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Datalink Reports 2010 Fourth Quarter and Year-End Operating Results
Record Fourth Quarter and Annual Revenue Up 76% and 65% Year-Over-Year, Respectively

CHANHASSEN, Minn., Feb 17, 2011 (BUSINESS WIRE) --

Datalink (Nasdaq: DTLK), a leading provider of data center infrastructure and services, today reported results for its fourth quarter and year that ended December 31, 2010. Revenues for the quarter ended December 31, 2010, increased 76% to $91.0 million compared to $51.8 million for the prior-year period. Sequentially, revenues were up 32% from $69.2 million in the third quarter of 2010. Revenues for year ended December 31, 2010, increased 65% to $293.7 million compared to $178.1 million for the year ended December 31, 2009.

GAAP Results
On a GAAP basis, the company reported net earnings of $2.4 million or $0.19 per basic and diluted share for the fourth quarter ended December 31, 2010. This compares to a net loss of $158,000 or $0.01 per basic and diluted share in the fourth quarter of 2009 and earnings of $771,000 or $0.06 per basic and diluted share in the third quarter of 2010. For the year ended December 31, 2010, the company reported net earnings of $2.3 million or $0.18 per basic and diluted share, compared to a net loss of $555,000, or $0.04 per basic and diluted share, for the year ended December 31, 2009.

Non-GAAP Results
Non-GAAP net earnings for the fourth quarter of 2010 were $3.1 million, or $0.24 per basic and diluted share, compared to non-GAAP net earnings of $1.3 million, or $0.10 per basic and diluted share, in the fourth quarter of 2009. Sequentially, non-GAAP earnings grew 125% from $1.4 million in the third quarter. For the year ended December 31, 2010, the company reported non-GAAP net earnings of $5.4 million, or $0.42 per basic share and $.041 per diluted share, compared to net earnings of $1.8 million, or $0.14 per basic and diluted share, for the year ended December 31, 2009. A detailed reconciliation between GAAP and non-GAAP information is contained in the tables included herein.

The company's results for the year ended December 31, 2010 include Incentra, LLC results of operations for the full year, while 2009 only includes Incentra from December 17, 2009, the acquisition date.

Paul Lidsky, Datalink's president and CEO, commented, "2010 was a record year for Datalink. We reported record revenues of $294 million and our highest earnings since 2006. In addition, the $91.0 million of revenues and $3.1 million of non-GAAP net earnings in the fourth quarter of 2010 were both quarterly records. We also reported our seventh consecutive quarter of non-GAAP net earnings. Other significant accomplishments for 2010 and the fourth quarter and the year include:

  • Product revenues for the quarter were a record $59.1 million which represents a 51% increase over third quarter and a 96% increase over the same period in 2009. This increase reflects our ability to close several multi-million dollar accounts with Global 100 companies during the fourth quarter.
  • Service revenues for the quarter were a record $31.9 million which represents a 6% increase over third quarter and a 48% increase over the same period in 2009. This reflects our continued emphasis on increasing Datalink's share of professional services and support services, which supports our customer intimacy go-to-market model.
  • In 2010 we had 55 customers each purchase over $1 million of product and services from us as compared to 31 customers in 2009.
  • We exited the quarter with a healthy and strengthening balance sheet. Our working capital increased $3.5 million to $21.6 million from the third quarter and we have no debt.

Our collective accomplishments during 2010 reaffirm our successful execution on our acquisition and data center strategies. These strategies, coupled with improving economic conditions, resulted in increased revenue and gross margin dollars, throughout the year. This allowed us to leverage our G&A culminating in a fourth quarter operating profit margin of 5% and 2010 operating earnings of $4.0 million as compared to a 2009 operating loss of $451,000. We continue to see an increase in demand for unified data center solutions with flexible architectures. Our investments in our expanded data center portfolio support these market conditions and our ability to continue to deliver unified platforms to our customers should fuel growth in 2011," said Lidsky.

Outlook
Based on the company's sales pipeline and the traditional cyclical decline in first quarter revenues when compared to the previous fourth quarters, we expect revenues to be between $77 million and $82 million for the first quarter of 2011. Datalink's first quarter operating expenses are typically higher than other quarters. Therefore the company expects first quarter 2011 net earnings to be between $0.03 and $0.08 per diluted share on a GAAP basis, and net earnings of between $0.09 and $0.14 per diluted share on a non-GAAP basis.

Effective January 1, 2011, the company was required to adopt a new revenue recognition accounting standard. This new standard, which applies to all resellers of computer hardware, requires that Datalink now recognize product revenues upon shipment versus upon installation under our old revenue recognition method. Accordingly Datalink's first quarter 2011 guidance reflects this new revenue recognition policy. Datalink estimates that the effect of this accounting change, which is included in our first quarter 2011 revenue and earnings guidance, is approximately $8 million of product revenue or about $0.05 of GAAP and non-GAAP earnings per share. These product revenues and earnings would have been recognized in the fourth quarter of 2010 if the company had been recognizing revenue upon shipment. Without the change in its revenue recognition policy, the company's 2011 first quarter guidance would have been between $69 million and $74 million compared to first quarter 2010 actual revenue of $62.5 million, or a 10% to 18% increase, and our GAAP and non-GAAP earnings per share range would be approximately $0.05 lower. This compares to a GAAP net loss of $0.07 per diluted share and non-GAAP earnings of $0.01 per diluted share in the first quarter of 2010.

"I am pleased with the strong start to the new year as our first quarter guidance suggests a 10% to 18% increase in revenues, before our changes in revenue recognition, year over year," said Lidsky. "I believe that our first quarter forecast is indicative of the steadily increasing demand for unified data center infrastructure and that our customers and prospects continue to invest in this area. Datalink's investments in our expanded product and services portfolio position us to take full advantage of this expanding market," he added.

Non-GAAP earnings per share exclude the effect of acquisition accounting adjustments from the Incentra 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 $0.05 per diluted share for the first quarter of 2011.

Conference Call and Webcast Today
Datalink will hold a conference call at 4:00 p.m. central 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 (877) 277-9804. Participants will be asked to identify the Datalink conference call and provide the designated identification number (36524198). A live Webcast of the conference call can be heard via Datalink's website at http://cts.businesswire.com/ct/CT?id=smartlink&url=http%3A%2F%2Fwww.datalink.com&esheet=6616922&lan=en-US&anchor=www.datalink.com&index=2&md5=da4c6e121e1f8ec48c4ecd5d017f06bf.

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 http://cts.businesswire.com/ct/CT?id=smartlink&url=http%3A%2F%2Fwww.datalink.com&esheet=6616922&lan=en-US&anchor=www.datalink.com&index=7&md5=3345185e30ce60573cde73bc9e0309fc.

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 anticipated 2011 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, including, but not limited to: the level of continuing demand for storage, including the effects of current economic and credit conditions; 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; revenue recognition policies that may unpredictably defer reporting of our revenues; our ability to hire and retain key technical and sales personnel; our dependence on key suppliers; our ability to adapt to rapid technological change; risks associated with integrating possible future acquisitions; fluctuations in our quarterly operating results; future changes in applicable accounting rules; and volatility in our stock price. Further, our revenues for any particular quarter are not necessarily reflected by our backlog of contracted orders, which also may fluctuate unpredictably. We cannot assure that we can grow or maintain our revenue and backlog from current levels.

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 Twelve Months Ended
December 31, December 31,

2010

2009

2010

2009

Net sales:
Products $ 59,092 $ 30,209 $ 180,424 $ 94,788
Services 31,948 21,597 113,255 83,294
Total net sales 91,040 51,806 293,679 178,082
Cost of sales:
Cost of products 46,989 22,755 140,984 71,303
Cost of services 23,895 15,787 83,951 60,343
Amortization of intangibles 277 - 1,108 -
Total cost of sales 71,161 38,542 226,043 131,646
Gross profit 19,879 13,264 67,636 46,436
Operating expenses:
Sales and marketing 8,318 5,591 32,353 21,408
General and administrative 3,406 2,881 14,092 11,943
Engineering 3,666 3,031 15,652 11,650
Other income - - (503 ) -
Integration and transaction costs - 1,043 581 1,043
Amortization of intangibles 336 310 1,483 843
15,726 12,856 63,658 46,887
Earnings (loss) from operations 4,153 408 3,978 (451 )
Interest income, net 3 12 14 93
Earnings (loss) before income taxes 4,156 420 3,992 (358 )
Income tax expense 1,739 578 1,690 197
Net earnings (loss) $ 2,417 $ (158 ) $ 2,302 $ (555 )
Net earnings (loss) per common share:
Basic $ 0.19 $ (0.01 ) $ 0.18 $ (0.04 )
Diluted $ 0.19 $ (0.01 ) $ 0.18 $ (0.04 )
Weighted average common shares outstanding:
Basic 12,855 12,636 12,801 12,550
Diluted 13,054 12,636 12,981 12,550
DATALINK CORPORATION
BALANCE SHEETS
(In thousands, except share data)
December 31, December 31,

2010

2009

(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 8,988 $ 12,901
Short term investments - 2,730
Accounts receivable, net 57,779 44,109
Inventories 2,210 1,561
Current deferred customer support contract costs 48,715 38,050
Inventories shipped but not installed 7,191 8,973
Income tax receivable 1,064 1,073
Other current assets 607 205
Total current assets 126,554 109,602
Property and equipment, net 2,126 1,808
Goodwill 23,146 23,178
Finite life intangibles, net 5,219 7,810
Deferred customer support contract costs non-current 18,742 11,186
Other assets 285 394
Total assets $ 176,072 $ 153,978
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 28,749 $ 31,025
Note payable due to seller of acquired business - 3,000
Accrued commissions 3,546 2,680
Accrued sales and use tax 1,414 1,228
Accrued expenses, other 3,427 3,092
Current deferred tax liability 3,723 814
Customer deposits 2,209 3,994
Current deferred revenue from customer support contracts 61,571 48,765
Other current liabilities 279 302
Total current liabilities 104,918 94,900
Deferred income tax liability 203 1,357
Deferred revenue from customer support contracts non-current 23,284 13,850
Other current liabilities non-current 212 456
Total liabilities 128,617 110,563
Stockholders' equity

Common stock, $.001 par value, 50,000,000 shares authorized, 13,569,533
and 13,260,788 shares issued and outstanding as of December 31, 2010 and
December 31, 2009, respectively

14 13
Additional paid-in capital 43,332 41,595
Retained earnings 4,109 1,807
Total stockholders' equity 47,455 43,415
Total liabilities and stockholders' equity $ 176,072 $ 153,978
DATALINK CORPORATION
RECONCILIATION BETWEEN GAAP AND NON-GAAP NET INCOME
(In thousands, except per share data)
(Unaudited)
Three Months Ended Twelve Months Ended
December 31, December 31,
2010 2009 2010 2009
Net earnings (loss) on a GAAP basis $ 2,417 $ (158 ) $ 2,302 $ (555 )
Adjustments:
Amortization of intangible assets $ 277 - $ 1,108 -

Acquisition accounting adjustment to Incentra and MCSI
deferred revenue, net

71 82 853 120
Total gross margin adjustments 348 82 1,961 120

Stock based compensation expense included in sales and
marketing

195 75 509 300

Stock based compensation expense included in general
and administrative

395 146 754 820

Stock based compensation expense included in
engineering

100 75 329 366
Integration and transaction costs - 1,043 581 1,043
Amortization of acquisition intangible assets 336 310 1,483 843
Total operating expense adjustments 1,026 1,649 3,656 3,372
Income tax expense 694 271 2,538 1,135
Non-GAAP net earnings $ 3,097 $ 1,302 $ 5,381 $ 1,802
Non-GAAP net earnings per share - Basic $ 0.24 $ 0.10 $ 0.42 $ 0.14
Non-GAAP net earnings per share - Diluted $ 0.24 $ 0.10 $ 0.41 $ 0.14
Shares used in non-GAAP per share calculation - Basic 12,855 12,636 12,801 12,550
Shares used in non-GAAP per share calculation - Diluted 13,054 12,731 12,981 12,594
DATALINK CORPORATION
BALANCE SHEETS
(In thousands)
Dec 31, Dec 31

2009

Incentra

Cross

Datalink

2008

Assets
Current assets
Cash and cash equivalents 12,901 (10,360 ) (2,000 ) (996 ) 26,257
Short term investments 2,730 1,257 1,473
Accounts receivable, net 44,109 10,699 5,044 28,366
Inventories 1,561 167 164 1,230
Current deferred customer support contract costs 38,050 3,246 1,717 33,087
Inventories shipped but not installed 8,973 (1,262 ) 10,235
Current deferred income taxes 0 0 (1,417 ) 1,417
Income tax receivable 1,073 1,059 14
Other current assets 205 60 (74 ) 219
Total current assets 109,602 3,811 (2,000 ) 5,493 102,298
Property and equipment, net 1,808 119 48 (447 ) 2,088
Goodwill 23,178 4,012 1,418 0 17,748
Intangibles 7,810 5,219 534 (843 ) 2,900
Deferred customer support contract costs non-current 11,186 504 95 10,587
Other assets 394 190 (67 ) 271
Total assets 153,978 13,855 0 4,231 135,892
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable 31,025 5,042 2,606 23,377
Note payable - Laurus 3,000 3,000 0 0
Accrued commissions 2,680 862 490 1,328
Accrued sales and use tax 1,228 496 329 403
Accrued expenses, other 3,092 (359 ) 3,451
Current deferred tax liability 814 0 814 0
Sublease reserve current 288 (23 ) 311
Customer deposits 3,994 (2,079 ) 6,073
Current deferred revenue from customer support contracts 48,765 3,870 1,275 43,620
Other current liabilities 14 14 0

Total current liabilities

94,900 13,270 0 3,067 78,563
Deferred income tax liability 1,357 634 723
Deferred revenue from customer support contracts non-current 13,850 585 (30 ) 13,295
Sublease reserve non-current 348 (287 ) 635
Other liabilities non-current 108 (49 ) 157
Total liabilities 110,563 13,855 0 3,335 93,373
Stockholders' equity
Common Stock 13 0 13
Additional paid-in capital 41,595 1,451 40,144
Accumulated deficit 1,807 (555 ) 2,362
Total stockholders' equity 43,415 0 0 896 42,519
Total liabilities and stockholders' equity 153,978 13,855 0 4,231 135,892
DATALINK CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Twelve Months Ended
December 31,

2010

2009

Cash flows from operating activities:
Net earnings (loss) $ 2,302 $ (555 )

Adjustments to reconcile net earnings (loss) to net cash provided by operating
activities:

Provision for bad debts 73 57
Depreciation 945 838
Amortization of intangibles 2,591 843
Amortization of discount on short term investments - (15 )
Income taxes 9 -
Amortization of sublease reserve (288 ) (310 )
Deferred income taxes 1,755 2,866
Stock based compensation expense 1,592 1,485
Changes in operating assets and liabilities, net of effects of acquisitions
Accounts receivable (13,742 ) (8,226 )
Inventories 1,133 1,098
Deferred costs/revenues/customer deposits, net 2,234 (567 )
Accounts payable (2,276 ) 2,606
Accrued expenses 1,387 460
Other (240 ) 106
Net cash provide by (used in) operating activities (2,525 ) 686
Cash flows from investing activities:
Proceeds from short term investments 2,730 (1,257 )
Payment for acquisitions, net of cash acquired - (12,360 )
Purchases of property and equipment (1,263 ) (391 )
Net cash provided by (used in) investing activities 1,467 (14,008 )
Cash flows from financing activities:
Payment of note payable due to seller of acquired business (3,000 ) -
Excess tax from stock compensation (16 ) -
Proceeds from issuance of common stock from option exercise 364 174
Tax withholding payments reimbursed by restricted stock (203 ) (208 )
Net cash used in financing activities (2,855 ) (34 )
Decrease in cash and cash equivalents (3,913 ) (13,356 )
Cash and cash equivalents, beginning of period 12,901 26,257
Cash and cash equivalents, end of period $ 8,988 $ 12,901
Supplemental cash flow information:
Cash paid for income taxes $ 509 $ 278
Cash received for income tax refunds $ 568 $ 1,888

SOURCE: Datalink

Datalink
Media & Alliances:
Suzanne Gallagher, 720-566-5110
SVP of Marketing
Email: sgallagher@datalink.com
or
Investors & Analysts:
Greg Barnum, 952-944-3462
Vice President and CFO
Email: gbarnum@datalink.com
or
Investor Relations:
Kim Payne, 952-279-4794
Investor Relations Coordinator
Fax: 952-944-7869
Email: einvestor@datalink.com
website: www.datalink.com




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