Analyst Conference Summary

Rackable Systems

conference date: April 24, 2008 @ 2:00 PM Pacific Time
for quarter ending: March 31, 2008 (1st quarter)

Forward-looking statements

Overview: Glass half empty, or maybe two-thirds empty. Plunging sales, but improved gross margins despite that and cash flow positive. A lot of positive details below.

Basic data:

$68 million in revenue is down 39% sequentially from $111.7 million and down 6% from $72 million year-earlier.

Net income was negative $2.9 million, improved sequentially over a loss of $19.0 million, and improved from a loss of $16.1 million year-earlier.

EPS (earnings per share) were negative $0.10, improving sequentially from a loss of $0.65, and up quite a bit from negative $0.36 year-earlier.


For full 2008 revenues are expected bewtween $353 and $374 million, GAAP gross margins between 17.6 and 20.6%, with positive cash and non-GAAP EPS for the year. This is lower guidance for the top end.

Conference Highlights:

First quarter is seasonally weak for revenue. In addition some orders were delayed but not cancelled. Some customers decreased purchases.

We have cut out costs. Non-top 3 customers were 59% of revenue, which was up from 37% year-earlier. Storage was 19% of revenue. International 7.4%.

Next generation technology will be available by the end of this quarter, doubling densities. We are way ahead of our competitors on power efficiency. AMD and Intel quad core benchmarks are great. Our beta cycle is near complete, full market launch within 60 days.

Non GAAP EPS was positive $0.06; Non-GAAP net income was $1.7 million. Stock based compensation expense was $3.5 million. Other charges to GAAP were $0.8 million amortization of Terrascale acquisition, $1.3 million quarterly payout for Terrascale, and a tax benefit of $1.0 million.

Gross margins improved to 23.5% (24% non-GAAP), up from 12.5% year-earlier.

Cash and short term investments ended at $198.2 million (they get $206.9 million by adding in long term investments. On that basis cash was up $8.8 million from Q4). Does hold $8.7 million in auction securities, so those were reclassified to long-term. Inventory was $36.2 million. Accounts receivable $34.6 million.

Cost of revenue was $52.0 million. Gross profit $16.0 million. Operating expenses $20.7 million. Loss from operations $4.7 million. Other income $2.0 million. Income tax benefit $0.2 million.

Industry mix was internet 64%, media 12%, financial 8%, other 16%, with strong performance in oil and gas.

Amazon, Microsoft, FaceBook and YouTube were each over 10% customers in quarter.

Headcount ended at 348.

The next stage of Rackable is growth and scale.


DRAM help with gross margin? Main contributors were market diversification and product mix. Some DRAM benefit, but not a major factor.

Mix shift? Fair amount of high-end taylored database builds.

How much unprofitable revenue did you give up? Won't give specifics, but we are chosing only deals that are profitable.

IceCube? Pipeline is healthy. $20 to $50 million possible this year. But no revenue in Q1 on the Cube. Additional prototypes were delivered in quarter. We see it as a deployment choice for customers.

Storage business up, was that part of positive margin mix? Yes. Rapidscale is not the main contributor, it includes higher capacity drives and new RAID technologies. We were able to sell to compute clouds and databases because of our improved offerings. We remain committed to Rapidscale, which is geared to high performance (HPC) environments. We need to expand our skills at the software stack layer.

When will we see Japan revenue? We are a great fit with CPC in Japan. We would expect some contribution this year with acceleration in 2009.

Linearity in quarter? Normal. No difference between top 4 and rest of customers.

Competition? Sun is lost. HP is the expensive provider. IBM is expansive and inflexible. Dell is the low-cost bundler. Everyone has validated our build-to-order business model.

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Copyright 2008 William P. Meyers