Analyst Conference Summary

conference date: November 5, 2009 @ 1:30 PM Pacific Time
for quarter ending: September 30, 2009 (third quarter 2009)

Forward-looking statements

Overview: Best quarter in my memory, essentially breaking even on strong sequential revenue growth.

Basic data (GAAP) :

Revenues were $63.6 million , up 17% sequentially from $54.3 million, but down 17% from $76.6 million in the year-earlier quarter.

Net income was negative $1.1 million, a sequential improvement from negative $4.2 million, and also improving on a loss of $3.7 million year-earlier.

EPS was $0.02, improving sequentially from negative $0.09, and also an improvement from negative $0.08 year-earlier.

Guidance:

Q4 2009 revenues expected between $62 and $67 million, with non-GAAP EPS of negative $0.07 to negative $0.01. Expects price reductions to some customers and increased operating expense for sales and R&D. Cash and equivalents balance ending between $55 million and $60 million.

Conference Highlights:

Quite pleased by results in quarter. Revenue increased sequentially on sales to its current largest customer (HP) offset by a decrease in revenues from Sun.

Gross margin was 18.3%, up sequentially from 14.7%. Non-GAAP gross margin was 18.4%. Higher operating expenses were more than offset by increased revenue.

Non-GAAP net income was negative $0.1 million, or $0.00 per share; break-even for practical purposes.

EBITDA was positive $0.4 million, up sequentially from a loss of $2.3 million and also up from negative $1.8 million year-earlier.

Cash and equivalents ended at $59.2 million, up $2.1 million in the quarter. $3.3 million cash flow from operations.

Cost of goods sold was $52.0 million, leaving gross profit of $11.6 million. Operating expense of $12.9 million included $2.8 million for sales and marketing, $7.2 million R&D, $2.3 million for general and administrative expense, and a $0.5 million restructuring charge. leaving an operating loss of $1.2 million. Other income was near zero, as was income tax.

Revenues from Sun were $0.5 million, as those products are nearing end of life. These were higher-margin products, so the decrease hurt margins.

$1.5 million of revenue had been previously deferred until a contract was completed. This was high-margin business.

HP accounted for 59% of revenue, NetApp for 19%, Sun for 1%.

Dot Hill has started hiring software engineers and sales people. Expects R&D expense to continue to increase slightly.

Demand appears to be returning, particularly in the entry-level storage sector. We are chasing supplies of components, which could constrain our ability to deliver products. This is not just Dot Hill, it is industry-wide. We have new OEM design wins, but they may take quarters to ramp into production. New 2.5" drive arrays are doing well. RAIDCore software is beginning to flow out.

Will increase investment in channel sales programs and on creating new software, which has higher margins than hardware.

Q&A:

NetApp appears to have declined sequentially? Would not read too much into the decline. Their fiscal calendar is not in line with ours. Also, we have a new product they have introduced.

Component shortages details? We source hard disks from all three major suppliers. We don't do much Fibre Channel any more. Recovery of demand took hold while factories were still down sizing. This should be temporary, maybe two quarters to get demand and supply back in line. Prices are not going up, but they are not cutting costs the way they usually do, except maybe in NAND and memory chips.

Less than normal Q1? Can't see any reason for less than normal Q1 seasonality, but the recession makes predictions more difficult than usual.

We are pretty confident that we will get at least one more major vendor in the near future.

We are seeing early signs of success with our new channel sales program. It may not be material in Q4, but it could be material within a year.

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