Analyst Conference Summary

conference date: March 4, 2010 @ 1:30 PM Pacific Time
for quarter ending: December 31, 2009 (fourth quarter 2009)

Forward-looking statements

Overview: Stalled revenues at a level that is not profitable. No good news for Q1 2010 either.

Basic data (GAAP) :

Revenues were $62.6, down 2% sequentially from $63.6 million, and down 14% from $72.4 million in the year-earlier quarter.

Net income was negative $5.0 million, a sequential drop from negative $1.1 million, but improved from negative $8.6 million year-earlier.

EPS was negative $0.11, down sequentially from negative $0.02, but up from negative $0.19 per share year-earlier.

Guidance:

Q1 2010 revenue range of $60 to $65 million, with non-GAAP EPS negative $0.05 to $0.10. Gross margins should improve sequentially. Cash will end between $50 and $52 million due to Cloverleaf related expenses and net loss.

Conference Highlights:

"In the face of a very tough economic environment, we feel these results were positive."

During 2009 operating expense was reduced from $53 million 2008 rate to $46.8 million.

"We have executed very well for our large Tier-1 customers and in launching new and very competitive products." Attractive margins can be reached by adding software-based solutions and developing sales channels.

Year-to-year revenue decline mainly attributed to reduced sales to Sun. The $1.0 million sequential revenue decrease resulted from "a few non-recurring revenue transactions," which were getting customers to assume ownership of some hub inventory and recognizing deferred revenue from a government customer.

Due to component shortages about $2 million dollars of product that could have shipped in the quarter instead shipped in Q1.

HP accounted for 52% of revenue and NetApp accounted for 32% of revenue. Sun revenue was just 1%.

GAAP gross margin was 14.3%, down sequentially from 18.3% due to price reductions, less of deferred revenue recognition in quarter, and increased NetApp low margin orders. Also operating expenses increased sequentially. Non-GAAP gross margin was 14.5%.

Non-GAAP net loss was $3.0 million or $0.06 per share. EBITDA was negative $2.1 million.

Cash and equivalents ended at $57.6 million, down sequentially from $59.2 million. Cash flow from operations negative $1.1 million.

In Q1 2010 operating expenses are expected up due to Cloverleaf acquisition, channel program investments and software R&D increases.

Cost of goods sold was $53.6 million, leaving gross profit of $9.0 million. Operating expenses of $14.0 million included: sales and marketing $3.1 million; research and development $6.8 million; general and administrative $2.6 million; and a restructuring charge of $1.5 million. Leading to an operating loss of $5.0 million. Other income negligible, as was income tax.

Move from California to Colorado should be completed by June this year.

2010 business model is leveraging customers, products and supply chains to sell software and professional services. This should provide operating leverage. Hill also has the opportunity to get major new OEM customers, which involves early expenses. But gross margins for software could be in 70% to 90% range without signifant cost increases. In 2010 core storage business can be EBITDA break even in $240 to $270 million range. Software business revenues just beginning to ramp in 2010, might break even in 2010 and be profitable in 2011.

Dot Hill hit its product cost reduction targets in 2010, despite parts shortages toward the end of the year.

There is strong interest in new products from both existing and potential OEMs. Dot Hill is first to market with a number of new technologies.

Q&A:

What components were in short supply? Disk drives at certain capacity points, particularly for some of our older products.

Break even for entire business? No guidance beyond coming quarter. Investments could be dilutive to earnings in 2010. We hope the investments would become accretive in 2011.

Channel program progress? We are very pleased. We have over 50 open storage providers in U.S. and Europe. We are beginning to see orders and revenue. Series 3000 is particularly getting interest.

RAIDCore revenue outlook? We expect all software product revenue to be low this year. With RAIDCore we are creating an installed base; first shipped in Q4 2009. With installed base we would have a launching pad for upgrades, which would not occur until 2011. RAIDCore is being shipped in certain servers of one Tier 1 OEM.

Cloverleaf revenues in 2010? We are positive about the reception we have received so far. It is opening new doors with prospective OEMs. Evaluations are ongoing; technology has been validated in diverse storage environments. It is performing exactly as expected.

Are there many potential OEMs in the revenue range you have indicated? There are about 20 globally.

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