Datalink Q2: Big Growth On Services, New Data Center Techs

Datalink caught investors by surprise Thursday when it reported better-than-expected second-quarter results.

The Eden Prairie, Minn.-based midrange solution provider cited increasing sales of high-margin services and a push by customers to adopt new IT solutions including flash storage, converged infrastructure and the cloud as a big part of its growth and profitability during the quarter.

Datalink reported second-quarter revenue of $159.4 million, up about 8 percent in the year-ago period.

[Related: EMC's Tucci Addresses Question Of Potential VMware Spinoff On Q2 Financial Call]

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Datalink reported GAAP earnings of $3.6 million, or 16 cents per share, compared to earnings of $2.9 million or $0.16 per share in second-quarter 2013. Non-GAAP earnings were $4.9 million, or $0.22 per diluted share, compared to last year's earnings of $4.7 million, or $0.26 per diluted share.

The results exceeded Wall Street expectations of $149.6 million in revenue and non-GAAP earnings of $0.13 cents per share.

The company's shares closed up about 20 percent on Friday to $11.97.

Paul Lidsky, Datalink’s president and CEO, said during the company's quarterly earnings call with analysts Thursday that the strong results came from a variety of reasons.

"Some of this growth stems from closing sales that we expected in the first quarter, but that did not materialize until the second quarter because customers were spending extra time evaluating newer technologies like private and hybrid cloud and flash and hybrid converged storage."

Datalink CFO Greg Barnum said services were a big contributor to the solution provider's success.

Professional services accounted for about 8 percent of Datalink's total revenue in the first six months of 2014 compared to 7 percent during the same period as last year, Barnum said.

"This growth is a key focus area as we need these higher-margin professional service revenues to increase as a percentage of our total revenues in order to offset any product margin pressures," he said.

NEXT: Margins Up, Server And Networking Up; Storage Down, And That's Good

While Datalink's margins continue to fluctuate quarter to quarter, the company expects its product margins to continue to fall, Barnum said.

"As we have stated in the past, our strategy over time is to offset these declines in product margins by selling more services, which carry higher gross margins," he said.

Lidsky said Datalink, which depended primarily on the storage market for sales and margins in the past, is continuing to see its networking and server business outgrow its storage sales.

In the second quarter, storage made up 27 percent of Datalink's total revenue, compared to 36 percent last year, while networking and server revenue accounted for 23 percent, up from last year's 20 percent, Lidsky said. Total services as a part of revenue hit 38 percent, up from last year's 37 percent, he said.

"While we are pleased with this growth in our server and networking business and its alignment with our growth strategies, this shift in revenues will continue to impact overall margins, but at the same time, drive significant business expansion," he said.

Datalink said Wednesday that it is NetApp's top partner in the Americas for FlexPod converged data center infrastructure and for clustered Data ONTAP sales for the vendor's fiscal 2014 year.

Lidsky said that ranking validates the importance of converged infrastructure to his company's business.

"Another validation of our strategy has been seen in the continued sales growth of converged data center technology, which integrates networking, computing, storage and in some cases, virtualization," he said. "These solutions generated $25 million in product revenue from 26 different customers in the second quarter of 2014."

Datalink also saw its flash storage business boom in the second quarter, with sales of flash storage solutions from NetApp, EMC, Pure Storage, Nimble Storage and Tintri helping triple its flash sales pipeline over the first quarter of 2014, Lidsky said.

"We expect this technology to continue to be a catalyst for spending in 2014 and beyond and once again create more opportunities for additional services sales," he said.

During the question-and-answer period, Lidsky said in response to an analyst question that the overwhelming majority of Datalink's discussions with customers is around next-generation data center architectures.

NEXT: Looking Ahead To More Growth

"It may be virtual data centers, it may be a discussion about a private or hybrid cloud, it may be about introducing flash technology," Lidsky said. "But most of our work is about doing something transformational with our customers and that makes up most of the conversations that we have and I would say a majority of our pipeline."

Datalink in the first six months of 2014 saw its base of repeat customers grow 8 percent over last year to 1,918 customers, and spending by those customers grew 10 percent, Lidsky said. "And the number of customers spending more than $1 million with us climbed 15 percent from 59 to 68 as we succeeded in selling large, strategic data center projects," he said. "We saw a similar increase this quarter-over-quarter."

Looking forward, Datalink expects its strong growth to continue.

Datalink is estimating its third quarter 2013 revenue will come in at between $150 million and $160 million, up between 7 percent and 15 percent from third quarter 2013 revenue of $139.6 million. The company expects third quarter 2014 GAAP earnings to be between 11 cents and 17 cents per share compared to 4 cents a share last year, while non-GAAP earnings per share are expected to be between 16 cents and 22 cents per share compared to last year's 13 cents.