10-22-13 4:00 PM EDT | Email Article

Datalink (Nasdaq: DTLK), a leading provider of data center infrastructure and services, today reported results for its third quarter and nine months that ended September 30, 2013. Revenues for the quarter ended September 30, 2013, increased 33% to $139.6 million compared to $104.8 million for the quarter ended September 30, 2012. Revenues for the nine months ended September 30, 2013, increased 23% to $421.3 million compared to $343.9 million for the nine months ended September 30, 2012.

The company’s results for the quarter and nine months ended September 30, 2013, include the results of operations from the acquisition of Strategic Technologies, Inc. (“StraTech”), which was completed on October 4, 2012. The results for the third quarter of 2013 also reflect the partial impact of the additional 3.8 million common shares issued in connection with the follow-on stock offering which closed on August 14, 2013. The dilution on GAAP and non-GAAP earnings from the additional shares outstanding on the 2013 third quarter and nine months was approximately $0.01 per share.

“Year over year, these numbers show substantial performance gains in every product and service category in our portfolio, reflecting the range of our product line as well as our ability to design, deploy, migrate and support new data center installations. Sequentially, unexpected product shortages and delivery issues with one of our top storage partners contributed to a 6% revenue decline that brought the third-quarter numbers in at the low end of our guidance, but those orders remain on the books and the revenues will be realized in the fourth quarter,” said Datalink President and CEO Paul Lidsky. “With those orders as well as newer sales in the pipeline, our end-of-quarter backlog is 46% higher this year than last, and that positions the company for a strong fourth quarter.”

GAAP Results
On a GAAP basis, the company reported net earnings of $828,000 or $0.04 per diluted share for the third quarter ended September 30, 2013. This compares to net earnings of $1.9 million or $0.11 per diluted share in the third quarter of 2012. For the nine months ended September 30, 2013, the company reported net earnings of $4.9 million or $0.26 per diluted share, compared to net earnings of $7.3 million, or $0.42 per diluted share, for the nine months ended September 30, 2012. The decrease in net earnings is due to the amortization of intangible assets related to the acquisition of StraTech, gross margin declines, end-of-quarter delivery issues along with higher operating expenses associated with investments in our Advanced Services and network engineering talent to support our growing Cisco business.

Non-GAAP Results
Non-GAAP net earnings for the third quarter of 2013 were $2.6 million, or $0.13 per diluted share, compared to $2.8 million, or $0.16 per diluted share, in the third quarter of 2012. For the nine months ended September 30, 2013, the company reported non-GAAP net earnings of $10.6 million, or $0.57 per diluted share, compared to $9.7 million, or $0.56 per diluted share, for the nine months ended September 30, 2012. A detailed reconciliation between GAAP and non-GAAP information is contained in the tables included herein.

Third-quarter and year-to-date highlights include:

  • Record third quarter and first nine month non-GAAP revenues.
  • A 37% year-over-year increase in combined customer support and professional services revenues to a record $56.0 million in the third quarter of 2013. That included a 64% increase in third-quarter professional services revenues compared to the same quarter in 2012.
  • Expansion of the company’s OneCall Support services to include coverage for all Cisco products sold by Datalink, providing opportunities for incremental services revenue increases.
  • Continued growth in customers who did over $1 million of business with the company to 21 for the third quarter of 2013 from 11 for the third quarter of 2012.
  • Generated $16.9 million of cash from operations year to date, contributing to an end-of-quarter total of more than $70.4 million of cash and investments.
  • A #37 ranking on Forbes’s 2013 Best Small Companies, based on return on equity, sales and earnings growth over the past year as well as growth over the past five years.

Outlook
Datalink projects revenues of $160.0 million to $170.0 million for the fourth quarter of 2013 compared to $147.3 million for the fourth quarter of 2012. This represents an increase in expected revenues of between 9% and 15%, based on the company’s current backlog, sales pipeline, and historical trends. The company expects fourth quarter 2013 net earnings to be between $0.15 and $0.21 per diluted share on a GAAP basis, and net earnings of between $0.24 and $0.30 per diluted share on a non-GAAP basis. This compares to net earnings of $0.18 per diluted share and $0.31 per diluted share on a GAAP and non-GAAP basis, respectively, for the same period in 2012.

Non-GAAP earnings per share exclude the effect of acquisition accounting adjustments from the StraTech acquisition 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 fourth quarter of 2013.

Conference Call and Webcast Today
Datalink will hold a conference call at 4:00 p.m. Central Daylight Time, during which Datalink's president and chief executive officer, Paul Lidsky, and vice president of finance and chief financial officer, Greg Barnum, will discuss company results and provide a business overview. Participants can access the conference call by dialing (866) 318-8618. Participants will be asked to identify the Datalink conference call and provide the designated identification number (77351429). A live Webcast of the conference call can be heard via Datalink’s website at www.datalink.com.

About Datalink
A complete data center solutions and services provider for Fortune 500 and mid-tier enterprises, Datalink transforms data centers so they become more efficient, manageable and responsive to changing business needs. Datalink helps leverage and protect storage, server, and network investments with a focus on long-term value, offering a full lifecycle of services, from consulting and design to implementation, management and support. Datalink solutions span virtualization and consolidation, data storage and protection, advanced networks, and business continuity. Each delivers measurable performance gains and maximizes the business value of IT. For more information, call 800.448.6314 or visit www.datalink.com.

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for certain forward-looking statements. This press release contains forward-looking statements, including our internal projections of certain anticipated 2013 results, which reflect our views regarding future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those identified below, which could cause actual results to differ materially from historical results or those anticipated. The words "aim,” "believe," "expect," "anticipate," "intend," "estimate," "should" and other expressions which indicate future events and trends identify forward-looking statements. Actual future results and trends may differ materially from historical results or those anticipated depending upon a variety of factors, many of which are included under “Risk Factors” in our annual report on Form 10-K for our year ended December 31, 2012, including, but not limited to: the level of continuing demand for data center solutions and services including the effects of current economic and credit conditions and the ability of organizations to outsource data center infrastructure-related services to service providers such as us; the migration of organizations to virtualized server environments, including using a private cloud computing infrastructure; the extent to which customers deploy disk-based backup recovery solutions; the realization of the expected trends identified for advanced network infrastructures; reliance by manufacturers on their data service partners to integrate their specialized products; continued preferred status with certain principal suppliers; competition and pricing pressures and timing of our installations that may adversely affect our revenues and profits; fixed employment costs that may impact profitability if we suffer revenue shortfalls; our ability to hire and retain key technical and sales personnel; continued productivity of our sales personnel; our dependence on key suppliers; our ability to adapt to rapid technological change; success of the implementation of our enterprise resource planning system; risks associated with integrating completed and future acquisitions; the ability to execute our acquisition strategy; fluctuations in our quarterly operating results; future changes in applicable accounting rules; and volatility in our stock price. Furthermore, our revenues for any particular quarter are not necessarily reflected by our backlog of contracted orders, which also may fluctuate unpredictably. We cannot assure you that we can grow or maintain our revenue and backlog from current levels. Additional factors that may cause actual results to differ from our assumptions and expectations include those set forth in our most recent filing on Form 10-K filed with the Securities and Exchange Commission. Any forward-looking statement made by us in this press release is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.

Non-GAAP Details
Non-GAAP financial measures exclude the impact from acquisition accounting adjustments to deferred revenue and costs, stock-based compensation expense, amortization of acquisition intangible assets, integration and transaction costs related to acquisitions and the related effects on income taxes. These non-GAAP measures are not in accordance with, or an alternative for measures prepared in accordance with, GAAP and may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. We believe that non-GAAP measures have limitations in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP and that these measures should only be used to evaluate our results of operations in conjunction with the corresponding GAAP measures.

These non-GAAP financial measures facilitate management's internal comparisons to our historical operating results and comparisons to competitors' operating results. We include these non-GAAP financial measures in our earnings announcement because we believe they are useful to investors in allowing for greater transparency with respect to supplemental information used by management in its financial and operational decision making, such as employee compensation planning. We believe that the presentation of these non-GAAP measures when shown in conjunction with the corresponding GAAP measures provides useful information to investors and management regarding financial and business trends relating to our financial condition and results of operations.

 
DATALINK CORPORATION
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
           
Three Months Ended Nine Months Ended
September 30, September 30,

2013

2012

2013

2012

 
Net sales:
Products $ 83,756 $ 64,052 $ 261,455 $ 221,586
Services   55,831       40,722     159,874       122,318  
Total net sales   139,587       104,774     421,329       343,904  
 
Cost of sales:
Cost of products 67,106 49,795 205,919 172,184
Cost of services   42,659       30,967     122,135       92,349  
Total cost of sales   109,765       80,762     328,054       264,533  
Gross profit   29,822       24,012     93,275       79,371  
Operating expenses:
Sales and marketing 14,512 10,052 43,291 34,829
General and administrative 5,215 4,228 15,909 13,580
Engineering 7,158 5,755 20,282 16,704
Integration and transaction costs 7 103 80 123
Amortization of intangibles   1,757       619     5,580       1,857  
Total operating expenses   28,649       20,757     85,142       67,093  
Earnings from operations 1,173 3,255 8,133 12,278
Interest income (expense), net   (10 )     13     (126 )     1  
Earnings before income taxes 1,163 3,268 8,007 12,279
Income tax expense   335       1,345     3,141       4,976  
Net earnings $ 828     $ 1,923   $ 4,866     $ 7,303  
 
Earnings per common share:
Basic $ 0.04 $ 0.11 $ 0.27 $ 0.43
Diluted $ 0.04 $ 0.11 $ 0.26 $ 0.42
Weighted average common shares outstanding:
Basic 19,619 17,085 18,253 17,036
Diluted 20,120 17,585 18,624 17,465
 
 
DATALINK CORPORATION
BALANCE SHEETS
(In thousands, except share data)
           
September 30, December 31,

2013

2012

(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 25,141 $ 10,315
Short term investments 45,288 -
Accounts receivable, net 90,923 144,072
Receivable due from seller of StraTech acquisition 4,243 4,243
Inventories, net 2,448 2,554
Current deferred customer support contract costs 84,477 87,052
Inventories shipped but not installed 8,925 8,784
Income tax receivable 1,650 2,430
Other current assets   595     852  
Total current assets   263,690     260,302  
Property and equipment, net 6,816 6,082
Goodwill 37,467 37,467
Finite-lived intangibles, net 15,180 20,760
Deferred customer support contract costs non-current 44,685 40,771
Deferred tax asset 4,297 4,471
Long term lease receivable 539 -
Other assets   495     455  
Total assets $ 373,169   $ 370,308  
 
Liabilities and Stockholders' Equity
Current liabilities
Line of credit $ - $ 6,000
Floor plan line of credit 12,253 -
Accounts payable 32,852 83,880
Accrued commissions 3,331 8,531
Accrued sales and use tax 1,998 3,489
Accrued expenses, other 6,661 6,027
Current deferred taxes 9,113 9,034
Customer deposits 5,266 3,645
Current deferred revenue from customer support contracts 104,674 105,167
Other current liabilities   179     157  
Total current liabilities 176,327 225,930
Deferred revenue from customer support contracts non-current 53,928 48,167
Other liabilities non-current   698     828  
Total liabilities   230,953     274,925  
 
 
Stockholders' equity
Common stock, $.001 par value, 50,000,000 shares authorized, 22,695,083 and 18,726,723 shares issued and outstanding as of September 30, 2013 and December 31, 2012, respectively 23 19
Additional paid-in capital 112,838 70,875
Retained earnings   29,355     24,489  
Total stockholders' equity   142,216     95,383  
Total liabilities and stockholders' equity $ 373,169   $ 370,308  
 
 
DATALINK CORPORATION
RECONCILIATION BETWEEN GAAP AND NON-GAAP NET INCOME
(In thousands, except per share data)
(Unaudited)
             
Three Months Ended Nine Months Ended
September 30, September 30,

2013

2012

2013

2012

       
Earnings from operations on a GAAP basis $ 1,173   $ 3,255   $ 8,133   $ 12,278  
GAAP operating margin 0.8 % 3.1 % 1.9 % 3.6 %
 
Non-GAAP Adjustments:
Purchase accounting adjustment to StraTech deferred revenue and cost, net   176     6     985     26  
Total gross margin adjustments 176 6 985 26
 
Stock based compensation expense included in sales and marketing 337 171 943 543
Stock based compensation expense included in general and administrative 448 421 1,276 1,129
Stock based compensation expense included in engineering 339 134 699 369
Integration and transaction costs 7 103 80 123
Amortization of intangible assets   1,757     619     5,580     1,857  
Total operating expense adjustments   2,888     1,448     8,578     4,021  
 
Non-GAAP earnings from operations 4,237 4,709 17,696 16,325
Non-GAAP operating margin 3.0 % 4.5 % 4.2 % 4.7 %
 
Interest income (expense), net (10 ) 13 (126 ) 1
Income tax expense impact including Non-GAAP items   1,670     1,917     6,940     6,628  
 
Non-GAAP net earnings $ 2,557   $ 2,805   $ 10,630   $ 9,698  
 
Non-GAAP net earnings per share - Basic $ 0.13   $ 0.16   $ 0.58   $ 0.57  
Non-GAAP net earnings per share - Diluted $ 0.13   $ 0.16   $ 0.57   $ 0.56  
 
Shares used in non-GAAP per share calculation - Basic   19,619     17,085     18,253     17,036  
Shares used in non-GAAP per share calculation - Diluted   20,120     17,585     18,624     17,465  
 
     
DATALINK CORPORATION
STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
     
Nine Months Ended
September 30,

2013

2012

 
Cash flows from operating activities:
Net earnings $ 4,866 $ 7,303
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
 
Change in fair value of trading securities (54 ) 0
Benefit for bad debts (103 ) (35 )
Depreciation 1,527 1,201
Amortization of finite lived intangibles 5,580 1,857
Deferred income taxes 253 (32 )
Stock based compensation expense 2,918 2,041
Changes in operating assets and liabilities:
Accounts receivable, net 52,715 32,703
Inventories (35 ) 3,741
Deferred costs/revenues/customer deposits, net 5,553 1,337
Accounts payable (51,028 ) (36,476 )
Accrued expenses (6,058 ) (1,781 )
Income tax payable (receivable) 780 (3,152 )
Other   (8 )         1,352  
Net cash provided by operating activities   16,906           10,059  
 
Cash flows from investing activities:
Purchases of trading securities, net (45,234 ) -
Maturities of investments - 1,192
Sales of investments - 2,294
Purchases of property and equipment   (2,261 )         (3,493 )
Net cash used in investing activities   (47,495 )         (7 )
 
Cash flows from financing activities:
Net payments under line of credit (6,000 ) -
Proceeds from floorplan line of credit 12,253 -
Proceeds from stock offering 39,021 -
Excess tax from stock compensation 393 557
Proceeds from issuance of common stock from option exercise 252 330
Tax withholding payments reimbursed by restricted stock   (504 )         (730 )
Net cash provided by financing activities   45,415           157  
 
Increase in cash and cash equivalents 14,826 10,209
Cash, beginning of period   10,315           18,947  
Cash, end of period $ 25,141         $ 29,156  
 
Supplemental cash flow information:
Cash paid for income taxes $ 1,715 $ 7,604
Cash paid for interest expense $ 115 $ -
 

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