Analyst Conference Call Summary

Dot Hill
HILL

conference date: November 10, 2011 @ 1:30 PM Pacific Time
for quarter ending: September 30, 2011 (third quarter, Q3 2011)


Forward-looking statements

Overview: Back in the red. Missed guidance.

Basic data (GAAP) :

Revenues were $48.1 million, down 10% sequentially from $53.2 million and down 22% from $61.6 million in the year-earlier quarter.

Net income was negative $12.2 million, down sequentially from negative $1.9 million and down from negative $1.3 million year-earlier.

EPS was negative $0.22, down sequentially from negative $0.04 and from negative $0.02 year-earlier.

Guidance:

Due to flooding in Thailand, may be in a broad range or even outside of that.

Q4 net revenue range of $47 to $53 million with non-GAAP EPS range negative $0.03 to positive $0.03. Cash may be deployed to acquire disk drive inventory.

Conference Highlights:

A $2.3 million charge for a 2009 power supply component problem was included in cost of goods sold. There was also a $2.9 impairment of assets change. There was a $0.6 million insurance claim gain and a $0.7 million restructuring charge.

Non-GAAP numbers: gross margin 28.1%, up sequentially from 26.3% and up from 19.3% year-earlier, mainly because of planned discontinuance of low-margin NetApp business. Net income was negative $1.1 million, down sequentially from positive $0.4 million and from positive $0.2 million year-earlier. EPS negative $0.02. EBITDA $0.2 million.

Non-GAAP net income was also impacted by increased R&D, a bad debt from a software customer, and increased software license costs.

After the quarter ended signed a 5 year extension agreement with largest customer, HP. "Coupled with existing OEM roadmaps, new design wins, new Tier 2 OEMs and channel cutomers that we acquired in Q3, and with the potential for incremental upside from other prospects that are still in the evaluation stage of our products, we could be setting up ourselves well for a solid 2012." [my italics, WPM]

Cash and equivalents balance ended at $45.7 million, down $0.8 million in the quarter. Cash flow from operations was negative $1.0 million.

Dot Hill's Tier 2 OEM business grew 97% y/y; channels business grew 104% y/y. The sequential revenue decline was largely from inventory re-balancing at a single customer.

Excluding NetApp income, which was discontinued due to poor margins, revenue grew 7% y/y.

Largest AssuredUVS OEM (also the launch partner) will not continue to offer Assured UVS in the future. Given the recent payment deliquency we will not recognize revenue from them until we see the funds. Missed software revenue goals due to this.

Intellectual property monetization discussions are in very early stages.

Cost of goods sold was $40.0 million, leaving gross profit of $8.0 million. Operating expense of $20.1 million included $9.5 million for research and development, $3.8 million for sales and marketing, $2.0 million general and administrative, $0.7 million restructuring, and $4.1 million goodwill impairment (re Cloverleaf acquisition). Operating income was negative $12.1 million. Income taxe $0.1 million.

We supply the disk drives for systems representing about 1/3 of our revenue. Otherwise customers supply the drives. We have a mitigation plan, including physically securing all the drives to meet anticipated Q4 demand. Hill has ordered all drives for Q1, but suppliers are not yet providing availability. We have $23 million in backlogged orders, an unprecedented amount. Our primary disk suppliers are Hitachi and Seagate. So far Hill has not raised prices. However, the situation is highly volatile and may take several quarters to return to normal.

Believe $50 million is now the break even revenue number.

Q&A:

March quarter risk from drive challenges? It is very hard to call at this point in time. 75% of our business is driveless. HP and Lenovo are specific examples. Our Q1 drive demand is already on order, which is much earlier than usual. Our vendors are the least-impacted.

Gross margin given drive price increases? Our disk drive prices have not gone up yet, except in a few cases. That could change. We have stockpiled drives at prior prices.

Tier 2 OEM wins, extent of revenue? Concurrent is already in ramp. Two signed contracts have not been announced, they would not generate revenue until late in Q1. Could be in the $20 to $25 million per year range in aggregate.

Software AssuredUVS? We are not predicting timing for a rebound to $2 million per quarter. May rebundle for reseller channel. Looking at features and selling price.

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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