Enabling Ecological Data Centers: Rackable Systems CEO Mark Barrenchea (Part 7)

SM: Based on your core market where you are selling into the $350 million install base, how far can you go? Can you double that?

MB: Assuming a $1 billion business, I would like to see the Internet as 40%-50% of my business. The remainder should come from a mixture of other businesses.

SM: What has been your experience of being a public company in this market? Do you wish you had not gone public?

MB: We are in realm of philosophy. I think America has a few core advantages. As the American system continues to evolve these core assets are well protected. The first is access to capital. It is an American phenomenon to get plentiful access to capital. Second, we have an integrated market. I can buy anything I want within a single city. Third, we have access to incredible talent.

Today we have wrapped ourselves in a knot. Banks are lending money they did have to people who never should have borrowed it.

SM: Access to capital got completely out of control on both sides.

MB: It is obvious in hindsight. We also had banks wrapping complex instruments around bad loans which were sliced and diced. When property values fell, everything fell with it. I read the balance sheet of Citibank yesterday and they are $1 trillion in debt. They do $35 billion a year in revenues, they have $21 billion cash on hand, and free cash flows of $15 billion. At that run rate it would take them 55 years to pay their debt. It is insane. Because access to capital was so cheap, people lost focus of the fundamentals; revenue, profit, and free cash flow.

SM: And debt to equity ratio.

MB: I use a slightly different ratio, which is three years of free cash flow for debt. If I am going to borrow $1 billion I need to pay it back in three years.

In terms of being a public company right now, I have focused Rackable on building a balance sheet. When I became CEO we had $160 million in cash; we have over $200 million now. I have increased our cash position by $50 million over the past six months and we have no debt. We are in great shape from a balance sheet perspective. I don’t know how companies that have lost sight of the fundamentals are going to make their debt payments. Strong companies will double down their innovation. If you have scale and staying power you will use this as an opportunity to increase your engineering investment.

SM: Are you going to increase R&D, then?

MB: We are actually taking a counter position where we are investing more right now. We had no offshoring at Rackable. We are putting that in. We just completed a building in Shanghai, and we are going to double engineering over the next two years. We have been doing everything in Freemont, and we now have an opportunity to double engineering in a down economy.

SM: In this environment, the quarter by quarter aspect of being a public company becomes complex because of the increased obstacles encountered when closing deals.

MB: Sure. There are things a CEO controls and things a CEO doesn’t. I focus on what I can control. In a down market I am hyper focused on what I can control. We are not panicked but we are a bit disappointed.

SM: Things are going to be shit for the next few years.

MB: It is certainly not a v-shaped recovery. This is a checkmark: down fast, with a long slope back up.

SM: That is the reality of the market. This has been a great story; thanks for sharing it.

This segment is part 7 in the series : Enabling Ecological Data Centers: Rackable Systems CEO Mark Barrenchea
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