Friday, September 29, 2006

Calls of Note Part 3

- Thomas Weisel Partners is positive on Rackable Systems (NASDAQ:RACK) ahead of results saying are comfortable with their estimates of $85mn in revenue (a 48% y/y increase) and $0.20 in pro forma EPS for Rackable in the current September quarter. They continue to believe that Rackable could grow 35-40% over the next several years, with improving margins: a classic growth story at an attractive valuation, in firm's view.

Firm believes the most likely scenario for Rackable this quarter is some very modest possible upside to their estimates and strong guidance, with some chance for an alternate scenario of more significant upside this quarter, but then less aggressive guidance.

Length of sales cycle shortened = increased visibility: The pause has passed with sales cycles back to normal. Intel versus AMD choices appear mixed-largely irrelevant for Rackable.

Rackable seeing success in EU: Expect an increase with Amazon (and others) in EU this quarter and next, after a drop to 1% of total revenue last quarter due to a planned reduction in spending.

Terrascale a big boost to Storage offerings: Rackable now has a proprietary high margin offering that aligns perfectly with its target server customers. The distributed file system market should grow rapidly, and the primary competition today is with small private companies.

Notablecalls: Not actionable but good to know category. Absolutely nothing new in this note. Although I must admit I may have been somewhat too negative on the co in the past. RACK may indeed be one of tech's secular growth stories. As TWP notes, they believe that Rackable could be a $1-2bn company in the next three to five years, with 10%-plus share of the low-end server market complemented by a healthy high-margin storage business.

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