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Datalink: Fiscal 2Q16 Financial Results

132% Y/Y increase in sales of all-flash storage representing 51% of storage revenue

(in $ million) 2Q15 2Q16 6 mo. 15 6 mo. 16
Revenue 182.6 199.2 358.0 363.8
Growth   9%   2%
Net income (loss) 0.7 3.9 0.7 3.4

Datalink Corp. reported results for its second quarter ended June 30, 2016.

Revenues for the quarter ended June 30, 2016, increased 9% to $199.2 million compared to $182.6 million for the quarter ended June 30, 2015, and increased 21% over revenues of $164.6 million in the first quarter of 2016.

Revenues for the six months ended June 30, 2016, increased 2% to $363.8 million compared to $358.0 million for the six months ended June 30, 2015.

GAAP Results
On a GAAP basis, the company reported net earnings of $3.9 million or $0.18 per diluted share for the second quarter ended June 30, 2016. This compares to net earnings of $661,000 or $0.03 per diluted share in the second quarter of 2015. For the six months ended June 30, 2016, the company reported net earnings of $3.4 million or $0.16 per diluted share, compared to net earnings of $647,000, or $0.03 per diluted share, for the six months ended June 30, 2015. The income tax expense for the quarter and six months ended June 30, 2016 includes discrete tax benefits of approximately $1.6 million and $1.4 million, respectively, primarily due to R&D tax credits for 2012 thru 2016. The company has determined that certain activities it performs qualify for R&D tax credits as defined by Internal Revenue Code Section 41. Excluding this credit, earnings per diluted share for the quarter and six months ended June 30, 2016 would have been $0.10 and $0.08, respectively.

Non-GAAP Results
Non-GAAP net earnings for the second quarter of 2016 were $3.9 million, or $0.18 per diluted share, compared to non-GAAP net earnings of $2.7 million, or $0.12 per diluted share, in the second quarter of 2015. For the six months ended June 30, 2016, the company reported non-GAAP net earnings of $5.2 million, or $0.24 per diluted share, compared to non-GAAP net earnings of $5.0 million, or $0.22 per diluted share, for the six months ended June 30, 2015. The income tax expense for the quarter and six months ended June 30, 2016 includes discrete tax benefits primarily for R&D tax credits of $500,000 on an annualized basis for 2016. Excluding this credit, non-GAAP earnings per diluted share for the quarter and six months ended June 30, 2016 would have been $0.17 and $0.22, respectively

Highlights

  • Second quarter earnings from operations increased 212% to $3.7 million on a GAAP basis and 35% to $6.4 million on a non-GAAP basis compared to second quarter 2015.
  • A 132% year-over-year increase in sales of all-flash storage, with flash now representing 51% of the company’s storage sales compared to 21% in 2015. Flash storage yields lower gross margins than traditional storage but helps to offset continued declines in traditional storage revenues and also drives migration and other consulting services when part of a converged solution.
  • A 5% year-over-year increase in total services revenues, reflecting the company’s emphasis on growing its services business.
  • Services comprised 41% of the company’s year to date revenues in 2016, up from 40% in the first six months of 2015.
  • A continued increase in $1 million+ customers, with seven-figure spending by 40 organizations in the second quarter of 2016 compared to 30 in the same period in 2015.
  • A #45 ranking on CRN’s 2016 Solution Provider 500 list of the top technology integrators, solution providers and IT consultants in North America by revenue, as well as its fifth consecutive CRN Tech Elite 250 honor reflecting the company’s list of advanced technical certifications.
  • Company ending the quarter with over $70.8 million of cash and investments and no debt.

Outlook
We had a solid second quarter, highlighted by strong revenue and earnings growth. Contributing to this growth were several seven-figure data center modernization contracts that demonstrate the complex mix of technologies and services required to optimize data center operations today. Our ability to provide a full range of consulting, project planning and management, implementation, data migration and automation services were instrumental in securing these contracts,” said Paul Lidsky, president and CEO. “At the same time, the market has accepted flash storage at a faster rate than we expected earlier in the year, which impacts our overall revenue growth and gross margins. As a result we no longer believe our annual growth rate will reach our original forecast of 4% to 6% and instead our annual growth rate will be more in line with industry averages.”

Comments

Abstracts of the earnings call transcript:

Greg Barnum, CFO:
"(...) for the first half of 2016, our revenue mix was 22% storage, 28% networking and servers, 8% software, 1% tape and 41% services. If you compare that to the six months a year ago, we saw 23% storage, 28% networking, 7% software, 1% tape and 40% services."

Paul Lidsky, president and CEO:
"(...) newer storage partners like Pure and others are continuing to drive our flash growth but now we are also seeing all flash arrays from legacy partners like NetApp contributing significantly to our sales in this sector. (...) we are beginning to see flash adoption in our converged data center infrastructure sales.
"Also on the subject of project revenues, I should mention that we also saw strong second quarter growth from some of our legacy storage and network partners as well as HDS, Veritas which was Symantec, and Cisco, all recording double-digit sales increases during the quarter, showing that we are selling a good mix of products beyond just flash.
"Now, let me combine products and services for you to tell you about two large engagements. (...) The first involves a $7 million engagement with one of the largest banks in the United States. They wanted to modernize their data center to achieve better performance, scalability and efficiency. We did all the preliminary analysis and recommended two of our major storage partners, Pure for tier 1 applications, and HDS for tier 2 and 3 for both the production and disaster recovery environments. We are delivering the new technology and also engaged to execute the planning and migration of the data to these new platforms. The second project is one of the nation's largest property and casualty insurance companies. They needed to refresh their legacy storage environment to improve reliability as well as performance and scalability. To date, we have sold over $10 million of Pure storage and NetApp and over $500,000 of services and the project is only halfway complete. Datalink is providing data migration, implementation, project planning and management, and automation services as well.
"Meanwhile, we still continue to build our wallet share, customer base and converged data center infrastructure sales. (...) We added 70 new clients during the second quarter of this year and we logged a 32% increase in our converged sales Q2 over Q1 of this year."

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