Releases

posted on 14 March 2008 09:28

CARLSBAD, Calif., March 13 /PRNewswire-FirstCall/ -- Dot Hill Systems Corp. (Nasdaq: HILL - News) today announced financial results for the fourth quarter ended December 31, 2007.

For the fourth quarter of 2007, net revenue was $51.8 million, compared to $59.4 million for the fourth quarter of 2006 and $45.7 million for the third quarter of 2007. The net revenue figures for the fourth quarter of 2007 were above the guidance range of $44 to $48 million that the company provided on November 8, 2007 and were in-line with the revised guidance the company provided on January 7, 2008 and February 8, 2008. The year-over-year decline in net revenue was due primarily to a decline in revenue from the company's largest OEM customer that was partially offset by increased revenues from the company's second largest OEM customer and sales of its Series 2000 products. The sequential quarterly increase in net revenue was largely due to greater than expected revenue contributions from the company's two largest OEM customers.

Net loss was $46.4 million for the fourth quarter of 2007, or $1.01 per fully diluted share (including a non-cash goodwill impairment charge of $40.7 million), compared to $9.1 million for the fourth quarter of 2006, or $0.20 per fully diluted share (including a foreign income tax expense of $0.5 million related to a legal settlement) and $4.1 million for the third quarter of 2007, or $0.09 per fully diluted share. Excluding the goodwill impairment charge, net loss was $5.7 million for the fourth quarter of 2007, or $0.12 per fully diluted share. Excluding the foreign income tax expense related to a legal settlement, net loss was $8.6 million for the fourth quarter of 2006, or $0.19 per fully diluted share, and $4.1 million for the third quarter of 2007, or $0.09 per fully diluted share.

Net revenue for the full year 2007 was $207.1 million, compared to $239.2 million for the full year 2006. The year-over-year decline in net revenue was due primarily to an expected decline in revenue contribution from the company's largest OEM customer that was partially offset by increased revenue from the company's Series 2000 product sales and from sales to its second largest OEM customer.

Net loss was $60.2 million for the full year 2007, or $1.32 per fully diluted share (including a non-cash goodwill impairment charge of $40.7 million), compared to $80.8 million for the full year 2006, or $1.80 per fully diluted share (including $3.4 million associated with a legal settlement, $1.4 million in foreign income tax expenses related to a legal settlement, $47.1 million in a tax valuation allowance, and $1.3 million in one-time compensation and consulting-related expenses associated with the retirement of the company's prior CEO). Excluding the goodwill impairment charge, net loss for the full year 2007 was $19.5 million, or $0.43 per fully diluted share. Excluding the legal settlement, foreign income tax expenses related to a legal settlement, tax valuation allowance and one-time compensation and consulting-related expense associated with the retirement of the company's prior CEO, net loss for the full year 2006 was $27.6 million, or $0.62 per fully diluted share.

Gross margin for the fourth quarter of 2007 was 12.2 percent as compared to fourth quarter 2006 gross margin of 7.9 percent and third quarter 2007 gross margin of 14.3 percent. The improvement in gross margin percentage on a year-over-year basis is attributed to the improved margin structure on the company's Series 2000 products, reduction of manufacturing overhead and variances and continued cost benefits as a result of the company's migration to its offshore manufacturing partner. This was offset by an increase in lower margin product sales to the company's second largest OEM customer. On a sequential basis, as anticipated, gross margin percentage for the fourth quarter of 2007 was lower due to the continued ramp of products that the company is shipping to its second largest OEM customer.

On a full year basis, gross margin for 2007 was 12.8 percent compared to full year 2006 gross margin of 15.3 percent. The decline in gross margin percentage on an annual basis is attributed to the reduction in higher margin revenue from the company's largest OEM customer, compounded by the effect of several new product introductions during the course of 2007.

The company exited the fourth quarter of 2007 with cash and cash equivalents of $82.4 million. This compares to the third quarter 2007 balance of cash, cash equivalents and short-term investments of $90.2 million. The sequential decrease in cash was due primarily to operating losses and the creation of hub inventory for certain of Dot Hill's large OEM customers.

The company is targeting first quarter 2008 net revenue in the range of $48 to $52 million and a net loss per fully diluted share in the range of $0.15 to $0.19 on a non-GAAP basis. These figures exclude the impact of approximately a $2.0 million reduction in revenue associated with the issuance of warrants to HP, as well as share-based compensation expense, foreign currency translation gains or losses and severance and restructuring charges and other one-time items that may occur or are projected to occur. The company has factored into its earnings guidance the potential impact for additional engineering expenses associated with the development and launch of products for HP as well as a potentially lower gross margin percent due to product sales mix and additional manufacturing overhead expenses related to the HP revenue ramp.

Dot Hill will release final results on its fourth quarter 2007 earnings conference call scheduled for March 13, 2008 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 877-407-8035 (U.S.) or 201-689-8035 (International) at least five minutes prior to the start of the call. A replay of the webcast will be available on the Dot Hill web site following the conference call. For a telephone replay, dial 877-660-6853 (U.S.) or 201-612-7415 (International) and enter account number 286, then passcode 259172.

Valuation of Goodwill

On an annual basis, the company reviews goodwill for impairment and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable in accordance with Statement of Financial Accounting Standards, or SFAS, No. 142, Goodwill and Other Intangible Assets. Consequently, for the year ended December 31, 2007 the company performed an impairment test of the goodwill related to its SANnet reporting unit for each quarter through September 30, 2007. Based upon the results of these impairment tests, management concluded that the fair value of the reporting unit exceeded the carrying value, and therefore the second step of the goodwill impairment test was not required for any quarters through September 30, 2007. However, during the fourth quarter of 2007, the market value of Dot Hill's common stock substantially declined. As a result of this decline, management determined that the goodwill related to its SANnet reporting unit was impaired and the second step of the goodwill impairment test was performed to measure the amount of the impairment. As a result, the company recognized a $40.7 million impairment charge to its goodwill related to the SANnet reporting unit.

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, 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 Carlsbad, Calif., Dot Hill has offices and/or representatives in China, Germany, Japan, Netherlands, United Kingdom and the United States. For more information, visit us at http://www.dothill.com.

[Formatted by Majid Soltani, staff writer.]