfully bring our flagship products to market. The reduction in our second quarter revenue reflects this transition and the early-stage nature of the HyperCloud and [NV] launch.

We are optimistic as we begin to gradually gain traction with HyperCloud and the launch of our other new products. We currently have seven new high-density [unintelligible] products in some stage of evaluation or qualification at the three major OEMs.

Now, let me turn the call over to Gail for the financial review.

Gail Sasaki

Thanks, Chuck. As Chuck mentioned, our second quarter results reflect a transitional period for our organization as we move forward in launching our new products while the contribution from our more mature products attached to prior generation servers continues to decrease.

Our revenue for the second quarter ended June 30, 2012 was $10.6 million, down 34% compared to $16 million for the second quarter of 2011, and down sequentially due to the product line transition just mentioned.

Gross profit for the second quarter ended June 30, 2012 was $2.7 million, or 26% of revenues, compared to a gross profit of $4.9 million, or 31% of revenues, for the second quarter of 2011, due to lower revenues and a transition in the product mix.

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