After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Mike Smargiassi. Please go ahead.
Thank you, Cole, and good day, everyone. Welcome to Netlist's conference call to discuss the strategic agreements with SK Hynix. On today's call will be Chuck Hong, Chief Executive Officer of Netlist and Kiyosaki, Chief Financial Officer. As a reminder, 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 And the answer 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 announcing Netlist's agreement with SK Hynix issued on Monday, April 5, 2021. 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. It's good to see so many of you in attendance. Today, we would like to provide some basic information about the settlement agreement with SK Hynix That was inked earlier this week. After 5 plus years of litigation And some legal setbacks at the ITC and German and Chinese courts, The recent negotiations that resulted in this agreement occurred in recent months with the backdrop of a positive markment And venue rulings in the Western District of Texas and the Federal Circuit Appellate Court. In the end, we are very pleased to have secured this settlement with SK Hynix, Which provides Netlist with significant strategic value.
We believe the deal also provides tangible benefits to Hynix as well. The main elements of the settlement have been disclosed in our 8 ks. Turning to the supply agreement. The worldwide chip shortage has been well documented in recent weeks, And memory and storage chips are no exception. Analysts project a shortage of DRAM and NAND components through 2022.
This deal allows us to secure significant volume of Hynix products Of our choosing for both integration into Netlist products and resale. Given the prevailing market conditions and the business terms of this agreement, we believe that the access to scarce memory chips will provide a significant boost to our product business going forward. In regards to CXL, You may have seen Micron and Hynix in recent weeks. They have publicly announced plans to focus on products for this emerging Industry standard. Netlist has been out ahead of much of the industry with development work in this area with the design of the HybridIMM for CXL over the past several years.
We believe this technology, which enables terabytes of low cost NAND to operate with the performance of DRAM, Will be of strategic importance to Hynix, now the 2nd largest supplier of NAND flash in the world. The companies will explore technical collaboration with a goal of successfully commercializing Hybridem CXL. In all, this is a broad strategic partnership, which encompasses patents, products and technology That opens up many avenues of synergistic growth for Netlist. Before we close out, I would like to comment briefly on our other activities in the IP area. We currently have ongoing litigation with Google And Samsung, Google in the Northern District of California and progressing per the publicly announced schedule.
The Samsung case is on the fast track at the Central District of California with the trial set for this coming November. In addition, we continue to work diligently to bolster the patent portfolio, recently receiving allowances We are committed to increasing the value of our intellectual property and licensing it on a fair, reasonable and nondiscriminatory terms Operator, we're now ready for questions.
Thank you. And we will now begin the question and answer session. And our first question today will come from Suji Desilva with ROTH Capital. Please go ahead.
Hello, Chuck. Hello, Gail, and congratulations on executing this agreement here. Yes. Thanks, James. You're welcome.
So Chuck, I mean, maybe we could talk about the supply shortages in the industry. It just seems like the prevailing conditions are persistent and will last. I mean, these supply And last, I mean, these supply agreements, just can you give a sense of how important they are for you in terms of being able to supply your customers capturing share versus Competitors, just to help us understand some color there.
Yes. I think it's The volumes are significant, certainly. I think the timing is good given the market conditions. There is a worldwide shortage of DRAMs, in particular, That is expected to last for the next couple of years. So access to DRAM components as well as memory modules and NAND flash products at What we believe will be favorable terms based on the terms of the agreement Growing the customer base, there are components such as industrial temp, Some of the higher speeds, stack DRAMs, things like that are very difficult to secure from any supplier Regardless of who you are.
I think this agreement will allow us with the partnership of Hynix to Be able to support those niche high end requirements, some of which will is the key to getting into Some of the major OEMs and data center customers.
Great. That's helpful color for sure. And then maybe, Chuck, on CXL, I couldn't help but notice Intel and Pat Gelsinger got on Earlier in the week and launched their Gen 3 Xeon Scalable product and mentioned CXL is an important component here going forward. Can you talk about how what you're doing might intercept the Intel server roadmap to give us a sense of what the opportunity is in terms of timing And technology and size for you?
Yes. I believe the First Intel A platform that will have CXL bus enabled is Cascade Lake, we think that will be sometime later next year. I think we are on track to have Initial samples to operate on those systems. I think given The DRAM scaling problems that The entire industry, including Intel, AMD, the big hyperscalers as well as the major OEMs like HP, Dell, They are all focused on creating products for the CXL bus And growing that segment of the market. So I think we've got a unique approach as we talked about Because we are unlike some of the other suppliers, I mean, CXL bus is a connection.
It is a highway between the CPU and storage. We're using a lot of NAND. Most of it is NAND and it's low cost and We're able to leverage the low cost of that to create the performance of very high cost And scarce DRAM. So I think we've got a unique value proposition In this segment, and I think companies like Hynix, who are Very large, very big supplier of NAND. I think it's a natural fit Or for those companies.
Outstanding. And then my last question, Chuck, is on DDR5. This is one of the first times I've heard you mention it, though I was presuming You're certainly working on the roadmap for DRAM in general, but maybe you can talk about what technology development efforts I should think about for DDR5 Perhaps versus prior generations if they kind of arc differently or if they're very just similar, continuations of your efforts? Any color there
would be helpful as well.
Yes. Our innovations are around the subsystem. The raw material of DRAMs and NAND flash, That's for the major multi $1,000,000,000 capital intensive businesses like Hynix and Micron And Samsung. We take those raw materials and try to create at a board level Higher speed, higher density, unique offerings that's beyond the standard. So DDR5, if you look at the memory modules at DDR5 for servers as well as laptops Are quite different.
And we it turns out that we've had patents Kind of projecting out many, many years some of these innovations that we created 5, 6 years ago,
Some
of them going back 10 years ago correctly projected the direction of DDR5. So a lot of this has to do with high speed and high power at DDR5. And we believe we've got good coverage at least of So we will get patents issued shortly on these new patents that cover DDR5. So the I was mentioning that the claims have been allowed by the patent office.
Okay. Congratulations again on this milestone agreement.
All right. Thanks a lot, Sushy. Thank you.
And our next question will come from Richard Shannon with Craig Hallum Capital Group. Please go ahead.
Chuck and Gail, I'll add my congratulations. It took a long time, but great to get over the finish line. So,
hats off to that.
Yes. Thank you, Richard.
Thanks, Richard. You
bet. So just a quick question on the license agreement here. You described in the 8 ks something It's fully paid up. I'm not a lawyer, I don't understand patent speak here. But does this mean that there's no chance for ongoing royalties during the term of the agreement?
Or Is it potential or how would we understand that beyond the initial payment that was described in that 8 ks?
Yes. I think for the term of this agreement that fully paid means that is the extent of the payments. And then after the 5 year term of this agreement, there'll Likely to be renewal negotiations ahead of that. And Our patents are good. It's got a long life, most of our patents.
So at least for those for the 5 years, that's what it means, it's fully paid. Now the value of the agreement is not just the lump sum payment. Certainly, it's in the product support. It's the opportunity to collaborate with a global Player like Hynix on our technology. So to assess the overall value, you have to look at all of those other items As consideration in this deal.
Okay. That is fair enough. Gail, just a quick follow-up on the financials here. Has this fee been paid yet? And how does it get recognized as all upfront or is it recognized
It will be recognized all upfront, one payment, On revenue recognition.
Okay. Have you received it yet, Gail? Or when do
you expect that to happen if not?
We have not yet received it, but we do expect it in Next few weeks.
Okay. That is helpful. Let's jump over to Hybrid DIMM CXL. Chuck, I wanted to get a sense of what you expect with the collaboration from Hynix on this product, The benefit there and when do you expect to come to market with us? I think you mentioned in Suji's question about getting samples out soon, but want to get a sense of timing and where do you expect to hit the windows, coincident with the Cascade Lake that comes out next year?
Yes. I think it will be initially, it will take some time for CXL to become prevalent. If you look at the way PCIe emerged Over some 20 years ago, and it's been a the standard bus in any computer for the last 20 plus years. But it took a while for it to get adopted. So I think for it to become a market of Multi billions of dollars for the industry, yes, I would say it's a few years out For that to happen.
But we will have early samples next year. We are staffing up very aggressively On the design and verification front, so Yes. It's probably the most important thing that we're doing as a company Outside of licensing efforts.
Okay, fair enough. My last question Regarding the supply agreement here, again on Suji's question, you talked about the Importance of that, I guess I'm kind of wondering about the mechanics of this agreement. Given the scarce supply environment, To what degree are you assured of getting a minimum amount just to supply your internal needs? Or is there are there minimum amounts here? Can think of like the $600,000,000 worth of products applied over 5 years, is that kind of could you just divide by 20 to get the minimum amount you can get every quarter?
How does this work in a capacity constrained environment?
That's probably a very good way to look at that. Just divide by the number of years. And We'll hope to we hope to work quickly here to ramp that business, both for Components coming in to be integrated into our products as well as resale. So yes, I think in terms of looking at the impact to our top line, that's Probably a good way to look at it, but it will take some time. For 1st couple of quarters, we'll have to ramp up.
We'll have to provide a forecast, understand what is available out there Because it's people are in queue to buy this stuff right now, as you know, with the automotive I mean memory is not that much different actually. So yes, it's We believe it will be highly beneficial to have access to, at very good terms To these raw material.
Okay. I forgot one last quick question for Gail. Are there any liabilities or potential liabilities from a legal funding perspective with the settlement?
Yes. We have some required tax withholdings, Richard, And some other fees, which we can't discuss additional details at this point.
Okay, fair enough. That's all for me. Thank you.
Thank you, Richard.
And ladies and gentlemen, this will conclude the question and answer session. Also concluding today's call, we'd like to thank you for attending today's presentation. And at this time, you may now disconnect your lines.