Dot Hill: Fiscal 4Q11 Financial Results

Dot Hill Systems Corp. announced financial results for the fourth quarter and year ended December 31, 2011.

Financial and Operational Highlights:

• 2011 non-GAAP revenue of $198.5 million increased 6% from 2010 excluding the exited NetApp business, and the Tier 2 OEM business increased over 40% on a year-over-year basis;
• 2011 non-GAAP gross margin of 26.3% was up from 18.0% for 2010 and increased over 45% excluding revenues from the terminated NetApp business;
• 2011 non-GAAP net loss of $0.04 per share was reduced from a net loss of  $0.11 per share for 2010; and,
• 2011 cash flow from operations of $2.2 million compared favorably to a negative cash flow from operations of $9.1 million in 2010.

"2011 was a year of foundation setting for Dot Hill, against a backdrop of huge change in our industry," said Dana Kammersgard, president and CEO, Dot Hill Systems. "Our universe has changed dramatically, and we believe that we have already benefited from the many mergers and acquisitions in the data storage industry. We have worked aggressively, as we said we would, to fill the voids left by our competitors, such as winning new OEM customers like Autodesk and Concurrent Computer and new distributors such as Harwood and Pac Data. We have additional wins not yet announced and expect to add others throughout 2012."

Fourth Quarter 2011 Financial Detail:
The company recognized net revenue of $47.0 million for the fourth quarter of 2011, compared to $65.4 million for the fourth quarter of 2010 and $48.1 million for the third quarter of 2011. GAAP gross margin for the fourth quarter of 2011 was 17.6% compared to 21.0% for the fourth quarter of 2010 and 16.7% for the third quarter of 2011. GAAP operating expenses for the fourth quarter of 2011 were $15.0 million, as compared to $13.3 million for the fourth quarter of 2010 and $20.1 million in the third quarter of 2011.

GAAP net loss for the fourth quarter of 2011 was $6.6 million, or $0.12 per share, as compared to a net profit of $0.3 million, or $0.01 per share, in the fourth quarter of 2010, and a net loss $12.2 million, or $0.22 per share, in the third quarter of 2011.

Non-GAAP net revenue for the fourth quarter of 2011 was $48.0 million, which excludes $1 million of contra-revenue associated with the extension of warrants granted to the company’s largest customer in 2008 to concurrently expire with the five-year renewal of the supply agreement in October 2016. Excluding revenues from the terminated NetApp relationship, net revenues for the fourth quarter of 2010 would have been $52.9 million and $48.1 million in the third quarter of 2011, which represents a decline of 9.2% on a year-over-year basis due primarily to disk drive shortages arising from the floods in Thailand.


Non-GAAP gross margin was 24.8% for the fourth quarter of 2011, compared to 22.0% for the fourth quarter of 2010 and 28.1% for the third quarter of 2011. The year-over-year improvement in gross margin was largely attributable to a more favorable product and customer mix, and the sequential decline in gross margin was primarily due to increased costs of hard disk drives, which we intentionally did not pass through to our customers, product and customer mix, and increased general warranty reserves. Total non-GAAP operating expenses for the fourth quarter of 2011 were $13.6 million, as compared to $12.2 million for the fourth quarter of 2010 and $14.5 million for the third quarter of 2011. The year-over-year increase in non-GAAP operating expenses was largely due to incremental engineering investments and increased year-end sales compensation. The sequential reduction in non-GAAP operating expenses was primarily attributable to non-recurring bad debt charges in the third quarter of 2011, a partial reversal of an accrual taken in the third quarter of 2011 and lower R&D project material expenses.

Non-GAAP net loss for the fourth quarter of 2011 was $1.6 million, or $0.03 per share, as compared to a fourth quarter of 2010 non-GAAP net profit of $2.0 million, or $0.04 per share, and a third quarter 2011 non-GAAP net loss of $1.1 million, or $0.02 per share. Non-GAAP EBITDA for the fourth quarter of 2011 was negative $1.3 million compared to positive $2.6 million for the fourth quarter of 2010 and positive $0.2 million for the third quarter of 2011.

Full-Year 2011 Financial Detail:
The company recognized net revenue of $197.5 million for the full year of 2011, compared to $252.5 million for the full year of 2010. GAAP gross margin for 2011 was 21.1%, compared to 17.0% in 2010. GAAP operating expenses for 2011 were $63.5 million compared to $55.9 million in 2010. GAAP net loss for 2011 was $22.0 million, or $0.40 per share, as compared to a net loss of $13.3 million, or $0.25 per share, for 2010.

Non-GAAP net revenue decreased to $198.5 million for 2011 from $252.5 million for 2010. Excluding NetApp, non-GAAP revenue in 2010 would have been $186.9 million, representing growth of 6% year-over-year. The company stated that the highlight from a revenue perspective was the over 40% year-over-year growth in its Tier 2 OEM business. Non-GAAP gross margin was 26.3% for 2011, compared to 18.0% for 2010. 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 2011 were $54.3 million, as compared to $51.1 million for 2010. The increase in non-GAAP operating expenses was due in large part to incremental engineering expenses to support the company’s mid-range and next generation entry-level storage array development efforts.

Non-GAAP net loss for 2011 was $2.2 million, or $0.04 per share, as compared to a 2010 non-GAAP net loss of $6.0 million, or $0.11 per share. Non-GAAP EBITDA for 2011 was positive $0.6 million compared to negative $3.7 million for 2010.

"All in all I am pleased with the continued progress we made in 2011 with respect to our business model," stated Hanif Jamal, CFO, Dot Hill Systems. "We have made significant strides in the gross margin structure of our business and in particular in 2011. I am very encouraged with the success of our Tier 2 OEM business, which grew over 40% on a year-over-year basis, and we should carry some of that momentum into 2012 and 2013. I believe that we are on track to get to mid-term financial goals in 2013 that we established at our Analyst day in November 2010." 

Balance Sheet and Cash:
The company exited 2011 with cash and cash equivalents of $46.2 million compared to $45.7 million at the end of 2010 and $45.7 million at the end of the third quarter of 2011.

First Quarter 2012 and Full Year 2012 Outlook:
The company is targeting first quarter 2012 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 company is targeting full year 2012 revenue of $205 million to $225 million and non-GAAP EPS of $0.02 to $0.08.