Dot Hill's Alive & Well

SAN vendor hits a profit via OEM relationship with Sun

January 29, 2004

3 Min Read
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Dot Hill Systems Corp. (Nasdaq: HILL) today announced solid earnings based on its relationship with Sun Microsystems Inc. (Nasdaq: SUNW). (See Dot Hill Posts Profit.)

The news contrasts with Sun's disappointing storage earnings reportearlier this month (see Sun Reduces Q2 Loss), but highlights the opportunity at the low and high ends of the SAN market.

Dot Hill, which makes Fibre Channel SAN systems, announced a profitable fourth quarter that completed a year of turnaround, fueled primarily by its OEM deal with Sun (see Dot Hill: Not Ill Anymore, Dot Hill Becomes Sun Worshipper and Dot Hill Stares at Sun). With Sun accounting for a whopping 84 percent of its fourth-quarter sales, Dot Hill reported income of $6.8 million, or $0.14 per share, after losing $12.4 million, or $0.49 per share, a year ago. It was Dot Hill's third straight profitable quarter after losing in 11 consecutive quarters.

All I can say is, what a difference a year makes,” Dot Hill CEO Jim Lambert said during a call with analysts.

To make the day brighter, Dot Hill said it extended its OEM deal with Sun two more years, through May 2007. Sun has sold Dot Hill’s low-end SAN system as part of a deal signed in May 2002 that gave Sun a minor ownership stake in Dot Hill.Sun business accounted for $48.5 million of Dot Hill’s fourth-quarter revenue, up by $4.6 million over the third quarter. Sun is Dot Hill's largest OEM, Lambert said.

But the company's got its sights set further, too. Lambert laid out Dot Hill’s two major goals for 2004: increase sales through Sun and increase sales through all its other OEMs.

Lambert gave no details of what products might be added to the relationship, but Sun has been testing Dot Hill SATA and UltraSCSI drives. When asked if Dot Hill might provide Sun with midrange SANs, CFO Preston Romm waxed oblique: “We are really focused overall on the volume part of the marketplace. It’s somewhat of an artificial line as to where you divide the entry level and mid-range. We do not have every one of the features that some of our largest competitors like EMC or Hitachi Data Systems have. But I can assure you we have those features on our roadmap.”

Sun appears to be stymied about drawing that midrange line. It reported total storage sales of $376 million when it announced earnings earlier this month. And storage sales grew at a lower rate than overall sales (see Sun Reduces Q2 Loss). But even though storage sales dropped 4 percent sequentially, they increased on the low end, where Sun OEMs Dot Hill gear, and at the high end, where it gets systems from Hitachi.

Other highlights of the Dot Hill call:

  • Sales to OEMs besides Sun increased 28 percent from the third quarter, and the company is focused on adding new, large OEMs;

  • Headcount grew in the fourth quarter, but staffing decreased overall for 2003;

  • Dot Hill shipped 19,954 units of its SANnet II Blade server;

  • Lambert gave guidance for the next quarter of revenue flat with last quarter and slightly higher net income.

— Dave Raffo, Senior Editor, Byte and Switch

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