Dot Hill: Fiscal 3Q10 Financial Results

 

Dot Hill Systems Corp. announced financial results for the third quarter ended September 30, 2010.

Operational Highlights:

• Substantially completed restructuring designed to expand gross margin, reduce operating expenses and to achieve profitable non-GAAP EBITDA;
• Signed agreements with multiple partners in Japan for its new AssuredUVS unified virtual storage software, from the Cloverleaf Communications acquisition in January of 2010;
• Signed an OEM agreement with Lenovo to market private branded storage systems  based on the Company’s AssuredSAN 3000 series products;
• Announced numerous other customer design wins for the AssuredSAN 3000 series products;
• Introduced the AssuredSAN 3400 series to deliver affordable 10Gb iSCSI storage arrays; and
• Finalized the accelerated transfer of associated manufacturing rights to NetApp effective December 1, 2010.

Dana Kammersgard, the Company’s president and chief executive officer stated: "I am pleased to report that we achieved non-GAAP operating profit in the third quarter. Delivering profitability is an important event for us and a goal that we have been working towards for a long time. While we have a lot of work ahead of us, we believe that our Q3 results demonstrate the viability of our strategy and represent the potential for a new beginning for Dot Hill."  

Third Quarter 2010 Financial Details:
The Company recognized net revenue of $61.6 million for the third quarter of 2010, as compared to $63.6 million for the third quarter of 2009 and $65.5 million for the second quarter of 2010. Included in third quarter 2009 net revenue, was revenue associated with a sequential reduction of Dot Hill-owned finished goods hub inventories of $4.1 million as we worked with certain of our customers to improve supply chain efficiencies and transfer ownership to them of much of the inventory that we had previously held on their behalf. GAAP gross margin for the third quarter of 2010 was 18.3 percent, compared to 18.3 percent for the third quarter of 2009 and 14.8 percent for the second quarter of 2010. Operating expenses for the third quarter of 2010 were $12.6 million, as compared to $12.9 million for the third quarter of 2009 and $15.5 million for the second quarter of 2010.

Net loss for the third quarter of 2010 was $1.3 million, or $0.02 per share, as compared to a net loss of $1.1 million, or $0.02 per share, for the third quarter of 2009, and $5.8 million, or $0.11 per share, for the second quarter of 2010.

Non-GAAP gross margin was 19.3 percent for the third quarter of 2010, as compared to 18.4 percent for the third quarter of 2009 and 15.8 percent for the second quarter of 2010. The improved gross margin was largely attributable to increasing software sales, lower manufacturing overhead and supply chain related variances including the move to ocean freight and product cost reductions. Total non-GAAP operating expenses for the third quarter of 2010 were $11.7 million, as compared to $11.7 million for the third quarter of 2009 and $13.6 million for the second quarter of 2010. Included in the third quarter of 2010 non-GAAP operating expenses, were investments in the Company’s channel program and software development initiative, which were primarily added between the fourth quarter of 2009 and the second quarter of 2010. The sequential reduction in operating expenses was largely due to the restructuring activities the Company undertook at the end of the second quarter of 2010, which included the closure of its Carlsbad, California facility, salary reductions and headcount reductions.

Non-GAAP net income for the third quarter of 2010 was $0.2 million, or $0.00 per share, as compared to third quarter 2009 non-GAAP net income of $0.1 million, or $0.00 per share, and a second quarter 2010 non-GAAP net loss of $3.3 million, or $0.06 per share. Non-GAAP EBITDA for the third quarter of 2010 was positive $0.7 million, as compared to positive $0.4 million for the third quarter of 2009 and negative $2.8 million for the second quarter of 2010.

Balance Sheet and Cash Flows:
The Company exited the third quarter of 2010 with cash and cash equivalents of $41.8 million, as compared to $42.6 million at the end of the second quarter of 2010. The sequential decline in cash was largely a result of working capital timing, including payments related to the Company’s restructuring activities, and operating losses. At the end of the third quarter of 2010, the Company elected to pay $3.0 million earlier than due to take advantage of discounts that will benefit the Company in the fourth quarter of 2010. The Company also borrowed $3.0 million to offset this accelerated payment.

Hanif Jamal, the Company’s senior vice president and chief financial officer, commented: "I am very pleased with the third quarter 2010 financial results and feel that we are on track to establishing a business that is both sustainable and profitable. During the fourth quarter of 2010, we expect revenues to be between $58 and $62 million and non-GAAP earnings per share to be between positive $0.01 and negative $0.03 per share. The potential of a sequential decline in revenue is due entirely to the transfer of manufacturing rights to NetApp beginning on December 1, 2010 and consequently we expect no revenue from NetApp in December. Over the next few quarters we currently project the trajectory for EPS to be relatively flat in the break-even range, with the possibility of a small improvement or degradation, as we replace the NetApp margin with margin from new OEM revenues, software and channel revenues."

The Company stated that it expected to maintain gross cash above $40 million, but may elect to borrow against its credit facility and take advantage of similar ‘early pay’ discounts as they did in the second and third quarters of 2010.