Dot Hill: Fiscal 2Q09 Financial Results

Dot Hill Systems Corp. announced financial results for the second quarter of 2009. The company recognized net revenue in the second quarter of 2009 of $54.3 million, as compared to $71.0 million for the second quarter of 2008 and $53.9 million for the first quarter of 2009.

Gross margin for the second quarter of 2009 was 14.7 percent, compared to 10.2 percent in the second quarter of 2008 and 17.2 percent in the first quarter of 2009. Operating expenses for the second quarter of 2009 were $12.3 million, as compared to $14.7 million in the second quarter of 2008 and $12.6 million in the first quarter of 2009.

Net loss for the second quarter of 2009 was $4.2 million, or $0.09 cents per fully diluted share, as compared to a net loss of $7.4 million, or $0.16 per fully diluted share in the second quarter of 2008 and a net loss of $3.3 million, or $0.07 per fully diluted share, in the first quarter of 2009.

The decline in year-over-year revenue was due to the economic downturn along with declines in revenues from Sun, partially offset by increases in revenues from Hewlett-Packard. On a sequential basis, revenues increased slightly which the company attributed primarily to increases in revenues from Hewlett-Packard offset by a decrease in revenues from Sun.

Non-GAAP gross margin was 14.9 percent for the second quarter of 2009, compared to 10.6 percent in the second quarter of 2008 and 17.4 percent in the first quarter of 2009.

The year-over-year improvement in non-GAAP gross margin percentage was primarily due to the strong progress the company made in reducing product costs over the past year, partially offset by product mix shifts as sales of higher margin Sun and other SANnet II products have declined. The company also indicated that sequential non-GAAP gross margins declined for three primary reasons. First, during the first quarter of 2009, the company had higher than expected sales of high-margin products to telecommunications and government customers, which was not replicated in the second quarter. Second, as a result of the economic downturn, certain of the company’s customers reduced their forecasts for legacy products that are nearing end of life, which resulted in an accrual on potential excess materials for these products. Third, the company continued to experience further decline in higher margin revenues from Sun and for its SANnet II products, which was for the most part replaced with revenues from other customers at lower margins.

Total non-GAAP operating expenses for the second quarter of 2009 were $11.1 million, as compared to $13.7 million for the second quarter of 2008 and $11.7 million for the first quarter of 2009. The company attributed the sequential and year over year decreases in operating expenses to its continuing expense reduction initiatives, including reductions in headcount and other discretionary expenses implemented since the third quarter of 2008.

Non-GAAP net loss for the second quarter of 2009 was $3.0 million or $0.06 per fully diluted share as compared to a second quarter 2008 net loss of $6.0 million, or $0.13 per fully diluted share and a first quarter 2009 net loss of $2.3 million, or $0.05 per fully diluted share.

The company exited the second quarter of 2009 with cash and cash equivalents of $57.1 million and a $0.7 million note payable associated with the purchase of intellectual property from Ciprico. This compares to the March 31, 2009 cash and cash equivalents balance of $54.3 million and the Ciprico note payable of $0.8 million. The increase on the company’s cash position was primarily attributable to tighter management of working capital. The company also generated $3.4 million in cash flow from operations during the second quarter of 2009.

"Overall, we had a strong quarter against a difficult economic environment," said Hanif Jamal, Dot Hill’s senior vice president and chief financial officer. "Our product cost reduction initiatives, operating expense controls and cash management have been excellent and well executed and resulted in a fifth consecutive quarter of non-GAAP operating expense reductions."

The company is targeting third quarter 2009 net revenue in the range of $55 to $62 million and a net loss per fully diluted share in the range of $0.02 to $0.08 on a non-GAAP basis. "Gross margin percentage is expected to remain flat to slightly up on a non-GAAP basis due to product cost reductions and moderate sequential growth in revenue offset by the dilutive impact associated with product mix changes and product line transitions changes," said Jamal. "Operating expenses are expected to increase slightly as we start to invest in sales and marketing, software and hardware product development and we begin to transition our corporate headquarters to Colorado. We expect cash and cash equivalents at the end of September 30, 2009 to be in the range of $52 to $56 million."

"I am pleased with the achievements of our team during the second quarter of 2009," said Dana Kammersgard, Dot Hill’s president and chief executive officer. "It was a quarter of solid execution against a difficult economic backdrop. Operationally, we have cut expenses and have systemically improved our gross margins, despite a decline this last quarter because of accruals for excess materials on aging product lines, and have managed our working capital and cash extremely well. More importantly however, I am very excited about the last half of 2009 and into 2010, when we expect the economy to begin to recover and demand to stabilize and we take advantage of technology transitions to win new customers. I am pleased to report that we already have five new design wins this year with others pending and a revenue pipeline that appears to be increasing."