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Wall Street grossed out by Rackable's dwindling margins

Feeling the competitive strain

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Shares of Rackable Systems began an all too familiar downward march, following a first quarter profit and gross margins warning.

Well, profit isn't the best word to use since Rackable revealed that it will likely report a first quarter loss for the period that closed March 31. The loss stands as just one item in a long list of negative factors hurting the company during the quarter, including a large order cancellation, intense pricing pressure and severance costs.

The end result? Rackable expects gross margins for Q1 to come in a whopping 30 per cent lower than expected. The server and storage seller has seen gross margins hover around 21 per cent and earlier predicted Fiscal 2007 gross margins between 17 per cent and 21 per cent. The Q1 gross margins were once meant to come in "at the low end" of the Fiscal 2007 range, according to a spokeswoman, and will now come in even lower.

"Intense competitive conditions for business at our largest customers continued throughout the first quarter of 2007, which negatively impacted our gross margin and bottom line," said Tom Barton, Rackable's CEO.

A couple weeks back, we called Rackable after hearing rumors of layoffs. The company handed us a fat “no comment” at the time but has since confirmed the firings. It noted “severance charges related to an internal reorganization.” hurt the recent quarter.

Rackable expects first quarter revenue between $70m to $75m.

It's highly dependent on business from three, major customers – Microsoft, Yahoo! and Amazon.com. With that in mind, Rackable has worked for months to bring on a more diverse client base.

In the meantime, the likes of Dell, HP and Sun Microsystems have taken aim at Rackable's server business, arming systems and services for larger internet companies that buy systems 10,000 units at a time.

Rackable's constant revenue, profit and gross margins gyrations prove overwhelming for investors. The company's stock bounces around like a scantily clad lass at a Hustler Club opening. At last check, Rackable's shares tumbled 8 per cent on today's news. ®

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