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Rackable Systems Announces Record Fiscal 2006 Revenue and Earnings
Record Annual Revenue of $360.4 M and Non-GAAP EPS of $0.94MILPITAS, Calif.--(BUSINESS WIRE)--Rackable Systems, Inc., (NASDAQ:RACK - News) a provider of servers and
storage products for scale out data center deployments, today
announced financial results for the quarter and year ended December
30, 2006. Q4 Highlights
2006 Highlights
"For the first time in Rackable System's history, we have broken the $100 million quarterly revenue mark," stated Tom Barton, Chief Executive Officer of Rackable Systems. He continued, "However, as we noted in our press release on January 16th, during the fourth quarter we faced several unexpected challenges that negatively impacted our gross margin and earnings per share. The gross margin pressure we experienced this quarter was primarily due to increasingly competitive conditions and an unanticipated increase in DDR memory pricing. Despite these difficulties, we were able to retain and expand key customer relationships during the quarter. Additionally, while sales of our higher-margin RapidScale(TM) products were impacted by a longer than expected product rollout, we remain optimistic about long-term prospects for this business." Q4 Financial Results Total revenue for the fourth quarter ended December 30, 2006 was $106.9 million, up 28.6% from $83.1 million in the fourth quarter of 2005. During the fourth quarter of 2006, the company recorded stock-based compensation charges of $7.8 million, amortization of patents and customer list of $359,000 and amortization of intangibles in connection with the Terrascale acquisition of $553,000, resulting in a GAAP net income for the fourth quarter of $563,000 or $0.02 per diluted share compared to a GAAP net income of $7.3 million or $0.32 per diluted share in the same period a year ago. Non-GAAP net income for the fourth quarter of 2006 was $5.6 million or $0.19 per diluted share, compared to non-GAAP net income of $7.6 million or $0.33 per diluted share in the same period a year ago. GAAP gross margin for the fourth quarter of 2006 was 18.8% compared to 24.9% in the same period a year ago. Non-GAAP gross margin for the fourth quarter was 19.8% compared to 24.9% in the same period a year ago. 2006 Financial Results Total revenue for the twelve months ended December 30, 2006 was $360.4 million, up 67.6% from $215.0 million in the twelve months of 2005. During 2006, the company recorded stock-based compensation charges of $20.8 million, amortization of patents and customer list of $1.4 million, write-off of acquired in-process R&D of $2.8 million and amortization of intangibles in connection with the Terrascale acquisition of $690,000, resulting in GAAP net income for the twelve months of 2006 of $11.5 million or $0.40 per diluted share, compared to $8.5 million or $0.47 per diluted share in the same period a year ago. Non-GAAP net income for 2006 was $27.0 million or $0.94 per diluted share, compared to $15.0 million or $0.83 per diluted share in the same period a year ago. GAAP gross margin for 2006 was 21.4% compared to 23.1% in the same period a year ago. Non-GAAP gross margin for 2006 was 22.4% compared to 23.1% in the same period a year ago. Non-GAAP financial measures 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. The reconciliation between GAAP and non-GAAP net income (loss), gross margin and net income (loss) per share is provided in the financial tables accompanying this press release. Business Outlook Rackable Systems is providing the following projections for the full fiscal year ending December 31, 2007:
Conference Call Information Rackable Systems will discuss these financial results and its outlook for 2007 in a conference call at 1:30 p.m. PST, 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 until February 6, 2007, at 9:00 p.m. PST and can be accessed by dialing 719-457-0820 or 888-203-1112 and entering confirmation code 5960456. Cautionary Statement Regarding Forward Looking Statements The statements in this press release regarding the company's optimistic outlook for its RapidScale product line and the company's projections for full year 2007 financial results, especially under the section entitled "Business Outlook," are forward-looking statements. Actual results may differ materially due to a number of risks and uncertainties, including: the failure of the RapidScale products to achieve market acceptance; 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 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; 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; and new products by competitors may come on the market, which would decrease the demand for Rackable Systems' products. Detailed information about additional 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 November 14, 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. 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 financial measures 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, cash payments related to 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 core operating performance against prior periods, the preparation of operating budgets and to determine appropriate levels of operating and capital investments. Management excludes these items from its non-GAAP gross margin and non-GAAP net income, whether or not recurring 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's 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, and are not intended to be an alternative to financial measures prepared in accordance with GAAP. 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 reconciliation between the company's GAAP and non-GAAP financial results is provided at the end of this press release and 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 scale out data center deployments. The company's servers 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. Rackable Systems® is a registered trademark and RapidScale is a trademark of Rackable Systems, Inc. RACKABLE SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
December 30, December 31,
2006 2005
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $30,446 $29,099
Short-term investments 130,025 25,065
Accounts receivable 104,070 49,700
Inventories 68,137 40,649
Deferred income taxes 7,408 6,504
Deferred cost of sales 2,375 8,665
Prepaids and other current assets 12,934 4,111
------------ ------------
Total current assets 355,395 163,793
PROPERTY AND EQUIPMENT--Net 5,372 2,588
GOODWILL 22,871 2,820
INTANGIBLE ASSETS--Net 14,007 6,601
OTHER ASSETS 11,614 240
------------ ------------
TOTAL $409,259 $176,042
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $61,102 $28,226
Accrued expenses 19,894 8,291
Income taxes payable 247 3,179
Deferred revenue 5,972 11,771
------------ ------------
Total current liabilities 87,215 51,467
DEFERRED INCOME TAXES 2,920 304
DEFERRED RENT 23 28
DEFERRED REVENUE 3,412 978
------------ ------------
Total liabilities 93,570 52,777
STOCKHOLDERS' EQUITY 315,689 123,265
------------ ------------
TOTAL $409,259 $176,042
============ ============
RACKABLE SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
Three Months Ended For the Year Ended
----------------------- -----------------------
December December December December
30, 31, 30, 31,
2006 2005 2006 2005
----------- ----------- ----------- -----------
REVENUE $106,876 $83,117 $360,376 $214,985
COST OF REVENUE 86,756 62,439 283,400 165,329
----------- ----------- ----------- -----------
GROSS PROFIT 20,120 20,678 76,976 49,656
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Research and
development 5,518 853 16,485 2,247
Sales and marketing 8,742 4,778 27,051 15,402
General and
administrative 7,293 2,868 21,893 8,390
----------- ----------- ----------- -----------
Total operating
expenses 21,553 8,499 65,429 26,039
----------- ----------- ----------- -----------
INCOME (LOSS) FROM
OPERATIONS (1,433) 12,179 11,547 23,617
OTHER INCOME
(EXPENSE)--Net:
Change in fair value
of embedded
derivatives in
preferred stock -- -- -- (4,192)
Interest income 2,070 235 7,488 509
Interest expense (13) -- (13) (1,537)
Other income--net 8 24 822 23
----------- ----------- ----------- -----------
Total other income
(expense)--net 2,065 259 8,297 (5,197)
----------- ----------- ----------- -----------
INCOME BEFORE INCOME
TAX PROVISION 632 12,438 19,844 18,420
INCOME TAX PROVISION (69) (5,124) (8,372) (9,908)
----------- ----------- ----------- -----------
NET INCOME $563 $7,314 $11,472 $8,512
=========== =========== =========== ===========
NET INCOME PER SHARE
Basic $0.02 $0.36 $0.43 $0.86
=========== =========== =========== ===========
Diluted $0.02 $0.32 $0.40 $0.47
=========== =========== =========== ===========
SHARES USED IN NET
INCOME PER SHARE
Basic 28,012,081 20,455,673 26,947,888 9,946,791
=========== =========== =========== ===========
Diluted 29,452,182 22,677,638 28,618,309 18,040,017
=========== =========== =========== ===========
Stock-based compensation is included in the following cost and expense
categories by period (in thousands):
Three Months Ended For the Year Ended
----------------------- -----------------------
December December December December
30, 31, 30, 31,
2006 2005 2006 2005
----------- ----------- ----------- -----------
Cost of revenue $1,042 $21 $3,583 $91
Research and
development 2,067 15 5,069 70
Sales and marketing 2,197 64 6,245 261
General and
administrative 2,482 33 5,858 131
----------- ----------- ----------- -----------
Total $7,788 $133 $20,755 $553
=========== =========== =========== ===========
RACKABLE SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the For the
Year Ended Year Ended
December December
30, 2006 31, 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $11,472 $8,512
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 3,566 3,926
Loss on disposal of property and equipment -- 2
Accrued interest income -- (206)
Provision (benefit) for doubtful accounts
receivable, net of writeoffs 311 61
Deferred income taxes 1,183 (5,293)
Accretion for preferred stock dividends
recorded as interest expense -- 1,087
In-process research and development 2,840 --
Stock-based compensation 20,755 553
Changes in fair value of embedded
derivatives in preferred stock -- 4,192
Changes in operating assets and
liabilities:
Accounts receivable (53,833) (40,417)
Inventories (27,196) (27,026)
Prepaids and other assets (19,692) (2,949)
Accounts payable and other payables 32,055 17,963
Accrued expenses 11,200 2,470
Income taxes payable (2,932) 4,839
Deferred cost of sales 6,200 (8,665)
Deferred revenue (3,513) 12,567
----------- -----------
Net cash used in operating activities (17,584) (28,384)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (547,017) (55,765)
Proceeds from sales and maturities of
marketable securities 442,089 30,907
Terrascale acquisition, net of cash acquired (31,886) --
Purchases of property and equipment (3,938) (1,801)
Expenditures for intangibles (152) (158)
----------- -----------
Net cash used in investing activities (140,904) (26,817)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit, net -- (14,061)
Repurchase of common stock from Founders -- (6,000)
Payment of notes payable to related parties -- (3,000)
Redemption of mandatorily redeemable
preferred stock -- (24,738)
Proceeds from issuance of common stock upon
follow on offering--net of issuance costs 138,452 46,835
Proceeds from issuance of common stock upon
initial public offering--net of issuance
costs -- 67,780
Excess tax benefit of stock options
exercised 14,971 --
Proceeds from issuance of common stock upon
ESPP purchase 1,541 --
Proceeds from issuance of common stock upon
exercise of stock options 4,906 373
----------- -----------
Net cash provided by financing
activities 159,870 67,189
----------- -----------
Effect of exchange rate changes on
cash and cash equivalents (35) --
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,347 11,988
CASH AND CASH EQUIVALENTS--Beginning of period 29,099 17,111
----------- -----------
CASH AND CASH EQUIVALENTS--End of period $30,446 $29,099
=========== ===========
RACKABLE SYSTEMS, INC.
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES
(In thousands, except share and per share amounts)
(Unaudited)
----------------------------------------------------------------------
Three Months Ended For the Year Ended
----------------------- -----------------------
December December December December
30, 31, 30, 31,
2006 2005 2006 2005
----------- ----------- ----------- -----------
GAAP GROSS PROFIT $20,120 $20,678 $76,976 $49,656
Add back stock-based
compensation 1,042 21 3,583 91
----------- ----------- ----------- -----------
Non-GAAP GROSS PROFIT $21,162 $20,699 $80,559 $49,747
=========== =========== =========== ===========
GAAP GROSS MARGIN 18.8% 24.9% 21.4% 23.1%
Add back stock-based
compensation 1.0% 0.0% 1.0% 0.0%
----------- ----------- ----------- -----------
Non-GAAP GROSS MARGIN 19.8% 24.9% 22.4% 23.1%
=========== =========== =========== ===========
GAAP INCOME (LOSS)
FROM OPERATIONS $(1,433) $12,179 $11,547 $23,617
Add back:
Stock-based
compensation 7,788 133 20,755 553
Amortization of
intangible assets -
Terrascale
acquisition 553 - 690 -
Amortization of
patents and
customer list 359 359 1,436 1,436
Write-off of
acquired in-process
R&D - - 2,840 -
----------- ----------- ----------- -----------
Non-GAAP INCOME FROM
OPERATIONS $7,267 $12,671 $37,268 $25,606
=========== =========== =========== ===========
GAAP NET INCOME $563 $7,314 $11,472 $8,512
Add back (deduct):
Stock-based
compensation 7,788 133 20,755 553
Amortization of
intangible assets -
Terrascale
acquisition 553 - 690 -
Amortization of
patents and
customer list 359 359 1,436 1,436
Write-off of
acquired in-process
R&D - - 2,840 -
Change in fair value
of embedded
derivatives in
preferred stock - - - 4,192
Dividends on
preferred stock
recorded as
interest expense - - - 1,087
Adjustment to tax
provision (1) (3,631) (242) (10,150) (763)
----------- ----------- ----------- -----------
Non-GAAP NET INCOME $5,632 $7,564 $27,043 $15,017
=========== =========== =========== ===========
GAAP NET INCOME PER
SHARE - DILUTED $0.02 $0.32 $0.40 $0.47
Add back:
Stock-based
compensation,
amortization of
intangible assets -
Terrascale
acquisition,
writeoff of
acquired in-process
R&D, amortization
of patents and
customer list and
adjustment to tax
provision. $0.17 $0.01 $0.54 $0.36
----------- ----------- ----------- -----------
Non-GAAP NET INCOME
PER SHARE - DILUTED $0.19 $0.33 $0.94 $0.83
=========== =========== =========== ===========
SHARES USED IN
COMPUTING NET INCOME
PER SHARE
DILUTED - GAAP 29,452,182 22,677,638 28,618,309 18,040,017
=========== =========== =========== ===========
DILUTED - Non-GAAP 29,452,182 22,677,638 28,618,309 18,040,017
=========== =========== =========== ===========
(1) The provision of income taxes used in arriving at the non-GAAP net
income was computed using an income tax rate of 39.7% and 40.7% for
the three and twelve months ended December 30, 2006, respectively,
and using an income tax rate of 41.5% for the three and twelve months
ended December 31, 2005.
RACKABLE SYSTEMS
Reconciliation From Non-GAAP to GAAP Projections
(in millions, except per share amounts)
Year Ended
December 31,
2007
-----------------
Low High
-------- --------
Estimated GAAP earnings per diluted share $(0.10) $0.20
Add back
Projected stock-based compensation, amortization
of intangible assets - Terrascale acquisition,
cash payments related to Terrascale acquisition,
amortization of patents and customer list and
adjustment to tax provision $ 0.85 $0.85
-------- --------
Estimated non-GAAP earnings per diluted share $0.75 $1.05
======== ========
Estimated number of diluted shares 30.0 31.0
-------- --------
Year Ended
December 31,
2007
-----------------
Low High
-------- --------
Projected revenues $450.0 $525.0
GAAP projected gross profit $75.6 $110.1
Add back projected stock based compensation
expense included in cost of revenue $ 5.4 $ 5.4
-------- --------
Non-GAAP projected gross profit $81.0 $115.5
======== ========
GAAP projected gross margin equals GAAP projected
gross profit divided by projected revenue 16.8% 21.0%
Non-GAAP projected gross margin equals non-GAAP
projected gross profit divided by projected revenue 18.0% 22.0%
Contact: Rackable Systems, Inc. Madhu Ranganathan, 408-240-8088 Chief Financial Officer investorrelations@rackable.com or Ashton Partners Trisha Dill, 415-869-5757 |
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