When I moved to San Francisco in the early 1990's and started meeting the computer graphics crowd, the place everyone said they wanted to work was Silicon Graphics. Not only was that where the cutting edge lay, it was also seen as a smart career move. Surely, in a few years, Silicon Graphics would surpass HP and then Intel and IBM.
It did not work out that way. Today Rackable Systems (RACK) announced it would buy Silicon Graphics (SGIC) for about $25 million. While that is certainly a bargain basement price for a treasure chest of intellectual property, I cannot assume that Rackable will do well with the acquisition.
Silicon Graphics' (aka SGI) traditional problem is running a business that actually makes money. That is exactly the problem Rackable Systems has had these last few years. Rackable has a substantial amount of cash in hand, but it was mostly generated from its initial IPO, not from profits. Rackable grew rapidly and had some profitable quarters a few years back, but then they got shoved around by bigger competitors, notably Sun, HP, Dell, and IBM. I think Rackable on its own could be profitable again if IT spending picks up some time this year, but this acquisition will create distractions and a lot of new variables to manage. So we have the dilemma of a company with a tremendous opportunity that could turn into a serious downside.
What are Rackable shareholders (that includes me) getting for their $25 million in cash? The latest results for SGI showed revenues of $82.8 million and a GAAP net loss of $49.2 million and an EBITDA of negative $17.3 million. That is no way to run a business. And it is not just from the recession. Once upon a time SGIC's market capitalization was over $1 billion.
So the first thing Rackable management should do is can as much of SGI's management as is necessary. Cut costs to the bone. Assuming an $80 million per quarter run rate, if you can't generate $8 million of profit on that, you should get out of the business. If there is revenue that can't be made to generate a profit, jetison it.
Having watched variously poorly managed technology companies for years, I will ball park what I would expect to see if I were a Rackable manager reviewing SGI. Sure, if you spend $1 million on a product, and it is a good product, and offer it for sale at $800,000, someone is going to buy it. What you need to do is price the product at $1.1 million. If your customer will not pay $1.1 million for the product that cost you $1 million, you don't need that customer. So first you try to raise the price, and if that does not work, you close that product line down. Let the managers and workers find jobs elsewhere (good luck). Or if they want to keep their jobs, and sell their product for $800,000, they need to find ways to reduce product cost, and if necessary give back enough of their compensation package to make that work. There a business people lacking high school diplomas who could tell you this; MBAs could tell you this; but technology guys often are mesmerized by their toys and forget they are in business.
SGI has some pretty nice products. Supercomputers. Those should be priced to generate a profit. Graphics software. Why should that not make a profit? Servers - lots of companies make profits selling servers. Professional services - how can you not make profits on professional services? (Technology geniuses have found a way to do that: pay your staff more than you charge the clients! Fail to take overhead into account!)
Rackable's last acquisition did not go well. Management said that RapidScale storage technology would be the Next Big Thing (back in 2006) but it was a failure that apparently could not be sold once Rackable no longer wanted it.
On the bright side, Rackable does have some pretty amazing talent, so maybe management can turn the company around and make hay with the SGI assets too. Rackable got big quickly because it took the need to lower power consumption at data centers seriously. It is still very, very good at that. It has clients like Amazon, Microsoft, Facebook, and Yahoo, and it has been making advances internationally and in new specialties like Defense and Oil exploration.
SGI looked like it should be valuable in the 1990's because it put technology first, before profits. Some times that works, but usually it does not. The best business model wins when the technology is good enough. The best business technology solves enterprise problems at a price that beats the alternatives. Profits have to be part of the model, or else you can't keep up research and development efforts. The leading edge wanders off to ATI or NVIDIA.
Because SGI is selling itself off through a bankruptcy, rather that directly with a merger, it is possible that debts will disappear. This, in itself, might help it move towards profitability, but even if it is the case, can't change the need for better management.
I'm not selling my Rackable stock, but I'm not buying more right now either. I'd like to see what Rackable does with the SGI assets over the next six months or so. If Rackable runs SGI like SGI ran SGI, this merger will sink it.
See also my Rackable Systems page, with links to Rackable analyst conference summaries.
Showing posts with label RACK. Show all posts
Showing posts with label RACK. Show all posts
Wednesday, April 1, 2009
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
http://www.rackable.com/
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
http://www.rackable.com/
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!
More:
Rackable Systems
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!
More:
Rackable Systems
Tuesday, October 14, 2008
Rackable Systems (RACK) Hit by Economy
Rackable Systems issued a press release yesterday (October 13, 2008) stating customer purchases slowed down in September. This should not be a surprise; we will be hearing a lot of such statements in the coming weeks. In theory, since this is a known issue, stock prices have already tanked enough to more than compensate for it. Instead, just as Rackable (RACK) has had a major price hit today, we will probably see more individual hits corresponding with September quarter earnings announcements going forward.
Rackable released quite a bit of good news along with the bad, and it bears looking at. They signed up 25 new customers in the quarter. Their customers are all large corporations that need energy efficient, powerful, and managable datacenters, so 25 is a very good number. New generations of products are available for Q4. This is on top of the deals with IBM and NetApp from earlier in the year.
Opportunities and dangers abound for Rackable. As the leader in designing energy-efficient large scale server systems, it must compete with much larger players like IBM, Dell, HP and Sun, who have all been improving the energy efficiency of their systems. Rackable has plenty of cash on its balance sheets, almost $200 million at the end of Q2, and it is highly focussed on its niche. Its annual sales guidance is now $275 to $300 million, scaled back from above $350 million. It has been losing money on a GAAP basis but stayed in the break-even range on a cash basis. All in all, with a market capitalization today of $224 million, it seems undervalued even by current market standards.
I am a long term investor in Rackable Systems.
For more details, see
My Rackable Systems (RACK) analyst conference summary for Q2 2008
Rackable Systems press release of October 12, 2008
www.rackable.com
Rackable released quite a bit of good news along with the bad, and it bears looking at. They signed up 25 new customers in the quarter. Their customers are all large corporations that need energy efficient, powerful, and managable datacenters, so 25 is a very good number. New generations of products are available for Q4. This is on top of the deals with IBM and NetApp from earlier in the year.
Opportunities and dangers abound for Rackable. As the leader in designing energy-efficient large scale server systems, it must compete with much larger players like IBM, Dell, HP and Sun, who have all been improving the energy efficiency of their systems. Rackable has plenty of cash on its balance sheets, almost $200 million at the end of Q2, and it is highly focussed on its niche. Its annual sales guidance is now $275 to $300 million, scaled back from above $350 million. It has been losing money on a GAAP basis but stayed in the break-even range on a cash basis. All in all, with a market capitalization today of $224 million, it seems undervalued even by current market standards.
I am a long term investor in Rackable Systems.
For more details, see
My Rackable Systems (RACK) analyst conference summary for Q2 2008
Rackable Systems press release of October 12, 2008
www.rackable.com
Tuesday, August 5, 2008
Rackable Systems Disappoints, Promises
Rackable Systems (RACK) reported Q2 revenues that were up 12% over Q1 ($76 million v. $68 million). There are high expectations for Rackable, so the impressive sequential increase was not enough to compensate for the poor bottom line. Even on a non-GAAP basis there was a net loss of $3.5 million, or $0.12 per share. The GAAP loss was amplified by an impairment charge of $16 million to $28 million or negative $0.95 per share. [See my Rackable (RACK) analyst conference summary for August 4, 2008 for a full report]
The impairment charge was because they are "looking at strategic options" for their RapidScale storage technology, which they acquired only a few years ago, and which was supposed to help them grow into a much larger company. Obviously they expect to sell the division for less than they acquired it for, hence the write-down.
The sequential increase in revenue was marred by a single sale where management decided to make a substantial price cut to get the business. They would not name a client or a dollar amount, but they believe this one-time transaction will lead to future profitable sales.
There are, however, reasons for optimism. Management did not lower the guidance for 2008. They expect revenues of at least $353 million, which implies that Q3 and Q4 revenues will be over $100 million each, which would be quite a jump.
They have some reasons for this optimism. In a bull market the bulls would be swarming all over these "forward looking statements." The backround is their claim, upheld by independent researchers, that their technology is far more energy efficient than that of their competitors (Sun, HP, IBM, etc.). In addition to their standard data center and Internet server farm technologies, they have a product called the ICE Cube, which is a portable server farm in a standard storage container. They have been talking about this for well over a year now, and they finally completed their first sale after Q2 ended. At least as important, IBM has decided to partner with them on the ICE Cube by supplying its own blade servers (BladeCenter); presumably IBM will do the marketing on this joint product. Raytheon is also partnered with Rackable to sell ICE Cube technology to the government; it is particularly attractive for military applications.
For their standard servers (the Eco-Logical line), they had their first sale in the energy (petroleum) vertical market. About 65% of revenues were generated with sales to their current major clients, Amazon, Yahoo, and Microsoft.
And even the RapidScale debacle has its upside. They expect to announce a new, global storage partnership soon. So they don't need RapidScale as badly as some giant computer corporation needs their server farm technology.
They even made their first sale in Japan. Rackable has had weak international sales, but is working on that problem with partners.
I own Rackable stock; I am certainly not selling it at this point. Rackable has disappointed investors over the past two years, and profitability has been elusive. If you don't own the stock you might want to wait until Q3 results are in, to see if management can make good on its promises.
As always, keep diversified.
More data:
www.rackable.com
Openicon Rackable Page
The impairment charge was because they are "looking at strategic options" for their RapidScale storage technology, which they acquired only a few years ago, and which was supposed to help them grow into a much larger company. Obviously they expect to sell the division for less than they acquired it for, hence the write-down.
The sequential increase in revenue was marred by a single sale where management decided to make a substantial price cut to get the business. They would not name a client or a dollar amount, but they believe this one-time transaction will lead to future profitable sales.
There are, however, reasons for optimism. Management did not lower the guidance for 2008. They expect revenues of at least $353 million, which implies that Q3 and Q4 revenues will be over $100 million each, which would be quite a jump.
They have some reasons for this optimism. In a bull market the bulls would be swarming all over these "forward looking statements." The backround is their claim, upheld by independent researchers, that their technology is far more energy efficient than that of their competitors (Sun, HP, IBM, etc.). In addition to their standard data center and Internet server farm technologies, they have a product called the ICE Cube, which is a portable server farm in a standard storage container. They have been talking about this for well over a year now, and they finally completed their first sale after Q2 ended. At least as important, IBM has decided to partner with them on the ICE Cube by supplying its own blade servers (BladeCenter); presumably IBM will do the marketing on this joint product. Raytheon is also partnered with Rackable to sell ICE Cube technology to the government; it is particularly attractive for military applications.
For their standard servers (the Eco-Logical line), they had their first sale in the energy (petroleum) vertical market. About 65% of revenues were generated with sales to their current major clients, Amazon, Yahoo, and Microsoft.
And even the RapidScale debacle has its upside. They expect to announce a new, global storage partnership soon. So they don't need RapidScale as badly as some giant computer corporation needs their server farm technology.
They even made their first sale in Japan. Rackable has had weak international sales, but is working on that problem with partners.
I own Rackable stock; I am certainly not selling it at this point. Rackable has disappointed investors over the past two years, and profitability has been elusive. If you don't own the stock you might want to wait until Q3 results are in, to see if management can make good on its promises.
As always, keep diversified.
More data:
www.rackable.com
Openicon Rackable Page
Monday, May 26, 2008
Rackable System Misses Microsoft Container Boat
Rackable Systems (RACK) makes energy-efficient racks of servers for datacenters. Microsoft is a known client. Rackable has designed and built server farm units that fit in 40 foot standard shipping containers, calling them ICE Cubes. So imagine the disappointment of investors like myself when Microsoft announced that it would fill its new Chicago datacenter with servers in chipping containers - but not ICE Cubes. Apparently Microsoft decided to make its own customized containers, which it calls CBlox. Microsoft had installed a few of Verari Systems Forest containers in another location, and liked the overall design concept enought to plan to scale it out in Chicago. Sun also makes containerized server systems. Doubtless others will enter the fray.
Rackable has disappointed investors a number of times in the past couple of years. It is an innovative company that created a new space, the super-energy efficient datacenter. But once bigger players like Sun, IBM, HP and Dell saw what was happening, they sometimes underbid Rackable with their own less energy efficient designs and have raced get Greener in this expanding market.
One factor in the Microsoft decision was probably that Rackable does not use blade servers. So far management has been resolute in refusing to go the blade server route, claiming that such servers are actually inefficient compared to Rackable's half-depth server rack systems (with some data to back up that assertion). In any case the CBlox design, as well as Verari's, does use blade servers.
Rackable's stock has been mostly going up the last few weeks despite the Microsoft loss. Part of that is that the overall market is up due to increased liquidity. RACK's price was way low in the first quarter of this year, in my opinion. I suspect also that Rackable has its hands full with customers for its Eco-Logical servers and storage systems, and is going to sell plenty of ICE Cubes too. Most companies can't do their own engineering the way Microsoft can. One ICE Cube would go a long way for most corporations; few need to build hundreds of the things, as Microsoft does. I suspect the ICE Cube is much more portable than Microsoft's CBlox. The Pentagon will be wanting some to move around, and you can put one in a parking lot. Hook it up to electricity and the Internet and it will function just fine, without the expense of a building.
Of course we won't know more until Rackable announces its Q2 2008 results, which won't be until July. In the meantime see my summary of the Rackable analyst conference for Q1 2008.
More data:
www.rackable.com
My main Rackable page
Rackable has disappointed investors a number of times in the past couple of years. It is an innovative company that created a new space, the super-energy efficient datacenter. But once bigger players like Sun, IBM, HP and Dell saw what was happening, they sometimes underbid Rackable with their own less energy efficient designs and have raced get Greener in this expanding market.
One factor in the Microsoft decision was probably that Rackable does not use blade servers. So far management has been resolute in refusing to go the blade server route, claiming that such servers are actually inefficient compared to Rackable's half-depth server rack systems (with some data to back up that assertion). In any case the CBlox design, as well as Verari's, does use blade servers.
Rackable's stock has been mostly going up the last few weeks despite the Microsoft loss. Part of that is that the overall market is up due to increased liquidity. RACK's price was way low in the first quarter of this year, in my opinion. I suspect also that Rackable has its hands full with customers for its Eco-Logical servers and storage systems, and is going to sell plenty of ICE Cubes too. Most companies can't do their own engineering the way Microsoft can. One ICE Cube would go a long way for most corporations; few need to build hundreds of the things, as Microsoft does. I suspect the ICE Cube is much more portable than Microsoft's CBlox. The Pentagon will be wanting some to move around, and you can put one in a parking lot. Hook it up to electricity and the Internet and it will function just fine, without the expense of a building.
Of course we won't know more until Rackable announces its Q2 2008 results, which won't be until July. In the meantime see my summary of the Rackable analyst conference for Q1 2008.
More data:
www.rackable.com
My main Rackable page
Thursday, February 7, 2008
Rackable Systems (RACK)
Rackable Systems (RACK) reported record revenues for Q4 2007. It appears to have gotten through difficulties that began in 2006. In the meantime momentum investors have forgotten about it, so the stock appears to be a bargain even compared to other technology stocks that are undervalued in the current liquidity squeeze.
If you want all the salient details, including numbers, management comment, and analysts' questions, you should see my summary of the February 6, 2008 Rackable Analyst Conference. Here I'll analyze the data.
Rackable's sales seem to be consistently seasonal, with quarters ending in December generating considerably higher sales that the other 3 quarters. Revenues were $111.7 million, up 28% sequentially from $87.2 million and up 4.5% from $106.9 million year-earlier. I would not call that strong growth. But it is the third quarter of improving results.
As to earnings, I usually prefer to look at GAAP numbers, but this is a case where I think non-GAAP numbers are actually more accurate. With GAAP rules there was a $23.9 million expense for writing off goodwill acquired in the TerraScale acquisition. That acquisition did not end up generating the expected revenue and earnings, at least not yet. But the charge is non-cash.
Eliminating the goodwill impairment charge and the other usual non-cash charges and one-time matters and you get non-GAAP earnings per share of $0.18.
But that is not why I think the stock is cheap. The market capitalization (number of shares times price per share) of Rackable was $237.4 million when the market closed today.
Rackable reported that it had cash and equivalents at the end of the quarter at $198.1 million. In 2007 that increased $37.6 million.
Which means tht if you forget the money that earlier investors sank into getting the company started and buying TerraScale, in 2007 Rackable generated $1.27 per share in cash.
Today Rackable shares sold for $8.05. For that money you get $6.70 in cash plus (if 2008 is flat on this measure) $1.27 per year.
As attractive as that should be to value investors, the real story hear is Rackable's technology and customer base. Rackable specializes in computer server systems for Internet companies and data centers. Some of its biggest customers are Amazon, Microsoft, Facebook and Yahoo.
Rackable specializes in making vast arrays of servers easy to manage, low in power consumption, and low in space consumption.
In addition to its past client base, it is making good progress, partnering with Raytheon, in getting military and government contracts. It has also partnered to sell more of its systems outside the United States market.
Bookings ended the quarter strongly, so Q1 2008 could be less seasonally down than Q1 2007 was. Rackable's management guided to flat non-GAAP EPS in 2008 compared to 2007. But the reason for that is good: they are investing in a larger sales team and new, highly-competitive products.
Technology companies are usually subject to extreme competition. Rackable's competitors are mostly far larger companies: IBM, Sun, and HP. So any investment in Rackable stock should be considered risky.
I own Rackable stock, so you should look at the data carefully. I try to be objective, but even when I am objective my stock choices don't always work out.
See also:
www.rackable.com
My Rackable main page
And stay diversified!
If you want all the salient details, including numbers, management comment, and analysts' questions, you should see my summary of the February 6, 2008 Rackable Analyst Conference. Here I'll analyze the data.
Rackable's sales seem to be consistently seasonal, with quarters ending in December generating considerably higher sales that the other 3 quarters. Revenues were $111.7 million, up 28% sequentially from $87.2 million and up 4.5% from $106.9 million year-earlier. I would not call that strong growth. But it is the third quarter of improving results.
As to earnings, I usually prefer to look at GAAP numbers, but this is a case where I think non-GAAP numbers are actually more accurate. With GAAP rules there was a $23.9 million expense for writing off goodwill acquired in the TerraScale acquisition. That acquisition did not end up generating the expected revenue and earnings, at least not yet. But the charge is non-cash.
Eliminating the goodwill impairment charge and the other usual non-cash charges and one-time matters and you get non-GAAP earnings per share of $0.18.
But that is not why I think the stock is cheap. The market capitalization (number of shares times price per share) of Rackable was $237.4 million when the market closed today.
Rackable reported that it had cash and equivalents at the end of the quarter at $198.1 million. In 2007 that increased $37.6 million.
Which means tht if you forget the money that earlier investors sank into getting the company started and buying TerraScale, in 2007 Rackable generated $1.27 per share in cash.
Today Rackable shares sold for $8.05. For that money you get $6.70 in cash plus (if 2008 is flat on this measure) $1.27 per year.
As attractive as that should be to value investors, the real story hear is Rackable's technology and customer base. Rackable specializes in computer server systems for Internet companies and data centers. Some of its biggest customers are Amazon, Microsoft, Facebook and Yahoo.
Rackable specializes in making vast arrays of servers easy to manage, low in power consumption, and low in space consumption.
In addition to its past client base, it is making good progress, partnering with Raytheon, in getting military and government contracts. It has also partnered to sell more of its systems outside the United States market.
Bookings ended the quarter strongly, so Q1 2008 could be less seasonally down than Q1 2007 was. Rackable's management guided to flat non-GAAP EPS in 2008 compared to 2007. But the reason for that is good: they are investing in a larger sales team and new, highly-competitive products.
Technology companies are usually subject to extreme competition. Rackable's competitors are mostly far larger companies: IBM, Sun, and HP. So any investment in Rackable stock should be considered risky.
I own Rackable stock, so you should look at the data carefully. I try to be objective, but even when I am objective my stock choices don't always work out.
See also:
www.rackable.com
My Rackable main page
And stay diversified!
Monday, October 29, 2007
AMD Virtualization Wars
For years now AMD (AMD) and Intel (INTC) have been slugging it out in the microprocessor market. The next arena for this slugfest is virtualization, the process in which a single computer can run multiple instances of an operating system, or even entirely different operating systems (typically Linux and Microsoft).
Intel has been the dominant player in the microprocessor industry since the 1980s and still dwarfs AMD. But AMD gained a great deal of market share earlier in the new millennium with its Opteron and Athlon processors. Unfortunately it did not gain enough to prevent Intel from having a comeback in 2006 that has extended up until at least now. The main cause of AMD's insufficient gains during a period of time when it processors outperformed Intel's on any basis was human nature. Most businesses had standardized on Intel processors; many did not even consider taking advantage of the AMD proposition. I think a lot of this was influenced by the broad ownership of Intel stock among key decision makers, but I can't prove that without doing some costly research.
The question for those owning AMD stock (including me) and those rare people considering buying it should be: what will happen in Q4 2007 and in 2008. This will be highly dependent on the new quad core Opteron processors (code named Barcelona) and their virtualization features.
There are plenty of technical articles being written on virtualization and on AMD's and Intel's versions of it. The reality is, however, that until there have been a number of large-scale commercial installations that use virtualization 24 hours a day for long periods of time, we won't know if one design is superior to the other.
Virtualization seems like no big deal on a desktop or notebook computer. It is basically making possible in software what used to be done, in a clunky way, with a hard disk partitioned between two operating systems. Now using VMware or other virtualization software both operating systems can run at the same time, sharing the microprocessor, memory, and network bandwidth.
But according to Rackable Systems, making a server farm work well with virtualization is not so trivial of a task. Server farms already have issues with interconnecting all of their computers. There is an issue called load balancing: if you are, say Amazon (a Rackable client) and have thousands (or millions) of people searching your gigantic Web site all the time, and the Web site has to be coordinated with a database and a shipping system and a content management system, well, in non-tech speak it gets hairy. A virtual operating system sitting idle is just a waste of expensive equipment.
Rackable has a new line of servers ready for introduction that are engineered from the ground up for virtualized server farms. Probably IBM, Dell, Sun and HP are working on this issue too and will make their claims.
It will sure be interesting to see if this virtualization-ready line is available in only one flavor, AMD or Intel, or if it available for both.
Another area of interest in the AMD versus Intel battle is processors for notebook computers. In this area I see pundits constantly reporting that AMD cannot possibly compete. Yet it seems like every quarter AMD picks up a bit of market share in notebook computers. Partly this is because Intel started with so much market share and does have good notebook technology. Intel likes to charge its customers through the nose when it has no competition (hence accusations of monopoly pricing). Surprise, most people don't feel like they can pay $2000 for a notebook computer that will be broken on obsolete in 2 years. People really like computers to be in the $500 to $700 price range, and to make a profit in that market many notebook computer manufacturers have turned to AMD. With AMD readying a new line of notebook-optimized microprocessors, motherboard chips and graphics chips, it is possible that it may gain even more market share in 2008.
I consider investing in AMD to be a risky business. Investors should always balance the risks in their portfolios by diversification.
More data:
AMD home page
Intel home page
virtualization
My AMD page with links to summaries of AMD analyst conferences
VMware virtualization
Intel has been the dominant player in the microprocessor industry since the 1980s and still dwarfs AMD. But AMD gained a great deal of market share earlier in the new millennium with its Opteron and Athlon processors. Unfortunately it did not gain enough to prevent Intel from having a comeback in 2006 that has extended up until at least now. The main cause of AMD's insufficient gains during a period of time when it processors outperformed Intel's on any basis was human nature. Most businesses had standardized on Intel processors; many did not even consider taking advantage of the AMD proposition. I think a lot of this was influenced by the broad ownership of Intel stock among key decision makers, but I can't prove that without doing some costly research.
The question for those owning AMD stock (including me) and those rare people considering buying it should be: what will happen in Q4 2007 and in 2008. This will be highly dependent on the new quad core Opteron processors (code named Barcelona) and their virtualization features.
There are plenty of technical articles being written on virtualization and on AMD's and Intel's versions of it. The reality is, however, that until there have been a number of large-scale commercial installations that use virtualization 24 hours a day for long periods of time, we won't know if one design is superior to the other.
Virtualization seems like no big deal on a desktop or notebook computer. It is basically making possible in software what used to be done, in a clunky way, with a hard disk partitioned between two operating systems. Now using VMware or other virtualization software both operating systems can run at the same time, sharing the microprocessor, memory, and network bandwidth.
But according to Rackable Systems, making a server farm work well with virtualization is not so trivial of a task. Server farms already have issues with interconnecting all of their computers. There is an issue called load balancing: if you are, say Amazon (a Rackable client) and have thousands (or millions) of people searching your gigantic Web site all the time, and the Web site has to be coordinated with a database and a shipping system and a content management system, well, in non-tech speak it gets hairy. A virtual operating system sitting idle is just a waste of expensive equipment.
Rackable has a new line of servers ready for introduction that are engineered from the ground up for virtualized server farms. Probably IBM, Dell, Sun and HP are working on this issue too and will make their claims.
It will sure be interesting to see if this virtualization-ready line is available in only one flavor, AMD or Intel, or if it available for both.
Another area of interest in the AMD versus Intel battle is processors for notebook computers. In this area I see pundits constantly reporting that AMD cannot possibly compete. Yet it seems like every quarter AMD picks up a bit of market share in notebook computers. Partly this is because Intel started with so much market share and does have good notebook technology. Intel likes to charge its customers through the nose when it has no competition (hence accusations of monopoly pricing). Surprise, most people don't feel like they can pay $2000 for a notebook computer that will be broken on obsolete in 2 years. People really like computers to be in the $500 to $700 price range, and to make a profit in that market many notebook computer manufacturers have turned to AMD. With AMD readying a new line of notebook-optimized microprocessors, motherboard chips and graphics chips, it is possible that it may gain even more market share in 2008.
I consider investing in AMD to be a risky business. Investors should always balance the risks in their portfolios by diversification.
More data:
AMD home page
Intel home page
virtualization
My AMD page with links to summaries of AMD analyst conferences
VMware virtualization
Sunday, October 28, 2007
Rackable Systems New Friend: Facebook
Rackable Systems (RACK) reported Q3 2007 results that showed a second quarter of good revenue improvement and brought the company back from serious losses to break-even. Management reported that at the end of the quarter the backlog of orders had reached a record high. And just in case the analysts covering the conference missed the point, Rackable named the four customers that buy the most equipment from them: Microsoft, Yahoo, Amazon, and Facebook.
Before looking at Facebook and other opportunities, recall that RACK stock has been very volatile (See chart at NASDAQ). In the past 18 months it has been over $50 and as low as $11.25. The highs were reached after Rackable ramped up its highly efficient server system sales in the previous few years. The lows came after bigger server-market players took notice and started low-balling bids on systems, causing Rackable to lose sales and to lose profit margins on some sales that took place (See Rackable, Playing With the Big Guys, April 5 2007). Rackable had to restructure and write off inventory as obsolete. So in 2007, Q1 saw a plunge in revenues and heavy losses; Q2 saw a sequential increase in revenues and heavy losses; and Q3 saw a second sequential increase in revenues and break-even on earnings.
So where do we go from here if we take a ride with Rackable? (Note that I own stock in the company.) It depends on how well Rackable does against its competition. Rackable pioneered energy-efficient server farm designs, but its equipment is not the cheapest on the market. Its servers are easy-to-manage, and it now has some new, very innovative products. One is that is has a line of servers optimized for virtualization, which is a big industry trend. It also has ICE Cube, what might be called a server-farm in a box. These are your basic cargo containers filled with servers. You can buy a server farm ready to go and just put it in the parking lot; there is a lot of interest, and only one other company is trying to compete in this space so far. Once built an ICE Cube server farm uses far less energy than a conventionally warehoused system.
Another boost going forward will further enhance Rackable's reputation for being the leader in Green computing (their slogan is "Enabling the ecological datacenter") is the release of new server systems using AMD quad core Opteron processors. Rackable started as an AMD-only company, then added lines using Intel processors that became substantial over time. Conservative customers, and IT departments whose decision makers own Intel stock, still have Intel-only buying policies. But management confirmed that demand for AMD quad-core based servers is high and systems will be shipping this quarter (I am guessing that is the reason for the record level of backorders). The AMD chips are better designed than the Intel chips and so deliver more overall computing power with less energy consumption.
It is interesting that Google is not a Rackable customer. As the largest Internet company, you would think it would be in there with Microsoft, Yahoo, Facebook and Amazon. Google succeeded in part by stringing a lot of cheap servers together with their own proprietary methods. I'm betting those servers are very un-Green, very energy inefficient, but for now Google is so profitable it probably is not concerned much about its electric bill.
Facebook suddenly has a bunch of cash from Microsoft's buying a part-interest, so don't be surprised if they use some of it to build out their server farms. Microsoft has announced plans to greatly increase their Internet presence, so they will be expanding their server farms as well. And Yahoo and Amazon are expanding too, if not quite at Google's pace.
So I think Rackable systems has a good chance of being an emerging success story in 2008. However, you should be aware that the stock is risky. Rackable is planning on spending a lot of money on expansion; in the short run that will mean even if revenues ramp up, earnings may be negligible. Rackable is playing against formidable competitors like Sun, HP, Dell, and IBM, so they are not guaranteed to win.
Always keep your portfolio well-diversified.
More data:
Rackable web site
My Rackable page
My pages on others companies in this article: AMD, Intel, Sun, HP, IBM, Dell, Yahoo
Openicon Home page
Before looking at Facebook and other opportunities, recall that RACK stock has been very volatile (See chart at NASDAQ). In the past 18 months it has been over $50 and as low as $11.25. The highs were reached after Rackable ramped up its highly efficient server system sales in the previous few years. The lows came after bigger server-market players took notice and started low-balling bids on systems, causing Rackable to lose sales and to lose profit margins on some sales that took place (See Rackable, Playing With the Big Guys, April 5 2007). Rackable had to restructure and write off inventory as obsolete. So in 2007, Q1 saw a plunge in revenues and heavy losses; Q2 saw a sequential increase in revenues and heavy losses; and Q3 saw a second sequential increase in revenues and break-even on earnings.
So where do we go from here if we take a ride with Rackable? (Note that I own stock in the company.) It depends on how well Rackable does against its competition. Rackable pioneered energy-efficient server farm designs, but its equipment is not the cheapest on the market. Its servers are easy-to-manage, and it now has some new, very innovative products. One is that is has a line of servers optimized for virtualization, which is a big industry trend. It also has ICE Cube, what might be called a server-farm in a box. These are your basic cargo containers filled with servers. You can buy a server farm ready to go and just put it in the parking lot; there is a lot of interest, and only one other company is trying to compete in this space so far. Once built an ICE Cube server farm uses far less energy than a conventionally warehoused system.
Another boost going forward will further enhance Rackable's reputation for being the leader in Green computing (their slogan is "Enabling the ecological datacenter") is the release of new server systems using AMD quad core Opteron processors. Rackable started as an AMD-only company, then added lines using Intel processors that became substantial over time. Conservative customers, and IT departments whose decision makers own Intel stock, still have Intel-only buying policies. But management confirmed that demand for AMD quad-core based servers is high and systems will be shipping this quarter (I am guessing that is the reason for the record level of backorders). The AMD chips are better designed than the Intel chips and so deliver more overall computing power with less energy consumption.
It is interesting that Google is not a Rackable customer. As the largest Internet company, you would think it would be in there with Microsoft, Yahoo, Facebook and Amazon. Google succeeded in part by stringing a lot of cheap servers together with their own proprietary methods. I'm betting those servers are very un-Green, very energy inefficient, but for now Google is so profitable it probably is not concerned much about its electric bill.
Facebook suddenly has a bunch of cash from Microsoft's buying a part-interest, so don't be surprised if they use some of it to build out their server farms. Microsoft has announced plans to greatly increase their Internet presence, so they will be expanding their server farms as well. And Yahoo and Amazon are expanding too, if not quite at Google's pace.
So I think Rackable systems has a good chance of being an emerging success story in 2008. However, you should be aware that the stock is risky. Rackable is planning on spending a lot of money on expansion; in the short run that will mean even if revenues ramp up, earnings may be negligible. Rackable is playing against formidable competitors like Sun, HP, Dell, and IBM, so they are not guaranteed to win.
Always keep your portfolio well-diversified.
More data:
Rackable web site
My Rackable page
My pages on others companies in this article: AMD, Intel, Sun, HP, IBM, Dell, Yahoo
Openicon Home page
Monday, July 30, 2007
RACK is Back: Rackable Gets Nose Up
As I've reported in the past (See my RACK page) in 2005 Rackable Systems was a small but rapidly growing company taking market share mainly from Dell, HP, and Sun. When they got big enough to be noticed, in 2006, they found themselves being underbid on contracts for their racked Internet server systems. This led to a nasty dilemma: bidding low enough to keep building market share meant losing money on a deal. The situation hit bottom in Q1 2007 with revenues sinking to $72 million, the lowest since 2005, and losses of $0.36 or $0.13 per share, depending on whether you prefer GAAP or adjusted accounting.
On Thursday Rackable reported that Q2 2007 revenues had risen sequentially to $82.2 million, though that was still down 7% from year-earlier. GAAP EPS was a loss of $1.42, but non-GAAP EPS worked out to $0.02.
Better still, much of the GAAP and even non-GAAP expense was non-cash. In Q2 cash and equivalents increased by $10.5 million, ending at $180.6 million. That is an astonishing 53% of RACK market capitalization today.
There is a new management team in place, too.
One drag on the quarter was a $20.6 million write-down of obsolete inventory. This had to do mainly with two issues: DDR1 memory becoming obsolete more quickly than expected, and the shift towards Intel CPUs, leaving some AMD components (not necessarily AMD processors) dead in the water. That sounds like bad new for AMD, but management pointed out that the new Barcelona chips are being certified this quarter and interest in them appears to be strong. Rackable had a successful collaboration with Oracle and is also introducing servers ready for virtualization in Q3.
Management expects growth to accelerate in the second half of 2007 and to be in the black on a non-GAAP in the second half of the year. GAAP gross margins should turn positive as well.
Storage revenues increased to 10% of the total; this is a relatively new area for Rackable. They also have not done much on the international front, with only 6% of sales outside the U.S.
They continue to differentiate their product in order to prevent Dell and HP from undercutting them with pricing. They are integrating their RapidScale technology into new products and hope to see some results from that as well.
They are optimistic enough to be hiring sales staff and already increased their engineering headcount by 20%. The resulting increase in operating expense will make the nut needed for profitability bigger, but management realizes they have little choice but to grow or fold.
It is too early to confidently bid up the stock price, which only about 50 cents above its 52-week low. However, with one more quarter of increased revenues and increased EPS, I think current investors will see renewed interest in this innovative company.
More data:
Rackable investor relations page
On Thursday Rackable reported that Q2 2007 revenues had risen sequentially to $82.2 million, though that was still down 7% from year-earlier. GAAP EPS was a loss of $1.42, but non-GAAP EPS worked out to $0.02.
Better still, much of the GAAP and even non-GAAP expense was non-cash. In Q2 cash and equivalents increased by $10.5 million, ending at $180.6 million. That is an astonishing 53% of RACK market capitalization today.
There is a new management team in place, too.
One drag on the quarter was a $20.6 million write-down of obsolete inventory. This had to do mainly with two issues: DDR1 memory becoming obsolete more quickly than expected, and the shift towards Intel CPUs, leaving some AMD components (not necessarily AMD processors) dead in the water. That sounds like bad new for AMD, but management pointed out that the new Barcelona chips are being certified this quarter and interest in them appears to be strong. Rackable had a successful collaboration with Oracle and is also introducing servers ready for virtualization in Q3.
Management expects growth to accelerate in the second half of 2007 and to be in the black on a non-GAAP in the second half of the year. GAAP gross margins should turn positive as well.
Storage revenues increased to 10% of the total; this is a relatively new area for Rackable. They also have not done much on the international front, with only 6% of sales outside the U.S.
They continue to differentiate their product in order to prevent Dell and HP from undercutting them with pricing. They are integrating their RapidScale technology into new products and hope to see some results from that as well.
They are optimistic enough to be hiring sales staff and already increased their engineering headcount by 20%. The resulting increase in operating expense will make the nut needed for profitability bigger, but management realizes they have little choice but to grow or fold.
It is too early to confidently bid up the stock price, which only about 50 cents above its 52-week low. However, with one more quarter of increased revenues and increased EPS, I think current investors will see renewed interest in this innovative company.
More data:
Rackable investor relations page
Monday, April 30, 2007
Rackable Systems (RACK) Priced to Scoop Up
Rackable Systems (RACK) had a bad Q4 2006 in which revenues hit a record but net income plunged (see my analyst conference summary). Last week it reported Q1 revenues that plunged and a bloody net loss (see summary). I bought stock at several points last year; it has been a major drag on my portfolio. So why am I scooping up as much as my portfolio rules allow? Am I still trying to catch a falling knife?
Could be. Falling knives sometimes fall to zero; and that has happened to stocks in my portfolio in the past. That is one good reason for diverified portfolio rules. If you take three risky positions (normalized to 1) and one falls to zero but one goes to 2 and one goes to 4, you have doubled your money with very little net risk. The question is, did you do your research, do you really know what the risks are with each stock and therefore with the portfolio.
In an auction system like the stock market a substantial portion of stocks will have prices that are unsustainably high or low. When there is enthusiasm stocks can get priced as if their revenues have already grown by factors of 10 (or back in 1999, by infinity for some stocks). The same thing happens when people all dump stock on bad news: often the auction value goes far beneath the underlying value of the stock.
This is easy to see with Rackable Systems. On Friday, April RACK ended at $11.27 per share giving it a market capitalization of $322 million.
The company had $170 million in cash on March 31, 2007, which is 52.8% of its market capitalization. It has positive cash flow in Q1 of $9.6 million. If it starts making money again its effective tax rate will be very low due to NOLs (Net Operating Losses), which are losses it accumulated during its startup phase that can be credited against future profits.
Q1 was its worst revenue in a year, yet it had $72 million in revenues, or an annual run rate of $288 million. Q1 is typically seasonally weak.
Belt tightening alone can restore the company to profitability. As I explained in Rackable: Playing with the Big Guys, server technology competitors saw how well RACK was doing. Unable to compete on technology, at least one began bidding at below cost in order to stop Rackable in its tracks. In Q4 Rackable's management went for market share, reducing bids in order to keep clients. Since then they have realized that failure to make a profit is just as great of a threat as losing market share. So now they are continuing to compete with their superior technology, cutting their own costs, but refusing to match what management called "irrational competitor pricing."
I expect that, with its cash cushion and existing level of sales, even if things are tough going forward Rackable's stock price is at or near its low.
The upside potential is substantial. One good quarter (revenues above $80 million with GAAP net income of over $2 million) should send the stock price into the high teens.
Rackable is expanding from just selling servers to selling storage equipment as well. They are expecting about $20 million in storage revenues this year that they did not see last year. Storage is a very competive field, just like servers, but reports are Rackable has great technology.
Then there is always the possibility of a buyout. Rackables technologies are protected by patents. For Sun or HP an acquisition of RACK would make a fair amount of sense given the ability to acquire customers, cash, and NOLs all in one swoop.
Could be. Falling knives sometimes fall to zero; and that has happened to stocks in my portfolio in the past. That is one good reason for diverified portfolio rules. If you take three risky positions (normalized to 1) and one falls to zero but one goes to 2 and one goes to 4, you have doubled your money with very little net risk. The question is, did you do your research, do you really know what the risks are with each stock and therefore with the portfolio.
In an auction system like the stock market a substantial portion of stocks will have prices that are unsustainably high or low. When there is enthusiasm stocks can get priced as if their revenues have already grown by factors of 10 (or back in 1999, by infinity for some stocks). The same thing happens when people all dump stock on bad news: often the auction value goes far beneath the underlying value of the stock.
This is easy to see with Rackable Systems. On Friday, April RACK ended at $11.27 per share giving it a market capitalization of $322 million.
The company had $170 million in cash on March 31, 2007, which is 52.8% of its market capitalization. It has positive cash flow in Q1 of $9.6 million. If it starts making money again its effective tax rate will be very low due to NOLs (Net Operating Losses), which are losses it accumulated during its startup phase that can be credited against future profits.
Q1 was its worst revenue in a year, yet it had $72 million in revenues, or an annual run rate of $288 million. Q1 is typically seasonally weak.
Belt tightening alone can restore the company to profitability. As I explained in Rackable: Playing with the Big Guys, server technology competitors saw how well RACK was doing. Unable to compete on technology, at least one began bidding at below cost in order to stop Rackable in its tracks. In Q4 Rackable's management went for market share, reducing bids in order to keep clients. Since then they have realized that failure to make a profit is just as great of a threat as losing market share. So now they are continuing to compete with their superior technology, cutting their own costs, but refusing to match what management called "irrational competitor pricing."
I expect that, with its cash cushion and existing level of sales, even if things are tough going forward Rackable's stock price is at or near its low.
The upside potential is substantial. One good quarter (revenues above $80 million with GAAP net income of over $2 million) should send the stock price into the high teens.
Rackable is expanding from just selling servers to selling storage equipment as well. They are expecting about $20 million in storage revenues this year that they did not see last year. Storage is a very competive field, just like servers, but reports are Rackable has great technology.
Then there is always the possibility of a buyout. Rackables technologies are protected by patents. For Sun or HP an acquisition of RACK would make a fair amount of sense given the ability to acquire customers, cash, and NOLs all in one swoop.
Thursday, April 5, 2007
Rackable (RACK): Playing with the Big Guys
Today Rackable (RACK) had plunging stock price syndrome after the company announced that Q1 2007 earnings would be below expectations, that is to say, negative. How negative, we will have to wait until the earnings release.
At the analyst conference for Q4 2006 (see my summary) guidance for Q1 2007 was revenues between $70 and $75 million due to seasonality and lumpiness in largest accounts. They said to expect gross margins at low end of range. There are lots of details about why Q4 worked out the way it did and what Q1 might be like in the answers to analyst questions.
What did the press release say? "Total revenue for the first quarter of 2007 is expected to be in the range of its previous projections of $70 - 75 million." No change there. But "the company anticipates a net loss for the first quarter of 2007, on both a GAAP and non-GAAP basis," because "gross margin for the first quarter [is] to be approximately 30% lower than previously communicated." The details: price competition, a cancelled order, a severance package, and some tax obligations.
Management leaves some bright looking crumbs for investors: a greater than one book to bill ratio, the strongest backlog of orders ever, and cash balances improving to $170 million at the end of the quarter.
So how much is the stock worth today (which is to day, should you buy it because it is beneath that price, or should you sell it if you own it above that price)? It was at $55.75 per share within the last year; today the stock is below $15. What changed?
Rackable is in a position that is common in all industries, including technology. It had a good idea and executed well on it. It grew rapidly, from $53 million in annual sales in 2003 to $360 million in 2006. Investors (including me; I own the stock) got overly enthusiastic by projecting a straight line of increasing sales and profitability.
Sales revenues had not been bad, continuing to increase through Q4 2006. But Q1 2007 revenues will not only be sequentially (and seasonally) down; they will be below Q1 2006. In addition, starting with Q3 2006 earnings have taken a beating.
Rackable was noticed by the big guys because it was becoming a big guy. It was taking out full page ads in Infoworld; it was winning big contracts from YouTube, Microsoft, and other Internet search/portal players who liked Rackable's innovative approach to server farms. Sun, IBM, HP and Dell took a look and said: this has got to stop. Any one of these companies has the financial resources to take some losses in order to underbid Rackable. And reports are that this has been happening lately.
In order to keep its customers Rackable has cut its prices in specific situations. But it does not sell servers one at a time. It sells systems on a large scale. A few price cuts in a few specific situations and it is in the red.
Just as when the stock was bid up high based on future expectations, the pricing of the stock today depends on your model of future sales and earnings. No one actually knows what will happen; but some of us will guess right, and will at least guess in the ballpark, and some will be way off.
I think Rackable will pull through, but I see plenty of downside danger. To a fair extent they should be able to meet anything Sun, Dell, or HP can throw at them because Rackable has a superior (and patented) technology. They have the advantage of being a niche player: the other guys might be willing to underbid for a while, but they have other distractions and no one wants to be the head of the division that is bleeding money within a company that has many divisions.
The need for the type of server installations that RACK sells is growing rapidly. I think management was right to do what it took to keep their market share. They have enough cash that they can't be forced out of the game easily.
Rackable is not, today, a stock for short-term investors. It is a risky stock for long term investors. But today it has cash equal to 42% of its market share; the immediate downside is limited. I admire the guys at IBM, Sun, Dell, and HP, but I think Rackable may be the nimble running back that dodges the heavy defenders and makes a good run.
-------
See my summary of the Q4 2006 Rackable analyst conference
At the analyst conference for Q4 2006 (see my summary) guidance for Q1 2007 was revenues between $70 and $75 million due to seasonality and lumpiness in largest accounts. They said to expect gross margins at low end of range. There are lots of details about why Q4 worked out the way it did and what Q1 might be like in the answers to analyst questions.
What did the press release say? "Total revenue for the first quarter of 2007 is expected to be in the range of its previous projections of $70 - 75 million." No change there. But "the company anticipates a net loss for the first quarter of 2007, on both a GAAP and non-GAAP basis," because "gross margin for the first quarter [is] to be approximately 30% lower than previously communicated." The details: price competition, a cancelled order, a severance package, and some tax obligations.
Management leaves some bright looking crumbs for investors: a greater than one book to bill ratio, the strongest backlog of orders ever, and cash balances improving to $170 million at the end of the quarter.
So how much is the stock worth today (which is to day, should you buy it because it is beneath that price, or should you sell it if you own it above that price)? It was at $55.75 per share within the last year; today the stock is below $15. What changed?
Rackable is in a position that is common in all industries, including technology. It had a good idea and executed well on it. It grew rapidly, from $53 million in annual sales in 2003 to $360 million in 2006. Investors (including me; I own the stock) got overly enthusiastic by projecting a straight line of increasing sales and profitability.
Sales revenues had not been bad, continuing to increase through Q4 2006. But Q1 2007 revenues will not only be sequentially (and seasonally) down; they will be below Q1 2006. In addition, starting with Q3 2006 earnings have taken a beating.
Rackable was noticed by the big guys because it was becoming a big guy. It was taking out full page ads in Infoworld; it was winning big contracts from YouTube, Microsoft, and other Internet search/portal players who liked Rackable's innovative approach to server farms. Sun, IBM, HP and Dell took a look and said: this has got to stop. Any one of these companies has the financial resources to take some losses in order to underbid Rackable. And reports are that this has been happening lately.
In order to keep its customers Rackable has cut its prices in specific situations. But it does not sell servers one at a time. It sells systems on a large scale. A few price cuts in a few specific situations and it is in the red.
Just as when the stock was bid up high based on future expectations, the pricing of the stock today depends on your model of future sales and earnings. No one actually knows what will happen; but some of us will guess right, and will at least guess in the ballpark, and some will be way off.
I think Rackable will pull through, but I see plenty of downside danger. To a fair extent they should be able to meet anything Sun, Dell, or HP can throw at them because Rackable has a superior (and patented) technology. They have the advantage of being a niche player: the other guys might be willing to underbid for a while, but they have other distractions and no one wants to be the head of the division that is bleeding money within a company that has many divisions.
The need for the type of server installations that RACK sells is growing rapidly. I think management was right to do what it took to keep their market share. They have enough cash that they can't be forced out of the game easily.
Rackable is not, today, a stock for short-term investors. It is a risky stock for long term investors. But today it has cash equal to 42% of its market share; the immediate downside is limited. I admire the guys at IBM, Sun, Dell, and HP, but I think Rackable may be the nimble running back that dodges the heavy defenders and makes a good run.
-------
See my summary of the Q4 2006 Rackable analyst conference
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