Rackable Racks Up Terrascale

Rackable Systems will pay $38 million to buy Terrascale Technologies, a tiny software firm based in Montreal that specializes in clustered file systems that offer high-speed I/O between storage and servers. (See Rackable Buys Terrascale.)

Rackable -- whose primary market is data center and storage gear for high-performance computing (HPC) applications -- has worked for the last several quarters in partnership with Terrascale. A particularly successful implementation at the University of Florida seems to have encouraged all parties to seek a closer relationship. (See U. of Florida Clusters Rackable.)

That relationship will be sweet for Terrascale's employees, nearly all of them are set to stay at their present digs in Montreal. Terrascale CEO Gautham Sastri will become EVP of storage solutions at Rackable. Further, $8 million of the total price Rackable's paying for Terrascale will go to incentive payments over the next eight quarters to retain Sastri and other key employees.

Rackable is also deciding whether or not to exercise a $9 million option to buy a non-productized technology of Terrascale's called Distributed Parity Engine, which Rackable says improves the performance of single-system RAID arrays.

On a conference call this afternoon, Rackable execs said the real value of the buy lies in Terrascale's software, which has been on the market for a couple of years and has turned up in a set of InfiniBand packages Terrascale introduced earlier this year. (See Terrascale Moves Out of the Lab.) They predict it will bring in $20 million in revenues in 2007 and enable Rackable to realize 60 percent gross margins on the products that ship with the new software.In response to analyst questions today, Sastri said "nearly 70 percent" of Terrascale's primary competition comes from NetApp. Additionally, though, he sees Isilon, Panasas, and Ibrix in competitive situations.

Sastri claims Terrascale has won at organizations like Mitre, Raytheon, and the University of Florida because of its high-throughput I/O capabilities. While those have mostly been addressed to the HPC crowd, Sastri and Rackable CEO Tom Barton says that will now change, as the companies work toward releasing products for the general storage market.

Rackable predicts that the merger will be accretive to its revenues throughout 2007 by about $.05 in earnings per share on a non-GAAP basis. However, execs concede there will be $.01 to $.03 dilution to EPS in the third and fourth quarters of this year.

Rackable CEO Barton said the merger won't affect Rackable's existing partnerships with Xyratex and ONStor.

Mary Jander, Site Editor, Byte and Switch