Rackable announces Q1, posts loss

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Rackable, er Sgrackable, Racka-GI, the company that just bought SGI, announced its first quarter results yesterday. The company lost $.46 per share,

Rackable logoGAAP net loss per share from continuing operations was ($0.46) for the first quarter of 2009, compared to GAAP net loss per share of ($0.61) for the fourth quarter of 2008 and GAAP net income per share of $0.09 in the first quarter of 2008. Non-GAAP net loss per share from continuing operations was ($0.24) in the first quarter of 2009, compared to non-GAAP net loss per share of ($0.17) for the fourth quarter of 2008 and non-GAAP net income per share of $0.12 in the first quarter of 2008.

But more worrisome is the rapidly evaporating margin

GAAP gross margin from for the first quarter of 2009 was 6.1%, compared to (15.5)% for the fourth quarter of 2008 and 25.9% in the first quarter of 2008. Non-GAAP gross margin for the first quarter of 2009 was 6.3%, compared to 15.1% for the fourth quarter of 2008 and 26.4% in the first quarter of 2008.

It might be time to recall Guy Kawasaki’s first rule of business: charge more for product than it costs you to make. Rackable explains the downward slope thusly

The Company’s lower gross margin was attributed to three factors: first, reducing high-cost inventories of certain components through aggressive pricing; secondly, the significant revenue mix of our large Internet data center business; and finally, increased competitive pressure from various server vendors offering aggressive deals during the quarter.

What that explanation says to me is that they made bad bets on technology and got stuck with expensive kit they had to firesale, and that their cost structure is bloated relative to competitors who can outprice them (either because they are big enough to absorb a loss while they drive Rackable out of business or because they have a better cost structure and they are passing savings on). In any case, none of these things is a good sign for a company that just bought out a much larger, also ailing company.

Timothy Prickett Morgan at The Register looks into the numbers in a little more detail, and finds a (tiny) ray of sunshine

The company had sales of $67.8m and a loss of $766,000 in the year-ago quarter, and by comparison, those look like good times. But Q1 2009 is not as bad as the fourth quarter ended January 3, when the economic meltdown hammered Rackable just like it hit every server maker, with sales off 65.1 per cent to $38.8m and a net loss of $18.2m (that’s from continuing operations, by the way).

More of a sliver of sunshine.


  1. People have a crazy notion that the toxic assets purchased from SGI will save them. How can companies like SGI, Rackable and Cray get away with losing money quarter after quarter and year after year? These guys have the same problems: too few customers, long acceptance cycles, irregular sales cycle resulting in excess inventory and low to no margins.

  2. John West says

    @FJW – SGI and Rackable appear to be losing real money, but I wouldn’t lump Cray in that group. Cray has historically had problems, but over the past few (say, 3) years has been determinedly turning the business around. The loss they reported for the year last year wasn’t real money — it was an accounting trick, forced by the loss of “investor goodwill” from the balance sheet (whatever the hell that is). If you look at their checking account, they did well.

    In terms of the business Cray made a very conscious decision to do one thing (high end) and do it very well. This involved shutting down the follies of the previous management, killing off projects like the XD1, and reshaping their whole high end product line to leverage engineering investments across multiple lines of business. Only when all of this was done well did they start trying new things, like the CX1. And the CX1 is being tried in low business risk ways, primarily through partner agreements they can sever if they don’t pay off.

    Cray’s culture right now is to not do anything that doesn’t align with, and ultimately grow, the primary business. Their CEO flies coach, stays in crappy hotels, and has a tiny 8×8 foot office with like two chairs and a whiteboard (or at least did; I hear they just moved). Focus on the bottom line, all the way to the top of the business.

    SGI has great people and great technology, but the business is a mess. They have simply not had Cray’s discipline or focus on a single differentiating strategy (in vis, out of vis, back in vis…workstations, no workstations, workstations again…), and they lacked operational excellence in day-to-day execution — way too many managers, for example, and far too much investment in legacy workforce that wasn’t adding value.

    I know less about Rackable than SGI, but recent events and this most recent financial report indicate the potential for the kind of lack of focus and operating discipline that hobbled SGI. We’ll have to see them execute before we can decide whether their acquisition of SGI is just flailing about before the business ultimately dies, or whether it is part of a serious and focused strategy to enter and then dominate high end computing.