Analyst Conference Call Summary

conference date: August 7, 2014 @ 8:00 AM Pacific Time
for quarter ending: June 30, 2014 (second quarter, Q2 2014)

Forward-looking statements

Overview: Flat quarter, disappointing given number of new customers acquired over the last year.. Guided to an improved Q3.

Basic data (GAAP) :

Revenues were $48.2 million, flat sequentially from $48.2 million, and down 5% from $50.7 million in the year-earlier quarter.

Net income was negative $0.1 million , up sequentially from negative $0.4 million, but down from $2.1 million in the year-earlier quarter.

EPS (earnings per share) were $0.00, up sequentially from negative $0.01, but down from $0.04 in the year-earlier quarter.

Guidance:

Non-GAAP EPS $0.01 to $0.06. Precise timing of customers' new product introductions will affect revenue and EPS. Revenue of $50 to $58 million.

Conference Highlights:

Macro environment remained somewhat subdued, but Dot Hill is seeing improved bookings in July. Believes a server and storage refresh is coming, and HP is ramping up its sales. There were sales late in Q2 that did not ship before the end of the quarter.

Still believes 2014 will be more back-end loaded than normal for Dot Hill. 3 months closer to certain transformative events. 4 large customers or prospects will do major launches in the second half, with some revenue payoff in Q4. Will not pre-announce before our customers. "We have more than a dozen additional server and vertical market prospects in our pipeline that we are working to close."

Believes Dot Hill is well set up for 2015.

Our products are substantially faster than competing products at similar price points. We deliver first to market advantages with quality for vertical OEMs. Dot Hill has been working on these new products over the year.

Non-GAAP numbers: revenue was $48.4 million, down 1% sequentially from $48.9 million and down 4% from $51.2 million year-earlier. Net income was $1.3 million, up 30% sequentially from $1.0 million but down from $3.5 million year-earlier. EPS was $0.02, flat sequentially from $0.02, but down from $0.06 year-earlier. EBITDA was $2.3 million. Gross margin was 33.9%, sequentially from 31.1%, and up y/y from 34.7%. Stock based compenations was the main contributor to differnces between GAAP and non-GAAP.

HP contributed $23.8 million, 49% of total revenue, up 1.5% sequentially from $23.5 million, but down 7% y/y. Believes HP is well-positioned to capture market share in 2014. Refreshed offerings; believes still has upside. But slower Q2 due to inventory issue.

The critical vertical markets segment revenue was $20.8 million down 7% sequentially from $22.4 million and down 2% sequentially from $21.3 million . One customer (typically HILL's second largest) has a sharp drop-off in revenue, but this company has a history of lumpiness due to the nature of it customer. The customer generated $1.8 million in the quarter vs. $7.4 million in Q1.

Overall server OEM revenue (including HP) was $27.7 million, up 4% sequentially from $26.5 million, and down 8% y/y from $30.0 million.

Cash and equivalents ended at $40.4 million, sequentially from $40.3 million. Cash from operations was $1.7 million. $2.0 million debt. Accounts receivable ended up at $42.9 million, with inventories down to $6.5 million.

Cost of goods sold was $32.2 million, leaving gross profit of $16.0 million. Operating expenses were $16.0 million, consisting of: $9.3 million research and development, $3.3 million sales and marketing, and $2.9 million general and administrative. Leaving operating profit of $0.0 million. Other expense minimal. Income taxes near zero.

Q&A:

Q3 guidance midpoint implies $69 million for Q4? Yes.

The major 4 customers, is any new? We gave as much color as we are willing to at this point. There are a number of other incremental prospects. One customer is adding a Dot Hill product into its midrange offerings.

Largest customer (HP) relationship? Our relationship is great. We are 3 months closer to whatever IBM transaction happens. HP has begun to aggressively market to capture customers. But we think their hub inventory levels have fully normalized after the Q2 drawdown. We suspect they will be more predictable going forward.

Believes some people were doing last-time IBM server buys in Q2. HP and Dell are working aggressively to take advantage, but believes Lenovo will become a major competitor in that space.

Details on lower guidance range? Server OEM revenue was light in 1H. We expect Server OEM growth in 2H, including HP. Our vertical markets are strong. There can be puts or takes, plusses or minuses to our guidance depending on customer new product launches. The underperformance with respect to the guidance should be behind us, in the Server OEM business in particular.

Believes trailing 12 month figures are the best way to look at Dot Hill. The vertical market growth on this basis is more the reality than the particulars of Q2, for reasons discussed above.

We are not cutting investments given we are on the cusp of major product launches. We are also ramping our sales force to gain market share.

Vertical market competition? Video surveillance is an example: nothing has changed. We have an opportunity to gain share in unstructured database verticals.

Vertical as a % of revenue longer term? Nothing specific, but 14% to 18% revenue growth with 40% to 50% growth in vertical markets.

32% to 33% range is our goal. One to two quarters due not make a trend because of lumpiness from larger deals at customers.

Tax rate? We have $200 million in NOLs (net operating loss carry forwards). We due pay other taxes, but federal taxes should be negligible for a while.

Large deal environment? OEM design wins (like 4 near term product launches) are taking share from our largest competitor. These tend to be tied to technology transitions, like Intel CPU changes, or high network capacity. Other deals are one-time deals that our customers are competing with their competitors. We have an unusually large number of those surfacing, more than is typical.

We have one of the best hybrid arrays out there: SSD for fastest data, HDD for main storage. Our tiering capabilities are the best out there, and one or more of the deals involve that capability.

Some of our prospective customers are taking from Engenio [WM: now part of NetApp], our largest direct competitor. Some of the new introductions are wins from them.

We are not likely to ever sell to Google or Amazon, but we may be selling to service providers who are beginning to provide cloud services.

Cash use? We like to keep a substantial amount of cash to instill confidence in our customers about long term supply and support. We get better terms from customers because of our cash. We do review possible stock buy-backs on a regular basis. We also may need cash to build inventory for new customers. When we see free cash flow accelerate we may

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