Datalink Services Growth Overcomes Product Slowdown In Q3

Strong growth in services revenue more than made up for a moderate drop in product revenue to give midrange solution provider Datalink strong growth for its third fiscal quarter.

The Eden Prairie, Minn.-based solution provider warned, however, that growth is likely to be subdued in the near future as the company integrates the more product-focused business of its newly-acquired Bear Data Solutions.

Datalink on Tuesday reported revenue for the quarter ended September 30, of $144.9 million, up 4 percent from the year-ago period.

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

GAAP earnings for the quarter reached $3.5 million, or 16 cents per share, up from last year's $818,000 or 4 cents per share. On a non-GAAP basis, Datalink's earnings totaled $4.2 million, or 19 cents per share, compared to last year's $2.5 million, or 13 cents per share.

Datalink released its quarterly financial results a day after the company unveiled its $18.5 million acquisition of San Francisco-based solution provider Bear Data Solutions.

Datalink CFO Greg Barnum Tuesday said Tuesday during a call with analysts that Datalink's third-quarter product revenue of $81.2 million was down 3.1 percent compared to product revenue in the third quarter of 2013.

Services revenue rose 14.2 percent from the year-ago period to reach $63.7 million, Barnum said. Datalink saw growth of 8.2 percent in services revenue in the first nine months of 2014 compared to a 7.2 percent growth in the first nine months of 2013.

"This growth is a key focus as we need high-margin services business to offset pressures of product margin," he said.

For the quarter, 26 percent of Datalink's revenue came from storage sales, 19 percent from networking and server sales, 10 percent from software sales, 1 percent from tape sales and 44 percent from services, Barnum said.

Datalink counts networking and server sales together because sales of servers from its primary vendor, Cisco, go as part of a networking deal.

Bear Data recorded revenue of $130 million for 2013, the majority of which came from sales of servers and networking, Barnum said. Cisco accounted for about 40 percent of Bear Data's revenue, while Juniper accounted for 10 percent to 15 percent, he said.

"As a result, their margin will lower our overall margins this year and next year," he said.

NEXT: Looking Forward At Datalink

The acquisition of Bear Data, he said, presents big opportunities to sell Datalink's high-end services to that solution provider's customer base.

There is historical precedent for making that prediction, Barnum said. When Datalink in 2012 acquired StraTech, none of its customers were counted in Datalink's list of top-ten accounts, while today two are in the top ten, he said.

"This was not accomplished by selling more products into their accounts," he said. "It was from selling new products into those accounts."

Paul Lidsky, Datalink president and CEO, said during the quarterly earnings call that 89 percent of his company's customers are repeat customers, compared to 85 percent last year. And, for the first nine months of 2014, deals worth $1 million or more increased 9 percent over the prior year.

As a result, Datalink has a growing pipeline of large data center projects including converged systems, Lidsky said.

"Those projects, in turn, result in more advanced services opportunities," he said.

Looking forward, Datalink expects fourth-quarter revenue of $165 million to $175 million, compared to $173.4 million in the year-ago period. Datalink also expects fourth-quarter net earnings to be between 20 cents and 25 cents per share on a GAAP basis and between 27 cents and 32 cents per share on a non-GAAP basis. That compares to last year's 24 cents per share on a GAAP basis and 34 cents per share on a non-GAAP basis.

Those expectations do not include results from Bear Data. Lidsky said Datalink has not had enough time to determine the acquisition's impact on guidance.

PUBLISHED OCT. 21, 2014