Analyst Conference Summary

Rackable Systems

conference date: August 4, 2008 @ 2:00 PM Pacific Time
for quarter ending: June 30, 2008 (2nd quarter)

Forward-looking statements

Overview: Not a great quarter, with losses continuing and revenues up sequentially but not from year-earlier. New developments make management optimistic about Q3 and Q4.

Basic data (GAAP) :

Revenue was $76.0 million, up 12% sequentially from $68 million but down 8% from $82.2 million year-earlier.

Net income was negative $27.9 million, much worse that Q1's loss of $2.9 million, but not as bad as the $40.4 million loss year-earlier.

Earnings per share (EPS) was negative $0.95, sequentially down from negative $0.10, but up from negative $1.42 year-earlier.


For 2008 annual revenue expected between $353 and $374 million. Non-GAAP gross margin between 18% and 21%. Positive non-GAAP EPS expected for full year.

Conference Highlights:

Transitioning from a single line of products to multiple lines. Keeping up with rapid changes in Internet technology. Our advantages over our competitors in energy savings have increased. Now winning business ICE Cube contracts that can have significant revenue impact in the future. Also received first contract in the petroleum vertical. Now partnered with Raytheon, CTC, and IBM; will soon announce a new partnership in storage that will have a global impact.

GAAP Gross margin was 9.2%, reversing a negative 8.4% year-earlier. Non-GAAP gross margin was 9.7%, down from 17.5% year-earlier. Gross margin was impacted by pricing of a particular deal and by component shortages that resulted in higher costs. Has not changed view of not-taking unprofitable business; believes the particular deal will turn into a long-term one with better margins. Does not expect component shortages

8% international sales increase; 13% storage revenue increase, which now represents 13% of overall business.

RapidScale is no longer a core to strategy, so will seek strategic alternatives for that segment. Impairment charge ($16 million) is on RapidScale.

Disappointed with gross margin performance.

Non-GAAP net loss $3.5 million or $0.12 per share.

Cash and equivalents ended at $198.1 million, flat sequentially. Inventories ended at $48.9 million. Net cash provided by operating activities was $8.8 million. Stock based compensation expense was $7.2 million.

The company finally won its first contract for an ICE Cube system and its first deal in Japan. It is now working with IBM to offer blade servers in its ICE Cubes.

Cost of revenue was $69.0 million, leaving gross profit of only $7.0 million. Operating expenses of $37.1 million included $6.9 million R&D, $5.8 million sales and marketing, $6.9 million general and administrative, and a non-cash $16.8 million charge for impairment of assets, plus $0.7 million for restructuring. Loss from operations was $30.1 million. Interest income was $0.9 million. There was an income tax benefit of $1.3 million.

Refiled Q1 results with SEC; 26.1% GAAP gross margin.

328 employees, down due to outsourcing of a production line.


Order size effect versus component effect on gross margin? Repeated previous comments.

RapidScale revenues included or excluded in guidance? Has projected modest RapidScale revenue, but believes can make range even with RapidScale out.

ICE target revenue range? $20 to $50 million in 2008. Lots of customers are evaluating the technology. Federal win could lead to shipping many of the containers; should show some revenues in Q3 and then equal or more in Q4, or as soon as we can fulfill the orders. ICE margins should be higher than our average margins.

Sales cycle for small customers? No lengthening is seen so far in base market.

Oil and gas delivery will be in Q3.

Have you booked business that supports your guidance? Yes. Assumes conservative but stable economic environment.

Expenses? Q2 will be higher than Q3, then Q4 will be higher again.

Competitive environment, especially in low margin order? All of our competitors now have an offering. But we are two years ahead of them in technology. Our first wins are an indication that our technology is stronger. IBM picking us shows that as well.

Partner revenue? Less than 10%, went up slightly sequentially.

RapidScale exit? It is a fine product, just not a good fit for us. It is a technology that requires more investment, and we would like to maintain a strong relationship with whoever buys it. We believe the money needed for investment can be better spent on our other segments.

Components, specific? Worked through the shortages, but do not want to say which component it was?

Amazon, Yahoo, Microsoft together generated about 65% of revenues in Q2.

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Copyright 2008 William P. Meyers