Datalink's (DTLK) CEO Paul Lidsky on Q1 2016 Results - Earnings Call Transcript

| About: Datalink Corporation (DTLK)

Datalink Corporation (NASDAQ:DTLK)

Q1 2016 Earnings Conference Call

April 27, 2016 05:00 PM ET

Executives

Paul Lidsky - President and Chief Executive Officer

Greg Barnum - Vice President-Finance, Chief Financial Officer

Analysts

Chad Bennett - Craig-Hallum

Matt Ramsay - Canaccord Genuity

Eric Martinuzzi - Lake Street Capital Markets

Rich Kugele - Needham & Company

Jason Noland - Zacks Investment

Operator

Hello and welcome to today’s webcast. My name is John, and I will be your event specialist today. All lines have been placed on mute to prevent any background noise. Please note that today’s webcast is being recorded. We’ll be taking questions via the phone lines. [Operator Instructions].

It is now my pleasure to turn today’s program over to Paul Lidsky, President and CEO of Datalink. Paul, the floor is yours.

Paul Lidsky

Thank you, operator, good afternoon, everyone. I’d like to welcome all of you to today’s conference call. And thank you ahead for joining us. With me today is Greg Barnum, our Vice President of Finance and Chief Financial Officer. Greg will discuss our first quarter results in detail in just a few minutes, but first I would like to provide some context.

During the quarter we saw a continuation of some of the positive trends that we spoke about in our last earnings call. Flash storage sales continue to grow with more customers looking at significant investments to build all-flash data centers.

In the first quarter of 2016, flash sales contributed 56% of our total storage revenues up from 22% in the comparable quarter of 2015. Storage margins are improving slightly after several years of decline. Services are still on an upward trajectory as we continue to diversify our offerings in order to support IT organizations as they work to meet the demands, to support their company’s business objectives.

In addition, the number of large multi-million dollar projects in our pipeline continues to grow as more customers move away from transactional spending for traditional technology refreshes and move towards transformational projects like private and hybrid cloud initiatives that will drive new operational efficiencies and other business benefits.

Nevertheless, this was a challenging quarter because of two unusual factors that affected our sales flow and product delivery. First is reported by some of our manufacturing partners, the first quarter started with an unusually slow January. Sales did not regain their usual momentum until very late in the quarter with the strong last two weeks of March that has continued into April.

Second, the timing of our orders meant that many of our orders were booked so late in the quarter that three of our primary vendors were unable to fulfill them before the end of our reporting period on March 31. Historically these legacy partners have always been able to accommodate late quarter orders.

As a result of these delayed shipments, approximately $10 million of orders that historically would have shipped in time for quarter end did not ship. These orders have now shipped and are complete to our customers.

This created a record backlog entering the second quarter which will of course show up as revenue in the second quarter instead of the first. But it also contributed to a decline in our Q1 revenues and associated GP that Greg will talk about in a few minutes.

Had these orders shipped in the first quarter as expected, we would have generated overall revenues comparable to the first quarter of 2015. Both the late quarter sales activity and the unshipped orders certainly impacted our Q1 performance. But we believe these are first quarter anomalies that will not substantially affect our overall growth projections for 2016.

We believe we are still on track for annual growth in the 4% to 6% range twice the industry average based on our current sales cadence, the size of our pipeline, growth drivers like flash storage and the advanced consulting services we have built to address, the shift in IT spending habits and our ongoing efforts to rebalance our workforce to address those shifts as well as manage our expenses.

And we still have a strong balance sheet that will enable us to continue investing in new services that meet today’s changing IT needs as well as take advantage of strategic acquisition opportunities that may arise.

I will now turn the call over to Greg, to discuss our first quarter results in more detail. And then I will provide some additional perspectives. Greg?

Greg Barnum

Thanks Paul. Before we begin with the quarter’s results, let me first remind everyone that in today’s conference call we will be discussing our views regarding future events and financial performance.

These forward-looking statements are subject to certain risks and uncertainties. Actual future results and trends may differ materially from historical results or those anticipated depending upon a variety of factors. We undertake no obligation to publicly update any forward-looking statement whether written or oral that may be made from time to time whether as a result of new information, future developments, or otherwise. Please refer to our filings with the Securities and Exchange Commission for a full discussion of our risk factors.

My comments on the income statement will be referring to non-GAAP amounts and percentages as reported in today’s press release. A detailed reconciliation between GAAP and non-GAAP information is contained in the tables included in today’s press release. The primary adjustments we make to GAAP results relate to acquisitions, stock-based compensation charges, and the amortization of intangibles all net of income taxes.

Turning to the quarter then, in the first quarter of 2016, we saw revenues decrease 6% over the first quarter of 2015, with product revenues declining 15% and services revenues growing 8%. As Paul mentioned, there was approximately $10 million of product revenues that we expected to recognize as revenue in the quarter that did not ship from our vendors due to the timing of the receipt of the orders and some disk-drive shortages. These products shipped our year-over-year revenue growth would have been flat to slightly down.

For the quarter, our revenue mix was 18% storage, 27% networking and servers, 9% software, 1% tape, and 45% service. This compares to 22% storage, 30% networking and servers, and 39% services in the first quarter of last year. As these numbers indicate, we continue to see our traditional storage revenues decline and network remains the largest component of our product revenue, both factors which create downward pressures on our overall gross margins.

Our overall gross margin in the first quarter 2016 was 19.1% compared to 20.1% in the first quarter of 2015. The year-over-year decline was primarily due to the change in our revenue mix that I mentioned earlier.

Our operating margin in the first quarter was 1.2% of revenue compared to 2.3% of revenues in the first quarter of last year. Earnings per share for the quarter, was $0.05 per diluted share.

And the balance sheet then, we ended the quarter with over $66 million in cash and investments, working capital of $99.3 million and we remain debt free. During the first quarter then, we repurchased 600,000 shares of our common stock at an average price of $6.98. To date, we have repurchased 1,229,000 shares at an average price of $7.33 per share.

Let me now turn the call back over to Paul.

Paul Lidsky

Thanks Greg. Now, I’d like to spend a few minutes providing additional interpretation and commentary on the business. First concerning revenues, both Greg and I have already briefly talked about the impact of slow sales cadence in the first two months of the quarter and the approximately $10 million of unshipped orders at the end of the first quarter.

But also during that same quarter we saw our networking revenues decline due to longer lead requirements for product, which is standard for this practice but impactful due to the timing of orders in the first quarter. We also had a number of unrelated highly complex transformational opportunities that included products and services that didn’t close during the quarter as expected.

As I mentioned earlier, we continue to see growth in our flash storage revenues. Sales of purpose-built flash storage increased 218% between Q1 of 2015 and Q1 of 2016 with Pure and NetApp continuing to take a strong lead in the all-flash segment of our business.

Flash now represents 56% of Datalink’s storage sales as I said earlier compared to 22% in 2015 and just 6% in 2014. And it will continue to be a major growth driver for the foreseeable future as we approach a price-point where all flash storage is becoming more cost effective than spinning disk.

As we have discussed previously, this will help offset shrinking legacy storage sales while also driving migration and other consulting services to continue our services business growth and drive services to increasing percentages of overall revenue.

As Greg indicated, service comprised 45% of our Q1 revenues this year compared to 39% in the same quarter of last year. The percentages obviously were skewed by lower product revenues related to the unshipped order issue. But the numbers provide some insight into our strategic focus on services is altering our product services mix associated gross margins.

Our total services did increase 8% year-over-year which is a significant measure of our continued focus on service revenues. Our consulting services declined slightly primarily due to equipment that was bundled with consulting that was not available for production as expected. This resulted in missing some preset milestones on some of our more complex consulting projects, where projects are intertwined with consulting -- where products are intertwined with consulting services. These milestones are expected to be completed in the second quarter.

I’m also pleased to report our ongoing growth in the managed services segment of our business including newer and more sophisticated managed IT operation services like private cloud, backup and disaster recovery as a service. It’s important on several levels.

First; managed services is not just a one-time sale but a source of recurring income that carries over from quarter-to-quarter. Second; larger managed services contracts typically expands our relations and accounts and lead to add-on sales that include additional services and products.

In effect, managed services contracts act as a force multiplier for building incremental revenues and gross profit. And third; the rise in managed services reflects increasing customer pressure as documented in the recent IDG survey to offload day-to-day operations in order to drive business goals such as growth, efficiency and security. We’re seeing more clients use our managed services to keep the lights on while they pursue projects that will deliver tangible business benefits.

Another positive indicator involves the improvement in our storage and networking margins. Storage gross margins at 23% have improved from the 20% that we saw in Q4 of 2015, as stabilization is noteworthy considering the margin declines we have been seeing in this area for a number of quarters. In addition, our networking margins are up to 14% from the 13% we saw in Q4 2015.

As both Greg and I have indicated, Q1 was a challenging quarter but it has not changed our outlook on the year for a number of reasons. For one thing, our sales momentum picked up in late March and has continued strong through April, creating a solid pipeline that we believe will help us improve our performance in the second quarter.

We’re also benefiting from growth drivers like flash storage, managed services, our new security practice that we established in 2015 and our transition from selling point products to selling transformational projects that help clients align IT with their company’s business objectives.

We have an exceptionally strong balance sheet that will allow us to invest in new services that meet organization’s changing needs as well as take advantage of new strategic acquisition opportunities that we are aggressively pursuing.

And we continue to rebalance our headcount expenses to match the transformation of our business, these changes have not had any impact on our ability to execute against our strategy or pursue business.

This remains a challenging time but our initiatives over the past years to help clients utilize IT to support business objectives have positioned Datalink to adopt, to new ways in which organizations want to consume IT services and technologies.

Based on our current sales momentum, the major transformational projects currently in our pipeline and growth drivers like flash storage and consulting which includes our new security practice. We believe the 4% to 6% growth rates that we projected in February, is still attainable. This is double the annual 2% to 3% growth predicted for the industry overall.

We still face challenges created by the shift in IT spending habits from regular technology refreshes to business driven IT investments but we remain confident that we are following the right path. We believe that our focus on services, next generation storage, networking, converge and hyper-converge architectures and outcome based selling rather than just selling for refresh will help differentiate the company, fuel the next chapter of our growth and deliver the returns to our investors that they’re looking for.

Now, Greg and I would be happy to answer your questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from the line of Chad Bennett.

Chad Bennett

Hi guys, good afternoon.

Paul Lidsky

Hi Chad.

Greg Barnum

Hi Chad.

Chad Bennett

So, just a couple of questions. On the $10 million that shifted from the March quarter to the June quarter, it sounds like you’re just trying to get stuff from the three vendors out the door and time was the main culprit. I guess, was there anything specific to, I guess first question would be, what was the mix between say networking of storage of that $10 million? And then, can you characterize kind of the projects or the types of solutions that $10 million was related to if there is any way to do that?

Greg Barnum

No, it was mostly related to what we would classify as storage or software and the software we sell is mostly related to backup. So, software and storage, it wasn’t much networking equipment.

Chad Bennett

Okay.

Greg Barnum

And were there specific projects, not really. I wouldn’t point to VDC or anything like that they were all over the board.

Paul Lidsky

It touched a lot of the different categories we normally talk about.

Chad Bennett

Okay. And then Paul, I mean, the flash growth has been unbelievable for you guys over the last two years. But just the ability for that part of the business to be over half the storage business in such a short time is great. I guess you talk about the kind of Soup-to-Nuts flash data centers that you’re seeing out there. I guess, where else are you seeing flash being implemented and is it seamlessly a replacement for spinning disk at this time from a cost standpoint regardless of kind of apps or workloads running over it?

Paul Lidsky

I guess, I’ll answer in reverse. I think that flash by itself is, the price points are not overlapping spinning disk by any means. They’re getting close enough where there are clients who are consolidating data centers or moving them where they’re going to be a platform, where they’re planning for the future, they’re planning for an infrastructure that will carry them for the next several years. They’re planning for an infrastructure that would support cloud computing. And of course they’re looking for acceleration.

When you think about the efficiencies that flash provide and the lower cost of power to cooling and the space required, I mean we have clients whose data centers are filling up and they’re looking at what do they do, do they get more data center space, which is very expense or do they use the opportunity to use flash to become more efficient.

When you look at the total cost of ownership including all of those things, many companies will conclude that a greater percentage of flash in their data center if not all make sense. But I would say that we saw flash not only in purpose-built arrays but we saw flash as part of many of the spinning disk projects that we do. All of our legacy partners have a flash component set beyond all flash. And we tend to be providing flash in many, many configurations that are not purpose-built.

Chad Bennett

Okay.

Paul Lidsky

And I think, that continues as the price point of flash continues to come down as clients become more comfortable with what they can do with flash, I think you continue to see growth in flash. The market is as you know, as you know, the market is very receptive to it today. You also have a lot of interest still in converge and hyper-converge architectures most of which use flash as part of those architectures and will continue to do so. So, I think that growth continues over time.

It’s also been an important source of new logo acquisition for us which is not yet a fully tapped opportunity in the sense that I think there is a lot of market shift that we can create towards Datalink using flash. I think that when we have the opportunity to talk to clients about their data centers, there is a stronger story to be had when you talk about flash as opposed to another type of spinning disk.

And as I said earlier, it leads to services both consulting and professional services. So there is a lot of drag on the discussion that allows us to penetrate new clients. And that is a sort of an added advantage in the overall market shift.

Chad Bennett

Got it. And then, couple of more quick ones from me, hopefully. So it looks like the network biz considering that much of the shift was related to, was down year-over-year. I guess, is there any change to kind of the cadence of that business and kind of specifically your Cisco business in general in the growth outlook there?

Paul Lidsky

I don’t think so. With Cisco and this has historically always been this is true for many years. Cisco is not a manufacturer that you want to provide sales to in the last three weeks of a quarter they have longer lead times, always have longer lead times. We understand that. We don’t have an issue with it.

I think that time and timing has much to do with the decline in our Cisco business as anything else. I think the interest is out there. We still have clients looking at doing major purchases. In past quarters we had more than a few million plus orders, this first quarter we did not. I don’t think there is anything inherent in the Cisco business that is a headwind for us other than time and timing.

Chad Bennett

Okay, great. Last question from me. Greg, can you tell us, how many -- 10% customers you had in the quarter and who they were -- or 10% vendors I’m sorry?

Greg Barnum

10% vendors?

Chad Bennett

Yes.

Greg Barnum

Well, it would have been Cisco and NetApp for sure, I don’t, let me -- I need to look that up. I don’t get asked that question too often.

Chad Bennett

Okay.

Greg Barnum

NetApp, Cisco, Symantec/Veritas that would be it.

Chad Bennett

Okay, great. Thanks guys.

Paul Lidsky

Thanks Chad.

Operator

And your next question comes from the line of Matt Ramsay.

Matt Ramsay

Yes, thank you. Good afternoon, Paul and Greg.

Paul Lidsky

Hi Matt.

Greg Barnum

Hi Matt.

Matt Ramsay

Thanks for taking my questions. A couple, obviously the $10 million moving from Q1 to Q2 disrupted a little bit of the financial cadence of the year. But if those orders would have been still in Q1 as they normally would have, any difference to what you guys are expecting for sort of the shape of the year on the revenue side to get to that 4% to 6% growth than maybe you would have thought two or three months ago?

Paul Lidsky

I mean, had the first quarter been $10 million higher than it was?

Matt Ramsay

Correct.

Paul Lidsky

No, I think we still see the standard second quarter is up, third quarter down, fourth quarter big, I don’t see a reason to change that right now. I don’t know if the election will have an impact on that, I’m not reading anybody predicting that the election would have some kind of impact on the third quarter spend like it did four years ago.

But what we’re seeing right now, no, I don’t know of any reason why you wouldn’t see the same kind of seasonality is just not the right term, but.

Greg Barnum

I think all the sales cycles are becoming more complex. And that’s certainly something that we have seen shape up throughout the quarter. When you think about it, as clients move away from basic tech refresh or business outcome based decisions, there is an added complexity and justifying a major technology purchase against their business outcome versus simply saying, it’s off the books and we need new equipment and it’s more efficient and it’s faster.

So, I think everyone has in the industry has sort of commented on the fact at least among ourselves that every sales cycle of any magnitude is certainly more complex than they used to be. But I think that just tends to slow things down a little bit. But I think Greg is correct. We don’t have any reason to believe that the distribution would be different at this time.

Matt Ramsay

Got it, that’s helpful. And you mention on your comments that margins in both storage and the networking business ticked up a bit sequentially which is great to see. Perhaps you could just kind of walk us through the dynamics there of what you think drove that? Did you see, I don’t know, an accent hope [ph] in the pricing or anything in particular about mix that might have driven those margin up-ticks?

Greg Barnum

We had an unusually strong Veritas quarter. And Veritas historically has carried better margins for us that are trapped inside the storage number. We have seen some of our newer flash manufacturing partners work harder to show up gross margins realized in the potential that they have with us. I think that’s helped.

We certainly took advantage of some of the rebate programs and other things that manufacturers offer for complex technology sales. So, I think it’s been a combination of all those things happening in the same quarter.

Matt Ramsay

Got it. I guess the follow-up to that then is, do you expect those kind of trends to continue, I mean, should we expect gradual walk-up of some of those margins or are we still kind of in the ranges what we’ve seen over the last few quarters?

Greg Barnum

I think we’re still in those ranges.

Paul Lidsky

Yes, think we’re still on those ranges. We did have a good rebate quarter. So, I would still say our margins for the year would still be in the 18.5 as an average type number.

Matt Ramsay

Got it. And then the last one from me and I’ll jump back in the queue. The professional services business as you guys sort of categorized and lump it together had been trending 9% of revenue and it’s something that’s lead by track. And I imagine it’s higher this quarter just given the $10 million that’s shifted around. But what was that in the quarter, if you guys could break that out that would be helpful. Thanks.

Greg Barnum

One second.

Paul Lidsky

It was about 8.5%.

Matt Ramsay

All right. Thank you very much.

Greg Barnum

And as Paul said in his comments, a lot of that reason was that we didn’t meet some of the milestones in our consulting services which we used to call banned services because the product hadn’t been, product didn’t arrive in time, not to $10 million product we’re talking about but other product didn’t arrive in time so we couldn’t start on the project as soon as we’d like for the milestone didn’t get completed until the second quarter, which we thought would have, but got completed in the first quarter.

Paul Lidsky

And one of the things we’re doing Matt is that, if you look at our consulting backlog and it’s made up of predominantly very large multi-million dollar wins which is great news that we could get that kind of business from our clients and that we were credible enough to earn it. But all it takes is missing a milestone for any number of reasons client wasn’t ready with the data center. We have one client who has networking issues unrelated to anything we sold them that they had to rectify they weren’t aware of until they started the project.

There is a multitude of different reasons why a milestone might be missed. And given the concentration of large projects, it creates some volatility in the services number, the consulting number. I think that as the year goes by, we will a: will have more of these larger opportunities but we’ll also -- we also have programs in place that I think will generate some mid-sized consulting contracts which will give us a little bit of takeaway some of the volatility that comes from missing the milestone on a big deal. So, I think you’ll see things even out a little bit as the year goes by.

Matt Ramsay

That’s helpful. And then, Greg, any comments on OpEx for the year, I know you guys took some cost out over the last year or so. And OpEx ticked up a little bit sequentially but maybe if you could just walk us through expectations for the year? And that will be it from me. Thanks.

Greg Barnum

I don’t think we have any different than we talked on last quarter. We think OpEx will be relatively flat to down and up a $1 million from what we saw in 2015. And that would reflect the cost cuts we took last August plus salary increases, medical increases, higher gross margin, which means higher commissions. So, you net all that out and I would think operating expenses would be as we said in the last call flat to down a $1 million or $2 million.

Matt Ramsay

Got it. Thank you very much.

Paul Lidsky

Thank you, Matt.

Operator

Your next question comes from the line of Eric Martinuzzi.

Eric Martinuzzi

Thanks. I want to talk about the cash, the $66 million and the focus on the uses of cash specifically with regard to M&A? And then if you could also address the repurchase program?

Paul Lidsky

The repurchase program we authorized $10 million and we spent roughly $9 million if you do the math. But we saw the bottom $1 million left on that. We were obviously locked-up a quiet period until next week. So we have about $1 million left.

We continue to look for acquisition opportunities. That hasn’t stopped. We probably are focused more on certain areas now rather than no more on networking and security and consulting than we are in storage right now. But we’re still proceeding down all of those paths.

Eric Martinuzzi

Has there been, at the board level back to the buyback, has there been a discussion about beefing that backup or is it hales, keep the powder dry because there was networking and security bargains out there?

Paul Lidsky

Our next board meeting is in July, and it’ll definitely be on the agenda. But we have not discussed it. Our last board meeting was in February, we did not discuss it then.

Eric Martinuzzi

Okay. And then I wanted to go back to the services revenue line. I’m not sure I caught all the slicing and dicing of the services. I do understand $74 million of the quarter was service that was 45% total revenue. I also get that that was up 8% year-on-year which is terrific. But talk to me about the mix here, the consulting services, the managed services and then, I guess the maintenance agreements. I would imagine recent years past, maintenance agreements have been about I want to say maybe 30% of your revenue stream. Can you start there and then kind of built it back up to the $74 million?

Greg Barnum

Well, I don’t have that kind of a detailed breakdown. But the maintenance was about $60 million as you said. And the $14 million was our professional services. And as Paul mentioned, that number was lower than we had expected because of the milestone that slipped in Q2. Some of it was not our fault because other vendors didn’t get the product installed at the customers’ data centers in time or the data centers weren’t ready. But that’s -- the $14 million was what we call professional services. I don’t have the exact breakdown between them.

Eric Martinuzzi

You’re seeing this shift in your storage from a hard-disk drive oriented role to a flash array world. Did that, I know a lot of those maintenance contracts are tied to legacy storage installs. Are you seeing maybe an erosion, a non-renewal issues in the maintenance stream where always the flash array doesn’t break as much, we’re not going to have a maintenance contract. Because I’ve always looked at that as a pretty durable part of your revenue stream, I’m just wanted to clarify that theory.

Greg Barnum

Now, that’s a good question. The two things we do see is when we sell flash we sell maintenance always. But as a percent of the total revenue, the maintenance is a smaller percent than it is on spinning disk. You do see a slight decrease in your revenue on flash. You also see a lower gross margin on margin because it’s usually a vendor delivered as opposed to a Datalink delivered. So, the revenue gets affected slightly, the gross margin mix starts to change between Datalink delivered and vendor delivered as we sell more flash.

Paul Lidsky

And Eric beyond the exception to that is when you sell flash as part of a converge stack or hyper-converge stack then we provide one call on that stack because it’s a multi-vendor environment. So, as converge and hyper-converge continues to grow in the industry, those contracts will likely become one call contracts.

Eric Martinuzzi

I’m just trying to get my head around the linkage between dollar of storage products sold and the dollar of maintenance contracts sold. In the old days, it was 20% of the product sales went to maintenance contract and now it’s 10% or 15% of the product -- storage product sale goes to maintenance contracts. That’s really more of my question.

Paul Lidsky

Well, I think on hardware, at Datalink we’ve usually seen that to be around 12% to 13% of the hardware price as the year with the maintenance. On flash it’s maybe more like 10%. On software you see a higher number. But if you look at our maintenance it’s been around 33% of our total revenue which would tell you that’s three years’ worth of the maintenance let’s say.

Eric Martinuzzi

Got you.

Paul Lidsky

I don’t have the exact number it differs by every vendor and every product. I think it’s hard to give you an exact, it’s in that ballpark.

Eric Martinuzzi

Got you. And then just, I mean, back to the top-line and the full year, I assume there was a boatload of discussion around the guidance and kind of maintaining the 4% to 6%, I don’t know, just from my own perspective I’d to fight you guys lit back because if I wouldn’t again would not have gotten a lot of credit for maintaining. What was the discussion around the decisions to maintain was that pretty much every unity or was there differing opinions on that?

Paul Lidsky

I think it was a goal that we set for ourselves that allows us to create the forward momentum we’re looking for. I think that, you study the industry far more than we’d even do. So you know that certainly storage industry is not growing but there are other parts of the business networking and security and consulting that can grow. I think our objective is to maintain a strong forward momentum in-spite of the headwinds in storage and work our way through that and around that.

So I think that that’s what we are working to do rather than actually as to headwinds and just simply say throttle back is just too much for us. We’ll see what the outcomes are as the year goes by. But I think for us that’s the goal.

Eric Martinuzzi

Right. And you said April had shown some improvement and that helped you -- helped fortify the decisions?

Paul Lidsky

Late March and April, showed us a stronger momentum. I really, I can’t explain nor do I know anyone else who commented on their earnings call who can really explain why January was so slow and February didn’t pick-up. I have no answer for that and neither do any of my much more learned colleagues in the industry. And we just have to see how that plays out throughout the year.

Eric Martinuzzi

Understand. Okay, thanks for taking my questions guys.

Paul Lidsky

You’re welcome.

Operator

Your next question comes from the line of Rich Kugele.

Rich Kugele

Thank you, good afternoon. Two quick questions. One; did the $10 million in product drag within any service revenue shortfall as well or was it just the $10 million?

Paul Lidsky

It’s pretty much just product. We get installation but there is no way we would have installed it, on March one day. So, the orders had installation revenue with them but there is no way that would have happened in the first quarter. We wouldn’t have had time to install them. But they did carry maintenance and they did carry install, if that’s what you’re asking.

Rich Kugele

Okay. Yes, I’m just wondering if there was a bigger miss and that just happened to be the biggest piece of it.

Paul Lidsky

No, you take this and you take the milestone miss, you pretty much come with the whole miss that you guys were looking for anyway.

Rich Kugele

Okay. And then…

Greg Barnum

To talk about, was not in the $10 million, it’s an addition to the $10 million.

Rich Kugele

It’s an addition, okay. And then, as you look out pick the timeframe, 12 to 24 months. How much do you think that flash all-in which includes hybrid should ultimately represent of the business, is it a 75% type number of the storage side. Where do you think it kind of settles out?

Greg Barnum

Rich, I can’t honestly say I don’t know but I’ve thought that through like that. I mean, our legacy, our spinning disk business is still very large and our legacy customers are not showing a propensity to turn that over just for new technology. So I don’t know that, I think we’ll see flash continue to grow as a percent of revenue.

I think part of that will come from new logo acquisition, I don’t think as much of it will come from our legacy customers. And that number from legacy is so big that overcoming it with flash, which is not our objective, our objective is to look after our clients and make sure they have the right technology for their business issues. So we are not intentionally trying to display spinning disk with flash, like a flash company would.

There are manufacturers whose sole purpose and life is to replace spinning disk, that’s not what we’re doing here. We’re using flash where appropriate with legacy customers and who have legacy manufacturing, our installed base customers use flash for all kinds of reasons which we’ve discussed on the call. But we are not working to simply churn our base of spinning disk into flash.

So, it will follow whatever the normal course is or upgrades. I think our bigger push with flash and what may affect our numbers more will be purpose-built flash from our legacy partners and new logo acquisition using flash. And I really can’t say what that shift is going to look like.

Rich Kugele

Okay. Last question from me just on the competitive landscape on flash. Some vendors over the past few months have gone and launched upgraded versions of their traditionally disk and hybrid based solutions to now becoming all-flash varieties as well as some other vendors just stepping up price aggression to try and stay lofty, wave of incumbent of start-ups. But can you just talk about what the competitive landscape looks like there?

Paul Lidsky

Well, certainly, yes, the legacy manufacturers have announced or already have as generally available all-flash arrays, right, which you just described. I think that a lot of the decision comes down to the advantages and you can argue it back and forth but there are certainly advantages in many instances to have a purpose-built flash, one that was designed from a clean sheet of paper where not only -- not only the storage but the compute power, the upgrades, the customer support, everything is designed around a different concept.

There are lot of customers and clients out there who really appreciate how clean and all purpose-built flash really is. And there are many clients who are looking at the data center saying that they simply want to switch to that kind of a situation.

Legacy partners who are building all-flash arrays in many cases are still building them off of previous software data management designs. And so they’re not always as elegant. And again that’s in the mind of the beholder, that’s not for me to say. But I think there is room in the market for both approaches. And I think over time the market is going to tell us which they would prefer.

I think for Datalink, what’s most critical for us is that we can meet the needs of any of those clients with a multitude of manufacturing partners who allow us to be very, very specific in terms of what we build for our clients based on their needs. And we have focused a lot more on that on having the right type of storage and networking arrays necessary than we have on getting involved in the speed with which the industry, the flash industry grows.

So, I think there are a lot of different reasons why clients stick with either spinning disk or stick with a hybrid array with their spinning disk or because of say a data management layer they want to stay with that manufacturer when the manufacturer has an all-flash array. So, there are just a lot of reasons why our clients pick and choose what they do.

Rich Kugele

Understood. Okay. Thank you very much.

Operator

[Operator Instructions]. Next question comes from the line of Jason Noland.

Jason Noland

Okay, great. Thank you for bringing me on. I wanted to follow-up on… [Ends Abruptly]

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