By Peter Burrows Holy cow, it's an initial public offering by a computer hardware company! BusinessWeek Online has learned that Rackable Systems, a small server company based in Milpitas, Calif., plans to file the paperwork that preludes an IPO as early as the week of Jan. 24. Called an S-1 filing, the paperwork "is at the printers," says a source.
If the IPO proceeds, it would be the first by a hardware company in years. Since the megapaydays achieved by bubble-era high-fliers such as Cobalt Systems, few bankers have been willing to take a chance on hardware.
THE GOOGLE CONNECTION. The reason: Making computers isn't the grand business it used to be. In recent years, amid falling prices and commoditizing technology trends such as open-source software, only Dell (DELL) has made sustainable profits in the PC business. The server industry also has seen steep price declines. A Rackable spokesperson declined comment.
Why could Rackable buck the trend? It has been an innovator in helping some of the fastest-growing Internet companies run their server farms more efficiently. Founded in 1999, it got its start building servers for Google (GOOG), then just a startup itself. Today, say sources, its customers include Yahoo! (YHOO) and another major search portal.
Of course, filing the S-1 doesn't mean the offering, which one source says is being led by Lehman Brothers, is sure to go ahead. Indeed, the last hardware maker to file an S-1, Egenera, of Marlborough, Mass., still hasn't gone public, though it filed last summer. What's more, IBM's (IBM) decision in December, 2004, to sell its $12 billion PC unit to China's Lenovo for just $1.75 billion won't help Rackable fire up investors' enthusiasm. Indeed, filings show that Big Blue's PC unit had lost nearly $1 billion since 2001.
COOL TECH. While investor sentiment may prove an obstacle, Rackable does have impressive financials, say the sources. While Egenera lost $37 million on sales of $41 million in 2003, its last full year for which data is publicly available, sources say Rackable had sales of more than $100 million in 2004 and is growing rapidly. Also, the sources add, it has been profitable for years.
What's Rackable's secret? Rather than sell pricey stand-alone servers, it cobbles together plain-vanilla servers using commodity parts, as prescribed by each customer. Then, it stuffs these "blade servers," which look more like circuit cards than a regular PC, into special racks that make them much cheaper to run because they take up less room, so client companies pay less for data-center real estate.
Also, because of an unusual configuration that disperses the heat, Rackable's design solves the overheating issues many techies would expect to encounter when so many machines are stuffed into such small spaces. Another advantage: The configuration reduces the cables required to link all the systems, making them easily accessible. With fewer cables to deal with, the chance that someone will pull the wrong one while doing maintenance or fixing a problem is reduced.
"BEST FOOT SOLDIER." What's more, the racks are tuned to use network management software that lets the servers share processing jobs. That way, if one server fails, the others pick up its workload.
While rivals such as Hewlett-Packard (HPQ), IBM, and Sun Microsystems (SUNW) traditionally have focused on feature-laden high-end boxes in order to get a higher price, "We build the best foot soldier," Rackable co-founder Nikolai Gallow told BusinessWeek in a 2000 interview. "If you lose one, it doesn't matter. Instead of highly redundant systems, we have highly replaceable systems."
It will be interesting to see if Rackable can become an irreplaceable company on Wall Street. Burrows is Computer editor in BusinessWeek's Silicon Valley bureau