Dot Hill (HILL) is up today after reporting considerably better than expected Q1 revenues. Despite that, with expected revenues of over $200 million in 2012, its market capitalization is around $74 million. Is Dot Hill an overlooked prize, or is the market right about its value?
Dot hill manufactures data storage arrays for the low-end of the enterprise market, selling to OEMs that typically rebrand the devices. A few years ago Sun was their main customer, but Sun dropped them, leading to a crisis. HP is now their main customer. Management has been building an impressive list of other customers, reducing reliance on HP.
Revenues were $54.7 million, up 16% sequentially from $47.0 million and up 11% from $49.2 million in the year-earlier quarter. Usually Q1 sees a seasonal revenue drop from Q4, so these are impressive numbers. Part of the revenue, I am guessing in the range of about $4 to $5 million, came from orders from a particular customer that provides storage solutions to the telecom market. Management mentioned this could happen when they gave Q1 guidance in March, but they clearly hedged a bit.
The year over year comparison was the first good one turned in since NetApp was dropped as a client in 2010. I believe the prior negative year/year comparisons had been depressing the stock price, despite the compelling reasons for ditching NetApp.
GAAP net income was negative $1.8 million, up sequentially from negative $6.6 million, but worse than the negative $1.3 million of the year-earlier quarter. EPS was negative $0.03, up sequentially from negative $0.12, but down a penny from negative $0.02 year-earlier.
Even if we look at non-GAAP numbers, which drop out non-cash accounting charges, while HILL got into the black it was just barely: net income was $1.9 million. EPS was $0.03.
Guidance is that Q2 will be off Q1, with revenues between $48 and $52 million and non-GAAP EPS close enough to zero that it could be a plus or minus.
That is the past, what about the future? Technology companies can't dwell in the past, as RIMM, among so many others, have demonstrated. During the crisis (losing Sun during the recession) management started making smart moves about the future of the storage market. They are competing against giants, but they sometimes cooperate with giants like HP. Their storage products have actually received quite a bit of acclaim in the industry.
Some of the Q1 revenue growth came from new clients signed in 2011. Hill was able to win these customers because they produce very reliable storage technology at a reasonable cost and work hard for their clients. Autodesk and Concurrent Computer were cited as OEMs signed in 2011 that are seeing sales ramps. Official announcements of newer customers should be coming out as 2012 progresses.
Dot Hill has mainly served the entry-level enterprise storage market. Part of their success has been from adding higher level features to entry-level designs. New storage arrays that have mid-level enterprise features should be released in the second half of the year. OEMs are already excited about them, but a significant revenue ramp of the new products is probably a q4 and 2013 story.
On the whole Dot Hill management was upbeat, particularly about the second half of 2012. With the ramping of lines at newer OEM customers, Dot Hill should be able to enter an era of sustained profitability. Given that the company is debt free and holds $41 million in cash, there is a lot of upside potential if management can execute according to plan. In terms of share prices, I would be delighted, but not overly surprised, to see shares in the $3 to $5 range by mid 2013. I am also surprised, given their patent portfolio, that Dot Hill has not been a takeover target. Of course the usual risks apply, but I think all the risk is priced in at current levels.
Disclaimer: I am long Dot Hill. I won't make HILL trades for 1 week after publishing this article. I do not have positions in any of the other companies mentioned.
See also: www.dothill.com
My Q1 2012 Dot Hill analyst call notes