Datalink: FlexPod, Converged Infrastructure, Services Create Great 2013 Financials

Datalink, one of the few publicly listed midrange solution providers, on Thursday reported record revenue and solid earnings growth for its fiscal fourth-quarter 2013 and full-year 2013.

The Eden Prairie, Minn.-based solution provider also offered an optimistic outlook for growth in both revenue and earnings for the first quarter of 2014, with earnings potentially doubling over last year.

For the fourth quarter of 2013, which ended Dec. 31, Datalink reported revenue of $173.4 million, up 18 percent over the fourth quarter of 2012 and a new quarterly high for the company. That helped bump full-year 2013 revenue to $594.2 million, up 21 percent over the $491.2 million reported for 2012. Full-year revenue was a record for the company, Datalink said.

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Datalink reported fourth-quarter 2013 earnings of $5.2 million, or 24 cents per share, up from last year's $3.2 million, or 18 cents per share, on a GAAP basis.

For all of 2013, GAAP earnings reached $10.0 million, or 52 cents per share, down from last year's $10.5 million, or 60 cents per share. Datalink said the drop in earnings on an annual basis was due to the amortization of intangible assets related to the acquisition of substantially all of the assets of StraTech, as well as a write-down of accounts receivables related to StraTech.

On a non-GAAP basis, Datalink reported fourth-quarter 2013 earnings of $7.4 million, or 34 cents per share, compared with $5.6 million, or 31 cents per share, in the fourth quarter of 2012. For all of 2013, earnings on a non-GAAP basis were $17.9 million, or 93 cents per share, up from the $15.3 million, or 88 cents per share, of a year ago.

For Datalink, while product revenue still accounts for a majority of the company's business, its services revenue is growing much faster, said CFO Greg Barnum during the company's Thursday financial conference call.

Product revenue still accounts for the majority of Datalink's business. Barnum said Datalink's product revenue for all of 2013 reached $373.0 million, compared with services revenue of $222.0 million.

However, while product revenue was up 17 percent year-over-year, Datalink saw its customer support revenue increase 26 percent and its professional services revenue increase 39 percent over the same time period, Barnum said.

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"This trend of our professional services growing faster than product is important as services carry considerably higher gross margins than product, and will help offset any decline in product margins due to changes in the competitive environment and product mix changes," Barnum said.

In terms of Datalink's overall revenue mix for the fourth quarter, 36 percent came from storage, 18 percent from networking and servers, 9 percent from software, 1 percent from tape, and 36 percent from services, he said.

Storage accounted for 31 percent of revenue in the third quarter of 2013, while servers and networking accounted for 20 percent, Barnum said. The higher mix of storage in the fourth quarter helped increase Datalink's margins from 21.5 percent in the third quarter to 23.5 percent in the fourth quarter, he said.

Paul Lidskey, Datalink president and CEO, said there were several factors that contributed to the company's growth in 2013. These included an emphasis on converged infrastructure, which let the company sell into increasingly complex data center environments; growing partnerships with its primary vendor partners Cisco and NetApp; a broader portfolio of products and services; and an expansion of higher-margin professional services, Lidskey said.

Datalink in 2013 generated $534 million in revenue from 1,786 repeat customers, compared with $447 million from 1,666 repeat customers in 2012, due in part from the 2012 acquisition of StraTech, Lidskey said.

The company also generated $60 million in revenue from 440 new customers in 2013 compared with $44.6 million from 452 new customers in 2012, Lidskey said.

"So while we had 3 percent fewer new customers, these same customers spent 35 percent more," he said. "Keep in mind that this represents only one year of spend, and many of our projects have multiyear road maps where we expect to bring in additional revenue in the future."

Converged infrastructure, particularly sales based on the joint NetApp-Cisco FlexPod reference architecture, is an increasingly important part of Datalink's business.

Lidskey said Datalink in 2013 closed 98 converged infrastructure deals totaling about $91 million, or about one of every six dollars of revenue for the company. That was up from 83 converged infrastructure deals totaling $78 million in 2012.

Two-thirds of those deals were based on the FlexPod infrastructure with components from NetApp, Cisco and VMware, with sales up 85 percent over last year, Lidskey said.

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Datalink's 2013 NetApp revenue rose 22 percent over the prior year to reach $180 million, of which 25 percent came from FlexPod sales, Lidskey said. During that time, Cisco revenue increased 75 percent to $105 million, nearly all of which came from converged infrastructure sales, he said.

"This shows why we have put so much effort into our Cisco business despite the margin pressures it presents," he said. "With its combination of compute, network, storage and virtualization components, Cisco’s UCS and Nexus switch offerings are at the heart of the converged data center environment."

On the service side, Datalink in 2013 made several significant investments that it expects to lead to increasing growth in the future, Lidskey said.

These included the hiring of Steve Zipperman, the former Global Services Director in EMC's consulting division, to fill the new position of general manager of advanced services; the expansion of the advanced services team from 30 people to 48 people; the establishment of three new practice areas, including data center transformation, cloud service management and IT resiliency; and the hiring of a new national director of sales for advanced services, he said.

During the question-and-answer part of the call, when asked about who Datalink's primary competitors are, Lidskey said it was typically the manufacturers.

"We have done a very good job of competing against them in our data center wins because we have a wider range of services offerings," he said.

Datalink also competes to a lesser extent with smaller solution providers, who focus more on niche offerings and cannot match Datalink's data center experience, Lidskey said.

"And we can do more for our customers [than the smaller providers]. ... We are able to have a complete conversation around data centers," he said.

Looking forward, Datalink expects first-quarter 2014 revenue of $152.0 million to $162.0 million, compared with $133.6 million for the first quarter of 2013, or an increase of between 14 percent and 21 percent.

Earnings for the quarter on a per-share basis are expected to be between 8 cents and 13 cents on a GAAP basis compared with 6 cents in the first quarter of 2013. On a non-GAAP basis, earnings of 14 cents to 19 cents are expected, which could be down from last year's 18 cents per share, thanks to expenses related to the StraTech acquisition.