Datalink's Big Q4: Networking, Services Drive The Business While Storage Takes Back Seat

Datalink's Paul Lidsky

Datalink's transformation from a storage-focused solution provider to one whose business is driven by services and consulting is nearing completion, with networking and services the keystone to the company's future growth.

Datalink, Eden Prairie, Minn., on Wednesday said new focuses such as its Cisco business and its new security services are having a mixed impact on the company's revenue and earnings, but are helping lead the way for increased customer penetration.

The changes in Datalink's product mix come as customer spending patterns have changed, said Datalink President and CEO Paul Lidsky during the company's fourth fiscal quarter financial analyst conference call.

[Related: Datalink Acquires Bear Data For Cisco Expertise, West Coast Expansion]

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"IT purchases are no longer technology-driven, but more business-driven," Lidsky said. "And that's exactly what we're seeing in our business. Clients and prospects rarely initiated discussion with us by asking us about technology solutions. Instead, they described their business objectives and asked how technology can help them meet those goals."

That has led Datalink's business to shift from a storage focus to one that emphasizes a complete solution focus, Lidsky said.

"It's important to note that our growth continues to be fueled by our expanding product and services portfolio as well as our transition from selling point products to selling business outcomes," he said. "If we were still focused on selling exclusively storage, the business would be facing serious threats to its long-term viability. We made the right moves at the right time to continue to grow."

Cisco has become the key vendor for Datalink growth. Datalink had a relationship with Cisco for years, but that relationship was significantly enhanced by Datalink's late 2013 acquisition of Bear Data. In fact, Datalink's largest consulting services win to date was a $4.5 million data center deal closed by a former Bear Data account executive, he said.

"Networking and related services from Cisco continue to be our strongest growth driver," Lidsky said. "They increased the ways we can intercept IT spend and therefore form new client relationships that can lead to sales of other products and services."

Datalink's Cisco 2015 networking business rose 48 percent over the year before, he said.

Professional services -- including services related to data center relocation, cloud services management, disaster recovery and security -- were also important components of Datalink's 2015 business, Lidsky said. Professional services revenue grew 28 percent in fiscal 2015 over 2014.

"It also pulls through tens of millions of dollars in product sales every year," Lidsky said.

The year 2015 saw Datalink form its first security services practice, headed by Jason Rader, Datalink's national practice director for security services and former RSA chief security strategist and director of cyber threat intelligence, Lidsky said.

"We believe this practice will add an important revenue stream for both consulting services and product sales this year and in future years," he said.

While Datalink's storage business has become less of a growth driver, it is changing, Lidsky said. The solution provider's legacy storage business is showing the kind of weakness shown by major legacy storage vendors, but flash storage grew to 27 percent of total storage sales in 2015, up from 6 percent in 2014, he said. As a result, the company's storage margins have stabilized after falling in 2014, he said.

Datalink's converged infrastructure and hyper-converged infrastructure business rose 13 percent in 2015 over 2014 to reach $113 million, Lidsky said.

While the company's Cisco relationship was a strong part of that growth, he said the FlashStack converged infrastructure solution from Mountain View, Calif.-based all-flash storage vendor Pure Storage has also taken a strong lead in Datalink's business.

Datalink reported that revenue for its fourth fiscal quarter, which ended Dec. 31, was $208.8 million, up 12 percent over the $186.4 million the company reported for its fourth quarter of 2014.

For all of fiscal 2015, revenue was $764.8 million, up 21 percent over the $630.2 million reported for fiscal 2014.

For its fourth fiscal quarter, Datalink reported GAAP earnings of $2.7 million, or 12 cents per share, down from $4.5 million, or 20 cents per share, in the same period of last year. Full year 2015 earnings were $4.7 million, or 21 cents per share, compared with last year's $11.1 million, or 50 cents per share.

On a non-GAAP basis, earnings in the fourth quarter were $4.5 million, or 20 cents per share, compared with last year's $6.4 million, or 28 cents per share. For all of 2015, non-GAAP earnings were $12.4 million, or 56 cents per share, down from last year's $16.5 million, or 75 cents per share.