Datalink: Fiscal 4Q10 Financial Results

Datalink Corp. 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 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 the 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 continued emphasis on increasing Datalink’s share of professional services and support services, which supports customer intimacy go-to-market model.
• In 2010 the company had 55 customers each purchase over $1 million of product and services as compared to 31 customers in 2009.
• Datalink exited the quarter with a strengthening balance sheet. Working capital increased $3.5 million to $21.6 million from the third quarter with 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.