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Datalink: Fiscal 2Q15 Financial Results

2Q15 and 1H15 revenue up 15% and 20% Y/Y, respectively, but decline in core storage sales

(in $ million) 2Q14 2Q15 6 mo. 14 6 mo. 15
Revenue 159.4 182.6 298.9 358.0
Growth   15%   20%
Net income (loss) 3.6 0.7 3.9 0.66

Datalink Corp. reported results for its second quarter and six months that ended June 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 June 30, 2015, increased 15% to $182.6 million compared to $159.4 million for the quarter ended June 30, 2014, and increased 4% over revenues of $175.4 million in the first quarter of 2015.

Revenues for the six months ended June 30, 2015, increased 20% to $358.0 million compared to $298.9 million for the six months ended June 30, 2014.

GAAP Results
On a GAAP basis, the company reported net earnings of $661,000 or $0.03 per diluted share for the second quarter ended June 30, 2015. This compares to net earnings of $3.6 million or $0.16 per diluted share in the second quarter of 2014. For the six months ended June 30, 2015, the company reported net earnings of $647,000 or $0.03 per diluted share, compared to net earnings of $3.9 million, or $0.17 per diluted share, for the six months ended June 30, 2014.

Non-GAAP Results
Non-GAAP net earnings for the second quarter of 2015 were $2.7 million, or $0.12 per diluted share, compared to non-GAAP net earnings of $4.9 million, or $0.22 per diluted share, in the second quarter of 2014. For the six months ended June 30, 2015, the company reported non-GAAP net earnings of $5.0 million, or $0.22 per diluted share, compared to non-GAAP net earnings of $6.1 million, or $0.28 per diluted share, for the six months ended June 30, 2014.

Highlights of the quarter and six months ended June 30, 2015, include:

  • A 21% year-over-year increase in total services revenues in both the second quarter and the first six months of 2015, marking significant progress in building the company’s services business to improve margins and help customers drive data center transformation.
  • A 48% year-over-year increase in professional services revenues to a record $17.8 million in the second quarter of 2015, simultaneously increasing the portion of Datalink revenues coming from professional services to a record 10% during the quarter.
  • Multiple 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.
  • An 80% 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 services, as well as support services.
  • A #43 ranking on CRN‘s 2015 Solution Provider 500 list of North America’s top technology integrators based on annual revenues, marking a steady climb from #72 just five years ago.

These gains, however, were accompanied by a decline in the company’s core storage revenues caused by falling storage prices, new storage technologies and an industrywide slowdown in storage spending. That decline also contributed to lower gross margins during the second quarter and first six months of 2015.

The company responded earlier in the week by announcing a workforce rebalancing that will eliminate approximately $10 million of operating expenses on an annualized basis. The full impact of these adjustments will be realized in 2016, with about $2 million of savings to be realized in the fourth quarter of this year.

We anticipated some of the changes that are occurring in the IT market, and that is why we have been working hard over the last few years to transition the company away from its dependence on storage sales and transform it into a full-service provider of data center solutions and services. We are making strong progress, as our continued growth of consulting and managed services along with converged data center infrastructure indicate, and we will continue to invest in these and other parts of the business in support of continued growth,” said Paul Lidsky, president and CEO. “The actions we took will redistribute our resources to meet changes in the market and help keep the company growing profitably.”

Outlook
Datalink projects revenues of $175.0 million to $185.0 million for the third quarter of 2015, compared to $144.9 million for the third quarter of 2014. This represents an increase in expected revenues of between 21% and 28%, 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 third quarter 2015 net earnings to be between $0.04 and $0.09 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 $0.16 per diluted share and $0.19 per diluted share on a GAAP and non-GAAP basis, respectively, for the same period in 2014.

Comments

Abstracts of the earnings call transcript:

Paul Lidsky, president and CEO:
" (...) we saw another decline in our core storage revenues partly because of radical reductions in storage pricing in the marketplace and partially because of long sales cycles we mentioned previously as customers evaluate newer technologies like flash and cloud computing. In fact, one of those delayed deals caused us to come up shorter in our Q2 guidance if that contract had closed, we would have been well within our guidance.
"We also had an associated decline in our gross margins with lower margin networking products representing a larger share of our product mix and storage for the second quarter in a row. Clearly this is not the performance we had hoped for and we are responding proactively to the sustained shift in IT spending patterns in order to keep the company growing and protect our earnings.
" First, storage has fallen from 27% of our revenues in the second quarter of 2014 to 23% in the quarter we just ended.
"Second, I want to emphasize that we are seeing growth in our flash storage business both with solutions from legacy partners as well as products from some of our newer partners. Today flash represents 10% of our storage sales, up from 5% at the beginning of the year. This includes standalone flash solutions as well as flash storage based stack converged and hyper converged architectures that integrates storage computing, networking and in some cases virtualization for easy deployment and management.
"In fact, our sales of converged and hyperconverged infrastructures are one of the bright spots in an otherwise slow growth sector. We closed 47 virtual data center deals in the second quarter of 2015 compared 26 in the same quarter of 2014."

Gregory Barnum, CFO:
"On a sequential basis, total revenues increased 4.2%. For the quarter, our revenue mix was 23% storage, 28% networking and servers, 7% software, 1% tape and 41% service."

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