Rackable stomached $31.3m loss in 2008

Mystery customers cut cord

Server maker Rackable Systems has finished up a rough 2008 and is positioning itself to take on a challenging 2009 IT spending environment.

After the markets closed today, Rackable reported its fourth quarter and full year 2008 financial results, and sales for the peddler of energy-efficient, rack-based machines fell by 65.1 per cent to $38.8m. Excluding numbers related to discontinued product lines, Rackable posted an $18.2m loss in the fourth quarter ended January 3, compared to a gain of $4.7m in the year-ago quarter.

Including losses from those discontinued operations, Rackable had a $19.5m loss in Q4 2008 and an $18.9m loss in Q4 2007. For the full year, Rackable's sales fell by 29.4 per cent to $247.4m, and it had a loss of $31.3m on continuing operations, which was at least smaller than the $40m loss it had in 2007.

Mark Barrenechea, Rackable's president and chief executive officer, said that the company was affected by the deflationary economy and the reduction in capital spending that is affecting all economic sectors, and its woes were compounded by price volatility the components that go into its server and storage racks.

But the immediate issue was that Rackable's two largest customers spent $114m less on Rackable products in 2008 than they did in 2007. Those two firms were not named by Barrenechea, but when Rackable went public in June 2005, Microsoft, Amazon, and Yahoo were its biggest customers and accounted for the bulk of its sales.

Anyway, ignoring that huge falloff in spending from these two unnamed customers, Barrenechea said that server sales were up 5 per cent in 2008 and that across all of its customer base, storage sales were up 23 per cent and services sales grew by more than 40 per cent. (The company doesn't break out revenue figures for these areas independently).

Barrenechea said that the company added 100 new customers in 2008. Then he said that in addition to its key large-scale Internet, defense, and high-tech customers, Rackable was zeroing in on the financial services and oil and gas industries, which had revenue growth at the company of 58 per cent and 126 per cent respectively in 2008. In the fourth quarter, Rackable added 20 new customers, including telecom and defense clients, and oil giant ConocoPhillips accounted for more than 20 per cent of revenues.

In case you are wondering, Rackable is still "100 per cent committed" to containerized data centers, says Barrenechea, even though it did not recognize any revenue from its ICE Cube containers in 2008. "Interest remains high," he said. Then he repeated it later just to make sure Wall Street heard it right. The company is hopeful that its CloudRack cookie sheet servers (which have a lot less metal in them and are easier to cool), its MobiRack mobile rack enclosures, and its MicroSlice low-power servers (which are based on Mini-ITX and Micro-ATX boards commonly used in PCs) will give it some leverage in a tough 2009 IT spending environment.

On the storage front, Barrenechea was hoping that storage would account for between 10 and 20 per cent of total revenues. And it came in at the midpoint of that range for the year. Rackable is hoping that it will get traction with a partnership it has with NetApp and is also readying a new set of storage products, expected in the next 30 to 90 days, that will allow it to cram 1 PB of capacity into a single rack.

Barrenechea said that in 2009, Rackable would be spending up to 10 per cent of its cash pile, which weighed in at $171.9m as the year ended, to invest in product development and building up sales. He also said that the board of directors at the company had voted today to authorize the purchase of up to $40m in Rackable stock, which helps pump up the earnings per share comparisons and which also gives the company stock that it can give to employees as compensation - should it decide to do that.

To keep costs in line with decline revenues, Rackable let go of 60 employees in 2008 and had a headcount of 318 as the year ended. In January, when it became clear that the fourth quarter was not good and 2009 was going to be tough, Rackable cut another 15 per cent of its workforce. At the time of that announcement, I was told that headcount at the company was 350, but clearly, it wasn't. Anyway, with another 48 people being let go January, that puts Rackable's headcount down to 270.

Looking ahead, Rackable provided some guidance, but said it was tough to be precise. Because of its relatively strong order pipeline and the number of deal deferrals it saw at the end of 2008, Rackable expects sales in the first quarter of 2009 to be flat to up compared to the fourth quarter of 2008. The company added that it expected to have between $160m and $170m in cash as 2009 ends and that its non-GAAP operating expenses would fall by about 10 per cent. The company also warned that non-GAAP earnings per share would be less in 2009 than in 2008. ®