Dot Hill: Fiscal 3Q08 Financial results

Dot Hill Systems Corp. announced financial results for the third quarter ended September 30, 2008. Net revenue was $76.6 million (a record for the company’s quarterly net revenue), compared to $45.7 million for the third quarter of 2007, and $71.0 million for the second quarter of 2008. Included in the third quarter 2008 revenue figures is an accrued payment of $1.7 million from one of the company’s large OEM customers in consideration of Dot Hill price reductions.

Net revenue for the third quarter of 2008 was within the guidance range of $73 to $78 million that the company provided on August 8, 2008.

For the third quarter of 2008, net loss was $3.7 million, or $0.08 per fully diluted share and included a one-time legal settlement of $0.5 million of which approximately $0.3 million was included in cost of goods and $0.2 million was included in operating expenses. Also included in the net loss was a $1.7 million accrued payment from one of the company’s large OEM customers in consideration for price reductions. The company had anticipated receiving this payment when it established guidance on August 8, 2008. This compares to a net loss of $4.1 million for the third quarter of 2007, or $0.09 per fully diluted share, and a second quarter 2008 net loss of $7.4 million, or $0.16 per fully diluted share.

On a non-GAAP basis, after excluding share-based compensation expense, severance costs and foreign currency adjustments, net loss for the third quarter of 2008 was $3.1 million, or $0.07 per share on a fully diluted basis and was within the $0.06 to $0.10 range that the company set on August 8, 2008.

Gross margin percentage for the third quarter of 2008 was 11.7 percent as compared to third quarter 2007 gross margin of 14.3 percent and second quarter 2008 gross margin of 10.2 percent. The gross margin percentage for third quarter of 2008 includes a $0.3 million legal settlement benefit and $1.7 million accrued payment from one of the company’s large OEM customers. The company attributes the decrease in gross margin percentage on a year-over-year basis primarily to a change in product and customer sales mix, as the company’s higher margin net revenue from Sun Microsystems has declined over the past year, while shipments of the company’s lower margin products to NetApp, Hewlett-Packard and other customers have increased. On a sequential basis, gross margin percentage increased despite the decline in net revenue from Sun Microsystems, primarily due to material cost reductions that the company realized during the quarter.

"We are pleased that we were able to meet our projections for the third quarter of 2008," said Dana Kammersgard, president and chief executive officer, Dot Hill. "Despite challenging market conditions, we were able to achieve record net revenue which was an improvement of 8 percent sequentially and 68 percent year-over-year. Our focus has shifted from one of revenue diversification and top line growth to continued margin improvement and the attainment of sustainable profitability. We remain intensely focused in these areas and remain confident that we will return to profitability in the near term."

Dot Hill exited the third quarter of 2008 with cash and cash equivalents of $56.5 million and a $0.9 million note payable associated with the purchase of intellectual property assets from Ciprico, Inc. This compares to the second quarter 2008 balance of cash and cash equivalents of $62.1 million, with no outstanding debt. The sequential decrease in cash and cash equivalents was due primarily to operating losses, increased working capital requirements associated with the ramp in the company’s business and a one-time cash payment of $2.25 million associated with the purchase of intellectual property assets from Ciprico, Inc.

"I am pleased with the fact that we managed to lower overall inventory levels by almost $1 million quarter over quarter, despite a significant revenue ramp in our business," said Hanif Jamal, senior vice president and chief financial officer at Dot Hill. "This was due in part to $3.3 million of higher than expected end of quarter inventory pulls from two of our larger OEM customers."

The company is targeting fourth quarter 2008 net revenue in the range of $70 to $76 million and a net loss per fully diluted share in the range of $0.05 to $0.10 on a non-GAAP basis, which excludes share-based compensation expense, severance and restructuring charges and currency gains and losses. The company believes that the higher than expected end of quarter inventory pulls from two of its larger OEM customers could impact revenues for the fourth quarter of 2008 and has been contemplated in the established guidance.