Good morning, and welcome to the Netlist Inc. Fourth Quarter 2019 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mike Smargiassi. Please go ahead.

Thank you, Cray [ph], and good day, everyone. Welcome to Netlist fourth quarter 2019 conference call. Leading today's call will be Chuck Hong, Chief Executive Officer of Netlist; and Gail Sasaki, Chief Financial Officer. As a reminder, the earnings release and a replay of today's call can be accessed on the Investors 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 the press release today. Netlist assumes no obligation to update forward-looking statements. I would now like to turn the call over to Chuck.

Thanks, Mike, and hello, everyone. 2019 was a year of progress on several fronts for Netlist. First, we established a sustainable sales pipeline for our enterprise SSD product line, and began to regrow our revenues. Second, we made advancement in the commercialization of HybriDIMM, with the publication of industry standard protocol specifications for NVDIMM-H at JEDEC. Third, we secured a favorable initial determination at the United States International Trade Commission or the ITC in the ongoing campaign to protect our intellectual property. And lastly, we continue to strengthen our IP portfolio by securing newly issued patents that cover server memory products, including registered DIMMs. We ended the year with strong fourth quarter results and delivered substantial improvements on both, the top line and bottom line for the year-over-year and sequential quarter periods. We believe this performance and the progress we made in the past year provides us with solid momentum as we enter 2020. Turning first to product sales; we are seeing strong traction in the SSD pipeline which is a direct reflection of the progress we have made in penetrating the enterprise and data center markets. In the fourth quarter, we shipped the first production orders for Netlist NVMe SSDs to a major cloud services provider, and a major server OEM. And as noted during last quarters call, we have received follow-on orders covering shipments through the next couple of quarters. Netlist's enterprise class SSDs offer industry-leading performance and multiple capacities in a number of form factors, and are well suited to service the storage needs of different workloads and applications. Most of our qualifications and revenues have come from the AIC and U.2 form factors. Starting this this year, we began sampling the M.2 form factor into certain enterprise storage and medical market segments, and are currently planning to complete qualification with multiple OEMs in the first half of 2020. That should add to the current momentum and the growing pipeline. As many of you know, there continues to be supply shortages of SSDs across the industry, and at the same time, the usage and density requirements in cloud and data center applications continue to expand. These market dynamics, along with the sales progress we are making provides positive momentum for the SSD and the overall products business. While we do not provide formal guidance, we expect to see continued growth in product sales in the first quarter. Turning now to HybriDIMM. In 2019, we made further progress, both on the product and standardization components of our commercialization. NVDIMM-H standardization efforts continue within JEDEC and will provide the industry standards necessary to develop a healthy ecosystem of broad-based users and suppliers for the HybriDIMM technology. Currently, there are over 60 registered member companies on the NVDIMM-H committee within JEDEC including every major server OEM and memory suppliers, along with some of the world's largest hyper-scalars and other end-users. Netlist is heading up the activities which will result in a common specification for the industry to use for NVDIMM-H. In addition, we continue our work with a major semiconductor company under our memorandum of understanding that was signed last year, as well as discussions with other potential partners for the NVDIMM-H ASIC controller. Turning now to intellectual property. In October of last year, we secured a major win against SK-Hynix in the ITC, with a positive initial determination where the Chief Administrative Law Judge found the 907 patent to be valid and infringed by SK-Hynix's LRDIMM server memory product. As part of the regular ITC process, this initial determination is subject to review by the ITC commissioners and on January 31, the ITC issued a notice of commission to termination. The notice stated at the ITC would review and park the initial determination, which we expected based on past ITC actions. And that -- it extended to target date for completion of the investigation and issuance of the final determination from February 21, 2020 to April 7, 2020. During this review, the commission may affirm, set aside or modify portions of the ID under review. If the initial determination is affirm, SK-Hynix would face an exclusion order on the sale, sale for importation, and importation into the United States of billions of dollars annually of it's LRDIMM server memory products. There have been significant positive developments with respect to the protection of intellectual property rights over the last several months, that is worth noting, that may benefit Netlist going forward. Late last year, a case entitled Arthrex versus Smith & Nephew that was decided at the Federal Circuit Court of Appeals, brought into question the constitutionality of the appointment of judges at the patent trials and appeals court. This ruling could result in changes at the PTAB [ph] which can decide the validity of patents brought before it, and maybe applicable to certain cases we have before that administrative body. Another recent case decided at the Federal Circuit entitle TCL versus Ericsson was related to standard essential patents, and whether or not royalty rates for standard essential patents can be dictated by a judge or decided by a jury. The Federal Circuit ruled that it is a question for the jury to decide. Finally, the US PTO and the Department of Justice jointly issued a statement a couple months ago updating their position that injunction as a remedy should be available in cases involving standard essential patents, and this may increase the odds for patent holders securing sales bans for infringing products. These are all very favorable developments, long overdue in the IP legal landscape which helps to even the playing field for inventors and companies such as Netlist. I will now turn the call over to Gail for the financial review.

Thanks, Chuck. Revenues for the fourth quarter ended December 28, 2019 were $9.4 million compared to revenues of $6.1 million in the previous quarter, an increase of 53% consecutively. The significant sequential increase on top line was due to overall growth across the product lines, in addition to an initial production order for Netlist NVMe SSDs from a major cloud computing vendor. Q4 '19 product gross profit percentage before manufacturing cost increased to 20.7% compared to 12.6% consecutively, and compared to 14.3% for Q4 '18. After manufacturing costs the net gross margins were 15.3% for the current quarter, and 9.5% for last year's quarter. The improvement and gross margin percentage was primarily driven by product mix which included an increase in the sale of Netlist's legacy NVMe SSD products. Revenues for the full year ended December 28, 2019 were $26.1 million compared to revenues of $33.5 million for the 2018 year. A year-over-year decrease in revenue was in line with the industry, as both, Samsung and SK-Hynix recently reported year-over-year memory revenue down by over 30% due to demand and supply issues in 2019. Netlist full year 2019 product gross profit before manufacturing costs was $4.1 million at 15.8%, compared to $3.7 million for the full year 2018 at [ph] 10.9%. Full year 2019 operating expenses was down by 25% due to decreased litigation costs compared to the prior full year. And as a result, the full year bottom line improved by 27% over 2018. And although we don't guide as Chuck mentioned, given the current pace and mix of bookings during the first quarter, we do anticipate improvement in both, first quarter revenue and first quarter gross profit compared to Q4 '19. Given the disruption to DRAM and NAND supply from the coronavirus, it is difficult to make predictions regarding the full year 2020. But analysts see no sign of a slowdown in the near-term for our target customers. During the last two months, we have closely monitored the coronavirus situation and potential impact on Netlist business and factory in Suzhou, China. All of Netlist, Suzhou employees have now returned to the factory and we have not experienced any material disruptions in production or the supply chain to date. We ended 2019 with cash and cash equivalents, and restricted cash up $11.7 million compared to $8.6 million at the end of the third quarter. We raised approximately $3.9 million during the fourth quarter under the $10 million equity purchase agreement we had entered into during June of last year, and have $3.6 million remaining to utilize opportunistically over the next couple of years. We continue to proactively manage the operational cash cycle which for Q4 '19 included improvement in day sales outstanding and days payable outstanding consecutively offset by an increase in the inventory cycle due to the proactive decision to secure inventory earlier than normal, to mitigate potential shortages in order to service the robust demand that we have been seen. This week we renewed the $5 million working capital line of credit with Silicon Valley Bank for another year through April 2021, which we used to support working capital and revenue growth. Finally, we will once again be participating in the Annual ROTH Conference in Orange County, California, taking place in about a week from March 15 to March 17; and we look forward to seeing many of you at the conference. Operator, we are now ready for questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Suji Desilva with ROTH Capital. Please go ahead.

Chuck and Gail, congratulations on the progress here. So, on the SSDs that you talked about shortages; Chuck, I was just hoping that I get understanding of what's going on in the NAND supply -- NAND itself supply demand? And then, what sub-segments of NAND maybe are driving the SSD charges or what are the factors driving that at this point?

The -- Suji, the NAND supply has been short, even before the coronavirus hit and much of those shortages had been reflected in the enterprise SSD space. For -- as you know, for mobile phones, you know the demand is down, and the supply into that space has not been constrained but the resurgence of demand from the hyper-scalars and the large cloud vendors have led to a shortage of enterprise SSDs starting Q4 or even before that last year, and that's only been exacerbated by the virus situation. So we expect, you know, across the board and certainly with our customers that there will be a robust demand and some tightness in the supply of enterprise SSDs through the rest of this year.

Okay. And despite that you started booking some SSD revenues. I'm curious, do you have some sense of how big that opportunity can be for you in 2020? Kind of, upside/downside with customary ramping?

Yes. I think in the last quarter, we talked about -- you know, with the couple of the large customers that we have, the revenues from those big customers can range anywhere between $5 million and $10 million for the year. We believe that's certainly possible and perhaps even some upside to that in 2020.

Okay, that's helpful. And on the HybriDIMM side, congratulations on the progress there with the ratification or the spec, rather. What is the timeframe for ASIC development with your partner? And when would sampling start thereafter?

The timeline is still some quarters away. The ASIC itself -- it would take a little over a year to design, so we're looking at the second half of next year.

Okay, got it. And then, last questions on the litigation. I know the FD date [ph] has moved out here. If it's an exclusion order were to be implemented or to be enacted, how long would Hynix have to implement that? Would that be immediate or would they have some buffer timeframe to implement that exclusion order if it came to that?

I think they would get a couple of quarters is our view right now. You know, we'll have to see; all of those details come out with the final determination on April 7. But in our view it's a couple of quarters for them to work out any necessary logistics they may require to deal with import man [ph].

Okay, very helpful. Congratulations again on the progress.

Okay.

Thanks, Suji.

The next question comes from Richard Shannon with Craig-Hallum Capital Group. Please go ahead.

All right, Chuck and Gail, thanks for taking my questions as well. Maybe a couple of numbers or any questions to start with here, probably for Gail. On the fourth quarter, if I heard you correctly, it sounds like there was some growth not only from the NVMe SSDs, but also from the older legacy DIMMs. Did I catch that correctly? And if so, to what degree are each of those driving that growth?

Yes, that was correct. It was kind of just widely distributed. Going forward, the NVMe SSDs and the SSDs in general, will contribute to the growth. And hopefully, we'll continue to get some orders from legacy as well.

Okay, that's helpful. And then, you talked about in the first quarter it will not [indiscernible]. Growth, both in sales and in gross profit dollars, does that also include -- I would presume but just wanted to check, the expected gross margins to improve as well?

Yes.

Okay. And as we look throughout the rest of the year, presumably get some growth here from your SSDs and maybe other products. What kind of a falter margin would you expect to see you, Gail?

I think it will continue in the range of 15% and higher as we throughout the year. Was that your question?

Well, it just was the falter margin as you grow revenues for -- is there a falter rate of 30% or 20% or what should we -- how should we think about that?

Richard, the falter rate…

Fall-through margin.

Fall-through margin.

I'm not sure what you mean by that, sorry.

You know what, I'll take that offline. Chuck, maybe a question on your NVMe SSDs, it sounds like we've got some great progress here. Maybe if you can kind of help us understand the breadth of the pipeline here and the possibility of seeing other customers being cloud guy -- more importantly, cloud guys where certainly OEMs are ramping in this year. How should we think about that potential?

Yes. I think as we stated in the past, we've got 20-some odd customers qualified, that continues to grow. Obviously, an overall tightness in the supply helps to drive new opportunities. So we're very excited about the growth and we believe, it's certainly a very high gross margin opportunity compared to the rest of the business, and it's more sticky business because the product gets qualified based on the performance advantage that we have. We've got superior random read and write, and sequential read write capabilities from our SSDs relative to the competition; so, you know, people are choosing it for those performance benefits. So, it's a solid value proposition and we expect to continue to grow this side of the market. We are investing in sales resources, marketing resources, and we expect this to really drive the top line, as well as the bottom line through the next couple of years.

Okay, that's fair enough. My last question and I'll jump in the line. Gail, on OpEx here. How should we think about that for this year? In your prepared remarks you talked about it declining, largely through litigation, obviously, I'm not asking for things that you haven't talked about in terms of planned future litigation, if any, but how should we see that OpEx trend this year, particularly, if you expected to continue to see a top line growth?

You should expect to see some moderate increases. I think in SG&A, we will be -- as Chuck mentioned, adding to the headcount. But I think overall, there will -- it will be flat year-over-year or down.

Okay. I think that's all the questions for me. Thank you.

Okay. Thanks, Richard.

This concludes our question-and-answer session, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.