Analyst Conference Call Summary

conference date: August 6, 2015 @ 8:00 AM Pacific Time
for quarter ending: June 30, 2015 (second quarter, Q2 2015)

Forward-looking statements

Overview: Good y/y revenue & profit growth. Raised 2015 guidance.

Basic data (GAAP) :

Revenues were $61.5 million, up 1% sequentially from $61.1 million, and up 28% from $48.2 million in the year-earlier quarter.

Net income was $0.7 million, down 82% sequentially from $3.9 million, but up from negative $0.1 million in the year-earlier quarter.

EPS (diluted earnings per share) were $0.01, down sequentially from $0.06, but up from $0.00 in the year-earlier quarter.

Guidance:

Q3 Non-GAAP revenue expected between $58 and $63 million. EPS $0.05 to $0.08.

Raised full-year 2015 guidance to revenue of $245 to $260 million and EPS to $0.30 to $0.35 (previously $0.25 to $0.35).

Conference Highlights:

Q2 was the third data point of double-digit revenue growth. Macro and secular headwinds affecting storage market are not abating. Taking market share from competition based on feature advantages. Talking to possible new partners.

Non-GAAP numbers: revenue was $60.6 million, just above flat sequentially from $60.3 million and up 25% from $48.4 million year-earlier. Net income was $3.9 million, down 2% sequentially from $4.0 million and up 200% from $1.3 million year-earlier. EPS was $0.06, flat sequentially from $0.06, and up 200% from $0.02 year-earlier. EBITDA was $5.2 million. Gross margin was 32.0%, down sequentially from 33.8%, and y/y from 33.9%.

GAAP gross margin was 32.7%, down sequentially from 34.4% and down slightly from 33.2% year-earlier.

Margin decline was mainly due to the change in mix between vertical markets and server OEM customers. Non-GAAP gross margin by market: Vertical Markets 41.9%; Server OEM 25.2%

The critical vertical markets segment revenue was $24.8 million down 31% sequentially from $35.9 million and up 19% y/y from $20.8 million. Teleco and big data verticals contributed to y/y increase. Recent product announcements by partners indicate growth is sustainable.

Overall server OEM revenue (including HP) was $35.8 million, up 47% sequentially from $24.3 million, and up 30% y/y from $27.5 million. Strength was from largest customer (HP) and a global launch by another partner.

HP contribution no longer broken out.

Cash and equivalents ended at $49.1 million, up sequentially from $46.3 million. Cash from operations was $1.6 million. $2.9 million debt. Accounts receivable ended at $45.0 million, with inventories down to $9.2 million sequentially from $9.5 million.

Cost of goods sold was $41.4 million, leaving gross profit of $20.1 million. Operating expenses were $19.4 million, consisting of: $10.0 million research and development, $3.4 million sales and marketing, and $6.0 million general and administrative. Leaving operating profit of $0.8 million. Other expense minimal. Income taxes near zero.

Q&A:

What would be the drivers causing hitting the low end of 2015 guidance? I don't see too many scenarios for that. A bad macroeconomy could do it. There is more upside than downside to the range. The HP, Quantum, and TeraData new offerings should drive growth.

Operating margin implied by guidance? Very comfortable with 18% to 25% margin. It depends on mix of customers and timing of our investment to bring on new customers.

$250 million incremental annual opportunity? That is from today. Our customers have announced new products and those should take share from our largest competitor. Our customers' declines in revenue are irrelevant to Dot Hill as long as we gain market share.

HP launch in March of Dot Hill product, how much in Q2 was 1 time? Believes it is all sustainable growth. But keep in mind both vertical markets and server OEM sales are lumpy. Lumpiness does not imply one-time revenue. Orders tend to be large.

New server OEM customer guidance? Would not conclude revenue will go down in Q3 for a given customer based on immediacy of product launch.

Drivers to high end of vertical market guidance range? The company specific catalysts for 2015 guidance are in place. We have other prospective design wins that could have a minor impact on 2015, but mainly they would impact 2016, if they happen.

Verticals, convincing partners to expand their product lines? That is tightly coupled to gaining market share. Typically we get brought in at the entry level, then work up to the high end. There is a lot of moving up the value chain right now within existing partners.

What kind of competitive responses have you seen? The landscape has not changed too much for us. The traditional service companies are focused on the datacenter and the cloud. They are not pursuing the OEM business, which has lower margins. The newer guys like Nimble are sales at any cost, growth at any cost companies, which means they are not targeting our clients much. We are uniquely aligned in a tight collaborative effort with both our OEM and vertical market partners.

Oil and gas sector has fallen off the cliff as far as the price of oil, but they are still spending on big data analytics to get as much as they can out of their current assets.

We make our forecasts based on what we hear from our customers, not their end customers.

Number of >10% customers was 3.

Quantum is a good partner for us in the scale-out business. We transitioned most of our channel sales guys over to Quantum. Op ex reduction comes from that. Quantum should be a growth engine in primary storage as the guys who used to work for us train their larger sales force.

RealTier? It is important and unique. It is exhibiting growth. One customers is talking about hybrid array capability in the entry level tier. It is a disruptive technology and our competitors don't have as full of solutions.

Verticals where you are seeing more interest? Video surveillance right now. Media and Entertainment we have done with Quantum. Big data analytics are interested in lower costs per petabyte that we offer.

Timing for $250 million opportunity? It is coming progressively on a customer by customer basis.

Any particularly weak vertical market in Q2? It was not a result of macroeconomics. Our customers are selling in big chunks to companies like AT&T, Verizon, and Disney. The orders are usually 7 figures, sometimes 8 figures. Hence lumpiness quarter to quarter.

New server OEM is taking the entry level line. There is potential for them to take more. Too early to predict the size of this customer.

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