I have been following Dot Hill since the spring of 2006. See my Dot Hill analyst summary page for everything I have written on this data storage company in the past. I have mainly accumulated, occasionally sold HILL over that period, most recently buying a chunk at August 12, 2010 at $1.05 per share. At the moment I am writing it is $1.52 per share. Yesterday it topped out at $1.65 per share.
The sudden interest (other than from those who track popping stock prices and don't care much about the underlying reasons) was the bidding war between HP and Dell for 3Par, a data storage company. HP won, if paying $2.4 billion for a company with revenues just breaking the $200 million a year level, can be considered winning. Presumably HP and Dell thought that 3Par technology is worth a lot more when integrated into their large selling machines.
By comparison Dot Hill had 2009 sales of $234 million, and most recently reported $65.5 million for its second quarter of 2010 ending June 30, 2010, an annual run rate of about $260 million. See my Dot Hill Q2 2010 analyst call summary for details on the quarter.
But there are a lot of different approaches to the storage sector, ranging from hard drive manufacturers to pure software plays. Dot Hill has mainly been the supplier to OEMs of low to mid-range enterprise-level disk storage solutions (for network attached storage (NAS) and storage area networks (SANs)). A few years ago most of Hill's business came from Sun, but they are no longer a client. The big client: HP. Next on the list: NetApp, but apparently the NetApp contract is being terminated by Hill because its profit margins did not work out.
In order to not be so subject to one or two big clients Hill has been working hard for a couple of years now to pick up many smaller OEMs. In numbers of new clients this is working out, but in the last quarter HP still accounted for 58% of revenues.
The big change, and the one that might add 3Par like value to Dot Hill, is their increased focus on software solutions that go along with their hardware. In fact, their new software solutions can work on almost any hardware platform. If anything drives profits, or makes Hill a desirable acquisition target, it is the software, which is already available from Xiotech and should become generally available from other clients in 2011. I should note that the software builds on Hill's expertise, which in turn in reflected in their large number of patents for data storage techniques.
I am not counting on Hill being acquired. I am counting on sales of storage software and hardware (less the known NetApp termination) ramping, with profit margins being higher than in the past couple of years. With a market capitalization this moment of only $84 million, and revenues as I have stated, no debt, and cash balances (end of June) at $42 million, I see Hill as a stock with tremendous upside. On the other hand, data storage is a very competitive field, and there is no guarantee that Dot Hill's software will gain the kind of traction it needs to be a major contributor to profits. It has not had a profitable quarter in quite a while.