Analyst Conference Summary

Rackable Systems, Inc.

conference date: April 26, 2007 @ 1:30 PM PT
for quarter ending: March 31, 2007 (1st quarter)

Forward Looking Statements
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Overview: Weak quarter. Okay, a bloody bad quarter. Guidance is not pretty, either.

Basic data:

Revenues of $72.0 million were down 33% sequentially from $106.9 million and down 15% sequentially from $84.4 million in the year-earlier quarter.

GAAP net loss for the quarter was $10.2 million, following a narrow $0.6 million profit in the prior quarter.

GAAP EPS ($0.36).

Non-GAAP figures were given as a net loss of $3.6 million or $(0.13) per share.

Cash and equivalents ended at $170.1 million, up $9.6 million in the quarter.


Q2 revenues between $75 and $85 million. Expects improved gross margins due to falling memory prices.

Conference Highlights:

A challenging quarter. Has a new revenue diversification strategy. Will focus on higher margin products. Gautham Sastri was promoted to Chief Operating Officer. Todd Ford will be an executive vice president but is on his way out. Tom Barton will re-assume the President position.

Did get some traction in storage segment. Saw increased Intel adoption.

Environment has dramatically changed. Very significant reduction in gross margins from top 3 accounts. Dramatic improvements cannot be made over night; must diversify. Will continue to server largest accounts, but focus on expansion of account base. RapidScale clustered storage offering will have higher margins.

Need to standardize product line. Smaller customers may not need as much configuration flexibility and are not willing to pay for special configuration. Hope to reduce order lead times, expand distribution, and reduce inventory.

Did get significant revenues from all three of their top customers. Set gross margin guidelines. Will not try to match irrational competitor pricing.

Working on improving sales efforts.

RapidScale visibility is good; margins are good; customers are signing up.

Concentro was launched and they have begun taking orders.

Not yet ready to give changed 2007 financial guidance based on these changes.

Cash flow from operations was $10.4 million, about the only good news this quarter.

Non-GAAP: $17.7 million operating expense. Included one time charges of $0.4 million R&D; $0.4 million sales; $1.25 million from an order cancellation; $1.9 million tax. $14.1 million operating expense excluding the charges. S&M were slightly lower. G&A was higher for Sarbane-Oxley compliance and patent litigation. Expect it to be lower going forward.

Inventory was flat sequentially. Have a potential problem with DDR memory for AMD platforms; possible write-off if it does not sell.

296 employees.

Gross margin 12.5% GAAP. 13.5% non-GAAP. Driven by lower revenues.

Top 3 customers represented 62% of revenues; all were over 10% customers.


Q2 revenue projections are based on what we already know. New customer revenue potential is still there, but development of revenue has been slower than expected.

R&D going forward? Will be higher in 2007, but are not ready to quantify it yet.

Model shift, standardization customers? We are looking for channel partners and indirect distribution. Our standardized offerings will still be very differentiated from Dell and HP. Still will have AC and DC options, remote management, densities.

How sensitive are your top customers to pricing? For competitive reasons can't give details, but believes will get better margins.

Storage mix in quarter? 12%. Does not break out RapidScale. Still aiming for $20 million for RapidScale for 2007, mostly in second half. Bookings are accelerating rapidly.

Operating Expense trends? Will be more specific at mid-quarter update. But will trend up.

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Copyright 2007 William P. Meyers