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Rackable gets racked by investors

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The ever volatile shares of Rackable Systems have imploded following a fourth quarter financial warning.

Rackable on Tuesday informed investors that fourth quarter gross margins and earnings per share figures would likely come in well below analyst expectations. The server and storage maker blamed higher memory costs, pricing pressure from rivals, and slower than expected sales of its new RapidScale storage products. Investors responded to the news by sending Rackable shares down between 30 per cent and 47 per cent in the after-hours markets.

Fourth quarter revenue should come in between $105.5m and $106.8m - a range near the high-end of previous forecasts. Rackable also expects to post net income somewhere between a loss of $700,000 and a profit of $194,000.

Rackable expects these results to translate into earnings per share of 17 cents to 18 cents - well off the analysts' mark of 27 cents per share.

It's not unusual for Rackable's shares to shift 30 per cent or more on negative news. Investors have come to expect nothing but double-digit growth from the hardware start-up that claims such impressive scalps as Microsoft and Yahoo! and punish it when it fails to deliver.

During our interview last month, Rackable's CEO Tom Barton emphasized the gross margin pressure being felt by the the company.

Barton's hoping that the new RapidScale storage line can produce higher margin sales than the company's flagship server boxes. Clearly, however, things have not moved along at the clip Barton hoped.

"Although it took us longer than expected to roll out our new RapidScale line of products, early customer feedback has been positive and we remain enthusiastic about the long-term opportunities for this business," he said in a statement. ®

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