First-Quarter Revenues Up 5% Year-Over-Year, Including 15% Increase in Services

Datalink (Nasdaq: DTLK), a leading provider of data center infrastructure and services, today reported results for its first quarter ended March 31, 2014. Revenues for the quarter ended March 31, 2014, increased 5% to $139.5 million compared to $133.5 million for the quarter ended March 31, 2013. Product revenues decreased 1% to $83.2 million and services revenues increased 15% to $56.3 million year over year.

The company’s results for the quarter ended March 31, 2014, reflect the full 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 2014 first quarter was approximately $0.01 per share.

The first quarter of 2014 GAAP results also includes an $876,000 or $0.02 per share gain relating to the escrow settlement agreement reached with StraTech in January 2014. Under the terms of the agreement, related to Datalink’s acquisition of StraTech in October 2012, the former owners of StraTech agreed to release the entire 242,805 shares of Datalink common stock that were being held in escrow in exchange for a payment of $100,000 and the release of certain other claims. The gain is based on the value of Datalink common stock on the date of the agreement. In the fourth quarter of 2013 we recorded a write-down of $611,000 of the account receivable from StraTech to its estimated realizable value. The net impact on our financial statements between the fourth quarter of 2013 and the first quarter of 2014 is a net gain of $265,000.

GAAP ResultsOn a GAAP basis, the company reported net earnings of $301,000 or $0.01 per diluted share for the first quarter ended March 31, 2014. This compares to net earnings of $1.1 million or $0.06 per diluted share in the first quarter of 2013.

Non-GAAP ResultsNon-GAAP net earnings for the first quarter of 2014 were $1.2 million, or $0.06 per diluted share, compared to $3.1 million, or $0.18 per diluted share, in the first quarter of 2013. A detailed reconciliation between GAAP and non-GAAP information is contained in the tables included herein.

“These first quarter results produced top line growth greater than most of our OEM partners are experiencing but were less than the revenue and earnings guidance we gave in February and reflect a greater decline in our overall gross margin than we expected. This decline in gross margin was caused by storage orders forecasted to close during Q1 that were delayed because customers were still evaluating their hybrid cloud and solid state storage strategies,” said Paul Lidsky, president and CEO of Datalink. “Since these delays primarily affected storage decisions, a higher percentage of our revenues came from lower-margin server and networking purchases, which in turn produced lower overall gross margins. While we believe that we will see these orders materialize later in the year and our storage/server and networking mix will return to expected levels, we have taken multiple cost reduction and organizational actions to protect our earnings and help the company increase its top line growth.”

These actions - effective immediately - will reduce operating expenses by approximately $3.6 million for the remainder of the year or $0.10 per fully diluted share. They include a restructuring of the sales operations and services delivery organizations which will provide greater efficiency while driving increased growth. In the second quarter, the company will take a one-time charge of approximately $350,000 relating to severance payments from these actions.

The company is also continuing to focus on driving higher-margin services revenues. That focus yielded a strong Q1 services performance, including:

  • A 15% year-over-year increase in total services revenues, including a 28% increase in professional services revenues.
  • An increase in professional services to 8.1% of total revenues compared to 6.6% in the first quarter of 2013.
  • Major new engagements in the company’s recently expanded Advanced Services practice, ranging from data center relocations, infrastructure migrations and hybrid cloud orchestration and management to a $1.9 million data migration contract with a large banking institution.

“In the past few years we have steadily broadened our services portfolio to provide a higher-margin revenue stream as well as to help our customers address the growing complexity of the data center infrastructure in the face of new developments like converged architectures, cloud computing and the transition of IT teams to become service organizations. These numbers show that the strategy is succeeding even in a down quarter,” Lidsky said. “Services will play an increasingly important role in our growth moving forward, continue to increase our wallet share with customers, and provide a strong competitive advantage over providers that lack our full-service capabilities.”

During the first quarter, Datalink continued to maintain a strong balance sheet with cash and investments of over $71 million, no debt and working capital of $93 million.

OutlookDatalink projects revenues of $145 million to $155 million for the second quarter of 2014 compared to $148.2 million for the second quarter of 2013. The company expects second quarter 2014 net earnings to be between $0.04 and $0.09 per diluted share on a GAAP basis, and net earnings of between $0.11 and $0.16 per diluted share on a non-GAAP basis. This compares to net earnings of $0.16 per diluted share and $0.26 per diluted share on a GAAP and non-GAAP basis, respectively, for the same period in 2013.

Non-GAAP earnings per share exclude the effect of acquisition accounting adjustments from the StraTech asset acquisition to deferred revenue and costs, integration and transaction costs related to acquisitions, stock-based compensation expense, amortization of intangible assets, severance costs, and the related effects on income taxes. The company estimates this total effect will be approximately $0.07 per diluted share for the second quarter of 2014.

Conference Call and Webcast TodayDatalink will hold a conference call shortly afterward at 4:00 p.m. Central Time during which time Datalink president and chief executive officer, Paul Lidsky, and chief financial officer, Greg Barnum, will discuss company results and provide a business overview. Participants can access the conference call by dialing (877) 703-6108. Participants will be asked to identify the Datalink conference call and provide the designated identification number (77580976). A live webcast of the conference call can be accessed here or via Datalink’s investor relations website at www.datalink.com.

About DatalinkA 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 network infrastructures, business continuity, and cloud enablement. 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 2014 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, 2013, 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 DetailsNon-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, severance costs 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 March 31,

2014

2013

  Net sales: Products $ 83,195 $ 84,422 Services   56,340       49,096   Total net sales   139,535       133,518     Cost of sales: Cost of products 66,770 66,065 Cost of services   43,283       37,620   Total cost of sales   110,053       103,685   Gross profit   29,482       29,833   Operating expenses: Sales and marketing 15,664 13,208 General and administrative 5,301 5,642 Engineering 7,514 6,987 Integration and transaction costs - 48 Amortization of intangibles   1,416       1,982   Total operating expenses   29,895       27,867   Earnings (loss) from operations (413 ) 1,966 Gain on settlement related to StraTech acquisition 876 - Interest income 48 16 Interest expense   (29 )     (116 ) Earnings before income taxes 482 1,866 Income tax expense   181       768   Net earnings $ 301     $ 1,098     Earnings per common share: Basic $ 0.01 $ 0.06 Diluted $ 0.01 $ 0.06 Weighted average common shares outstanding: Basic 21,537 17,532 Diluted 22,009 17,927     DATALINK CORPORATION BALANCE SHEETS (In thousands, except share data)     March 31, December 31,

2014

2013

(Unaudited) Assets Current assets Cash and cash equivalents $ 35,460 $ 24,871 Short term investments 36,147 51,214 Accounts receivable, net 98,047 131,246 Inventories, net 2,341 4,120 Current deferred customer support contract costs 92,075 89,304 Inventories shipped but not installed 11,647 16,000 Income tax receivable 1,608 - Other current assets   1,784   1,279 Total current assets   279,109   318,034 Property and equipment, net 6,562 6,722 Goodwill 37,780 37,780 Finite-lived intangibles, net 12,093 13,509 Deferred customer support contract costs non-current 49,615 49,044 Deferred tax asset 6,800 7,116 Long term lease receivable 2,264 510 Other assets   684   393 Total assets $ 394,907 $ 433,108   Liabilities and Stockholders' Equity Current liabilities Floor plan line of credit $ 14,124 $ 19,977 Accounts payable 40,158 61,296 Accrued commissions 4,838 7,133 Accrued sales and use tax 1,547 2,067 Accrued expenses, other 4,836 8,033 Income tax payable - 11,586 Current deferred taxes 1,694 1,694 Customer deposits 4,674 4,240 Current deferred revenue from customer support contracts 113,977 110,567 Other current liabilities   603   187 Total current liabilities 186,451 226,780 Deferred revenue from customer support contracts non-current 60,119 59,576 Long term lease payable 1,902 - Other liabilities, non-current   608   956 Total liabilities   249,080   287,312     Stockholders' equity Common stock, $.001 par value, 50,000,000 shares authorized, 22,490,892 and 22,785,422 shares issued and outstanding as of March 31, 2014 and December 31, 2013, respectively 22 23 Additional paid-in capital 110,970 111,239 Retained earnings   34,835   34,534 Total stockholders' equity   145,827   145,796 Total liabilities and stockholders' equity $ 394,907 $ 433,108       DATALINK CORPORATION RECONCILIATION BETWEEN GAAP AND NON-GAAP NET INCOME (In thousands, except per share data) (Unaudited)   Three Months Ended March 31, 2014 2013     Earnings (loss) from operations on a GAAP basis $ (413 ) $ 1,966   GAAP operating margin -0.3 % 1.5 %   Non-GAAP Adjustments: Purchase accounting adjustment to acquired deferred revenue and cost, net   57     512   Total gross margin adjustments 57 512   Stock based compensation expense included in sales and marketing 320 272 Stock based compensation expense included in general and administrative 421 526 Stock based compensation expense included in engineering 243 143 Integration and transaction costs - 48 Amortization of intangible assets   1,416     1,982   Total operating expense adjustments   2,400     2,971     Non-GAAP earnings from operations 2,044 5,449 Non-GAAP operating margin 1.5 % 4.1 %   Interest expense, net 19 (100 ) Income tax expense impact including Non-GAAP items   831     2,205     Non-GAAP net earnings $ 1,232   $ 3,144     Non-GAAP net earnings per share - Basic $ 0.06   $ 0.18   Non-GAAP net earnings per share - Diluted $ 0.06   $ 0.18     Shares used in non-GAAP per share calculation - Basic   21,537     17,532   Shares used in non-GAAP per share calculation - Diluted   22,009     17,927       DATALINK CORPORATION STATEMENT OF CASH FLOWS (In thousands) (Unaudited)     Three Months Ended March 31,

2014

2013

    Cash flows from operating activities: Net earnings $ 301 $ 1,098 Adjustments to reconcile net earnings to net cash provided by operating activities: Change in fair value of trading securities 17 - Provision (benefit) for bad debts (23 ) 8 Depreciation 574 487 Amortization of finite lived intangibles 1,416 1,982 Gain on settlement related to StraTech acquisition (876 ) - Deferred income taxes 316 175 Stock based compensation expense 984 941 Changes in operating assets and liabilities: Accounts receivable, net 31,468 16,202 Inventories 6,132 (4,492 ) Deferred costs/revenues/customer deposits, net 1,045 2,178 Accounts payable (19,236 ) (20,495 ) Accrued expenses (6,012 ) (3,584 ) Income tax receivable (1,608 ) 153 Income tax payable (11,586 ) - Other   (728 )     (549 ) Net cash provided by (used in) operating activities   2,184       (5,896 )   Cash flows from investing activities: Sale of investments 15,050 - Purchases of property and equipment   (414 )     (973 ) Net cash provided by (used in) investing activities   14,636       (973 )   Cash flows from financing activities: Net proceeds under line of credit - 2,000 Net borrowings (payments) under floor plan line of credit (5,853 ) - Excess tax from stock compensation 340 277 Proceeds from issuance of common stock from option exercise 77 176 Tax withholding payments reimbursed by restricted stock   (795 )     (244 ) Net cash provided by (used in) financing activities   (6,231 )     2,209     Increase (decrease) in cash and cash equivalents 10,589 (4,660 ) Cash and cash equivalents, beginning of period   24,871       10,315   Cash and cash equivalents, end of period $ 35,460     $ 5,655     Supplemental cash flow information: Cash paid for income taxes $ 12,718 $ 175 Cash paid for interest expense 3 88  

DatalinkInvestors & AnalystsGreg Barnum, 952-279-4816Vice President and CFOgbarnum@datalink.comorPressJill Schmidt, 847-415-9311S&S Public Relations, Inc.jills@sspr.comorInvestor RelationsKim Payne, 952-279-4794Investor Relations CoordinatorFax: 952-944-7869einvestor@datalink.com

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