Datalink: Fiscal 3Q08 Financial Results

Datalink Corporation, an independent information storage architect, reported revenues for the quarter ended September 30, 2008, were $50.0 million compared to $45.8 million for the prior-year period, an increase of 9 percent. Revenues for the nine month period ended September 30, 2008 were $147.4 million compared to $127.1 million for the prior year nine month period, an increase of 16 percent. Datalink’s results for the third quarter and first nine months of 2008 include three months and nine months, respectively, of Midrange Computer Solutions, Inc. (MCSI) results of operations following the acquisition which closed on January 31, 2007 and results for the 2007 third quarter and nine months include three and eight months respectively, of MCSI.

GAAP Results
On a GAAP basis, the company reported net earnings of approximately $1.1 million or $0.08 per diluted share for the third quarter ended September 30, 2008. This compares to net earnings of $844,000 or $0.07 per diluted share in the third quarter of 2007. For the nine months ended September 30, 2008, the company reported net earnings of $2.6 million, or $0.20 per diluted share, compared to a net loss of $221,000, or $0.02 per diluted share, in the first nine months of 2007.

Non-GAAP Results
Non-GAAP net earnings for the third quarter of 2008 were $1.3 million, or $0.11 per diluted share, compared to non-GAAP net earnings of $1.1 million, or $0.09 per diluted share in the third quarter of 2007. For the nine months ended September 30, 2008, the company reported non-GAAP net earnings of $3.4 million, or $0.27 per diluted share, compared to net earnings of $898,000, or $0.07 per diluted share, in the first nine months of 2007. A detailed reconciliation between GAAP and non-GAAP information is contained in the tables included herein.

Charlie Westling, Datalink’s President and CEO, commented: "We are pleased with our record third quarter revenue and year-over-year earnings growth. These results were delivered in a very challenging economic environment, and reflect our focus on delivering storage solutions that offer compelling business value to our customers. We also continue to do a good job of wrapping professional services and customer support around the products and technologies that we are bringing to our customers. Highlights for the quarter included:

• Improved overall gross margin of 27.5 percent, which compares to 26.8 percent in the second quarter of 2008 and 25.9 percent in the third quarter of 2007;
• Improved operating income margin of 3.4 percent, which compares to 3.1 percent in the second quarter of 2008 and 2.5 percent in the third quarter of 2007;
• Record level of services revenue totalling $21.1 million, up 16.6 percent from the prior year period; and
• Improved levels of productivity, as gross profit dollars per employee on an annualized basis increased to $263,000 in the third quarter of 2008, up 14.4 percent from $230,000 in the third quarter of 2007."

Westling continued: "During the third quarter we did start to see the impact of tightening credit conditions for a few of our customers, which resulted in delayed, and in some instances, scaled back purchases. However we are entering the fourth quarter with a solid backlog and sales opportunity pipeline, which we believe will enable us to build upon our strong performance over the last five quarters and continue our profitable growth for the rest of this year. We remain focused on:

• 
  Continuing to increase employee productivity by leveraging investments in field and customer support areas;
• Further penetrating the enterprise customer base;
• Targeting high growth market segments and deploying new technologies;Delivering greater value to customers through more solutions and services, such as our backup and recovery reporting and assessment services offering; and
• Pursuing acquisitions that will enable the company to build critical mass in key locations and provide additional services to our customers."

Outlook
The company ended the quarter with a backlog of $31 million compared to $32 million at the end of the second quarter of 2008. As we continue to assess our sales pipeline and customer spending plans for Q4, we believe that we have an opportunity to deliver another quarter of year-over-year growth and profitability in the fourth quarter, however not at the historical Q4 growth rates that we have seen in the past. A key variable for this quarter will be the extent to which customers will be able to take advantage of year end budget flush opportunities, which are typical in most years. At this point, it is too early in the quarter to tell how much of this activity will occur. Combining all of these factors, the company expects revenue to be between $49 million and $53 million, with GAAP net earnings to be between $0.08 and $0.12 per diluted share in the fourth quarter of 2008. On a non-GAAP basis, the company expects fourth quarter earnings to be in the range of $0.10 to $0.14 per diluted share. This compares with revenues of $50.7 million in the fourth quarter of 2007 and net earnings of $0.11 per diluted share and $0.13 per diluted share on a GAAP and non-GAAP basis, respectively. Non-GAAP earnings per share exclude the effect of purchase accounting adjustments from the MCSI acquisition to deferred revenue, stock-based compensation expense, amortization of acquisition related intangible assets, MCSI integration costs in 2007 and the related effects on income taxes. The company estimates this total effect will be approximately $.02 per diluted share for the fourth quarter of 2008.