Analyst Conference Call Summary

conference date: March 3, 2011 @ 1:30 PM Pacific Time
for quarter ending: December 31, 2010 (fourth quarter 2010)

Forward-looking statements

See also: Dot Hill Jumps on Preliminary Q4 Results [January 10, 2010]

Overview: Earnings improving on reduced revenues.

Basic data (GAAP) :

Revenues were $65.4 million, up 6% sequentially from $61.6 million, and up 4% from $62.6 million in the year-earlier quarter.

Net income was $0.3 million, up sequentially from negative $1.3 million and well up from negative $5.0 million year-earlier.

EPS was $0.01, up sequentially from negative $0.02 and up from negative $0.11 year-earlier.

Guidance:

Q1 2011 revenue between $49 and $53 million due to the planned termination of business with NetApp. Non-GAAP EPS between negative and positive $0.02. Pro-forma (excluding NetApp) the mid-point would represent revenue 23% growth y/y. 23 to 24% non-GAAP gross margin. Cash to end between $42 and $46 million.

Full year 2011 revenue between $207 and $220 million with non-GAAP EPS of $0.01 to $0.08.

Conference Highlights:

Competitive landscape in storage consolidated drastically in 2010. Should provide opportunities in 2011.

NetApp relationship terminated in quarter (November 30th) by Dot Hill due to negative margins. Excluding NetApp revenues would have been $52.9 million, which should be used as a comparison going forward.

Cash balance at the end of the quarter was $45.7 million, up $3.9 million in the quarter. Cash flow from operations was $7.4 million.

GAAP gross margin was 21%, up sequentially from 18.3% and y/y from 14.3%.

Non-GAAP gross margin was 22%. Net income was $2.0 million or $0.04 per share. EBITDA was $2.6 million. Year-earlier non-GAAP net income was negative $2.7 million and EBITDA was negative $2.1 million.

AssuredSAN 3000 series provided first-to-market features to customers in 2010. Added several new OEM customers, including Lenovo, Samsung, and Ericson.

AssuredUVS management software is getting good traction.

AssuredVRA now has over 100,000 licenses and is now acretive.

Hopes to have at least $2 million per quarter in software revenue by the end of 2011.

Branded channel buildout continues. Has about 180 resellers. Expects to have 250 resellers by the end of 2011 with a $3 million per quarter run rate.

"We know we have to replace the revenues from NetApp with higher margin revenues."

HP represented 62% of revenue, NetApp 19%, others 19%.

$1.2 million of revenue was from the channel. $793,000 was from software sales.

Cost of goods sold was $50.3 million, leaving gross profit was $11.3 million. Operating expenses of $12.6 million included $7.4 million for R&D, sales and marketing $2.6 million, general and administrative $2.4 million, and $0.1 million restructuring. Operating loss was $1.3 million.

Q&A:

Other revenue improvement? Tier two OEM wins from last year contributed in Q4, including Ericson and Samsung. None of these new relationships are fully ramped.

Operating expense trend? Will keep a close eye on op ex, but do need to make some investments in marketing and engineering. So expect small, incremental increases in op ex for the rest of the year.

HP relationship? Going well, revenues grew in 2010, and several new products were introduced. They are pleased with our product line and level of support.

Investor concern about HP dominance of revenue? Understands danger of concentration in one customer, as we saw from ending of Sun relationship. Whole point of current transformation is to diversify customer base over time. We walked away from NetApp only because there was no way to improve margins. HP margins have improved. As Lenovo ramps that will help to diversify revenue.

Component shortages? We saw none in Q4.

EMC and Dell going after entry-level market? VMXE is more noise than actual reality in the channel. It does seem to be a competitive entry-level product, but only for iSCSI. The market is mainly in block Fibre Channel SAN. We are pushing up into the midrange space. We have a midrange prototype ready.

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