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RACK
Rackable Systems, Inc.
conference date: October 30, 2006
for quarter ending: September 30, 2006 (3rd quarter)
See also Warning Note of January 17, 2007
Overview: Sequential revenue dip, but management claims it looks like a very strong 4th quarter coming based on orders arriving late in Q3 and in October.
Basic data:
Revenues of $80.5 million are down 9% sequentially and up 40% from year-earlier.
There was a GAAP net loss of $386,000 or .01 per share. Excluding stock-based compensation and $3.0 million of amortization of intangibles from the Terrascale acquisition, non-GAAP net income was $5.4 million or .19 per share, down 14% from year-earlier.
Gross margin (GAAP) 21.4%, down from 23.7% in the prior quarter and 24.1% year-earlier. Non-GAAP gross margin 22.6%.
Cash and equivalents ended at $195.8 million, down from $215.3 the prior quarter due to $30 million cash expenses from the Terrascale acquisition. Excluding Terrascale, cash flow would have been positive about $10 million.
Guidance:
Q4 revenues are expected to be between $100 and $110 million. GAAP EPS expected at .10 to .12 per share. Non-GAAP EPS of .25 to .27. Gross margins (non-GAAP) of 23 to 24%.
For the full year ending December 31, 2007, revenues of $475 to $525 million. GAAP EPS of .46 to .58. Non-GAAP EPS $1.28 to $1.40. Gross margin (non-GAAP) of 23-24%.
Conference Highlights:
A major new customer will start generating income in Q4. Delay in a major order during Q3 has come in for Q4. Channel demand is strong.
DDR supply was scarce and memory pricing was a problem, leading to some of the loss of gross margin. Because of spurt at end-of-quarter, paid significant amounts for contractor overtime, which also hurt margins.
Top 3 customers represented 58% of revenues. 12 over $1-million customers. AOL, Facebook, and YouTube are new customers.
$12.8 million storage revenues, representing 16% of total revenues.
Expects strong sequential gains in server revenues in Q4. $67.7 million server revenue, reprenting 84% of total.
No significant Terrascale revenues for Q3.
84% AMD, 15% Intel servers.
October one of highest booking months on record.
Dell will be more competitive in the future due to adoption of AMD. This may cut into RACK's server margins.
Much technology transition successfully completed in Q3.
Q3 was very back-end loaded (surge of orders last few weeks of quarter).
Operating expenses were up significantly from Q2. Employees increased mainly due to Terrascale acquisition. $2.1 million for R&D. $5.2 million for sales and marketing. $4.4 million for general and administrative expense. Inventories ended at $47.3 million. Capital expenditures were under $1 million.
Q&A:
Forward guidance? Based on known customer spend cycles and some reasonable expectations for new customers, plus plans for expenses.
Terrascale for Q4? Good customer traction, bookings. Does not want to project Q4, but sticking with $20 million in Terrascale revenues in 2007.
10% customers? None in Q3, but could have a couple new ones within the 1st to 2 quarters of 2007.
Inventories? Flat sequentially due to strong October bookings.
Server/storage mix? 15 to 20% storage revenues in 2007.
Old v. new customers? Healthy mix will be from newer customers, including larger new customers moving from minor to major customers.
Terrascale's single-box RAID technology evaluated positively.
Sales force? Had said they wanted to double, but only added a handful of executives. International sales force needs to grow, perhaps by acquisitions.
Foundation or compute side was 79%, scale-out 5% for server revenues.
Q4 linearity? Believes will not be back-loaded in Q4 as it was in Q3.
New Intel chips? Believes in time will trend towards more Intel products, but customer base is sticky. Once they qualified on AMD, they tend to stick with it.
Competition on price or features? In blade servers, HP and IBM servers are going to smaller deployments. Dell and HP have been more aggressive with pricing. Dell now has leading-edge chips, and tends to be the price setter in the market.
YouTube? Does not know what their plans are going forward as far as consolidating with Google.
DRAM is typically 25% of bill of materials.
Does not expect any major changes with top-3 customers. All three already use multiple vendors.
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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