OEMs Prop Up Dot Hill, Engenio

Two players in the midrange SAN system market, Dot Hill Systems Corp. (Nasdaq: HILL) and Engenio Information Technologies Inc., are showing upticks in OEM sales, pointing to a positive industry trend -- though further growth for each could depend on gaining even more deals.

Dot Hill and Engenio are among the suppliers that provide systems to leading SAN system vendors. Dot Hills major business is supplying low-end SAN systems to Sun Microsystems Inc. (Nasdaq: SUNW), while Engenio gets most of its revenues from midrange systems sold to IBM Corp. (NYSE: IBM).

Dot Hill today reported revenues of $69.6 million and net income of $6.7 million, or $0.15 per share, for last quarter (see Dot Hill Exceeds Q2 Guidance). Revenue was up 44 percent over the same period last year and 43 percent from last quarter. According to Reuters, analysts’ estimates for Dot Hill were $58.2 million in revenues and $0.10 earnings per share.

Sun accounted for 87 percent of Dot Hill's total revenues.

Engenio, still part of LSI Logic Corp. (NYSE: LSI) but expected to price its IPO later this week or next, listed revenues of $113.3 million last quarter and net income of $4.6 million, or $0.09 EPS in a statement filed with the SEC(see Engenio Might Wait on IPO, LSI's Storage Sub Plans IPO, and LSI Storage Becomes Engenio). The revenue increased 13 percent from the same quarter last year, although it dropped $2.5 million from the previous quarter.IBM accounted for 54 percent of Engenio’s revenues -- up from 50 percent a year ago.

Earnings from both Both Dot Hill and Engenio signal growth in the entry-level and midrange SAN system markets, where vendors seem to have escaped the disappointments other storage companies experienced last quarter.

“I think if you note that IBM, Network Appliance, EMC all saw strength in their midrange last quarter... the demand seems to be solid,” LSI Logic CEO Wilf Corrigan told analysts Tuesday when LSI reported earnings. “We see that continuing to be strong.”

Still, both Dot Hill and Engenio appear to be weighted heavily in favor of significant OEMs, a dangerous dependency. Dot Hill’s guidance for the current quarter reflected its large stake in one OEM. The company is forecasting revenue of $57 million to $61 million and EPS of $0.09 to $0.11 -- down from this quarter -- largely because it is traditionally a slow quarter for Sun. Dot Hill also took a hit in the first quarter of this year when Sun had poor results (see Sun Dogs Dot Hill).

Dot Hill CEO Jim Lambert says his company is actively in the running for a greater diversity of low-end SAN system deals (see Have Patents, Will Travel). “Our number one priority is to get other Tier 1 OEMs lined up,” Lambert today told analysts on a conference call. “We’re talking to them day and night.”Sources say Hitachi Data Systems (HDS) is almost certainly one of the major OEMs Dot Hill is seeking, and Hewlett-Packard Co. (NYSE: HPQ) might be the other.

Meanwhile, Dot Hill gained about $1 million in revenues from a new OEM, NEC Electronics Corp. Japan, last quarter and began shipping through other small OEMs, Lambert said. However, Sun’s percentage of Dot Hill revenue actually grew during the quarter.

Lambert also said Dot Hill unsuccessfully tried to land a NAS OEM deal with Sun, which instead acquired NAS from a joint venture agreement with Procom Technology Inc. (Nasdaq: PRCME). (See Sun Sings New Storage Song and Sun, Procom Form Alliance.)

Engenio has not commented on any future business because it is in a quiet period ahead of its IPO, but it's believed to be in the running for the same deals. Also, sources say Sun has decided to OEM at least part of its midrange SAN family from Engenio. Adaptec Inc. (Nasdaq: ADPT) and Xyratex are other competitors of Dot Hill and Engenio in the low end (see Xyratex Swims in Public Pool).

— Dave Raffo, Senior Editor, Byte and Switch0