Friday, May 25, 2012

Rackwise (RACK) Racks Up Losses

Here comes another mailing-inspired blog article.  I just got a teaser brochure from Tim Fields Untapped Wealth.  Most of you know where I'm about to go with this now that you've seen the promotional source.  This brochure touts Rackwise (RACK), some kind of provider of data center management (DCM) software.  I don't focus on the software sector, but that doesn't give me a disadvantage when I need to screen out stocks that should never become candidates for my capital.  All I have to do is look at fundamentals.

Rackwise should not have gone public based on their fundamentals.  They lost more than twice as much money (i.e., negative net income) in 2011 as they did in 2010.  Their executive team is a mixed bag; the CEO and CFO have little direct experience running software companies but other team members have held a variety of positions in growth-oriented software companies.  Their 10-K from March 2012 mentions their significant operating losses and expresses doubt about their ability to continue as a going concern.  BTW, multiyear losses would be tolerable in a tech startup focused on spending to grow revenues, but the 10-K admits they've cut back on some promotional expenses to conserve cash.  That 10-K also mentions a master licensing agreement with Intel to deploy Rackwise's DCM software in all of Intel's data centers.  The agreement was completed in November 2011 but I'm not clear on whether Rackwise will realize significant revenue from this development.  Meanwhile, Rackwise's CEO was awarded stock options that vested at $1,527,000 as a reward for this transaction.  Well, that's just great work (and great for my sarcasm too).  Whether this massive options expense is justified by bottom line success remains to be seen.  

BTW, their product isn't very original.  I've known about data center power management since at least 2009, when I was partly responsible for running a data center in a large enterprise.  My team monitored the diagnostics constantly and they noticed that the temperature in the server room was approaching an intolerably high level due to a cooling system failure.  They shut down the servers immediately and kept them offline until the cooling system could be restored.  Rackwise's system is not really a big improvement over the tech we used three years ago.

Rackwise might have a chance if their Intel license develops into some kind of JV.  Right now they have no chance of impressing me until they can turn a profit.

Full disclosure:  No position in RACK at this time.