Dot Hill Revenue Increases 89 Percent Over Preceding Quarter

1/31/2003 - Dot Hill Systems Corp. (AMEX:HIL) announced financial results for the fourth quarter ended December 31, 2002. Net revenue increased to $16.3 million for the fourth quarter, compared to $8.6 million in the third quarter of 2002 and $10.5 million for the fourth quarter of 2001. This represents an 89 percent increase in revenue quarter over quarter, and a 55 percent increase year over year.

The company reported a net loss applicable to common stockholders of $12.4 million, or $0.49 per share, for the fourth quarter 2002, which includes various non-cash adjustments such as the write-off of obsolete inventory and reserves for vacant office space, as well as costs associated with the high-volume ramp up of the new SANnet® II SCSI product line. Excluding these adjustments and costs, the company experienced a pro forma net loss applicable to common stockholders of $4.8 million, or $0.19 per share, as compared to the third quarter 2002 pro forma net loss of $6.1 million, or $0.25 per share, and the fourth quarter 2001 pro forma net loss of $4.2 million, or $0.17 per share.

"This was an important quarter for Dot Hill, during which we experienced a substantial increase in revenue and raised $10.5 million of cash," said Preston Romm, chief financial officer. "Sun launched our privately-branded SCSI product to its customers in the middle of October, which appears to be a clear success. We borrowed $4.5 million from Sun during the quarter, raised another $6 million of equity by issuing preferred stock and paid off, in its entirety, our line of credit with Wells Fargo. We exited the fourth quarter with $12.1 million of cash in the bank, of which $2.0 million is restricted for a letter of credit. This cash balance is up from the third quarter’s $5.0 million, inclusive of the same letter of credit. We expect to pay off the amounts borrowed from Sun by the end of the second quarter."

Gross margin for the fourth quarter was negative $2.0 million, which included certain non-cash adjustments and ramp-up costs. Excluding these adjustments and costs, pro forma gross margin for the fourth quarter was $3.4 million, or 21 percent, compared to the third quarter’s pro forma gross margin of $2.0 million, or 23 percent. "Our margins for the SCSI product are expected to improve over the next two quarters as we phase-in identified cost reduction measures and exit the start-up phase of manufacturing the new SCSI product, as reflected in our pro forma numbers," explained Romm.

"During the fourth quarter of 2002, we did a good job of executing on our near-term corporate goals, which led to impressive revenue growth despite a global economy that left many of our fellow storage vendors struggling," said James Lambert, president and chief executive officer. "Dot Hill spent much of 2002 putting the building blocks in place that will facilitate our return to profitability, with the objective of tripling our revenue in 2003. The fourth quarter proved that those building blocks have created a solid foundation. We shipped over 695 terabytes of storage during the fourth quarter, compared to 127 terabytes during the third quarter. That is a 447 percent increase, and over 82 percent of those terabytes in the fourth quarter were the new SCSI product line. In the coming quarters, we expect to launch three more of our products -- a Fibre Channel, NAS and Blade version of the SCSI system that is now selling so well. We also expect that discussions with potential channel partners will evolve into solid relationships. Dot Hill exited 2002 with a strong backlog of $26.1 million. The year 2003 is full of promise for Dot Hill, and we look forward to the opportunities that it brings."

Continuing and building on the Open Axis IntelligenceTM; strategic initiative previously introduced, Dot Hill shifted its focus to indirect channel sales during 2002. These efforts culminated in partner program development and recruitment plans that included value added resellers (VAR), systems integrators (SI) and original equipment manufacturers (OEM). In conjunction with the announcement of its new SANnet II product family, Dot Hill reduced and restructured its direct sales force. Indirect channel sales, including OEMs, SIs and VARs, accounted for 86 percent of Dot Hill’s fourth quarter 2002 revenue. Direct sales accounted for 6 percent and service and other accounted for 5 percent of revenue.

Dot Hill Systems Corp. is a leader in the innovative design and delivery of storage networking solutions to businesses worldwide. Its products include the SANnet family of storage systems and the Axis Storage ManagerTM. For more information, visit Dot Hill on the web at

Dot Hill, the Dot Hill logo, Axis Storage Manager, OpenAxis Intelligence and SANnet are trademarks of Dot Hill Systems Corp.

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