Rackable Slashes 2008 Revenue Guidance

Rackable Systems(RACK), which makes high-density servers for the Internet economy's largest players, has slashed its revenue and earnings projections for 2008, citing an "abrupt" slowdown in corporate purchasing. Rackable said it now expects revenue of $275 million to $300 million, a reduction of about $75 million from the company's earlier projection of $353 million to $374 million.

"The recent market downturn has been dramatic and has greatly impacted the timing of our customers’ buying decisions," said Mark Barrenechea, president and CEO of Rackable. "The swift decline of the economy caused a demonstrable slow down in corporate purchasing as we entered September. While we felt positive business momentum early in our third quarter, this abrupt financial and economic deterioration is impacting our ability to meet our previously provided fiscal 2008 outlook.”

Rackable is heavily reliant on orders from Microsoft (MSFT), Yahoo (YHOO) and Amazon (AMZN), which together accounted for 65 percent of the company's revenues during the second quarter. The new guidance equates to a 20 percent reduction in Rackable's 2008 revenue projections - meaning that either one of those big customers is reducing its orders from Rackable, or the company's bid to diversify its revenue beyond the "big three" has been hit hard by the economic downturn. 

In its analyst call in August, Rackable said demand for its servers, racks and storage products remained strong, and reaffirmed its guidance. "While we recognize that there are a number of factors weighing in the economy, we are not seeing this effect short term or long term demand for our data center solutions," Barrenechea said at the time.

But Rackable’s competitors have been stepping up their focus on the company’s core markets. Dell, IBM and HP have all unveiled new high-density servers that target the major cloud builders. The data center containerspace, 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.

Rackable said it expects to finish 2008 with between $175 million and $200 million. “Our balance sheet is cash strong with no debt and we remain in a robust R&D cycle, delivering compelling new products every quarter," said Barrenechea. "In addition, Rackable has recently expanded its sales and service organizations to cover key new verticals, such as federal, oil and gas, media and entertainment and financial services."