conference date: March 6, 2014 @ 8:00 AM Pacific Time
for quarter ending: December 31, 2013 (fourth quarter, Q4 2013)
Overview: Great quarter, but apparently disappointing to momentum players.
Basic data (GAAP) :
Revenues were $58.8 million, up 12% sequentially from $52.6 million, and up 34% from $44.0 million in the year-earlier quarter.
Net income was $2.2 million, up 22% sequentially from $1.8 million and well up from negative $5.0 million year-earlier.
EPS (earnings per share) were $0.04, up 33% sequentially from $0.03 and well up from negative $0.09 year-earlier.
Q1 2014 non-GAAP revenue expected between $47 and $50 million. Non-GAAP EPS expected between $0.00 and $0.01. Q1 is typically seasonally weak; this guidance is up 8% y/y.
Full year 2014 non-GAAP revenue expected between $220 and $255 million. Non-GAAP EPS between $0.18 and $0.29.
Vertical markets are expected to see strong growth, with the server OEM market relatively flat. At midpoint of guidance revenue growth y/y is 14%.
32% to 33% non-GAAP gross margin, about flat from 2013.
Expects revenue ramp to be back-end loaded as new OEM customers ramp in second half of year.
Does not expect 2014 to be particularly good for storage companies in general, but believes Dot Hill will grow from vertical markets. In future calls will discuss vertical markets in a more granular fashion. Dot Hill is taking market share.
There are several new and potential OEM deals in the pipeline.
HP contributed $35.6 million, 59% of total revenue, and up 19% from $29.9 million year-earlier. There was good sequential growth in the quarter. Believes HP is well-positioned to capture market share in 2014.
The critical vertical markets segment grew 42% y/y to $18.2 million and up 8.5% sequentially.
Overall server OEM revenue (including HP) was $39.8 million, 15% sequentially, and up 18% y/y. Non-HP server OEM revenue was $4.2 million, up 5% sequentially, and 10% y/y.
Non-GAAP numbers: revenue was $59.7 million, up 13% sequentially from $52.9 million and up 29% from $46.2 million year-earlier. Net income was $4.2 million, up 50% sequentially from $2.8 million and well up from negative $2.0 million year-earlier. EPS was $0.07, up 40% sequentially from $0.05, but well up from negative $0.03 year-earlier. EBITDA was $4.9 million. Gross margin was 31.7%, down sequentially from 32.8%, y/y from 28.3%
Cash and equivalents ended at $40.4 million, flat sequentially from $40.4 million. Cash from operations was negative $1.1 million, due to receivables from largest customer. $2.0 million debt. Accounts receivable ended up at $42.9 million, with inventories up to $6.5 million.
Cost of goods sold was $41.0 million, leaving gross profit of $17.8 million. Operating expenses were $15.6 million, consisting of: $8.7 million research and development, $3.6 million sales and marketing, and $3.2 million general and administrative. Leaving operating of income of $2.1 million. Other expense near zero. Income taxes had a slight benefit.
Server OEM guidance, why not better? There are a lot of moving parts. These are foundational customers: HP, Lenovo, Dell, etc. They are confronted with economic headwinds, and decreases from trend to cloud. They give us economies of scale, but not much growth, but there is some upside. We expect HP will capitalize first to market advantage. 4% overall growth in storage for 2014 per Gartner, etc. So our guidance is prudent.
Color on skew to back half in 2014? We expect progressive growth during the year. Different OEMs are ramping at different times at different magnitudes, so hard to be more precise than that.
Operating expense? We held op ex flat in 2013. We curtailed some structural expenses like salaries. In 2014 health care costs will rise and we will make some investments in engineering and sales.
Is the soft Q1 guides due to inventory builds? It is hard to gauge customer inventory. It could be some over build in Q4, especially with HP and the new lines. Mostly it is just seasonal; we are guiding up 8% y/y for Q1.
Q1 vertical markets? Not unreasonable to look at September quarter as comparison.
Non-HP server OEMs? Lenovo is a part of that. They are acquiring IBM's server business. We would expect some growth in 2014 in the non-HP server business. There could be some upside from ASUS, but this is a small segment for us.
[I put out a Q1 number that was a little too high] but what changed for the soft guidance? We never put out first quarter guidance before today. There is the G3 to G4 changeover at HP. We have no control of the ramp of OEM customers. We had a very strong Q4, the Q1 numbers are mainly seasonally down. Server OEMs have been down about 10% per year for several years. Industry analysts have been wrong for several years prediction 4% or 5% growth.
Emerging hybrid companies as competition? Consider what public storage companies are growing as fast as us. We are not interested in non-profitable growth. These newly-minted storage companies are targeting the IT datacenters through reseller networks, so head-to-head against NetApp, EMC, etc. If those companies compete on price, they will staunch the small player growth. We are not selling mainly into datacenters, but into the revenue-generating portions of our verticals (movie production, oil & gas, etc.). So we don't have so much incremental sales and marketing expense. Our patented technology is as good as anybody's in quality. We can demonstrate weekly 5 nines worth of availability (99.999%).
Shift to the cloud, how does it effect the market? I think we are seeing, in the public cloud, ancillary operations like CRM & HR are moved there, both at SMB and larger companies. So some of the traditional datacenter is being absorbed into the cloud. It affects more midrange storage product than high-end. But enterprise are experimenting with private and public cloud. By selling into the revenue side of our customers, they are not going to move their proprietary work into the cloud, at least not quickly.
Teradata role in 2014 growth? Should not assume there will be a 2 quarter pause in vertical market growth. We believe growth in the second half will be faster than in the first half, based on the projected ramps of a number of customers. We also have more prospects that might become customers and generate revenue before the end of the year. 2013 Teradata business for us was not meaningful, though it grew rapidly. In vertical markets we are replacing competitors. Plus you can assume the usual lumpiness, for instance Q2 2013 was a big quarter for us.
New product lines into large vertical OEMs? It happens all the time. The OEM sales is relationship and roadmap based. We constantly work with OEMs on road maps and near-term projects.
Effects of Lenovo buying IBM's server division? We are very bullish on Lenovo. We are currently their entry-level storage provider in China. To the extent they want to become a major player in the server space, outside of IBM, they are likely to expand worldwide. In the short term it benefits players other than IBM and Lenovo; CIOs are going to go with a more certain partner in the short term. But in the mid to long term Lenovo has shown they can grow share within a market they enter. IBM products tend to be mid-range, not entry level like our products.
Seagate acquisition of Xyratex? That transaction should close very soon. At one time, 5 years ago, they were a competitor of ours. But they moved to be a chassis enclosure company, while we moved to being a high-feature company. We picked up a number of their vertical OEM customers a few years ago. They are also doing cluster for HPC. They are being acquired for the harness provider business, but could move up the value chain for cloud service providers. We see no near-term detriment to Dot Hill; it is a very low margin space.
We would see $0.20 to $0.30 of each new revenue dollar to contribute to the bottom line.
Isn't guidance conservative? We would like to execute well and it is difficult to predict the rate and magnitude of new customer revenue ramps.
We won't be doing pipeline bubble charts in the future, but we will give guidance on future revenue growth. The charts were beginning to be over-analyzed for revenue. We did not think that was helpful. Do not conclude that we have lost any opportunities. We have incrementally more opportunities than we had when we were putting out the charts.
Insider ownership? A few months ago all the board members bought a small number of shares. For several years management took incentive compensation in the form of stock.
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