Datalink Reports 2015 Third Quarter and Nine Month Operating Results

Third Quarter and Nine Month Revenues Up 37% and 25% Year-Over-Year, Respectively

EDEN PRAIRIE, Minn.--()--Datalink (Nasdaq: DTLK), a leading provider of data center infrastructure and services, today reported results for its third quarter and nine months that ended September 30, 2015. Financial results for both reporting periods include the results of operations from the acquisition of Bear Data Solutions, which closed on October 19, 2014.

Revenues for the quarter ended September 30, 2015 increased 37% to $198.0 million compared to $145.0 million for the quarter ended September 30, 2014, and increased 8% over revenues of $182.6 million in the second quarter of 2015. Revenues for the nine months ended September 30, 2015, increased 25% to $556.0 million compared to $443.9 million for the nine months ended September 30, 2014.

GAAP Results

On a GAAP basis, the company reported net earnings of $1.3 million or $0.06 per diluted share for the third quarter ended September 30, 2015. This compares to net earnings of $3.5 million or $0.16 per diluted share in the third quarter of 2014. For the nine months ended September 30, 2015, the company reported net earnings of $2.0 million or $0.09 per diluted share, compared to net earnings of $7.4 million, or $0.33 per diluted share, for the nine months ended September 30, 2014.

Non-GAAP Results

Non-GAAP net earnings for the third quarter of 2015 were $3.3 million, or $0.15 per diluted share, compared to non-GAAP net earnings of $4.2 million, or $0.19 per diluted share, in the third quarter of 2014. For the nine months ended September 30, 2015, the company reported non-GAAP net earnings of $8.3 million, or $0.37 per diluted share, compared to non-GAAP net earnings of $10.3 million, or $0.46 per diluted share, for the nine months ended September 30, 2014. A detailed reconciliation between GAAP and non-GAAP information is contained in the tables included herein.

Highlights of the quarter and nine months ended September 30, 2015, include:

  • A 20% year-over-year increase in total services revenues in the first nine months of 2015 and a 16% increase in the third quarter of 2015 compared to 2014, marking continued progress toward our goal of building the company’s higher margin services business that helps customers transform their data centers to support their business needs.
  • A 33% year-over-year increase in professional services revenues to a record $48.5 million in the first nine months of 2015, simultaneously increasing the portion of Datalink revenues coming from professional services to 9% of total revenues from 8% in the first nine months of 2014.
  • Multiple new seven-figure contracts awarded to Datalink’s Advanced Services practice, including engagements for large data center consolidation and transformation, infrastructure virtualization and application and data migration projects.
  • A 21% quarter-over-quarter increase in the number of converged data center infrastructure sales, a key building block for other IT initiatives like private clouds, where Datalink can offer additional consulting, managed and support services. A 55% year-over-year increase in nine month Cisco revenues, reflecting ongoing growth in the company’s networking products business.
  • A five-fold increase in our revenues from the emerging solid state storage providers in the first nine months of 2015 yielding lower gross margins than traditional storage but helping to offset continued declines in traditional storage revenues caused by the transition to flash storage, falling storage prices, and an industry wide move away from three-year technology refresh cycles in favor of upgrading technology to achieve specific business benefits.

The company is on track with the workforce rebalancing and other expense control strategies that were announced at the end of the second quarter that we anticipate will eliminate approximately $10 million of operating expenses on an annualized basis when fully implemented in the first quarter of 2016.

“Included in our third quarter results are a number of one-time, low margin fulfillment orders from one of our largest customers totaling $10.7 million. Without these orders our revenue growth for the third quarter would have been a solid 29%, which is significantly higher than our OEM partners, and our third-quarter gross margins and operating margin percentages would have been higher as well,” said Paul Lidsky, Datalink’s president and CEO. “At the same time, we expect continued margin pressures because of the growth in our networking and solid state storage business. We have responded by building our services revenues and adjusting our expense model, and we will continue to do both in order to drive profitable growth and deliver strong results for our investors.”

Outlook

Datalink projects revenues of $195.0 million to $210.0 million for the fourth quarter of 2015, compared to $186.4 million for the fourth quarter of 2014. This represents an increase in expected revenues of between 5% and 13%, based on the company’s current backlog, sales pipeline, historical trends, and expected continued softness in storage spending countered by continued growth in the company’s networking and services business during the quarter. The company expects fourth quarter 2015 net earnings to be between $0.13 and $0.19 per diluted share on a GAAP basis, and net earnings of between $0.20 and $0.26 per diluted share on a non-GAAP basis. This compares to net earnings of $0.16 per diluted share and $0.28 per diluted share on a GAAP and non-GAAP basis, respectively, for the same period in 2014.

Non-GAAP earnings per share exclude the effect of acquisition accounting adjustments to deferred revenue and costs, integration and transaction costs related to acquisitions, stock-based compensation expense, amortization of intangible assets, and the related effects on income taxes. The company estimates this total effect will be approximately $0.07 per diluted share for the third quarter of 2015.

Conference Call and Webcast Today

Datalink will hold a conference call shortly after 4:00 p.m. Central Time during which time Datalink’s president and chief executive officer, Paul Lidsky, and chief financial officer, Greg Barnum, will discuss company results and provide a business overview. Participants can access the conference call by dialing (855) 793-2451. Participants will be asked to identify the Datalink conference call and provide the designated identification number (60747550). A live webcast of the conference call can be accessed here or via Datalink’s investor relations website at www.datalink.com.

About Datalink

Datalink is a complete IT services provider that helps companies transform their technology, operations, and service delivery to meet business challenges. Combining extensive experience, a full lifecycle of services and a comprehensive approach to producing IT innovations that empower positive business outcomes, Datalink delivers success across cloud IT transformation, next generation technology, and security. For more information, call 800.448.6314 or visit www.datalink.com.

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for certain forward-looking statements. This press release contains forward-looking statements, including (i) anticipated margin pressure and plans to drive profitable growth, (ii) anticipated financial performance for third quarter and months ended September 30, 2015 and, (iii) Datalink’s projections of certain anticipated fourth quarter and full year 2015 results, which reflect our views regarding future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those identified below, which could cause actual results to differ materially from historical results or those anticipated. The words "aim,” "believe," "expect," "anticipate," "intend," "estimate," "should" and other expressions which indicate future events and trends identify forward-looking statements. Actual future results and trends may differ materially from historical results or those anticipated depending upon a variety of factors, many of which are included under “Risk Factors” in our annual report on Form 10-K for our year ended December 31, 2014, including, but not limited to: the level of continuing demand for data center solutions and services including the effects of current economic and credit conditions and the ability of organizations to outsource data center infrastructure-related services to service providers such as us; the migration of organizations to virtualized server environments, including using a private cloud computing infrastructure; the extent to which customers deploy disk-based backup recovery solutions; the realization of the expected trends identified for advanced network infrastructures; reliance by manufacturers on their data service partners to integrate their specialized products; customers switching to solid state storage solutions; continued preferred status with certain principal suppliers; competition and pricing pressures and timing of our installations that may adversely affect our revenues and profits; fixed employment costs that may impact profitability if we suffer revenue shortfalls; our ability to hire and retain key technical and sales personnel; continued productivity of our sales personnel; our dependence on key suppliers; our ability to adapt to rapid technological change; success of the implementation of our enterprise resource planning system; risks associated with integrating completed and future acquisitions (including a failure of anticipated synergies to materialize); the ability to execute our acquisition strategy; fluctuations in our quarterly operating results; future changes in applicable accounting rules; and volatility in our stock price. Furthermore, our revenues for any particular quarter are not necessarily reflected by our backlog of contracted orders, which also may fluctuate unpredictably. We cannot assure you that we can grow or maintain our revenue and backlog from current levels. Additional factors that may cause actual results to differ from our assumptions and expectations include those set forth in our most recent filing on Form 10-K filed with the Securities and Exchange Commission. Any forward-looking statement made by us in this press release is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.

Non-GAAP Details

Non-GAAP financial measures exclude the impact from acquisition accounting adjustments to deferred revenue and costs, stock-based compensation expense, amortization of acquisition intangible assets, integration and transaction costs related to acquisitions, severance costs and the related effects on income taxes. These non-GAAP measures are not in accordance with, or an alternative for measures prepared in accordance with, GAAP and may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. We believe that non-GAAP measures have limitations in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP and that these measures should only be used to evaluate our results of operations in conjunction with the corresponding GAAP measures.

These non-GAAP financial measures facilitate management's internal comparisons to our historical operating results and comparisons to competitors' operating results. We include these non-GAAP financial measures in our earnings announcement because we believe they are useful to investors in allowing for greater transparency with respect to supplemental information used by management in its financial and operational decision making, such as employee compensation planning. We believe that the presentation of these non-GAAP measures when shown in conjunction with the corresponding GAAP measures provides useful information to investors and management regarding financial and business trends relating to our financial condition and results of operations.

DATALINK CORPORATION
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
           
Three Months Ended Nine Months Ended
September 30, September 30,
2015 2014 2015 2014
 
Net sales:
Products $ 123,871 $ 81,209 $ 339,394 $ 262,656
Services   74,161     63,738   216,621     181,206
Total net sales   198,032     144,947   556,015     443,862
 
Cost of sales:
Cost of products 104,181 63,276 278,149 206,457
Cost of services   58,970     49,338   171,345     140,107
Total cost of sales   163,151     112,614   449,494     346,564
Gross profit   34,881     32,333   106,521     97,298
Operating expenses:
Sales and marketing 16,376 13,943 52,087 45,474
General and administrative 6,262 5,858 19,746 15,996
Engineering 7,602 6,661 24,470 21,621
Integration and transaction costs 419 - 939 -
Amortization of intangibles   1,746     1,307   5,652     4,082
Total operating expenses   32,405     27,769   102,894     87,173
Earnings from operations 2,476 4,564 3,627 10,125
Gain on settlement related to StraTech acquisition - - - 876
Interest income 114 95 241 215
Interest expense   (66)     (93)   (203)     (201)
Earnings before income taxes 2,524 4,566 3,665 11,015
Income tax expense   1,210     1,020   1,704     3,605
Net earnings $ 1,314   $ 3,546 $ 1,961   $ 7,410
 
Earnings per common share:
Basic $ 0.06 $ 0.16 $ 0.09 $ 0.34
Diluted $ 0.06 $ 0.16 $ 0.09 $ 0.33
Weighted average common shares outstanding:
Basic 22,060 21,563 22,004 21,540
Diluted 22,833 22,253 22,585 22,153
DATALINK CORPORATION
BALANCE SHEETS
(In thousands, except share data)
   
September 30, December 31,
2015 2014
(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 24,379 $ 27,725
Short-term investments 26,566 22,994
Accounts receivable, net 147,378 171,531
Net working capital receivable from acquisition - 741
Lease receivable 4,262 2,482
Inventories, net 19,879 5,447
Current deferred customer support contract costs 120,850 106,497
Inventories shipped but not installed 13,058 20,035
Income tax receivable 1,743 4,194
Other current assets   1,362   3,563
Total current assets   359,477   365,209
Property and equipment, net 7,848 7,244
Goodwill 47,101 47,101
Finite-lived intangibles, net 10,951 16,603
Deferred customer support contract costs, non-current 58,439 58,484
Deferred tax asset 6,850 6,874
Long-term lease receivable 7,757 4,016
Other assets   756   759
Total assets $ 499,179 $ 506,290
 
Liabilities and Stockholders' Equity
Current liabilities
Floor plan line of credit $ 25,506 $ 27,656
Accounts payable 59,980 86,266
Lease payable 3,502 2,319
Accrued commissions 2,857 5,334
Accrued sales and use taxes 2,733 4,117
Accrued expenses, other 6,675 7,730
Deferred taxes 1,271 2,281
Customer deposits 4,587 3,325
Current deferred revenue from customer support contracts 146,927 131,061
Other current liabilities   1,007   746
Total current liabilities 255,045 270,835
Deferred revenue from customer support contracts, non-current 70,273 70,663
Long-term lease payable 6,700 3,278
Other liabilities non-current   1,149   828
Total liabilities   333,167   345,604
 
 
Stockholders' equity
Common stock, $.001 par value, 50,000,000 shares authorized, 22,786,258 and 22,876,753 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively 23 23
Additional paid-in capital 118,413 115,048
Retained earnings   47,576   45,615
Total stockholders' equity   166,012   160,686
Total liabilities and stockholders' equity $ 499,179 $ 506,290
DATALINK CORPORATION
RECONCILIATION BETWEEN GAAP AND NON-GAAP NET INCOME
(In thousands, except per share data)
(Unaudited)
       
Three Months Ended Nine Months Ended
September 30, September 30,
2015 2014 2015 2014
       
Earnings from operations on a GAAP basis $ 2,476 $ 4,564 $ 3,627 $ 10,125
GAAP operating margin 1.3% 3.1% 0.7% 2.3%
 
Non-GAAP Adjustments:
Purchase accounting adjustment to StraTech deferred revenue and cost, net   3   36   21   144
Total gross margin adjustments 3 36 21 144
 
Stock based compensation expense included in sales and marketing 265 257 1,248 708
Stock based compensation expense included in general and administrative 336 534 1,074 1,324
Stock based compensation expense included in engineering 568 204 1,943 687
Integration and transaction costs 419 - 939 -
Amortization of intangible assets   1,746   1,307   5,652   4,082
Total operating expense adjustments   3,334   2,302   10,856   6,801
 
Non-GAAP earnings from operations 5,813 6,902 14,504 17,070
Non-GAAP operating margin 2.9% 4.8% 2.6% 3.8%
 
Interest income (expense), net 48 2 38 14
Income tax expense impact including Non-GAAP items   2,528   2,748   6,273   6,799
 
Non-GAAP net earnings $ 3,333 $ 4,156 $ 8,269 $ 10,285
 
Non-GAAP net earnings per share - Basic $ 0.15 $ 0.19 $ 0.38 $ 0.48
Non-GAAP net earnings per share - Diluted $ 0.15 $ 0.19 $ 0.37 $ 0.46
 
Shares used in non-GAAP per share calculation - Basic   22,060   21,563   22,004   21,540
Shares used in non-GAAP per share calculation - Diluted   22,833   22,253   22,585   22,153
DATALINK CORPORATION
STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
   
Nine Months Ended
September 30,
2015 2014
 
Cash flows from operating activities:
Net earnings $ 1,961 $ 7,410
Adjustments to reconcile net earnings to net cash provided by operating activities:
Change in fair value of trading securities 16 (93)
Provision for bad debts 155 114
Depreciation 2,425 1,891
Amortization of finite-lived intangibles 5,652 4,082
Gain on settlement related to StraTech acquisition - (876)
Deferred income taxes (986) (454)
Stock-based compensation expense 4,264 2,719
Changes in operating assets and liabilities:
Accounts receivable, net and leases receivable 19,218 27,154
Inventories (7,455) 10,009
Deferred costs/revenues/customer deposits, net 2,430 3,294
Accounts payable and leases payable (21,681) (20,924)
Accrued expenses (4,916) (4,789)
Income tax receivable - (16,320)
Income tax payable 2,451 -
Other   2,786     384
Net cash provided by operating activities   6,320     13,601
 
Cash flows from investing activities:
Purchases, sales and maturities of trading securities, net (3,588) 15,305
Purchases of property and equipment   (3,029)     (1,620)
Net cash provided by (used in) investing activities   (6,617)     13,685
 
Cash flows from financing activities:
Net payments under floor plan line of credit (2,150) (4,956)
Repurchase of common stock (174) -
Excess tax from stock compensation 132 583
Proceeds from issuance of common stock from option exercise 34 88
Tax withholding payments reimbursed by restricted stock   (891)     (1,000)
Net cash used in financing activities   (3,049)     (5,285)
 
Increase in cash and cash equivalents (3,346) 22,001
Cash and cash equivalents, beginning of period   27,725     24,871
Cash and cash equivalents, end of period $ 24,379   $ 46,872
 
Supplemental cash flow information:
Cash paid for income taxes $ 269 $ 19,799
Cash received for income tax refunds $ 88 $ 4
Cash paid for interest expense $ 139 $ -

Contacts

For Datalink
Investors & Analysts
Greg Barnum
Vice President and CFO
952-279-4816
gbarnum@datalink.com
or
Press
Jill Schmidt
847-921-1295
jill@jillschmidtpr.com

Contacts

For Datalink
Investors & Analysts
Greg Barnum
Vice President and CFO
952-279-4816
gbarnum@datalink.com
or
Press
Jill Schmidt
847-921-1295
jill@jillschmidtpr.com