conference date: November 6, 2014 @ 8:00 AM Pacific Time
for quarter ending: September 30, 2014 (third quarter, Q3 2014)
Overview: Hit prior guidance for Q3, very strong guidance for Q4.
Basic data (GAAP) :
Revenues were $52.1 million, up 8% sequentially from $48.2 million, but down 1% from $52.6 million in the year-earlier quarter.
Net income was $0.0 million, up sequentially from negative $0.1 million, but down from $1.8 million in the year-earlier quarter.
EPS (diluted earnings per share) were $0.0, flat sequentially from $0.00, but down from $0.03 in the year-earlier quarter.
Non-GAAP Q4 2014 revenue expected between $62 and $68 million. Non-GAAP EPS range $0.07 to $0.12. Guidance is because of customer launches of new products, the back-end loaded nature of 2014, and "is an indication of our confidence in a strong Q4 revenue inflection which should set us up very well for a solid 2015."
Expects to use cash to build inventories to support higher demand in Q4.
Confident that revenue and earnings ramp is beginning. Growth should continue in 2015 as new products ramp.
RealStor products leapfrogs competitors. Delivers cost-effective enterprise storage with automatic real-time tiering. Hottest data is always on fast solid-state drives.
Our products are substantially faster than competing products at similar price points. We deliver first to market advantages with quality for vertical OEMs. Dot Hill has been working on these new products over the year.
Reiterated prediction of back-end loaded 2014 against a weak macro background. Grantly refresh of servers has not yet helped the storage industry. But Dot Hill's company-specific catalysts will show results in Q4.
Ultra48 based array will be taken into mainstream product line of an unnamed company, which is already shipping, despite not being announced yet. Another customer will announce inclusion of RealStor 2.0 in their lineup soon. The fourth new customer has had delays and won't launch until the first half of 2015. Smaller customers will also have announced new products in Q4, and their is a pipeline of other new customers.
The challenge in Q4 will be having a supply sufficient to satisfy expected high customer demand.
Non-GAAP numbers: revenue was $52.0 million, up 7% sequentially from $48.4 million and down 2% from $52.9 million year-earlier. Net income was $1.7 million, yo 31% sequentially from $1.3 million but down 39% from $2,8 million year-earlier. EPS was $0.03, up 50% sequentially from $0.02, but down 40% from $0.05 year-earlier. EBITDA was $2.8 million. Gross margin was 32.4%, down sequentially from 33.9%, and down y/y from 32.8%. Stock based compenations was the main contributor to differences between GAAP and non-GAAP.
HP contributed $28.6 million, 55% of total non-GAAP revenue, up 20% sequentially from $23.8 million.
The critical vertical markets segment revenue was $20.5 million down 1% sequentially from $20.8 million and up 17% y/y from $17.5 million .
Overall server OEM revenue (including HP) was $31.5 million, up 14% sequentially from $27.7 million, and down 11% y/y from $35.4 million. Server OEM business may not do as well in Q4 as earlier expected.
Cash and equivalents ended at $42.4 million, sequentially from $40.4 million. Cash from operations was $1.9 million. $0.0 million debt. Accounts receivable ended down at $36.9 million, with inventories up to $7.0 million.
Cost of goods sold was $35.2 million, leaving gross profit of $17.0 million. Operating expenses were $16.9 million, consisting of: $9.5 million research and development, $3.5 million sales and marketing, and $3.8 million general and administrative. Leaving operating profit of 0.1$ million. Other expense minimal. Income taxes near zero.
Because of lumpiness of markets within quarters, believe best to look at trailing 12 month figures.
Vertical market margin, customer vs. product mix? It could be both. It varies by vertical, size of customer, and product. As we launch new products they can be higher or lower than the average margin, with more commodity-like products typically having lower margins.
Four major new programs, revenue from? We have a lot of work to do. We are dependent on our customer sales and acceptance in the field, as well as inventory levels.
Inventories? The majority of forecasts from customers, they are not very good, especially ramping a brand new product. If they have upside it can be a challenge for us to fulfill demand. But we would rather chase supply, which is the case this quarter.
Back in loading again in 2015? Not as extreme as we think it will be in 2014, because some of the ramp will be in place at the beginning of 2015. But normal seasonality is stronger 2H than 1H. Depends on if and when we add new customers.
Server OEM, trailing 12 month? Down 3% on prior year. For quarter was up 14% sequentially, but down 11% from Q3 2013.
Largest customer (HP) assumptions going forward? Plus or minus 5 in server OEM business in 2015. Believes Grantly server refresh will help in 2015, as might the IBM divestiture to Lenovo, which should help the HP server side, which should help storage side in turn.
Operating expense going forward? Expenses precede customer product launches, mostly with R&D expense. In vertical markets S&M expenses have been relatively flat despite a 3x increase in revenue over the past few years. We believe operating expenses will grow slower than revenue.
Working capital cash need? In 2009 we launched HP and inventories peaked at $10 million. We have a similar situation going on right now. There will be some timing issues, with more inventory at the beginning of the ramp. We are not concerned about liquidity, we have $42 million on the balance sheet. We believe it is the best use of cash for us, not stock buy backs or dividends.
What could drive revenue to low end of Q4 guidance? We could be limited if there are shortages of quality parts. It is about the supply chain. We have product in the water from China into LA, and the customs agents found gypsy moths on the ship, causing a delay of several days.
Are there multiple components that could cause shortages? There are always multiple components, especially for a 25% q/q ramp. Disk drives, cpu, metal, cable, etc., but we have buffer. Some components are single-sourced, but those tend to be high volume components.
RealStor 2.0 is far more flexible than the original, particularly dealing with any configuration of hybrid arrays. Our competitors mostly use batch tiering, ours is real-time.
How much vertical market revenue was related to RealStor 1.0? Some, will not break out.
What is the TAM for RealStor 2.0 with Ultra48? We are still in bands 2 through 5. We are also addressing the embedded solutions vertical markets. We have not so much increased our TAM as set up to be more competitive in the TAM we serve, in particular hybrid storage arrays.
Do you have the marketing muscle to push the products? I think we do. We added a couple of hires for marketing. The RealStor 2.0 webinar is an example. It is a unique product that offers compelling value.
One of our major customers will be rolling out RealStor 2.0 soon. But we need 3rd parties to increase the visibility of this product. We have products out for independent reviews. "We think we have a barnburner of a product."
It is hard to predict Q4 to Q1 seasonality. It hasn't even been that consistent in past years.
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