Rackable Systems Goes Back to Wall Street for $226.5 Million

Published: February 28, 2006

by Timothy Prickett Morgan

Having gone public in June 2005 to raise $70 million (with more funds coming from a kicker offering that is common in initial public offerings), the owners of server maker Rackable Systems are heading back down to Wall Street to cash in some stock to raise an estimated $226.5 million to help fund the company's further growth.

While Rackable's shares didn't do so well initially on Wall Street, the company has done a lot of engineering to make rack-mounted servers that can pack a lot of processing wallop in a small space and has some interesting DC power units and low-power processors that make its machines run as much as 40 percent cooler than standard Xeon-based rack servers. For data centers busting at the seams or those with severe power and cooling issues, the designs put forth by Rackable are starting to resonate. And now is a very good time for Rackable to go back down to Wall Street and cash in some stock.

Rackable sells rack servers and related storage products that put the servers back-to-back in a rack that is designed to move hot air from the center of the box, like a chimney. Because of the compactness of the design, Rackable can put twice as many processors in the space taken up by a standard rack. The company also uses low-voltage Opteron processors, which can also significantly cut down on power use and heat dissipation. Finally, its most advanced machines do not have AC power supplies inside each server module in the rack, but rather a big DC power unit at the top of the rack that has power lines that reach down into the servers. The DC power unit can also be stored outside of the rack--say, down the hall where the HVAC unit is located--thus keeping the environment surrounding the servers cooler.

With heat and cooling being such big issues in data centers these days, it is not really surprising that Rackable saw revenues spike by 262 percent, to $83.1 million, in the fourth quarter ended December 31, 2005. The company went profitable last summer, but had some pretty big losses before that--as startups often do. For the full 2005 year, Rackable posted sales of $215 million, almost double from the prior year. And, to top it off, the company had $8.5 million in profits compared to a $55.4 million loss in 2004. The company sold 56,100 servers in 2005, and has been doubling its sales every year since 2003. Amazon, Microsoft, and Yahoo are Rackable's three largest customers, and to date the company has about 250 customers, most of whom are in the United States.

Having shown such good growth and with a desire to sell to more companies the world over, it is not really surprising that Rackable, which had a market capitalization of $761 million as its shares have almost quadrupled since the company went public, is going back down to Wall Street to peddle more stock. Rackable did a secondary offering in December 2005, and with this round, its owners plan to sell 7.5 million shares and hope to raise $226.5 million. Just under 3.35 million shares are being issued by Rackable and 4.153 million shares of stock owned by venture capitalists and company executives will be sold. The company's underwriters have the option of issuing another 1.125 million shares, and given how Rackable's stock has gone up, it seems likely they will probably issue those extra shares, too.