Datalink's Bear Data Acquisition: A Drag On Earnings Now, But Future Growth Driver

Datalink's 2014 acquisition of fellow solution provider Bear Data Solutions added less than expected to the company's fourth fiscal quarter 2014 revenue and was a drag on earnings, but Datalink said the additional Cisco Systems networking business from the acquisition points to a brighter future.

Eden Prairie, Minn.-based Datalink Wednesday reported revenue for the fourth fiscal quarter 2014, which ended Dec. 31, of $186.4 million, up 7.5 percent over the $173.4 million the company reported for the fourth fiscal quarter of 2013. Those figures included the revenue of Bear Data, which Datalink acquired in October.

Revenue for full-year 2014, including Bear Data revenue, reached $630.2 million, up 6.1 percent compared to the $594.2 million Datalink reported for 2013. Not counting the Bear Data revenue, 2014 revenue was up 3.4 percent over last year, Datalink reported.

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

Datalink reported GAAP-based earnings for the fourth quarter of $3.7 million, or 16 cents per share, down from the $5.2 million, or 24 cents per share, the company reported last year. On a non-GAAP basis, earnings for the fourth quarter reached $7.3 million, or 33 cents per share, excluding the Bear Data acquisition.

For all of 2014, Datalink earnings on a GAAP basis reached $11.1 million, or 50 cents per share, compared to $10.0 million, or 52 cents per share a year ago.

For the fourth quarter of 2014, Bear contributed about $16.0 million in revenue and subtracted about 7 cents per share in earnings.

The single-digit 2014 organic growth rate represented the first time for some time that Datalink's growth was that slow, said Datalink CFO Gregory Barnum.

That drop in revenue growth was due primarily to a slowdown in storage sales "as customers continue to evaluate new technologies like SSD," Barnum said during the Datalink live quarterly financial analyst presentation.

Barnum also cited a move by customers to shift some storage spending to security.

Paul Lidsky, Datalink president and CEO, said during the analyst presentation that the company would have hit guidance without the Bear Data acquisition, but that the acquisition is an important component for future growth.

"Bear's lower-margin network sales will be compensated over the long term by the sales of higher-margin products and services to Bear customers," he said.

NEXT: Focus On New Partnerships, Converged Infrastructure

With the Bear Data acquisition, Cisco has become Datalink's top vendor partner, displacing long-term storage vendor NetApp, Lidsky said. Symantec is the company's third-largest vendor partner. "This is part of our strategy of being a total solution provider beyond the data center," he said.

Datalink in 2014 had 145 customers who brought the solution provider at least $1 million in revenue each, up from 124 in 2013, Lidsky said. Average customer spend during that time rose from $534,000 to $578,000, driven primarily by larger-scale projects, he said.

Datalink in the fourth quarter closed a record number of converged infrastructure deals, with the number of such deals up 29 percent over last year. For all of 2014, Datalink had 129 converged infrastructure projects, up 30 percent over 2013, Lidsky said.

"We expect converged infrastructure solutions to continue to drive growth going forward," he said.

Services revenue in 2014 rose 12.5 percent over 2013's revenue, which was about six times the growth Datalink had for product revenue, Lidsky said.

While Cisco, NetApp, and Symantec are expected to continue to be Datalink's top partners going forward, the company is also working with several new entrants into the market, including all-flash storage array vendor Pure Storage, hybrid flash array vendor Nimble Storage, and EMC's XtremIO all-flash array line, Lidsky said.

"We also participate with all the new converged and hyper-converged solutions," he said.

Looking forward, Lidsky said Datalink expects revenue for fiscal year 2015 to rise between 25 percent and 33 percent compared to 2014 to reach between $175 million and $185 million.

PUBLISHED FEB. 20, 2015