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Rackable admits Q4 sales plummet

Slashes payroll 15 per cent

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Going public has not been as much fun for boutique server maker Rackable Systems as the idea must have sounded like a few years back. Today, the company announced that it had slashed 15 per cent of its 350-strong workforce to get costs back in line with falling sales. Those Sales that are falling thanks in large part to the Meltdown, natch.

Rackable - which sells energy-efficient x64 servers to services providers, Web startups, and other companies that want dense servers and storage as well as energy efficiency - might be lamenting that it has to air its laundry to Wall Street, as it encounters tight economic conditions and makes substantial cuts to its payroll. But having gone public in June 2005, when times were pretty good in IT, the company is sitting on a pile of cash. Which helps cushion the blow a little when the economy heads south.

Rackable today revised its expected 2008 sales downward, the second time it has done so this year.

The first time, back in November, was when the company reported its third quarter financial results, which saw sales plummet by 25.2 per cent to $65.3m and a loss of $6m. That loss was greatly reduced because Rackable cut research and development expenses by 23.4 per cent, sales and marketing by 65.1 per cent, and general and administrative costs by 47.9 per cent.

Back in August, before the economic meltdown was in full swing, Rackable told Wall Street to expect somewhere between $353m and $374m in revenues for 2008, with some profits. But in November, at the peak of the Meltdown, the company said it would only have between $275m to $300m in sales for the year and would book a loss in the range $1.26 to $1.45 per share. Today, Rackable said that it expected revenues to be as low as $245m to $250m for 2008, so clearly some sales that were expected in Q4 got pushed out. The company did not provide an estimate for its expected losses for the year, as it did back in November.

Rackable added that it would end the quarter with between $175m and $185m in cash and equivalents. At the end of the third quarter, in September, the company had $184.6m. As we go to press on Wednesday afternoon, Rackable's shares are down 14.6 per cent to just $4.15 a pop, and the company has enough money to take itself private, now that it has a market capitalization of $145m. This is not necessarily the best way to spend the money, but it is a tactic that might sound tempting to some in the same position as Rackable.

"Rackable Systems was adversely impacted by the economic turmoil during the fourth quarter," explained Mark Barrenechea, the company's president and chief executive officer. "However, we are acting quickly and decisively to match expenses to revenues, including having reduced our work force by 15 per cent this month. We have also re-purposed investment dollars to increase our commitment to engineering and new products.

Our cost control and working capital actions resulted in strong inventory controls and cash management, despite a challenging quarter. We continue to protect our strong balance sheet, manage our working capital, and be debt-free. For the long-term, we are innovating to win and our new products are being well received."

Rackable said that the layoffs would trim $4m to $5m in costs out of its books and that the costs of the restructuring would be immaterial. Barrenechea said that as 2009 got started, the company had a $20m sales backlog for its servers. To try to pump up its prospected for 2009, the company said that it has sold two of its ICE containerized data centers to a customer in the fourth quarter of 2008 and would be able to recognize revenue for these in the first quarter of 2009.

The company's CloudRack cookie-sheet, minimalist servers, which are aimed at so-called hyperscale clients who want something akin to the kit that Google builds for itself, have been ordered by a "leading Internet company" and the new MobiRack mobile rack server has had its first sales, in this case to an unnamed government agency.

Rackable added 15 new customers in Q4, but did not say in its statement what revenues would be for the quarter. But if you do the math, the company had $209.2m in sales for the first nine months of 2008, and that means Q4 sales will be somewhere between $36m and $41m, a very steep decline from the $111.6m in sales it had in the fourth quarter of 2007.

Like many server makers, Rackable was counting on an upgrade cycle boost from to Intel's new "Nehalem" Xeon processors, expected at the end of March, and Advanced Micro Devices' "Shanghai" Opterons, which are now shipping in volume after being launched last fall. Now, the goal at server makers is not to boost sales, which may no longer be possible, but to use the features of Nehalem and Shanghai systems to preserve as much revenues as possible in their respective customer bases and to attack rival x64 server makers to steal away some business.

One this is certain: 2009 is shaping up to be a rough year for servers. And with IBM, Hewlett-Packard, Sun Microsystems, and Dell all chasing the hyperscale space where Rackable and rival Verari Systems made their nut all alone for a few years, this part of the market is going to be particularly bloody. ®

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