Dot Hill: Fiscal 4Q10 Financial Results

Dot Hill Systems Corp. announced financial results for the fourth quarter and year ended December 31, 2010.

Financial and Operational Highlights:

• Fourth quarter 2010 revenue of $65.4 million or sequential growth of over 18% excluding revenues from terminated NetApp business;
• Fourth quarter 2010 non-GAAP gross margin of 22% up from 19.3% in the prior quarter and up from 14.5% in the fourth quarter of 2009;
• Non-GAAP EPS of $0.04 up from $0.00 in the prior quarter and up from ($0.06) in the fourth quarter of 2009; and
• End of fourth quarter 2010 cash and cash equivalents of $45.7 million, up from $41.8 million in the prior quarter.

Fourth Quarter 2010 Financial Detail:
The Company recognized net revenue of $65.4 million for the fourth quarter of 2010, compared to $62.6 million for the fourth quarter of 2009 and $61.6 million for the third quarter of 2010. GAAP gross margin for the fourth quarter of 2010 was 21%, compared to 14.3% for the fourth quarter of 2009 and 18.3% for the third quarter of 2010. GAAP operating expenses for the fourth quarter of 2010 were $13.3 million, as compared to $14.0 million for the fourth quarter of 2009 and $12.6 million in the third quarter of 2010.

GAAP net profit for the fourth quarter of 2010 was $0.3 million, or $0.01 per share, as compared to a net loss of $5.0 million, or $0.11 per share, in the fourth quarter of 2009, and $1.3 million, or $0.02 per share, in the third quarter of 2010.

Excluding revenues from the terminated NetApp relationship, net revenues from the fourth quarter of 2010 would have been $52.9 million as compared to $42.7 million in the fourth quarter of 2009 and $44.8 million in the third quarter of 2010 which represents growth of 23.9% on a year-over-year basis and 18.1% on a quarter over quarter basis.

Non-GAAP gross margin was 22% for the fourth quarter of 2010, compared to 14.5% for the fourth quarter of 2009 and 19.3% for the third quarter of 2010. The improvement in gross margin was largely attributable to a more favorable product and customer mix. Total non-GAAP operating expenses for the fourth quarter of 2010 were $12.2 million, as compared to $11.8 million for the fourth quarter of 2009 and $11.7 million for the third quarter of 2010.

Non-GAAP net profit for the fourth quarter of 2010 was 2.0 million, or $0.04 per share, as compared to a fourth quarter of 2009 non-GAAP net loss of $2.7 million, or ($0.06) per share, and a third quarter 2010 non-GAAP net profit of $0.2 million, or $0.00 per share. Non-GAAP EBITDA for the fourth quarter of 2010 was $2.6 million compared to negative $2.1 million for the fourth quarter of 2009 and $0.7 million for the third quarter of 2010.

"All in all I am pleased with the progress we made in 2010," said Hanif Jamal, Dot Hill’s senior vice president and chief financial officer. "This progress is evidenced by the sequential improvement in non-GAAP gross margin and EPS during 2010 which culminated with the company today reporting a $0.04 non-GAAP EPS for the fourth quarter."

Full-Year 2010 Financial Detail:
The Company recognized net revenue of $252.5 million for the full year of 2010, compared to $234.4 million for the year ended 2009. GAAP gross margin for 2010 was 17 percent, compared to 16.1 percent in 2009. GAAP operating expenses for 2010 were $55.9 million compared to $51.7 million in 2009. GAAP net loss for 2010 was $13.3 million, or $0.25 per share, as compared to a net loss of $13.6 million, or $0.29 per share, in 2009.

Non-GAAP gross margin was 18% for 2010, compared to 16.3% for 2009. The increase in non-GAAP gross margin was primarily due to product cost reductions, reduced overhead expenses and a more favorable customer and product mix. Total non-GAAP operating expenses for 2010 were $51.1 million, as compared to $45.7 million for 2009. The increase in non-GAAP operating expenses was due primarily to incremental expenses to support the company’s strategic investments in channel development and expenses associated with the company’s AssuredUVS business acquired from Cloverleaf Communications Inc. in January 2010.

Non-GAAP net loss for 2010 was $6.0 million, or $0.11 per share, as compared to a 2009 non-GAAP net loss of $7.3 million, or $0.15 per share. Non-GAAP EBITDA for 2010 was negative $3.7 million compared to negative $5.5 million for 2009.

"Throughout 2010, we made solid, incremental progress in our transformation from a low margin, entry level, OEM storage array provider to a storage solutions company with a broader range of higher margin products and routes to market as we added to our software offerings and continued to build out our branded channels," said Dana Kammersgard, Dot Hill’s president and chief executive officer. "At our Analyst Day in November, I called this ‘A New Beginning.’ In many ways, I feel that we are strategically better positioned, and a very different company today than we were even just a year ago. 2010 was certainly a landmark year for the data storage industry with a heightened level of merger and acquisition activity which I believe will result in voids in the marketplace which we will work aggressively to fill in 2011." 

Balance Sheet and Cash:
The company exited 2010 with cash and cash equivalents of $45.7 million compared to $57.6 million at the end of 2009 and $41.8 million at the end of the third quarter of 2010. The year-over-year decrease was primarily attributable to the company’s 2010 net loss and the acquisition of Cloverleaf Communications Inc.

First Quarter 2011 and Full Year 2011 Outlook:
The Company is targeting first quarter 2011 net revenue in the range of $49 million to $53 million and a non-GAAP EPS in the range of a loss of $0.02 to a profit of $0.02.

"The expected sequential decline in both revenue and non-GAAP EPS is due primarily to the termination of the NetApp business coupled with normal seasonality" said Mr. Jamal. "Hence I believe it is more meaningful to compare our revenue guidance with the Q410 revenues without NetApp of $52.9 million and Q110 revenues of $41.6 million. At the mid-point of our guidance range we are expecting a 3.2% sequential decline in revenue and a 22.6% year over year growth in revenue. Gross margin percentage is expected to improve on a non-GAAP basis to between 23% and 24% as we expect a more favorable customer sales mix in the quarter," said Mr. Jamal. "Operating expenses are expected to increase to be between $12.5 million and $13 million as we continue to invest in our channel program and product development. Consequently, we expect cash and cash equivalents at the end of the first quarter of 2011 to be in the range of $42 to $46 million."

The company is targeting full year 2011 revenue of $207 million to $220 million and non-GAAP EPS of $0.01 to $0.08.