Dot Hill: Fiscal 2Q13 Financial Results

Dot Hill Systems Corp. reported financial results for the second quarter 2013, ended June 30, 2013.

Non-GAAP Second Quarter 2013 Financial Highlights:

• Total non-GAAP net revenue was $51.2 million compared to $44.9 million for the first quarter of 2013 and $47.7 million for the second quarter of 2012;
• Net revenue from vertical markets grew 55% sequentially and 106% on a year-over-year basis;
• Non-GAAP gross margin was 34.7% compared to 32.1% for the first quarter 2013 and 27.4% for the second quarter 2012, and the highest gross margin in over eight years;
• Operating expenses declined slightly compared to first quarter 2013 and second quarter 2012;
• Company achieved profitability with non-GAAP EPS of $0.06, compared to $0.00 for the first quarter of 2013 and a loss of ($0.03) for the second quarter of 2012.

"I am both pleased and encouraged with our Q2 performance. We grew our topline 14% sequentially and 7% year-over-year, despite a decline in contribution from our largest customer," stated Dana Kammersgard, president and CEO, Dot Hill. "Most importantly, revenues from our vertical markets increased a very impressive 55% sequentially and more than doubled year-over-year. This favorable product mix drove gross margin% to an eight-year high and gross margin improvement of 2.6% sequentially and 7.3% year-over-year."

Second Quarter 2013 GAAP Financial Detail
(including discontinued operations):
The company recognized GAAP net revenue of $50.7 million for the second quarter of 2013, as compared to $47.8 million for the second quarter of 2012 and $44.5 million for the first quarter of 2013. GAAP gross margin for the second quarter of 2013 was 33.5% as compared to 22.9% for the second quarter of 2012 and 32.2% for the first quarter of 2013. GAAP operating expenses for the second quarter of 2013 were $14.9 million, as compared to $15.6 million for the second quarter of 2012 and $15.3 million in the first quarter of 2013. GAAP net income for the second quarter of 2013 was $2.1 million, or $0.04 per fully diluted share, as compared to a net loss of $5.0 million, or ($0.09) per share, for the second quarter of 2012, and a net loss of $1.0 million, or ($0.02) per share, for the first quarter of 2013.

Second Quarter 2013 Non-GAAP Financial Detail:
The company recognized non-GAAP net revenue of $51.2 million for the second quarter of 2013, as compared to $47.7 million for the second quarter of 2012 and $44.9 million for the first quarter of 2013.

Non-GAAP gross margin was 34.7% for the second quarter of 2013, as compared to 27.4% for the second quarter of 2012 and 32.1% for the first quarter of 2013. The increase in gross margin during the second quarter of 2013 relative to the first quarter of 2013 was largely due to a more favorable customer and product sales mix, primarily resulting from a spike in revenues from a specific telecommunications customer. Total non-GAAP operating expenses for the second quarter of 2013 were $14.2 million, as compared to $14.6 million for the second quarter of 2012 and $14.3 million for the first quarter of 2013.

Non-GAAP net income for the second quarter of 2013 was $3.5 million, or $0.06 per fully diluted share, as compared to second quarter 2012 non-GAAP net loss of $1.9 million, or ($0.03) per share, and first quarter 2013 non-GAAP net income of $0.04 million, or $0.00 per fully diluted share. Non-GAAP EBITDA for the second quarter of 2013 was a positive $4.3 million, as compared to negative $0.9 million for the second quarter of 2012 and positive $0.8 million for the first quarter of 2013.

Balance Sheet:
On June 30, 2013, the company had cash and cash equivalents of $40.4 million, and $2.1 million in short-term borrowings or cash and cash equivalents net of short-term borrowings of $38.3 million. This compares to $40.3 million in cash and cash equivalents and $2.8 million in short-term borrowings on March 31, 2013, or cash and cash equivalents net of short-term borrowings of $37.5 million. Net cash was only up $0.8 million despite higher reported operating profits due to capital expenditures and intra-quarter timing of working capital.

Third Quarter and Full Year 2013 Outlook:
The company issued third quarter 2013 guidance of non-GAAP net revenue of $50 million to $55 million and non-GAAP EPS of $0.02 to $0.05. The company also updated its 2013 outlook issued at its Analyst Day on April 8, 2013 and confirmed on May 9, 2013. Based on relatively small downward adjustment to expected server OEM revenues, the company now projects full year 2013 non-GAAP revenue of $200 million to $215 million which compares to prior guidance of $205 million to $227 million. Non-GAAP gross margin for 2013 is now forecasted to be between 32% and 33% compared to 30% to 31% projected at the company’s Analyst Day in April. Non-GAAP operating expenses for 2013 are now expected to be between $58 million and $60 million, as opposed to the previous projection of $60 million to $64 million. Fully diluted non-GAAP EPS for 2013 is expected to be $0.10 to $0.16, compared to the prior outlook of $0.02 to $0.10.

"2013 is shaping up to be a strong year for Dot Hill. We are extremely pleased with the traction in vertical markets," stated Hanif Jamal, CFO, Dot Hill. "On the other hand, we believe that there is greater risk today than just four months ago of achieving our 2013 revenue goal for server OEMs. However, we fully expect to more than offset the potential EPS dilution resulting from our revised internal server OEM revenue projections, as we now expect higher gross margin due largely to vertical markets’ growth and from lower full-year operating expenses. As a result, we have more than doubled the mid-point of our non-GAAP full-year EPS guidance from $0.06 cents in April to $0.13 as of today."

To read the earnings call transcript