Dot Hill: Fiscal 4Q08 Financial Results

Dot Hill Systems Corp. announced financial results for the fourth quarter and year ended December 31, 2008. The company ended the fourth quarter of 2008 with GAAP net revenue of $72.4 million, gross margin of 13.9%, operating expenses of $18.9 million and a net loss of $8.6 million, or $0.19 cents per share. Included in the net loss are a non-cash impairment charge against our long-lived assets of $5.4 million, $0.7 million in share-based compensation expense, $0.8 million in restructuring expenses and $0.4 million in foreign currency gains.

For the year ended December 31, 2008, GAAP net revenue was $272.9 million, or 32% higher than the year ended December 31, 2007 GAAP net revenue of $207.1 million. Included in year ended December 31, 2008 net revenue was a reduction of $2.3 million associated with a warrant issued to Hewlett Packard. Gross margin for the year ended December, 31 2008 was 11.1%, down from 12.8% from the year ended December 31, 2007. Operating expenses were $57.6 million for the year ended December 31, 2008 compared to $91.8 million for the year ended December 31, 2007. The year ended December 31, 2008 operating expenses included a $5.4 million impairment for certain of our long-lived assets, $2.9 million in share-based compensation expense, $0.8 million in restructuring expenses, $0.5 million in severance expenses, $0.6 million in foreign currency gains and a $3.8 million legal settlement benefit. The year ended December 31, 2007 expenses included a goodwill impairment charge of $40.7 million, $2.4 million in share-based compensation expense, $1.0 million in severance expenses and $2.2 million in foreign currency gains. GAAP net loss was $25.8 million, or $0.56 per fully diluted share, for the year ended December 31, 2008 compared to a GAAP net loss of $60.2 million, or $1.32 per fully diluted share for the year ended December 31, 2007.

On a GAAP basis, for the fourth quarter of 2008, Dot Hill posted net revenue of $72.4 million which compares to GAAP net revenue of $76.6 million for the third quarter of 2008 and $51.8 million for the fourth quarter of 2007. For the fourth quarter of 2008, GAAP net revenue was in line with the guidance range of $70 to $76 million that the company provided on its November 6, 2008 earnings call. GAAP net revenue increased nearly 40% from the fourth quarter ended December 31, 2007 to the fourth quarter ended December 31, 2008. This growth was primarily attributable to the ramp in shipments to Hewlett-Packard and NetApp, partially offset by a decline in shipments to Sun.

Non-GAAP gross margin was 14.0% for the fourth quarter of 2008, a 2.2 percentage point improvement compared to non-GAAP gross margin of 11.8% for the third quarter of 2008 and 12.5% for the fourth quarter of 2007. The sequential quarterly and year-over-year improvement in non-GAAP gross margin percentage was due primarily to the progress made in reducing product costs during the fourth quarter of 2008. Total non-GAAP operating expenses for the fourth quarter of 2008 were $12.5 million, as compared to non-GAAP operating expenses of $12.6 million for the third quarter of 2008 and $12.8 million for the fourth quarter of 2007. Non-GAAP net loss for the fourth quarter of 2008 was $2.1 million, or $0.05 per share on a fully diluted basis. This compares to a non-GAAP net loss of $3.1 million for the third quarter of 2008, or $0.07 per fully diluted share, and a non-GAAP net loss of $4.7 million for the fourth quarter of 2007, or $0.10 per fully diluted share. The non-GAAP net loss for the fourth quarter of 2008 was at the positive end of the $0.05 to $0.10 fully diluted non-GAAP net loss per share guidance range that the company provided on November 6, 2008.

For the year ended December 31, 2008, non-GAAP net revenues were $275.2 million compared to non-GAAP net revenues of $207.1 million for the year ending December 31, 2007. The 33% increase in revenue was primarily due to growth in revenues from Hewlett Packard and NetApp, offset by a decline in Sun product revenue. Non-GAAP gross margin percentage declined to 12.1% for the year ended December 31, 2008 from 13.0% for the year ended December 31, 2007 due to the decline in higher margin Sun product revenues. Non-GAAP operating expenses increased to $53.0 million for the year ended December 31, 2008 from $50.4 million for the year ended December 31, 2007 mainly due to increases in engineering expenses associated with the launch of products for Hewlett Packard and the acquisition of RAIDCore assets from Ciprico, Inc. This increase was partially offset by declines in sales and marketing and general and administrative expenses. Non-GAAP net loss for the year ended December 31, 2008 declined slightly to $18.2 million, or $0.40 per fully diluted share, from $18.4 million, or $0.40 per fully diluted share, for the year ended December 31, 2007.

The company exited the fourth quarter of 2008 with cash and cash equivalents of $56.9 million and a $0.9 million note payable associated with the purchase of intellectual property assets from Ciprico. This compares to a third quarter of 2008 balance of cash and cash equivalents of $56.5 million with a $0.9 million note payable.

For the first quarter of 2009, the company is targeting net revenue in the range of $56 to $63 million on a GAAP basis and a net loss per fully diluted share in the range of $0.06 to $0.11 on a non-GAAP basis. "We expect revenues to decline from the fourth quarter of 2008 due primarily to the tough economic climate as well as due to normal seasonal factors," said Hanif Jamal, Senior Vice-President and Chief Financial Officer. "Gross margin percentage is expected to be flat to down slightly despite continued product cost reductions during the quarter. This is largely due to the projected lower revenue levels across which to offset fixed manufacturing overhead. Operating expenses are expected to be slightly lower due to actions we took in the fourth quarter of 2008. We expect cash and cash equivalents at the end of March 31, 2009 to be in the high $40 million to low $50 million range."

"I believe that we have now clearly demonstrated throughout 2008 that the transformation we started back in 2006 is on track", stated Dana Kammersgard, President and Chief Executive Officer. "We have the best product portfolio in our history, excellent relationships with some very strong customers, high quality, cost effective supply chain partners and a very competent and dedicated team. We entered 2009 with a strong balance sheet of nearly $57 million in cash and cash equivalents, minimal debt and a $30 million working capital facility."