Dot Hill Reports First Quarter 2010 Results

LONGMONT, Colo., May 6 /PRNewswire-FirstCall/ -- Dot Hill Systems Corp. (Nasdaq: HILL) today announced financial results for the first quarter ended March 31, 2010.

Financial and Operational Highlights:

• Completed acquisition of Cloverleaf Communications, Inc. in January 2010
• Successfully released and began volume shipments of Dot Hill's next generation Series 3000 products
• Increased revenue by 11 percent to $60.0 million compared to $53.9 million in first quarter 2009
• Awarded a 2010 Everything Channel Partner Program Guide's prestigious Five-Star Partner rating

"Our transformation to embrace more software products and channel-oriented routes to market and thereby deliver higher value-add and higher-margin business continues to progress," commented Dana Kammersgard, the company's President and Chief Executive Officer. "While conversations with prospects for our next-generation storage products are progressing well, and the development of our Cloverleaf products is on schedule, we will not be satisfied until our financial results reflect material contribution from these initiatives. In order to accelerate our pace towards profitability, we are in the process of evaluating a company-wide expense reduction and resource reallocation plan that we believe will enable us to invest in our software technology and channel program, while simultaneously reducing our overall cost structure, and therefore our break-even point."

First Quarter 2010 Financial Detail:

The Company recognized net revenue of $60.0 million for the first quarter of 2010, as compared to $53.9 million for the first quarter of 2009 and $62.6 million for the fourth quarter of 2009. The increase in year-over-year revenue was due to increases in revenue from our largest customer, partially offset by declines in legacy revenue from Sun Microsystems. On a sequential basis, revenue declined by $2.6 million, which was largely a result of late quarter bookings being deferred into the second quarter and a sequential decline in revenue from our second largest customer.

Gross margin for the first quarter of 2010 was 13.5 percent, compared to 17.2 percent for the first quarter of 2009 and 14.3 percent for the fourth quarter of 2009. Operating expenses for the first quarter of 2010 were $14.5 million, as compared to $12.6 million for the first quarter of 2009 and $14.0 million for the fourth quarter of 2009.

Net loss for the first quarter of 2010 was $6.4 million, or $0.12 per share, as compared to a net loss of $3.3 million, or $0.07 per share, for the first quarter of 2009, and $5.0 million, or $0.11 per share, for the fourth quarter of 2009.

Non-GAAP gross margin was 14.6 percent for the first quarter of 2010, as compared to 17.4 percent for the first quarter of 2009 and 14.5 percent for the fourth quarter of 2009. The decline in year-over-year non-GAAP gross margin was largely due to a decline in our legacy Sun business. Total non-GAAP operating expenses for the first quarter of 2010 were $13.5 million, as compared to $11.4 million for the first quarter of 2009 and $11.8 million for the fourth quarter of 2009. The increase in non-GAAP operating expenses was largely attributable to the Cloverleaf Communications, Inc. acquisition and investments in other software development and the Company's channel sales organization.

Non-GAAP net loss for the first quarter of 2010 was 4.8 million, or $0.09 per share, as compared to a first quarter 2009 non-GAAP net loss of $2.0 million, or $0.04 per share, and a fourth quarter 2009 non-GAAP net loss of $2.7 million, or $0.06 per share. Non-GAAP EBITDA for the first quarter of 2010 was negative $4.3 million, as compared to negative $1.6 million for the first quarter of 2009 and negative $2.1 million for the fourth quarter of 2009.

Balance Sheet and Cash Flows:

The Company exited the first quarter of 2010 with cash and cash equivalents of $51.3 million, as compared to $57.6 million at the end of 2009. The decrease in the Company's cash and cash equivalents was primarily attributable to cash used for the Cloverleaf acquisition. The Company also used $4.7 million in cash flows from operations during the quarter ended March 31, 2010, which included approximately $1.5 million of Cloverleaf liabilities that the Company assumed in the acquisition that are reflected in operating cash flows.

Hanif Jamal, the Company's Senior Vice President and Chief Financial officer commented, "We remain optimistic about our strategy, and believe that we'll be successful in improving our financial results and reaching non-GAAP EBITDA break-even by the end of this year. Some actions we are currently reviewing include a thorough financial analysis of select product lines, consolidation of our contract manufacturers, and reduction of certain operating expenses, including manufacturing overhead, in the second half of 2010. We would expect Q2 revenues and non-GAAP loss per share to be in the same ball park as our Q1 results and that cash could potentially drop into the $40-45 million range as a result of projected operating losses, restructuring costs and working capital requirements. We intend to host a follow up conference call in mid June to discuss the decisions we have made and their impact on the second half of 2010.  We will also provide more specific Q2 guidance at that time."

Conference Call Information:

Dot Hill's first quarter 2010 financial results conference call is scheduled to take place on May 6, 2010 at 4:30 p.m. ET. Please join us for a live audio webcast at www.dothill.com in the Investor Relations section. If you prefer to join via telephone, please dial 877-303-3196 (U.S.) or 408-427-3864 (International) at least five minutes prior to the start of the call. A replay of the webcast is scheduled to be available on the Dot Hill web site following the conference call. For a telephone replay, dial 800-642-1687 (U.S.) or 706-645-9291 (International) and enter conference ID# 71853345.

About Non-GAAP Financial Measures

This press release contains financial results that exclude the effects of stock-based compensation expense, severance costs, restructuring costs, intangible asset amortization, transaction expenses associated with our acquisition of Cloverleaf, a contingent consideration adjustment and foreign currency gains or losses, and are not in accordance with U.S. generally accepted accounting principles (GAAP). The Company believes that these non-GAAP financial measures provide meaningful supplemental information to both management and investors that is indicative of the Company's core operating results and facilitates comparison of operating results across reporting periods. The Company uses these non-GAAP measures when evaluating its financial results as well as for internal resource management, planning and forecasting purposes. These non-GAAP measures should not be viewed in isolation from or as a substitute for the Company's financial results in accordance with GAAP. A reconciliation of GAAP to non-GAAP measures is attached to this press release.

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About Dot Hill

Delivering innovative technology and global support, Dot Hill empowers the OEM community to bring unique storage solutions to market, quickly, easily and cost-effectively. Offering high performance and industry-leading uptime, Dot Hill's RAID technology is the foundation for best-in-class storage solutions offering enterprise-class security, availability and data protection. The Company's products are in use today by the world's leading service and equipment providers, common carriers and advanced technology and telecommunications companies, as well as government agencies. Dot Hill solutions are certified to meet rigorous industry standards and military specifications, as well as RoHS and WEEE international environmental standards. Headquartered in Longmont, Colorado, Dot Hill has offices and/or representatives in China, Germany, Japan, United Kingdom, Singapore, Israel and the United States. For more information, visit us at http://www.dothill.com.

Statements contained in this press release regarding matters that are not historical facts are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act. Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Such statements include statements regarding Dot Hill's projected financial results for the second quarter of 2010, prospects for Dot Hill's next-generation products, expense reduction and resource allocation plans and their effect on the Company's projected future financial results. The risks that contribute to the uncertain nature of the forward-looking statements include, among other things: the risk that actual financial results for the second quarter of 2010 may be different from the financial guidance provided in this press release; the risk that Dot Hill's next-generation products may not achieve market acceptance; the Company's expense reduction and resource allocation plans may not have the anticipated positive effects on the Company's financial results; the risks associated with macroeconomic factors that are outside of Dot Hill's control; the fact that no Dot Hill customer agreements provide for mandatory minimum purchase requirements; the risk that one or more of Dot Hill's OEM or other customers may cancel or reduce orders, not order as forecasted or terminate their agreements with Dot Hill; the risk that Dot Hill's new products may not prove to be popular; the risk that one or more of Dot Hill's suppliers or subcontractors may fail to perform or may terminate their agreements with Dot Hill; unforeseen technological, intellectual property, personnel or engineering issues; and the additional risks set forth in the form 10-K most recently filed with the Securities and Exchange Commission by Dot Hill. All forward-looking statements contained in this press release speak only as of the date on which they were made. Dot Hill undertakes no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they were made.

SOURCE Dot Hill Systems Corp.