Dot Hill: Fiscal 3Q11 Financial Results

Dot Hill Systems Corp. announced financial results for the third quarter ended September 30, 2011.

Financial and Operational Highlights:

• Third quarter 2011 revenue of $48.1 million which, excluding the exited NetApp business, compares to $44.8 million in the third quarter of 2010 and represents 7.3% year-over-year growth. The Company stated that its Tier 2 OEM business grew 97% on a year-over-year basis and its Channel business grew 104% on a year-over-year basis.
• Third quarter 2011 GAAP gross margin of 16.7% down from 24.8% in the prior quarter and down from 18.3% in the third quarter of 2010.
• Third quarter 2011 non-GAAP gross margin of 28.1% up from 26.3% in the prior quarter and up from 19.3% in the third quarter of 2010.
• Third quarter 2011 GAAP EPS of $(0.22) per share compared to $(0.04) per share in the second quarter of 2011 and $(0.02) per share in the third quarter of 2010.
• Third quarter 2011 non-GAAP EPS of $(0.02) compared to $0.01 in the prior quarter and down from $0.00 in the third quarter of 2010.
• Cash and cash equivalents of $45.7 million as of September 30, 2011, down slightly from $46.5 million as of June 30, 2011.

Third Quarter 2011 Financial Detail:
The Company recognized net revenue of $48.1 million for the third quarter of 2011, compared to $61.6 million for the third quarter of 2010 and $53.2 million for the second quarter of 2011. Excluding NetApp, net revenues grew 7.3% on a year-over-year basis from $44.8 million for the third quarter of 2010 but down 9.6% on a quarter-over-quarter basis from $53.2 million for the second quarter of 2011. The Company stated that its Tier 2 OEM business grew 97% on a year-over-year basis and its Channels business grew 104% on a year-over-year basis. The Company attributed the sequential decline in revenue primarily to inventory re-balancing and rationalization at a certain customer and not recognizing revenue from a delinquent but significant software customer.

GAAP gross margin for the third quarter of 2011 was 16.7%, compared to 18.3% for the third quarter of 2010 and 24.8% for the second quarter of 2011. Included in the third quarter 2011 cost of goods sold was a charge of $2.3 million associated with a power supply component problem that occurred in 2009, and a $2.9 million impairment of long- lived assets associated with the Company’s acquisition of Cloverleaf Communications Inc. These charges were partially offset by a $0.6 million gain on an insurance claim. The net impact of these charges and gain of $4.6 million resulted in a gross margin reduction of 9.6%.

GAAP operating expenses for the third quarter of 2011 were $20.1 million, as compared to $12.6 million for the third quarter of 2010 and $15.1 million in the second quarter of 2011. Included in third quarter 2011 GAAP operating expenses was a $4.1 million Goodwill impairment charge associated with the Company’s acquisition of Cloverleaf Communications Inc. and a $0.7 million restructuring charge associated with the remaining lease payments for the company’s former headquarters in Carlsbad, California.

GAAP net loss for the third quarter of 2011 was $12.2 million, or $(0.22) per share, as compared to a net loss of $1.3 million, or $(0.02) per share, for the third quarter of 2010, and net loss of $1.9 million, or $(0.04) per share, for the second quarter of 2011.

Non-GAAP gross margin was 28.1% for the third quarter of 2011, compared to 19.3% for the third quarter of 2010 and 26.3% for the second quarter of 2011. The year-over-year improvement in gross margin percent was primarily a result of a more favorable product mix, including the elimination of low margin revenue from NetApp, component cost reductions and larger contributions from the Company’s higher margin Tier 2 OEM and Channels businesses.

Total non-GAAP operating expenses for the third quarter of 2011 were $14.5 million, as compared to $11.7 million for the third quarter of 2010 and $13.5 million for the second quarter of 2011. The Company attributed the sequential increase in operating expenses primarily to planned incremental engineering investments, a bad debt associated with a delinquent software customer and incremental software licensing costs.

Non-GAAP net loss for the third quarter of 2011 was $1.1 million, or $(0.02) per share, as compared to a third quarter 2010 non-GAAP net income of $0.2 million, or $0.00 per share, and second quarter 2011 non-GAAP net income of $0.4 million, or $0.01 per share. Non-GAAP EBITDA for the third quarter of 2011 was $0.2 million compared to $0.7 million for the third quarter of 2010 and $1.1 million for the second quarter of 2011.

"All in all, and in spite of the unusual charges we have taken, I am pleased with the progress we have made in the third quarter," said Dana Kammersgard, president and chief executive officer, Dot Hill Systems. "Last week, we signed an amendment to our contract with our largest customer [HP. Editor] that extends our relationship for an additional 5 years through October of 2016. Coupled with existing OEM roadmaps, new design wins, new Tier 2 OEM’s and channel customers that we acquired in Q3, and with the potential for incremental upside from other prospects that are still in the evaluation stage of our products, we could be setting up ourselves well for a solid 2012."

Balance Sheet:
The Company exited the third quarter of 2011 with cash and cash equivalents of $45.7 million compared to $41.8 million at September 30, 2010 and $46.5 million at June 30, 2011.

Fourth Quarter 2011 Outlook:
"The impact of the flooding in Thailand has created a significant amount of uncertainty with respect to sourcing hard disk drives which are critical components in our storage systems," said Hanif Jamal, chief financial officer, Dot Hill Systems. "While we debated not issuing guidance for Q4 2011, we decided to go ahead with the caveat that there could be significant downside or even upside volatility. Consequently, we are providing broader guidance ranges than we normally do, to hedge for some of the potential risk to our supply of disk drives."

The Company is targeting fourth quarter 2011 net revenue in the range of $47 million to $53 million and a non-GAAP EPS in the range of $(0.03) per share to $0.03 per share.