Dot Hill: Fiscal 1Q10 Financial Results

Dot Hill Systems Corp. announced financial results for the first quarter ended March 31, 2010.

Financial and Operational Highlights:

• Completed acquisition of Cloverleaf Communications, Inc. in January 2010
• Successfully released and began volume shipments of Dot Hill’s next generation Series 3000 products
• Increased revenue by 11 percent to $60.0 million compared to $53.9 million in first quarter 2009
• Awarded a 2010 Everything Channel Partner Program Guide’s prestigious Five-Star Partner rating

"Our transformation to embrace more software products and channel-oriented routes to market and thereby deliver higher value-add and higher-margin business continues to progress," commented Dana Kammersgard, the company’s President and Chief Executive Officer. "While conversations with prospects for our next-generation storage products are progressing well, and the development of our Cloverleaf products is on schedule, we will not be satisfied until our financial results reflect material contribution from these initiatives. In order to accelerate our pace towards profitability, we are in the process of evaluating a company-wide expense reduction and resource reallocation plan that we believe will enable us to invest in our software technology and channel program, while simultaneously reducing our overall cost structure, and therefore our break-even point."

First Quarter 2010 Financial Detail:

• The Company recognized net revenue of $60.0 million for the first quarter of 2010, as compared to $53.9 million for the first quarter of 2009 and $62.6 million for the fourth quarter of 2009. The increase in year-over-year revenue was due to increases in revenue from our largest customer, partially offset by declines in legacy revenue from Sun Microsystems. On a sequential basis, revenue declined by $2.6 million, which was largely a result of late quarter bookings being deferred into the second quarter and a sequential decline in revenue from our second largest customer.
• Gross margin for the first quarter of 2010 was 13.5 percent, compared to 17.2 percent for the first quarter of 2009 and 14.3 percent for the fourth quarter of 2009. Operating expenses for the first quarter of 2010 were $14.5 million, as compared to $12.6 million for the first quarter of 2009 and $14.0 million for the fourth quarter of 2009.
• Net loss for the first quarter of 2010 was $6.4 million, or $0.12 per share, as compared to a net loss of $3.3 million, or $0.07 per share, for the first quarter of 2009, and $5.0 million, or $0.11 per share, for the fourth quarter of 2009.
• Non-GAAP gross margin was 14.6 percent for the first quarter of 2010, as compared to 17.4 percent for the first quarter of 2009 and 14.5 percent for the fourth quarter of 2009. The decline in year-over-year non-GAAP gross margin was largely due to a decline in our legacy Sun business. Total non-GAAP operating expenses for the first quarter of 2010 were $13.5 million, as compared to $11.4 million for the first quarter of 2009 and $11.8 million for the fourth quarter of 2009. The increase in non-GAAP operating expenses was largely attributable to the Cloverleaf Communications, Inc. acquisition and investments in other software development and the Company’s channel sales organization.
• Non-GAAP net loss for the first quarter of 2010 was 4.8 million, or $0.09 per share, as compared to a first quarter 2009 non-GAAP net loss of $2.0 million, or $0.04 per share, and a fourth quarter 2009 non-GAAP net loss of $2.7 million, or $0.06 per share. Non-GAAP EBITDA for the first quarter of 2010 was negative $4.3 million, as compared to negative $1.6 million for the first quarter of 2009 and negative $2.1 million for the fourth quarter of 2009.

Balance Sheet and Cash Flows:
The Company exited the first quarter of 2010 with cash and cash equivalents of $51.3 million, as compared to $57.6 million at the end of 2009. The decrease in the Company’s cash and cash equivalents was primarily attributable to cash used for the Cloverleaf acquisition. The Company also used $4.7 million in cash flows from operations during the quarter ended March 31, 2010, which included approximately $1.5 million of Cloverleaf liabilities that the Company assumed in the acquisition that are reflected in operating cash flows.

Hanif Jamal, the Company’s Senior Vice President and Chief Financial officer commented: "We remain optimistic about our strategy, and believe that we’ll be successful in improving our financial results and reaching non-GAAP EBITDA break-even by the end of this year. Some actions we are currently reviewing include a thorough financial analysis of select product lines, consolidation of our contract manufacturers, and reduction of certain operating expenses, including manufacturing overhead, in the second half of 2010. We would expect Q2 revenues and non-GAAP loss per share to be in the same ball park as our Q1 results and that cash could potentially drop into the $40-45 million range as a result of projected operating losses, restructuring costs and working capital requirements. We intend to host a follow up conference call in mid June to discuss the decisions we have made and their impact on the second half of 2010. We will also provide more specific Q2 guidance at that time."