Dot Hill's stock price shot up today on a series of announcements about partners and future guidance, as well as holding its annual analyst day. The last 5 years have been rocky for HILL despite gradual acquisitions of new customers since in lost Sun. In 2012 Dot Hill was developing products that it said would attract new customers [See Dot Hill's 2013 Hopes]. Today was delivery day.
New guidance was given for Q1 2013, Q2 2013, full year-2013, and (tentatively) 2014.
A recap of Q4 2012 provides perspective: revenues were $44.1 million, down 6% from year earlier. Non-GAAP earnings per share (EPS) were negative $0.03, down from $0.00 year-earlier. Not a great quarter.
Prior guidance for Q1 2013 was revenue between $43 and $46 million, with a non-GAAP EPS loss between $0.02 and $0.04.
Today's guidance for Q1 (which should be pretty close, given that the quarter is over) is revenue of $44 to $45 million, narrowing but not increasing the range, with EPS as low as negative $0.02 and as high as $0.00.
$0.00 non-GAAP EPS may not seem like much to get excited about, but that includes research and development costs for new products as well as startup manufacturing costs in costs-of-goods sold. With higher revenue and flat or lower R & D costs going forward, we get to the prettier picture for the future:
Q2 2013 guidance is for revenues between $47 and $53 million, up about 12% sequentially. Non-GAAP EPS estimated range is negative $0.01 to $0.02 per share.
For the full year 2013 revenues are estimated between $205 and $227 million. Non-GAAP EPS should be positive $0.02 to $0.10. That would be great if it happens.
For the full year 2014 revenue estimates are between $231 and $301 million and non-GAAP EPS could be $0.11 to $0.40.
While such long-term predictions should be taken with a healthy spoonful of the salt of cynicism, consider the value of HILL stock if it hit the $0.40 per share top of guidance in 2014. That would likely more than restore investor confidence, so let's give a PE ratio of 15. That would bring the stock to $6 per share. As I write it is trading at $1.53. There are a lot of hoops to jump between $1.53 and $6.00, but there are some reasons to not entirely discount the top range of estimates.
The world of data storage has been evolving rapidly. HILL does not sell disk drives. It sells storage systems for small, medium, and increasingly enterprise businesses. It used to make storage systems for Sun Microsystems until Sun brought a competitor in house. It then picked up HP and NetApp as OEM clients, plus some smaller players and system integrators. Dot Hill dumped NetApp because the margins in the deal was bad, and that made its revenues slump. But all the while it used its substantial cash to develop better systems. Now we are seeing the payoff.
The big announcement today is that Quantum is selling systems, its new QX family, supplied by Dot Hill. A rep from Quantum, at today's Hill analyst conference, reviewed how Quantum has been addressing the rapidly evolving data storage market and how Hill's new products fit into the picture. The amount of data stored in the world is climbing rapidly, largely to accommodate video, full time data feeds, and the mining of big data. Verticals with particular needs to expand their disk drive farms rapidly include entertainment, government, life sciences, and resource extraction (geology). In entertainment many company are rapidly expanding their incoming video feeds, and need all that video instantly for editing and pushing out to consumers. Clients need cheap, reliable storage, and that is what Dot Hill has been developing and is now shipping.
HP, which has provided the bulk of HILL revenues these last few years, has committed to continue using Hill as a supplier of their lower-end, mass market products, the MSA line, the market share leader in its class. While no specifics were mentioned, HP indicated a product refresh is on the horizon. HP has noted Dot Hill systems value, reliability, and interoperability (ability to work with most hardware and software).
The new data storage workloads that are driving the adoption of Hills (patented) technologies are described as a randomized sequential workload. In other words, a lot of data has to be quickly available, and it is hard to predict which data will be needed. However, in a VMWare environment, the new Dot Hill systems were shown to be rock solid reliable and capable of learning about the data demands so as to increase spread over time. With SSD still expensive and tape still much cheaper (using less electricity) than disk drives, the ability to load balance between various media has become a necessity, and Dot Hill does that well.
Also notable is that Dot Hill has greatly increased its addressable market by moving to the higher-end of the data storage market. It is also bringing high-end capabilities to the midrange and even lower range business markets, which makes all of its offering attractive at their price points.
It is an exciting time to be an owner of Dot Hill, but the usual cautions apply: data storage is highly competitive, margins could be better, and the global economy is always an issue.
So keep diversified! And congratulations if you already own HILL stock.
Disclaimer: I own HILL stock. I won't trade HILL stock for at least 3 days from the first publication of this article.
See also:
My Dot Hill main page.
My Q4 2012 Dot Hill conference notes
and of course www.dothill.com
Showing posts with label HP. Show all posts
Showing posts with label HP. Show all posts
Monday, April 8, 2013
Thursday, March 15, 2012
Dot Hill Expects New OEM Customers in 2012
Dot Hill (HILL) is up today after reporting a poor fourth quarter 2012 yesterday. Q4 results were in line with revised guidance given in February. Today's stock price upside came from new customer sign-ups that management hopes will provide both higher revenues and better margins in 2012.
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. While they are happy with the HP relationship, which was extended for five years last year, management has been building an impressive list of other customers, reducing reliance on HP.
Revenue in Q4 was $47.0 million, down 2% sequentially from $48.1 million and down 28% from $65.4 million year-earlier. Part of the y/y decline resulted from the purposeful ditching of NetApp as a client because NetApp would not allow Dot Hill workable margins.
HP represented 67.5% of revenue in Q4. In Q1 2011, after NetApp dropped out, HP accounted for 76% of revenue. Partly there was a drop in revenue from HP, but mainly their share shrank because Hill's sales to smaller, Tier 2 OEMs grew 40% y/y.
Q4 revenue was also hurt by the Thailand flooding and resulting shortage of disk drives. Hill did not raise its prices in Q4, but did raise prices in February largely because of the higher prices of disks due to the shortage. They estimated they could have generated another $4 million in revenue in Q4 if not for the disk shortages. Q1 also has seen supply shortages, but drives are generally available except for the highest-capacity, newest technology drives. The disk supply issue should be over by Q3.
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 the year progresses.
Finally, 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 2013 story.
Earnings were disappointing. GAAP net income was negative $6.6 million, non-GAAP net income was negative $1.6 million, but some of the charges were non-cash. Cash flow from operations was positive by $1.1 million.
On the whole Dot Hill management was upbeat, particularly about the second half of 2012. The hope would be that with no disasters, a reasonably healthy global economy, and the ramping of lines at newer OEM customers, Dot Hill will be able to enter an era of sustained profitability. Given that the company is debt free and holds $46 million in cash, and that its market capitalization today is just $82.6 million, Dot Hill is highly speculative, but has a lot of upside potential if management can execute according to plan.
Disclaimer: I am long Dot Hill, and sometimes actively trade in the stock. 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.
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. While they are happy with the HP relationship, which was extended for five years last year, management has been building an impressive list of other customers, reducing reliance on HP.
Revenue in Q4 was $47.0 million, down 2% sequentially from $48.1 million and down 28% from $65.4 million year-earlier. Part of the y/y decline resulted from the purposeful ditching of NetApp as a client because NetApp would not allow Dot Hill workable margins.
HP represented 67.5% of revenue in Q4. In Q1 2011, after NetApp dropped out, HP accounted for 76% of revenue. Partly there was a drop in revenue from HP, but mainly their share shrank because Hill's sales to smaller, Tier 2 OEMs grew 40% y/y.
Q4 revenue was also hurt by the Thailand flooding and resulting shortage of disk drives. Hill did not raise its prices in Q4, but did raise prices in February largely because of the higher prices of disks due to the shortage. They estimated they could have generated another $4 million in revenue in Q4 if not for the disk shortages. Q1 also has seen supply shortages, but drives are generally available except for the highest-capacity, newest technology drives. The disk supply issue should be over by Q3.
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 the year progresses.
Finally, 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 2013 story.
Earnings were disappointing. GAAP net income was negative $6.6 million, non-GAAP net income was negative $1.6 million, but some of the charges were non-cash. Cash flow from operations was positive by $1.1 million.
On the whole Dot Hill management was upbeat, particularly about the second half of 2012. The hope would be that with no disasters, a reasonably healthy global economy, and the ramping of lines at newer OEM customers, Dot Hill will be able to enter an era of sustained profitability. Given that the company is debt free and holds $46 million in cash, and that its market capitalization today is just $82.6 million, Dot Hill is highly speculative, but has a lot of upside potential if management can execute according to plan.
Disclaimer: I am long Dot Hill, and sometimes actively trade in the stock. 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.
Tuesday, September 6, 2011
HP, Dead or Just Resting?
HP, as the Hewlett Packard Company likes to be known, (NYSE: HPQ), is on its last legs, if you judge it by its stock price. It is selling for less than six times earnings. It has become a symbol of technological failure lately, mainly because of the failure of its tablet computer offering and its lack of presence in the smartphone market. Also, it announced it wanted to sell or spin off its personal computer (PC) business, but apparently no one with that kind of bucks wants to buy the division.
But suppose the pundits and investors arranging for a funeral are reading the symptoms wrong. In that case it possible this is a buying opportunity for those who get an accurate view of the situation. After all, a PE under 6 means trailing earnings are about 17% of the stock price. That strikes me, on the surface, as a much better deal than 2% annual returns on risky long term loans to the United States government.
The most solid evidence that things are not so bad are actual GAAP results from fiscal Q3 2011, as reported on August 18, 2011. True, revenue was up only 1% y/y, and while GAAP net earnings were $1.9 billion, up 9% y/y, non-GAAP net earnings were $2.3 billion, down 11.4% y/y.
A company with $1.9 billion in GAAP earnings in a quarter is not on death's doorstep. So the low stock price must be based on opinions about something more fundamental than mere profits: technology trends.
I have been around long enough to see a lot of companies go out of business, especially in the PC space. I know it can happen. Margins are brutal when differentiation from competitors is difficult. That is why IBM turned over its PC business to Lenovo. On the other hand, Lenovo has done quite well since then, so maybe IBM's strategy was not so brilliant.
The main theory is that tablets and smartphones are going to eat PCs, just like PCs ate up minicomputers back in the 1980s. To buy that argument you have to include servers in the PC category, because what PCs ate up was dumb terminals. Servers, based on technology similar to PCs, are what actually killed minicomputers.
Digging deep into history, recall that PDAs were going to replace PCs. Instead MP3 players replaced PDAs, because more people wanted to listen to music than wanted to carry around a tiny crippled business tool. HP was a leader in PDAs, and a failure in MP3 players, yet it did not die from the experience.
HP has several segments; the future does not look the same for each segment. The printer segment does not seem to be disappearing. The business hardware segment, excluding PCs, includes servers, enterprise-level storage, and other datacenter components like switches, routers, and the software needed to enable and manage racks of equipment. Because people are increasingly relying on mobile information, these datacenters, aka the cloud, continue to expand. Competition with IBM, Dell, Cisco, Oracle and many other companies is fierce, but so far HP has competed rather well. Services for enterprise computing are also a major source of revenue and profit.
So if the consumer PC division is seen as a weakness, the worst case scenario should be that it gets spun off. Stockholders get the enterprise and printer gravy in one tray and the consumer business in another.
If HP is making a mistake, it is not seeing the further possibilities of the PC business (with PC broadly defined). Every few years since the PC was born it has been declared to have all the computational power it needs. I have made that mistake myself. These days the new AMD A-series chips can run a pretty good game without the need for a discrete graphics card. They can put HD video on a big screen. The end of innovation must be near, except for smartphones. And tablets.
If you think PC innovation is coming to an end, you have not talked to the visionaries at Microsoft, or AMD, or even at Intel. Amazing things are just beginning to be computationally possible. A good example is the Kinect device for Xbox 360 games. There is no reason similar technology can't be attached to PCs running 60 inch displays. In fact, hackers are doing that already, with Microsoft even offering a software development kit (SDK) to help.
Yes, you will be able to wave your hand in the air, talk a bit, and do everything from altering an accounting spreadsheet to running a tractor to manipulating DNA from the comfort of your chair.
You are going to want the latest smartphone when you are on the road. But in your den or office, you are going to want a PC with a big screen, input devices more intuitive than touchscreens, and a hairy advanced processing unit to make it all work in real time.
If Leo Apotheker is too dull to see the potential of HP's PC division, it is still going to be profitable for the foreseeable future, even if it is just a commodity manufacturer of innovation spun elsewhere. A spin off suits me fine. Wish I would run it, wish I could own it. In addition I would get shares of the enterprise segment, a gold mine in itself.
Wait, I can own a piece of it. That is the great thing about stocks, you don't have to buy the whole company all at once.
Disclaimer: As I write this I own no HPQ, but it is on my wish list to buy. I do own AMD stock. I do occasional subcontracted work for Microsoft. I also own stock an HP competitor, SGI, that specializes in technical computing.
But suppose the pundits and investors arranging for a funeral are reading the symptoms wrong. In that case it possible this is a buying opportunity for those who get an accurate view of the situation. After all, a PE under 6 means trailing earnings are about 17% of the stock price. That strikes me, on the surface, as a much better deal than 2% annual returns on risky long term loans to the United States government.
The most solid evidence that things are not so bad are actual GAAP results from fiscal Q3 2011, as reported on August 18, 2011. True, revenue was up only 1% y/y, and while GAAP net earnings were $1.9 billion, up 9% y/y, non-GAAP net earnings were $2.3 billion, down 11.4% y/y.
A company with $1.9 billion in GAAP earnings in a quarter is not on death's doorstep. So the low stock price must be based on opinions about something more fundamental than mere profits: technology trends.
I have been around long enough to see a lot of companies go out of business, especially in the PC space. I know it can happen. Margins are brutal when differentiation from competitors is difficult. That is why IBM turned over its PC business to Lenovo. On the other hand, Lenovo has done quite well since then, so maybe IBM's strategy was not so brilliant.
The main theory is that tablets and smartphones are going to eat PCs, just like PCs ate up minicomputers back in the 1980s. To buy that argument you have to include servers in the PC category, because what PCs ate up was dumb terminals. Servers, based on technology similar to PCs, are what actually killed minicomputers.
Digging deep into history, recall that PDAs were going to replace PCs. Instead MP3 players replaced PDAs, because more people wanted to listen to music than wanted to carry around a tiny crippled business tool. HP was a leader in PDAs, and a failure in MP3 players, yet it did not die from the experience.
HP has several segments; the future does not look the same for each segment. The printer segment does not seem to be disappearing. The business hardware segment, excluding PCs, includes servers, enterprise-level storage, and other datacenter components like switches, routers, and the software needed to enable and manage racks of equipment. Because people are increasingly relying on mobile information, these datacenters, aka the cloud, continue to expand. Competition with IBM, Dell, Cisco, Oracle and many other companies is fierce, but so far HP has competed rather well. Services for enterprise computing are also a major source of revenue and profit.
So if the consumer PC division is seen as a weakness, the worst case scenario should be that it gets spun off. Stockholders get the enterprise and printer gravy in one tray and the consumer business in another.
If HP is making a mistake, it is not seeing the further possibilities of the PC business (with PC broadly defined). Every few years since the PC was born it has been declared to have all the computational power it needs. I have made that mistake myself. These days the new AMD A-series chips can run a pretty good game without the need for a discrete graphics card. They can put HD video on a big screen. The end of innovation must be near, except for smartphones. And tablets.
If you think PC innovation is coming to an end, you have not talked to the visionaries at Microsoft, or AMD, or even at Intel. Amazing things are just beginning to be computationally possible. A good example is the Kinect device for Xbox 360 games. There is no reason similar technology can't be attached to PCs running 60 inch displays. In fact, hackers are doing that already, with Microsoft even offering a software development kit (SDK) to help.
Yes, you will be able to wave your hand in the air, talk a bit, and do everything from altering an accounting spreadsheet to running a tractor to manipulating DNA from the comfort of your chair.
You are going to want the latest smartphone when you are on the road. But in your den or office, you are going to want a PC with a big screen, input devices more intuitive than touchscreens, and a hairy advanced processing unit to make it all work in real time.
If Leo Apotheker is too dull to see the potential of HP's PC division, it is still going to be profitable for the foreseeable future, even if it is just a commodity manufacturer of innovation spun elsewhere. A spin off suits me fine. Wish I would run it, wish I could own it. In addition I would get shares of the enterprise segment, a gold mine in itself.
Wait, I can own a piece of it. That is the great thing about stocks, you don't have to buy the whole company all at once.
Disclaimer: As I write this I own no HPQ, but it is on my wish list to buy. I do own AMD stock. I do occasional subcontracted work for Microsoft. I also own stock an HP competitor, SGI, that specializes in technical computing.
Tuesday, August 9, 2011
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
Keep Diversified!
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
Keep Diversified!
Friday, June 3, 2011
AMD Fusion Upside
AMD (Advanced Micro Devices) recently revealed that it has been unable to meet the demand for its first Fusion processors. They call these APUs, for Advanced Processing Units, to indicate that each chip includes both a CPU and a GPU (graphics processing unit). Introduced in late 2010, the first APU variety was designed to bring low cost, high quality graphic capabilities to inexpensive notebook computers. Computer makers (HP, Lenovo, Sony, etc.) embraced these first Fusion chips as a big improvement on the Atom chip from Intel, famous for underwhelming netbooks (sub-standard but very portable notebooks).
Does that mean the sun is finally rising on AMD investors (that includes me)? Intel remains not only holding most market share, but dominating the most profitable segments of the market, including chips for server computers. On the other hand Intel has its own problems, pressed from below by ARM architecture based chips in smartphones and tablets, while failing to be able to deliver the graphic quality consumers now expect. To make a workable business or consumer computer manufacturers need to add an AMD Radeon or NVIDIA GPU to the system.
Intel itself is not exactly the darling of Wall Street anymore. Today Intel is trading at 10 times last year's non-GAAP earnings per share. No tech bubble there. AMD is trading at 8.5 times last year's EPS. Intel is wading in cash; AMD has a substantial amount of debt. If you wanted to buy a computer processor manufacturing company, Intel would be the more obvious choice.
To break out of its trading range AMD, at the very least, would have to start generating substantially more earnings than it has lately. What are the chances of that, when the sector itself appears to be in trouble, and Intel has a tradition of crushing AMD whenever Intel's market share starts to slip?
It really does come down to Fusion. Intel is scared of Fusion, so it is using considerable resources to catch up in graphics technology. Intel is now paying NVIDIA to use its intellectual property, which probably includes graphics designs. That should start to show up in Intel chips in 2012. My guesstimate is that by 2013 Intel will have closed the graphics gap. So AMD's future profits, and the value of its stock, highly depends on how much market share it can pick up in 2011 and 2012, and at what kind of profit margins.
It came as a surprise to me, and probably to everyone, that AMD became supply-constrained in Q1. I think the problem is that the first Fusion chips were on the 40 nm process, which is where most graphics chips are at this year. Both NVIDIA and AMD reported supply constraints at 40 nm in early 2010. AMD failed to anticipate demand for its new chips, and so did not book enough capacity in advance. AMD now contracts for fabrication of its chips, whereas Intel has its own fabs. On the April 21 AMD analyst call for Q1 2011, AMD executives talked about insuring future fabrication capacity, so that must be about the Fusion shortfall.
Right now AMD is about to launch its second round of Fusion processors, which will be more powerful, but also will require more power. So they will be for higher-end notebooks and for desktop CPUs. The will be on the more-advanced 33 nm process. That may have its own issues, but it won't run into the 40 nm roadblock. Later this year AMD will also introduce its Bulldozer CPUs, which are not part of Fusion (they don't have graphics processing on the die).
The upside for AMD investors depends on continued support from manufacturers (HP, Dell, Lenovo, etc.) and from retailers like Best Buy. The near-universal sentiment now is that consumers get more for their money with AMD based computer systems, particularly when it comes to graphics capabilities. Thus AMD should pick up market share this year in the sub-$1000 categories of notebook and desktop computers.
One commonly told story is that consumers are moving to tablets, so sales of PCs and notebook computers are about to come to a grinding halt. The actual evidence for that is scant. In the U.S., prior to the introduction of tablet computers (they've been around for nearly a decade, but did not become popular until Apple marketed a more attractive, if less powerful, version), everyone pretty much had at least one computer, either a desktop or a notebook, maybe a netbook. Most moderate to heavy users had a PC at work and a desktop and either a notebook or netbook for personal use. As the new thing, tablets are going to sell, and with budgets tight, they are going to cause purchases of notebooks and desktops to be delayed. But most tablet computer users have found they are not really a replacement for their more powerful cousins. So, the question becomes: what do they upgrade next? Are they going to get an even newer tablet, or are they going to refresh the old desktop or notebook computer?
You know what the gadget guys will have. A good, reliable, high-performance desktop, a good notebook computer for working away from home, a tablet to be cool and consume video, and a smartphone.
AMD is not going to compete in the smartphone space, but their Fusion chips are beginning to appear in Windows-based tablets. Their stand-alone graphics chips are now used by Apple for its desktop computers.
Also, this is a global market. The same low-cost high-graphics capability that appeals to U.S. consumers will appeal even more to first-time PC buyers in India, China, Brazil, and developing countries.
A recovery of market share in the server GPU market would also benefit AMD, but I'll leave that topic to a later story.
Any reasonable investor not already holding AMD should probably take a show-me the market share and EPS gains attitude. On the other hand, there is a good chance that 2011 will be a year when those of us who already hold AMD will see the upside of Fusion. Maybe as early as the report on Q2, if production was ramped for the new Fusion products.
See also:AMD home page
Tuesday, May 10, 2011
Dot Hill Does Well By HP, Looks For More Partners
Dot Hill (Nasdaq: HILL), a data storage equipment manufacturer, had a very interesting analyst call reporting Q1 2011 results last Thursday. Until December NetApp had been Dot Hill's second largest customer. But profit margins for that particular relationship for Dot Hill were negative, and negotitions with NetApp were not fruitfull. So Dot Hill dropped NetApp.
The result was a pretty steep drop in revenue to $49.2 million, down 25% sequentially from $65.4 million in Q4, and down 18% from $60.0 million year-earlier. Q1 is typically the slowest quarter for Dot Hill. However, the profit hit was much less. GAAP Net income was negative $1.2 million, down sequentially from $0.3 million, but up from negative $6.4 million year-earlier. Non-GAAP net income was $0.1 million for EPS of $0.00, better than I expected.
HP, which buys storage arrays from Dot Hill and resells them under its own brand, was responsible for 76% of Hill's revenues in the quarter. Sales to HP grew 20% y/y. But Dot Hill knows the danger of manufacturing mainly for one customer. They used to make equipment almost exclusively for Sun Microsystems. That business disappeared several years ago.
In fact Hill already supplies to several other major players including Lenovo and Samsung. But in none of these cases is it the exclusive storage supplier. It also sells through a large number of smaller systems integrators, but in the quarter that only amounted to $1.2 million in revenue.
There are three relatively large opportunies for Dot Hill going forward, aside from just selling more through HP. LSI's storage division Engenio is being acquired by NetApp. Some of LSI's Engenio clients are NetApp competitors. Some have begun discussions with Hill about switching to Hill as a first or second source. The second opportunity is selling more software with its hardware solutions, which brings higher profit margins. The third is the industry is consolidating, and Hill is an attractive acquisition candidate, although no discussions have been announced.
Q2 is looking better than Q1, partly due to orders late in Q1 that did not ship until Q2. Revenues for Q2 are projected at between $49 and $53 million, with non-GAAP net income and EPS expected in the vicinity of break-even. When Hill takes on new major OEM clients it does customization for them, which incurs increased engineering costs.
It is notable that GAAP gross margins increased from 13.5% year-earlier to 24.6% in Q1. This was partly from dropping NetApp, partly from a higher-margin mix in the rest of the business, and partly from increasing sales of storage management software.
For a greater level of detail see my Dot Hill Q1 2011 analyst call summary.
I own Dot Hill stock.
See also www.dothill.com
The result was a pretty steep drop in revenue to $49.2 million, down 25% sequentially from $65.4 million in Q4, and down 18% from $60.0 million year-earlier. Q1 is typically the slowest quarter for Dot Hill. However, the profit hit was much less. GAAP Net income was negative $1.2 million, down sequentially from $0.3 million, but up from negative $6.4 million year-earlier. Non-GAAP net income was $0.1 million for EPS of $0.00, better than I expected.
HP, which buys storage arrays from Dot Hill and resells them under its own brand, was responsible for 76% of Hill's revenues in the quarter. Sales to HP grew 20% y/y. But Dot Hill knows the danger of manufacturing mainly for one customer. They used to make equipment almost exclusively for Sun Microsystems. That business disappeared several years ago.
In fact Hill already supplies to several other major players including Lenovo and Samsung. But in none of these cases is it the exclusive storage supplier. It also sells through a large number of smaller systems integrators, but in the quarter that only amounted to $1.2 million in revenue.
There are three relatively large opportunies for Dot Hill going forward, aside from just selling more through HP. LSI's storage division Engenio is being acquired by NetApp. Some of LSI's Engenio clients are NetApp competitors. Some have begun discussions with Hill about switching to Hill as a first or second source. The second opportunity is selling more software with its hardware solutions, which brings higher profit margins. The third is the industry is consolidating, and Hill is an attractive acquisition candidate, although no discussions have been announced.
Q2 is looking better than Q1, partly due to orders late in Q1 that did not ship until Q2. Revenues for Q2 are projected at between $49 and $53 million, with non-GAAP net income and EPS expected in the vicinity of break-even. When Hill takes on new major OEM clients it does customization for them, which incurs increased engineering costs.
It is notable that GAAP gross margins increased from 13.5% year-earlier to 24.6% in Q1. This was partly from dropping NetApp, partly from a higher-margin mix in the rest of the business, and partly from increasing sales of storage management software.
For a greater level of detail see my Dot Hill Q1 2011 analyst call summary.
I own Dot Hill stock.
See also www.dothill.com
Monday, March 28, 2011
Oracle, Adobe, Red Hat Show Software Leverage
In theory the software business model is an attractive one. Write a piece of software. Once released, the production cost of each new copy is new zero. Sell enough copies to cover your R&D cost and your operating overhead, and you break even. After that you (and your stockholders) get rich, since each copy costs you nothing. Compare that to hardware based technology, where there (usually) is nowhere near as much profit leverage. Oracle (ORCL) , Adobe (ADBE) and Red Hat (RHT) all showcased the strength of this model when they announced their latest quarter results. Oracle reported fiscal Q3 ending February 28, 2011 on March 23. Partly because of its acquisition of Sun, revenues were up 37% y/y to $8.76 billion and net income was up 78% to $2.12 billion. [See Oracle analyst call Q3 2011] Adobe reported fiscal Q1 ending March 4, 2011 on March 22. Revenues were up 20% y/y to $1.03 billion. Net income was up 84% to $234.6 million. [See Adobe analyst call Q1 2011] Red Hat reported fiscal Q4 ending February 28, 2011 on March 23. Revenues were up 25% y/y to $244.8 million. Net income was $33.5 million, up 43% y/y. [See Red Hat analyst call Q4 2011] Note that for all three companies, profits (net income) were up on a larger percentage basis than revenues. That is the software model: once costs are covered, incremental sales have very high profit margins. Of course, if it were that simple, everyone would start a software company. Software sales are very competitive. Each of these three companies is the market leader in its domain: Oracle with database and business intelligence; Adobe with content generation; Red Hat with enterprise-grade Linux. Fail to make sales and you can lose money, or just scrape by. Naturally hardware companies are very interested in selling more of their own software with their machines, as the higher margins help the bottom line. IBM and HP, for instance, sell software and services, not just computers. One interesting play would be the small storage company Dot Hill. It has adding storage management software to its offerings, which should have a positive effect on its margins in 2011 and beyond. [See also my Dot Hill analysis page] I don't own any of the above mentioned stocks except Dot Hill, although I have owned Red Hat in the past. There are many issues to consider before buying a software stock, including its trailing and future-looking price-to-earnings ratios. So keep diversified!
Wednesday, March 23, 2011
Itanium Near Death
Itanium processors, decreed Intel back in 1998, were the next big thing. The question was how to deal with the 32 bit to 64 bit data path transition, which had already been made by some high-end competitors like Sun and IBM. Itanium would be the high end, while consumers and small businesses could make due for another decade with 32 bit Intel based machines.
AMD (then Advanced Micro Devices) saw an opportunity and introduced x86 chips that could run either 32 bit or 64 bit software, or both. The idea was popular partly because it was far easier for software developers to upgrade x86 code from 32 to 64 bits than to create the new, Itanium code, which had a different instruction set.
Intel had to follow AMD's lead and introduce 64 bit, non-Itanium upgrades to its chips. In addition, the original Itaniums, introduced in 2001, were not very competitive with the IBM and Sun chips. Most businesses that wanted a 64 bit transition opted to go with the lower cost AMD or Intel chips.
Intel nevertheless continued to develop Itanium chips, with HP as their main partner. The market for them was miniscule. Software developers put little effort into Itanium. Red Hat dropped Itanium software development in 2009. Microsoft announced it would phase out Itanium in 2010.
Today Oracle announced it would no longer support Itanium. Oracle dominates enterprise business and database software stacks. At the high end, it now owns the former Sun franchise, and it also runs on the new SGI high-end computers, as well as the more everyday x86 chips from AMD and Intel.
That leaves Intel working with its original partner HP. They are both big companies, but they are drifting away from reaching critical mass with Itanium. Intel is likely to drop Itanium, which means HP will have to stick to commodity CPU chips or look for another partner, perhaps IBM.
The only significant winner I see from this inevitable death of Itanium is SGI. They once made machines based on Itanium, but their new supercomputers, the Altix UV series are popular because, while they run on standard CPUs, they are very effectively glued together by SGI technology. While SGI is a small company compared to HP and IBM, if they can catch even a modest percentage of the customers that need to replace aging Itanium-based computers, they will get a very significant boost. [note: I own SGI and AMD stock at the time this is written]
See also:
www.sgi.com
http://www.hp.com/
Intel Itanium processors
http://www.oracle.com/
http://www.amd.com/
AMD (then Advanced Micro Devices) saw an opportunity and introduced x86 chips that could run either 32 bit or 64 bit software, or both. The idea was popular partly because it was far easier for software developers to upgrade x86 code from 32 to 64 bits than to create the new, Itanium code, which had a different instruction set.
Intel had to follow AMD's lead and introduce 64 bit, non-Itanium upgrades to its chips. In addition, the original Itaniums, introduced in 2001, were not very competitive with the IBM and Sun chips. Most businesses that wanted a 64 bit transition opted to go with the lower cost AMD or Intel chips.
Intel nevertheless continued to develop Itanium chips, with HP as their main partner. The market for them was miniscule. Software developers put little effort into Itanium. Red Hat dropped Itanium software development in 2009. Microsoft announced it would phase out Itanium in 2010.
Today Oracle announced it would no longer support Itanium. Oracle dominates enterprise business and database software stacks. At the high end, it now owns the former Sun franchise, and it also runs on the new SGI high-end computers, as well as the more everyday x86 chips from AMD and Intel.
That leaves Intel working with its original partner HP. They are both big companies, but they are drifting away from reaching critical mass with Itanium. Intel is likely to drop Itanium, which means HP will have to stick to commodity CPU chips or look for another partner, perhaps IBM.
The only significant winner I see from this inevitable death of Itanium is SGI. They once made machines based on Itanium, but their new supercomputers, the Altix UV series are popular because, while they run on standard CPUs, they are very effectively glued together by SGI technology. While SGI is a small company compared to HP and IBM, if they can catch even a modest percentage of the customers that need to replace aging Itanium-based computers, they will get a very significant boost. [note: I own SGI and AMD stock at the time this is written]
See also:
www.sgi.com
http://www.hp.com/
Intel Itanium processors
http://www.oracle.com/
http://www.amd.com/
Monday, January 10, 2011
Dot Hill Exceeds Q4 Guidance
The price of Dot Hill stock is soaring today (up $0.46 per share to $2.35, or 24.3% as I write) after preliminary Q4 results were released that exceeded prior guidance. See my Dot Hill Q3 analyst conference call report for Q3 results and Q4 prior guidance.
Dot Hill has been trying to rebuild its data storage hardware business for years, following the demise of its relationship with it former major client, Sun. Its products are mainly sold to OEMs that relabel them or incorporate them into larger systems. Its main client is HP, but it has won a swarm of smaller OEMs and system integrators in the past 3 years. Margins, however, were a problem. Hill's second largest client, NetApp, refused to negotiate prices that allowed Hill to make a profit, so that relationship was terminated as of December 1.
Anticipation of a decline of revenues due to the NetApp termination has been a major reason for Hill's low stock price. Instead, in even with 2 final months of NetApp included in the quarter, revenues increased from $62 million in Q3 to about $65 million in Q4. Keep in mind that for enterprise data storage systems Q4 is typically the best season. Even so, Hill's new line of data storage products must be selling extremely well to hit $65 million with NetApp out of the picture.
And those sales have higher profit margins, allowing Non-GAAP earnings per share to be in the range of $0.02 to $0.04. After years in the red, this is great news for Dot Hill.
Profit margins should continue to expand in 2011 because Hill should be selling an increasing amount of software along with its hardware offerings. Software, in this case storage management software, carries much better profit margins than the hardware.
Q1, 2011, will be a bit tougher. It will be the first full quarter without NetApp revenues, and it is traditionally a seasonally weak quarter. Dot Hill has a new relationship with Lenovo which should ramp in 2011, but apparently that won't affect Q1 much.
Good work and thanks to the entire crew at Dot Hill!
See also Dothill.com
Dot Hill has been trying to rebuild its data storage hardware business for years, following the demise of its relationship with it former major client, Sun. Its products are mainly sold to OEMs that relabel them or incorporate them into larger systems. Its main client is HP, but it has won a swarm of smaller OEMs and system integrators in the past 3 years. Margins, however, were a problem. Hill's second largest client, NetApp, refused to negotiate prices that allowed Hill to make a profit, so that relationship was terminated as of December 1.
Anticipation of a decline of revenues due to the NetApp termination has been a major reason for Hill's low stock price. Instead, in even with 2 final months of NetApp included in the quarter, revenues increased from $62 million in Q3 to about $65 million in Q4. Keep in mind that for enterprise data storage systems Q4 is typically the best season. Even so, Hill's new line of data storage products must be selling extremely well to hit $65 million with NetApp out of the picture.
And those sales have higher profit margins, allowing Non-GAAP earnings per share to be in the range of $0.02 to $0.04. After years in the red, this is great news for Dot Hill.
Profit margins should continue to expand in 2011 because Hill should be selling an increasing amount of software along with its hardware offerings. Software, in this case storage management software, carries much better profit margins than the hardware.
Q1, 2011, will be a bit tougher. It will be the first full quarter without NetApp revenues, and it is traditionally a seasonally weak quarter. Dot Hill has a new relationship with Lenovo which should ramp in 2011, but apparently that won't affect Q1 much.
Good work and thanks to the entire crew at Dot Hill!
See also Dothill.com
Wednesday, September 8, 2010
Dot Hill Reacts to Storage Acquisition Events
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.
Keep diversified!
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.
Keep diversified!
Wednesday, June 16, 2010
Dot Hill, Xiotech and NetApp: new plan
Yesterday Dot Hill revealed more details of its plans for achieving profitability by the 4th quarter of 2010. The big surprise is that they may stop selling to NetApp in 2011. In another announcement, they are selling or licensing their storage software, iSN, to advanced storage provider Xiotech.
Dot Hill used to provide data storage equipment primarily to Sun Microsystems, but that segment started to go away several years ago, and is essentially gone now, representing less than 1% of revenue. In the meantime they designed new storage hardware and sold it to premier OEMs HP and NetApp for rebranding. In 2008 they looked like that strategy was going to make them profitable by 2009. Then the recession hit.
Another problem has always been profit margins. In particular, to get the NetApp business Dot Hill sold devices for less than cost. There was a small margin on the actual price of the devices over the cost of manufacturing, but it did not cover operating costs like corporate overhead, R&D, and sales. It was hoped that costs for the devices could be lowered over time, and they have been, but the profit margin is still not there. Apparently NetApp is not willing to pay more, so they will begin manufacturing the devices themselves in 2011, or discontinue that line.
In Q1 Hill reported that NetApp represented about 30% of revenue, or $18 million. It may be a big deal to give up that much revenue, but I agree that Dot Hill should not stay in the business of subsidizing a larger, profitable company like NetApp.
HP represented 50% of revenue in Q1; without NetApp, Dot Hill will be in the same position with HP that they were with Sun a few years ago. To remedy that they are both working with a large number of small, value-added data storage companies (the channel) and looking for at least one more large OEM customer. Discussion continues to be underway, but even if a deal is made it would take several months for a new OEM to introduce a new line.
The brightest part of the picture is in software. Software has far better margins than hardware, and Dot Hill's new iSN (Intelligent Storage Networking) platform is highly regarded. Dot Hill is already selling some software with its systems through HP, and of course its channel partners will sell this too. Apparently you don't need Hill hardware to run the software; it should work with most storage hardware. The hope is that the new deal with Xiotech is the first of many. Again, it takes time to get a product to market. Dot Hill's R&D costs for software have gone up, so in the short run it makes the profit line look worse, but that should improve in a quarter or two.
The main method for achieving profitability will be the classic: cutting costs. In this case salaries are being cut 5% and 10% of the work force will be laid off. Manufacturing is being consolidated.
Altogether Management (Dan Kammersgard) believes that by Q4 Dot Hill will be able to break even on a EBITDA basis with just $60 to $65 million in revenue. They are projecting Q2 revenue of $62 to $65 million. Prior to the loss of NetApp, my guess is revenue is likely to ramp to more like $70 million by Q4 because of seasonality and the general health of the data storage industry. EBITDA (earnings before interest, taxes, depreciation and amortization) is usually the lowest standard of profitability. Non-GAAP net income would be nicer, and GAAP net income is the gold standard for reporting.
I consider Dot Hill to be one of my most speculative investments. On the other hand the stock is dirt cheap today at about $1.16 per share. That gives it a market capitalization of about $64 million. They expect to have a cash balance of at least $40 million at the end of Q2.
For more data on Q1, see my Dot Hill Q1 2010 Analyst Conference Summary . For past conference summaries and my earlier commentary see my Dot Hill main page.
And of course see www.dothill.com.
Dot Hill used to provide data storage equipment primarily to Sun Microsystems, but that segment started to go away several years ago, and is essentially gone now, representing less than 1% of revenue. In the meantime they designed new storage hardware and sold it to premier OEMs HP and NetApp for rebranding. In 2008 they looked like that strategy was going to make them profitable by 2009. Then the recession hit.
Another problem has always been profit margins. In particular, to get the NetApp business Dot Hill sold devices for less than cost. There was a small margin on the actual price of the devices over the cost of manufacturing, but it did not cover operating costs like corporate overhead, R&D, and sales. It was hoped that costs for the devices could be lowered over time, and they have been, but the profit margin is still not there. Apparently NetApp is not willing to pay more, so they will begin manufacturing the devices themselves in 2011, or discontinue that line.
In Q1 Hill reported that NetApp represented about 30% of revenue, or $18 million. It may be a big deal to give up that much revenue, but I agree that Dot Hill should not stay in the business of subsidizing a larger, profitable company like NetApp.
HP represented 50% of revenue in Q1; without NetApp, Dot Hill will be in the same position with HP that they were with Sun a few years ago. To remedy that they are both working with a large number of small, value-added data storage companies (the channel) and looking for at least one more large OEM customer. Discussion continues to be underway, but even if a deal is made it would take several months for a new OEM to introduce a new line.
The brightest part of the picture is in software. Software has far better margins than hardware, and Dot Hill's new iSN (Intelligent Storage Networking) platform is highly regarded. Dot Hill is already selling some software with its systems through HP, and of course its channel partners will sell this too. Apparently you don't need Hill hardware to run the software; it should work with most storage hardware. The hope is that the new deal with Xiotech is the first of many. Again, it takes time to get a product to market. Dot Hill's R&D costs for software have gone up, so in the short run it makes the profit line look worse, but that should improve in a quarter or two.
The main method for achieving profitability will be the classic: cutting costs. In this case salaries are being cut 5% and 10% of the work force will be laid off. Manufacturing is being consolidated.
Altogether Management (Dan Kammersgard) believes that by Q4 Dot Hill will be able to break even on a EBITDA basis with just $60 to $65 million in revenue. They are projecting Q2 revenue of $62 to $65 million. Prior to the loss of NetApp, my guess is revenue is likely to ramp to more like $70 million by Q4 because of seasonality and the general health of the data storage industry. EBITDA (earnings before interest, taxes, depreciation and amortization) is usually the lowest standard of profitability. Non-GAAP net income would be nicer, and GAAP net income is the gold standard for reporting.
I consider Dot Hill to be one of my most speculative investments. On the other hand the stock is dirt cheap today at about $1.16 per share. That gives it a market capitalization of about $64 million. They expect to have a cash balance of at least $40 million at the end of Q2.
For more data on Q1, see my Dot Hill Q1 2010 Analyst Conference Summary . For past conference summaries and my earlier commentary see my Dot Hill main page.
And of course see www.dothill.com.
Wednesday, August 19, 2009
Dot Hill Beneath the Surface
Dot Hill makes data storage components, and they have had a rough time the last five years or so. If you just look at the bottom line, it has been a sad story. Dot Hill had (and has) a strong cash balance with no debt, and for years profitability has been just a little over two quarters away.
Yet a lot has changed. If you look under the hood, you can understand why I am not alone in thinking that Dot Hill is likely to start showing profits in Q4 2009 and then really take off in 2010. [Assuming the usual caveat: if the economy does not implode]
At the end of Q2 Dot Hill had $57. 1 million in cash (it has a $0.7 million note payable for a recent acquisition as its only debt). Revenues for the quarter were $54.3 million, barely up from Q1 and down 24% from $71.0 million in Q2 2008.
But expenses have been slashed as well. Part of this expense reduction is a response to the recession, but much of it has to do with Dot Hill's product development cycle. The heavy R&D expenses were in 2007 and 2008. Now much of the R&D expense is devoted to lowering the production costs of the current generation of data storage components.
A few years ago Dot Hill had one major customer for its products: Sun Microsytems. But Sun decided to buy a much larger data storage company, so the writing was on the wall: new products would be developed internally. Dot Hill was relegated to supplying parts for expanding or replacing its old components used by existing Sun customers. And, of course, now Sun has been eaten by Oracle (sound like a Greek myth, doesn't it?).
So Dot Hill used its cash to develop new products for new customers (equipment vendors, as opposed to end customers). Reports are the new products are very good and end customers like them. Dot Hill sells the components to an increasing number of OEMs. Sun represented only 5% of revenues in Q2. A year ago Sun repesented 28% of revenue, and two years ago that was 65%.
HP is now the single largest Dot Hill customers. The new products only became available from HP in March of 2008. In Q2 2009 they represented 51% of revenue. The next largest customer is NetApp, which represented 24% of revenue. All the remaining customers accounted for 20% of revenue.
With sales to Sun unable to drop much further, the ramping HP revenues should cause Hill revenues to ramp in coming quarters.
Dot Hill has hit an economic sweet spot with their new products, which greatly improve storage capacity, efficiency, and power savings at a very attractive price point for end customers.
To a large extent costs of goods sold will ramp along with revenues, as will some operating costs. But right at this moment Dot Hill is running a lean system, so much of the coming revenue increases should increase the bottom line. In Q2 GAAP net income was negative $4.1 million. Non-GAAP net income was negative $3.0 million. But cash flow from operations was positive $3.4 million.
Since cost of goods sold represented 85% of revenues (GAAP), it will take a considerable ramp to get to GAAP profitability. But management believes that as the product lifecyle lengthens cost of goods sold will decrease as a percentage of sales (which is typical for this type of equipment) and there will be savings as production runs scale. Also, Dot Hill (through HP) is starting to sell software to help with storage management, and that has much better gross margins.
As always, things could go wrong with the economy, with clients, or with end-customer demand. But Dot Hill management (and employees) have been through the fire and come out looking pretty good. I believe they are well tempered and able to respond rapidly to changes in technologies and economic conditions.
As always, keep diversified!
More Data:
Dot Hill web site
My summary of the Q2 Dot Hill analyst conference
Yet a lot has changed. If you look under the hood, you can understand why I am not alone in thinking that Dot Hill is likely to start showing profits in Q4 2009 and then really take off in 2010. [Assuming the usual caveat: if the economy does not implode]
At the end of Q2 Dot Hill had $57. 1 million in cash (it has a $0.7 million note payable for a recent acquisition as its only debt). Revenues for the quarter were $54.3 million, barely up from Q1 and down 24% from $71.0 million in Q2 2008.
But expenses have been slashed as well. Part of this expense reduction is a response to the recession, but much of it has to do with Dot Hill's product development cycle. The heavy R&D expenses were in 2007 and 2008. Now much of the R&D expense is devoted to lowering the production costs of the current generation of data storage components.
A few years ago Dot Hill had one major customer for its products: Sun Microsytems. But Sun decided to buy a much larger data storage company, so the writing was on the wall: new products would be developed internally. Dot Hill was relegated to supplying parts for expanding or replacing its old components used by existing Sun customers. And, of course, now Sun has been eaten by Oracle (sound like a Greek myth, doesn't it?).
So Dot Hill used its cash to develop new products for new customers (equipment vendors, as opposed to end customers). Reports are the new products are very good and end customers like them. Dot Hill sells the components to an increasing number of OEMs. Sun represented only 5% of revenues in Q2. A year ago Sun repesented 28% of revenue, and two years ago that was 65%.
HP is now the single largest Dot Hill customers. The new products only became available from HP in March of 2008. In Q2 2009 they represented 51% of revenue. The next largest customer is NetApp, which represented 24% of revenue. All the remaining customers accounted for 20% of revenue.
With sales to Sun unable to drop much further, the ramping HP revenues should cause Hill revenues to ramp in coming quarters.
Dot Hill has hit an economic sweet spot with their new products, which greatly improve storage capacity, efficiency, and power savings at a very attractive price point for end customers.
To a large extent costs of goods sold will ramp along with revenues, as will some operating costs. But right at this moment Dot Hill is running a lean system, so much of the coming revenue increases should increase the bottom line. In Q2 GAAP net income was negative $4.1 million. Non-GAAP net income was negative $3.0 million. But cash flow from operations was positive $3.4 million.
Since cost of goods sold represented 85% of revenues (GAAP), it will take a considerable ramp to get to GAAP profitability. But management believes that as the product lifecyle lengthens cost of goods sold will decrease as a percentage of sales (which is typical for this type of equipment) and there will be savings as production runs scale. Also, Dot Hill (through HP) is starting to sell software to help with storage management, and that has much better gross margins.
As always, things could go wrong with the economy, with clients, or with end-customer demand. But Dot Hill management (and employees) have been through the fire and come out looking pretty good. I believe they are well tempered and able to respond rapidly to changes in technologies and economic conditions.
As always, keep diversified!
More Data:
Dot Hill web site
My summary of the Q2 Dot Hill analyst conference
Friday, April 17, 2009
Dot Hill Data Storage Preliminary Q1 Results
Dot Hill's sales of data storage equipment fell in the March 2009 quarter more than expected. But sales did not fall off a cliff. I am still sticking with the theory that the one technology product that enterprise-sized corporations must buy this year is more storage capacity. It is the law.
Dot Hill's products are very well positioned to take advantage of enterprises needing more storage but wanting to cut back on capital expenditures. While serving only a tiny sliver of the market so far, it is clear tht Dot Hill has gained considerable market share during this last year. In the past three years it has transitioned from being highly dependent on sales to a single OEM, Sun, to having three solid large clients, Sun, HP, and NetApp, plus a host of smaller OEMs and channel distributors.
Preliminary estimates for Q1 were released on April 14, 2009 [See also Dot Hill Preliminary Q1 press release]. Revenue probably came in just below $54 million. Non-GAAP net loss should be $0.05 to $0.07. At the Dot Hill Q4 analyst conference on February 26, 2009 guidance was for Q1 2009, with admitted low visibility, was $56 to $63 million in revenue with non-GAAP EPS negative $0.06 to $0.11. So despite being somewhat below the bottom of guidance on revenue, they did well on EPS.
Management has done a great job reducing costs. Any sort of firming of the global economy should result in a revenue ramp-up that puts Dot Hill back in the black. They have a good cash reserve, about $54 million at the end of the quarter.
Market capitalization has shot up since the announcement, but it is still just $38 million as I write. If they can do a profitable quarter by the end of the year, with over $200 million a year in revenues, you can bet this stock will shoot up. I have; I own the stock (so weigh that against my obvious enthusiasm).
Aside from the possibility that this recession will last into 2010, the main potential risks for Dot Hill are price competition from competitors and the danger of being dependent on Sun, HP, and NetApp for most of their sales.
See also:
My Dot Hill main page
www.dothill.com
Dot Hill's products are very well positioned to take advantage of enterprises needing more storage but wanting to cut back on capital expenditures. While serving only a tiny sliver of the market so far, it is clear tht Dot Hill has gained considerable market share during this last year. In the past three years it has transitioned from being highly dependent on sales to a single OEM, Sun, to having three solid large clients, Sun, HP, and NetApp, plus a host of smaller OEMs and channel distributors.
Preliminary estimates for Q1 were released on April 14, 2009 [See also Dot Hill Preliminary Q1 press release]. Revenue probably came in just below $54 million. Non-GAAP net loss should be $0.05 to $0.07. At the Dot Hill Q4 analyst conference on February 26, 2009 guidance was for Q1 2009, with admitted low visibility, was $56 to $63 million in revenue with non-GAAP EPS negative $0.06 to $0.11. So despite being somewhat below the bottom of guidance on revenue, they did well on EPS.
Management has done a great job reducing costs. Any sort of firming of the global economy should result in a revenue ramp-up that puts Dot Hill back in the black. They have a good cash reserve, about $54 million at the end of the quarter.
Market capitalization has shot up since the announcement, but it is still just $38 million as I write. If they can do a profitable quarter by the end of the year, with over $200 million a year in revenues, you can bet this stock will shoot up. I have; I own the stock (so weigh that against my obvious enthusiasm).
Aside from the possibility that this recession will last into 2010, the main potential risks for Dot Hill are price competition from competitors and the danger of being dependent on Sun, HP, and NetApp for most of their sales.
See also:
My Dot Hill main page
www.dothill.com
Monday, March 2, 2009
Dot Hill Stores Well
Dot Hill (HILL), a maker of data storage devices, reported a solid fourth quarter of 2008, in contrast to many equipment manufacturing in the data storage industry. Revenues were $72.4 million, down 5% sequentially from $76.6 million but up 40% from $51.8 million year-earlier. Dot Hill is still operating in the red, with GAAP losses of $8.6 million or $0.19 per share. That included a non-cash goodwill impairment charge, so on a cash basis they are getting close to break even.
Why the prosperity? Partly data storage equipment is a necessity, rather than a luxury, for modern enterprises. Every bit of data needs to be stored in an accessible manner, and data is generated in ever increasing torrents.
Dot Hill also has picked a pretty sweet space in the data storage arena. The firm was in disaster mode in 2006 and 2007. Most of its revenue were from sales to Sun, which was having its own troubles and then bought a different data storage company. Sun started phasing Dot Hill out. So the engineers at Dot Hill got busy and came out with a variety of new products designed to meet end user needs. HP and NetApp are now big customers, and a number of smaller OEMs are taking the Dot Hill products as well. Surprisingly, the business from Sun has fallen off more slowly than expected. Not only did customers want to build out the Dot Hill products they already had, but replacement parts has become a good business. Even the economic slowdown is helping, as some firms would rather just replace the drives in their Sun-Dot Hill systems than buy totally new equipment.
Of course if tech spending continues to dry up, Dot Hill could get hurt like so many other companies. HP closed the last two weeks of 2008, hurting revenues in the reported quarter. Q1 is traditionally a seasonally slow quarter for data equipment hardware. Management made it clear they don't really know what Q1 revenues will be, but threw the figures of $56 to $63 million to analysts. They said that was a cautious estimate, but it could still be too high in a worst case scenario.
Dot Hill had $56.9 million in cash at the end of the quarter. Management believes that as long as the economy is not too bad, they should be profitable on a non-GAAP, cash basis in the second half of 2009.
If the economy recovers at all, Dot Hill should be a very sweet play. It is an under $1 stock today, trading around $0.52 lately. I own some stock and intend to accumulate it (up to the maximum my portfolio model allows) at this price, presuming the equipment keeps selling.
Keep diversified!
More: My Dot Hill 2/26/2009 analyst conference summary
www.dothill.com
Why the prosperity? Partly data storage equipment is a necessity, rather than a luxury, for modern enterprises. Every bit of data needs to be stored in an accessible manner, and data is generated in ever increasing torrents.
Dot Hill also has picked a pretty sweet space in the data storage arena. The firm was in disaster mode in 2006 and 2007. Most of its revenue were from sales to Sun, which was having its own troubles and then bought a different data storage company. Sun started phasing Dot Hill out. So the engineers at Dot Hill got busy and came out with a variety of new products designed to meet end user needs. HP and NetApp are now big customers, and a number of smaller OEMs are taking the Dot Hill products as well. Surprisingly, the business from Sun has fallen off more slowly than expected. Not only did customers want to build out the Dot Hill products they already had, but replacement parts has become a good business. Even the economic slowdown is helping, as some firms would rather just replace the drives in their Sun-Dot Hill systems than buy totally new equipment.
Of course if tech spending continues to dry up, Dot Hill could get hurt like so many other companies. HP closed the last two weeks of 2008, hurting revenues in the reported quarter. Q1 is traditionally a seasonally slow quarter for data equipment hardware. Management made it clear they don't really know what Q1 revenues will be, but threw the figures of $56 to $63 million to analysts. They said that was a cautious estimate, but it could still be too high in a worst case scenario.
Dot Hill had $56.9 million in cash at the end of the quarter. Management believes that as long as the economy is not too bad, they should be profitable on a non-GAAP, cash basis in the second half of 2009.
If the economy recovers at all, Dot Hill should be a very sweet play. It is an under $1 stock today, trading around $0.52 lately. I own some stock and intend to accumulate it (up to the maximum my portfolio model allows) at this price, presuming the equipment keeps selling.
Keep diversified!
More: My Dot Hill 2/26/2009 analyst conference summary
www.dothill.com
Friday, March 14, 2008
Dot Hill Q4 2007 Results
Dot Hill (HILL) stock plunged today on the news that ... there was no real news. I always wonder who is being stupid here, the people who bid up the stock when Dot Hill announced a new deal with HP, or the people who dumped the stock when the HP deal did not retroactively make Q4 2007 a wonderful quarter. Maybe they are the same people.
There was, of course, the illusion of news, or lack thereof, and the analyst conference did offer some insight into the trajectory of Dot Hill, a storage technology company. It was mostly glass half full stuff.
The biggest item was a non-cash write-down of goodwill. At $40.7 million it swamped everything else. I've seen quite a few of these lately, mostly at companies that have made acquisitions and then seen their stock prices drop. They are required when reporting GAAP (Generally Accepted Accounting Principles) numbers under rule SFAS 142. This is one of the rare cases when I think GAAP numbers are misleading. Goodwill is mostly an accounting fiction, and writing down a chunk in a single quarter tells you nothing about how a company performed in that actual quarter.
Revenue was $51.8 million, up 13% sequentially from $45.7 million in Q3 but down 14% from $59.4 million year-earlier. Non-GAAP net revenue loss was $5.7 million or $0.12 per share. See my summary of the Dot Hill Q4 2007 analyst conference for more data.
On the one hand Dot Hill management always seems to think profitability is just over the horizon. Years of losses keep the stock price low, with occasional bouts of optimism. The company had $82 million in cash at the end of the quarter, but it used to have a lot more and cash has been draining out quarter by quarter.
On the glass-half-full side, Dot Hill has transitioned out of a difficult situation and shown truly substantial progress on this. Dot Hill is in the data storage component business. A few years ago most of its business was acting as a supplier to Sun. Even then the situation was competitive, but then Sun bought a storage equipment company and is gradually phasing out the Dot Hill products. Yet the Dot Hill products were quite good. Sun is still the single largest customer, and sales to Sun were better than expected in Q4.
So Dot Hill has been looking for new customers and creating new products for them. They reported they now have 26 customers, mostly relatively small OEMs. But they work with big OEMS too. NetApp (formerly Network Appliances) became their second biggest customer after carrying a new line of products starting in Q4.
The problem with the transition has been the time required to develop new products, and the cost. Dot Hill has handled this well, conserving their cash better than most companies would. R&D expense in Q4 was only $5.9 million. They have also been finding cheaper ways to manufacture their products (while keeping quality high), which helps them compete and have a chance at being profitable.
It costs money to service any new customer, and quite a bit of money to get started on a volume ramp, as they have done with NetApp and are doing with HP. There is the danger that you can spend this money and then not sell enough goods to recoup costs, much less make a profit.
If Sun sales continue to ramp down slowly and HP and NetApp and other OEM sales ramp up relatively quickly, I believe management is right that Dot Hill can become (non-GAAP) profitable in some quarter of 2008. Want me to guess? I'll pick Q3.
I own a bit of HILL, so I might be overly optimistic, but I think I'm being pretty cautious. At this moment market capitalization (number of shares times price per share) is $119 million. That is for a company with $82 million cash, ballpark $200 million annual sales, and new contracts with NetApp and HP. I call that undervalued, but risky, since profitability is the key to real value.
Keep diversified.
More data:
My main Dot Hill page
www.dothill.com
There was, of course, the illusion of news, or lack thereof, and the analyst conference did offer some insight into the trajectory of Dot Hill, a storage technology company. It was mostly glass half full stuff.
The biggest item was a non-cash write-down of goodwill. At $40.7 million it swamped everything else. I've seen quite a few of these lately, mostly at companies that have made acquisitions and then seen their stock prices drop. They are required when reporting GAAP (Generally Accepted Accounting Principles) numbers under rule SFAS 142. This is one of the rare cases when I think GAAP numbers are misleading. Goodwill is mostly an accounting fiction, and writing down a chunk in a single quarter tells you nothing about how a company performed in that actual quarter.
Revenue was $51.8 million, up 13% sequentially from $45.7 million in Q3 but down 14% from $59.4 million year-earlier. Non-GAAP net revenue loss was $5.7 million or $0.12 per share. See my summary of the Dot Hill Q4 2007 analyst conference for more data.
On the one hand Dot Hill management always seems to think profitability is just over the horizon. Years of losses keep the stock price low, with occasional bouts of optimism. The company had $82 million in cash at the end of the quarter, but it used to have a lot more and cash has been draining out quarter by quarter.
On the glass-half-full side, Dot Hill has transitioned out of a difficult situation and shown truly substantial progress on this. Dot Hill is in the data storage component business. A few years ago most of its business was acting as a supplier to Sun. Even then the situation was competitive, but then Sun bought a storage equipment company and is gradually phasing out the Dot Hill products. Yet the Dot Hill products were quite good. Sun is still the single largest customer, and sales to Sun were better than expected in Q4.
So Dot Hill has been looking for new customers and creating new products for them. They reported they now have 26 customers, mostly relatively small OEMs. But they work with big OEMS too. NetApp (formerly Network Appliances) became their second biggest customer after carrying a new line of products starting in Q4.
The problem with the transition has been the time required to develop new products, and the cost. Dot Hill has handled this well, conserving their cash better than most companies would. R&D expense in Q4 was only $5.9 million. They have also been finding cheaper ways to manufacture their products (while keeping quality high), which helps them compete and have a chance at being profitable.
It costs money to service any new customer, and quite a bit of money to get started on a volume ramp, as they have done with NetApp and are doing with HP. There is the danger that you can spend this money and then not sell enough goods to recoup costs, much less make a profit.
If Sun sales continue to ramp down slowly and HP and NetApp and other OEM sales ramp up relatively quickly, I believe management is right that Dot Hill can become (non-GAAP) profitable in some quarter of 2008. Want me to guess? I'll pick Q3.
I own a bit of HILL, so I might be overly optimistic, but I think I'm being pretty cautious. At this moment market capitalization (number of shares times price per share) is $119 million. That is for a company with $82 million cash, ballpark $200 million annual sales, and new contracts with NetApp and HP. I call that undervalued, but risky, since profitability is the key to real value.
Keep diversified.
More data:
My main Dot Hill page
www.dothill.com
Wednesday, January 10, 2007
Me and HP
I am going to begin summarizing HP analyst conferences. The next conference is not until February 20th, but I've been thinking about my relationship with HP [stock symbol: HPQ].
HP used to be Hewlett-Packard after the last names of the two men who formed the company in 1939 long before I was born. The company did not incorporate until 1947, a year when its revenues approached $1 million.
I first heard of Hewlett-Packard in the mid-1970s, in college, when hand-held calculators first became popular. I have never owned one made by HP; right now I have a TI and a Casio that are put to good use. The thing about HP was that it was not a consumer-goods producer, but an engineering firm. Early on it seemed like it would miss out on the PC revolution, but of course now it is a big name in personal computers, servers, storage and related things. It spun off Agilent a few years back, a stock I briefly owned. I also owned HP from 12/09/2003 until 2/2/2004 and made a good return on it.
I am working, typing in this blog entry, on an HP Pavillion a200y that I bought several years back for some experimenting I was doing with black boxes. It is my general purpose computer now because I consider it expendable. My newer computer is from Systemax, customized, runs on an AMD dual-core 64 bit processor, and is just waiting to install Microsoft Vista. At that point the HP will be used for Linux experiments.
On my quality scale of computers I have owned, the a200y is pretty near the bottom. I won't go into its problems but they seem to be mostly related to HP using overly cheap components. The result was a ridiculously low price, and I've certainly gotten my money's worth of use out of it. But it brings up the problem faced by Dell as well as HP and other computer vendors: how much can you compete on price before you are using lousy components that ruin your reputation for quality?
But I also have a HP LaserJet 1020 which was ridiculously inexpensive to buy and has performed great. As a small, black and white laser printer I can highly recommend it. Printers and supplies for them are a big part of HP's current success.
HP stock closed today at $42.20, which makes me realize I would have been better off as a long-term investor. But seeing into the past is a lot easier than seeing into the future.
According to NASDAQ HPQ has a price-earnings (PE) ratio of 19.36, which inverts to a 5.17% return. That is very reasonable if you expect HP to chug along for the next 10 or 20 years. The dividend of $0.32 per share works out to a 0.76% return. So the hope of HP investors is clearly that they will get price-appreciation, not just the paltry dividend.
I see no reason for someone like me to buy HP stock right now, but who knows, maybe if I listen to the analyst conference I may understand it better and change my mind. Or not.
To see the list of companies that I follow, just click here.
HP used to be Hewlett-Packard after the last names of the two men who formed the company in 1939 long before I was born. The company did not incorporate until 1947, a year when its revenues approached $1 million.
I first heard of Hewlett-Packard in the mid-1970s, in college, when hand-held calculators first became popular. I have never owned one made by HP; right now I have a TI and a Casio that are put to good use. The thing about HP was that it was not a consumer-goods producer, but an engineering firm. Early on it seemed like it would miss out on the PC revolution, but of course now it is a big name in personal computers, servers, storage and related things. It spun off Agilent a few years back, a stock I briefly owned. I also owned HP from 12/09/2003 until 2/2/2004 and made a good return on it.
I am working, typing in this blog entry, on an HP Pavillion a200y that I bought several years back for some experimenting I was doing with black boxes. It is my general purpose computer now because I consider it expendable. My newer computer is from Systemax, customized, runs on an AMD dual-core 64 bit processor, and is just waiting to install Microsoft Vista. At that point the HP will be used for Linux experiments.
On my quality scale of computers I have owned, the a200y is pretty near the bottom. I won't go into its problems but they seem to be mostly related to HP using overly cheap components. The result was a ridiculously low price, and I've certainly gotten my money's worth of use out of it. But it brings up the problem faced by Dell as well as HP and other computer vendors: how much can you compete on price before you are using lousy components that ruin your reputation for quality?
But I also have a HP LaserJet 1020 which was ridiculously inexpensive to buy and has performed great. As a small, black and white laser printer I can highly recommend it. Printers and supplies for them are a big part of HP's current success.
HP stock closed today at $42.20, which makes me realize I would have been better off as a long-term investor. But seeing into the past is a lot easier than seeing into the future.
According to NASDAQ HPQ has a price-earnings (PE) ratio of 19.36, which inverts to a 5.17% return. That is very reasonable if you expect HP to chug along for the next 10 or 20 years. The dividend of $0.32 per share works out to a 0.76% return. So the hope of HP investors is clearly that they will get price-appreciation, not just the paltry dividend.
I see no reason for someone like me to buy HP stock right now, but who knows, maybe if I listen to the analyst conference I may understand it better and change my mind. Or not.
To see the list of companies that I follow, just click here.
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