Data storage isn't a particularly sexy business. Yet the sector has been active lately, including Sun's (NASDAQ:SUNW) purchase of StorageTek for a cool $4.1 billion in cash.
In fact, with new regulations such as HIPAA and Sarbanes-Oxley, companies need storage more than ever. They're also replacing old technology and taking a greater interest in disaster recovery systems. This is good news for storage companies, right?
Perhaps. Look at Datalink (NASDAQ:DTLK), which announced its second-quarter results yesterday. Revenues surged 34% to $28.7 million. The sequential increase was 35%. Net earnings were $0.04 per share, compared to a $0.10-per-share loss last year.
Datalink calls itself an "information storage architect." Its services include ensuring constant data availability; data recovery following disasters; and helping companies to manage their existing storage resources. Companies generally want best-of-breed solutions, without the headaches and hassles of setting them up and running them. In those cases, Datalink's services can provide excellent value for a company. It's not wedded to any one set of software or hardware, so Datalink can potentially serve a wider variety of customers.
As interest in storage grows, Datalink is landing major deals. In the second quarter, the company signed four customers to contracts in excess of $1 million apiece, including one $8.3 million contract.
Over the past year, management has taken a variety of initiatives to encourage profitable growth. They've hired experienced engineers and sales people, increased training, improved customer service, and expanded professional services. So far, the work is paying off, and investors are starting to notice. Following the earnings news, Datalink shares surged 51% to $4.30.
I believe a good chunk of the recent demand stems from the new government regulations I mentioned earlier. Investors should also keep in mind that the storage business is "lumpy," dependent on fairly large contracts that can sometimes be delayed or cancelled outright.
Nonetheless, Datalink is confident its growth will continue. For the third quarter, it estimates $27 million to $31 million in revenues, and earnings of $0.02 to $0.10 per share. So long as the company makes good on its prospects, its shares' upward climb is likely far from over.
We've stored up related Foolishness:
Fool contributor Tom Taulli does not own shares of any company mentioned in this article.
