Rackable: Fiscal 4Q08 Financial Results

Rackable Systems, Inc. announced financial results for the fourth quarter and fiscal year 2008.

“2008 was a tough year for our industry and for Rackable. Given our strong financial flexibility with $181 million in cash and investments, we plan on making key investments for 2009,” said Mark J. Barrenechea, president and CEO of Rackable Systems. “First, we plan to invest up to 10% of our cash to expand our product offerings and our sales and service capabilities. Second, the company announced a $40 million share repurchase program today. We believe this is an ideal time to invest in Rackable and that these investments will place the company in a stronger competitive position to gain market share as the economy recovers.”

Total revenue from continuing operations for the fourth quarter of 2008 was $38.8 million, compared to $111.3 million in the fourth quarter of 2007. Total revenue from continuing operations for the fiscal year 2008 was $247.4 million compared to $350.7 million in fiscal year 2007.

GAAP gross margin from continuing operations for the fourth quarter of 2008 was (15.5)%, compared to 25.0% in the fourth quarter of 2007. Non-GAAP gross margin from continuing operations for the fourth quarter of 2008 was 15.1%, compared to 21.5% in the fourth quarter of 2007. GAAP gross margin from continuing operations for fiscal year 2008 was 11.9%, compared to 13.5% in fiscal year 2007. Non-GAAP gross margin from continuing operations for fiscal 2008 was 17.1%, compared to 18.0% in fiscal year 2007.

GAAP net loss per share from continuing operations was ($0.61) for the fourth quarter of 2008, compared to GAAP net income per share of $0.16 in the fourth quarter of 2007. Non-GAAP net loss per share from continuing operations was ($0.17) in the fourth quarter of 2008, compared to non-GAAP net income of $0.20 in the fourth quarter of 2007. GAAP net loss per share from continuing operations was ($1.06) for fiscal year 2008, compared to GAAP net loss of ($1.39) per share in fiscal year 2007. Non-GAAP net loss per share from continuing operations was ($0.19) for fiscal year 2008, compared to non-GAAP net income of $0.22 per diluted share in fiscal year 2007.

Rackable Systems ended the fourth quarter of 2008 with $180.6 million of cash, cash equivalents, long-term and short-term investments compared to $198.1 million as of December 30, 2007.

Business and Financial Highlights

• Decreased purchases by our two largest customers, comprising 21% of our sales in 2008, were the primary factor of revenue decrease. Excluding two large customers in 2008 and 2007, Rackable revenues increased by 5% from 2007 to 2008.
• Based on the strength of the company’s balance sheet, Rackable announced today a stock repurchase program to buy up to $40 million of its shares.
• Rackable introduced MicroSlice architecture to service a large class of enterprise workloads that do not require expensive virtualization software and expensive data center server features. The approach is so revolutionary that it enables sub-$500 servers that run on as little as 72 watts.
• Rackable’s cash and working capital management continue to be a core strength during the economic downturn. During the fourth fiscal quarter, accounts receivable decreased by $17 million and accounts payable decreased by $24 million.
• Rackable focused on cost control during the fourth fiscal quarter. Operating expenses decreased by 42% year-over-year and 18% quarter-over-quarter.
• The company continues to diversify its customer base and acquired over 100 new customers for the year and over 20 in the fourth fiscal quarter, including ones in such diverse verticals as telecommunications hardware, the Department of Defense, and advanced scientific research. Conoco Philips was greater than 10% of revenue for the fourth fiscal quarter.
• To align expenses with revenue, Rackable reduced its workforce by 15% in January 2009, yielding an estimated annual operating savings of approximately $4 to $5 million. We do not expect the costs of the restructuring to be material.

Business Outlook for Q1 and Fiscal Year 2009
All projections exclude the effect of the stock repurchase. Rackable Systems’ financial projections for Q1 and fiscal year 2009 are as follows:

• First fiscal quarter of 2009 revenue is projected to be flat to slightly up from fourth fiscal quarter of 2008.
• Fiscal year 2009 ending cash and investments balance to be in the range of $160 to $170 million.
• Fiscal year 2009 non-GAAP annual operating expenses will decrease approximately 10% from fiscal year 2008.
• Fiscal year 2009 non-GAAP EPS is anticipated to be less than in fiscal year 2008.