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Datalink Reports 2014 Second Quarter and Six Month Operating Results

Datalink (Nasdaq: DTLK), a leading provider of data center infrastructure and services, today reported results for its second quarter and six months that ended June 30, 2014. Revenues for the quarter ended June 30, 2014 increased 8% to $159.4 million compared to $147.8 million for the quarter ended June 30, 2013, and increased 14% over revenues of $139.5 million in the first quarter of 2014. Revenues for the six months ended June 30, 2014, increased 6% to $298.9 million compared to $281.3 million for the six months ended June 30, 2013.

GAAP Results
On a GAAP basis, the company reported net earnings of $3.6 million or $0.16 per diluted share for the second quarter ended June 30, 2014. This compares to net earnings of $2.9 million or $0.16 per diluted share in the second quarter of 2013. For the six months ended June 30, 2014, the company reported net earnings of $3.9 million or $0.18 per diluted share, compared to net earnings of $4.0 million, or $0.22 per diluted share, for the six months ended June 30, 2013.

Non-GAAP Results
Non-GAAP net earnings for the second quarter of 2014 were $4.9 million, or $0.22 per diluted share, compared to non-GAAP net earnings of $4.7 million, or $0.26 per diluted share, in the second quarter of 2013. For the six months ended June 30, 2014, the company reported non-GAAP net earnings of $6.1 million, or $0.28 per diluted share, compared to non-GAAP net earnings of $7.8 million, or $0.43 per diluted share, for the six months ended June 30, 2013. A detailed reconciliation between GAAP and non-GAAP information is contained in the tables included herein.

The company’s results for the quarter and six months ended June 30, 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 earnings from the additional shares outstanding on the 2014 first quarter and six months were approximately $0.05 and $0.06 per share, respectively.

Highlights of the quarter and six months ended June 30, 2014, include:

  • Record second quarter and first six month revenues, exceeding guidance issued in May and fueled in part by placement of orders that had been delayed in the 1st quarter of 2014 as customers evaluated newer solid state storage and hybrid cloud strategies.
  • 11% and 13% year-over-year increases in total services revenues during the second quarter and six months, respectively.
  • Continued increases in converged data center infrastructure orders, including a 7% quarter-over-quarter and 18% year-over-year increase.
  • A 15% increase in the number of customers spending more than $1 million with the company during the first six months of 2014 compared to the first six months of 2013.
  • A #1 partner ranking for NetApp FlexPod and clustered Data ONTAP sales in the Americas during NetApp’s 2014 fiscal year, based on revenues.
  • Continued investment in Datalink’s Advanced Services offerings, with revenues increasing 43% to $3.1 million in the second quarter of 2014 as compared to the first quarter of 2014.
  • A #47 ranking on CRN’s 2014 Solution Provider 500 list of North America’s top technology integrators based on annual revenues, marking a steady climb from #72 just four years ago.

“The second quarter of 2014 saw a partial return to a normal sales cadence as some customers completed their due diligence on newer technologies like flash storage and cloud computing that had postponed sales we originally expected to close in the first quarter. We expect more of these delayed orders to get placed in the third quarter and that is reflected in our guidance,” said Paul Lidsky, Datalink’s president and CEO. “At the same time, the combination of increased services and converged technologies revenues demonstrates the validity of our end-to-end data center product and services model and its potential for building our business.”

Outlook
Based on the company’s current backlog and sales pipeline, the company projects revenues of $150.0 million to $160.0 million for the third quarter of 2014 compared to $139.6 million for the third quarter of 2013. This represents an increase in expected revenues of between 7% and 15%. The company expects third quarter 2014 net earnings to be between $0.11 and $0.17 per diluted share on a GAAP basis, and net earnings of between $0.16 and $0.22 per diluted share on a non-GAAP basis. This compares to net earnings of $0.04 per diluted share and $0.13 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 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 third quarter of 2014.

Conference Call and Webcast Today
Datalink 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 (866) 510-0712. Participants will be asked to identify the Datalink conference call and provide the designated identification number (54017216). A live webcast of the conference call can be accessed here or via Datalink’s investor relations 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 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 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, 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 Six Months Ended
June 30, June 30,

2014

2013

2014

2013

 
Net sales:
Products $ 98,252 $ 93,295 $ 181,447 $ 177,699
Services   61,128       54,484     117,468       103,598  
Total net sales   159,380       147,779     298,915       281,297  
 
Cost of sales:
Cost of products 76,411 72,747 143,181 138,813
Cost of services   47,486       41,471     90,769       79,090  
Total cost of sales   123,897       114,218     233,950       217,903  
Gross profit   35,483       33,561     64,965       63,394  
Operating expenses:
Sales and marketing 15,867 15,572 31,531 28,779
General and administrative 4,837 5,051 10,138 10,694
Engineering 7,446 6,136 14,960 13,124
Integration and transaction costs - 25 - 73
Amortization of intangibles   1,359       1,841     2,775       3,823  
Total operating expenses   29,509       28,625     59,404       56,493  
Earnings from operations 5,974 4,936 5,561 6,901
Gain on settlement related to StraTech acquisition - - 876 -
Interest income 72 13 120 29
Interest expense   (79 )     (30 )   (108 )     (145 )
Earnings before income taxes 5,967 4,919 6,449 6,785
Income tax expense   2,404       2,015     2,585       2,783  
Net earnings $ 3,563     $ 2,904   $ 3,864     $ 4,002  
 
Earnings per common share:
Basic $ 0.17 $ 0.17 $ 0.18 $ 0.23
Diluted $ 0.16 $ 0.16 $ 0.18 $ 0.22
Weighted average common shares outstanding:
Basic 21,519 17,600 21,528 17,566
Diluted 22,039 18,103 22,007 17,986
 
DATALINK CORPORATION
BALANCE SHEETS
(In thousands, except share data)
   
June 30, December 31,

2014

2013

(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 33,399 $ 24,871
Short term investments 45,037 51,214
Accounts receivable, net 102,211 131,246
Inventories, net 18 4,120
Current deferred customer support contract costs 98,893 89,304
Inventories shipped but not installed 10,580 16,000
Income tax receivable 1,481 -
Other current assets   1,059   1,279
Total current assets   292,678   318,034
Deferred customer support contract costs non-current 49,217 49,044
Property and equipment, net 6,838 6,722
Goodwill 37,780 37,780
Finite-lived intangibles, net 10,734 13,509
Deferred taxes 6,800 7,116
Long term lease receivable 2,811 510
Other assets   661   393
Total assets $ 407,519 $ 433,108
 
Liabilities and Stockholders' Equity
Current liabilities
Floor plan line of credit $ 16,991 $ 19,977
Accounts payable 33,766 61,296
Accrued commissions 4,729 7,133
Accrued sales and use tax 1,713 2,067
Accrued expenses, other 5,888 8,033
Income tax payable - 11,586
Current deferred taxes 1,694 1,694
Customer deposits 4,892 4,240
Current deferred revenue from customer support contracts 123,152 110,567
Other current liabilities   1,109   187
Total current liabilities 193,934 226,780
Deferred revenue from customer support contracts non-current 60,312 59,576
Long term lease payable 2,385 -
Other liabilities non-current   561   956
Total liabilities   257,192   287,312
 
 
Stockholders' equity
Common stock, $.001 par value, 50,000,000 shares authorized, 22,492,992 and 22,785,422 shares issued and outstanding as of June 30, 2014 and December 31, 2013, respectively 22 23
Additional paid-in capital 111,907 111,239
Retained earnings   38,398   34,534
Total stockholders' equity   150,327   145,796
Total liabilities and stockholders' equity $ 407,519 $ 433,108
 
DATALINK CORPORATION
RECONCILIATION BETWEEN GAAP AND NON-GAAP NET INCOME
(In thousands, except per share data)
(Unaudited)
           
Three Months Ended Six Months Ended
June 30, June 30,
2014 2013 2014 2013
       
Earnings from operations on a GAAP basis $ 5,974   $ 4,936   $ 5,561   $ 6,901  
GAAP operating margin 3.7 % 3.3 % 1.9 % 2.5 %
 
Non-GAAP Adjustments:
Purchase accounting adjustment to StraTech deferred revenue and cost, net   51     297     108     809  
Total gross margin adjustments 51 297 108 809
 
Stock based compensation expense included in sales and marketing 131 334 451 606
Stock based compensation expense included in general and administrative 370 302 790 828
Stock based compensation expense included in engineering 239 217 483 360
Integration and transaction costs - 25 - 73
Amortization of intangible assets   1,359     1,841     2,775     3,823  
Total operating expense adjustments   2,099     2,719     4,499     5,690  
 
Non-GAAP earnings from operations 8,124 7,952 10,168 13,400
Non-GAAP operating margin 5.1 % 5.4 % 3.4 % 4.8 %
 
Interest expense, net (7 ) (17 ) 12 (116 )
Income tax expense impact including Non-GAAP items   3,247     3,271     4,072     5,471  
 
Non-GAAP net earnings $ 4,870   $ 4,664   $ 6,108   $ 7,813  
 
Non-GAAP net earnings per share - Basic $ 0.23   $ 0.27   $ 0.28   $ 0.44  
Non-GAAP net earnings per share - Diluted $ 0.22   $ 0.26   $ 0.28   $ 0.43  
 
Shares used in non-GAAP per share calculation - Basic   21,519     17,600     21,528     17,566  
Shares used in non-GAAP per share calculation - Diluted   22,039     18,103     22,007     17,986  
 
DATALINK CORPORATION
STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
   
Six Months Ended
June 30,

2014

2013

 
Cash flows from operating activities:
Net earnings $ 3,864 $ 4,002
Adjustments to reconcile net earnings to net cash provided by operating activities:
Change in fair value of short term investments 4 -
Provision (benefit) for bad debts 71 (44 )
Depreciation 1,222 989
Amortization of finite-lived intangibles 2,775 3,823
Gain on settlement related to StraTech acquisition (876 ) -
Deferred income taxes 316 174
Stock based compensation expense 1,724 1,794
Changes in operating assets and liabilities:
Accounts receivable, net and leases receivable 26,663 50,756
Inventories 9,522 (2,336 )
Deferred costs/revenues/customer deposits, net 4,211 5,257
Accounts payable and leases payable (25,145 ) (40,386 )
Accrued expenses (4,903 ) (5,930 )
Income tax receivable (1,481 ) 2,135
Income tax payable (11,586 ) -
Other   479       (38 )
Net cash provided by operating activities   6,860       20,196  
 
Cash flows from investing activities:
Sales of short term investments 6,173 -
Purchases of property and equipment   (1,338 )     (1,679 )
Net cash provided by (used in) investing activities   4,835       (1,679 )
 
Cash flows from financing activities:
Net payments under line of credit - (6,000 )
Net payments under floor plan line of credit (2,986 ) -
Excess tax from stock compensation 526 277
Proceeds from issuance of common stock from option exercise 88 237
Tax withholding payments reimbursed by restricted stock   (795 )     (244 )
Net cash used in financing activities   (3,167 )     (5,730 )
 
Increase in cash and cash equivalents 8,528 12,787
Cash and cash equivalents, beginning of period   24,871       10,315  
Cash and cash equivalents, end of period $ 33,399     $ 23,102  
 
Supplemental cash flow information:
Cash paid for income taxes $ 14,809 $ 242
Cash paid for interest expense $ - $ 68

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