Sunday, November 9, 2008

Rackable Systems Has Ice Cube Orders

Rackable Systems (RACK) has been talking about its ICE Cube containerized datacenter systems for over a year now. At their analyst conference on November 3, 2008, they announced that an indefinite amount of ICE Cubes will ship in Q4. My take is that if the orders are not cancelled, and if they ship early enough in Q4, Rackable may report revenues from the orders in Q4. This is great news for Rackable investors (which includes me).

We knew from the pre-announcement that Q3 results would be bad, and they were. Revenues were $65.3 million, down 14% sequentially from $76.0 million and down 25% from $87.2 million year-earlier.

On the other hand, even though net income was negative, it improved significantly due to tighter cost controls. Net income was a loss of $6.0 million, a sequential improvement on Q2 loss of $27.9 million, but worse than essentially $0 results year-earlier. EPS was negative $0.20, compared to negative $0.95 in Q2, and $0.00 year-earlier.

Rackable still has a lot of cash and equivalents, ended at $184.6 million, down sequentially from $198.1 million. Most of the reduction, according to management, was to produce the ICE Cube units that will ship this quarter.

Rackable was not able to sell its RapidScale storage division, so that will be written off as a loss. Instead it is partnering with NetApp for storage. You may recall how RapidScale was once lauded as a division that was going to give Rackable a competitive edge and good profit margins once it ramped up. Well, that does not mean closing it down now is not the right thing to do.

The NetApp partnership might work out to be more than it appears. Management says the NetApp people are introducing them to potential new clients. Since NetApp is probably confronted with occasional losses against vendors like HP and Dell that can provide both servers and storage, working with Rackable could prevent them from losing from sales. It is conceivable that the partnership could be quite beneficial for both parties, but I would not bet on it until I saw some actual revenues coming in. Rackable expects the NetApp partnership to start generating revenue in 2009.

They continue to lead with their high-quality, computationally intense, energy efficient technology. Their newest technology is called CloudRack. Obviously they are targeting the cloud computing market.

Rackable's stock is in the dumps, but then again they have not turned in a profitable quarter in some time. They have enough cash to survive a downturn, but so do their principal competitors. So Rackable, while promising, has to be rated as a risky tech stock.

For details on what management said on November 3, see my Summary of the Rackable Systems analyst conference for Q3 2008.

Keep Diversified!


Rackable Systems

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