Datalink 2Q Revenue Up, Earnings Down As Sales Shift From Traditional Storage

Regional solution provider Datalink reported higher year-over-year revenue but lower earnings in its fiscal second quarter, due in part to an increase in lower-margin networking sales.

The Eden Prairie, Minn.-based company also said it plans a $10 million reduction in operating expenses on an annual basis, a move that will include layoffs and changes to compensation policies.

For the quarter ended June 30, Datalink reported revenue of $182.6 million, up 15 percent from the $159.4 million it reported in last year's second quarter.

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

On a GAAP basis, Datalink reported earnings of $661,000 or 3 cents per share, down from the $3.6 million or 16 cents per share it reported last year. On a non-GAAP basis, earnings in the quarter were $2.7 million, or 12 cents per share, down from last year's $4.9 million, or 22 cents per share.

The results included results from the operations of Bear Data Solutions, which Datalink acquired in October of 2014.

Datalink CFO Greg Barnum, on the company's earnings call, said 23 percent of its revenue came from storage sales, down from 27 percent a year ago. Networking sales accounted for 28 percent of Datalink's sales, up from last year's 23 percent. He said 41 percent of Datalink's revenue came from services, compared to 38 percent from services last year. Seven percent of Datalink's sales came from software, and one percent was from tape, he said.

Several factors negatively impacted Datalink's earnings, Paul Lidsky, Datalink’s president and CEO, said on the call.

Datalink's core storage business -- which until a few years ago accounted for the vast majority of its sales -- was impacted by a radical drop in storage pricing and longer sales cycles, as customers evaluated new technologies like cloud computing, Lidsky said.

"In fact, one of those delayed deals caused us to not meet our guidance," he said.

However, Lidsky said, Datalink's flash storage sales have blossomed quickly, and now account for about 10 percent of the company's total storage sales, up from about 5 percent early this year. However, he said, margins on flash storage solutions are in the mid- to high teens, compared to over 20 percent for traditional storage.

Converged infrastructure, hyper-converged infrastructure, and virtual data centers were all bright spots for Datalink in the quarter, he said. This includes an 80-percent quarter-over-quarter increase in the number of converged data center infrastructure sales, which Lidsky said gives the company a base on which to offer new consulting, managed services, and support services.

The increase in Datalink's services business shows that the company's efforts to refocus resources in that area have paid off, Lidsky said. This includes seeing professional services, the highest-margin part of Datalink's business, growing 48 percent year-over-year to $17.8 million. It now accounts for nearly 10 percent of Datalink's total revenue, he said.

During the Q&A portion of the call, Lidsky said $10 million reduction in operating expenses will ensure that Datalink has the right people addressing the different parts of its business going forward.

"It's more of a realization that we should invest in the trends as we see them today," he said.

Looking forward, Datalink expects revenue for its third fiscal quarter of $175.0 million to $185.0 million, up 21 percent to 28 percent over the $144.9 million reported in the third quarter of 2014. The company also expects third quarter 2015 earnings of between 4 cents and 9 cents per share on a GAAP basis, and between 13 cents and 18 cents per share on a non-GAAP basis. This is down from the 16 cents per share on a GAAP basis and 19 cents per share on a non-GAAP basis.

"The company is moving into the right direction," Lidsky said.