Rackable to turnaround
Merriman Curham Ford initiated Rackable Systems Inc., (Nasdaq: RACK) to a buy Thursday.
After gross margin declines since December 2006, analyst David Duley of Merriman Curham Ford forecasts a turnaround for the provider of x86 server and data storage solutions for modern data centers.
In a research note Duley writes, “Gross margins have bottomed out and should improve over the next several quarters.”
Gross margins were beaten down as a result of larger competitors offering ASP reductions to key customer accounts for Rackable. Duley said he expects strategic initiatives to materialize and purports margins will be driven by new products and an expanded channel.
“As overall profitability improves, we believe the stock has a good chance of a nice move off the bottom,” wrote Duley.
The stock currently trades at 0.5 times EV/FY 2006 sales. Second quarter revenues are forecasted to be between $75 and $85 million, or up 4%-18% sequentially. General and administrative expenses are expected to decrease by 8%-10% from pro-forma levels purported in the first quarter; however, research and development costs are expected to increase. Duley expects earnings for fiscal year 2007 to clock in at a loss of $0.07, but forecasts a profit of $0.38 per share for fiscal year 2008.
Duley expects the overall server market to improve over the next several quarters. Higher levels of Internet traffic and increasing video content could drive growth of the rack mounted segment by more than 30% over the next several years. Rackable has a $4 to $5 billion piece of the $12 to $15 billion rack-mounted segment of the server market.
The server and data storage solutions provider intends to capitalize on new market opportunities in storage servers. Rackable acquired Terrascale in August 2006, which expanded the company’s addressable market into the $3.5B storage server market. The storage server market is expected to grow at a 42% compounded annual growth rate through 2009.
“Rackable will be able to differentiate itself on its total cost of ownership,” writes Duley. The company’s total cost of ownership is lower than competitors Dell, Hewlett Packard, and IBM as a result of its product differentiation.
The California-based company has a new CEO onboard to guide the small-cap entity as it attempts to pop back into the black. Mark Barrenchea, who formerly served as senior VP of applications development at technology juggernaut Oracle Corp (Nasdaq: ORCL), intends to focus on expanding the account base and diversifying customer stream among other initiatives.
Shares of Rackable traded up 3.5 % or $0.44 to $13.01 at 11:10 a.m. E.T. on Thursday.
