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Dot Hill Systems Corp.’s second-quarter 2014 adjusted earnings per share came in line with the Zacks Consensus Estimate but were down on a year-over-year basis.  


Quarter Details

Dot Hill reported non-GAAP revenues of $48.4 million, which not only decreased 5.5% from the year-ago quarter but also lagged the Zacks Consensus Estimate of $51 million. The decline in revenues was primarily attributed to delay in order bookings, which resulted in orders that remained unshipped.

Revenues from the vertical market came in at $20.8 million, down from $21.3 million reported in the year-ago quarter. Revenues from server OEM was $27.7 million in the second-quarter, down 8% year over year, primarily due to lower-than-expected revenues from customers (down 7%).

The company’s adjusted gross margin (excluding all one-time items but including stock-based compensation) decreased 100 basis points (bps) on a year-over-year basis to 33.9% primarily due to a lower revenue base.

Dot Hill’s adjusted operating margin (excluding all one-time items but including stock-based compensation) decreased 501 bps from the year-ago quarter to 0.6% primarily due to higher operating expenses as a percentage of revenues (up 402 bps on a year-over-year basis). Total operating expenses increased 8.2% from the year-ago quarter and came in at $16.1 million.

The company’s adjusted net income (excluding all one-time items but including stock-based compensation) came in at $0.2 million, which deteriorated from $2.8 million reported in the year-ago quarter.

Dot Hill exited the second quarter with cash and cash equivalents of approximately $42.2 million compared with $40.3 million in the prior quarter. Receivables were $32.8 million versus $33.7 million in the prior quarter.

Dot Hill’ balance sheet does not comprise any long-term debt. The company reported cash flow from operations of $1.7 million for the three months ended Jun 30, 2014.


For the third quarter of fiscal 2014, Dot Hill expects non-GAAP revenues in the range of $50.0 million to $58.0 million (mid-point $54.0 million). The Zacks Consensus Estimate is pegged at $57.0 million. Non-GAAP earnings are expected to be in the range of 1 cent to 6 cents. The Zacks Consensus Estimate is pegged at 4 cents per share.

Our Take

Dot Hill reported tepid second-quarter fiscal 2014 results and provided modest third-quarter guidance. The company’s top line missed the Zacks Consensus Estimate while the bottom line matched the same. Moreover, year-over-year comparisons were unfavorable. Delay in order bookings and lower-than-expected revenues from new and existing customers impacted quarterly results.

Nonetheless, the company remains encouraged by the traction in vertical markets and expects to generate strong revenues from this market in the near future.

We believe that with the growing need for advanced storage solutions, Dot Hill will cope with the increasing demand for data generation and data sharing activities. Moreover the company’s product launches and expected growth in the deal pipeline will boost its revenues, going forward.

However, the volatile spending atmosphere and competition from EMC Corporation (EMC - Analyst Report) and NetApp, Inc. (NTAP - Analyst Report) remain concerns.

Currently, Dot Hill shares have a Zacks Rank #3 (Hold).

A better-ranked stock worth considering in the technology sector is F5 Networks, Inc. (FFIV - Snapshot Report), carrying a Zacks Rank #1 (Strong Buy).