A turnaround is in the works for Irvine’s Netlist Inc., a beaten-down maker of computer memory products that’s upending its business to Wall Street’s delight.
The company’s shares got a kick-start after Netlist announced a new strategy in which it would shift away from the dead-end business of making memory modules, or circuit boards loaded with memory chips that get built into computers and servers.
Netlist now plans to target a niche by making boards with specialized controller chips that help manage other memory boards within servers. It’s hinging its strategy on a single patent it owns.
“This product has taken us two years, tens of millions of dollars and thousands of engineering man-hours,” Chief Executive Chun “Chuck” Hong said.
The value of the company has more than quadrupled since the news broke on Nov. 11.
Even with some profit-taking last week, shares are up more than 2,300% since the start of the year on a market value of around $150 million.
Before the strategy was announced, the stock was up about 190% for the year.
Netlist has had a rough couple of years since its initial public offering in late 2006, when it raised roughly $35 million.
A massive memory chip slump in 2007 and another in 2008 all but steamrolled Netlist as falling prices of memory chips slashed the value of its stockpiles and squeezed profits.
“It’s been a long, hard road since our IPO in late 2006,” Hong said.
The new controller chips, for which Netlist holds a patent, help boost performance, cut down on power and save on costs for running data storage centers, according to the company.
“Investors are looking at the tip of the iceberg in terms of the potential of this product,” Hong said. “This is a technology that has legs.”
The new, custom chips have the effect of “supercharging” the most common type of memory chips found in computers, called dynamic random access memory.
“We believe that we have the world’s first virtual memory controller chips,” Hong said.
The controller chip is a design that comes out of a patent Netlist filed in 2004, which stemmed from a custom job it did for Apple Inc.
“We had to solve a particular problem in Apple’s servers,” Hong said. “But then we realized that that problem exists in almost all servers. It’s a much broader application.”
Netlist is looking to sell the niche memory boards to makers of high-end servers, including IBM Corp., Dell Inc. and Hewlett-Packard Co., among others.
What finally pushed Netlist to switch its focus was a combination of bad timing and a tanking market.
“The memory market collapsed and then just when it started to recover slightly, the greater economy went bad,” he said. “It’s a combination of those macro, industry and economic trends that hurt us.”
The company also saw problems because of what Wall Street calls “product mix,” which means it had too many products that were subject to the wild fluctuations of memory chip prices.
Netlist couldn’t compete on any level: price, niche or volume.
“The products that we were selling over the past few years became commoditized,” Hong said. “We had some product differentiation at the beginning, but that went away as competitors came into the market. Then you are only competing on scale of volume—which we don’t have.”
The company now is fighting for survival as its new business model hinges on a single patent.
In September, the company filed a lawsuit against Westlake Village-based chipmaker Inphi Corp.
Netlist alleged that Inphi infringed on its controller chip patent and is seeking damages and an injunction.
Netlist still is a tiny player among larger competitors such as Northern California’s Smart Modular Technologies Inc. and Fountain Valley’s Kingston Technology Co.
The company fell into red ink and has struggled to get its footing for some time.
For the three months through Oct. 3, Netlist narrowed its loss to $2 million from $7 million a year earlier. It saw sales of $6 million, down 79% from a year earlier.
The stock isn’t followed by analysts and is lightly traded with shares hovering at about $7 last week.
Earlier this year, it fielded several warnings and delisting notices from the Nasdaq exchange for its stock price being too low.
The company has undergone a major restructuring. It outsourced its manufacturing to China and hired on engineers.
“Over the past few years we have shut down manufacturing,” Hong said. “We have had to bring in chip designers who we didn’t have in-house in order to align our organization with the new business model.”
Netlist, which has some 75 workers here, converted its Irvine factory into a space for labs and testing.
The company expects the new direction and turnaround to “have significant impact on our financials in the coming quarters,” Hong said.
Netlist hasn’t yet announced any customers but is building samples for qualification and testing.
