Analyst Conference Call Summary

conference date: May 9, 2013 @ 8:00 AM Pacific Time
for quarter ending: March 31, 2013 (first quarter, Q1 2013)

Forward-looking statements

Overview: Slight sequential revenue increase in a normally seasonally down quarter. Strong guidance.

Basic data (GAAP) :

Revenues were $44.5 million, up 1% sequentially from $44.1 million but down 19% from $54.6 million in the year-earlier quarter.

Net income was negative $1.0 million, up sequentially from negative $5.0 million and also up from negative $1.9 million year-earlier.

EPS (earnings per share) were negative $0.02, up sequentially from negative $0.09 and also up from negative $0.03 year-earlier.

Guidance:

Second quarter revenue range $47 to $53 million with a non-GAAP EPS range from negative $0.01 to positive $0.02.

Full year revenue $205 to $227 million with non-GAAP EPS of $0.02 to $0.10 per share.

Conference Highlights:

"Based on our existing customer sales funnel, we are expecting solid revenue and earnings growth in the second half of 2013 with the potential for even higher revenue growth and non-GAAP EPS accretion in 2014." Revenues were at high end of prior guidance.

Non-GAAP numbers: revenue was $44.9 million, down sequentially from $46.2 million, and down 18% y/y. Net income was $0.04 million, up sequentially from negative $2.0 million. EPS was $0.00, up sequentially from negative $0.03. Gross margin 32.1%, up sequentially from 29.3% and the highest in 5 years. $0.8 million EBITDA.

Y/y revenue drop was due to a large purchase by a single telecom customer in Q1 2012.

Vertical Markets revenue was $13.3 million, up 20% sequentially. Doing especially well in Media and Entertainment and in Telecommunications markets with midrange 4000 or 5000 series products. Q2 revenue expected to show continuing traction. Vertical Markets segment is the growth and margin opportunity for Dot Hill.

Launch of entry level 3000 series is on schedule to launch this summer.

New OEM pipeline remains strong. Quantum and Acer are now launching products.

HP revenue was down 9% sequentially. Now 61% of total revenue.

Server OEMs now drives volume and economy of scale.

Cash and equivalents ended at $40.3 million, flat sequentially from $40.3 million. Short term notes payable of $2.8 million, also flat sequentially.

Cost of goods sold was $30.0 million, leaving gross profit of $14.4 million. Operating expenses were $15.0 million, consisting of: $8.7 million research and development, $3.1 million sales and marketing, and $3.1 million general and administrative. Leaving an operating loss of $0.5 million. Other expense near zero. Income taxes near zero.

Q&A:

Pipeline above $20 million deal? We don't count Phase 1 potential deals in guidance; we have not verbal award yet, but at the moment it is moving forward very fast. It is a telco Big Data mix. We are seeing a counter-trend back in the direction of modular block-based storage at moderate pricing with high performance. The other big deal is in Big Data and moving from Phase 3 customization to ramp and launch, but has been moving more slowly.

Guidance includes the installed base and Phase 2, 3, and 4 opportunities.

Gross margin guidance retreat? The revenue from larger customers take disk drives with the systems, which tends to reduce margins. There were also some one-time benefits in Q1.

Entry level product launch? We have a regular product cycle. We have to work with new CPUs and protocol inflection points. Fibre Channel and SAS are doubling in speed. If we are not first to market we will be very early to market with our OEM customers. There is still a market for scale-out iSCSI. We are likely to grow our vertical markets with this product as well.

Cash use priorities? Given we have guidance for operating profit, that should push cash up. But launching new products may require us to hold inventory, and it is hard to predict the level we will need, which reduces cash. We don't really need $40 million cash to run the business, but it helps us with customers and suppliers. Priority for cash and cash flow is to expand the business. We are not looking at mergers and acquisitions, buybacks, or dividends at this point. Focus is on execution and growth.

How many people are on this call? About 40.

If I do the math and it is linear, I get $65 million in Q4. Can we project that slope further? No comment on $65, but reasonable assumptions. We are projecting accelerated growth into 2014, to about $263 million annual revenue. But deals could fall through, creating a down side. On the other hand nothing in Phase 1 or pre-Phase 1 is projected yet.

We expect the server OEM business to remain relatively flat for the year.

We are not involved in hybrid-drives per se. We do hybrid arrays that include both HDD and SSD. We have an advantage in being able to move data between these within 5 seconds, in real time, where our competitor does it just once a day. This is a big advantage in cloud data systems. It is also an advantage in film production and telco message services.

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