Rackable Shares Slide After Earnings Miss

Growing competition in the market for cloud servers and data center containers put a dent in earnings for Rackable Systems (RACK), which yesterday reported lower than expected second quarter results. In early trading on Wall Street Tuesday, shares of Rackable were trading down 19 percent a $10.13 a decline of $2.42.

Rackable's loss, excluding unusual items, was 12 cents a share, while analysts were expecting the company to break even. But the company's gross profit margin of 9.2 percent was a major setback compared to first quarter margins of 23.5 percent. Rackable cited higher costs for components, and the need to discount prices to win a large customer contract.

"The company won an important opportunity at lower pricing, which we believe will put us in an advantageous position for more profitable, long term opportunities," Rackable said in a statement. Company executives said earlier this year that it intended to discontinue low-margin deals in order to improve its margins.

But Rackable's competitors have stepped up their focus on the company's core markets. Dell, IBM and HP have all unveiled new high-density servers that to target the major cloud builders. The data center container space, where Rackable was hoping to win business with its ICE Cube solution, has also gotten much more crowded in recent months. IBM and HP have launched container solutions, joining Rackable, Sun and Verari Systems.

What deal might have been important enough to convince Rackable to cut its costs? The company didn't say. Rackable's four largest customers are Microsoft (MSFT), Yahoo (YHOO), Amazon (AMZN) and Facebook.

But one obvious possibility is the deal to equip Microsoft's Chicago data center, where the company will install between 150 and 220 containers. While Microsoft is a major Rackable customer, it is also known to have tested containers from both Verari and Dell.

Rackable also said it recently won an ICE Cube contract for the US Federal Government and booked its first business in Japan.