Sun Dogs Dot Hill

Last quarter, Dot Hill Systems Corp.'s (Nasdaq: HILL) relationship with Sun Microsystems Inc. (Nasdaq: SUNW) propelled it to a healthy profit that marked a turnaround year (see Dot Hill's Alive & Well).

Now, however, analysts fear Sun is dragging down Dot Hill for the March quarter.

Industry insiders fingered Sun as one of the struggling OEMs that caused QLogic Corp. (Nasdaq: QLGC) to pre-announce it would miss its numbers Tuesday night (see QLogic Dives on Shortfall). Now there is chain reaction of speculation about how that will affect Dot Hill, which supplies Sun with its low-end Fibre Channel SAN systems and recently signed a deal to provide Sun with SATA-based systems as well.

Merriman Curhan Ford & Co. and Lehman Brothers downgraded Dot Hills stock in the wake of QLogic’s news. Merriman said Dot Hill’s Sun-related revenues fell as much as 15 percent from the December quarter. Lehman cut its quarterly revenue forecast for Dot Hill from $54 million to $49 million and its earnings forecast from $0.14 EPS to $0.10; and the firm dropped its full-year forecasts from $270 million to $242 million and from $0.63 to $0.50.

Deutsche Bank AG and Susquehanna Financial Groupalso dropped earnings and revenue expectations for Dot Hill, though they stopped short of downgrading the stock.All this is a turnabout for Dot Hill. Back in the December quarter, Sun accounted for 84 percent of Dot Hill’s revenue. So when Dot Hill reported income of $6.8 million, or $0.14 per share, after losing $12.4 million, or $0.49 per share, the previous year, Sun received credit for Dot Hill’s change of fortune.

Sun had no comment on news of the QLogic or Dot Hill downgrades.

What does Dot Hill say? “We have no comment,” says director of investor relations Kirsten Garvin. “We just closed the quarter yesterday and it’s too early to comment.”

Garvin wouldn’t say if Dot Hill is sticking to its previous guidance, which was a flat $57.5 million in revenue and slight improvement in earnings for the quarter.

But one analyst, George Elling of Deutsche Bank, wrote in a note this week that it will be tough for Dot Hill to hit its guidance, because its quarter was back-loaded with 70 percent of orders to be filled in March.The downgrades took a toll on Dot Hill’s stock today. By mid-afternoon, shares dropped to $9.50, down $0.54 or 5.38 percent.

The good news for Dot Hill? Some analysts who've issued cautions lately expect brighter days ahead. Deutsche Bank is encouraged by the prospect of new business from Sun and IBM Corp. (NYSE: IBM), a recent acquisition of SAN controller vendor Chaparral Network Storage (see Dot Hill Picks Up Chaparral), and an expected ramp from SATA sales in the second half of the year. Susquehanna’s Kaushik Roy forecasts Dot Hill’s SATA deal with Sun to be worth $15 million to $20 million in the second half of 2004; and he expects Sun to have a strong June quarter.

— Dave Raffo, Senior Editor, Byte and Switch