05.01.07 

rack: NEW CEO MAKES IT OFFICIAL; RACK IS IN TURNAROUND MODE
Yesterday morning, Rackable Systems announced that Tom Barton has resigned and that Mark Barrenechea, a current Board member and former executive at CA, Inc. (CA: Hold), has been appointed as President and CEO. In light of the considerable challenges the Company faces, management outlined a broad strategy to realign the Company's business by 1) fine-tuning its go to market model, and 2) realigning product offerings towards standardization. While we continue to believe Rackable will be a key beneficiary of the near-term massive data center builds and are impressed with the Company's strong bookings momentum, we are concerned that the predatory pricing environment will continue to hinder gross margin performance. Although we view the hiring of Barrenechea as a positive, it is clear to us that details of the realignment have yet to be formulated and that management transition adds another level of uncertainty to the mix. Until visibility with respect to the Company's ability to diversify its customer base improves, we suggest that investors stay on the sidelines. We are maintaining our Hold rating. Contact Us for Full Report - PDF

04.27.07 

rack: Q1 CONFIRMS VALUE PROPOSITION IN QUESTION
Last night, Rackable Systems reported Q1 results with revenue and EPS in line with the revised guidance provided earlier this month. We believe the large miss in Q1 was driven by continued intense competitive pricing by Dell at the Company's largest customers, including both Yahoo! (YHOO: Not Rated) and Microsoft. We continue to believe Rackable will be a key beneficiary of the massive data center builds over the next several quarters and are impressed with the following: 1) strong bookings momentum, with a book to bill well above 1; 2) a record backlog going into Q2; and 3) traction gained with the RapidScale clustered storage product line. However, we do not believe the margin issue will remedy itself anytime soon. We believe the Company's overall value proposition and management's ability to execute on its growth strategy over the long term is in question. We are maintaining our Hold rating. Contact Us for Full Report - PDF

04.05.07 

rack: PRE-ANNOUNCES Q1:07; MARGINS TAKE A ANOTHER BIG HIT; VALUE PROPOSITION IN QUESTION; DOWNGRADING TO HOLD
Last night after the market close, Rackable Systems negatively pre-announced Q1:07 results, with revenues in line with previously issued guidance of $70-75M but gross margins 30% lower than previously issued guidance of 18%. We believe this large miss was driven by continued intense competitive pricing by Dell at the Company's largest customers including both Yahoo and Microsoft. We continue to believe Rackable will be a key beneficiary of the massive data center builds over the next several quarters and are impressed with: 1) strong bookings momentum with a book to bill well above 1; 2) a record backlog going into Q2; and 3) traction gained with the RapidScale clustered storage product line. However, we do not believe the margin issue will remedy itself any time soon and therefore question the Company's overall value proposition and management's ability to execute on its growth strategy over the long term. We are downgrading RACK shares to Hold from Buy. Contact Us for Full Report - PDF

02.02.07 

rack: REPORTS DECEMBER QUARTER; 2007 STORY INTACT
Last night, Rackable Systems reported Q4:06 results with revenue and EPS in line with original revenue guidance and the revised EPS guidance provided during the negative pre-announcement on January 16th. Management cited several factors for the original EPS shortfall, including 1) predatory pricing at one large account; 2) unexpected spikes in price for DDR1;, 3) lower than expected sales of high margin RapidScale storage products; and 4) costs related to the heavily back-end loaded quarter. While we are clearly disappointed with the EPS miss, we believe the potential for reaccelerated top and bottom line growth in the long-term remains intact given the Company's strong competitive positioning, compelling TCO proposition, and expansion into the higher margin storage business. Overall, we believe the Company remains well positioned to grow its share of the $4-8B globally addressable market for large scale x86 server deployments. Based on this, we are reiterating our Buy rating and lowering our price target to $25/share from $28/share, representing 20x our 2008 operating EPS estimate, plus ~$5.50/share in cash. Contact Us for Full Report - PDF

01.17.07 

rack: PRE-ANNOUNCES Q4:06 RESULTS; REVENUES IN LINE, EPS FALLS SHORT; 2007 STORY INTACT; REITERATING BUY RATING
Last night after the market close, Rackable Systems pre-announced Q4:06 results, coming in towards the mid-point of the previously issued revenue guidance range, but missing both gross margin and EPS guidance. We believe the miss was driven by three primary factors in this order: 1) aggressive pricing by competition at Microsoft in the final hours of the quarter, and to a lesser extent, 2) slightly higher than expected DDR memory prices, and 3) a $1M shortfall with higher-margin RapidScale products. While we are disappointed and believe this may leave many investors scratching their heads, we believe the 2007 story remains intact. With shares trading off ~30% in after-hours and 20x our revised 2007 EPS estimate of $1.08, we would encourage investors to add to or begin accumulating RACK shares as we continue to believe Rackable will be a key beneficiary of the massive data center builds we expect over the next several quarters. We are reiterating our Buy rating on RACK shares and lowering our price target to $28/share from $40/share, representing 25x our 2007 operating income assumption ($0.85/share) plus ~$7/share in cash. Contact Us for Full Report - PDF

12.04.06 

rack: DECEMBER QUARTER ON TRACK; EXPECT A BANNER YEAR IN 2007; REITERATING BUY RATING AND $40 PRICE TARGET
Over the past several quarters, we believe that Rackable Systems has made substantial progress in laying the foundation for growth in Q4:06 and 2007. We believe this growth is beginning to manifest itself and is driving the Company towards the higher end of guidance. Overall, we believe that the December quarter is benefiting from Rackable's accelerating expansion into the estimated massive multi-billion dollar spend for servers and storage in large scale data centers targeted to support the growth of e-commerce, web-based applications, and streaming media services requiring highly scalable, high-density, and cost-effective infrastructures. Going into 2007, we feel that Rackable is following a very aggressive but prudent business strategy that should enable the Company to expand its customer base and drive margin expansion. Based on these factors, we are reiterating our Buy rating on RACK shares at a $40/share price target, representing 28x our 2007 operating income assumption ($1.18/share) plus ~$7/share in cash. Contact Us for Full Report - PDF

11.13.06 

rack: ANOTHER LOOK AT THE RACK; REMAINS A TOP PICK; REITERATING BUY RATING
Overall, Rackable Systems remains a top pick and we continue to believe that the Company has made substantial progress over the last few quarters in laying the foundation for growth for the remainder of 2006 and 2007. We feel these efforts will enable the Company to capitalize on the estimated massive multi-billion dollar spend for servers and storage in large scale data centers targeted to support the growth of e-commerce, web-based applications, and streaming media services requiring highly scalable, high-density, and cost-effective infrastructures. Consequently, we view Rackable as being among the most exciting companies in our universe and suggest that growth-oriented investors consider creating or building positions in RACK shares. In the following discussion, we revisit the primary factors that make Rackable Systems a top pick in our coverage universe as well as analyze the bear case and rebut with our belief of why the shorts will continue to fail for the foreseeable future. Contact Us for Full Report - PDF

10.31.06 

rack: THE RACK IS BACK ON TRACK; IMPROVED VISIBILITY LEADS TO HIGHER THAN EXPECTED GUIDANCE; REITERATING BUY RATING
Last night, Rackable Systems reported Q3:06 results, coming in short of our estimates but at the low end of management's guidance. Overall, while we are slightly disappointed with the September quarter results, we view the quarter as a transitional one given the one quarter spending pause at one of the Company's top three customers. More importantly, we are highly impressed by the guidance provided for Q4:06 and 2007, which were both ahead of plan and offer some perspective on how large an opportunity exists and how solid the visibility is for Rackable Systems moving forward. Management also cited strong channel bookings momentum during the quarter, which should lead to better visibility. Given our overall belief that the Company is well positioned to capitalize on the increasingly complex IT infrastructure needs of large scale data center deployments and is poised to grow at a much faster pace compared to its peers, coupled with our view that this transitional period is behind us, we feel the Company is poised to resume growth in the December quarter and well into 2007. Based on this, we are reiterating our Buy rating and raising our price target to $40/share, representing 28x our 2007 operating EPS estimate, plus ~$7/share in cash. Contact Us for Full Report - PDF

10.17.06 

rack: SEPTEMBER QUARTER EARNINGS PREVIEW; THE 'PAUSE' HAS PASSED, VISIBILITY CONTINUES TO IMPROVE
Rackable Systems recently closed its Q3:06 and will report earnings October 30 after the market close. We believe the Company will report an in-line to slightly better Q3:06 and provide guidance ahead of our and consensus estimates. We believe the Company's visibility has significantly improved over the last couple of months driven by 1) the July spending pause at Yahoo! (YHOO: Buy) related to the introduction of Intel's Woodcrest CPU is largely behind us and sales cycles are back to normal; 2) the Company has recently landed a handful of new customers that should kick in over the next few quarters; and 3) the Company has received early orders from Microsoft for its Quincy data center build and we expect this business to begin to ramp in Q4:06. With RACK shares currently trading at 23x our 2007 EPS estimate of $1.33 and with an expected growth rate of at least 25-30% for the next few years, we would be buyers of RACK shares ahead of the Company's Q3:06 earnings call. We are reiterating our Buy rating and $36/share price target, based on 25x our 2007 operating EPS estimate, plus over $6/share in cash (excludes $38M related to the acquisition). Contact Us for Full Report - PDF

09.26.06 

rack: CONCERNS FROM COMPUTERWORLD ARTICLE OVERBLOWN; SEPTEMBER QUARTER ON TRACK, DECEMBER LOOKS EVEN BETTER
Yesterday, shares of RACK were off as much at 7% from their intra-day highs only to rally back and close up 3% by the market close. We believe the downward pressure in RACK shares early in the day was driven by a recent ComputerWorld article suggesting that Google (GOOG: Buy) is experimenting with Sun Microsystems' open-source version of its Solaris operating system and the perceived competitive threat and potential lost business for Rackable at Google. We reiterate, however, that 1) Google continues to build its own servers in house and will do so for the foreseeable future; 2) Google and Rackable continue to have a good relationship; and 3) Google represents a potential avenue for growth in the storage server market. Furthermore, we believe Rackable will meet or slightly beat Q3:06 consensus estimates and raise its Q4:06 guidance. With RACK shares currently trading at 21x our 2007 EPS estimate of $1.33 and with an expected growth rate of at least 25-30% for the next few years, we view current levels as an attractive entry point. We are reiterating our Buy rating and $36/share price target, based on 25x our 2007 operating EPS estimate, plus over $6/share in cash (excludes $38M related to the acquisition). Contact Us for Full Report - PDF

08.30.06 

rack: ANNOUNCES ACQUISITION OF TERRASCALE; REITERATING BUY
Yesterday, after the market close, Rackable Systems announced that it signed a definitive agreement to acquire Terrascale Technologies, a provider of storage solutions for enterprise-class cluster and grid applications, for $38M in cash. Terrascale's current product offering consists of hardware and software platforms that enable I/O connectivity between servers and storage subsystems, particularly those in the commodity based subsegment. We believe that Rackable chiefly intends to leverage Terrascale's TerraGrid clustered file system software towards building out its storage business, primarily high capacity storage servers. Overall, we believe this acquisition-Rackable's first-is a prudent move that enables Rackable to both provide additional value to its existing business as well as increase overall corporate gross margins. We continue to feel that Rackable's differentiated and patented technology platform-which we believe addresses emerging concerns regarding server density, power consumption, heat dissipation, and total cost of ownership-has placed the Company on a growth trajectory exceeding that of its competitors. We view the Company's current valuation as highly attractive, with RACK shares currently trading at 20x our revised 2007 EPS estimate of $1.33, and an expected growth rate of at least 25-30% for the next few years. We are, therefore, reiterating our Buy rating and $36/share price target, based on 25x our 2007 operating EPS estimate, plus over $6/share in cash (excludes $38M related to the acquisition). Contact Us for Full Report - PDF

08.28.06 

rack: RACKABLE'S JUST GETTING STARTED; NEW LARGE CUSTOMER WINS IN THE WORKS; INITIATING COVERAGE WITH A BUY RATING
We are initiating coverage on Rackable Systems (RACK), a provider of high-density compute and storage servers for the scale-out and volume server market, with a Buy rating and $36 price target. Although Rackable is a relatively new entrant with only a small share of this multi-billion dollar market, we believe the Company is well positioned to capitalize on the increasingly complex IT infrastructure needs of large scale data center deployments and is poised to grow at a much faster pace compared to its peers. We believe that Rackable possesses a highly differentiated and patented technology platform that addresses emerging concerns regarding server density, power consumption, heat dissipation, and total cost of ownership. Although the Company's September quarter guidance disappointed the Street in mid-July, we believe this weakness was a one quarter phenomenon and Rackable's growth story is just getting started. Our conviction is strengthened by the potential for upside on both the top and bottom line stemming from several unannounced customer wins worth several million dollars each that we believe the Company has recently signed. We view the Company's current valuation as highly attractive, with RACK shares currently trading at 19x our 2007 EPS estimate of $1.30, and an expected growth rate of at least 25-30% for the next few years. We are, therefore, initiating coverage with a Buy rating and establishing a $36/share target based on 25x our 2007 operating EPS plus over $7/share in cash. Contact Us for Full Report - PDF