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Wednesday, October 12, 2005

Datalink (DTLK) hints at a storage technology "refresh cycle"

Datalink (DTLK): Earnings came in a bit short as the enterprise storage solution company announced strong YoY and sequential quarterly earnings growth. They revenues for the quarter, rose 22 percent to $31MM from $25MM YoY and grew 9 percent sequentially from Q2 revenues of $29MM. Backlog for Q4 ended at $19MM, including $8MM of the new big fish customer. Gross profits increased to 25%(ish) and mgmt expects GM to continue to increase. Operating profits have improved because of lower fixed costs (rent at HQ – subleased saving $950K a year). Net loss included a $3.5MM non-cash charge because of subleasing costs. However, net income got hit due to “variable incentive compensation” related to performance and new customer attainment incentives, but the timing peaked in Q3 and are expected to decline. An analyst asked where leverage in the model would come from; the company’s response was that two incentive programs will phase out and others will proceed at a lower rate. Also, Datalink used more 3rd-party contractors to fulfill professional services contracts, which is expected to decline. Tax benefits are no longer recorded due to consistent profitability. Co has $11.3MM in cash; +$2MM.

Q3 Outlook: revenue - $27-31MM, net income 2 – 10 cents per diluted share.

Interesting quote: “They are also increasingly looking for e-mail management and archiving solutions which more effectively address their regulatory compliance and data growth requirements.” – good news for wiki companies like Jotspot.com and SocialText. Wikis allow for collaborative work without passing numerous excel spreadsheets, powerpoints and word documents around that clog up a company’s servers and storage.

Another interesting comment: “Customers have storage technology infrastructures that are fully depreciated and are now looking to refresh their storage technology infrastructures.” Management furthered commented that companies are moving away from single-tier architectures and towards lower-cost infrastructures. They expect this “refresh cycle” to go on for some time as customers look to simplify heterogeneous storage structures.

Technology trends that Datalink is investing in:

  • ILM Technology: The ability to search all emails by sender, receiver, time and subject. Helps with regulatory compliance (SOX) and litigation discovery costs.
  • Server consolidation: Putting several NAS appliances on one server, saving time and money.
  • Tape virtualization: integration of disk-based back-up with tape environments. Benefits: higher reliability, faster single file back up, etc…

So, overall it appears that the market is spooked by the fact that while revenues grew, most of it came from a single customer that amounted for $8MM. Clearly their analyzing this company’s performance excluding this one big customer. Which, hey, I get that, but given a $37MM market cap, this company is doing pretty well when looking at total revenue growth. Plus management sounds pretty confident in future backlog and investment trends. I believe management when they say that there are lot of enterprises that have hairball storage infrastructures and are looking to consolidate and optimize accordingly. However, it begs the question that if this is true, then there are lot of players who will see a bump from this. Hello EMC, Symantec (SYMC) and even, gasp, Sun (SUNW). Hmm...

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