Analyst Conference Call Summary

conference date: May 7, 2015 @ 8:00 AM Pacific Time
for quarter ending: March 31, 2015 (first quarter, Q1 2015)

Forward-looking statements

Overview: Continuing to grow and hitting guidance.

Basic data (GAAP) :

Revenues were $61.1 million, down 10% sequentially from $68.2 million, and up 27% from $48.2 million in the year-earlier quarter.

Net income was $3.9 million , down sequentially from $8.5 million, but up from negative $0.4 million in the year-earlier quarter.

EPS (diluted earnings per share) were $0.06, down sequentially from $0.13, but up from negative $0.01 in the year-earlier quarter.

Guidance:

In Q2 2015 revenue is expected between $58 and $62 million, and non-GAAP EPS is expected between $0.04 and $0.08.

No change in full year 2015 guidance.

Conference Highlights:

Q1 was a solid start to 2015. Guidance shows "our expectations for a strong year of growth for all of 2015." This was despite a weak quarter for the entire storage industry. Telco and Asia were particularly strong. We are taking share from our primary competitor.

The newest products are highly competitive. Has set a new baseline for growth in 2015. Plans for additional customers, wins, and product launches in 2015. By no means all of our customers have announced our products.

In April Teradata integrated AssuredSAN Ultra48 into its new Data Warehouse Appliance 2800. Quantum announced it would integrate Dot Hill's full enterprise line of storage into its tiered storage offerings.

In April introduced RealStream software for large scale parallel data balancing. RealSure balances large scale searches in real time.

Non-GAAP numbers: revenue was $60.3 million, down 12% sequentially from $68.2 million and up 23% from $48.9 million year-earlier. Net income was $4.0 million, down 53% sequentially from $8.5 million and up 300% from $1.0 million year-earlier. EPS was $0.06, down 54% sequentially from $0.13, and up 550% from $0.02 year-earlier. EBITDA was $5.1 million. Gross margin was 33.8%, sequentially from 34.6%, and y/y from 33.1%.

The critical vertical markets segment revenue was $35.9 million down 7% sequentially from $38.5 million and up 60% y/y from $22.4 million. New customer revenue ramp continues.

Overall server OEM revenue (including HP) was $24.3 million, down 18% sequentially from $29.7 million, and down 8% y/y from $26.5 million. Expects revenue to be flat overall for 2015 vs. 2014.

HP contributed about $21.7 million, 36% of total non-GAAP revenue, down 18% sequentially from $26.6 million.

Four customers represented more than 10% of revenue in the quarter.

Cash and equivalents ended at $46.3 million, up sequentially from $42.5 million. Cash from operations was $6.5 million. $2.5 million debt. Accounts receivable ended at $42.2 million, with inventories down to $9.5 million sequentially from $11.3 million.

Cost of goods sold was $40.1 million, leaving gross profit of $21.0 million. Operating expenses were $17.1 million, consisting of: $10.1 million research and development, $3.8 million sales and marketing, and $3.2 million general and administrative. Leaving operating profit of $3.9 million. Other expense minimal. Income taxes near zero.

Q&A:

Asia Pacific strength? We have a number of customers, both vertical and server OEM, that were strong in that region.

Can you accelerate vertical growth? Sales cycle can be 1 to 3 years. We regularly consider expanding the sales force, by just a few people when appropriate, but it has to be balanced with engineering since we usually customize the devices. We are very focused on a few vertical market potential customers. Sales expense target in vertical market is 6 to 7%.

2017 type opportunities? OEMs tend to be sticky, long term revenue streams. We have a number of new OEM partners we are beginning to ramp. 2015 revenue is mostly from existing customers, by 2017 the current customers will still provide a majority of revenue.

Server OEM forecast, does guidance imply a new customer? We reiterate our confidence in basically flat OEM revenue in 2015.

Arrow distributor relationship? We just announced a master distributor relationship with Quantum. With Arrow we are working with the OEM group in Europe. So their customers are smaller OEMs that we don't choose to make direct partners.

Confidence in 2015 guidance? Midpoint is $250 million. It is too early to tell in the year. We have seen depressed earnings at our peers. In the last two years we did have big Q4s, but not in 2011 and 2012. It comes down to the magnitude of customer launches.

In verticals, there are requirements commonalities between video production storage and oil and gas. Predictive, autonomic analytics are built into the storage arrays to solve their problems. We are balancing growth and profitability, so we are limiting expansion into new verticals at present. We are expanding within our focus and to some adjacencies.

We have features under development that have not been announced yet. A lot of the features are driven by our customers.

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