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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