Chuck Hong - Chief Executive Officer Gail Sasaki - Chief Financial Officer Mike Smargiassi - Investor Relations, Brainerd Communicators Inc.

Richard Shannon - Craig-Hallum Bob Evans - Pennington Capital

Good afternoon and welcome to the Netlist Q1 2015 earnings conference call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there will an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Mike Smargiassi. Please go ahead.

Thank you, Kate and good afternoon ladies and gentlemen. Welcome to Netlist's first quarter 2015 conference call. Leading today's call will be Chuck Hong, Chief Executive Officer of Netlist and Gail Sasaki, Chief Financial Officer. As a reminder, our earnings release and a replay of today's call can be accessed on the Investor's 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 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. 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.

Thanks Mike and good afternoon everyone. Let me apologize in advance for my voice, I lost it over the weekend. Transcripts are available after the call in case some of this becomes unclear. Stated in our release, the first quarter results reflect ongoing investments in transitioning our base businesses, base products to next generation technology and HyperVault R&D, as well as legal expenses associated with the current litigation. While our current financial results are below the levels we would like them at, we continue to aggressively pursue and invest in strategic initiatives that leverage our strength and position the company for profitable growth in the future. First, we are moving our base products to next generation technology. We spent the past year development EXPRESSvault3 and DDR4, NVDIMM or NV4 and we are now ready to take these new products to market. EV3 replaces EV1 which were in end of life last year. NV4 adds a DDR4 option to the DDR3 NV3 product, which was developed last year and will commence volume shipment next quarter. In April we introduced the EV3 at the DSI Show in San Jose and since then we have been invited to perfume product demonstrations and add dozens of customers. There’s been an overwhelming response from the market to EV3 breakthrough performance. Simply put, in a server or storage system, EV3 provides the fastest medium to write data for indexing, journaling and cashing, critical functions in a data center. At 400,000 IOPS EV3 delivers latency-performance, which is orders of magnitude superior in today’s fastest SSDs. The EV3 is based on the industry standard of PCIe3 interface to enable plug and play connectivity, making the solution ready to use the day it ships. There are no motherboard or BIOS adjustments that are required and there is no need to rewrite any of the software applications. All of this simplicity will accelerate the products adoption into the market. We are seeing strong interests from major hyper scale customers, storage appliance vendors and server OEMs. We believe EV3 could be $100 million revenue opportunity for Netlist over the next few years. We expect both EV3 and NV4 to ship in volume starting in the second half of year. Second, our HyperVault product is receiving strong interest from strategic partners. We announced last month the signing of an LOI, Letter of Intent with LG Electronics to jointly work on HyperVault mobile memory controller targeted for LGs next generation SmartPhones. For the SmartPhones, HV employs cash buffer to decrease DRAM density and delivers cost savings while maintaining performance. This is clearly a huge opportunity as SmarPhone shipments will approach 2 billion units in several years and a cost of DRAM, as well as DRAM content in each phone continues to increase. Third, we are making good progress on the development of our core memory channel storage HyperVault product. I should note that the Storage Networking Industry Association has formally included HyperVault as a product category within the NV space and we are seeing increased interests from major companies in this category and in the HyperVault. These developments give us a greater confidence and some analyst estimates suggesting this market could be a multi-billion dollar opportunity in the next few years. We expect to begin sampling HV at the end of the year and anticipate that it will begin to contribute to revenues next year. Fourth, we are strengthening our management and sales teams. We recently appointed J.B. Kim to newly create a position of Executive Vice President of Asia Pacific Sales and Marketing. J.B. previously was the Head of Worldwide Sales and Marketing at SK Hynix and has held a number of senior positions at LG. Both OEMs and hyper scale customers in Asia are showing great interest in NV, EV and HV. Over time we expect a large share of our sales to come from the Asia Pac and J.B will lead this effort, as well as help drive important strategic alliances in the region. Fifth, regarding the current litigation, we are pursuing both post-trial motions and have a solid strategy to reverse the jury’s verdict on the breach of contract. These motions will be ruled on by the court over the next few months. Further the separate patent infringement suit against both SanDisk and Diablo on ULLtraDIMM is still intact and this lawsuit will likely be addressed by the court over the coming months. We firmly believe that the ULLtraDIMM contains Netlist proprietary and patented intellectual property. Now, let me turn the call over to Gail for the financial review of the first quarter and a better voice.

Thanks Chuck. Revenues for the first quarter ended March 28, 2015 were $2.1 million compared to $7 million for the first quarter of 2014, mainly due to the absence of prior generation NVvault and EXPRESSvault sales to Dell and others, which had accounted for 59% of the revenue in the 2014 first quarter. Gross profit for the first quarter of 2015 was $700,000 compared to a gross profit of $2 million in the first quarter of 2014, reflecting the decline in revenue and resulting unabsorbed manufacturing capacity. Net loss for the first quarter was $6.5 million or $0.14 loss per share, compared to a net loss of $2 million or $0.05 loss per share in the first quarter of last year. These results include stock-based compensation in the first quarter of $511,000 compared with $531,000 in the prior-year period and depreciation and amortization expense of $148,000 compared with $282,000 in the prior year's first quarter period. Adjusted EBITDA loss after adding back net interest expense, income taxes, depreciation, stock-based compensation and net non-operating expense was approximately $5.3 million for the first quarter of 2015, compared to an adjusted EBITDA loss of $800,000 for the prior year period. Operating expenses were $6.7 million in the first quarter compared to $3.6 million in the last year's first quarter. After subtracting intellectual property legal fees from both periods, operating expenses were up by $643,000 compared to last year's first quarter, mainly due to increased headcount for our HyperVault, NVvault and EXPRESSvault next generation product development. We ended the first quarter of 2015 with cash and cash equivalents and restricted cash totaling $21.2 million as compared to $11.7 million at the end of the fourth quarter, which included net proceeds of approximately $14.3 million from the registered direct offering in February and IP term loan during the quarter. At the end of the first quarter we also had untapped capacity of $700,000 on our receivables bank line of credit from Silicon Valley Bank for working capital needs and access to $5 million of incremental funds under our IP bank loan agreement with Fortress Investment Group. We believe our balance sheet and credit line provides us with ample support to continue to support the development of our new products and execute our IP monetization plan. I will now turn the call back over to Chuck for concluding remarks.

Thanks Gail. In summary, we are investing in key initiatives that will drive growth and value for our shareholders. With our next generation EV and NV which we developed over the past year, we will serve the rapidly growing market for hybrid memory products starting in the second half. We have been in development with HV for the past year and a half and we expect to sample this product at the end of the year. We are excited to welcome LG as a strategic partner and are pleased that other industry players are also starting to recognize the value of our IP. We look forward to creating additional alliances and remain committed and excited about the future of Netlist. Thank you all very much for listening and we are now ready for questions.

[Operator Instructions] The first question comes from Richard Shannon of Craig-Hallum. Please go ahead.

Good afternoon Chuck and Gail. Thanks for taking my questions and Chuck, maybe I’ll try to direct more to Gail, so you don’t have to talk too much. Sorry about that.

That’s nice. Thanks.

Hi Richard.

Hi, maybe just a quick question on the first quarter results. Gail, you had the quarter gross margins of roughly 33% or just seemingly ahead of the previous quarter. Can you help us understand what drove that result?

Sure, it’s mainly due to product mix with more EV, our first generation EV1 product in Q1.

Okay. Can you give us a sense of how much of the sales were from EV1 in the quarter?

About 43% of the total.

Okay, great. A few questions looking forward. I think Chuck in your prepared remarks you talked about EV3 product has been recalled and you’re expecting to start shipping next quarter, which is great to see. Do you expect to retain all the customers that you had particularly in the storage and appliance side that you had for EV1 last year or perhaps even expanding that base?

Yes. Well Richard, just to clarify, we are requalifying. The product was introduced and it was demonstrated at the show and we’ve been demonstrating it with a couple of dozen customers over the last three weeks. So the product will be available for customer sampling next month and we expect the qualifications to take place through Q3. It will likely be a fairly short qualification, because its PCIe card, its plug and play. We are looking at greatly expanding the customer base. I think what EV3 does is basically it accelerates journaling, cash and data logging with the use of DRAM and Flash, so it’s the fastest option in the marketplace. But we expect to sample maybe two to three dozen customers on EV3, so it will greatly expand our customer base. I think we had maybe between five to 10 customers on the original EV.

Okay. And just to clarify Chuck, based on your comments it sounds like we should expect maybe a little bit of revenue contribution in the third quarter, but really starting in earnest in the fourth quarter of EV3.

Yes.

Okay, great. Next question, since your announcement I believe in January and February of this year regarding working with Microsoft to include your NVDIMM or Vault products in their servers want to get an update on progress there. I’m wondering if we should expect to see purchase orders by the middle of the year or how should we think about that relationship here evolving.

Well, as we stated, I think some of that came out during the litigation and some of the legal paperwork, but we are qualified. We are among the two suppliers qualified on the NV3. Now, there has been delays in adopting NV3, but we still see pockets of demand at Microsoft and we think there will be business on NV3. Hard to know exactly when those POs will come, but there are various user groups within Microsoft and I think we’re still hopeful that sometime during the year we’ll see some business on that, but we’re ready to go, we’re poised to ship product once we see demand.

Okay, fair enough. Just a few more questions from me; back to Gail probably. Want to get a sense, in your second quarter how should we expect legal expenses to trend. I know you got some ongoing post trial work here. Any sense that you can help us figure out that in relationship to the overall OpEx for the quarter?

Sure. We’re still working as you said on the post trial motions; however, we do believe that the expense will be more than half, less by 50% of what we saw in Q1. So under $2 million, between $1.5 million and $2 million.

Okay, great. And then, Gail can you give us any sense of what you’re expecting for top line revenues for this quarter. I know you have given specific guidance in the past, but any sense directionally, kind of flattish with the first quarter, up or down, any sense you could give us would be great.

Yes, I think we’re anticipating a flattish quarter for revenue.

Okay. And then how do you expect the cash balance to sit exiting the second quarter?

Well, our current cash position as of today is just under $20 million. So we believe in Q2, maybe in the $18 million to $19 million range for cash.

Okay, perfect. I think that’s all the questions I’ll have. I’ll cede the floor for others. Thank you Chuck and Gail.

Thanks.

Thanks Richard.

The next question comes from Bob Evans of Pennington Capital. Please go ahead.

Hi, good afternoon and thanks for taking my questions.

Hi Bob.

Hi. In your agreement with LG, can you give us a sense of the EUM savings that you provide relative to the current solution and how we should think about the potential ramp of that product?

Bob, I think we should look at that as a starting point. We’ve been working with them for the past six months. We have a Letter of Intent to work jointly on a solution. I think once the HyperVault, the core product is introduced towards the end of this year, from that point on we’ll start to work on a mobile version and a lot of this is software work and then there is some period of integration work with LG on their handsets. So realistically we’re looking at something mid next year, but in terms of potential impact, the window is there for a long, long time to do business. Most of the high end phones today have about three gigabytes and if you look at $7 a gigabyte, that’s $21. Our solution enables the handset manufactures to go to a one gigabyte solution. So they would remove essentially $14 worth of DRAMs and instead they – and our solution would probably cost anywhere between $3 and $4. So a net savings of $10 on a bill of material cost of a high end mobile phone, which is around $95. So it’s a significant savings. DRAM costs continue to go up. Over time phones will go to three and four gigabytes of DRAM, they’ll continue to increase. So there’s an enormous opportunity. I think we’re just starting out and putting together this solution in working with LG.

Okay. And I believe last call you said you had business signed with both Seagate and Twitter for the latter part of this year. Can you remind me what products they would be using of yours?

Those are both EV3’s. Yes, EV3’s for a Seagate acquired company called Xyratex and they work on storage boxes for a variety of different customers. So we’re very close to getting qualifications completed at Seagate. With Twitter there is more work to be done there. The qualification there is into their datacenter, so the design and the qualification process is a bit more expensive.

Either once you’re qualified or it sounds like you’ve got business there. Are you going to be able to tell us something officially, whether you can use the clients or not. Certainly from an investor standpoint we hope that you can at least talk about the step for that and the opportunity.

Use the client or not, Bob, what does that mean?

The client name; is it something that we’re going to be able to see in the future from a press release standpoint, the ability to talk about either a client win or at least a win with the client in a certain sector.

It depends on the customer. Many of these guys are more flexible. Some of them are more flexible than others in terms of doing press releases with vendors. But there are many other big name customers with which we’re working to pre qualify the EXPRESSvault. I think that’s the point that we want to get across. It is, we had tremendous response and enthusiasm over the performance of our product and what it can do and this is across out in Asia, Taiwan, Japan, Korea, China, there’s a dozen customers out there and probably a few dozen in the U.S. that are asking for samples and so we’re very enthusiastic about the potential of this product once it is released to the market over the next couple of months.

And can you comment on where you are with Microsoft and should we continue to see – should we start to see revenues start to ramp there in the second half?

Well, we’re hopeful. I mean, we continue to meet with them. I think really the significant thing is that we worked with them for the last year and a half and we are now a certified supplier and it’s a matter of demand being generated in the various pockets of the user base of Microsoft and we’re ready to service that demand as soon as it created. I think there is tremendous opportunities with that customer, because they are a big guy doing the fastest growing cloud business. So it may not be right away today and we don’t have clear visibility, but we think we’re in a good position to take business on the non-volatile products over the next two years at Microsoft.

And finally, can you elaborate about – you mentioned that you have other strategic conversations. Can you elaborate to what extent, give us some color there in terms of new products.

Well, the strategic discussions are where we’re talking to major industry players; those that produced high volume raw material, Flash and DRAMs and those discussions are – they know how to cooperate with us, between the parties with our IP, as well as our products, because these products will be heading the market, NV, EV and HyperVault, HV in the coming months and quarters. So there are opportunities to leverage their market reach to get our products and solutions out to the marketplace. There are opportunities to get access to their raw material at lower costs and then potentially looking at our IP portfolio as well.

Okay, thank you.

Okay, thank you.

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