Well-Positioned with New Software Patents: Dot Hill Corp.

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Dot Hill Corp
(NASDAQ: HILL)
Dana Kammersgard, CEO, and Hanif Jamal, CFO

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Corporate Profile:
Offering world-class security, availability and data protection, Dot Hill provides responsive and adaptive RAID hardware and storage management software solutions to meet 24/7/365 business demands. With Dot Hill, businesses can proactively safeguard and manage business data, and leverage operational efficiencies to save time, effort and expense today, while meeting the evolving business needs of tomorrow, strategically and cost effectively.

With more than twenty years in the storage industry, Dot Hill has a solid reputation in the storage array market, serving as an OEM partner for some of the world’s most prominent storage brands. Now with the iSN® storage virtualization platform, Dot Hill delivers solutions for many of the business challenges that face midrange and enterprise customers as well.

TRANSCRIPT:

WSR: Good day from Wall Street. This is Juan Costello, Senior Analyst with The Wall Street Reporter, and joining us today is Dana Kammersgard, CEO of Dot Hill Corporation, as well as Hanif Jamal, the corporate Chief Financial Officer. The company trades on NASDAQ, ticker symbol is HILL, and they provide storage solutions as well as software for various OEMs and the like. Thanks for joining us today gentlemen.

Dana Kammersgard: Good morning, Juan and it’s great to be here, thanks for your time.

WSR: Now, starting off, give us a brief history and overview of Dot Hill Corp. for some of our listeners here who are new to your story.

Dana Kammersgard: Dot Hill has been around since 1999. We are the result of a merger between Box Hill Systems, which was a Manhattan-based storage company, and Artecon, which was a company that I founded in 1984. Dot Hill has historically provided storage systems, external RAID storage systems to SMBs and department and workgroup type customers, primarily through OEMs.

WSR: Talk to us a little bit about some of the recent patents, some of the company’s key products, and where we may be able to find them.

Dana Kammersgard: We have had a steady drumbeat of patents over the last several years. Today, we have, I believe, 71 storage patents granted or allowed, and another 30 plus pending. In fact we’ve done so well in that regard from an innovation point of view that at a recent investor conference by MDB called Bright Lights, we were one of the top five of all micro-cap companies that they studied, which was approx. about 1,600 in terms of our patent success rate, that is in terms of the growth of our patent portfolio, the success rate, actually having patents granted or allowed and/or the value as they independently determined at our patent portfolio. Our products are sold on a private branded basis by companies like Hewlett-Packard, NetApp, Motorola, Fujitsu, NEC and a host of smaller companies as well. And essentially what we do is provide highly redundant enterprise storage in a very small form factor with very high performance. And where we are heading is moving up the value chain at this point in time and bringing more software, more enterprise class features into our external storage arrays. Things that are hot right now include features that allow you to maximize the efficiency and optimize the use of your storage within the data center that includes buzz terms like thin provisioning and tier provisioning where you can automatically migrate the most frequently used, the most recently accessed data up to faster-moving storage from slower-moving storage and then move it back down if it becomes less frequently used. Those are features that are classically at the high end of the stack from a storage point of view, and we are rapidly bringing those down into the realm that we serve, which is the entry to mid-range space.

WSR: Talk to us about some of those trends in that sector right now, and how well positioned you believe Dot Hill Corp. is to capitalize on them.

Dana Kammersgard: It’s a very interesting time to be in storage in general, and certainly the hot buttons in our world are cloud computing, virtualization, thin provisioning, tier provisioning, etcetera. The market just saw a very heated bidding war for a company at the high end of the storage space, a little company called 3PAR that was recently auctioned off to HP as the highest bidder after a very aggressive bidding war between Dell and HP. We provide similar sorts of products and features in the entry level to mid range. One of the transactions that we did recently back in January of this year was the purchase of Cloverleaf Communications and their product, intelligent storage networking or iSN software services. iSN allows us to virtualize, allows us to cluster, it allows us to thin provision and tier provision not only across Dot Hill arrays, but over a diverse and distributed heterogeneous school of storage vendors. So, with this software in the data center, you can aggregate and virtualize into a cloud the storage from EMC or storage from IBM or storage from HP or NetApp or Dot Hill or LSI or any of the other smaller players out there. It solves a very complicated data center problem, which is, how do I get the maximum use out of not just one of my vendors’ storage, but across all of my vendors’ storage because the vast majority of data centers today have storage from disparate vendors.

WSR: What would you say makes your company unique from some of the other players in the sector?

Dana Kammersgard: I think we have done a very good job of delivering enterprise class features at the entry level. We have constantly and continually tried to drive features that are typically in storage arrays that are sold for $250,000, down into the $25,000 space. I think that this acquisition of Cloverleaf, and the subsequent release of products based on that technology will allow us to really move the bar in terms of what is available to SMBs and SMEs in terms of enterprise class features. And again, one of the values there is that we do it heterogeneously. So, we’re in the process of and on the verge of moving beyond a storage array company into a true storage solutions company that can provide a single pane of glass across all of the storage within a data center, not just what we provide, and that’s a very uncommon capability at this point in time. Some of the companies in our space, such as 3PAR or Compellent do some of those features, but they do it only across their own storage arrays, and by opening it up to do it on a diverse heterogeneous basis, we can solve a much bigger problem and a much more complicated problem facing data center CIOs and system administrators today.

WSR: What were some of the value drivers behind the company’s Q2 results from last month, which saw a significant improvement, and as a result raised your guidance?

Dana Kammersgard: We exceeded guidance pretty much across the board last quarter. Fundamentally that was a function of the early indicators of the success of our strategic initiatives, and as we transform the company from an entry level storage array provider to a holistic storage solutions provider, we have launched incremental software products that bring higher margin revenues to the company, we have launched a channel initiative going out to reseller partners, we’ve have attracted about 185 of those to date, bringing diverse revenues and higher margin revenues to the company as well, and fundamentally it was a lot of heavy lifting, a lot of blocking and tackling, spending constraints, renegotiating some contracts, and the value that we bring to our OEMs who are selling our products under their label very successfully. As we roll into Q3, you will see from our guidance that we’re looking for revenue to be relatively flat, but a dramatic improvement in the bottom line as a result of those items that I just described as well. So, we’ll begin to see the fuller benefit of those actions in Q3.

Hanif Jamal: Let me just add to that. If you take a look at the financial trajectory of the company, we had a $0.09 loss in Q1 and a $0.06 loss in Q2, we have guided to $0.00 to $0.04 loss in Q3, and we’ve indicated that we can be EBITDA breakeven by Q4. So, the financial trajectory of the company is looking very positive at this stage.

WSR: Well good, and perhaps you guys can talk to us about the strength of the management team over at HILL?

Dana Kammersgard: Our team is comprised of a number of highly respected industry veterans. Hanif, prior to joining Dot Hill four years ago was at Gateway, and prior to that spent 17-years at Hewlett-Packard. Our Senior Vice President of Engineering comes to us from McData, Cabletron and Digital. Our Senior Vice President of Operations comes to us from hard disk drive companies such as Maxtor and WD. Our VP of Quality comes to us from a number of storage companies, including Quantum, Maxtor and Iomega. We’ve got a great team. We are very excited about what we have accomplished over the last three years; we have replaced $200 million worth of Sun Microsystems revenue with $200 million worth of HP, NetApp, and other revenue. Recall, if you will, back in ’05 and ’06 Sun Micro was 84% of our revenue and out of $214 million roughly. Today, it’s very close to zero, and yet we’ve maintained and grown our overall topline. Most companies would not have survived that kind of event. We believe that we have not only survived, but we’ve got strong momentum going forward with incremental wins and incremental customers in our sales team, and sales management has done a great job in that regard.

WSR: What are some of the goals, milestones, and objectives that the team is hoping to accomplish here within the course of the next year?

Dana Kammersgard: We are, as I indicated, on the verge of transforming the company from an entry-level storage array provider to a holistic storage solutions provider that will participate very actively in the cloud, very actively in virtualized storage, and very actively in unified storage platforms. And at that macro level that’s what’s going to occur over the next year, and that comes from the integration of our Cloverleaf acquisition into our product portfolio, that comes from the launch of incremental thin provisioning and tier provisioning features into our storage arrays, it comes from the development of a channel to sell these bundled solutions to and through, and it comes from the addition of incremental OEMs and/or resellers. Clearly, the near-term benchmark for us is to demonstrate that we do have financial control over this company, and are going to return to profitability or at minimum an adjusted EBITDA breakeven by the end of this year. That is the bar that we have set for the public to measure ourselves by. In addition to that, we have asked them to measure us by the improvement of gross margins over the course of the next couple of quarters. So, we’ve been through a long, at times, painful transformation in replacing $200 million worth of revenue with $200 million worth of new revenue based on new products, and we believe that we’re well along the path now to financial viability, operating margin profitability, and looking forward to demonstrating that to Wall Street, to our investors, and to the analysts. But the bigger picture is the strategic transformation of the company into one that has earned the right to be called a leader in terms of unified and virtual storage platforms. We believe we have all the assets now on board to do that.

WSR: Well, great. So you just presented at the Rodman & Renshaw conference here in New York earlier this week, and as you continue to speak with investors and members of the financial community, do you guys believe that the Dot Hill Corp. story, message, and ultimately your upside potential are completely understood and appreciated by the financial community?

Dana Kammersgard: No, I don’t think it is yet to be honest with you. I think we’ve got a lot of work to do in that regard, and as we demonstrate the success of transformation in financial results, I think we’ll get a lot more traction and people will pay a lot more attention. We do have an Analyst Day planned for November 9th, Hanif and I will be out on the road. Over the course of the next few months and quarters as well telling this story, but ultimately it comes down to proof points, and the most important proof point to Wall Street in the near-term is returning to profitability. And as I indicated, we expect to get to, at a minimum, a breakeven on an adjusted EBITDA basis by the end of this year. Hopefully, we can do better than that but the bottom line is that’s what people are going to start to get excited about.

WSR: So, once again joining us today is Dana Kammersgard, Chief Executive Officer for Dot Hill Corporation, as well as their Chief Financial Officer, Hanif Jamal. The company trades on NASDAQ, ticker symbol is HILL, currently trading at $1.34 a share, market capital is north of $73 million. We were just discussing some of the company’s recent patents as well as some of the trends right now in the OEM sector, and some of the highlights of what they shared with investors at the Rodman & Renshaw conference here in New York. Before we conclude, gentleman, just to recap some of your key points, why do you believe investors should consider Dot Hill Corp., HILL, as a good long-term investment opportunity?

Dana Kammersgard: So, one, as I indicated, we have moved through the course of, rather linked the transformation and we’re on the verge of now demonstrating to the public whether it be investors, analysts, or the market in general, that we have become sustainably profitable, that our operating model does work. But again, more important than that I think we will shortly demonstrate, and certainly a proof point will be at the Analyst Day on November 9th. The fact that we have all the assets now to play as a leader and an innovator in the cloud storage, virtualized storage, unified storage markets with the products and technology that we have invented organically and/or acquired over the course of the last 12 months or so. We will be launching new products later this year that provide additional proof points to that and it’s a very, very exciting time to be in storage. There is an awful lot going on, it is a very hot market from an investment point of view, and from an innovation point of view, and we intend to be a leader in that space, and we intend to be able to demonstrate and prove that to our public here in the near term as well.

Hanif Jamal: I want to add to that. I think investors should take a look at our enterprise value, we have $42 million of cash on the balance sheet. The market cap at $1.34 is around $70 million, so we’re looking at about $30 million enterprise value, and we’re seeing that’s highly undervalued for this company.

WSR: We certainly look forward to continue to track the company’s growth as well as report on your upcoming progress, and I’d like to thank you both for taking the time to join us today and update our investors on Dot Hill Corp.

Dana Kammersgard: Thanks, Juan.

Hanif Jamal: Thanks, Juan.

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