Analyst Conference Summary

Dot Hill

conference date: August 11, 2010 @ 1:30 PM Pacific Time
for quarter ending: June 30, 2010 (second quarter 2010)

Forward-looking statements

Overview: Some improvement in revenues, but still in the red.

Basic data (GAAP) :

Revenues were $65.5 million, up 9% sequentially from $60.0 million and up 21% from $54.3 million in the year-earlier quarter.

Net income was negative $5.8 million, improving sequentially from negative $6.4 million, but worse than negative $4.2 million year-earlier.

EPS was negative $0.11, improved sequentially from negative $0.12, but worse than negative $0.09 year earlier.


Q3 2010 revenues between $60 and $64 million, non-GAAP EPS zero to negative $0.04. Cash should stay above $40 million.

Conference Highlights:

Exceeded high end of guidance on a strong revenue quarter.

Restructuring is designed to reduce operating expenses and achieve positive EBITDA by the end of 2010. Starting July 1 operating expense should drop about $3 million per quarter. Also raised some prices to some customers.

A $1.4 million restructuring charge impacted the quarter.

Non-GAAP numbers: gross margin 15.8%. Net loss $3.3 million, for EPS negative $0.03.

Negative $2.8 million EBITDA.

14.8% GAAP gross margin.

Operating expenses increased substantially y/y due to software development expense and increased channel sales organization.

Cash and equivalents ended at $42.6 million. Loans outstanding increased to $3.0 million.

Revenues from channel partners doubled from Q1 2010.

Cost of goods sold was $55.8 million, leaving GAAP gross profit of $9.7 million. Operating expenses of $15.5 million included $8.5 million for R&D, $3.4 million for sales and marketing, and $2.2 million for general and administration, plus $1.4 million restructuring. Leaving an operating loss of $5.8 million. Trivial other income and income tax.

An OEM agreement was signed with Xiotech for storage software. Series 3000 6 gigabit product was launched. Generic version of software is now available for evaluation.

Now over 170 channel partners. Focus will move to converting pipeline to revenues.

Transferring manufacturing rights to NetApp by December 1. This was a money-losing segment, so margins should improve.

So far has seen just normal summer seasonality, but is aware of caution due to macro economy.

Said small storage companies are becoming acquisition targets.

Consolidation of supply chain and move to ocean freight helped lower expenses.


Q3 by region? Europe takes all of August off, so down there. We are getting good traction in Germany for series 3000. Americas and Asia seem typically seasonal.

Softness in market? Just what has been reported for the PC industry caution, but so far we have seen no effects in the enterprise market. Comparable companies in our space gave cautious guidance.

Channel program? A single good size deal helped us double revenue sequentially. Won't see that doubling here on out, but traction is good. We have 800 registered deals, up from about 600 in Q2. We are no longer focusing on new partners, rather working with current partners to increase sales. Products are working great, we are beginning to get some buzz.

10% customers? HP 58% and NetApp 27%. [leaving 15% for others]

We bought parts early to take advantage of offered discounts.

Software rollout? First rollout was with Xiotech; we can't say their actual launch date. Yesterday announced version for other OEMs, with a number of smaller partners already evaluating. Solution oriented easy-to-use version will come out later this year.

Digruntled investor: can this be a profitable business? In 2003 we raised money and bought Chaparel Systems for $62 million so we could own our IP. We had to replace $200 million in annual Sun Microsystems revenue, which we did, if not yet profitably. In the course of this we got about 70 patents. So we think we have generated a lot of value in the past 3 years. We believe we can achieve sustainable profits after we first hit break-even. Also our relationship to HP is valuable because it is a means to market as we bring out new products.

Dana owns 2.5% of the stock. Insiders have not been selling stock.

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Copyright 2010 William P. Meyers