Storage VAR Datalink Q3 Revenue Up, Earnings down

Storage solution provider Datalink on Wednesday reported strong revenue growth and a dip in earnings for its third fiscal quarter of 2007, but was unable to clearly break out what part of its growth was due to its acquisition earlier this year of Midrange Computer Solutions. (MCSI).

Minneapolis-based Datalink acquired MCSI in February for $14 million in cash and Datalink stock.

For the third quarter, which ended September 30, Datalink reported revenue of $48.5 million, up 38 percent from the $33.2 million in the same period. Revenue in for the first nine months of the fiscal year were $127.1 million, up 18 percent from the $107.3 million recorded during the first nine months of 2006.

Datalink reported earnings of $884,000, or 7 cents per share during the third quarter. This compares to $1.3 million, or 11 cents per share, during the same period last year.

Greg Barnum, vice president of finance and CFO for Datalink, said that Datalink and MCSI are integrated to the point where it is hard to separate the revenue and earnings from the two. However, he estimated that organic Datalink revenue growth was about 10 percent in the quarter.

Barnum also said disk-based product sales accounted for 37 percent of revenue during the quarter, compared to 12 percent coming from tape-based products, 7 percent from software, 4 percent from SANs, and 40 percent from services.

During the earnings conference call, Charlie Westling, Datalink's president and CEO, attributed the results of the quarter to a 17-percent increase in gross profit dollars per employee, opening of nine new customers which separately generated at least $100,000 in revenue for the quarter, and completion of the integration of MCSI.

Overall gross profit margin in the third quarter was 25.9 percent, up slightly from the 25.2 percent reported in the second quarter thanks to an increase in professional services revenue.

Datalink ended the quarter with a backlog of $25 million, down from $30 million at the end of the second quarter, due to soft bookings in August and early September, Westling said.

For the current quarter, Westling said Datalink expects revenue to between $47 million and $52 million, with earnings to be between 6 cents per share and 11 cents per share. "From an industry perspective, there's still some level of caution," he said. "But normal seasonal factors will kick in."

Scott Robinson, CTO of Datalink, said in response to an analyst's question about the state of the storage market, that the business has traditionally been impacted by falling prices and higher capacity requirements, but that the impact from data de-duplication will increase over time.

De-duplication, also called "de-dupe," removes duplicate information as data is backed up or archived. It can be done on the file level, where duplicate files are replaced with a marker pointing to one copy of the file, and/or at the sub-file or byte level, where duplicate bytes of data are removed, resulting in a significant decrease in storage capacity requirements.

Robinson also said that server virtualization has turned out to be a strong driver in terms of storage consolidation. "So it has potential to impact capacity over time," he said.

Westling responded to a CMP Channel reporter's question about channel mergers and acquisitions by saying that Datalink is continuing to focus on its MCSI acquisition, and cannot speculate on future purchases. "There is consolidation in the industry," he said. "We will continue to look at opportunities."

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