Datalink (DTLK) 8-K Datalink Reports 2010 Third Quarter and Nine Month Operating Results

Exhibit 99.1

DATALINK REPORTS 2010 THIRD QUARTER AND NINE MONTH OPERATING RESULTS

Record Third Quarter Revenue Up 62 Percent Year-Over-Year

CHANHASSEN, Minn., October 19, 2010 -- Datalink (Nasdaq: DTLK), a leading provider of data center infrastructure and services, today reported results for its third quarter and nine months that ended September 30, 2010.  Revenues for the quarter ended September 30, 2010, increased 62% to $69.2 million compared to $42.7 million for the prior-year period.  Sequentially, revenues were down 2% from $70.9 million in the second quarter of 2010.  This seasonal trend is principally due to the difficulty of completing installations during the summer months when customers’ IT organizations are at lower staffing levels.  Revenues for the nine month period ended September 30, 2010, increased 60% to $202.6 million compared to $126.3 million for the nine months ended September 30, 2009.   Backlog at the end of the quarter grew 19% to $52.7 million up from $44.4 million at the end of the second quarter.

GAAP Results

On a GAAP basis, the company reported net earnings of $771,000 or $0.06 per basic and diluted share for the third quarter ended September 30, 2010.  This compares to a net loss of $84,000 or $0.01 per basic and diluted share in the third quarter of 2009 and earnings of $5,000 or $0.00 per basic and diluted share in the second quarter of 2010.  For the nine months ended September 30, 2010, the company reported a net loss of $115,000 or $0.01 per basic and diluted share, compared to a net loss of $397,000, or $0.03 per basic and diluted share, in the first nine months of 2009.

Non-GAAP Results

Non-GAAP net earnings for the third quarter of 2010 were $1.4 million, or $0.11 per basic and diluted share, compared to non-GAAP net earnings of $116,000, or $0.01 per basic and diluted share, in the third quarter of 2009.  Sequentially, non-GAAP earnings grew 84% from $748,000 in the second quarter.  For the nine months ended September 30, 2010, the company reported non-GAAP net earnings of $2.2 million, or $0.17 per basic and diluted share, compared to net earnings of $500,000, or $0.04 per basic and diluted share, in the first nine months of 2009.  A detailed reconciliation between GAAP and non-GAAP information is contained in the tables included herein.

The company’s results for the third quarter and the first nine months of 2010 include three and nine months of Incentra, LLC results of operations, respectively, following the acquisition which closed on December 17, 2009.

Paul Lidsky, Datalink’s president and CEO, commented, “The third quarter was a record quarter for Datalink.  The $69.2 million of revenues represents our highest third quarter revenues ever and our non-GAAP operating income of $2.5 million is our highest third quarter operating income since 2000.  In addition, we go into the fourth quarter with a record backlog of approximately $53 million.  The 19% increase in our backlog indicates stronger sales resulting from the increased wallet and market share driven by the successful execution of our data center strategy, coupled with a steadily increasing trend in technology spending.   Other significant accomplishments for the quarter include:

·During the quarter, we closed the largest order in Datalink history, an $8 million virtualization and consolidation project to deliver enhanced disaster recovery capabilities with a leading global consulting and software company.  This project included not only hardware and software, but Datalink professional services and customer support services as well.  We expect this order to install and be recognized as revenue in the fourth quarter of this year.

·We also closed our largest Cisco deal in Q3 for $1.4 million which is representative of our investments in our networking practice and the ability of our account executives to sell networking to existing storage customers as part of our data center strategy.

·Service revenues for the quarter were a record $30.1 million which represents a 12% increase over second quarter and a 48% increase over the same period in 2009.  This reflects our continued emphasis on leveraging Datalink’s professional services and support services, both of which support our customer intimacy go-to-market model.

·We exited the quarter with a healthy and strengthening balance sheet.  Our working capital increased $2.3 million to $18.1 million from second quarter.

Our collective accomplishments during the nine months of 2010 are evidence that Datalink is successfully executing on our data center strategy while at the same time seeing the leverage in our financial model,” said Lidsky.

Outlook

The company ended the third quarter of 2010 with a backlog of $52.7 million, which is up over $8 million from backlog at the end of the second quarter of 2010.  Based on this backlog, we expect revenues to be between $75 million and $80 million for the fourth quarter of 2010.  The company expects fourth quarter 2010 net earnings to be between $0.09 and $0.13 per diluted share on a GAAP basis, and net earnings of between $0.12 and $0.16 per diluted share on a non-GAAP basis. This compares to revenues of $51.8 million with a GAAP net loss of $0.01 per diluted share and non-GAAP earnings of $0.10 per diluted share in the fourth quarter of 2009.

Non-GAAP earnings per share exclude the effect of acquisition accounting adjustments from the Incentra acquisition to deferred revenue and costs, integration and transaction costs related to acquisitions, stock-based compensation expense, amortization of intangible assets, and the related effects on income taxes. The company estimates this total effect will be approximately $0.03 per diluted share for the fourth quarter of 2010.

Conference Call and Webcast Today

Datalink will hold a conference call at 4:00 p.m. central time, during which Datalink’s president and chief executive officer, Paul Lidsky, and vice president of finance and chief financial officer, Greg Barnum, will discuss company results and provide a business overview. Participants can access the conference call by dialing (877) 277-9804. Participants will be asked to identify the Datalink conference call and provide the designated identification number (11620262). A live Webcast of the conference call can be heard via Datalink’s website at www.datalink.com.

About Datalink

A complete data center solutions and services provider for Fortune 500 and mid-tier enterprises, Datalink transforms data centers so they become more efficient, manageable and responsive to changing business needs. Datalink helps leverage and protect storage, server, and network investments with a focus on long-term value, offering a full lifecycle of services, from consulting and design to implementation, management and support. Datalink solutions span virtualization and consolidation, data storage and protection, advanced networks, and business continuity. Each delivers measurable performance gains and maximizes the business value of IT. For more information, call 800.448.6314 or visit www.datalink.com.

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain forward-looking statements.  This press release contains forward-looking statements, including our internal projections of anticipated 2010 results, which reflect our views regarding future events and financial performance.  These forward-looking statements are subject to certain risks and uncertainties, including those identified below, which could cause actual results to differ materially from historical results or those anticipated.  The words “aim, “believe,” “expect,” “anticipate,” “intend,” “estimate” and other expressions which indicate future events and trends identify forward-looking statements.  Actual future results and trends may differ materially from historical results or those anticipated depending upon a variety of factors, including, but not limited to:  the level of continuing demand for storage, including the effects of current economic and credit conditions; competition and pricing pressures and timing of our installations that may adversely affect our revenues and profits; fixed employment costs that may impact profitability if we suffer revenue shortfalls; revenue recognition policies that may unpredictably defer reporting of our revenues; our ability to hire and retain key technical and sales personnel; our dependence on key suppliers; our ability to adapt to rapid technological change; risks associated with integrating possible future acquisitions; fluctuations in our quarterly operating results; future changes in applicable accounting rules; and volatility in our stock price. Further, our revenues for any particular quarter are not necessarily reflected by our backlog of contracted orders, which also may fluctuate unpredictably.  We cannot assure that our 2009 acquisition of Cross Telecom assets will increase our revenues or profits.  We also cannot assure that in conjunction with our December 2009 acquisition of certain assets and assumption of certain liabilities of Incentra,

LLC’s reseller business we will generate anticipated revenues or profits from the acquired business.  We further cannot assure that we can grow or maintain our revenue and backlog from current record levels.

Non-GAAP Details

Non-GAAP financial measures exclude the impact from acquisition accounting adjustments to deferred revenue and costs, stock-based compensation expense, amortization of intangible assets, integration and transaction costs related to acquisitions and the related effects on income taxes.  These non-GAAP measures are not in accordance with, or an alternative for measures prepared in accordance with, GAAP and may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. Datalink believes that non-GAAP measures have limitations in that they do not reflect all of the amounts associated with Datalink’s results of operations as determined in accordance with GAAP and that these measures should only be used to evaluate Datalink’s results of operations in conjunction with the corresponding GAAP measures.

These non-GAAP financial measures facilitate management’s internal comparisons to the Datalink’s historical operating results and comparisons to competitors’ operating results. We include these non-GAAP financial measures in our earnings announcement because we believe they are useful to investors in allowing for greater transparency with respect to supplemental information used by management in its financial and operational decision making, such as employee compensation planning. Datalink believes that the presentation of these non-GAAP measures when shown in conjunction with the corresponding GAAP measures provides useful information to investors and management regarding financial and business trends relating to its financial condition and results of operations.

# # #

Company Contacts:
	Media & Alliances:		Investors & Analysts:
	Suzanne Gallagher		Greg Barnum
	SVP of Marketing		Vice President and CFO
	Phone: 720-566-5110		Phone: 952-944-3462
	Email: sgallagher@datalink.com		Email: gbarnum@datalink.com
	Investor Relations:
	Kim Payne
	Investor Relations Coordinator
	Phone:	952-279-4794
	Fax:	952-944-7869
	Email: einvestor@datalink.com
	website: www.datalink.com

DATALINK CORPORATION

STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Net sales:
Products	$	39,166		$	22,412		$	121,332		$	64,579
Services	30,054			20,299			81,307			61,697
Total net sales	69,220			42,711			202,639			126,276
Cost of sales:
Cost of products	30,014			17,086			93,995			48,548
Cost of services	22,264			14,666			60,056			44,556
Amortization of intangibles	277			—			831			—
Total cost of sales	52,555			31,752			154,882			93,104
Gross profit	16,665			10,959			47,757			33,172
Operating expenses:
Sales and marketing	8,270			5,041			24,035			15,817
General and administrative	3,361			3,297			10,686			9,062
Engineering	3,730			2,829			11,986			8,619
Other income	(503		)	—			(503		)	—
Integration and transaction costs	—			—			581			—
Amortization of intangibles	382			178			1,147			533
	15,240			11,345			47,932			34,031
Earnings (loss) from operations	1,425			(386		)	(175		)	(859		)
Interest income, net	3			20			11			81
Earnings (loss) before income taxes	1,428			(366		)	(164		)	(778		)
Income tax (benefit) expense	657			(282		)	(49		)	(381		)
Net earnings (loss)	$	771		$	(84	)	$	(115	)	$	(397	)
Net earnings (loss) per common share:
Basic	$	0.06		$	(0.01	)	$	(0.01	)	$	(0.03	)
Diluted	$	0.06		$	(0.01	)	$	(0.01	)	$	(0.03	)
Weighted average common shares outstanding:
Basic	12,821			12,564			12,783			12,520
Diluted	12,909			12,564			12,783			12,520

DATALINK CORPORATION

BALANCE SHEETS

(In thousands, except share data)

	September 30,		December 31,
	2010		2009
	(Unaudited)
Assets
Current assets
Cash and cash equivalents	$	17,153	$	12,901
Short term investments	—		2,730
Accounts receivable, net	37,413		45,612
Inventories	2,518		1,669
Current deferred customer support contract costs	44,380		38,050
Inventories shipped but not installed	16,507		8,973
Income tax receivable	617		1,073
Other current assets	411		288
Total current assets	118,999		111,296
Property and equipment, net	2,154		1,808
Goodwill	23,669		23,701
Finite life intangibles, net	5,832		7,810
Deferred customer support contract costs non-current	17,467		11,186
Other assets	361		394
Total assets	$	168,482	$	156,195
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	27,290	$	33,062
Note payable due to seller of acquired business	—		3,000
Accrued commissions	3,100		2,860
Accrued sales and use tax	534		1,228
Accrued expenses, other	3,617		3,092
Current deferred tax liability	814		814
Sublease reserve current	272		288
Customer deposits	9,317		3,994
Current deferred revenue from customer support contracts	55,892		48,765
Other current liabilities	14		14
Total current liabilities	100,850		97,117
Deferred income tax liability	1,357		1,357
Deferred revenue from customer support contracts non-current	21,648		13,850
Sublease reserve non-current	147		348
Other current liabilities non-current	156		108
Total liabilities	124,158		112,780
Stockholders’ equity
Common stock, $.001 par value, 50,000,000 shares authorized, 13,337,137 and 13,260,788 shares issued and outstanding as of September 30, 2010 and December 31, 2009, respectively	13		13
Additional paid-in capital	42,619		41,595
Retained earnings	1,692		1,807
Total stockholders’ equity	44,324		43,415
Total liabilities and stockholders’ equity	$	168,482	$	156,195

DATALINK CORPORATION

RECONCILIATION BETWEEN GAAP AND NON-GAAP NET INCOME

(In thousands, except per share data)

(Unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2010		2009			2010			2009
Net earnings (loss) on a GAAP basis	$	771	$	(84	)	$	(115	)	$	(397	)
Adjustments:
Amortization of intangible assets	$	277	—			$	831		—
Purchase accounting adjustment to Incentra and MCSI deferred revenue, net	127		10			783			37
Total gross margin adjustments	404		10			1,614			37
Stock based compensation expense included in sales and marketing	135		76			314			223
Stock based compensation expense included in general and administrative	125		431			359			675
Stock based compensation expense included in engineering	76		176			229			291
Integration and transaction costs	—		—			581			—
Amortization of intangible assets	382		178			1,147			533
Total operating expense adjustments	718		861			2,630			1,722
Income tax expense	516		671			1,897			862
Non-GAAP net earnings	$	1,377	$	116		$	2,232		$	500
Non-GAAP net earnings per share - Basic	$	0.11	$	0.01		$	0.17		$	0.04
Non-GAAP net earnings per share - Diluted	$	0.11	$	0.01		$	0.17		$	0.04
Shares used in non-GAAP per share calculation - Basic	12,821		12,564			12,783			12,520
Shares used in non-GAAP per share calculation - Diluted	12,909		12,668			12,890			12,570

DATALINK CORPORATION

STATEMENT OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine Months Ended September 30,
	2010			2009
Cash flows from operating activities:
Net loss	$	(115	)	$	(397	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Provision for bad debts	14			14
Depreciation	681			628
Amortization of intangibles	1,978			533
Amortization of discount on short term investments	—			(2		)
Income tax receivable	456			(2,792		)
Amortization of sublease reserve	(217		)	(233		)
Deferred income taxes	—			2,345
Stock based compensation expense	902			1,189
Changes in operating assets and liabilities
Accounts receivable	8,185			10,943
Inventories	(8,383		)	3,544
Deferred costs/revenues/customer deposits, net	7,637			(4,054		)
Accounts payable	(5,772		)	(13,455		)
Accrued expenses	71			(1,475		)
Other	(11		)	(5		)
Net cash provide by (used in) operating activities	5,426			(3,217		)
Cash flows from investing activities:
Proceeds from short term investments	2,730			(1,257		)
Purchases of property and equipment	(1,027		)	(156		)
Net cash provided by (used in) investing activities	1,703			(1,413		)
Cash flows from financing activities:
Payment of note payable due to seller of acquired business	(3,000		)	—
Excess tax from stock compensation	(28		)	(163		)
Proceeds from issuance of common stock from option exercise	251			91
Tax withholding payments reimbursed by restricted stock	(100		)	(129		)
Net cash used in financing activities	(2,877		)	(201		)
Increase (decrease) in cash and cash equivalents	4,252			(4,831		)
Cash and cash equivalents, beginning of period	12,901			26,257
Cash and cash equivalents, end of period	$	17,153		$	21,426
Supplemental cash flow information:
Cash paid for income taxes	$	62		$	277
Cash received for income tax refunds	$	538		$	47