Edgio Inc (EGIO) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Limelight Networks 2007 second quarter results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. At that time we will provide instructions for those interested in entering the queue for the Q&A. We request that individuals on the call today limit themselves to one question and one follow-up to allow others an opportunity to participate. Please note that this conference call is being recorded today August 9, 2007 and will be archived on the company's website www.llnw.com.

Representing Limelight Networks today are Jeff Lunsford the company's Chairman and Chief Executive Officer and Matt Hale Limelight's Chief Financial Officer. With that I would like to introduce Matt Hale, Limelight's Chief Financial Officer. Mr. Hale?

Thank you, operator. And good morning everyone. Some portions of this conference call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are all statements that are not strictly statements of historical fact such as statements regarding future events or future financial performance, including but not limited to statements relating to Limelight Networks market opportunity and future business prospects, guidance on 2007 financial results and statements concerning anticipated future growth and profitability. As well as management's plans, goals, strategies, expectations, hopes and beliefs.

These forward-looking statements are subject to risks and uncertainties and other factors that could cause actual results to differ materially from those contained, projected or implied in the forward-looking statements. And reported results should not be considered an indication of future performance. Factors that could cause actual results to differ are included in Limelight Networks registration statement on form S-1 and in the Company's periodic filings with the Securities and Exchange Commission.

With that opening I will turn the time over to Jeff. Thanks Matt. Good morning ladies and gentlemen and thank you for joining us. Today we are pleased to report the results of Limelight Networks second quarter of operations in 2007 and to provide you with an update of how we see our strategy succeeding in the dynamic, rapidly evolving and high-growth marketplace of rich media content delivery. In the second quarter we accomplished a substantial amount in moving the company forward, further establishing Limelight as the ascendant provider of content delivery services worldwide. And an enablement partner of choice for businesses desiring to deliver rich media assets such as video, music, games software and social media over the Web.

The scale performance and flexibility of Limelights' innovative and differentiating content delivery platform are becoming well understood in the buying marketplace. This led to our adding 149 net new customers in the quarter; achieving record booking levels in the United States, Europe and Asia. Global new business bookings in the quarter were more than double those achieved in Q2 of 2006. This doubling represents the incremental productivity of our existing sales team and only a handful of the newly hired sales resources that started in Q1. There is a second wave of resources hired later in the quarter that we anticipate will contribute to increased booking levels in the second half of the year.

In addition to new customers we strengthened our relationships with our current customers through modifications and extensions of their agreements with the Company. As mentioned we commenced a large strategic contract with a current customer of the Company. The contract which involves custom CDN services as well as content delivery services extends our relationship with this customer for the next five years. The contract also involves a cross license of intellectual property and as a result requires the Company to account for its revenues including its legacy content delivery services revenue in accordance with SOP 97.2.

To provide transparency into the fundamentals of our business we are adopting a non-GAAP revenue measure to more accurately reflect the underlying performance of the business in Q2 and future quarters related to this change in accounting treatment specifically for this large customer. Matt will provide you more details into this agreement and its impact on GAAP revenue. Using this non-GAAP revenue convention the Company achieved non-GAAP revenue in the quarter of $24.7 million non-GAAP EPS on a diluted basis of zero, and non-GAAP adjusted EBITDA of $4.4 million.

On a GAAP basis the Company achieved revenue of $21.2 million a GAAP EPS loss of $.23 per share and GAAP adjusted EBITDA of a loss of $5.6 million. Turning to other operating highlights for the quarter we achieved several notable milestones in our plan to scale the business in the key areas of customer based sales capabilities, network capacity and capital base. In the customer area we continue to build a diversified portfolio of customers, adding as I mentioned 149 net new customers in the quarter and growing our base from 727 at the end of March to 876 at the end of June.

Customer wins in the quarter included Viacom, CNN, Turner, US golf associations and electronic arts in the United States, Sony Corporation in Asia-Pac and Nokia Corporation in EMEA. In the sales area we continued building a worldwide enterprise sales force growing from 44 quota-carrying reps at the end of March to 58 quota-carrying reps at the end of June. We added additional skilled resources in the area of sales management, sales engineering and account management to support this expansion.

As mentioned above we also achieved record bookings in the quarter and are looking at a solid pipeline for continued customer additions in Q3. We anticipate that the additions to this team will begin to show productivity in Q3 and Q4. In the network capacity and capability area we continued building to be the world's fastest and most scalable content delivery network, scaling our total network egress capacity to approximately 1.4 terabits per second today and targeting 2 terabits per second by some point in Q1 of next year.

Lastly we expanded our capital base in the quarter with the execution of our initial public offering, taking our net cash position defined as total cash and investments minus debt, from a negative -$12 million at the end of March to over $187 million at the end of June. This capital base provides a solid foundation for growth as we look to expansion opportunities in the future.

In our press release we have provided guidance for both GAAP and non-GAAP revenue and GAAP and non-GAAP earnings. On our full year GAAP revenue guidance is for a range of 101 to $103 million and our non-GAAP revenue guidance for a range of 103 to $105 million. Our full-year GAAP EPS guidance is a range of a loss of $.54 to a loss of $.51 and our non-GAAP EPS guidance is a range of breakeven to earnings of $0.02 per diluted share. Non-GAAP adjusted EBITDA will be in the range of 16 to $19 million.

We began to experience some unanticipated drop-off in a few of our media customers in our June and July revenue. We believe this drop-off is due to the seasonality that media companies experience after the television season ends. In addition we began to feel some increased price pressure in certain customer segments which I will discuss in a moment. These two factors are leading us to be cautious in where we are setting revenue and earnings guidance for Q3 and the full year. Despite of the strong bookings I mentioned earlier.

Given the success we are seeing with our sales and marketing ramp however we believe we should continue to invest as we are currently able to attract some of the most talented individuals in the sector who we are confident will help us capitalize on the opportunity in the marketplace. It is important to note that we did not experience the same seasonality in 2006 as the television streaming portion of our business was just developing and business was ramping in other areas by over 200% annually.

Widespread consumption of Internet rich media content is still an emerging industry and we are learning what usage patterns will be and how to factor that into our future planning. Entering Q3 we feel comfortable with the strength of our business and the prospects before us. In conversations with our customers and prospects we are hearing of many major media pushes this fall which we anticipate will have a positive impact on our traffic later this year. We are also seeing confirmation of the broadband consumers growing appetite for high-quality content whether video, music or games.

This brings us to pricing. Over the last 30 days investors have begun focusing on a potential price war in the CDN marketplace so we thought it would be helpful to discuss what we are seeing in our sales channel with you directly today. We are beginning to experience some price pressure in the marketplace. We feel it is coming not so much from a price war as directly from content providers that are seeing extremely rapid traffic growth. These are normally the forward thinking providers that are pushing the envelope on consumer experience by investing in the higher resolution and thus higher bit rate streams which consumers prefer. In some cases the traffic growth is occurring ahead of the maturation of those customers' monetization strategies and they are asking for lower per-unit rates as their volumes grow and as their business models develop.

We believe this pressure actually works in Limelight's favor as it is created opportunities for us to build inroads into some of the largest media companies in the world and into smaller but high potential innovators. We believe Limelight is the most aggressive company in the space at driving down our delivery costs while maintaining world-class service levels and it has been passing on a portion of those savings to our customers which enables their business models. We are seeing good progress in the areas of bandwidth cost reduction, expanded peering relationships, server throughput efficiency increases and the potential incorporation of new technologies into our delivery cost equation. Our current potential customers recognize that continually enhancing cost efficiencies is one of Limelight's core competencies. They appreciate they can count on more content delivery volume at lower per-unit pricing from Limelight every year.

It is also important to note however that we are tasking our expanded enterprise sales force with penetrating more traditional and higher-margin content delivery areas where we see lower traffic growth rates but also higher margin opportunities. We believe this market segment diversification combined with the addition of expanded services in the future will help contribute to margin expansion into our targeted range.

I will now turn the call over to Matt to walk through some specifics around our numbers. Thanks Jeff. As Jeff stated we generated $21.2 million in GAAP revenue and $24.7 in non-GAAP revenue during the quarter. This represented a 43% and 67% growth respectively over the same period last year. We are pleased with the rapid progress we are making in diversifying our revenue and customer base. In Q2 no customer represented more than 10% of our GAAP revenues and only one customer represented more than 10% and that customer represented 14% of our non-GAAP revenues.

It is noteworthy that we are now in the first year of a five-year strategic arrangement with that customer, so we are comfortable with this concentration and with our growing relationship with them. During the second quarter Limelight's international revenue represented 15% of total GAAP revenue and 12% of total non-GAAP revenue. This compares to 7% of GAAP revenue in the prior period and is consistent with the previous quarter and represents solid growth and penetration in the international markets.

As Jeff mentioned we added 149 new customers in the quarter bringing our total customer count to 876. This is a record quarterly customer growth at topping our previous high of 102 net new customers in Q3 of last year.

Our average annualized revenue per customer which we refer to as ARPC was $97,000 in Q2 on a GAAP basis -- on a GAAP revenue basis and $112,000 on a non-GAAP revenue basis. That compares to $94,000 for the same period last year and $126,000 last quarter. The sequential reduction in the ARPC is a result of a large number of customer adds in the quarter which increases the denominator significantly. And as we mentioned during our IPO roadshow while our business and the number of customers is growing as rapidly as it is, variations in the ARPC either up or down will not necessarily be indicative of the positive or negative trends. We do believe that this will become a bellwether metric over time however.

Our GAAP gross margin which includes both depreciation and stock-based compensation was 30% for the quarter and our non-GAAP gross profit margin was 35% compared to 51% for the same period last year and 36% last quarter. Past gross margin was 55% on a GAAP basis and 58% on a non-GAAP basis for Q2, and that compares to 65% for the same period last year and it was up 3% from the 55% in the previous quarter.

As Jeff mentioned earlier we entered into a five-year agreement with a major customer and at this point we are not at liberty to disclose the identity of the customer but we expect to in the near future. This agreement is a large multi-element contract that includes a substantial traffic commitment over five years, and it also includes custom CDN services and consulting and a cross licensing of key intellectual property from both companies related to content delivery.

The intellectual property includes certain components of Limelight's CDN software. Because this contract involves a software component we determined the entire contract falls under the accounting guidance of SOP 97-2, and we have very recently determined that we should defer all revenue earned for the quarter from this customer including the ongoing CDN traffic services into future periods. The total revenue which we deferred for the quarter was $3.5 million, along with associated incremental costs incurred of $0.9 million. Of this $3.5 million, $2.6 million will be recognized in the third quarter of 2007 and the remaining $0.8 million will be recognized over the remaining 44 month period of the agreement.

We believe the GAAP accounting for this arrangement does not reflect the economics of this contract because substantial revenue and costs are deferred into the future quarters. And in the case of the custom CDN services amortized over approximate four year period even though we will receive significant cash payments associated with this contract in the first year. Accordingly we adopted the convention of reporting both GAAP revenue and non-GAAP revenue and earnings related to this contract to assist you in better understanding our underlying results.

Let me walk you through the accounting a little bit more in detail. For the traffic component we earn $2.6 million of CDN traffic revenue during Q2 which is deferred under this accounting treatment along with the incremental costs and will be recognized in full in Q3 as acceptance of the contingent portion of the first phase of the custom CDN project occurred in July. The deferral of CDN traffic will only happen this one time. For custom CDN consulting revenue we earned $0.8 million of services during the second quarter associated with the initial work on the first phase of the project. This earned revenue and associated incremental cost of $0.3 million was deferred and will be amortized over an approximate four year remaining life of the contract. We expect to earn an additional $2 million of custom CDN service revenue in the second half of 2007, which will also be deferred and amortized over the remaining contract period as earned.

It is important to note that there will be no additional deferral of costs under this agreement now that acceptance of the first phase has occurred. The project calls for an ongoing custom CDN services to be provided over the next several years. Amortization of this CDN revenue and associated license revenue is expected to be $0.8 million in Q3. We have provided a table in our press release that reconciles our GAAP revenue and earnings to the non-GAAP presentation for the quarter. On a go-forward basis we will provide this reconciliation of GAAP to non-GAAP to assist you in better understanding our results.

So to recap in using this non-GAAP revenue convention the company achieved non-GAAP revenue in the quarter of $24.7 million, had breakeven results from a diluted EPS basis. And on a GAAP basis reported revenue of $21.2 million of revenue and an EPS loss of $.23.

GAAP and non-GAAP operating expenses were $17.2 million in Q2 and that is up $4.2 million for the same quarter last year and $12.6 million in the prior quarter. Operating expenses also include depreciation of stock-based compensation charges and excluding these non-cash charges our operating expenses for the quarter were $10.9 million which is up from $4 million in the same period last year and $7.2 million in the prior quarter.

The sequential increase in operating expenses reflect the significant investment we are making in the area of our business from ramping G&A costs associated with public company expenses to expanding sales and marketing to expand platform capacity to adding R&D capabilities and resources. And we expect to see continued investment throughout the remainder of 2007.

Non-GAAP adjusted EBITDA was $4.4 million and that compared to $5.6 million for the same period last year and $6.6 million for last quarter. Similar to the gross margin changes above the reduction in non-GAAP adjusted EBITDA reflects the impact of cash investments we are making to support our growth. Total depreciation and amortization for the second quarter was $5.2 million and that is up from $2.1 million for the same period last year and $4.8 million last quarter. These charges include $5.1 million for network related depreciation and $0.1 million for operating expenses.

Net interest expense in Q2 of $0.2 million included interest on bank debt of a half a million and a non-cash charge of $4 million associated with a debt discount that was written off in conjunction with the retirement of that debt during the quarter. This was offset by $0.6 million of interest income during the quarter. GAAP net loss for the quarter was $10.5 million or 23 -- or a loss of $.23 per share. Non-GAAP diluted EPS was a profit of $.4 million and breakeven per diluted share. Our diluted weighted average share count for the quarter was 79.4 million shares.

During the same quarter our stock-based compensation expense was 6.6 million up from 5.5 million in the prior quarter and I will ask you to please see the table included in our press release for a breakout of these expenses by area of our business. Moving on to the balance sheet our cash balance at June 30 was $187.9 million and that is up $12.5 million from the previous quarter. The increase in cash represents the net proceeds from the public offering offset by the payoff of the $25 million bank debt. We also used $3.9 million of cash in operations during the quarter.

Capital expenditures for the quarter were $8.5 million and that is up from $5.6 million in the previous quarter. GAAP days sales outstanding for the quarter were 83 days and that is up from 53 days in the previous quarter. When you calculate the DSO using non-GAAP revenue that number drops to 72. Included in that 72 is another 10 days associated with end of quarter billings for pass-through hardware that was purchased for this large CDN project customer. Additional increase in DSO was primarily associated with new monthly minimum startup billings associated with the large number of new customers activated during the quarter. We generally expect DSO to range in the 60 to 70 day area.

For Q3 we expect to achieve GAAP revenues in the range of 27 to 28 million and non-GAAP revenue in the range of 25.5 to 26.5. And I will remind you that the Q3 GAAP revenue will include the reversal of the $2.6 million of CDN traffic revenue deferred in Q2. We expect to report a GAAP EPS loss in the range of $.10 to $0.08 and a non-GAAP EPS loss of $0.06 to $0.04. Stock-based compensation expense for Q3 is expected to be approximately 5 to 5.5 million. Details of stock-based compensation expense by category as I mentioned is provided in this in the press release.

Jeff has already described our full-year guidance so I will not repeat that here. And I will just remind you that there is a complete reconciliation of GAAP to non-GAAP measures for each of those GAAP and non-GAAP metrics that we have provided. Capital expenditures for the first year were $14.1 million and we expect expenditures for the full year to be in the range of 30 to 35 million. Investments in sales and marketing which we kicked off at the end of last year are beginning to bear fruit as evidenced by the 149 new customers. And our capital expenditures have continued to expand our network capacity to position us for substantial reserve capacity to meet the coming market demand.

So with that I will turn it back to you Jeff. Thanks Matt. Summing up we feel good about the quality and strength of our platform and the sales momentum with which we entered Q3. And we are taking a cautious view regarding seasonality and price pressure in our forward-looking guidance. We don't believe the latter affects the long-term prospects for the business because we feel Limelight is the best positioned content delivery provider to execute in this rapidly changing and competitive marketplace. We believe our service suite which attractively combines quality, operation, maturity, performance, flexibility and operating efficiency positions us to continue on a path of expanding market share. We are building this Company to win and our two most important forward-looking metrics, customer additions and bookings, were both nicely trending in the right direction in Q2 and illustrate that our plan is succeeding.

Based on the trends in these metrics we feel great about the market and are continuing to invest in the opportunity. We will now open the line for questions. Operator?

(OPERATOR INSTRUCTIONS). Sarah Friar, Goldman Sachs.

Good morning, Jeff, talking about the conservativeness on guidance so if I think of the three levers, there is demand, there is pricing and then there is competition. It seems like you are saying demand is still very good. You have talked a little bit about pricing; can you give us more color on the competitive side? So in particular your big competitor being Akamai, are you seeing changes in their strategy vis-a-vis pricing? And then we have seen a lot of announcements out of smaller CDNs. Are they starting to nibble away or how do you think their momentum is moving in the market?

Good morning Sarah. So first of all yes, we see demand with the bookings numbers, the customer adds, demand is very healthy and the sales folks we are hiring are coming online so we feel good about demand. On the competitive front we have been -- this company has been and I guess bitter competition with Akamai for almost six years. Its entire existence. And I think the dynamic there is the same as it has been since we started talking which is on very strategic deals, we will see those guys get in and get very aggressive on price. And then the smaller guys are, I would say you know you are always in a hot market like this, going to have established providers and then folks you see how well those established providers are doing. And so they are coming into the market. And there are three or four smaller players that we see from time to time in the sales channel but none of them steps out glaringly. I mean really for the large opportunities we believe that we and Akamai are the kind of heads and shoulders from a scale and quality standpoint above the rest. And so our competition in those -- in the large opportunities usually ends up being head to head with them.

Got it. So you haven't seen a marked change if you think about going into your IPO roadshow in the June time frame to now, it's still similar competitive environment?

Yes, I think that since I have been here I have heard that their management team has told them not to lose a deal to Limelight on price, quote, unquote. So that's I believe has been their mandate and you know I think that what happens is we basically each evaluate opportunities, looking at our own cost structure, our own P&L as we discussed before profitability in this business is all about filling the valleys and different customer opportunities have different cost profiles for both us and them. And I think we just look at each opportunity on a case-by-case basis.

One quick follow-up for Matt. Matt, are you still comfortable with the view that growth margins can continue to rise despite the fact you have this downtick sequentially. And kind of what continues to drive that drive that rise in gross margin?

So a couple of things. We are as I mentioned seeing good progress in, as our traffic scales getting increased leverage on our core bandwidth buying for transit. We are still seeing some success in colo. We have some very good server efficiency projects underway in the labs; we are seeing very promising results. And those are the initiatives that we discussed with you a few months ago. So and then the second thing is as we expand the solution set, and as we task our enterprise sales force to go penetrate the more let's call them classical content delivery market segments that aren't these new rich media super high-volume, super high-growth, as I said earlier they are lower growth but higher-margin opportunities. We believe that we can expand into those markets and execute higher margin customer relationships.

And then the third element is we have discussed in the past that today we have a great core CDN service and it is our plan to add complementary solutions to that in the future. We don't have anything that we are ready to talk about immediately but that is absolutely long-term. We have spoken in the past about a gross margin target in excess of 50% and we still feel comfortable based on what we saw in the latest months of June and July from a gross margin standpoint that we can march towards that. I think as you and I have said in the past probably a point a quarter or something like that, but it is going to be -- it is not going to be a straight line.

Great. Let me leave it there. I know others have will have questions. Thanks.

Peter Cooper, Morgan Stanley.

Great, thanks very much. Hey Jeff let's talk about this deal for a second, the license deal which is certainly a nice chunk of revenues. If I am looking at it with the rose colored glasses here is this kind of a way where if somebody is thinking about doing something in-house you guys are still making money on it?

That is correct, Peter.

Would we expect deals like this in the future do you think?

It is not a core part of our strategy to become a software company but when a very large and very strategic customer approached us about this opportunity we sat down with them and crafted a large five-year strategic relationship, where we believe it made a lot of sense for Limelight. As we mentioned there is cross license of intellectual property involved here and ongoing CDN services that we are providing for five years with commitments therein. So if something makes good business sense for us we will look at it and now that we have done that once, we certainly wouldn't rule out doing it again. But we are not on a dramatic path to becoming a software company. We do not have any active discussions with other folks along these lines today.

That's very helpful. Thank you. And then I am not sure what you can comment on. We saw recently in the ongoing court saga you guys had won a motion recently. The Markman Hearing seemed to be leaning in your favor. Any updates that you can discuss about the lawsuit at this point?

The only factual update is yesterday the judge set a trial date of February 11; and beyond that we have been advised that we should not discuss litigation matters.

Understood. I will leave it there. Thanks very much.

Catharine Egbert, Jefferies.

Hi, good morning; I also have a question on this custom CDN customer. Can you tell us what exactly kind of contents are they delivering and also does this business have any off-line component or are they purely an online business?

This customer is a very large company that has all types of Internet media and also has what you'd probably characterize as off-line business as well.

And what are you doing for them, Jeff? Is it -- is it within their own network? Is it something customer facing? Can you tell us the kind of content it is?

Catherine, we have been asked by this customer not to discuss either their identity or their specifics around the contract. This contract will become I believe attached to our 10-Q for the third quarter and you know I think at that time there will be.

Prior to that.

Prior to that there will be a good bit more color but we are trying to honor the customer's request for confidentiality in our contractual commitment for confidentiality.

Okay. Understandable. And then just really quickly, Jeff, you said that there was traffic growth ahead of monetization strategies. And that was creating some pricing pressure. Can you talk about where that -- is it like social networking sites? Is it rich media? Where are you seeing that?

Where we are seeing it most prevalent is in sites that are in investing in high quality video and we are seeing that the consumers are flocking to those sites. Consumers are -- they don't like the jerky low-bit rate stuff. They definitely migrate to areas where they can get a quality viewing experience and that there is a direct correlation between that and bit-rate streams. And so some of these customers are experimenting with those and what is happening is they put the high-bit rate streams up there. Their traffic goes through the roof and they realize they have a success on their hands from a consumer viewership standpoint. And based on that now it is time to get the whole ad wrapping system and salesforce or partnership in place and sometimes that monetization project lags the traffic growth.

Okay. That helps; thank you.

Aaron Kessler, Piper Jaffray.

Hi guys, a few questions. First on the large customer deal can you give us a sense about the competitive win or if you already had the customer maybe you gained some additional share from that customer? Also was this kind of originally in your thinking that this size customer for the year and then I have a couple of follow-up questions.

Yes, Aaron, so this was an existing customer and that is what primarily led to this adoption of the non-GAAP revenue. Because all of the revenue from this existing customer which has been a substantial part of our revenue in the past essentially goes to zero on a GAAP basis in Q2, even though we have done 90 days of traffic for them it gets rolled into the 97-2 bucket. So that is why we believed it was appropriate to adopt this non-GAAP convention to show it to you both ways; how does it look GAAP and how does it look non-GAAP. But it was an existing customer and yes, the existing part of this customer relationship as well as the revenue contemplated from this long-term strategic partnership was factored into our thinking since the days that we began talking with you.

And is this an exclusive deal or are they still using other vendors out there?

Not exclusive.

Got it, okay. And then just any visibility you can provide us at this point to what you have into Q4 revenues. Q4 revenue guidance does look somewhat conservative given your relatively solid Q3 guidance. How should we think about the Q4 ramp? And I have just a follow-up question for Matt. Can you give us a sense for the share count for Q3?

So with the Q4 I guess you are just backing out the Q3 guidance from the full year; and again we believe the right thing to do here when we are seeing a little bit of seasonality that we haven't seen in the past, is to just step back and monitor that. All of our customers are forecasting good big projects for the fall but we believe it would be aggressive to just assume that all that is going to happen. And the way our forecasting works is that we take current month revenue and flow it through and add new bookings to that. And when you have a dip from seasonality in a month like July then that flows through into Q3 and Q4 and so we just think while bookings are ahead of plan and doing great and adding to the revenue, we want to make sure that we don't overestimate the return of that seasonal traffic in the fall.

Right. And Matt do you have a sense for the share count for Q3 (multiple speakers.)

I meant to pop that out there for you. The basic shares you should use is 82 million and the diluted share is 86 million.

Great. Thank you.

David Hilal, Friedman Billings Ramsey.

Thank you a few questions. A follow-up to the seasonality questioned there, Jeff, I understand the softness potentially in Q3 for seasonality but I certainly would think Q4 would bounce back and be quite strong. And as you pointed out we can back into the Q4 numbers, so I guess I don't understand why Q4 guidance is so low because seasonality theoretically should actually play to your advantage in Q4 and not your disadvantage.

You are right, David. We believe it will. We just think again to be as a newly public company, we want to be very forthright and transparent with you guys. And the way this industry is developing and at this growth rate we want to give you all the benefit of what we are looking at and show you how we are thinking about it. And the way we are thinking about it right now is we believe that traffic is coming back and we believe a lot of big fall initiatives will flow over our networks. Customers are telling us that but until we see it we think it is prudent not to go ahead and count on it.

So when you think about what has changed between when you are on IPO roadshow and now, obviously seasonality seems to be something new, more severe pricing pressure you mentioned as well. If you had to kind of be one of those -- does one of those have a bigger impact on your guidance versus the other? Is it fairly equal? I am just trying to understand the magnitude --

I would probably say it is about equal because we have some reasonably large customers that are in this category of high traffic working on monetization and so we just again believe it is prudent to assume that while they are working on that we just can't -- we have always viewed ourselves as partners to our customers and not as an arms length bare fisted vendor that is going to gauge every penny out of them. We want these guys to be successful. So I would say it is about half that and it is about half the seasonality. It is hard to quantify it on the fly but those are really the two factors.

And on the pricing pressure were there deals in the quarter that it got so bad that you walked away because it didn't make economic sense, and maybe philosophically you can talk about how you view that?

Yes, there were deals like that, and our sales operations process and pricing approval process has gotten much more rigorous just over the last six months as we have put in more measures. And I am personally approving anything that is over 20% off of list, and our pricing practices just like most technology companies where you see things on average between 20% and 30% off list price. So there are definitely deals where we say no, we are not going to do that at that rate. I would say that those are -- that's not at all the norm -- there is probably -- that might be one in 10 deals that we look at where we say their expectations or their request is unrealistic and we are going to move on and work with customers that value what we do for a living.

All right. And then let me ask you the next software update I think you guys code named the pesto, is that still on target for Q1 of '0?

Well pesto is a multi-element or multi-component release. There are in our architecture, there are many components in the software layer. And there will be some components of pesto that we put into production in Q1, as I think mentioned to you in the past. You will not see a step function where we propagate it through the network and all of a sudden our efficiency doubles. It is a major performance enhancement release and it will go out in components and we should see we think over next, probably all of next year as it phases in. What we hope to be something around a doubling of server throughput efficiency.

All right. And then my last question if you could bifurcate your sales and I would be curious to look at it on a bookings basis, as well as the 149 net new customers. But if you think about your old sales model which was the indirect basically your telesales effort versus now your direct model how much of the business was driven via the direct sales that you have been adding versus your traditional indirect go-to-market strategy?

Yes, that's a good question. So as an example our New York field office in the quarter delivered I would say probably 10% of our bookings and these are all folks who are new to Limelight within the last roughly 6 months, and so the New York sales office is coming online. We have added substantial resources in our London office and those guys are knocking the cover off the ball.

Europe is a very fertile market for us right now. We think that we are taking about four months for these field reps to come online and it is more like two to three months for telesales rep to come online. The bulk of the over performance in the bookings as I mentioned was however delivered by the existing Tempe tele-salesforce team and that is what is actually very encouraging is these guys are performing at efficiency rate sales productivity rates, you know higher than they have. So their productivity is improving and we have the field coming online, but the record bookings in Q2 are really mostly by the old team. And it is real -- it is one team but the field is just beginning to come online. So we think that we will see strong bookings in Q3 and Q4 given the pipeline that we are looking at today and the productivity ramp of those field resources.

And I lied, I have got one more question for Matt. Matt, I don't understand the guidance, the delta between GAAP and non-GAAP revenue in Q3 is $1.5 million. I would've thought it would have been the $2.6 million that got deferred out that you are going to recognize in Q3. So help me understand that -- what is $1.5 million delta?

Yes, in Q3 we do put the $2.6 million into revenue and then -- but we also take about $1.1 million of additional from a pro forma or a non-GAAP measure. We recognized about $1.1 million of additional services on the custom CDN so the two offset each other.

Okay. Got it. All right, thank you.

Thank you, David.

Catherine Egbert, Jeffries.

Hi thanks. A couple of quick ones. Jeff you said the bookings in the quarter were pretty good. Can you give us any color on that?

Well it was, bookings there is not a GAAP definition of bookings so as we have said in the past we will give you a color around bookings but a number is not really something that is easy to quantify. As we define a booking, we doubled bookings, more than doubled bookings over the last year. It was record bookings in all three theaters which is the Americas, Asia-Pac and Europe. The average term of our contracts is still around one year, but we also are -- we have implemented incentive plans where our salesforce get compensated more for multiyear deals, so we are working to drive up the longer-term commitments.

We also have incentivized our sales folks to get higher committed revenue and that is working. We picked up about 4 percentage points of our total revenue in the quarter that is 4 percentage points higher in Q2 is committed revenue as a percentage of revenue than we were in Q1. So all those things give you a sense that and with the customer adds at 149 the performance was basically record all around. And we feel like Q3 will be from an overall booking standpoint, even higher.

Okay. That's what I was looking for. That's helpful. And then really quickly, Matt, can you tell us about bandwidth pricing what you are seeing both for longer-term contracts and spot pricing?

Well we continue to see our ability to achieve decreases; you know when bandwidth was $100 we achieved big dollar savings, as a percentage though we continue to see that come down. We also see the amount of peering going up where we have added significant number of peers since we last reported and our peering and the amount of traffic that we are sending over settlement pre peering which has the same effect of reducing bandwidth. That is going up. So we are attacking it on both fronts. And at this point in looking at it from a percentage reduction we have been able to achieve pretty well along the historical averages.

Okay. That's helpful. Thank you.

Aaron Kessler, Piper Jaffray.

Just follow up on the EBITDA guidance I was also a little lower than we were expecting for -- can you give us some color? Is that more just a little lower revenue expectation or is that more increased sales and marketing and maybe the pricing pressure that you have noted? Thank you.

So it is a combination, Aaron. I think the guidance of 103 to 105 million in pro forma revenue is a little lower than we have been modeling as I mentioned for the two reasons of seasonality and just being cautious about price pressure. And in that combined with the fact that the company has enjoyed kind of a good bit of prominence recently and we have been able to attract; we have been approached by many of the most talented sales and folks in the industry. And we believe the right thing to do is to go ahead and get those folks on the team while they are interested in Limelight. They are going to help us execute on this plan and move further up the enterprise value chain and deepen our relationship with many of these enterprise accounts. So we are -- we believe the right long-term thing to do here is to proceed with that sales and marketing build and build for an '08 and '09 where we see a great market opportunity and not to just because we feel a little cautious about revenue, to all of a sudden dramatically change that growth profile.

Great. Thank you.

[Ray Conley], VAI.

How are you doing Jeff?

Fine, Ray. Good morning.

Could you talk a little bit about how you are thinking about CapEx in your forecasting going forward?

Sure, Matt?

Yes, Ray, we had -- the first half we spent a little over 14 million and as I said in the prepared remarks we expect that to be -- to probably top 30 million and come in between there and 35 million for the year. And then we have previously said we think that somewhere between 35 and 40 million will be a sustainable amount of CapEx for the next couple of years. So as a percentage of revenue CapEx should continue to drive down.

Okay. And can you all tell us what percent of your traffic was geared in the quarter?

Yes, it was 56%.

Okay. Thank you.

We have reached the allotted time for our Q&A session. I will now turn the call over to Mr. Lunsford for closing remarks.

I would just like to thank you for joining us today. As mentioned with feel like the bookings trajectory and the customer adds here paint a bright picture and we are going to continue investing. We look forward to seeing you out there and talking to you on any follow-up calls that you would like to have. Thank you.

This concludes your conference call for today. Thank you for your participation. You may now disconnect.