Rackable Systems, Inc. Announces Third Quarter 2006 Financial Results
Company Raises Fourth Quarter Outlook and Expects Strong Growth in 2007
MILPITAS, CALIF. October 30, 2006 Rackable Systems, Inc. (NASDAQ: RACK), a provider of servers and storage products for large-scale data center deployments, today announced financial results for the third quarter of 2006.
"This quarter, we continued to make significant progress in diversifying our revenue base with the addition of several key customers. We are now actively supplying our products to 9 of the top 20 Internet sites in the country and are on track to deploy to a 10th during the fourth quarter," said Tom Barton, Chief Executive Officer of Rackable Systems, "We previously announced a delay in an expected customer order from the third quarter to the fourth quarter. We are pleased to report we have secured that order, and it was larger than anticipated. Given this, as well as generally strong bookings momentum over the last 60 days, we now expect to exceed our previously announced projections for full year 2006."
Q3 Financial Results
Total revenue for the third quarter ended September 30, 2006 was $80.5 million, up 40% from $57.4 million in the third quarter of 2005.
During the third quarter of 2006, the company recorded stock-based compensation charges of $6.1 million and the write-off of in-process R&D and amortization of intangibles in connection with the Terrascale acquisition of $3.0 million resulting in a GAAP net loss of $(389,000) or $(0.01) per diluted share compared to a GAAP net income of $4.4 million or $0.20 per diluted share in the same period a year ago. Non-GAAP net income for the third quarter was $5.4 million or $0.19 per diluted share, compared to non-GAAP net income of $4.7 million or $0.22 per diluted share in the same period a year ago.
GAAP gross margin for the third quarter was 21.4% compared to 24.1% in the same period a year ago. Non-GAAP gross margin for the third quarter was 22.6% compared to 24.2% in the same period a year ago. Third quarter gross margin was negatively impacted by rapid price increases in component pricing, specifically DDR memory. The company expects gross margins to improve in the fourth quarter and for the full year 2007.
Total revenue for the nine months ended September 30, 2006 was $253.5 million, up 92% from $131.9 million in the first nine months of 2005. GAAP net income for the first nine months of 2006 was $10.9 million or $0.39 per diluted share, compared to $1.2 million or $0.07 per diluted share in the same period a year ago. Non-GAAP net income for the first nine months was $21.4 million or $0.76 per diluted share, compared to $7.5 million or $0.43 per diluted share in the same period a year ago.
Rackable Systems ended the quarter with $195.8 million of cash, cash equivalents and short-term investments compared to $ 215.3 million as of the end of the second quarter. Cash balances decreased by only $19.5 million during the quarter despite payments of $30.0 million, made during the quarter in conjunction with the Terrascale acquisition. Absent the Terrascale payments, the Company would have accreted $10.5 million of cash during the quarter. Cash flow from operations for the nine months ended September 30, 2006 was $18.7 million compared to a negative cash flow from operations of $(25.7) million for the same period a year ago.
In the first quarter of fiscal 2006, Rackable Systems adopted Statement of Financial Accounting Standards No. 123R, Share-Based Payments (FAS 123R), which requires that stock-based compensation be recorded in its financial statements. The company's non-GAAP financial measures exclude the following:
Rackable Systems has increased its financial projections for the fourth quarter ending December 31, 2006.
Rackable Systems is providing the following projections for the full fiscal year ending December 31, 2007:
Barton concluded, "The momentum we are experiencing in the back half of the year, and specifically bookings in the past 60 days, give us the confidence to increase projections for the fourth quarter. Market and customer demand for our product set appears strong and we anticipate this will continue through 2007. Despite increasing competitive intensity in the X86 server markets, we expect to achieve gross and operating margin leverage in 2007 as we begin to recognize benefits from the Terrascale acquisition and the investments we have made in our infrastructure during 2006."
Conference Call Information
Rackable Systems will discuss these financial results and its outlook for the fourth quarter and full year of 2006 in a conference call at 1:30 p.m. PST, today. The public is invited to listen to a live web cast of Rackable Systems' conference call on the investor relations section of the company's website at www.rackable.com. For investors unable to participate in the live conference call, an audio replay will be available on October 30, 2006 at approximately 4:30 p.m. PST and will remain available until November 2, 2006 at 9:00 p.m. PST. To access the audio replay, dial 719-457-0820 or 888-203-1112 and enter confirmation code 9374585. A web cast replay of the call will be available on the Investor Relations section at www.rackable.com approximately two hours after the conclusion of the call and will remain available until the company's next earnings call.
Cautionary Statement Regarding Forward Looking Statements
The statements in this press release regarding the company being on track to deploy a 10th top 20 Internet site in the fourth quarter, the company's projections regarding improving gross margins for the fourth quarter and full year 2007, the company's projections regarding its fourth quarter 2006 and full year 2007 financial performance, especially under the section entitled "Business Outlook," the company's expectation of continued strong market and customer demand for the company's product set, and the company's expectation for achieving gross and operating margin leverage in 2007, in this press release are forward-looking statements. Actual results may differ materially from the expectations contained in these statements due to a number of risks and uncertainties, including: 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; Rackable Systems operates in a very competitive market, and increased competition may cause pricing pressure on Rackable Systems' products, which would negatively affect Rackable Systems' gross and operating margins, as well as other financial measures; Rackable Systems is unable to control component pricing, and as a result component pricing can rise unexpectedly, negatively impacting Rackable Systems' gross margins as well as other financial measures; and new products by competitors may come on the market, which would decrease the demand for Rackable Systems' products. Detailed information about potential factors that could affect Rackable Systems' business, financial condition and results of operations is included in Rackable Systems' Quarterly Report on Form 10-Q under the caption "Risks Relating to Our Business and Industry," in Item 2 of that report, filed with the Securities and Exchange Commission (the "SEC") on August 15, 2006 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 if any forward-looking statement later turns out to be inaccurate.
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 represent 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. Non-GAAP net income (loss) and net income (loss) per share discussed in this press release exclude stock-based compensation expense, write-off of in-process R&D and amortization of intangibles and other assets recorded in connection with the Terrascale acquisition, amortization of patents and customer list in connection with the acquisition of the company's predecessor, change in fair value of embedded derivatives in preferred stock, dividends on preferred stock recorded as interest expense, and 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 uses the non-GAAP financial measures for planning purposes, including analysis of the company's 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 net income change in fair value embedded derivatives in preferred stock and dividends on preferred stock recorded as interest expense as these charges relate to the company's prior capital structure and Rackable Systems does not expect to incur any future charges of this nature. Management excludes from its non-GAAP gross margin and non-GAAP net income certain nonrecurring items to facilitate its review of the comparability of the company's core operating performance on a period to period basis because such items are not related to the company's ongoing core operating performance as viewed by management. 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, 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. Hence, non-GAAP financial measures should not be considered in isolation from the company's GAAP results of operations. Pursuant to the requirements of SEC Regulation G, a detailed reconciliations between the company's GAAP and non-GAAP financial results and financial projections are 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. is a provider of 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 and remote management. Founded in 1999 and based in Milpitas, California, Rackable Systems serves Internet, semiconductor design, enterprise software, federal government, entertainment, financial services, oil and gas exploration and biotechnology customers worldwide.