Datalink Reports 2011 Fourth Quarter and Year End Operating Results

CHANHASSEN, Minn.--(BUSINESS WIRE)--

Datalink DTLK, a leading provider of data center infrastructure and services, today reported results for its fourth quarter and year that ended December 31, 2011. Revenues for the quarter ended December 31, 2011, increased 26% to $114.7 million compared to $91.0 million for the prior-year period. Revenues for year ended December 31, 2011, increased 29% to $380.0 million compared to $293.7 million for the year ended December 31, 2010.

GAAP Results
On a GAAP basis, the company reported net earnings of $2.6 million or $0.15 per diluted share for the fourth quarter ended December 31, 2011. This compares to net earnings of $2.4 million or $0.19 per diluted share in the fourth quarter of 2010. For the year ended December 31, 2011, the company reported net earnings of $9.8 million or $0.61 per diluted share, compared to net earnings of $2.3 million, or $0.18 per basic and diluted share, for the year ended December 31, 2010.

Non-GAAP Results
Non-GAAP net earnings for the fourth quarter of 2011 were $4.1 million, or $0.24 per diluted share, compared to non-GAAP net earnings of $3.1 million, or $0.24 per diluted share, in the fourth quarter of 2010. For the year ended December 31, 2011, the company reported non-GAAP net earnings of $13.0 million, or $0.80 per diluted share, compared to net earnings of $5.4 million, or $0.41 per diluted share, for the year ended December 31, 2010. A detailed reconciliation between GAAP and non-GAAP information is contained in the tables included herein.

The company's results for the quarter and year ended December 31, 2011 include:

• The additional 3.3 million common shares issued in connection with the follow-on stock offering in March 2011. The dilution on GAAP and non-GAAP earnings from the additional shares outstanding on the 2011 fourth quarter and full year's earnings was approximately $0.05 per share and $0.16 per share, respectively.
• The results of operations from the acquisition of Midwave Corporation, which was completed on October 3, 2011. Excluding Midwave, revenues for the fourth quarter and year ended December 31, 2011, would have increased approximately 12% and 25%, respectively compared to the prior year periods. The acquisition had no impact on GAAP or non-GAAP earnings in the fourth quarter of 2011.
• For the fourth quarter GAAP results, the benefit of the receipt of a $553,000, or approximately $0.02 per share early termination payment relating to the earn-out under the October 2009 purchase agreement with Cross Telecom. Under the terms of the purchase agreement, Cross was required to expend $600,000 with Datalink for goods and services for the period October 2011 through September 2012. Cross elected to terminate the commitment with a lump sum buy-out payment in October 2011. The benefit from this payment is not included in Non-GAAP earnings for the fourth quarter of 2011.

Paul Lidsky, Datalink's president and CEO, commented, “2011 was a record year for Datalink. We reported revenues of $380 million and our highest earnings ever. In addition, the $114.7 million of revenues in the fourth quarter of 2011 is a quarterly record for Datalink. We also reported our eleventh consecutive quarter of non-GAAP net earnings.”

Other significant accomplishments for 2011 and the fourth quarter include:

• A record $77.9 million in product revenues for the quarter, which represents a 40% increase over third quarter and a 32% increase over the same period in 2010. In addition, service revenues were a record $36.8 million in the fourth quarter. These increases reflect both the acquisition of Midwave Corporation and Datalink's ability to continue to close multi-million dollar accounts during the fourth quarter.
• Continued growth in multi-million dollar accounts among Global 1000 companies. In 2011, the company saw 77 customers purchase over $1 million of product and services from Datalink as compared to 55 customers in 2010. In addition, the company acquired 290 new customers in 2011 as compared to 272 in 2010.
• A follow on offering 3.3 million shares that closed in March 2011, generating approximately $17 million of cash to be primarily used for acquisitions. On October 3, 2011, the company used these funds to acquire the assets of Midwave Corporation, doubling its footprint in the Twin Cities and making Datalink the dominant data center services and infrastructure provider in the region. The acquisition also doubled the company's Cisco technology and services revenues, expanded its managed services portfolio with the addition of a data center infrastructure monitoring service, added an established security practice including product, services and consulting, and doubled the size of Datalink's consulting services team. While the acquisition was only slightly accretive in its first quarter of operations and as expected did not generate enough earnings to offset the dilution from the follow-on offering, the company expects the acquisition to have a positive earnings impact once all of the synergies are recognized by the second half of 2012.
• Achievement of the industry's first NetApp Specialization in "Data Center - FlexPod" Unified Architectures certification. The new specialization recognizes Datalink as having fulfilled one of the most rigorous levels of solution competency recognized by NetApp and includes NetApp, Cisco and VMware top certification requirements.
• Significant momentum for the company's virtualized data center (VDC) solutions, with 22 solution projects sold in Q4 compared to 6 in the comparable period in 2010, and 89 deals for the whole year compared to 33 in 2010.
• Exiting the quarter with a healthy and strong balance sheet with working capital of $37.9 million, cash and investments of $22.4 million, and continued debt-free status.

“Datalink's collective accomplishments during 2011 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,” Lidsky said. “This allowed us to leverage our fixed expenses culminating in a 2011 non-GAAP operating profit margin of 5.8% and 2011 non-GAAP operating earnings of $21.9 million as compared to a 2010 non-GAAP operating profit margin of 3.3% and 2010 non-GAAP operating income of $9.6 million.

“In addition, our strong 2011 performance left us with a record backlog going into the first quarter and accelerated activity that has carried over with strong sales in the first months of Q1,” Lidsky added. “As we exit the year, we continue to see increasing 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 deliver unified platforms to our customers should fuel growth in 2012.”

Outlook
With the strong start to the new year, Datalink's first quarter guidance suggests a 17% to 24% year-over-year revenue increase in fiscal 2012. Based on the company's current backlog and sales pipeline, the company projects revenues of $108 million to $116 million for Q1 2012 compared to $85.7 million for Q1 2011. In addition, Datalink's first quarter operating expenses are typically higher than other quarters. Therefore the company expects first quarter 2012 net earnings to be between $0.07 and $0.12 per diluted share on a GAAP basis, and net earnings of between $0.13 and $0.18 per diluted share on a non-GAAP basis. This compares to net earnings of $0.12 per diluted share and $0.16 per diluted share on a GAAP and non-GAAP basis, respectively, for the same period in 2011.

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 $0.06 per diluted share for the first quarter of 2012.

Effect of Accounting Change
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 the company now recognize product revenues upon shipment versus upon installation under its old revenue recognition method. Accordingly, the company's fourth quarter and twelve months of 2011 results reflects this new revenue recognition policy. The company's revenue for 2011 includes $8.6 million of revenues that would have been recognized in the fourth quarter of 2010 if the company had been recognizing revenue upon shipment in 2010. These revenues were recognized in the first and second quarters of 2011.

Conference Call and Webcast Today
Datalink will hold a conference call at 7:30 a.m. Central Standard Time, during which Datalink's president and chief executive officer, Paul Lidsky, and vice president of finance and chief financial officer, Greg Barnum, will discuss company results and provide a business overview. Participants can access the conference call by dialing (877) 277-9804. Participants will be asked to identify the Datalink conference call and provide the designated identification number (42977576). A live Webcast of the conference call can be heard via Datalink's 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 networks, and business continuity. 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 anticipated 2011 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, including, but not limited to: the level of continuing demand for storage, including the effects of current economic and credit conditions; 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; revenue recognition policies that may unpredictably defer reporting of our revenues; our ability to hire and retain key technical and sales personnel; our dependence on key suppliers; our ability to adapt to rapid technological change; risks associated with integrating possible future acquisitions; fluctuations in our quarterly operating results; future changes in applicable accounting rules; and volatility in our stock price. Further, our revenues for any particular quarter are not necessarily reflected by our backlog of contracted orders, which also may fluctuate unpredictably. We cannot assure that we can grow or maintain our revenue and backlog from current levels.

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, early termination payments related to the Cross acquisition 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,
			2011					2010				2011					2010
Net sales:
Products			$	77,932				$	59,092			$	245,743				$	180,424
Services				36,780					31,948				134,284					113,255
Total net sales				114,712					91,040				380,027					293,679
Cost of sales:
Cost of products				60,228					46,989				188,384					140,984
Cost of services				27,493					23,895				100,978					83,951
Amortization of intangibles				1,053					277				1,053					1,108
Total cost of sales				88,774					71,161				290,415					226,043
Gross profit				25,938					19,879				89,612					67,636
Operating expenses:
Sales and marketing				11,402					8,318				38,723					32,353
General and administrative				4,142					3,406				15,468					14,092
Engineering				5,444					3,666				17,535					15,652
Other income				(553	)				-				(1,127	)				(503	)
Integration and transaction costs				329					-				454					581
Amortization of intangibles				619					336				1,766					1,483
				21,383					15,726				72,819					63,658
Earnings from operations				4,555					4,153				16,793					3,978
Interest income				28					3				50					15
Interest expense				(14	)				-				(40	)				(1	)
Earnings before income taxes				4,569					4,156				16,803					3,992
Income tax expense				1,962					1,739				6,958					1,690
Net earnings			$	2,607				$	2,417			$	9,845				$	2,302
Net earnings per common share:
Basic			$	0.16				$	0.19			$	0.62				$	0.18
Diluted			$	0.15				$	0.19			$	0.61				$	0.18
Weighted average common shares outstanding:
Basic				16,736					12,855				15,803					12,801
Diluted				17,206					13,054				16,213					12,981

DATALINK CORPORATION
BALANCE SHEETS
(In thousands, except share data)
			December 31,				December 31,
			2011				2010
			(Unaudited)
Assets
Current assets
Cash and cash equivalents			$	18,947			$	8,988
Short term investments				3,486				-
Accounts receivable, net				102,289				57,779
Inventories				1,736				2,210
Current deferred customer support contract costs				62,901				48,715
Inventories shipped but not installed				9,779				7,191
Income tax receivable				405				1,064
Other current assets				1,169				607
Total current assets				200,712				126,554
Property and equipment, net				3,453				2,126
Goodwill				32,446				23,146
Finite life intangibles, net				9,035				5,219
Deferred customer support contract costs non-current				28,785				18,742
Deferred tax asset				3,159				-
Other assets				361				285
Total assets			$	277,951			$	176,072
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable			$	63,292			$	28,749
Accrued commissions				5,069				3,546
Accrued sales and use tax				2,574				1,414
Accrued expenses, other				5,209				3,427
Current deferred tax liability				7,459				3,723
Customer deposits				2,145				2,209
Current deferred revenue from customer support contracts				76,998				61,571
Other current liabilities				85				279
Total current liabilities				162,831				104,918
Deferred income tax liability				-				203
Deferred revenue from customer support contracts non-current				34,740				23,284
Other current liabilities non-current				195				212
Total liabilities				197,766				128,617
Stockholders' equity
Common stock, $.001 par value, 50,000,000 shares authorized, 17,899,171 and 13,569,533 shares issued and outstanding as of December 31, 2011 and December 31, 2010, respectively				18				14
Additional paid-in capital				66,212				43,332
Retained earnings				13,955				4,109
Total stockholders' equity				80,185				47,455
Total liabilities and stockholders' equity			$	277,951			$	176,072

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,
			2011					2010				2011					2010
Net earnings on a GAAP basis			$	2,607				$	2,417			$	9,845				$	2,302
Adjustments:
Amortization of intangible assets			$	1,053				$	277			$	1,053				$	1,108
Acquisition accounting adjustment to Incentra and MCSI deferred revenue, net				15					71				108					853
Total gross margin adjustments				1,068					348				1,161					1,961
Stock based compensation expense included in sales and marketing				389					195				782					509
Stock based compensation expense included in general and administrative				351					395				1,259					754
Stock based compensation expense included in engineering				143					100				516					329
Other income from Cross buyout				(553	)				-				(553	)				-
Integration and transaction costs				329					-				454					581
Amortization of acquisition intangible assets				619					336				1,766					1,483
Total operating expense adjustments				1,278					1,026				4,224					3,656
Income tax expense				901					694				2,228					2,538
Non-GAAP net earnings			$	4,052				$	3,097			$	13,002				$	5,381
Non-GAAP net earnings per share - Basic			$	0.24				$	0.24			$	0.82				$	0.42
Non-GAAP net earnings per share - Diluted			$	0.24				$	0.24			$	0.80				$	0.41
Shares used in non-GAAP per share calculation - Basic				16,736					12,855				15,803					12,801
Shares used in non-GAAP per share calculation - Diluted				17,206					13,054				16,213					12,981

DATALINK CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
			Twelve Months Ended
			December 31,
			2011					2010
Cash flows from operating activities:
Net earnings			$	9,845				$	2,302
Adjustments to reconcile net earnings to net cash provided by operating activities:
Provision for bad debts				84					73
Depreciation				1,045					945
Amortization of finite lived intangibles				2,819					2,591
Deferred income taxes				374					1,755
Stock based compensation expense				2,557					1,592
Changes in operating assets and liabilities, net of effects of acquisitions
Accounts receivable				(33,019	)				(13,742	)
Inventories				(2,114	)				1,133
Deferred costs/revenues/customer deposits, net				2,485					2,234
Accounts payable				25,610					(2,276	)
Accrued expenses				3,605					1,387
Income tax receivable				659					9
Other				(625	)				(528	)
Net cash provide by (used in) operating activities				13,325					(2,525	)
Cash flows from investing activities:
Proceeds from short term investments				6,492					2,730
Purchase of short term investments				(9,978	)				-
Payment for acquisitions				(17,542	)				-
Purchases of property and equipment				(1,102	)				(1,263	)
Net cash provided by (used in) investing activities				(22,130	)				1,467
Cash flows from financing activities:
Proceeds from stock offering, net of offering costs				17,454					-
Payment of note payable due to seller of acquired business				-					(3,000	)
Excess tax from stock compensation and restricted stock vesting				276					(16	)
Proceeds from issuance of common stock from option exercise				1,034					364
Tax withholding payments reimbursed by restricted stock				-					(203	)
Net cash provided by (used in) financing activities				18,764					(2,855	)
Increase (decrease) in cash and cash equivalents				9,959					(3,913	)
Cash and cash equivalents, beginning of period				8,988					12,901
Cash and cash equivalents, end of period			$	18,947				$	8,988
Supplemental cash flow information:
Cash paid for income taxes			$	5,934				$	509
Cash received for income tax refunds			$	469				$	568
Supplemental disclosure of non-cash investing activities:
Non-cash stock issued as consideration for acquisition			$	1,564				$	-