Analyst Conference Call Summary

conference date: March 14, 2013 @ 8:00 AM Pacific Time
for quarter ending: December 31, 2012 (fourth quarter, Q4 2012)

Forward-looking statements

Overview: Despite new clients unable to gain revenue traction or attain profitability.

Basic data (GAAP) :

Revenues were $44.1 million, down 9% sequentially from $48.2 million and down 6% from $47.0 in the year-earlier quarter.

Net income was negative $5.0 million, down sequentially from negative $3.0 million but up from negative $6.6 million year-earlier.

EPS (earnings per share) were negative $0.09, down sequentially from negative $0.05 but up from negative $0.12 year-earlier.

Guidance:

Q1 revenue between $43 and $46 million, with a non-GAAP EPS loss between $0.02 and $0.04.

Conference Highlights:

Dot Hill has won a total of 11 "new opportunities that are in various stages of contract negotiations, customization, and/or launch preparation." Most of these are 4000 series customers. Plans the launch of the next generation entry-level data storage products this summer. End market customers ended the year on a cautious note.

Non-GAAP numbers: revenue was $46.2 million; gross margin 28.3%, up from 25.4% year-earlier. Net income was negative $2.0 million, down sequentially from negative $1.7 million and from negative $0.1 million year-earlier. EPS was negative $0.03, flat sequentially and down compared to $0.00 year-earlier. $2.1 million in GAAP revenue was deferred in the quarter.

Non-GAAP EBITDA negative $1.0 million.

GAAP gross margin was 17.8%, up from 17.6% year-earlier.

Server OEM business revenue was . HP relationship remains strong. HP represented 64.7% of revenue.

Vertical Markets revenue grew 38% in 2012 over 2011. Media entertainment and telecommunications markets did well. Believes strategy to address vertical markets is working. Oil and gas, digital archiving are other addressable markets.

Excluding HP, OEM revenue was up 12% y/y. But overall OEM revenue was down y/y. Total HILL revenue was flat in 2012 vs. 2011.

Cash and equivalents ended at $40.3 million, down sequentially from $40.5 million and down from 45.2 million year-earlier. Borrowed $2.8 million on working capital line. Cash flow from operations positive $0.7 million.

Cost of goods sold was $36.3 million, leaving gross profit of $7.9 million. Operating expenses were $12.6 million, consisting of: $6.0 million research and development, $3.7 million sales and marketing, $2.8 million general and administrative, and $0.1 million restructuring. Leaving an operating loss of $4.7 million. Yet income taxes were $0.03 million.

Most of the new deals are competitor displacements, and so should grow revenues into 2014. The deal pipeline has matured. One large potential Big Data customer is in the customization stage, with launch as the next phase.

Q&A:

Cash management in 2013? Operating expenses should be flat to slightly up. Cash burn will be modest.

Cash bottom? Bottom associated with revenue inflection point later this year.

New revenue timing? Will discuss on analyst day. We expect it to begin to pick up in 2013, with just a little in Q2. Depends on end-customer acceptance of products and how much older OEM product has to be flushed out. 2013 revenue will come mainly from already-announced customers: Autodesk, Lenovo, Harris. The others in the pipeline will be ramping revenue more in 2014.

Largest customers (HP) were down for the year in 2012, and appeared to lose share to server OEM peers. But HP 2013 has potential to be stronger than 2012.

Rest of our business, excluding HP, is showing signs of growth for Q1. We did have a strong 2012 due to some large Tektronix orders; we don't expect a repeat of that, but Tektronix should be strong overall in 2013.

Ingenio displacements make up several unannounced names in our pipeline.

Gross margins to improve with new products? We would expect that, but depends on specific customer mix.

Vertical markets so small the large percentage increase can be wiped out by small HP drops. When can we make sustained earnings? But over 5 years we replaced $200 million a year of Sun Micro revenue with $200 million of other revenue, including HP. We don't expect a decline in HP revenue in 2013. We will soon see top line growth that is quite accretive. Our break even point is now less than $50 million per quarter.

Patent portfolio? We have looked at selling some IP, but it is more valuable to us as part of our portfolio. It makes no sense to file for infringement against potential customers. The IP helps us add OEM customers to the pipeline.

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