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RACK
Rackable Systems, Inc.
conference date: July 27, 2006
for quarter ending: July 1, 2006 (2nd quarter)
Overview: Revenue growth continues, but earnings slipped slightly from the prior quarter, mainly due to increasing R&D and sales and marketing expense. Guidance continues up for revenues but slightly down for earnings per share.
See interesting comments in Q&A section below on how they see competition from Sun, HP, Dell.
Basic data:
Revenues grew to a record $88.6 million, up 5% sequentially from $84.4 million in the March quarter and up 101% from $44 million in the year-earlier quarter. Net income was $5.3 million or .18 EPS, down sequentially for $6.0 million or .23 per share for Q1, but up from $1.2 million or .07 per share year-earlier. Non-GAAP income claimed was $8.1 million or .28 per share (compared to .30 for Q1). $4.1 million was stock-based compensation.
Cash and short-term investments ended at $215.2 million.
$77.7 million of revenue was from servers.
23.7% gross margin, down slightly from Q1.
$13.6 million operating expense. $6.6 GAAP operating income.
Share count went up by 3 million due to secondary marketing; that is why non-GAAP income was up slightly but earnings per share down slightly from Q1.
194 end of Q1 to 223 employees end of Q2.
Guidance:
3rd Quarter - we continue to see strong demand. $80-85 million. Full year 2006 revenues $345-355 million. Q3 gross margins of 22-24%, same for full year.
Non-GAAP Q3 net income $5.4 to 6.3 million or .18 to .21 per share. Stock $4 to 5 million in stock based compensation.
Non-GAAP EPS 2006 full year 28.2 to 29.2 million.
Conference Highlights:
Storage revenue grew to $9.9 million, 11% of total from 7% in the 1st quarter. Two different types of storage products, with different gross margins.
Top 3 customers represented 67% of revenue in Q2; demand from them is good. Doubled number of sales representatives since Q4 2005. Progress in Internet vertical; has 8 of 20 top sites. Rewarded big storage contract by new customer that will be seen in as revenue in Q3 and Q4.
Growing client list in oil and gas exploration; government; finance.
CPU platform adoption. Increasing Intel based-sales, which are now up to 24% on a unit basis. Some purchases delayed as customers evaluate new Intel products.
Migrating SATA storage to serial attached SCSI.
Also migrating to DC power technology for servers.
Competitive intensity from Dell and Sun did not increase.
DDR prices are rising; could see negative impact from this in Q3. Transitioning to newer AMD sockets requiring DDR2.
Q&A:
Focussing sales efforts on largest Internet, pharma, oil companies.
Q4 better than Q3? Seen a lot of customers carefully evaluate next round of purchases.
EPS lower guidance? Hiring in Q2 will have full impact in Q3; continuing investments. Will recognize benefits mainly in 2007.
Weakness on server side expected? Our understanding is reflected in Q3 guidance.
AMD v. Intel on gross margins? Dell and Sun competition more important than ratio of AMD to Intel sales. Concerns are mostly about DDR prices. Planning conservatively.
AMD v. Intel ratio? Believes 30 to 50% Intel by end of year, but very speculative.
With respect to Dell, more concerned with where they price the new Intel products rather than entry into AMD market.
Blade servers? Two separate things: packaging at hardware level v. software platform. Scaleout line is more blade-like line. RACK does not have its own software automation platform.
Sun is not showing up in RACKs traditional customer base. Sun is focussed on scale-up rather than scale-out situations. Dell was not competitive. HP is executing better and getting more aggressive on pricing.
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Disclaimer: Our analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. We cannot guarantee anything said by company representatives is true. We try not to make errors, but its possible. Before making or terminating an investment you should always verify any factual basis of your decision.
Copyright 2006 William P. Meyers