Dot Hill Continues Comeback

Dot Hill (nasdaq: HILL) is a botique designer and manufacturer of data storage equipment, most of which is resold by OEMs like HP, Lenovo, and Samsung. For background on the Dot Hill story see my Dot Hill Summary page, and for the latest results, see my Dot Hill Q2 2011 analyst conference call summary.

Dot Hill had a slightly better than expected Q2, with $53.2 million, up 12% versus comparable Q2 2010 revenues excluding NetApp. Dropping the NetApp relationship has proven to be a good idea, as new customers and improved margins have more than compensated. Non-GAAP net income was $0.4 million (EPS $0.01) compared to at EPS loss of $0.06 in Q2 2010.

Dot Hill's products are getting traction because they offer mid and high range enterprise storage features at relatively low prices. Margins are improving partly more Dot Hill storage management software is being sold along with the hardware.

Dot Hill has struggled to get on a solid footing, but now that it has done that, their are several interesting possibilities ahead. If any or all work out, revenues and profits should ramp materially. The data storage industry has been consolidating. One of Dot Hill's rivals was recently bought by NetApp, which means some OEM's now are being sourced by a competitor. Dot Hill has been in talks with multiple OEMs about switching. However, this is not news, as the situation was the same three months ago. There is no guarantee that Dot Hill will pick up one or more clients from this transition. However, if it does, that would go a long way to building new revenues and profits.

Dot Hill has a large number of patents related to storage technologies and has hired an outside contractor to investige monetizing them.

Finally, the storage management software is still a new opportunity. Feedback for customers should allow for enhancements and better bundling of with hardware. Software revenues have far higher margins than hardware revenues, so that could be quite a shot in the arm to profits.

Downside risks include the usual competition, unusual events, failure to execute, and overspending.

Dot Hill is certainly worth keeping an eye on if you are intested in the booming storage space [disclaimer: I own Dot Hill stock].

See also dothill.com

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