Datalink: Fiscal 4Q11 Financial Results

(in US$ millions)	4Q10	4Q11	FY10	FY11
Revenues	91.0	114.7	293.7	380.0
Growth		26%		29%
Net income (loss)	2.4	2.6	2.3	9.8

Datalink Corp. reported results for its fourth quarter and year that ended December 31, 2011.

Revenues for the quarter ended December 31, 2011, increased 26% to $114.7 million compared to $91.0 million for the prior-year period. Revenues for year ended December 31, 2011, increased 29% to $380.0 million compared to $293.7 million for the year ended December 31, 2010.

GAAP Results
On a GAAP basis, the company reported net earnings of $2.6 million or $0.15 per diluted share for the fourth quarter ended December 31, 2011. This compares to net earnings of $2.4 million or $0.19 per diluted share in the fourth quarter of 2010. For the year ended December 31, 2011, the company reported net earnings of $9.8 million or $0.61 per diluted share, compared to net earnings of $2.3 million, or $0.18 per basic and diluted share, for the year ended December 31, 2010.

Non-GAAP Results
Non-GAAP net earnings for the fourth quarter of 2011 were $4.1 million, or $0.24 per diluted share, compared to non-GAAP net earnings of $3.1 million, or $0.24 per diluted share, in the fourth quarter of 2010. For the year ended December 31, 2011, the company reported non-GAAP net earnings of $13.0 million, or $0.80 per diluted share, compared to net earnings of $5.4 million, or $0.41 per diluted share, for the year ended December 31, 2010. A detailed reconciliation between GAAP and non-GAAP information is contained in the tables included herein.

Results for the quarter and year include:

• The additional 3.3 million common shares issued in connection with the follow-on stock offering in March 2011. The dilution on GAAP and non-GAAP earnings from the additional shares outstanding on the 2011 fourth quarter and full year's earnings was approximately $0.05 per share and $0.16 per share, respectively.
• The results of operations from the acquisition of Midwave Corporation, which was completed on October 3, 2011. Excluding Midwave, revenues for the fourth quarter and year ended December 31, 2011, would have increased approximately 12% and 25%, respectively compared to the prior year periods. The acquisition had no impact on GAAP or non-GAAP earnings in the fourth quarter of 2011.
• For the fourth quarter GAAP results, the benefit of the receipt of a $553,000, or approximately $0.02 per share early termination payment relating to the earn-out under the October 2009 purchase agreement with Cross Telecom. Under the terms of the purchase agreement, Cross was required to expend $600,000 with Datalink for goods and services for the period October 2011 through September 2012. Cross elected to terminate the commitment with a lump sum buy-out payment in October 2011. The benefit from this payment is not included in Non-GAAP earnings for the fourth quarter of 2011.

Paul Lidsky, Datalink's president and CEO, commented: "2011 was a record year for Datalink. We reported revenues of $380 million and our highest earnings ever. In addition, the $114.7 million of revenues in the fourth quarter of 2011 is a quarterly record for Datalink. We also reported our eleventh consecutive quarter of non-GAAP net earnings."

Other accomplishments
for 2011 and the quarter include:

• A record $77.9 million in product revenues for the quarter, which represents a 40% increase over third quarter and a 32% increase over the same period in 2010. In addition, service revenues were a record $36.8 million in the fourth quarter. These increases reflect both the acquisition of Midwave Corporation and Datalink's ability to continue to close multi-million dollar accounts during the fourth quarter.
• Continued growth in multi-million dollar accounts among Global 1000 companies. In 2011, the company saw 77 customers purchase over $1 million of product and services from Datalink as compared to 55 customers in 2010. In addition, the company acquired 290 new customers in 2011 as compared to 272 in 2010.
• A follow on offering 3.3 million shares that closed in March 2011, generating approximately $17 million of cash to be primarily used for acquisitions. On October 3, 2011, the company used these funds to acquire the assets of Midwave Corporation, doubling its footprint in the Twin Cities and making Datalink the dominant data center services and infrastructure provider in the region. The acquisition also doubled the company's Cisco technology and services revenues, expanded its managed services portfolio with the addition of a data center infrastructure monitoring service, added an established security practice including product, services and consulting, and doubled the size of Datalink's consulting services team. While the acquisition was only slightly accreditive in its first quarter of operations and as expected did not generate enough earnings to offset the dilution from the follow-on offering, the company expects the acquisition to have a positive earnings impact once all of the synergies are recognized by the second half of 2012.
• Achievement of the industry's first NetApp Specialization in 'Data Center - FlexPod' Unified Architectures certification. The new specialization recognizes Datalink as having fulfilled one of the most rigorous levels of solution competency recognized by NetApp and includes NetApp, Cisco and VMware top certification requirements.
• Significant momentum for the company's virtualized data center (VDC) solutions, with 22 solution projects sold in Q4 compared to 6 in the comparable period in 2010, and 89 deals for the whole year compared to 33 in 2010.
• Exiting the quarter with a healthy and strong balance sheet with working capital of $37.9 million, cash and investments of $22.4 million, and continued debt-free status.

"Datalink's collective accomplishments during 2011 reaffirm our successful execution on our acquisition and data center strategies. These strategies, coupled with improving economic conditions, resulted in increased revenue and gross margin dollars throughout the year," Lidsky said. "This allowed us to leverage our fixed expenses culminating in a 2011 non-GAAP operating profit margin of 5.8% and 2011 non-GAAP operating earnings of $21.9 million as compared to a 2010 non-GAAP operating profit margin of 3.3% and 2010 non-GAAP operating income of $9.6 million."

"In addition, our strong 2011 performance left us with a record backlog going into the first quarter and accelerated activity that has carried over with strong sales in the first months of Q1," Lidsky added. "As we exit the year, we continue to see increasing demand for unified data center solutions with flexible architectures. Our investments in our expanded data center portfolio support these market conditions, and our ability to deliver unified platforms to our customers should fuel growth in 2012."

Outlook
With the strong start to the new year, Datalink's first quarter guidance suggests a 17% to 24% year-over-year revenue increase in fiscal 2012. Based on the company's current backlog and sales pipeline, it projects revenues of $108 million to $116 million for the first quarter of 2012, which represents a 26% to 35% increase, respectively, over revenues of $85.7 million for the first quarter of 2011. In addition, Datalink's first quarter operating expenses are typically higher than other quarters. Therefore the company expects first quarter 2012 net earnings to be between $0.07 and $0.12 per diluted share on a GAAP basis, and net earnings of between $0.13 and $0.18 per diluted share on a non-GAAP basis. This compares to net earnings of $0.12 per diluted share and $0.16 per diluted share on a GAAP and non-GAAP basis, respectively, for the same period in 2011.