Edgio Inc (EGIO) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Limelight Network's 2007 third-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. Please note that this conference call is being recorded today, November 5th, 2007, and will be archived on the company's website, www.llnw.com.

Representing Limelight Networks today is Jeff Lunsford, the Company's Chairman and Chief Executive Officer, and Matt Hale, Limelight Networks' Chief Financial Officer. With that I would like to introduce Matt Hale, Limelight Networks' Chief Financial Officer. Mr. Hale, you may begin.

Thank you, operator.

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' opportunity and future business prospects and 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, 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 the Company's periodic filings with the Securities and Exchange Commission.

With that completed, I'll turn the call 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' third quarter of operations in 2007.

First, let me provide some updated statistics on the macro-landscape. We believe there are three large-scale long-term trends that are helping to fuel Limelight Networks' growth.

First, a proliferation of multimedia viewing and listening devices and the demanding consumer's growing appetite for consuming high-quality content.

Second, the funding of that consumption, primarily through shifting ad dollars into the online and rich media advertising segments.

And, third, the rapidly increasing file and library sizes of the professional and user-generated content consumers are interested in.

Regarding the first trend. We are now hearing of $200 multimedia-capable PCs and of emerging initiatives to open the mobile handset platforms. Proliferation of lower cost and open-platform devices will further enable publishers to reach consumers over any device.

Regarding the second trend. In the second quarter 2007, we saw $5 billion of advertising spending funneled to the online channel according to the Interactive Advertising Bureau. This is less than 10% of enterprise advertising budgets and is growing at 26% per year. Of this $5 billion only 7% was spent on rich media advertising, and only 1% was spent on broadband video advertising. We believe this 8% share of online advertising is going to grow more rapidly than the 26% of overall online ad growth as more standards are developed and as tool sets become easier to deploy and use. We believe this shift is evidence of a long-term sustainable trend of ad dollars moving to the online channel, where advertisers have the opportunity to create more immersive experiences as they work to reach out and influence consumer behavior.

Regarding the third trend. There are no definitive data sources that quantify library sizes and file sizes, but we are seeing event sizes increase as much as fivefold from where they peaked last fall, which is indicative of larger files, larger libraries and larger consumer audiences. In general, we are seeing that CDN customers offering up high-fidelity content are growing more rapidly than those that are offering lower bit rate content. We believe consumers are searching for and finding the same type of broadcast experience they are just to enjoying through traditional high-fidelity television, DVD and game consoles.

Now, let's turn to Limelight Networks and our results in the third quarter amidst these growth trends. In the quarter, the market continued to embrace Limelight Networks as an innovative and the leading provider of content delivery services for the high-growth areas of online video, music, games, software and social media. Our differentiated architecture, which is optimized for large files and rich media traffic, continued to win business for us in head-to-head competition with both incumbent and emerging competitors. We enjoyed strong customer base and traffic growth and achieved key delivery milestones in our five-year strategic partnership with Microsoft. All of which contributed to revenue performance, margin expansion and cash generation that exceeded our expectations earlier in the quarter, when we established guidance. As you will see from our earnings metrics, a significant portion of the over-performance dropped directly to the bottom line.

Year-over-year top line non-GAAP revenue growth was 61% and sequential growth was 13%. We generated record bookings in the quarter, signing new relationships with over 200 net new customers. Our live production customer ranks grew by 112. And we made substantial strides in reducing account churn through our investments in account management. These strong revenue bookings and earnings numbers, combined with reduced account churn, are leading us to raise full-year earnings and revenue guidance for the year. Limelight's differentiated solution continues to allow us to grow more rapidly than the CDN market as a whole.

Turning to sales. Key customer additions in the U.S., included TiVo, PBS, Time Warner Cable, Warner Bros. Entertainment, Burger King, Sega, Salesforce.com, GodTube and Ripe Digital. In Europe, notable wins were ITV, IMG, Myvideo.com and Lonely Planet. And, in our recently opened operation in Japan, we signed VOD Systems, MSN and Allabout.com and substantially expanded our existing relationship with Sony Computer Entertainment to deliver their Playstation 3 updates globally.

In the quarter, we also continued to expand network capacity, opening two new delivery regions in the Asia Pacific theater of operations and continue to train our expanded sales force in ramp them to productivity.

Lastly, we continue to drive innovative new solutions into the marketplace in conjunction with many of our forward-thinking customers. Before I review those developments, I will turn it over to Matt to review the numbers.

Thanks, Jeff.

Before I get into the numbers, I'd like to remind you that we recently filed restated financial statements for the Company to correct for two errors that impacted our previously-reported results. The restated financial statements increased revenue and approved operating results for those affected periods. Any reference that I make today to historical periods will be to those restated balances.

During the third quarter, we reported GAAP revenue of $29.2 million, compared to $21.4 million for Q2. We reported a net loss of $3.1 million and $.04 per basic share. Reported non-GAAP earnings of $2.3 million and $0.3 per diluted share. The Q3 GAAP revenue included $2.6 million of CDN services revenue, which was deferred from Q2.

Please refer to the tables in our press release for a reconciliation of GAAP to non-GAAP measures. We reported non-GAAP revenue of $28 million, an increase of 13% over the prior quarter non-GAAP revenue and 61% over revenue for the same period last year.

Revenue this quarter includes $1.6 million of non-GAAP professional services revenue associated with our strategic relationship with Microsoft, and that compares to $0.8 million last quarter. This professional services revenue is deferred and amortized over periods ranging from 41 to 39 months for GAAP purposes. Therefore, recurring CDN services revenue in the quarter of $26.4 million is up 10% and 51% over the prior quarter and prior year, respectively.

During the second quarter, Limelight's international revenue represented 12% of non-GAAP revenue consistent with the prior quarter, and it is up from 7% of revenue for the same period in the prior year.

During the quarter, our active customer count rose to 988 for a net increase of 112 over the prior quarter. And this compared to an increase of 149 in the prior quarter. Our active or production customer count differs from our actual customer count, as we do not include active customer -- in the active customer count, new customers that have not started to generate revenue for us. The difference between the 112 added to the active customers in the two hundred-plus bookings that Jeff mentioned is simply a group of customers in our implementation cue.

Our average annualized non-GAAP revenue per customer, which we refer to as [Rpic] was $114,000 in Q3, consistent with the prior quarter and compared to $112,000 for the same period last year. And I'll caution you again that while our business and customer base are growing as rapidly as they are, variations in the RPic either up or down may not necessarily be indicative of positive or negative trends.

Gross profit margin on non-GAAP revenue, which includes both depreciation and stock compensation, was 39% for Q3, compared to 37% last quarter and 42% for the same period last year. The reduction in gross margin from the prior year is primarily due to an increase in depreciation on a substantial increase in network assets deployed over the last 12 months.

Looking at cash gross margins for Q3. They were 60%, compared to 58% for last quarter and 60% for the same period last year.

Operating expenses were $16.8 million in Q3, which was flat with last quarter and compared to $7.7 million for the same period last year. Operating expenses also include depreciation and stock-based compensation charges. Excluding these non-cash charges, our operating expenses for the quarter were $13.3 million, up $2.3 million over last quarter and up $8.3 million over the same period last year.

The sequential increase in operating expenses relates primarily to increased G&A costs associated with increased public company compliance and litigation expenses, increased head count and variable sales and marketing expense on expanded booking performance.

Adjusted EBITDA was $4.9 million, compared to $4.7 million last quarter and $5.9 million for the same period last year. Adjusted EBITDA increased over the prior quarter due to higher gross-margin contribution, which was partially offset by the higher cash operating expenses. Once again, refer you to the tables in our press release for a reconciliation of net loss to adjusted EBITDA.

Total depreciation and amortization for the third quarter was $5.9 million, up from $5.2 million for last quarter and $3 million, last year. The current quarter included $5.6 million of network-related depreciation and $0.3 million of operating expense depreciation.

Net interest income of $2.5 million in Q3 related to interest on our cash and investment balances. And compared to net interest expense of $0.2 million for both last quarter and the same quarter last year. At the end of Q2, the Company retired substantially all of its debt and, therefore, incurred minimal interest expense during the current quarter.

Moving on to the balance sheet, our combined cash and investment balance on September 30th was $194.2 million, up from $187.7 million in the previous quarter. Cash increased as cash flow from operations exceeded our capital investments. And, cash flow from operations was aided by a reduction in accounts receivable and an increase in deferred revenue. Capital purchases for the quarter were $7.3 million, down from $8.7 million in the previous quarter. Day sales outstanding for the quarter were 57 days, down from 90 days in the previous quarter.

Moving on to guidance. For Q4, we expect to achieve GAAP and non-GAAP revenue in the range of $28 million to $30 million. Non-GAAP revenue guidance includes $0.3 million expected from non-GAAP professional services revenue as compared to $1.6 million that was in Q3. So please note that some of the over-performance in Q3 was non-GAAP professional services revenue that was slated for Q4, but was delivered early. So when you upgrade your models, please consider this as revenue that shifted forward from Q3 into -- from Q4 into Q3, and it will not be replaced in Q4. GAAP revenue guidance includes amortization of deferred professional services revenue $0.3 million, which offsets this non-GAAP professional services revenue.

We are today raising full-year GAAP revenue guidance to a range of $102 million to $104 million. And, full-year non-GAAP revenue guidance to $104.3 million to $106.3 million. Adjusted EBITDA for Q4 is expected to be in the range of $4 million to $5 million, and, for the full year, to be in the range of $20.7 million to $21.7 million.

Stock-based compensation expenses for Q4 are expected to be approximately $3.6 million to $4.6 million. Details of our stock-based compensation by expense category are provided in our press release as supplemental disclosure.

Capital investments for the nine months were $21.6 million. We expect capital investments for the full year to be $30 million to $31 million.

With that, I'll turn it back over to Jeff.

Thanks, Matt.

Looking ahead, we feel good about the quality and strength of our platform and the sales momentum with which we entered Q4. We feel Limelight Networks is the best-positioned content delivery provider to execute within this rapidly growing and very dynamic marketplace. We believe our service suite, which attractively combines quality, operational maturity, performance, flexibility and operating efficiency positions us to continue to deliver growth that outpaces the rest of the market.

Our investment in an openly architected platform is allowing our customers and partners to easily imbed the Limelight Network's platform into their operations, providing for rapid leverage of our innovations in their efforts to bring their own compelling new offerings to the market.

Last week, at a gathering of approximately 200 customers and partners in Scottsdale, we introduced an exciting new offering for delivering HD content, LimelightHD, which leverages Limelight's unique architecture to deliver high-definition media and digital content over the Internet.

Leading Internet media entities, including Fox Interactive Media, MSN Video, Brightcove, and Rajshri.com, India's leading broadband video portal, are among those who announced they will offer HD content via the LimelightHD service. Media technology leaders supporting the LimelightHD initiative include Adobe Systems, Microsoft Corporation, Move Networks and VIO Networks.

LimelightHD will be available immediately on over 700 broadband access networks worldwide. The LimelightHD service is specifically designed to provide end users with a high-fidelity, high-definition media experience by bypassing the often congested public Internet and delivering content directly to last-mile broadband access networks.

At the heart of LimelightHD is Limelight Network's advanced global CDN architecture, consisting of thousands of high-performance content servers distributed worldwide connected directly to leading broadband access networks, interconnected via a high-speed, dedicated optical network and built to store and deliver entire content libraries. This global footprint reduces network latency and helps to ensure that every title in our HD content library, whether the most popular title or the least popular, will be consistently available to every user on demand. LimelightHD is just one example of Limelight's commitment to continued investment and innovation and collaboration with our customers and partners as this new industry develops.

We have mentioned many times this wave of traffic surging over the Internet and private lines as primarily a consumer-driven wave. We believe the compounding growth of this wave will continue for the next three to five years at a minimum, given the three macro trends mentioned earlier. We are aggressively investing and building this Company to help world-class publishers satisfy the insatiable consumer appetite for high-quality content this wave represents.

Limelight Networks was founded to transform the digital experience and advance the way we live, work and play. We have made great progress toward enabling new business models in the online world and realizing this original vision. We look forward to many more years of acting as a catalyst for advancing both the human experience and human interaction in the online world. When you read about Google PCs for $200 and see inexpensive handheld devices being used during your commute, think of how much data needs to be delivered to satisfy all those demanding consumers. Limelight Networks is well positioned to capture more than our fair share of that delivery business, and we look forward to reporting to you on reaching more key milestones in the future.

At this point, we'd like to turn it over to the operator for questions.

(OPERATOR INSTRUCTIONS). The first question comes from the line of Katherine Egbert with Jefferies & Co.

Hi, good afternoon. Couple of questions, Jeff and Matt. First of all, you reported a really good quarter and it looks like you're being quite conservative in terms of growth for Q4. Can you talk to us why in what would I think be your seasonally strongest quarter, you're being so conservative? And then also talk about the expenses for Q4? They seem to be flat quarter-on-quarter.

Okay. So, I'll take the first piece and then we'll let Matt talk about expenses. So, first of all, we were establishing guidance and we can't comment over the conservative or aggressive nature of that establishment. We believe this is the right range to set forth for investors. As we discussed last quarter, there's high variability in this business, Katherine, as you know.

Also, of import is the amount of revenue that we generated in Q3 as Matt mentioned in his prepared comments, $1.6 million of revenue in Q3 that was really normally slated to occur in Q4, and that's consulting revenue associated with our large partnership. If you look at the underlying traffic growth of the diversified business, almost 1,000 customers now, you'll get -- and you sort of have to back out that revenue, you'll get a more accurate sort of underlying growth number. And, you might not think that number's quite as conservative. But, ultimately, we believe this is the right to place to guide investors for Q4. Matt, you want to comment on expenses.

Katherine, we've held the line pretty well on expenses this quarter in spite of a pretty healthy increase in the litigation costs. And our Q4 contemplates a little lower cost associated with that than we had previously and that's about -- then over they're offset by increased sales and marketing costs, which leads us to a reasonably flat expense quarter.

Okay. And then, two quick ones. I noticed there's a big spike in deferred revenue. Can you talk about that? And then also, you pre-announced around 112 customers, I think it said, but today's press release says 175 new customers. What happened?

No. The press release says 112.

Okay. Oh, I'm --

The -- what was the first part of the question?

It was deferred revenues.

Deferred revenues. That's -- in the previous quarter, we talked about a significant license deal that we struck with Microsoft that is being deferred over a nearly -- just under four years. And that involved a substantial prepayment for that license or the payment terms of frontloading of that payment. And that was received during the quarter, so that's what ballooned the deferred revenues.

Okay. I said that other question backwards. I'm sorry. It was 112 today, the pre-announcement was 175.

Yes, the pre-announcement talked about our -- the number of bookings. The new customers that we've achieved and as Jeff said in his comments, we exceeded -- we're well over 200 on a net basis. As it relates to our active customer count that we use in the RPic calculation, that's 112. And the difference there is -- a new customer that's not generating revenue, we don't include in the RPic calculation until they start generating revenue.

Yeah. There's just a big implementation cue of signed, but not yet implemented customers, Katherine, is the difference.

Okay. Got it. Thanks, guys.

Sure. Okay, operator. Next question.

Your next question comes from the line of Sarah Friar with Goldman Sachs.

Good afternoon, guys. Just on CapEx. That came in a little bit lower than our forecast. And I'm just wondering, what that should imply as we think about next quarter and next year in particular? And, how you're dealing with the capacity utilization on the network? And, how that scales as effectively a fixed cost, if you know what I mean?

Well, I -- we've kind of seen a slow down of CapEx, and that's partly because we're enjoying some of the benefits that we've seen in deployment of our new software and also the better servers that we've deployed. So we've been able to get increased network capacity on a lower CapEx dollar. As it relates to the overall utilization, we are still running utilization of the network fairly similar to what we talked about on the IPO in the kind of the low to mid twenties.

Okay. And, is that where you'll keep it as we think through next year to allow for spikes and so on? Or do you think that you'll continue to build just given some of the excitement of what Jeff talked about all the new stuff coming online?

So, Sarah, we will over time dial up network utilization. The more diversified your customer base, the more diversified your traffic patterns and thus, the greater ability to run the network at higher utilization levels. The low to mid twenties that Matt mentioned is kind of the steady-state network utilization and then, we still see spikes that give above 40% utilization. And we want to be able to handle the largest events on the Internet, so we want to have that excess capacity.

So, over a period of years, we will slowly dialup network utilization as the customer base grows. But, quarter to quarter, I couldn't give you any direct input. We really just track things almost daily and make decisions almost daily.

Sure. And just one final one for you, it's still related on the growth-margin side. Again, a very nice improvement there, and it looked like it was actually the network growth -- comps that came down, or depreciation that came down. Matt, I know we'd talked on the IPO that you were using quite an aggressive timeframe to actually do that -- the depreciation over. Is that changing yet? Is that what took that down? Or, I mean, what should we expect going forward?

No. We're still using the same. We use a three-year depreciation on all our network assets. We've not changed that. I think what has changed though is our -- is a percentage of CapEx to revenue. So, we're slowing --

Got it.

We're slowing that down. And, again, that's related to overall throughput improvements that we're seeing in a network that don't require CapEx.

Got it. Okay, thanks a lot.

Thank you.

Our next question comes from the line of David Hilal with Friedman, Billings, Ramsey & Co.

Great, thank you. Jeff, your comments on HD. I wanted to drill a little bit into that. I think we all agree that that's going to be a big wave, but I wanted to try to get your perspective on the timing. And so let's just assume if 10% of your revenues was considered meaningful, when do you think HD-generated content will be meaningful to your annual revenue stream?

You know, Dave, that's a -- it's a hard thing to predict, because these initiatives are -- first of all, we're not giving any specific forward-looking guidance around '08 yet. I would estimate that will happen sometime in '08, but when in '08, I'm not sure. And the event sizes and there are a lot of players that are HD capable that are propagating out there, there are just way to many variables. Even the definition of HD is variable depending on who you ask. So I don't feel comfortable giving you a forecast of exactly 10%.

We definitely see it driving traffic growth as we mentioned already from last year to this year. Just the -- let's call it the increase in end-code rates are definitely driving more traffic. So, the 5x increase in event size that I mentioned wasn't just due to 5 times more viewers, it's a combination of more viewers with higher connection speeds and content that's encoded at higher bit rates. And all that combined gives you an event size or sometimes something's that 5x what people saw last year.

Okay. Let me ask you on sales and marketing. While up on a dollar basis, not up nearly as much as we thought or I think maybe as you guys articulated back during the IPO road show, and I wanted to get your thoughts on the ramp-up in sales and marketing. Have you slowed that down? Or will we see that accelerate into Q4 and into next year from what we saw in Q3?

Well, what we did is we invested a bit ahead of plan leading up to the IPO, so there was a little sales and marketing overspend in Q2 that we talked about last quarter. And, Q3 was primarily about getting those resources ingrained in our operations and ramped up and trained. We did achieve record booking levels in Q3, as I mentioned all-time record. And those folks are ramping into productivity. And now, you'll see us in Q4 -- and we hired some in Q3, but it wasn't as rapid as the ramp leading up to the IPO. Then, in Q4, you should see us probably hit the accelerator a little bit more on the sales and marketing growth.

We're really investing in all areas, R&D, the G&A required as a public company, salespeople, marketing programs, sales support programs, you name it. And then all the operations to handle the scaling of the network and all the account management and operations to handle the growth and the customer base. The customer base alone is growing at 20% a quarter right now.

And then, on CapEx, kind of a follow-up to prior question. CapEx was lower than I think most expected, and I think guidance for Q4 is the same. I know you guys were working on Pesto, which is going to help kind of utilization on the network and wanted to get an update on that.

Sure. So, the efficiencies that Matt talked about were primarily due to new equipment types, more powerful servers and the like. We do have elements of Pesto that are in what I'd call live test mode. We are going to start introducing Pesto into limited network operations probably later in Q4, earlier in Q1.

As we've said before Pesto is a -- it's a big catchall name for probably 10 different -- or more than 10 different components of the architecture that are being enhanced, and you're going to see those components introduced into production not as one huge event, but incrementally over probably the next 12 months.

David, those -- that -- those increases, or that software as it goes in will influence the amount of CapEx that we need going forward.

Yeah. Now with that said, David, there is -- we're rolling new software into production every month. And every new release has -- and almost every new release has, in many cases, some focus on performance and scale. It may be reporting on the backend. It may be you name it. It may be server throughput. There are a lot of different things we're doing to continue to help the platform scale and be more and more efficient.

Got it. Thank you.

Thank you.

Your next question comes from the line of [Brian Essex] with Morgan Stanley.

Hi. Good afternoon. It's O'Brien for Peter Cooper. I was just wondering if you'd had any insight into some of the customer dynamics that occurred in the quarter. Nice result with 112 net new adds. But what was the average retention rate behind that? What were the gross adds? And then, if maybe you could speak a little bit to the quality of customers? I know in the past that you said you're trying to pretty much improve the quality of the installed base. How is that working? And how we expect this to move going forward?

Okay. So, the two questions there. One. The proxy for I guess what you'd call quality, would be RPic. And RPic was steady quarter to quarter with the addition of whatever 112 new customers into the denominator.

Right.

The -- what I mentioned earlier about retention and churn, we've always just talked about net growth numbers, but we made substantial progress on reducing account churn in the quarter. We made so much progress, I don't anticipate seeing that kind of advancement in each quarter. We're constantly going to set the bar higher for ourselves and our account management team. But we almost cut the number of customers by count by 50% from Q2 to Q3. That's just an account count number. That's not a revenue-weighted number. So, this won't be something we talk about each quarter, it's just something that was very much an operating highlight for Q3.

And what we're focused on is growing the net number of customers in our base and growing RPic over time. As Matt mentioned, RPic -- if we go add 200 customers in a quarter, RPic could potentially go down, because your new customers tend to be smaller than your existing customers. But, we're focused on the quality customers, the one's who have growing businesses and are investing in their own businesses and value the services we deliver.

Okay. And any color on the competitive dynamics on a large customer front and how that may have been in the quarter versus maybe some of the smaller customers?

We -- this is a competitive and high-growth marketplace. It's like any other high-growth tech marketplace that I and anyone else on this management team has ever been involved in. It's characterized by rapidly -- rapid unit growth with some price compression per unit over time. But the units are growing so much faster than the price compression that the overall market is growing quite rapidly. And, people see the success of Limelight Networks and other CDNs, and so we have new entrants in the market on the low end and we have existing incumbent players on the high end. And our proxy for how competitive we are is how many -- what's our head-to-head win rate. And we talked about signing over 200 customers in head-to-head competitions in Q3. We think that number really says it all.

Okay. Great. Thank you.

Thank you.

Your next question comes from the line of Aaron Kessler with Piper Jaffray.

Couple questions here. First, can you give us any details on if there's any litigation costs with regards to shareholder lawsuits in the quarter? Also, on litigation on -- any update on terms next major dates we should look for in Akamai suit? And one follow-up question.

I'll cover the date; Matt can cover the costs. The date is simply that the trial is occurring, I believe it's the week of February 11th or February 12th.

February 11th.

Yes. And, that's all that we can tell you about progress in that situation. Matt, do you want to talk about expenses?

Yes, relative to shareholder litigation, we had just under $300,000 of expense for the quarter.

Great. And then, in terms of revenues as we go into '08. I know that one of your major competitors indicated recently that they thought growth would slow a little more meaningfully in '08 versus '07 given that we really haven't -- until we got maybe more adoption of HD or until there's the next inflection point in the sector. Would you agree with that analysis? Or do you think the growth will remain pretty robust next year even without really adoption of any HD services as we go into '08 here?

We don't -- our business is growing quite rapidly, so we're not in that sort of more mature business phase where we're looking for inflection points in the market. We're gaining market share and driving top-line growth from both just the organic growth of the market itself plus by expanding our market share within the market. And so are inflection point is every morning when our salespeople get out of bed and go into those head-to-head competitions and try to take market share.

Right.

Jeff Lunsford. And sign up new entrants into the market that don't have a CDN yet.

Right. And finally, in terms of like a reporting analytics solution, when would we expect maybe to get a more a swish into the market that obviously also further improve your turn rate and all that and improve the value-added services of Limelight?

Well, so we are enhancing our analytics and reporting every month with new releases, and that's an ongoing project. We have a lot of resources helping us with good experience in analytics. Folks I've worked with in the past, as an example, in that space.

We think -- that question goes to the larger question of overall additional products and services to deepen the relationship with customers. And we've said in the past that are current strategy is to focus on more CDN. There's so much to do in this core business -- expand new geographies, support emerging formats, deal with new channels like wireless, so on and so forth. And that we are creating an open architecture and letting other companies do things up and down the stack and hopefully take Limelight into their operating infrastructure. And that strategy appears to be working very well right now.

So the one area we are investing that you could potentially call another service would be reporting and analytics, but this is reporting analytics around the content we deliver. It's not the broader -- it's not broader analytics.

Right. Got it. Great, thank you.

Thank you.

Your next question from the line of [Rob Anderson] (inaudible).

Hi, thank you, good afternoon. You talked in your prepared remarks about growing faster than industry and you again mentioned market share gains, but can you discuss that your Q4 guidance in the context of that comment? Just given the guidance of your primary competitor reflects a higher growth year-over-year and about twice the growth rate on a sequential basis.

If you look, Rob, at the Q4 of last year for Limelight, you'll see that, what was it Matt, 20% of our revenue?

A little over 20%, yes.

Yes, 20% of our revenue came from one transitory customer. And that was a one-time project that was known to be an in-and-out kind of one-year project when we embarked on it. And so when we think about how this business is growing, we look at the diversified business under that. And again, you also need to look at just the Q3 to Q4, the swing in that $1.6 million in revenue, and calculate your growth rates there. And then I'll think you'll find that the growth rates of our business absent that Q4 hump of revenue from that customer, that one-time customer, are higher.

Okay, you're Qs and Ks discuss your exposure to My Space last year. Is that what you're referring to? Or can you tell us what that customer was this quarter as a percent of sales versus one year ago in the Q4 period, I mean?

Well, it was 20% revenue in Q4 of 2006. And we haven't broken it out this quarter or in our guidance for Q4.

But it's less. I can -- we can say it's less than 2% for the quarter and about 1% in the guidance for Q4.

Okay. Great. And then just one follow-up, Matt. Could you repeat what you said about your expectation for professional services revenue in Q4 previously versus what it is now? Just so we are on the same page there.

Yes. If you'll -- first off, rewind to last quarter. We said that we'd expect pro serve from this strategic Microsoft contract to be around $2 million for the full -- for the second half of the year. So we've taken about $1.6 million of that in Q4, and then contemplated in this guidance is about $0.3 million.

Okay. Thanks for the clarity there.

Thank you.

Your next question comes from the line of Michael Curtis (inaudible).

Hi, guys. Two questions. First of all, it looks like if you back-out the $1.6 million and the $0.3 million pro serve and then you get to sequential growth, which is around 10% second to third quarter and around 10% third to fourth quarter. I guess I was looking to see more of an effect of seasonality as you anticipate it and would have therefore expected more of an acceleration on a sequential basis in the fourth quarter.

Yes, I don't have my calculator out. I don't know if you look at the end of the range or the mid or the high end of the range.

Midpoint. Yes, we're looking at the midpoint.

Yes, at the midpoint of the range. Again, given what we're looking at right now. We think the guidance we set for Q4 is the appropriate place to set guidance. We also -- you look at year-over-year, we just put up 60% year-over-year growth, which is substantially higher than the other folks in the industry that are public and that report. So those are the numbers we look at when we talk about gaining market share. Then we look at the head-to-head wins of signing up over 200 customers in the quarter.

Yes. I mean, their definitely real big growth numbers. I guess, all I'm trying to question is the rate of growth. I guess I was trying to get some sense for how much seasonality you actually think that there is in the third quarter and fourth quarter, just to understand the business a little better?

And after that, my follow-up question was just about gross margins where cash margins were at a nice bump up this quarter. I know that you'd had a bump down last quarter. If you could explain what was positive that helped you out for this quarter versus last on gross margins -- cash gross margins?

Matt, you want to take cash gross margins?

Yes. We were definitely aided in the cash gross margins by the $1.6 million of professional services. So that was up about $0.8 million from the previous quarter. That helped about somewhere between 1% and 2%. So a lot of that gain that happened in the quarter was a result of the professional services.

And then on the seasonality issue? In other words, do you think there is as much as seasonality second to third and then third to fourth as you are -- you thought you might see, or is it flatter than you thought?

Well so, Michael, I'd answer that this way. When we establish guidance for Q3 and we guided to $25.5 million to $26.5 million, we were looking at the traffic and the numbers then and decided -- felt like we should -- that's where we should establish guidance, and we ended up doing $28 million in non-GAAP revenue. And right now, we're looking at traffic levels that indicate that we should be guiding at $28 million to $30 million. And we think that's the right range. And that doesn't mean you should extrapolate to what happened in Q3 is going to happen in Q4. What it means is this is a highly-variable business with 1,000 customers and just a lot of variability within those customers from month to month and from event to event. We can have one event with one large customer that could generate $0.5 million or $1 million of revenue that could be a positive surprise to us. Right.

Alright guys. Thanks very much with the help.

Thank you, Michael. Okay, operator. I believe there are no further questions at this time. Thank you everyone for joining the call today and we look forward to seeing you out there in the industry.

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