Irvine-based Netlist Inc. has spent the past year wrestling with patent disputes, supply shortages and longer-than-expected testing times with its potential customers.
Sounds like a disaster. But the struggles have Chief Executive C.K. “Chuck” Hong feeling hopeful a year into the company’s turnaround plan.
“I think we’ve made good progress,” Hong said. “We are laying the groundwork to make this transition into high value, more customized products. We are hoping all of this activity will flow down and show up in our financial results soon.”
Netlist is looking to shed its old business model selling commodity laptop memory boards in favor of more profitable specialized boards used in servers and corporate data centers.
The company launched two products—dubbed HyperCloud and NetVault—and has been working to get them designed into servers made by Dell Inc., Hewlett-Packard Co., IBM Corp. and others.
Lightly traded Netlist’s shares surged when the company announced its turnaround plans a year ago. Enthusiasm from Wall Street seems to have waned some since.
Shares are off 40% in the past 12 months on a recent market value of about $65 million.
“It’s not easy to reinvent yourself, plain and simple,” said Richard Kugele, an analyst at Needham & Co. in Boston. “I think there is interesting value to the technology. It’s now a matter of getting it over the goal line.”
Netlist is making headway thanks to NetVault design wins with Dell and Minnesota’s Compellant Technologies Inc.
The Compellant deal, announced last week, “will be a nice chunk of business over the next few years,” Hong said.
He declined to disclose the value of the deal.
Continuing Challenges
Netlist continues to face challenges.
In January, the company got wrapped up in several legal disputes over patents related to the controller chip technology that in effect “supercharges” memory chips inside a server, making them more efficient and speeding the flow of data.
Netlist traded patent lawsuits with Westlake Village-based chipmaker Inphi Corp., which went public in an $86 million initial public offering last month.
There’s been no resolution of the lawsuits.
One case has been put on hold. Another has a trial date set for late next year.
Some delays have thrown a wrench in the works, slowing down the qualification process and pushing sales farther into the future.
Netlist dealt with memory part supply issues during the third quarter.
“Unfortunately, being so tied to large manufacturers you are caught up in their qualification cycle so you are not in charge of your fate,” Kugele said. “When you throw a delay through the model, it has a profound effect.”
Further gumming things up is that Netlist depends on others to get its products from the sampling phase to customers.
Analyst Kugele said he believed the slowdown “elongated the cycle into early 2011.”
Last month, Kugele downgraded Netlist’s shares to “hold” from “buy” “until greater visibility into qualifications and ramps appear,” he said.
During the third quarter, Netlist reported a loss of $5 million on sales of $11 million.
For the current quarter, analysts are expecting a loss of $4 million on sales of $11 million.
Hong sees the tide turning soon for Netlist.
“We will be a vastly different company in terms of the financials a year from now,” he said.
