Datalink Banks on SAN Sales

With no products of its own, how does Datalink Corp. (Nasdaq: DTLK) make money in the storage networking market?

Simple -- by selling everyone else's.

As perhaps the only publicly held pure reseller/integrator in the storage networking market, Minneapolis-based Datalink is somewhat isolated from the business turbulence that can hit individual vendors, a position that might normally attract cautious investors seeking an entre into the storage arena.

Of course, when the entire market is in decline, there's also no place for a reseller to hide. Given the current chilly conditions in the IT purchasing world, it's no surprise that Wall Street has cooled a bit toward Datalink's stock (currently trading around $8 per share), with some analysts cutting ratings on the heels of the company's disappointing second quarter.

Analysts from C.E. Unterberg Towbin, for example, lowered their rating on Datalink from Strong Buy to Buy, after the company reported a loss of $623,000 (-7 cents per share) for the period ending June 30. However, most firms covering the company maintain a Buy rating with a 12-month target price of between $10 and $13, saying that Datalink's revenues should rebound when overall economic conditions improve.Scott Robinson, chief technical officer at Datalink, says the company is well aware of the pressures of the public markets.

"Most traditional resellers are smaller, and private," says Robinson, who prefers to refer to Datalink as a "storage architect" firm, since he claims it sells design and implementation expertise alongside storage software and hardware.

"We know we have pressure to grow revenues and earnings," Robinson says. "But that's in line with our strategy, anyway. We don't think of ourselves as competing against other resellers; we think of our competition as the hardware vendors themselves."

And just like those same hardware vendors, Datalink found the summer of 2001 a challenge, recording $27 million in revenues for its second fiscal quarter, compared to almost $35 million for the same period in 2000. Though a pre-report warning kept most analysts from whacking the company, Wall Street will likely be watching closely to see if the company meets its stated goal of $33 million to $38 million in revenue for the ongoing third quarter.

While the company resells a wide range of storage products -- including wares from Hitachi Data Systems (HDS), Network Appliance Inc. (Nasdaq: NTAP), and LSI Logic Corp. (NYSE: LSI), as well as management software from Veritas Software Corp. (Nasdaq: VRTS) and Legato Systems Inc. (Nasdaq: LGTO) -- storage-area network products represent one of its fastest-growing segments. According to Robinson, Datalink is among the top resellers of Brocade Communications Systems Inc. (Nasdaq: BRCD) Fibre Channel fabric switches.According to a report from Needham & Co., SAN-related revenues at Datalink grew by 7 percent during the past quarter, even as other categories declined. Though Robinson admits that many potential customers are applying more scrutiny to SAN plans, he says advising customers on the cutting edge of technology is where Datalink earns its keep.

"We're not interested in selling something that's already a commodity. It has to be hard, the newer stuff."

And by remaining independent, Datalink hopes to prove that it's mostly interested in helping its customers with their specific problems, rather than pushing a single line of products.

"Our status gives us a certain amount of independence, of objectivity," Robinson says. "We hope that's more valuable to our customers, rather than focusing on one product."

Of course, that also puts Datalink into the tricky position of competing against the sales and integration teams of the same companies it buys products from (like EMC Corp. [NYSE: EMC], for instance). Robinson says the tightrope dance Datalink must perform is all a part of playing under the big top that storage networking has become."For a lot of years, you could make a good living selling storage, without too much attention," says Robinson, who has been with Datalink for nearly 13 years, almost since the company's inception in 1987. "But now, the opportunity and the challenge have never been greater."

- Paul Kapustka, Editor at Large, Byte and Switch http://www.byteandswitch.com