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Dot Hill Systems Corp. (HILL) reported earnings of 5 cents per share for the second quarter of 2013, comprehensively beating the Zacks Consensus Estimate of 2 cents loss per share.

Revenues

The company reported revenues of $50.7 million, up 13.9% sequentially and 6.1% year over year and were at the mid-point of management’s guidance range of $47–$53 million.

Revenue Sources

Revenues from vertical markets increased 55% sequentially and 106% from the year-ago quarter to $20.6 million. The increase was driven by a rise in the number of new customers and increased contribution from a telecom infrastructure provider who contributed over 20% of total revenue for the quarter.

Revenues from Server OEMs declined 3% sequentially and 20% on a year-over-year basis to $29.1 million.

Margins

Reported gross margin for the quarter was 33.5%, up 110 basis points (bps) sequentially and 690 bps year over year. Higher volumes and a more favorable customer and product sales mix drove margin expansion.

Operating expenses (S&M, G&A and R&D) of $14.9 million were down 2.0% from $15.2 million in the year-ago quarter. All three expenses, sales & marketing (S&M), research & development (R&D), and general & administrative (G&A) decreased as a percentage of sales. As a result, the reported operating margin was 4.1%, up significantly from the year-ago quarter margin of (5.2%).

The quarter’s GAAP net income (continuing operations) was $2.1 million or earnings per share of 4 cents compared with a loss of $2.9 million or 5 cents in the year-ago quarter. Excluding special items but including stock-based compensation expenses, adjusted net income was $2.8 million or earnings per share of 5 cents compared with a net loss of $2.9 million or 5 cents a share in the year-ago quarter.

Balance Sheet

The company ended the second quarter with cash and cash equivalents balance of $40.4 million, roughly flat with $40.3 million in the prior quarter. Trade receivables were $29.1 million, up from $22.5 million in the prior quarter.

During the quarter, cash flow from operations was $2.1 million, capex was $1.1 million, and free cash flow was $1.0 million.

Guidance

For the third quarter of 2013, Dot Hill Systems expects total revenue in the range of $50–$55 million, representing an increase of 10.1% sequentially. Non-GAAP EPS is expected to be in the range of 2-5 cents.

For 2013, management expects revenues in the range of $200–$215 million versus prior guidance of $205-$227 million. On a non-GAAP basis, gross margin is expected in the range of 32%-33% (prior guidance of 30%-31%); operating expenses in the range of $58-$60 million (prior guidance of $60-$64 million) and EPS of 10 to 16 cents (prior outlook was 2-10 cents).

Conclusion

Dot Hill Systems, the leading provider of storage area network solutions reported a decent second quarter, with earnings exceeding the Zacks Consensus Estimate. Also, the top-line figures were up both from the prior quarter as well as from the year-ago quarter.

Management also gave a strong third quarter guidance, which indicates improving demand visibility. The company remains encouraged by the traction in vertical markets and expects to generate strong revenues from this market in the near future.

With a strong second quarter 2013 performance, better visibility for the upcoming quarters, growing need for advanced storage solutions to cope with the increasing demand for data generation and data sharing activities, product launches and expected growth in deal pipeline, this storage area network solutions provider is an attractive investment opportunity.

Currently, Dot Hill shares have a Zacks Rank #3 (Hold). Other stocks that are performing well at current levels include SanDisk (SNDK), Syntel Inc. (SYNT), and Gartner Inc. (IT), all carrying a Zacks Rank #1 (Strong Buy).