An Irvine company that competes in the same market as Fountain Valley-based Kingston Technology Co. is looking to raise $58 million in an initial public offering.
Irvine-based Netlist Inc., which makes memory modules for computers, wants to use the money to make acquisitions, pay down around $1 million in debt and start production in China, a move Kingston made more than a year ago.
Netlist, which goes after more lucrative segments of the memory market, faces competition from bigger players such as Kingston, which dominates with more than $3 billion in yearly sales.
Among companies that provide memory modules, Netlist ranked No. 20 worldwide in 2005 with less than 2% market share, according to iSuppli Corp. in El Segundo.
Kingston Technology is by far the largest player with nearly 17% market share. The No. 2 market player is Fremont-based Smart Modular Technologies Inc. at 5.5%.
If Netlist follows through, it will become one of just a few publicly traded memory module companies, along with Santa Ana-based SimpleTech Inc. and Smart Modular.
Demand for memory used in PCs, servers, networking gear and consumer electronics is growing. The overall market could grow by 23% this year and 17% next year, iSuppli analyst Nam Hyung Kim said.
Netlist could be looking to cash in on the sector’s growth.
The company and others buy memory chips from Asian and European suppliers and then assemble them onto circuit boards.
Memory chipmaker Qimonda AG had mixed results with a recent public offering. The company, a spinoff of Germany’s Infineon Technologies AG, lowered its offering price by about half before selling shares. The stock now trades above its opening price.
The underwriters for the Netlist offering are Thomas Weisel Partners LLC in San Francisco, WR Hamrecht & Co. in San Francisco and Needham & Co. in New York. The company is looking to trade under the symbol “NLST” on Nasdaq.
Founder and Chief Executive C.K. Hong owns about 45% of Netlist directly and through trusts.
Netlist, which was founded in 2000, has spent most of its young life in the red. But it has had some healthy sales growth, except for last year.
In 2001, the company’s first full year of operations, Netlist had sales of $2.7 million. Revenue jumped to $14 million in 2002, and then soared to $100.4 million in 2003. Sales grew 40% the next year, but nose-dived by nearly half to $79.9 million in 2005.
The decline stemmed from Dell Inc., an early buyer of Netlist products dating back in 2002. By late 2004, Netlist was shipping products to the U.S., Europe and Asia for Dell. But then the computer maker,and the industry, for that matter,shifted to a new generation of memory modules.
This transition “resulted in a significant decrease in our sales to Dell,” Netlist said in the filing for its public offering.
The company gave no more details on the problems but said sales to Dell began to recover late last year.
Sales to other customers, including IBM Corp. and China’s Lenovo Group Ltd., began to grow rapidly last year, according to Netlist.
Other customers include Google Inc. and Hewlett-Packard Co.
Sales rebounded in a big way in the first half of the year, hitting $66 million, nearly double a year earlier, Netlist said.
The company has racked up more than $20 million in losses as of the end of last year. But Netlist managed to post net income of $1.3 million in the first six months of the year compared to the year-ago period.
The company depends heavily on just three customers,Dell, Lenovo and IBM. Last year, the trio made up 68% of revenue. For the first six months of this year, they made up 81%.
While sales to Dell have stabilized, Lenovo’s business nearly evaporated this year. IBM now makes up nearly 50% of sales, a huge percentage for one customer.
“Any one of these three customers could decide at any time to discontinue, decrease or delay their purchase of our products,” Netlist said.
Another risk: Big customers could push for lower prices, potentially stemming Netlist’s profitability.
Netlist’s dependence on big computer makers has its upside, according to iSuppli’s Kim. The relationships afford fatter and steadier profits, he said.
The company also has to contend with the notoriously up-and-down memory market. Netlist and others can thrive or suffer with swings in the price of memory chips.
Netlist has made a name for itself by going after the high-end of the market. Its products go into increasingly popular blade servers, which demand high-speed memory modules that don’t take up much space.
The company said it does its own research and development.
“We collaborate with our … customers in the earliest stages of their new product design cycles,” the company said.
Netlist said it’s stayed true to dynamic random access memory, the standard for computer memory boards. Others, including Kingston, have branched out into flash memory used in gadgets such as the iPod and digital cameras.
The company makes all of its products at its Irvine plant. Netlist wants to open a site in China in the next year, the company said.
“We believe that this international expansion will allow us to improve our support of major (customers) with manufacturing sites in China, lower our production costs and provide access to engineering talent residing in China,” the company said.
“The module business is very cost sensitive,” Kim said. “Netlist’s plan to build facilities in China makes sense. In order to reduce cost structure and penetrate in other regions, Netlist needs a place in Asia.”
