Datalink: Fiscal 1Q15 Financial Results

Datalink Corp. reported results for its first quarter ended March 31, 2015.

Financial results for the first quarter of 2015 include the results of operations from the acquisition of Bear Data Solutions, which closed on October 19, 2014.

Revenues for the quarter ended March 31, 2015, increased 26% to $175.4 million compared to $139.5 million for the quarter ended March 31, 2014.

Product revenues increased 28% to $106.7 million and services revenues increased 22% to $68.6 million year-over-year. Within services revenues, professional services revenues increased 28% to $14.6 million or 8.3% of total revenues.

GAAP Results
On a GAAP basis, the company reported a net loss of $14,000 or $0.00 per diluted share for the first quarter ended March 31, 2015. This compares to net earnings of $301,000 or $0.01 per diluted share in the first quarter of 2014. The decline in earnings is primarily due to the costs associated with integration and amortization of intangibles related to our Bear Data Solutions acquisition and lower overall gross margins for the quarter.

Non-GAAP Results
Non-GAAP net earnings for the first quarter of 2015 were $2.4 million, or $0.11 per diluted share, compared to $1.2 million, or $0.06 per diluted share, in the first quarter of 2014. A detailed reconciliation between GAAP and non-GAAP information is contained in the tables included herein.

Factors affecting Datalink’s performance during the quarter included a decline in overall gross margins to 20.1% compared to 21.2% in the first and fourth quarters of 2014. This was caused primarily by a change in the product mix due to a significant increase in sales of lower-margin networking and server products (increasing to 32% of revenues in Q1 2015 compared to 22% in the first and fourth quarters of 2014), along with a decrease in sales of higher-margin storage products (decreasing to approximately 20% of revenues in the Q1 2015 compared to 28% and 29% in the first and fourth quarters of 2014). The softness in storage spend is an industry-wide phenomenon due to customer’s taking additional time to evaluate newer storage technologies, the movement of some IT workloads to the public cloud as customers implement hybrid storage solutions, and a change in the frequency of storage upgrades as many customers are delaying technology refreshes until they can realize additional business growth and profitability from the investment. In addition, CIO’s are redirecting a portion of their capital spend budget to security and upgrading core networks.

Achievements during the first quarter included:

• A 147% increase in the percentage of revenue coming from Advanced Services, a strategic practice that spans projects like private and hybrid cloud enablement, application and data migration, data center relocation, DR planning and residency services.
• A 39% year-over-year increase in the number of customers spending more than $1 million per quarter.
• A 162% year-over-year increase in new customers.
• A 63% year-over-year increase in orders for converged data infrastructures, which require Datalink’s higher-margin consulting services and also provide opportunities for future engagements to help customers meet the challenges of deploying private and hybrid clouds.
• A balance sheet with cash and investments of $52.7 million, no debt and working capital of $96.8 million.

“Our first quarter results came in at the low end of our revenue guidance and below our earnings per share guidance that we gave in February, primarily due to changes in IT spending habits that caused a greater-than-expected decline in our expected overall revenue and gross margin,” said president and CEO Paul Lidsky. “We believe that ongoing initiatives to diversify both our product and services portfolio will allow us to continue to grow at two to three times the industry average. Our continued investment in Advanced Services, as well as Managed Services, will also help us increase margins and allow us to participate in additional opportunities that can expand both our services and product growth rates.”

Outlook
Datalink projects revenues of $185.0 million to $195.0 million for the second quarter of 2015, compared to $159.4 million for the second quarter of 2014. This represents an increase in expected revenues of between 16% and 22%, based on the company’s current backlog, sales pipeline, historical trends, and expected continued softness in storage spending countered by continued growth in our networking and services business during the quarter.

The company expects second quarter 2015 net earnings to be between $0.07 and $0.12 per diluted share on a GAAP basis, and net earnings of between $0.16 and $0.21 per diluted share on a non-GAAP basis. This compares to net earnings of $0.16 per diluted share and $0.22 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 $0.09 per diluted share for the second quarter of 2015.

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