Analyst Conference Call Summary

conference date: March 5, 2015 @ 8:00 AM Pacific Time
for quarter ending: December 31, 2014 (fourth quarter, Q4 2014)

Forward-looking statements

My prediction: Dot Hill Q1 Guidance will be Crucial [Seeking Alpha, February 5, 2015]

Overview: Great quarter, forward guidance pretty good.

Basic data (GAAP) :

Revenues were $68.2 million, up 31% sequentially from $52.1 million, and up 14% from $59.7 million in the year-earlier quarter.

Net income was $8.5 million, up sequentially from $0.0 million, and up 286% from $2.2 million in the year-earlier quarter.

EPS (diluted earnings per share) were $0.13, up sequentially from $0.00, and up 225% from $0.04 in the year-earlier quarter.

Guidance:

Q1 2015 non-GAAP net revenue expected between $55 and $59 million, with EPS between $0.04 and $0.07.

Full year 2015 non-GAAP revenue expected between $230 million and $270 million, with EPS between $0.25 to $0.35.

Conference Highlights:

2014 ended on a strong note, with Dot Hill exceeding guidance on all metrics. It was the best revenue quarter in years. Believes gained share in the data storage market in 2014. Added new customers and breakthrough solutions for existing customers. Were able to get sufficient supplies to meet demand, despite warning that might not happen.

The newest products are highly competitive. Has set a new baseline for growth in 2015. Plans for additional customers, wins, and product launches in 2015. Shipped about 850 Ultra 48s and 200 Ultra 56s.

Non-GAAP numbers: revenue was $68.2 million, up 31% sequentially from $52.0 million and 14% from $59.7 million year-earlier. Net income was $8.5 million, up 400% sequentially from $1.7 million and up 102% from $4.2 million year-earlier. EPS was $0.13, up 333% sequentially from $0.03, and 86% from $0.07 year-earlier. EBITDA was $9.7 million. Gross margin was 34.6%, sequentially from 32.4%, and y/y from 31.7%, higher on better mix and more revenue with stable overhead. Stock based compensation was the main contributor to differences between GAAP and non-GAAP.

The critical vertical markets segment revenue was $38.5 million up 88% sequentially from $20.5 million and up 104% y/y from $18.9 million . New customer revenue ramp continues.

Overall server OEM revenue (including HP) was $29.7 million, down 6% sequentially from $31.5 million, and down 27% y/y from $40.8 million. Server OEM market was down in 2014, but seeing some signs of an upward trend.

HP contributed about $26.6 million, 39% of total non-GAAP revenue, down 7% sequentially from $28.6 million. Was down 25% from $35.6 million year-earlier. Began shipping RealStore 2.0 hybrid storage arrays in the quarter. These are at entry-level price points. Y/Y comparison was difficult. HP is included in server OEM numbers.

Cash and equivalents ended at $42.5 million, up slightly sequentially from $42.4 million. Cash from operations was $2.1 million. $2.0 million debt. Accounts receivable ended at $43.3 million, with inventories up to $11.3 million sequentially from $7.0 million.

Cost of goods sold was $44.8 million, leaving gross profit of $24.3 million. Operating expenses were $15.7 million, consisting of: $9.3 million research and development, $3.8 million sales and marketing, and $2.5 million general and administrative. Leaving operating profit of $8.6 million. Other expense minimal. Income taxes $0.1 million.

Because of lumpiness of markets within quarters, believe best to look at trailing 12 month figures.

Q&A:

Op ex and gross margin within guidance? Not providing guidance on those. May update at analyst day. We expect 32% to 33% gross margin, as of the last time we stated that.

Vertical guidance? Tied to ramps of multiple customers and incremental ramps and customers. It depends on their customer acceptance rates.

Server OEM guidance at midrange is flat y/y. We could make material market share gains at our largest customer. We could see new server OEMs picking us up. Could be a macro IT resurgence.

We believe we continue to take market share from our largest competitor. We think there is still $200 to $220 million a year of revenue still available that we might take from them.

Vertical market, normal seasonal pattern? We predicted 2014 would be more back-end loaded than usual. We launched major new products through new and existing customers in Q4. Vertical can be quite lumpy because of large size of end customer orders. So 2014 is not an absolute guide for seasonal trends. Does not think 2015 will be as back-end loaded as 2014, but still 2nd half stronger than 1st.

Market share gains? Competitive environment has not changed much, maybe mildly in favor of HILL. We have multiple ways of taking share with new customers, winning the new sockets, moving up the value line within existing customers. We are actively working to identify new verticals and within our successful verticals.

Server OEM has declined every year for years, why do you think you can be flat in 2015? Macro market growth is not likely, legacy players are not seeing much of what growth there is. But our legacy customers are showing a bit better projections. We are providing our customers with good differentiation at the entry level.

All we expect from the server OEM is a stable base; growth will be driven by vertical markets.

We had multiple partners launch the Ultra 56, we are selling it into the enterprise as well as telecom space.

Inventory and sell through? Our inventory went up about $5 million sequential, typical for supporting new product launches. We have reasonable visibility on sell-through of inventory. We expect inventory to not go down to prior levels.

We feel good about our 2015 guidance, but it includes many assumptions. Most guidance is based on current clients and products; growth is based on Q4 results.

Tax rate? We have close to $200 million of NOLs, so it will be a long time before we pay regular tax rates.

Hybrid array storage market? We just launched RealStore 2.0 in November, so it is too early to tell. We believe the growth rate is about 30% per year. We feel we have a differentiated product being rolled out by our largest customer. That customer adds their own media arrays to the equipment we sell them.

10% customers? There were 2 over 10% customers in 2014 and in Q4 of 2014. Will be in the 10-K filed next week.

Can RealStore 2.0 be extended to older storage bases? If they are Dot Hill based arrays. Not EMC or NetApp installed base. Our differentiation is taking off nicely, but we don't support a heterogeneous environment with other venders.

We don't want to set expectations above the guidance range we gave.

Grantley refresh effects? CPU refreshes tend to come in waves starting with Server boxes and ending with storage growth. We are starting to see some of that occur, for instance with HP servers. We are happy to be working with Lenovo.

[WPM: compared to the past, analyst interest was high, with more on the call and more questions asked]

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