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Executives

Jodi Bochert

Dana W. Kammersgard - Chief Executive Officer, President and Director

Hanif I. Jamal - Chief Financial Officer, Principal Accounting Officer, Senior Vice President, Corporate Secretary and Treasurer

Analysts

Glenn Hanus - Needham & Company, LLC, Research Division

Steven Busch

Dot Hill Systems (HILL) Q4 2012 Earnings Call March 14, 2013 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Dot Hill Fourth Quarter 2012 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Jodi Bochert. Ma'am, you may begin.

Jodi Bochert

Good morning. Thank you for joining us today for the Dot Hill conference call and webcast for our fourth quarter and 2012 year-end results.

Before we begin, I would like to advise you that we will be referring to a slide that can be found in the Investor Relations section of our website. I encourage you to access them now.

I would like to remind everyone that certain statements made during this call regarding matters that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the statements. To learn more about such risks and uncertainties, you should read the risk factors set forth in Dot Hill's most recent annual and quarterly filings with the Securities and Exchange Commission. All forward-looking statements made during this call speak only as of the time they are made. Dot Hill undertakes no obligation to update such statements to reflect events that occur or circumstances that exist after they are made.

Today's call provides you with certain financial results determined on a non-GAAP basis for quarters ended December 31, 2012, September 30, 2012 and December 31, 2011, and for fiscal years ended December 31, 2012, and December 31, 2011. For GAAP to non-GAAP reconciliation, please refer to our press release and Form 8-K made available earlier today.

In 2011 and/or 2012, the company's non-GAAP financial measures exclude the impact of: stock-based compensation expense; legal settlements and their associated expenses; intangible asset amortization; restructuring and severance charges; charges or credits for contingent consideration adjustments; charges for impairment of goodwill and other long-lived assets; contra-revenue charges from the extension of customer warrants; the recognition of deferred and amortized revenue and costs related to a long-term software contract, which were deferred in the company's GAAP financial statements; specific and significant warranty claims arising from a supplier's defective products and deferred revenue costs impact associated with the AssuredUVS software business, which the company has substantially closed down; and the effects of foreign currency exchange gains or losses. These non-GAAP financial metrics, together with reconciliations to the company's comparable GAAP financial measures, are contained in today's financial results press release and Form 8-K, which are posted on the Dot Hill website at www.dothill.com in the Investor Relations section and filed with the Securities and Exchange Commission.

Joining us today are President and CEO, Dana Kammersgard; and CFO, Hanif Jamal.

I will now turn the call over to Dana.

Dana W. Kammersgard

Thanks, Jodi. Good morning, everyone, and thank you for joining us. All things considered, I am pleased to report non-GAAP revenues for the full year of 2012 as flat compared to 2011, especially in light of the fact that William Blair & Company reported just 2 days ago that total storage product revenues for the top 5 publicly traded vendors declined by 2% in 2012 on a year-over-year basis.

As discussed on prior calls, macro environment and secular headwinds facing the IT industry in the storage sector persisted throughout the second half of the year. We did not experience a meaningful year-end budget flush and our customers in the Americas and Europe, in particular, ended the year on a cautious spending note.

Non-GAAP revenues in our server OEM business, which includes HP, Lenovo, Dell, Stratus, Lipro [ph] and now AMD declined about 9% year-over-year. Excluding our largest customer, non-GAAP revenues in our server OEM group grew nearly 12% annually. Our relationship with our largest customer remains very strong and together we have now shipped over 180,000 arrays. We are excited by the prospects of incremental opportunities with a number of our server OEM partners.

Our non-GAAP vertical market revenue, on the other hand, grew over 38% annually, an impressive growth rate by most any measure and especially in light of the headwinds our industry has faced throughout the year. We believe this is clear evidence that our strategic initiatives are beginning to work.

Within our verticals, we saw very strong growth in the media and entertainment industry and with various OEM partners serving the buildout of fourth-generation telecommunications infrastructure. At the same time, we have some excellent opportunities in big data, oil & gas, HPC and digital image archiving, which I will update you on in a moment.

We continue to be encouraged by the reception of both our new 4000 and the Pro 5000 series mid-range products. Earlier this year, I reported that in the fourth quarter of 2012, we had installed 18 seed units of the Pro 5000 and had converted 2 of those into sales. Those numbers have grown since then and we look forward to giving you a full update at our Analyst Day, once we have closed out the current quarter.

In addition, most of the incremental vertical OEM opportunities we are working on are based on the new 4000 Series products, which boast best-in-class price performance for embedded storage solutions.

Speaking of performance, we recently posted excellent results with the Pro 5000 series as part of a new SPC-1 Benchmark submission to the independent Storage Performance Council. This product demonstrated the best combination of SPC-1 price performance for mid-range systems priced between $30,000 and $200,000 at $2.96 per IOP with the lowest recorded cost per gigabyte, at $6.48, proving that a high-performance, tiered storage system can also be cost effective.

In addition, I can tell you that we expect to launch the first of our next-generation, entry-level products during the summer of this year and we have a number of OEMs considering these products now. Our product lineup has never been richer or more competitive.

I believe we are just beginning to demonstrate that our strategic vertical market and product expansion initiatives are working. As you may recall, these initiatives were designed to achieve 3 fundamental objectives. The first is top line growth. While flat year-over-year revenue performance does not sound very impressive, the 38% non-GAAP revenue growth we posted in the vertical markets is impressive and we do expect further growth in these markets to continue in 2013 with the pipeline we have built. We also do not anticipate the same level of decline in our server OEM business that we experienced in 2012.

Second objective is revenue diversification. In 2011, our largest customer represented 74% of our revenue. In 2012, this same customer was 66%, showing progress in the right direction. We believe this trend will continue in 2013 as we ramp new vertical market partners.

The third objective is margin expansion. Exiting 2011, our fourth quarter non-GAAP gross margin was 25.4% while non-GAAP gross margin of the same period in 2012 was 28.3%. As you might expect, our 4000 and Pro 5000 Series mid-range products generally have higher margins than our legacy 3000 Series and are therefore part of the margin expansion story. And we expect continued margin expansion in 2013, as well, a direct reflection of both improving customer and product mix.

We've talked in the past about Dot Hill's specific growth catalysts. These catalysts are what have generated the 38% non-GAAP revenue growth in vertical market revenues and what we believe will continue this growth in 2013. As a reminder, these include: A consolidating competitive storage landscape; the launch of new mid-range products increasing our total available market by over $6 billion into IDC price bands 4 and 5; and our focus on specific vertical markets, including media and entertainment, oil & gas, telco central office, big data analytics, HPC and digital image archiving.

Since the beginning of the year, we have developed and presented a few slides that attempt to clearly document the impact of these catalysts and the resulting traction of our strategic initiatives on our growth opportunities for 2013 and beyond. I'm going to refer to those now. We will also delve substantially deeper into these the opportunities at our Analyst Day on April 8.

On the Slide #2, we show the consolidation that has occurred in the storage industry over the last few years. With many of our competitors having been acquired or, in at least one case, simply shuttered a majority of independent, best-of-breed storage companies in our space have ceased to exist as stand-alone companies, which results in more opportunity for us.

The third slide depicts the typical OEM sales cycle, which progresses through 4 phases from first active engagement with a new prospect through to the launch and ramp of our new offerings based on -- of their new offerings based on our products. As you can see, the typical sales cycle can be anywhere from 6 months to over 18 months with an average perhaps of around 1 year from Phase 1 to Phase 4. The other significant take away from this slide is that everything to the right of Phase 1 is a dealer program that we have, in fact, won. That is, we have received at least a verbal award from any company in Phase 2 or beyond. At that stage, these are no longer prospects, we consider them customers.

Slide 4 represents the state of this pipeline of new OEM opportunities as it was last presented at the Noble Conference on January 23, 2013. You can see from this that there were 7 awarded programs in Phases 2 through 4 in a wide variety of verticals, including MNE [ph], telco, big data, oil & gas and digital image archiving. You may note, as well, a couple of new server OEM opportunities.

Slide 5 is now that same chart as of today. I think you will agree that we have made substantial progress even in the last 6 weeks, with the highlighted deals moving further to the right as we work through contract negotiations, customizations and launch preparations. In fact, as this slide suggests, since that conference, we have moved 4 additional OEMs into the win column and now have a total of 11 new opportunities in various stages of contract negotiations, customization and/or launch preparation.

I want to make one thing especially clear: the majority of these deals are competitive displacements and therefore not dependent on the economy or overall storage sector performance for us to grow. It is these deals that we expect to drive our growth later in 2013 and into '14. And as I mentioned earlier, we will delve deeper into these opportunities and this pipeline at our Analyst Day on April 8.

In summary, while it remains a difficult but improving environment, we are executing on our strategic initiatives, our vertical markets business has shown impressive growth and our deal pipeline is strong and growing.

With that, let me hand it over to Hanif. Hanif?

Hanif I. Jamal

Thank you, Dana, and good morning. Before I provide you with the details of our financial results, I would like to invite you to attend or listen to the webcast from the ROTH Conference in Laguna Niguel, California next Monday, March 18. In addition, I hope that you will be able to join us at our Analyst Day on April 8 in New York.

In summary, I think we made solid progress in 2012. While non-GAAP revenues were flat, our vertical markets business grew 38% on a year-over-year basis and our server OEM business, excluding our largest customer, was up almost 12% in 2012. We are pleased with the sales momentum, particularly in vertical markets. And as Dana has articulated, we have a strong customer pipeline that we believe will start to be accretive to revenue later in 2013 and into 2014.

We are also pleased that the non-GAAP gross margin continued to grow to 27.9% in 2012 from 26.4% in 2011. And we expect this trend to continue into 2013 due to a more favorable customer and product mix.

I will first provide you with the details of our financial performance for the fourth quarter of 2012 and will then summarize the total year 2012 financial results.

GAAP revenues for the fourth quarter of 2012 were $44.1 million compared to $48.2 million for the prior quarter and $47 million in Q4 '11. Due to an adjustment in our accounting for a long-term software contract, we deferred $2.1 million in revenue and $0.7 million in costs in the fourth quarter of 2012. This had no impact on cash and will not change how we report our non-GAAP revenues and costs, as it more closely reflects the cash flows of the contract.

GAAP gross margin for the fourth quarter 2012 was 17.8%, down from 25.3% in Q3 '12 and up from 17.6% in Q4 '11.

GAAP operating expenses for Q4 '12 were $12.6 million compared to $15.1 million in Q3 '12 and $15 million in Q4 '11. The result was a GAAP net loss of $5 million or $0.09 per share for the fourth quarter of 2012 compared to a loss of $3 million or $0.05 per share in Q3 '12 and a loss of $6.6 million or $0.12 per share in Q4 '11.

Non-GAAP revenues for the fourth quarter were $46.2 million compared to $48.2 million in the prior quarter and $48 million in Q4 2011. And this was within our revised guidance range issued in early January of $46 million to $46.5 million.

Our vertical markets business almost grew 8% sequentially and our largest customer accounted for 64.7% of non-GAAP revenues during the quarter.

Non-GAAP gross margin for the fourth quarter of 2012 increased to 28.3% from 26.4% in the prior quarter and was up from 25.4% in Q4 '11. The improvement in gross margin was largely due to the increased diversification of our revenues in both customer and product mix.

Total non-GAAP operating expenses for the fourth quarter of 2012 were $14.7 million as compared to $14.2 million for the third quarter of 2012 and $12.3 million for Q4 '11. The year-over-year increase in operating expenses was largely due to incremental engineering investments to support new customer customizations and launch preparation, as well as the development of our next-generation, entry-level product line, due to launch this summer.

Our non-GAAP net loss for the fourth quarter of 2012 was $2 million or $0.03 per share and was within our revised guidance range issued in early January. This compares to a third quarter 2012 non-GAAP net loss of $1.7 million or $0.03 per share and a fourth quarter 2011 non-GAAP net loss of $0.1 million or $0.00 per share.

Our non-GAAP EBITDA for the fourth quarter of 2012 was a negative $1 million compared to a negative $0.9 million for Q3 '12 and a positive $0.1 million for Q4 '11.

For the full year, GAAP net revenues were slightly lower, at $194.9 million in 2012, compared to $197.5 million in 2011.

Non-GAAP revenues were flat at $196.7 million in 2012 compared to $196.8 million in the prior year.

GAAP gross margin improved to 23.7% in 2012 from 21.1% in 2011, while non-GAAP gross margin improved to 27.9% in 2012, up from 26.4% in the prior year.

Non-GAAP gross margin dollars increased to $54.9 million in 2012 from $52 million in 2011 on flat revenue.

GAAP operating expenses declined to $60.4 million in 2012 from $63.5 million in 2011. GAAP -- non-GAAP operating expenses, on the other hand, increased to $57.8 million in 2012 from $48.8 million in 2011, due primarily to increased development expenses in support of the customers in our pipeline.

GAAP net loss for 2012 was $15 million or $0.26 per share compared to net loss of $22 million or $0.40 per share in 2011, while non-GAAP net loss was $3.7 million or $0.06 per share in 2012 compared to a profit of $3 million or $0.05 per share in the prior year.

Non-GAAP EBITDA for 2012 was a negative $0.4 million compared to a positive $5.4 million. Cash flow from operations was a negative $4 million in 2012 compared to a positive $2.1 million in 2011.

With respect to cash, we exited the fourth quarter of 2012 with cash and cash equivalents of $40.3 million and borrowed $2.8 million from our working capital line. This compares to an end of Q3 '12 balance of $40.5 million and borrowings of $1.8 million and $46.2 million at the end of Q4 '11 without any borrowing.

Cash flow from operations for the fourth quarter of 2012 was a positive $0.7 million compared to a negative $0.6 million for the third quarter of 2012 and a positive $1.1 million for the fourth quarter of 2011.

Now, let me turn to forward guidance for the current quarter. We will provide you with a longer-term outlook, including guidance, at our Analyst Day in 3 weeks.

Non-GAAP revenues for the first quarter of 2013 are expected to be in the range of $43 million to $46 million with a non-GAAP net loss of $0.02 to $0.04 per share. Normally, the first quarter is sequentially down from the fourth quarter and we expect the growth from our pipeline of new customers to begin later in 2013.

In summary, despite global economic and industry-specific headwinds, I remain excited about our prospects and opportunities as we begin 2013 with a strong new customer pipeline, a very competitive mid-range product offering and the planned launch of our next-generation, entry-level product line in the summer.

I will now turn the call back to the Shannon for a question-and-answer session, after which Dana will make some concluding remarks. Shannon?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Glenn Hanus of Needham.

Glenn Hanus - Needham & Company, LLC, Research Division

All right, I'll hit a few things here. So how should we think about cash managed -- operating expenses and cash management over the next few quarters, as you -- it appears like you're sort of in a little bit of hiatus here before you start to see the benefit of some of these design wins. Can you give us some thoughts about how you're going to manage that?

Hanif I. Jamal

So again, let me start with that. I think, certainly, from we're -- there's been a lot of work going on right now in the pipeline. I would expect that there would be just -- operating expenses to be flattish to maybe slightly up quarter-over-quarter, nothing too significant. And on the cash side, I expect there'll be some modest cash burn but I don't expect it to be very significant.

Glenn Hanus - Needham & Company, LLC, Research Division

When do you think cash might bottom? Sort of Q2, Q3 timeframe? Or how -- as we go through the course of the year?

Hanif I. Jamal

You're right. You're sort of thinking the right sort of direction here. I think, it's clearly, it's going to bottom, associated with the inflection point on revenue growth. So as we start to get some accretion from the new customers later this year, that will impact cash very directly.

Glenn Hanus - Needham & Company, LLC, Research Division

Can you give us maybe a little more color on the new revenues coming on? Should we think of that more as the third quarter with more acceleration in the fourth quarter? Or might we start -- I guess, might we start seeing something in Q2? Or can you give us a sense of the curve of that one?

Dana W. Kammersgard

Let me take that one, Hanif. Yes, we intend to give you more update and color on that at the Analyst Day, Glenn. I think it's hard to call for a variety of reasons. We do expect it to begin to pick up in 2013. I would expect some of that in -- a little bit of that in Q2, more of that in Q3 and more in Q4. It really depends on a number of factors that, to some extent, are outside of our control once we launch the product. That might include the acceptance of the new customers' product offerings in general. Remember, most of these are embedded solutions and, therefore, they've got to sell the solution at large, not just the storage. At the same time, we don't generally know how much inventory they may have of any competitor's product that they need to drain off. But I would expect to see a gradual pickup. I think that the 38% growth that we showed year-over-year from '11 to '12 is a function not of those -- not of these customers in the pipeline but of customers like Autodesk and Harris and Concurrent, who were publicly announced a while ago and their effect on our ramp and percentage in the vertical markets. So we expect all of these 11 to provide revenues in '13 but exactly when the aggregate begins to show dramatic change is a little hard to call at this point.

Glenn Hanus - Needham & Company, LLC, Research Division

All right. I'll try one more that you probably will want to defer mostly for the Analyst Day but I'll ask. So if you look at the -- can you maybe bracket a range of revenues possible from these 11 deals in '13 and '14? If you put a range around, it could be between X and Y type thing. Can you...

Dana W. Kammersgard

Yes, we're going to do that for you on April 8.

Glenn Hanus - Needham & Company, LLC, Research Division

Okay. How about this Q1 guide? How should we think about, if we look at -- think of HP and other server OEMs and the vertical markets. Can you give us some color around -- so the Q1 is down seasonal. Can you give us some of the puts and takes on the Q1 guide?

Dana W. Kammersgard

Yes. I think with respect to our largest customer, no secret who that is, right? They were down for the year, obviously, in '12. And we believe that they were down, generally speaking, comparably to their server OEM peers in storage and that we may see a little bit more of that in Q1. It's hard to call. Their first quarter, I believe, just ended, right, in January? And the forecast, I think, through the rest of the year has potential to be stronger than '12 for a variety of reasons that I really can't go into at this point in time. But I wouldn't be surprised to see Q1 down a little bit from them over -- our Q1 over Q4, just for seasonality reasons. With respect to the rest of the business, we're seeing upward trends at this point in time, inclusive of Q1.

Glenn Hanus - Needham & Company, LLC, Research Division

Okay. So sequential growth -- outside of the largest customer, sequential growth Q4 to Q1?

Dana W. Kammersgard

Yes. Now let me caveat that a little -- well, I think that's probably fair. Let me caveat that just one more -- in one more instance. Our Q1 of '11 was very strong because of some large, lumpy -- I'm sorry, Q1 of '12 was very strong due to some large orders from Tektronix specifically, one of our telco OEM partners. We don't expect that to occur in Q1 of '13. At the same time, we expect Tektronix to be a strong contributor throughout the year in the telco space.

Glenn Hanus - Needham & Company, LLC, Research Division

I was really just asking sequentially here.

Hanif I. Jamal

Okay. That's fine.

Dana W. Kammersgard

So I think that's a fair assessment, sequential growth Q4 to Q1. Outside of them.

Glenn Hanus - Needham & Company, LLC, Research Division

Okay, great. How about -- maybe you want to talk a little, Dana, about the competitive landscape you're seeing for these design wins and you have a bunch of incremental opportunities.

Dana W. Kammersgard

So a lot of the competition, as we have suggested, has gone away in one form or another, whether consolidated into a large company who is not focused on OEMs or simply gone away. A good example of one that went away this year is Active Storage, who shuttered their doors, I believe, it was January 31. And in that -- and as we've said many times before, Xyratex, as a competitor, exited the external RAID business a couple of years ago. Concurrent and Harris and Autodesk are all examples of OEMs that we picked up as a result of Xyratex getting out of the business. The other thing that we said was that the acquisition of Engenio by NetApp would result in some agitation within their customer base, within their OEM customer base with respect to buying from a supplier/competitor who is likely taking market share from some of their customers. And so I think we'll demonstrate here in the not-too-distant future that a number of the competitive displacements that we're talking about in that pipeline chart are, in fact, Engenio displacements as well. So I think we really are beginning to benefit or beginning to demonstrate the benefit of takeaways from Engenio. But there's others on that chart as well that we believe that we will displace, whether it be the smaller fry, like an Infortrend or even in one case, HDS. And again, we'll give you some more color on that in 3 weeks.

Glenn Hanus - Needham & Company, LLC, Research Division

And how about on gross margins? As we go through 2013, what would kind of -- you mentioned some opportunities for improvements. Should we assume that as the new design wins start to ramp up in the second half that those are generally higher margin and so we should see more gross margin improvement weighted to the second half rather than the first half of the year?

Hanif I. Jamal

Yes, I think that -- so I think generally speaking, I think that's a fair statement to say, that we would expect some -- the trends to go up. With that said, there could be some specific customer and product mix issues that could impact the gross margin. But I think, generally speaking, at a macro level, I think it's just fair to look at the sort of the trends and look at how gross margins were impacted from '11 to '12 based on that mix change, where you had our largest customer go down and the vertical markets go up 38%. So that's a fairly good -- a reasonable representation.

Operator

[Operator Instructions] Our next question is from Steve Busch of Southpaw Investments.

Steven Busch

So I don't want you to take this the wrong way but I just kind of want to discuss kind of the macro view down to a micro view of this last 5 years or more, actually. We've had a $73 million market cap and we haven't really posted positive earnings since 2005-ish. And we're talking about this 38% increase repeatedly in the vertical markets, which sounds good but it's only $900,000 versus a drop in HP alone of $2.57 million or 9%. So 38% sounds big but 9% is much bigger in dollar terms. And similarly, we state that, excluding HP, OEM annual revenue was up 12% year-over-year. I just think it's a bit disingenuous given that other OEMs was up only 1.7 -- $1.17 million versus $15 million drop in HP. So even at these large percentage growth rates, the dollar numbers on our largest customer significantly outweigh that. And I guess what I'm getting to is, at what point, regardless of revenue, do we actually start making positive earnings that are sustained? And do you see the 11 new OEM opportunities going forward to generate positive earnings in a more of a near-term rather than 3, 4 years out? And then I got a kind of a follow-up question.

Dana W. Kammersgard

Okay. First of all, I think it's a very fair question, Steve. And if you peel back the onion, just -- and I won't spend a lot of time treading back on the 5-year history but I will say that, over that 5 years, in fairness, we have replaced $200 million a year of Sun Micro revenue with $200 million a year of other revenue. So the last 5 years has been about transforming the company from a revenue foundation platform. And year-over-year, whereas HP was down about 9%, 10%, whatever the number is, we replaced that with significant -- at $13 million, we basically replaced with vertical market growth and/or other server OEMs, while diversifying the revenue stream even further. So from that point of view, I think, and I'm not at all suggesting by the way, that HP is going away or that HP, we expect to see another 9% or 10% headwind in '13 from HP. I don't think that's the case at all. I can't go into the reasons why I think that at this point in time, we'll provide you some more color on that in a couple, 3 weeks. But as we stabilize that revenue foundation, which I believe we are now demonstrating, at least '11 to '12, we will see the accretive benefit of the higher-margin vertical customers come to bear. And we will see top line growth that is quite accretive. What we have said publicly in the surrounding slides in our investor conferences, is about $0.20 to $0.30 above breakeven. Right, Hanif?

Hanif I. Jamal

Yes. Well...

Dana W. Kammersgard

$0.20 to $0.30 of every top line dollar above breakeven. If you do the math on Q4, you'll find that we lowered our breakeven point just a little bit from $50 million, which is where it's been for the course of the last few quarters. So I think we've really set the stage now, in terms of rebuilding our revenue, improving our margin, diversifying our customer base, to begin to show growth in aggregate rather than growth at the next level down. Because to replace $200 million a year, an 84% concentration customer over the course of 5 years, is no small event in and of itself. And if you look at the revenue growth below the Sun Micro line over those last 5 years, the compound annual growth rate was actually fairly impressive. That's all behind us at this point in time. The strategic initiatives that we have developed, in terms of product expansion and vertical market expansion, are just beginning to take off now. And in that context, I think you'll begin to see exactly what you're looking for, which is accretive growth with positive earnings.

Steven Busch

Okay. I mean, there's no doubt about it that you had a great job replacing the Sun revenues, which is one of the reasons why I own your stock. But again, it's all about earnings at some point. Revenues could be a $1 zillion but if we're still losing money, it doesn't really matter. But I'll take it and I'll see how we -- what you say in the next few weeks. So kind of off-topic and maybe just from a different angle that we've got -- had a back and forth before on, is there any way for you to tell us, as outside shareholders, what you think the patent portfolio is worth? And I know it's a bit of a touchy subject and you can't really go out and institute a royalty's stream or a royalty program based on being in business selling these products. So if we can't make substantial earnings off of our revenues no matter how big they grow to, does it make more sense to have less revenue on a higher return on earnings, $40 million revenue with $30 million earnings from a royalty-based system and not even have any product sales? And I appreciate your efforts.

Dana W. Kammersgard

Yes. No, I think that's a fair question as well. We've looked rather extensively at that, as you may know from prior calls. We have looked at the market in terms of selling some of our intellectual property. At the moment we have determined that it is more valuable to us as part of our portfolio rather than trying to piece out various patents for sale. I think that you're exactly right. On the one hand for us to go out and, let's say, hypothetically, HP infringed on one of our patents -- doesn't matter who, right? The fact of the matter is, it's not very palatable for us to go out and contend a patent infringement with companies that are likely to become or could become perspective customers. So in that context, it becomes problematic to file suit for infringement. We think that the portfolio is resonating with respect to the intellectual property value as embodied in our products, as represented in not only in the pipeline chart but other companies that we talk to that aren't in the pipeline yet. So at the moment, I think it's in our best interest to retain the portfolio as is, not get into the patent suit business and continue to try and monetize that in the way that we are. And again, I think as we provide more color at the Analyst Day, you'll understand that perhaps a little bit better.

Operator

I'm showing no further questions at this time. I would like turn the conference back over to Dana Kammersgard for closing remarks.

Dana W. Kammersgard

Okay. Thanks, Shannon, and thank you all for attending. I also want to thank all of our employees for their hard work and dedication throughout 2012 and for setting us up in a manner that we're very excited about with respect to '13 and beyond. I am very excited about the movement in our pipeline and the fact that we now have 11 new incremental opportunities as opposed to 7 just 6 weeks ago. And we look forward to sharing more detail on that with you at the Analyst Day. I hope you can attend or if not, at least listen to the webcast. Have a great day.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day.

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