Dot Hill: Fiscal 1Q09 Financial Results

Dot Hill Systems Corp. announced GAAP financial results for the first quarter of 2009. The company ended the first quarter of 2009 with net revenue of $53.9 million, as compared to $52.8 million for the first quarter of 2008 and $72.4 million for the fourth quarter of 2008. Included in the first quarter of 2008 net revenue was a reduction in revenue of $2.3 million associated with a warrant issued to Hewlett-Packard. Gross margin for the first quarter of 2009 was 17.2 percent, compared to 7.9 percent in the first quarter of 2008 and 13.9 percent in the fourth quarter of 2008. Gross margin for the first quarter of 2008 was negatively impacted by the $2.3 million revenue reduction associated with the warrant issued to Hewlett-Packard.

Operating expense for the first quarter of 2009 was $12.6 million, as compared to $10.9 million in the first quarter of 2008 and $18.9 million in the fourth quarter of 2008. Included in the first quarter of 2009 operating expenses was $0.7 million in share-based compensation expense, $0.1 million in restructuring expenses and $0.1 million in foreign currency losses. Included in first quarter 2008 operating expenses was a $3.8 million legal settlement benefit, $0.7 million in share-based compensation expense, $0.3 million in severance expenses and a foreign currency gain of $0.3 million. Fourth quarter 2008 operating expenses included an impairment charge of $5.4 million against long-lived assets and intangibles, $0.7 million in share-based compensation expense, $0.8 million in restructuring expenses and $0.4 million in foreign currency gains.

Net loss for the first quarter of 2009 was $3.3 million, or $0.07 cents per fully diluted share, as compared to $6.1 million, or $0.13 per fully diluted share in the first quarter of 2008 and $8.6 million, or $0.19 per fully diluted share in the fourth quarter of 2008.

On a non-GAAP basis, for the first quarter of 2009, Dot Hill posted net revenue of $53.9 million, which compares to non-GAAP net revenue of $55.1 million for the first quarter of 2008 and $72.4 million for the fourth quarter of 2008. For the first quarter of 2009, non-GAAP net revenue was below the guidance range of $56 to $63 million that the company provided on February 26, 2009, but was within the preliminary net revenue range provided by the company on April 14, 2009. The slight decline in year-over-year revenue was due to the economic downturn along with declines in revenues from Sun that were partially offset by increases in revenues from Hewlett-Packard. The sequential decline in revenues is largely attributed to the economic downturn and seasonal trends. Included in first quarter 2008 non-GAAP revenue is $2.3 million associated with a warrant issued to Hewlett-Packard, which for GAAP purposes is accounted for as a reduction to revenue.

Non-GAAP gross margin was 17.4 percent for the first quarter of 2009, as compared to 12.0 percent for the first quarter of 2008 and 14.0 percent for the fourth quarter of 2008. The year-over-year and sequential improvement in gross margin percentage was due primarily to the progress made in reducing product costs during the quarter. In addition, the company stated that certain of its telecommunications and government customers exceeded forecasts in the first quarter of 2009 at higher than average margins. Included in fourth quarter 2008 gross margin is an accrued payment of $1.3 million from one of the company’s customers as a partial offset to price reductions the company had given them.

Total non-GAAP operating expenses for the first quarter of 2009 were $11.7 million, as compared to $14.2 million for the first quarter of 2008 and $12.5 million for the fourth quarter of 2008. The sequential decrease in operating expenses was due in part to a reduction of approximately $450,000 in depreciation and amortization resulting from the impairment of some of the company’s long-lived assets and intangibles in the fourth quarter of 2008. In addition, in the first quarter of 2009, the company started to benefit from the impact of the cost-reduction measures that it took during the fourth quarter of 2008, which included headcount reductions as well as reductions in discretionary expenses.

Non-GAAP net loss for the first quarter of 2009 was $2.3 million, or $0.05 per fully diluted share as compared to a first quarter 2008 net loss of $7.0 million, or $0.15 per fully diluted share and fourth quarter 2008 net loss of $2.1 million, or $0.05 per fully diluted share. The net loss for the first quarter of 2009 was better than the $0.06 to $0.11 net loss per fully diluted share guidance range that the company provided on February 26, 2009 and at the favorable end of the preliminary range the company provided on April 14, 2009.

The company exited the first quarter of 2009 with cash and cash equivalents of $54.3 million and a $0.8 million note payable associated with the purchase of intellectual property assets from Ciprico. This compares to a December 31, 2008 cash and cash equivalents balance of $56.9 million and the Ciprico-related note payable of $0.9 million.

"Overall, we had a solid quarter and managed areas within our control with good discipline," said Hanif Jamal, Dot Hill’s senior vice president and chief financial officer. "Our product cost reduction initiatives, operating expense controls and management of our cash have been well executed and resulted in a third consecutive quarter of non-GAAP gross margin improvements, a fourth consecutive quarter of non-GAAP operating expense reductions and a total cash burn of just $2.2 million over the past two quarters, combined."

The company will not provide second quarter 2009 guidance, citing its inability to rely on forecasts from its OEM customers due to the uncertain macroeconomic conditions.

"I am pleased with the achievements of our team as we executed well across the business during the first quarter of 2009," said Dana Kammersgard, Dot Hill’s president and chief executive officer. "Our engineering and operations team achieved product cost reductions that were two to three times higher than historical norms. We won our first piece of business for RAIDCore with a Tier-1 server OEM and we were also first to market to launch and ship products based on a 2U, 24-drive RAID array that supports 2.5 inch hard disk drives and solid state disks."

The company also stated that it is still finalizing its first quarter 2009 financial results and is currently evaluating levels of raw materials in its supply chain. At the present time the company does not expect any changes to these financial results before it files its Form 10-Q with the Securities and Exchange Commission.