Thursday, January 15, 2009

Rackable Systems Sells ICE Cubes

The bad news from Rackable Systems (RACK) is that the fourth quarter of 2008 was slow. That should not be a surprise to anyone, given the overall economic panic we saw in Q4 2008.

While we are waiting for the economy to get its footing again, in the technology stock arena it is important to look at what companies will have to offer in the future. One thing RACK has is the ICE Cube system. This system has been available for sale for most of 2008. Rackable shipped to ICE Cubes in the quarter, but won't recognize revenue for them until fiscal 2009.

I had hoped more of these containerized server farms would sell during the quarter. On the other hand, a report that none sold in the quarter would not be surprising. Having two in the field is great, it will make more sales easier. Few companies want to be the first to but a new product when it is mission critical.

Rackable reported prelimary results for the full year, so fourth quarter results need to subtract the knowns from earlier in the year. Full year revenue is expected between $245 million and $250 million. Q3 revenue was $65 million, Q2 was $76 million, and Q1 was $68 million.

So Q4 revenue was between $36 and $41 million.

That is pretty bad. Even with a backlog and deferred product revenue of $20 million, that is pretty bad.

Which brings us back to Rackable's cash balance. The year-ending balance is expected between $175 and $185 million.

With Rackable's market capitalization at this moment is $122 million, (with stock price of $4.08 per share), you might think RACK is a bargain. I own Rackable stock and for years have watched as one development after another has stiffled the potential for growth and profitability. The energy-efficient data center space has become more crowded over the years.

So the downside risk is considerable. Rackable needs to sell a lot more ICE Cubes and a lot more server farms if it is going to compete with Sun, Dell, HP, IBM and a host of smaller competitors.

Balancing that pessimistic note is the potential for a big upside. In addition to the ICE Cubes, Rackable apparently has orders for its new CloudRack and MobiRack solutions. So maybe 2009 will be a better year than the economic forecasts and 4th quarter results indicate.

Always best to: Keep Diversified

See also my main Rackable Systems page

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