Dot Hill: Not Ill Anymore

Storage vendor finally gets into the black, beating Q2 expectations on strength of Sun OEM deal

July 24, 2003

3 Min Read
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Dot Hill Systems Corp. (AMEX: HIL) has finally managed to get into the black, reporting net income of $2.5 million, or 7 cents per share, on sales of $48.4 million for the second quarter of 2003. The results end the company's 11 straight quarters of losses (see Dot Hill Quadruples Q2 Sales and Dot Hill Sees Another Year of Red Ink).

Dot Hill's sales for the period were four times the $11.2 million of the year-ago quarter, and up 59 percent over the $30.5 million it reported for the first quarter of 2003. The turnaround at the midrange storage systems provider is attributable entirely to its OEM deal with Sun Microsystems Inc. (Nasdaq: SUNW), which accounted for 85 percent of its quarterly sales (see Dot Hill Becomes Sun Worshipper and Dot Hill Stares at Sun).

James Lambert, Dot Hill's president and CEO, acknowledged that storage sales through Sun were up in the quarter partly because it was the fourth quarter of Sun's fiscal year.

"In the fourth quarter, everything ships out the door," he said on a conference call with investors yesterday. Sun, which reported its quarterly results on July 22, said storage sales were up 15 percent sequentially (but down 16 percent year-over-year).

For the current quarter, Lambert noted that, while Sun's sales are typically "flat or down" in its fiscal first quarter compared with its fourth, "anecdotal evidence is that their storage business is doing very well." He added that Dot Hill is in negotiations with several systems integrators and OEMs to diversify its revenue stream beyond Sun.Indeed, what's helping Dot Hill is that the entire storage sector has been on the upswing. Others posting upbeat results for the second quarter include EMC Corp. (NYSE: EMC), QLogic Corp. (Nasdaq: QLGC), Storage Technology Corp. (StorageTek) (NYSE: STK), and Veritas Software Corp. (Nasdaq: VRTS) (see Veritas Vrooms, StorageTek Keeps on Growth Curve, QLogic Gets High on FC, and EMC Sinks Despite Hiking Profits).

The much brighter outlook for Dot Hill has pushed its stock price up in the past six months, from hovering around $4 in January to $15.95 in morning trading today. "Although HIL has had a big move, we believe the stock can continue to appreciate modestly as HIL's fundamentals continue to improve and it gains credibility and exposure with investors," writes Needham & Co. analyst Glenn Hanus, who maintains a Buy rating on the stock.

In light of its relatively strong quarterly results, Dot Hill raised its guidance for the full year 2003, projecting revenue of $180 million and net income of $0.25 per share, compared with its previous guidance of $171.5 million in revenue and net income of $0.21 per share.

Gross margins remain well below industry average, at 20.7 percent for the quarter. But that's a vast improvement over Dot Hill's previous margins, which were 18.1 percent for the first quarter of 2003 and 2.4 percent for the second quarter of 2002.

Dot Hill says margins have improved because it is now outsourcing nearly all its manufacturing to Solectron Corp. (NYSE: SLR), reducing its manufacturing expenses. The company said it has closed its manufacturing facility in Carlsbad, Calif., but at the same time has hired an additional 19 engineers.Separately, Dot Hill announced yesterday that it will be listed on the Nasdaq as of Monday, July 28, under the symbol "HILL," moving from the American Stock Exchange (see Dot Hill OK'd for Nasdaq). "We believe Nasdaq is a better fit for Dot Hill, given Nasdaq's focus on technology companies," says Lambert.

The company also said it has signed a two-year agreement with "a major storage vendor" it wouldn't name to license its SANpath software, which provides load-balancing across heterogeneous SAN storage systems.

Todd Spangler, US Editor, Byte and Switch

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