Datalink: Fiscal 4Q08 Financial Results

 
 
Datalink Corporation reported that revenues for the quarter ended December 31, 2008, were $48.2 million compared to $50.7 million for the prior-year period. Revenues for the year ended December 31, 2008, increased 10 percent to $195.6 million compared to $177.8 million for the prior-year period.

On a GAAP basis, the company reported net earnings of $843,000, or $0.07 per diluted share for the fourth quarter ended December 31, 2008. This compares to net earnings of $1.4 million, or $0.11 per diluted share, in the fourth quarter of 2007. For the year ended December 31, 2008, the company reported net earnings of $3.4 million, or $0.27 per diluted share, compared to net earnings of $1.2 million, or $0.10 per diluted share for the year ended December 31, 2007.

Non-GAAP net earnings for the fourth quarter of 2008 were $1.1 million, or $0.09 per diluted share, compared to non-GAAP net earnings of $1.6 million or $0.13 per diluted share, in the fourth quarter of 2007. For the year ended December 31, 2008, the company reported non-GAAP net earnings of $4.5 million, or $0.36 per diluted share, compared to non-GAAP net earnings of $2.6 million, or $0.21 per diluted share for 2007.

Charlie Westling, Datalink’s President and CEO, commented: “While we were disappointed with the revenue and earnings shortfall in the fourth quarter, 2008 was a year of records and significant accomplishments for the company."

Highlights included:

• Total revenues in 2008 increased 10% over 2007 to a record $195.6 million; services revenue increased 23% over the previous year to $82.1 million, also a record;
• Gross profit margin for the year was 27% which was the highest annual percentage since 2001;
• Earnings from operations increased 340% over 2007 to $5.1 million;
• Employee productivity, as measured by gross profit per employee, increased 11% over the previous year to a record $256,000;
• Balance sheet strengthened in 2008 with year-end cash and investments at $27.7 million, up $2.6 million from the prior year, with no debt;
• Greater customer breadth and diversity, with 36 customers generating over $1 million of revenue during the year versus 28 customers at that level in 2007, and no customer representing more than 5% of total revenues during 2008.

Westling continued: “Against the backdrop of very challenging economic conditions as we head into 2009, we plan to build upon our current platform and financial strength, expand our market share and improve our competitive position in the marketplace. Datalink’s priorities are:

• Investing in customer-facing teams to acquire top tier sales and engineering talent to expand our footprint in key markets and grow market share;
• 
  Reducing corporate expenses and realigning corporate resources to lower our quarterly sales break-even levels from approximately $44 million currently, to less than $40 million over the next few quarters;
• 
  Expanding our customer support capabilities and tools-based professional services offerings to deliver more value to our customers;
• 
  Driving greater penetration of storage practices and solutions into our enterprise customer base through emerging technologies such as data deduplication and virtualization which deliver compelling cost savings and return on investment; and
• 
  Pursuing acquisitions that will enable the company to achieve critical mass in key locations faster or provide additional services to our customers.”

Outlook
The company ended the fourth quarter of 2008 with a record backlog of $33 million. This backlog was greater than expected primarily due to the timing of orders received during the fourth quarter. While backlog entering the first quarter of this year was stronger than in recent quarters, we are seeing the negative impact of the economic slowdown affect many of our customers, with less visibility into their purchasing plans and greater scrutiny given to storage spending projects. In some cases, customers have not yet established budgets for storage initiatives for this year, as they take a wait-and-see approach in the midst of the current economic uncertainty. We have also had some customers decide to delay the implementation of projects from this quarter to later in the year due to data center readiness issues or other changing circumstances. Some of these delays involve customers who have already purchased and paid for equipment and services to be delivered by us. Because we recognize revenue upon completion of projects, any delays in implementation timelines from the current quarter to a later date will negatively affect our results this quarter.

The combination of all of these factors leads us to conclude that first quarter of 2009 results will likely be lower than last year’s first quarter results, and below our internal plan. Specifically, we expect revenues to be between $37 and $42 million for the quarter. Our first quarter expenses typically increase due to payroll taxes, accounting for employee benefits and audit related expenses. However, we are taking steps to reduce our cost structure in light of our lowered revenue expectations. With sequentially higher expenses, partially offset by expense reduction actions, applied to the forecasted range of revenues for the quarter, we expect a net loss per diluted share in the first quarter of 2009 to be between $0.04 and $0.09 on a GAAP basis, and a net loss of between $0.02 and $0.07 per diluted share on a non-GAAP basis. This compares to revenues of $47.7 million with GAAP earnings of $0.04 per diluted share and non-GAAP earnings of $0.06 per diluted share in the first quarter of 2008. Non-GAAP earnings per share exclude the effect of purchase accounting adjustments from the MCSI acquisition to deferred revenue, stock-based compensation expense, amortization of acquisition related intangible assets, and the related effects on income taxes. The company estimates this total effect will be approximately $.02 per diluted share for the first quarter of 2009.