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TMCNet:  Datalink Reports 2013 Fourth Quarter and Year-End Operating Results

[February 20, 2014]

Datalink Reports 2013 Fourth Quarter and Year-End Operating Results

EDEN PRAIRIE, Minn. --(Business Wire)--

Datalink (Nasdaq:DTLK), a leading provider of data center infrastructure and services, today reported results for its fourth quarter and the year ended December 31, 2013. Revenues for the quarter ended December 31, 2013, increased 18% to a record $173.4 million compared to $147.3 million for the quarter ended December 31, 2012. Revenues for the year ended December 31, 2013, increased 21% to a record $594.2 million compared to $491.2 million for the year ended December 31, 2012. For the year, product revenues increased 17% to $373.0 million and services revenues increased 28% to $221.2 million.

The company's results for the quarter and year ended December 31, 2013, include the results of operations from the acquisition of substantially all of the assets of Strategic Technologies, Inc. ("StraTech"), which was completed on October 4, 2012. The results for the fourth quarter of 2013 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 2013 fourth quarter and year end was approximately $0.05 per share and $0.04 per share, respectively.

The fourth quarter of 2013 also includes a $611,000 or $0.02 per share charge for the write-down of the account receivable from StraTech to its estimated realizable value. After the end of the quarter, the company reached a settlement agreement with the former owners of StraTech. Under the terms of the agreement, 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. Based upon the value of the Datalink common stock on the date of the agreement, the company will record income before tax of approximately $877,000 or $0.02 per share in the first quarter of 2014. The net impact on our financial statements between fourth quarter of 2013 and first quarter of 2014 will be a net gain of approximately $266,000.

GAAP Results
On a GAAP basis, the company reported net earnings of $5.2 million or $0.24 per diluted share for the fourth quarter ended December 31, 2013. This compares to net earnings of $3.2 million or $0.18 per diluted share in the fourth quarter of 2012. For the year ended December 31, 2013, the company reported net earnings of $10.0 million or $0.52 per diluted share, compared to net earnings of $10.5 million, or $0.60 per diluted share, for the year ended December 31, 2012. The decrease in net earnings per share for the year is primarily due to the amortization of intangible assets related to the acquisition of substantially all of the assets of StraTech, the additional dilution from the follow-on offering in August 2013, and the charge relating to the write down of the receivable from StraTech.

Non-GAAP Results
Non-GAAP net earnings for the fourth quarter of 2013 were $7.4 million, or $0.34 per diluted share, compared to $5.6 million, or $0.31 per diluted share, in the fourth quarter of 2012. For the year ended December 31, 2013, the company reported non-GAAP net earnings of $17.9 million, or $0.93 per diluted share, compared to $15.3 million, or $0.88 per diluted share, for the year ended December 31, 2012. A detailed reconciliation between GAAP and non-GAAP information is contained in the tables included herein.

Fourth-quarter and year-end highlights include:

  • Record fourth quarter revenues exceeding initial guidance, as well as record annual revenues.
  • A 17% year-over-year increase in product revenues to a record $373.0 million, including a record number of converged data center infrastructure sales.
  • A 28% year-over-year increase in total services revenues to a record $222.0 million, including 26% and 39% increases in customer support and professional services, respectively.
  • An expansion of the company's Advanced Services portfolio spanning data center relocation and migration services, cloud enablement and related IT-as-a-service consulting, and business continuity/disaster recovery.
  • Continued growth in customers who did over $1 million of business with the company, up from 102 in 2012 to 124 in 2013.
  • Generated $15.3 million of cash from operations in 2013, contributing to an end-of-year total of more than $76.1 million of cash and investments.

Outlook
Datalink projects revenues of $152.0 million to $162.0 million for the first quarter of 2014 compared to $133.6 million for the first quarter of 2013. This represents an increase in expected revenues of between 14% and 21%, based on the company's current backlog, sales pipeline, and historical trends. The company expects first quarter 2014 net earnings to be between $0.08 and $0.13 per diluted share on a GAAP basis, and net earnings of between $0.14 and $0.19 per diluted share on a non-GAAP basis. This compares to net earnings of $0.06 per diluted share and $0.18 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, and the related effects on income taxes. The company estimates this total effect will be approximately $0.06 per diluted share for the first quarter of 2013.

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) 318-8618. Participants will be asked to identify the Datalink conference call and provide the designated identification number (54485769). 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, 2012, 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 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 Twelve Months Ended
December 31, December 31,
2013 2012 2013 2012
Net sales:
Products $ 111,553 $ 97,455 $ 373,008 $ 319,041
Services 61,815 49,843 221,176 172,161
Total net sales 173,368 147,298 594,184 491,202
Cost of sales:
Cost of products 85,752 76,102 291,671 248,286
Cost of services 46,957 38,541 168,655 130,890
Total cost of sales 132,709 114,643 460,326 379,176
Gross profit 40,659 32,655 133,858 112,026
Operating expenses:
Sales and marketing 17,551 13,724 60,842 48,553
General and administrative 4,948 4,647 20,729 18,227
Engineering 7,126 6,270 27,536 22,974
Integration and transaction costs 15 236 95 359
Amortization of intangibles 1,671 2,338 7,251 4,195
Total operating expenses 31,311 27,215 116,453 94,308
Earnings from operations 9,348 5,440 17,405 17,718
Loss on settlement related to StraTech acquisition (611 ) - (611 ) -
Interest income (expense), net 19 2 (107 ) 3
Earnings before income taxes 8,756 5,442 16,687 17,721
Income tax expense 3,531 2,210 6,642 7,186
Net earnings $ 5,225 $ 3,232 $ 10,045 $ 10,535
Earnings per common share:
Basic $ 0.24 $ 0.19 $ 0.53 $ 0.62
Diluted $ 0.24 $ 0.18 $ 0.52 $ 0.60
Weighted average common shares outstanding:
Basic 21,516 17,348 19,078 17,114
Diluted 21,991 17,866 19,338 17,491
DATALINK CORPORATION BALANCE SHEETS (In thousands, except share data) � � � December 31, � � December 31, 2013 2012 (Unaudited) Assets Current assets Cash and cash equivalents $ 24,871 $ 10,315 Short term investments 51,214 - Accounts receivable, net 131,246 144,780 Receivable due from seller of StraTech acquisition - 3,307 Inventories, net 4,120 2,554 Current deferred customer support contract costs 89,304 87,052 Inventories shipped but not installed 16,000 8,784 Income tax receivable - 2,430 Other current assets � 1,279 � 852 Total current assets � 318,034 � 260,074 Property and equipment, net 6,722 6,082 Goodwill 37,780 37,780 Finite-lived intangibles, net 13,509 20,760 Deferred customer support contract costs non-current 49,044 40,771 Deferred tax asset 7,116 4,471 Long term lease receivable 510 - Other assets � 393 � 455 Total assets $ 433,108 $ 370,393 � Liabilities and Stockholders' Equity Current liabilities Line of credit $ - $ 6,000 Floor plan line of credit 19,977 - Accounts payable 61,296 84,716 Accrued commissions 7,133 8,531 Accrued sales and use tax 2,067 3,489 Accrued expenses, other 8,033 6,027 Income tax payable 11,586 - Current deferred taxes 1,694 9,034 Customer deposits 4,240 2,894 Current deferred revenue from customer support contracts 110,567 105,167 Other current liabilities � 187 � 157 Total current liabilities 226,780 226,015 Deferred revenue from customer support contracts non-current 59,576 48,167 Other liabilities non-current � 956 � 828 Total liabilities � 287,312 � 275,010 � � Stockholders' equity Common stock, $.001 par value, 50,000,000 shares authorized, 22,785,422 and 18,726,723 shares issued and outstanding as of December 31, 2013 and December 31, 2012, respectively 23 19 Additional paid-in capital 111,239 70,875 Retained earnings � 34,534 � 24,489 Total stockholders' equity � 145,796 � 95,383 Total liabilities and stockholders' equity $ 433,108 $ 370,393 �
DATALINK CORPORATION RECONCILIATION BETWEEN GAAP AND NON-GAAP NET INCOME (In thousands, except per share data) (Unaudited) � � � � � � � � Three Months Ended Twelve Months Ended December 31, December 31, 2013 2012 2013 2012 � � � � Earnings from operations on a GAAP basis $ 9,348 � $ 5,440 � $ 17,405 � $ 17,718 � GAAP operating margin 5.4 % 3.7 % 2.9 % 3.6 % � Non-GAAP Adjustments: Purchase accounting adjustment to StraTech deferred revenue and cost, net � 66 � � 849 � � 1,051 � � 874 � Total gross margin adjustments 66 849 1,051 874 � Stock based compensation expense included in sales and marketing 285 97 1,228 640 Stock based compensation expense included in general and administrative 396 213 1,672 1,341 Stock based compensation expense included in engineering 450 224 1,149 594 Integration and transaction costs 15 236 95 359 Amortization of intangible assets � 1,671 � � 2,339 � � 7,251 � � 4,196 � Total operating expense adjustments � 2,817 � � 3,109 � � 11,395 � � 7,130 � � Non-GAAP earnings from operations 12,231 9,398 29,851 25,722 Non-GAAP operating margin 7.1 % 6.4 % 5.0 % 5.2 % � Interest income (expense), net 19 2 (107 ) 3 Income tax expense impact including Non-GAAP items � 4,876 � � 3,807 � � 11,838 � � 10,419 � � Non-GAAP net earnings $ 7,375 � $ 5,593 � $ 17,906 � $ 15,306 � � Non-GAAP net earnings per share - Basic $ 0.34 � $ 0.32 � $ 0.94 � $ 0.89 � Non-GAAP net earnings per share - Diluted $ 0.34 � $ 0.31 � $ 0.93 � $ 0.88 � � Shares used in non-GAAP per share calculation - Basic � 21,516 � � 17,348 � � 19,078 � � 17,114 � Shares used in non-GAAP per share calculation - Diluted � 21,991 � � 17,866 � � 19,338 � � 17,491 � �
DATALINK CORPORATION STATEMENT OF CASH FLOWS (In thousands) (Unaudited) � � � � Twelve Months Ended December 31, 2013 2012 � Cash flows from operating activities: Net earnings $ 10,045 $ 10,535 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: � Change in fair value of trading securities (187 ) - Provision (benefit) for bad debts 115 (6 ) Depreciation 2,102 1,627 Amortization of finite lived intangibles 7,251 4,195 Loss on settlement related to StraTech acquisition 611 - Deferred income taxes (9,985 ) 262 Stock based compensation expense 4,049 2,576 Changes in operating assets and liabilities: Accounts receivable, net 12,909 (31,544 ) Inventories (8,782 ) 177 Deferred costs/revenues/customer deposits, net 7,630 4,440 Accounts payable (23,420 ) 2,943 Accrued expenses (814 ) 4,629 Income tax payable (receivable) 14,016 (2,025 ) Other � (270 ) � � � 1,007 � Net cash provided by (used in) operating activities � 15,270 � � � � (1,184 ) � Cash flows from investing activities: Purchases of trading securities, net (51,027 ) - Maturities of investments - 1,192 Sales of investments - 2,294 Purchases of property and equipment (2,742 ) (3,824 ) Payment for acquisitions, net of cash acquired � - � � � � (13,172 ) Net cash used in investing activities � (53,769 ) � � � (13,510 ) � Cash flows from financing activities: Net borrowings (payments) under line of credit (6,000 ) 6,000 Proceeds from floorplan line of credit 19,977 - Proceeds from stock offering 39,021 - Excess tax from stock compensation 885 780 Proceeds from issuance of common stock from option exercise 252 347 Tax withholding payments reimbursed by restricted stock � (1,080 ) � � � (1,065 ) Net cash provided by financing activities � 53,055 � � � � 6,062 � � Increase in cash and cash equivalents 14,556 (8,632 ) Cash and cash equivalents, beginning of period � 10,315 � � � � 18,947 � Cash and cash equivalents, end of period $ 24,871 � � � $ 10,315 � � Supplemental cash flow information: Cash paid for income taxes $ 1,738 $ 8,191 Cash received for income tax refunds $ 11 $ 25 Cash paid for interest expense $ 154 $ 25 � Supplemental non-cash investing and financing activities: Non-cash stock issued as consideration for acquisition $ - $ 2,025 Non-cash stock received for settlement of StraTech acquisition $ 2,647 $ - �


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