Analyst Conference Call Summary

Dot Hill

conference date: August 4, 2011 @ 1:30 PM Pacific Time
for quarter ending: June 30, 2011 (second quarter, Q2 2011)

Forward-looking statements

Overview: Revenue just above top end of guidance. Slightly positive non-GAAP EPS.

Basic data (GAAP) :

Revenues were $53.2 million, up 8% sequentially from $49.2 million, but down 19% from $65.5 million year-earlier.

Net income was negative $1.9 million, down sequentially from negative $1.2 million, and improved from negative $5.8 million year-earlier.

EPS was negative $0.04, down sequentially from negative $0.02, but improved from negative $0.11 year-earleri.


Q3 net revenue between $50 and $54 million. Non-GAAP EPS negative $0.01 to positive $0.02 per share. R&D will increase "to support new or prospective customer wins." 26.5% to 27.5% non-GAAP gross margin. Cash balance will end between $44 and $47 million.

Expects Q4 2011 non-GAAP gross margin in the 27% to 28% range.

Conference Highlights:

Cash and revenue exceeded guidance range in this "solid quarter of improving financial performance." EPS was at the upper end of the guidance range. "Our strategic direction and intent remains intact."

Excluding the former revenues from sales to NetApp, revenue grew 12% y/y. Stopped selling to NetApp in November 2010.

Non-GAAP numbers: net income $0.4 million, EPS $0.01, up sequentially from $0.00 and up from negative $0.06 year-earlier. Gross margin improved to 26.3%.

Revenue was strong across product lines and geographies. Revenue from largest customer (HP) grew 10% sequentially and 9% y/y. Other OEMs had strong ramps including Lenovo, Ericson, Samsung, and Tectronics, among others. Channel revenues grew 50% sequentially. Software revenues grew 8% sequentially.

Data storage industry consolidation could help Dot Hill. Is in discussion with several potential new (former LSI) OEM customers. While looking for AssuredSAN OEM customers, the channel and software initiatives have the greatest potential for profits.

Branded reseller revenue was $1.7 million, up sequentially from $1.1 million due to strong European sales.

Software revenue was $1.4 million and grew rapidly y/y.

Software AssuredUVS software will be bundled with AssuredSAN hardware for channel partners. High-end software features are being engineered that should create larger opportunities.

GAAP gross margin 24.8%, up from 24.6% sequentially and from 14.8% year-earlier. Margin improvement was mainly from improved product mix, including elimination of the low-margin NetApp business. Software margins also helped.

Non-GAAP EBITDA was $1.1 million, up sequentially from $0.7 million and also up from negative $2.8 million year-earlier.

Cash and equivalents ended at $46.5 million, up $0.2 million in the quarter. Cash flow from operations was $1.2 million.

Cost of goods sold was $40.0 million, leaving GAAP gross profit of $13.2 million. Operating expenses of $15.1 million included: R&D $9.0 million, sales and marketing $3.6 million, general and administrative $2.4 million. GAAP operating loss $1.9 million.


76% of revenue from HP, which is highly exposed in Europe? Our belief is that storage is becoming a non-discretionary expense. People are looking for smaller, cheaper storage products [like Dot Hill's]. We are taking macroeconomics into account for our guidance.

Stock compensation expense? There was a $0.9 sequential increase was from increased grants. This is changing from cash for short term incentives. Should remain at about the same level for the next few quarters.

Future R&D spend? Our R&D ebbs and flows according to product lifecycles. We are beginning to ramp up for the next generation of products. It is also increases as we chase larger sales opportunities. So a couple more quarters of this level of R&D investments.

Incremental revenue from new OEMs would be strongly accruing. "Many of them" are sorting through their options for Engenio/LSI/NetApp situation.

Odds of landing a new OEM are fairly good. Larger players take longer to make decisions.

Any recent signs of weakening demand? Not yet, but it could happen. Oracle acquired Pillar Data and may want to dump their channel partners.

We have about 225 resellers. In Europe we are seeing bigger deal wins. We have not seen that yet in the U.S. We have done well in the U.S. in media and entertainment.

AssuredVRA OEMs include Dell. This is dependent on Intel chipset generations.

AssuredUVS is getting good interest, but heterogeneous data centers are beyond many of our resellers. They want a bundled solution, which we will provide later this year.

IP monetization? We validated our patent portfolio independently. Next step is to establish the economic value of the portfolio, which is also being done by IP Capital. We should have a report from them in a few weeks. Then we will plan for monetization.

Movement to cloud, how does that affect you? Think of us as an arms broker. We can enable cloud services. Through our OEM partners we are participating in cloud creation. The cloud hype, so far, is a bit ahead of the reality.

Industry estimates for your market? Outlooks differ, but 9% to 12% growth predictions are typical.

Aren't you too concentrated with HP? When we ramp with companies like Lenovo we will be less concentrated.

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Disclaimer: Our analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. We cannot guarantee anything said by company representatives is true. We try not to make errors, but it is possible. Before making or terminating an investment you should always verify any factual basis of your decision.

Copyright 2011 William P. Meyers