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Monday, August 21, 2006

IPO Profile of Recent Filing: Netlist Inc.

"Our memory subsystems bridge the gap between industry standard approaches and the requirements of complex OEM systems"


Netlist, an Irvine based manufacturer of memory subsystems for computers, filed for an IPO on Friday under the ticker"NLST" on NASDAQ . The Irvine, CA-based subsystems clients include computer makers IBM, Dell, Gateway, Lenovo and Hewlett-Packard. Thomas Weisel, Needham & Co and WR Hambrecht are the stated underwriters. The detailed terms and the timing, which is usually 90 days, are pending and not stated in the prospectus.

Netlist was founded in 2000 and the company now looks profitable, but it had a significant drop in revenues from 2004 to 2005 as it shift focus. That looks partially rebuilt so far, but that was an eye-raising number.

2003 revenues $100.375M and net income -$15.9M;

2004 revenues $143.6M and net income -$974,000;

2005 revenues $78.85M and net income -$2.34M.

Its first six-month period is actually improving and now it looks as though they are running in the black:

First 6-months of 2005 revenues $36.4M and net income -$1.78 million;

First 6-months of 2006 revenues $65.9M and net income of $1.306 million.

Netlist's three largest customers comprised approximately 68% and 81% of our net sales for 2005 and the first six months of 2006. Sales to Dell, IBM and Lenovo represented 35%, 20% and 13%, respectively, of our net sales in 2005, and 33%, 46% and 2%, respectively, of our net sales in the first six months of 2006. The company also states in the prospectus: We expect that sales to these customers will continue to represent a significant percentage of our net sales for at least the next 12 months. We do not have long-term agreements with these three customers, or with any other customer. Any one of these three customers could decide at any time to discontinue, decrease or delay their purchase of our products. In addition, the prices that these three customers pay for our products are subject to negotiation and could change at any time.

After looking through the prospectus the reason for such a large drop and change in its profit matrix from 2004 to 2005 was that the company switched from a chips for telecom into a memory subsystems for computers.

The company and existing shareholders will sell shares at the IPO. Here is the "use of proceeds" listed: working capital and other general corporate purposes; repay $1.0 million in outstanding indebtedness under a term loan; to reduce outstanding borrowings under revolving line of credit; to establish a manufacturing facility in China; to expand R&D; and to acquire complementary businesses, products or technologies.

As of June 30, 2006, Netlist had 88 full-time employees, including 49 employees in operations, 16 employees in research and development, 13 employees in sales and marketing, and 10 employees engaged in other administrative functions. It does use contract employees in the operations department from time to time to effectively manage manufacturing, and as of June 30, 2006 it had 62 contract employees engaged full-time in manufacturing.

Unlike many other new memory and PC-guts and component companies, Netlist does do its own manufacturing at the Irvine factory and it will also have its own manufacturing facility down the road in Shanghai. Its primary competitors are memory module providers such as SimpleTech, Inc., SMART Modular Technologies, Inc., and Viking Interworks, a division of Sanmina-SCI Corporation; and it faces competition from DRAM manufacturers in a limited range of applications.

Here is the breakdown of its product clients:
Servers from Dell, Gateway, Google, and IBM;
Workstations from dell and Hwelett-Packard;
Mobile computing from Hewlett-Packard and Lenovo;
High-performance Computing from PSSC Labs, Verari, and Western Scientific;
Communications from Force10, Stoke, and Tekelec.

Management is broken down by key-person below:
Name Age Position
Chun K. Hong 45 President, CEO, Chairman
Jayesh Bhakta 48 VP of Engineering
Lee Kim 47 VP, CFO and Secretary
Christopher Lopes 46 Vice President of Sales
Nam Ki Hong 43 Director
Thomas F. Lagatta 48 Director
Alan H. Portnoy 61 Director
David M. Rickey 50 Director
Preston Romm 52 Director
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