Working Capital & Liquidity

Working Capital, defined as current assets less current liabilities, has increased 60% since 2008 (CAGR = 17%) and 75% just in 2011 compared to 2010. This increase was not linear as WC actually decreased in 2009 as a reflection of a worse performance from the company.

As I mentioned already, this increase can be good because it means DTLK has more current assets to face current liabilities and it can be bad if this increase is due to a lack of liquidity from these assets (e.g.: longer average collecting period – increase in accounts receivable) or even shorter period of chargeability on liabilities.

A deeper analysis shows that more than 80% of current assets are from accounts receivables and current deferred customer support contract costs. The same way, more than 85% of current liabilities come from accounts payable and current deferred revenue from support contracts.

I guess this is bad news in terms of Working Capital. Actually, average collecting and paying periods are both increasing so despite the decrease in liquidity of current assets liabilities’ period of chargeability are increasing. The problem is that APP is shorter than ACP and this is not sustainable in terms of liquidity. The good news is that this can be a temporary mismatch as Datalink’s track record shows since 2008.

The graphs above show that deferred revenues and costs from support contracts are increasing and that revenues are increasing more. This has to do with the fact that Datalink contracts customer support for a determined number of years, invoices and receives the money without incurring in the cost in that year. So revenues and the respective costs are diluted through the contracted years.

I see this has not having a big impact on working capital or liquidity. The fact that deferred revenues are increasing more than costs is good for profitability, but from the $16 million increase in 2011’s WC this only accounts for a $2 million decrease.

Liquidity

Operating cash flow has been positive for the last five years with the exception of 2010 when changes in working capital consumed almost $15 million of cash. We can see that the company’s growth strategy is consuming a lot of cash in working capital over the years.

Net earnings in 2011 regained importance in operating cash-flow. Amortization of intangibles also increased its relevance in 2010 and 2011 as the company acquires non-material assets along with Incentra’s and Midwave acquisitions.

The change in 2011 is mainly due to the increase in net earnings and the smaller increase in working capital as the company was able to delay payments significantly.

Investing activities’ Cash flow gives a clear statement of the acquisition strategy. In 2009 DTLK acquired Cross Telecom and Incentra and in 2011 acquired Midwave (see Acquisitions).

Cash-Flow from financing activities are only relevant in 2010 as the company used $3 million to repay the promissory note used in Incentra’s acquisition and in 2011 as the company raised about $17.5 million through a public stock offering. They issued more than 3 million shares.

With all this being said, Datalink reported to be have entered into a Credit Agreement which provides $10 million to help smooth cash-flows, although no borrowings were outstanding as of December 31^st.