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    Bullish Take – Netlist Poised to Recover following Second Major Customer Win in 2010

    Netlist Inc. (Nasdaq: NLST) shares have fallen 56% since the beginning of 2010 as the company fought through patent disputes, faced supply shortages and longer-than-expected testing times with its potential customers. Besides those challenges, NLST continued reporting heavy losses from operations, despite growing revenue. The company recovered 15% since the November 17 low of $2.14 and currently trades in the range of $2.45.

    NLST designs, manufactures and sells high-performance, logic-based memory subsystems for the server, storage and communications equipment markets. The company’s memory subsystems consist of combinations of dynamic random access memory integrated circuits, NAND flash memory, application-specific integrated circuits and other components assembled on printed circuit boards.

    However, the company is slowly discarding the old business, making the transition into high value, more customized products targeting the servers and data center customers. Accordingly, NLST introduced two new products: HyperCloud DDR3 memory technology in November 2009; and NetVault NV, non-volatile cache memory subsystem, in February 2010. While the company expected that its original equipment manufacturer customers would use extensively these products, NLST is still pretty much involved in demonstrating and testing of the new offering.

    During 2010 NLST succeeded to qualify NetVault NV with Dell Inc. (Nasdaq: DELL) and Compellent Technologies Inc. (NYSE: CML). Both companies selected NetVault NV to use with their server and data center offering helping to cut the total cost of ownership and ensure system uptime for weeks. The company expects the NetValut NV sales, which made up $4.4 million or 16% of its total sales for the nine months ended October 2, to ramp up next year with both clients and to get an additional boost from the commercial launch of HyperCloud.

    Meanwhile, NLST revenue continued to grow and gross profit improved in the third quarter of fiscal 2011. Revenues for the third quarter ended October 2, 2010, were $10.6 million, up 64% from revenues of $6.4 million for the third quarter ended October 3, 2009.  Sequentially, revenues improved 14%. Net loss for the third quarter ended October 2, 2010, was $4.9 million, or $0.20 loss per share, compared to a net loss in the prior year period of $2.1 million, or $0.11 loss per share. The company noted that the wider loss than a year ago reflected “higher engineering, sales and marketing costs associated with the technology development, and sampling and qualification efforts at various OEMs and end-users.”

    The longer-than-expected qualification of the company’s offering with its key customers have significantly discounted NLST’s valuation in 2010, however, the company is well positioned to capture the market and maintain a comparable to 2010 growth rate going forward. In addition, the product introductions with Dell and Compellent are indicative of the company’s potential and increasing probability of upcoming customer wins.

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