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Rackable Systems Announces Third Quarter 2007 Financial Results
FREMONT, Calif., Oct 25, 2007 (BUSINESS WIRE) -- Rackable Systems, Inc. (NASDAQ:RACK), a leading provider of servers and storage products for large-scale data centers, today announced financial results for the third quarter of 2007. Total revenue for the third quarter of 2007 was $87.2 million, up 6.1% from $82.2 million in the second quarter of 2007, and 8.4% compared to $80.5 million in the third quarter of 2006. Total revenue for the first nine months of 2007 was $241.5 million, compared to $253.5 million of revenue for the first nine months of 2006. GAAP gross margin for the third quarter of 2007 was 21.6%, compared to 21.4% in the same period a year ago. Non-GAAP gross margin for the third quarter of 2007 was 19.2%, compared to 22.6% in the same period a year ago. GAAP net income per share was breakeven for the third quarter of 2007 compared to GAAP net loss of ($0.01) per diluted share in the third quarter of 2006. Non-GAAP net income per diluted share was $0.09 compared to $0.19 in the third quarter of 2006. "We are pleased with our Q3 results and progress over the last two quarters," said Mark J. Barrenechea, President and Chief Executive Officer of Rackable Systems. "In Q3, we grew revenues, improved gross margins, and operated profitably. We also strengthened the executive team and attracted world-class talent within Operations, Service, and Engineering. Further, we won several new key base market accounts and achieved the second largest volume of systems shipped in the company's history." Rackable Systems ended the third quarter of 2007 with $178.8 million of cash, cash equivalents and short-term investments. Cash flow from operations for the first nine months of 2007 was $28.2 million compared to cash flow from operations of $18.7 million for the same period a year ago. Business Outlook Based on current business trends, Rackable Systems' financial projections for fiscal year 2007 are as follows: -- Annual revenue between $340-$360 million. -- GAAP gross margin between 10% and 12% for the full year of 2007. Non-GAAP gross margin between 16% and 18% for the full year of 2007. Non-GAAP financial measures disclosed in this press release exclude excess and obsolete inventory charges associated with next-generation technology shifts and related recoveries; stock-based compensation; severance costs associated with executive management departures; write-off of in-process research and development; amortization of intangible assets related to the Terrascale acquisition, amortization of patents and customer lists; quarterly payout related to the Terrascale acquisition and related adjustments to tax provision, including a valuation allowance charge. The reconciliation between GAAP and non-GAAP financials is provided in the tables accompanying this press release. Conference Call Information Rackable Systems will discuss these financial results and its outlook for 2007 and 2008 in a conference call at 2:00 p.m. PDT today. The public is invited to listen to a live web cast of the call on the Investor Relations section of the company's website at www.rackable.com. A replay of the web cast will be available approximately two hours after the conclusion of the call and remain available until the next earnings call. An audio replay of the conference call will also be made available approximately two hours after the conclusion of the call. The audio replay will remain available for five days and can be accessed by dialing 719-457-0820 and entering confirmation code 6462775. Cautionary Statement Regarding Forward Looking Statements The statements in this press release regarding 2007 projected financial results and primary operational focus are forward-looking statements. Actual results may differ materially due to a number of risks and uncertainties including: Rackable Systems operates in a very competitive market, and increased competition has in the past, and may continue, to cause pricing pressure on Rackable Systems' products, which would negatively affect Rackable Systems' gross and operating margins, as well as other financial measures; a significant portion of the company's revenues come from a small number of customers, and so the delay in placing an order, or the failure of a significant customer to place additional orders, could have a significant negative effect on Rackable Systems' financial performance; orders for Rackable Systems' products can be received at the end of the quarter, and so a delay in placing an order could have a significant negative effect on Rackable Systems' financial performance for the quarter; the failure of the RapidScale products to achieve market acceptance; Rackable Systems is unable to control component pricing, such as DDR memory pricing as has happened in the past, and as a result component pricing can rise unexpectedly, negatively impacting Rackable Systems' gross margins as well as other financial measures; Rackable Systems may be required to write-off additional significant amounts of excess and obsolete inventory; new products by competitors may come on the market, which would decrease the demand for Rackable Systems' products. Detailed information about other potential factors that could affect Rackable Systems' business, financial condition and results of operations is included in Rackable Systems' latest Quarterly Report on Form 10-Q under the caption "Risks Relating to Our Business and Industry," in Part I, Item 2 of that report, filed with the Securities and Exchange Commission (the "SEC") on August 9, 2007 and available at the SEC's Web site at www.sec.gov. Rackable Systems undertakes no responsibility to update the information in this press release. Use of Non-GAAP Financial Measures The non-GAAP financial measures discussed in the text of this press release and accompanying non-GAAP supplemental information are financial measures used by Rackable Systems' management to evaluate the operating performance of the company and to conduct its business operations. Non-GAAP gross margin discussed in this press release excludes stock-based compensation expense, excess and obsolete inventory charges related to next-generation technology shifts and related recoveries. Non-GAAP operating income (loss) discussed in this press release excludes stock-based compensation expense, excess and obsolete inventory charges related to next-generation technology shifts and related recoveries, severance costs associated with executive management departures, write-off of in-process research and development, amortization of intangibles recorded in connection with the Terrascale acquisition, amortization of patents and customer list in connection with the acquisition of the company's predecessor and cash payments related to the Terrascale acquisition. Non-GAAP net income (loss) and net income (loss) per share excludes the same items as non-GAAP operating income (loss) and, as well, excludes the related tax effects of the applicable items. Management presents non-GAAP financial measures because it considers them to be important supplemental measures of performance. Management believes that the excluded charges are not central to the company's core operating performance and uses the non-GAAP financial measures for planning purposes, including analysis of the company's core operating performance against prior periods, the preparation of operating budgets and to determine appropriate levels of operating and capital investments. Management excludes from its non-GAAP gross margin and non-GAAP net income (loss) the items cited above, whether or not recurring, to facilitate its review of the comparability of the company's core operating performance on a period to period basis as well as to better understand the fundamental economics of a specific period's operational and financial performance. Management uses this view of the company's operating performance for purposes of comparison with its business plan and individual operating budgets and allocations of resources. Management also believes that the non-GAAP financial measures provide additional insight for analysts and investors in evaluating the company's financial and operational performance in the same way that management evaluates Rackable Systems' financial performance. However, these non-GAAP financial measures have limitations as an analytical tool, as they exclude the financial impact of transactions necessary or advisable for the conduct of the company's business, such as the granting of equity compensation awards and the acquisition of Terrascale, as well as exclude the financial impact of other events affecting the company such as the operational ramifications of excess and obsolete inventory charges and are not intended to be an alternative to financial measures prepared in accordance with GAAP. For example, the benefits of having acquired intangible assets may be reflected in the company's financial performance, but the amortization of those intangibles is not. In addition, the charges for excess and obsolete inventory associated with next-generation technology platform shifts reflects operational decisions and purchases by the company in a previous period that resulted in a cash outlay that the company will not be able to recover, but the ramifications of this operating decision are not reflected in the non-GAAP financial measures. Hence, to compensate for these limitations, management does not review these non-GAAP financial metrics in isolation from its GAAP results, nor should investors. Pursuant to the requirements of SEC Regulation G, a detailed reconciliation between the company's GAAP and non-GAAP financial results is provided at the end of this press release. Investors are advised to carefully review and consider this information as well as the GAAP financial results that are disclosed in the company's SEC filings. About Rackable Systems Rackable Systems, Inc. (NASDAQ:RACK) is a leading provider of Eco-Logical(TM) servers and storage products for large-scale data center deployments. The company's products are designed to provide benefits in the areas of density, thermal efficiency, serviceability, power distribution, data center mobility and remote management. Founded in 1999 and based in Fremont, California, Rackable Systems is a founding member of The Green Grid and serves Internet, enterprise software, federal government, entertainment, financial services, oil and gas exploration and high performance-computing customers worldwide. Rackable Systems and Eco-Logical are trademarks or registered trademarks of Rackable Systems(R), Inc.
RACKABLE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
September 29, December 30,
2007 2006
------------- ------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 38,146 $ 30,446
Short-term investments 140,610 130,025
Accounts receivable, net 67,883 104,070
Inventories 50,852 68,137
Deferred income taxes 1,829 7,408
Deferred cost of sales 117 2,375
Prepaids and other current assets 24,409 12,934
------------- ------------------
Total current assets 323,846 355,395
PROPERTY AND EQUIPMENT--Net 7,888 5,372
GOODWILL 23,221 22,871
INTANGIBLE ASSETS--Net 20,169 14,007
OTHER ASSETS 1,337 9,125
------------- ------------------
TOTAL $ 376,461 $ 406,770
============= ==================
LIABILITIES AND STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES:
Accounts payable $ 62,505 $ 61,102
Accrued expenses 14,316 19,894
Income taxes payable 44 247
Deferred revenue 4,698 5,972
------------- ------------------
Total current liabilities 81,563 87,215
DEFERRED INCOME TAXES 2,072 431
DEFERRED RENT 670 23
DEFERRED REVENUE 3,370 3,412
------------- ------------------
Total liabilities 87,675 91,081
STOCKHOLDERS' EQUITY 288,786 315,689
------------- ------------------
TOTAL $ 376,461 $ 406,770
============= ==================
RACKABLE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
----------------------- -----------------------
September September September September
29, 30, 29, 30,
2007 2006 2007 2006
----------- ----------- ----------- -----------
REVENUE $ 87,243 $ 80,460 $ 241,505 $ 253,500
COST OF REVENUE 68,392 63,281 220,563 196,644
----------- ----------- ----------- -----------
GROSS PROFIT 18,851 17,179 20,942 56,856
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Research and
development 5,972 6,627 18,954 10,967
Sales and marketing 7,978 7,014 25,102 18,309
General and
administrative 7,590 6,487 28,491 14,600
----------- ----------- ----------- -----------
Total
operating
expenses 21,540 20,128 72,547 43,876
----------- ----------- ----------- -----------
INCOME (LOSS) FROM
OPERATIONS (2,689) (2,949) (51,605) 12,980
OTHER INCOME -- Net: 2,362 2,692 6,202 6,232
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE
INCOME TAX
(PROVISION) BENEFIT (327) (257) (45,403) 19,212
INCOME TAX BENEFIT
(PROVISION) 332 (132) (5,197) (8,303)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 5 $ (389) $ (50,600) $ 10,909
=========== =========== =========== ===========
NET INCOME (LOSS) PER
SHARE
Basic $ 0.00 ($0.01) ($1.77) $ 0.41
=========== =========== =========== ===========
Diluted $ 0.00 ($0.01) ($1.77) $ 0.39
=========== =========== =========== ===========
SHARES USED IN NET
INCOME (LOSS) PER
SHARE
Basic 29,124,546 27,812,158 28,636,658 26,593,157
=========== =========== =========== ===========
Diluted 29,317,375 27,812,158 28,636,658 28,228,922
=========== =========== =========== ===========
Stock-based compensation is included in the following cost
and expense categories by period (in thousands):
Three Months Ended Nine Months Ended
----------------------- -----------------------
September September September September
29, 30, 29, 30,
2007 2006 2007 2006
----------- ----------- ----------- -----------
Cost of revenue $ 455 $ 1,016 $ 1,867 $ 2,541
Research and
development 892 1,518 3,789 3,002
Sales and marketing 1,036 1,824 4,671 4,048
General and
administrative 2,543 1,713 8,805 3,377
----------- ----------- ----------- -----------
Total $ 4,926 $ 6,071 $ 19,132 $ 12,968
=========== =========== =========== ===========
RACKABLE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Nine Months
Ended Ended
September 29, September 30,
2007 2006
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(50,600) $10,909
Adjustments to reconcile net income
(loss) to net cash
used in operating activities:
Depreciation and amortization 5,007 2,203
Impairment loss on fixed assets 188 -
Provision for doubtful accounts
receivable, net of writeoffs 264 20
Deferred income taxes 14,740 2,415
Write-off of acquired in-process
research and development - 2,840
Stock-based compensation 19,132 12,968
Changes in operating assets and
liabilities:
Accounts receivable 35,923 (12,968)
Inventories 17,375 (6,379)
Prepaids and other assets (11,517) (13,122)
Accounts payable and other payables 1,245 17,125
Sales tax payable (1,677) -
Accrued expenses (3,253) 3,685
Income taxes payable 436 (3,179)
Deferred cost of sales 2,226 7,995
Deferred revenue (1,316) (5,848)
--------------- ---------------
Net cash provided by operating
activities 28,173 18,664
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (485,552) (384,547)
Proceeds from sales and maturities of
marketable securities 475,001 231,795
Terrascale acquisition, net of cash
acquired (350) (30,010)
Purchases of property and equipment (4,080) (2,688)
Expenditures for intangibles (9,122) (127)
--------------- ---------------
Net cash used in investing
activities (24,103) (185,577)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common
stock upon follow on
offering--net of issuance costs - 138,452
Excess tax benefit of stock options
exercised (430) 12,935
Repurchased restricted stock (245) -
Proceeds from issuance of common
stock upon ESPP purchase 1,843 1,542
Proceeds from issuance of common
stock upon exercise of stock options 2,537 2,900
--------------- ---------------
Net cash provided by financing
activities 3,705 155,829
--------------- ---------------
Effect of exchange rate changes on
cash and cash equivalents (75) -
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 7,700 (11,084)
CASH AND CASH EQUIVALENTS--Beginning
of period 30,446 29,099
--------------- ---------------
CASH AND CASH EQUIVALENTS--End of
period $38,146 $18,015
=============== ===============
RACKABLE SYSTEMS, INC. AND SUBSIDIARIES
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES
(In thousands, except share and per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
----------------------- -----------------------
September September September September
29, 30, 29, 30,
2007 2006 2007 2006
----------- ----------- ----------- -----------
GAAP GROSS PROFIT $ 18,851 $ 17,179 $ 20,942 $ 56,856
Add back (deduct):
Stock-based
compensation 455 1,016 1,867 2,541
Excess and obsolete
inventory charges
associated with
next-generation
technology shifts
and related
(recoveries) of
these written-down
inventories (2,562) - 18,027 -
----------- ----------- ----------- -----------
Non-GAAP GROSS PROFIT $ 16,744 $ 18,195 $ 40,836 $ 59,397
=========== =========== =========== ===========
GAAP GROSS MARGIN 21.6% 21.4% 8.7% 22.4%
Add back (deduct):
Stock-based
compensation 0.5% 1.2% 0.8% 1.0%
Excess and obsolete
inventory charges
associated with
next-generation
technology shifts
and related
(recoveries) of
these written-down
inventories (2.9)% - 7.4% -
----------- ----------- ----------- -----------
Non-GAAP GROSS MARGIN 19.2% 22.6% 16.9% 23.4%
=========== =========== =========== ===========
GAAP INCOME (LOSS)
FROM OPERATIONS $ (2,689) $ (2,949) $ (51,605) $ 12,980
Add back (deduct):
Stock-based
compensation 4,926 6,071 19,132 12,968
Excess and obsolete
inventory charges
associated with
next-generation
technology shifts
and related
(recoveries) of
these written-down
inventories (2,562) - 18,027 -
Severance costs
associated with
executive management
departures - - 781 -
Write-off of in-
process research and
development and
amortization of
intangible assets -
Terrascale
acquisition 699 2,977 1,773 2,977
Amortization of
patents and customer
list 359 359 1,077 1,077
Quarterly payout
related to
Terrascale
acquisition 1,295 - 3,885 -
----------- ----------- ----------- -----------
Non-GAAP INCOME (LOSS)
FROM OPERATIONS (2) $ 2,028 $ 6,458 $ (6,930) $ 30,002
=========== =========== =========== ===========
GAAP NET INCOME (LOSS) $ 5 $ (389) $ (50,600) $ 10,909
Add back (deduct):
Stock-based
compensation 4,926 6,071 19,132 12,968
Excess and obsolete
inventory charges
associated with
next-generation
technology shifts
and related
(recoveries) of
these written-down
inventories (2,562) - 18,027 -
Severance costs
associated with
executive management
departures - - 781 -
Write-off of in-
process research and
development and
amortization of
intangible assets -
Terrascale
acquisition 699 2,977 1,773 2,977
Amortization of
patents and customer
list 359 359 1,077 1,077
Quarterly payout
related to
Terrascale
acquisition 1,295 - 3,885 -
Adjustment to tax
provision/benefit
(1) (2,128) (3,620) 5,494 (6,517)
----------- ----------- ----------- -----------
Non-GAAP NET INCOME
(LOSS) (2) $ 2,594 $ 5,398 $ (431) $ 21,414
=========== =========== =========== ===========
GAAP NET INCOME (LOSS)
PER SHARE - DILUTED $ 0.00 ($0.01) ($1.77) $ 0.39
Add back:
Stock-based
compensation, excess
and obsolete
inventory charges
associated with
next-generation
technology shifts
and related
(recoveries) of
these written-down
inventories,
severance costs
associated with
executive management
departures, write-
off of in-process
research and
development and
amortization of
intangible assets -
Terrascale
acquisition,
amortization of
patents and customer
list, quarterly
payout related to
Terrascale
acquisition and
adjustment to tax
provision. $ 0.09 $ 0.20 $ 1.75 $ 0.37
----------- ----------- ----------- -----------
Non-GAAP NET INCOME
(LOSS) PER SHARE -
DILUTED $ 0.09 $ 0.19 ($0.02) $ 0.76
=========== =========== =========== ===========
SHARES USED IN
COMPUTING NET INCOME
(LOSS) PER SHARE
DILUTED - GAAP 29,317,375 27,812,158 28,636,658 28,228,922
=========== =========== =========== ===========
DILUTED - Non-GAAP 29,317,375 29,131,921 28,636,658 28,228,922
=========== =========== =========== ===========
(1) The provision of income taxes used in arriving at the non-GAAP net
income was computed using an income tax rate of 40.9% for the three
and nine months ended September 29, 2007 and September 30, 2006 and
includes a $13.2 million valuation charge for the nine months ended
September 29, 2007. The valuation allowance was recorded to adjust
the realizability of deferred tax assets at the beginning of the year
due to a projected pre-tax loss that will result in a cumulative pre-
tax loss position for fiscal years 2007, 2006, and 2005.
(2) Non-GAAP net loss for the nine months ended September 29, 2007
includes $1.3M of charges related to an order cancellation by one
customer, $0.4M of charges related to severance payments and $1.9M of
charges related to sales & use tax. All of these were recorded in the
three months ended March 31, 2007.
RACKABLE SYSTEMS, INC. AND SUBSIDIARIES
RECONCILIATION FROM NON-GAAP TO GAAP FINANCIAL PROJECTIONS
(in millions)
Revenue and Gross Margin Projections
---------------------------------------------------
FY 2007
------------------
Low High
--------- --------
Estimated revenues $ 340.0 $ 360.0
Non-GAAP estimated gross margin 16% 18%
Non-GAAP estimated gross profit $ 54.4 $ 64.8
Estimated stock based compensation expense under
cost of revenue $ (2.4) $ (2.4)
Excess and obsolete inventory charges associated
with next-generation technology shifts net of
related (recoveries) of these written-down
inventories $ (18.0) $ (18.0)
--------- --------
GAAP estimated gross profit $ 34.0 $ 44.4
--------- --------
GAAP estimated gross margin 10% 12%
SOURCE: Rackable Systems, Inc. Rackable Systems, Inc. Madhu Ranganathan, 510-933-8088 Chief Financial Officer investorrelations@rackable.com or Ashton Partners Jason Golz, 415-869-5766 Copyright Business Wire 2007 News Provided by COMTEX |
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