Analyst Conference Summary

conference date: November 3, 2008 @ 2:00 PM Pacific Time
for quarter ending: September 30, 2008 (3rd quarter)

Forward-looking statements

Overview: Another quarter of reduced revenues and net loss. It is hard to know how much to attribute to the economic slowdown, since Rackable was having trouble with sales before the slowdown. Only bright spot is reduction in net loss from Q2.

Basic data (GAAP) :

Revenues were $65.3 million, down 14% sequentially from $76.0 million and down 25% from $87.2 million year-earlier.

Net income was a loss of $6.0 million, a sequential improvement on Q2 loss of $27.9 million, but worse than essentially $0 results year-earlier.

EPS was negative $0.20, compared to negative $0.95 in Q2, and $0.00 year-earlier.

Guidance:

Reaffirmed full 2008 guidance. Revenue of $275 to $300 million, non-GAAP EPS a loss of $0.16 to $0.08. Cash and equivalents at year end between $175 and $200 million.

Conference Highlights:

Quarter was marked by new product releases including CloudRack and C2005, with more in pipeline. Worked on managing costs and driving operating efficiency. Maintained a strong balance sheet.

Gross margin was 17.1%, non-GAAP gross margin 17.6%, both down due to lower revenues.

Non-GAAP net loss was $0.05 per share, compared to a gain of $0.09 per share year-earlier.

Cash and equivalents ended at $184.6 million, down sequentially from $198.1 million, and coincidentially from $198.1 year-earlier. The majority of the reduction was to fund inventories and manufacturing for ICE Cube orders that are scheduled for Q4 delivery. Inventories increased by $16.6 million.

Cost of revenue was $54.1 million, leaving gross profit of $11.2 million. Operating expenses were $18.3 million total, consisting of: R&D $5.7 million, sales and marketing, $6.1 million, general and administrative $5.8 million, and impairments $0.7 million. Loss from operations was $7.1 million. Other income was $0.7 million. Income tax $0.4 million. Operating expenses were about $3 million lower than year-earlier.

25 new customers in quarter. They were in diverse verticals with key wins in Oil & Gas, financial services, and Web 2.0. Storage was 20.5% of revenues, international sales 17%, both improvements.

Will introduce a leasing program. Will offer lifetime warranties on equipment. Believes Rackable datacenter products will lead in 2009 with energy efficiency, compute and storage density, operating cost reductions, and heterogeneous, build-to-order systems. Investing in more R&D and expansion of sales force.

In Q4 most cash use will be to "fund key inventory positions for customer deliveries." Inventories ended Q3 at $65.5 million.

Had key wins in Oil and Gas, financial, and Web 2.0 verticals.

Amazon and Microsoft were both greater than 10% customers.

Q&A:

Inventory all from ICE Cubes? Almost all buildup was from containers. We feel pretty confident on the deliverables. We have purchase orders on hand for Q4 delivery.

Any improvement in environment lately? From our perspective not much has changed from September and October. It remains tough. Companies are prioritizing their projects and in many cases making smaller purchases.

How many containers shipped in Q3? Zero in Q3. Orders are for Q4. We are making progress. Our goals were $20 to $50 million in revenues this year, we are now looking at the low end of the range.

Storage strength? Not yet from NetApp. Due to rbod and jbod omnistore solutions so far. We are excited about the NetApp partnership and are building a pipeline with them.

For new datacenters, water-based cooling is most efficient. Air-based cooling suits some customers by eliminating a set of pipes.

Our best use of cash is to fund working capital and perhaps take advantage of market to make acquisitions. No plans for dividends or buybacks.

Competition with Dell and IBM? We have never been in a stronger position with our product line. NetApp is introducing us to new opportunities. What customers need right now is playing to our strength. Market dynamics with Dell, HP, IBM and Sun have not changed.

Trend in 2009 in R&D and Marketing? Continuance of Q4, upward.

Leasing capital? This will come from our partner, a 3rd party leasing company.

RapidScale to be closed down? Looked for strategic alternatives, but could not come to terms with eligible buyers. So are discontinuing operations and repurposing those dollars.

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