Analyst Conference Call Summary

conference date: August 8, 2012 @ 8:00 AM Pacific Time
for quarter ending: June 30, 2012 (second quarter, Q2 2012)

Forward-looking statements

Overview: Missed already low guidance range for revenue. Made the usual promises that new products will improve results in 2013. Has signed new OEMs.

Basic data (GAAP) :

Revenues were $47.8 million, down 13% sequentially from $54.7 million and down 10% from $53.2 million year-earlier.

Net income was negative $5.0 million, down sequentially from negative $1.8 million, and also down from negative $1.9 million year-earlier.

EPS was negative $0.09, down sequentially from negative $0.03, and down from negative $0.04 year-earlier.

Guidance:

Q3 revenue between $48 and $53 million, non-GAAP EPS from negative $0.04 to positive $0.01. Non-GAAP operating expenses will go up sequentially to invest in new products. Expects cash to go lower.

Full 2012 revenue $205 to $215 million with non-GAAP EPS negative $0.02 to positive $0.04. More conservative mainly due to macro economic situation.

Will discuss 2013 guidance in December.

Conference Highlights:

Experienced purchasing caution and uncertainty in the quarter. Had accelerated a meaningful amount of revenue into Q2 from Q1 for a particular company. Worried about macro economic environment and its impact on customers in the second half.

Believes midrange products and new OEM customers will cause growth in 2013 with non-GAAP profitability. Experiencing growth with Tier 2 OEMs, up 16% y/y. Doing well in telco and media entertainment markets. Channel revenues up 32% y/y. Largest customer [HP] revenue up slightly sequentially but down y/y. Working hard to diversify customer base.

Non-GAAP numbers: gross margin 27.4%, down sequentially but up from 26.1% year-earlier. Net income negative $1.9 million, down from $1.6 million year-earlier. EPS negative $0.03, down from positive $0.03 year-earlier. EBITDA negative $0.9 million.

Dot Hill will launch two new midrange storage system products on August 22. Operating expenses were up in Q2 to prepare for these launches. Will introduce a Band 4 and Band 5 product to supplement current Band 2 and Band 3 current products. Will be best in class in performance, price performance, and ease of use. Harris Broadcast Communications announced its version of the product yesterday.

"We now have signed contracts with a number of new OEMs." These wins should decrease dependence on the largest customer. Each OEM makes specifications for customization, which results in upfront costs. New launches typically stake several months to several quarters.

Revenue from largest customer down to 72% in Q2, down from 78% year-earlier.

Cash and equivalents balance end of quarter was $40.5 million, down sequentially from $41.4 million.

Decided to shut down AssuredUVS business and no longer trying to sell it.

Is having some discussions about the licensing of its patents.

Cost of goods sold was $36.8 million, leaving gross profit of $11.0 million. Operating expenses were $15.6 million, consisting of: $9.7 million for research and development; $3.4 million for sales and marketing; $2.5 million for general and administration; and $73 thousand restructuring. Operating income was negative $4.7 million. Income tax expense was $0.4 million.

Q&A:

Visibility in mid-range business for Q3 and Q4? We are not breaking out midrange vs. lower end guidance. We do believe customers will launch mid range products in 2012. Q4 tends to be seasonally stronger. We do anticipate revenue from midrange in Q4.

Disk drive shortage effects? Q1 was extremely difficult for availability. Q2 was normal availability, but prices were higher than pre-flood. Q3 expected prices to be back to normal.

When we sell hard drives with our products that can lower margins. HP is a driveless customer, so it has higher margins than OEMs that take drives with the product.

We are seeing competitive pricing ever from the big guys like Dell and IBM in Europe.

Some uses of cash will be the settlement for power supply issues, buildout in Israel, and inventory build for new customers.

May was pretty soft, and the first half of June was soft. In back half of June there was some pickup, and in July as well. We continue to see softness in Europe. Channel performance in the U.S. was quite strong, with four consecutive quarters of growth.

Color on new OEM wins? We don't pre-announce customers before they launch their products. We have a way to go with a number of these before they are ready to launch their products. We will have at least 3 midrange launch partners, and there will be more to go.

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