Dot Hill: Fiscal 4Q07 Financial Results

 
Dot Hill Systems
Corp. announced financial results for the fourth quarter
ended December 31, 2007. For the fourth quarter of 2007, net revenue was
$51.8 million, compared to $59.4 million for the fourth quarter of 2006 and
$45.7 million for the third quarter of 2007. The net revenue figures for the
fourth quarter of 2007 were above the guidance range of $44 to $48 million
that the company provided on November 8, 2007 and were in-line with the
revised guidance the company provided on January 7, 2008 and February 8, 2008.

The year-over-year decline in net revenue was due primarily to a decline in
revenue from the company’s largest OEM customer that was partially offset by
increased revenues from the company’s second largest OEM customer and sales of
its Series 2000 products. The sequential quarterly increase in net revenue was
largely due to greater than expected revenue contributions from the company’s
two largest OEM customers.

Net loss was $46.4 million for the fourth quarter of 2007, or $1.01 per
fully diluted share (including a non-cash goodwill impairment charge of
$40.7 million), compared to $9.1 million for the fourth quarter of 2006, or
$0.20 per fully diluted share (including a foreign income tax expense of $0.5
million related to a legal settlement) and $4.1 million for the third quarter
of 2007, or $0.09 per fully diluted share. Excluding the goodwill impairment
charge, net loss was $5.7 million for the fourth quarter of 2007, or $0.12 per
fully diluted share. Excluding the foreign income tax expense related to a
legal settlement, net loss was $8.6 million for the fourth quarter of 2006, or
$0.19 per fully diluted share, and $4.1 million for the third quarter of 2007,
or $0.09 per fully diluted share.

Net revenue for the full year 2007 was $207.1 million, compared to
$239.2 million for the full year 2006. The year-over-year decline in net
revenue was due primarily to an expected decline in revenue contribution from
the company’s largest OEM customer that was partially offset by increased
revenue from the company’s Series 2000 product sales and from sales to its
second largest OEM customer.

Net loss was $60.2 million for the full year 2007, or $1.32 per fully
diluted share (including a non-cash goodwill impairment charge of $40.7
million), compared to $80.8 million for the full year 2006, or $1.80 per fully
diluted share (including $3.4 million associated with a legal settlement,
$1.4 million in foreign income tax expenses related to a legal settlement,
$47.1 million in a tax valuation allowance, and $1.3 million in one-time
compensation and consulting-related expenses associated with the retirement of
the company’s prior CEO). Excluding the goodwill impairment charge, net loss
for the full year 2007 was $19.5 million, or $0.43 per fully diluted share.
Excluding the legal settlement, foreign income tax expenses related to a legal
settlement, tax valuation allowance and one-time compensation and
consulting-related expense associated with the retirement of the company’s
prior CEO, net loss for the full year 2006 was $27.6 million, or $0.62 per
fully diluted share.

Gross margin for the fourth quarter of 2007 was 12.2 percent as compared
to fourth quarter 2006 gross margin of 7.9 percent and third quarter 2007
gross margin of 14.3 percent. The improvement in gross margin percentage on a
year-over-year basis is attributed to the improved margin structure on the
company’s Series 2000 products, reduction of manufacturing overhead and
variances and continued cost benefits as a result of the company’s migration
to its offshore manufacturing partner. This was offset by an increase in lower
margin product sales to the company’s second largest OEM customer. On a
sequential basis, as anticipated, gross margin percentage for the fourth
quarter of 2007 was lower due to the continued ramp of products that the
company is shipping to its second largest OEM customer.

On a full year basis, gross margin for 2007 was 12.8 percent compared to
full year 2006 gross margin of 15.3 percent. The decline in gross margin
percentage on an annual basis is attributed to the reduction in higher margin
revenue from the company’s largest OEM customer, compounded by the effect of
several new product introductions during the course of 2007.

The company exited the fourth quarter of 2007 with cash and cash
equivalents of $82.4 million. This compares to the third quarter 2007 balance
of cash, cash equivalents and short-term investments of $90.2 million. The
sequential decrease in cash was due primarily to operating losses and the
creation of hub inventory for certain of Dot Hill’s large OEM customers.

The company is targeting first quarter 2008 net revenue in the range of
$48 to $52 million and a net loss per fully diluted share in the range of
$0.15 to $0.19 on a non-GAAP basis. These figures exclude the impact of
approximately a $2.0 million reduction in revenue associated with the issuance
of warrants to HP, as well as share-based compensation expense, foreign
currency translation gains or losses and severance and restructuring charges
and other one-time items that may occur or are projected to occur. The
company has factored into its earnings guidance the potential impact for
additional engineering expenses associated with the development and launch of
products for HP as well as a potentially lower gross margin percent due to
product sales mix and additional manufacturing overhead expenses related to
the HP revenue ramp.

Dot Hill Systems
Corp.