Edgio Inc (EGIO) 2007 Q4 法說會逐字稿

Good afternoon. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Limelight Networks Fourth Quarter and Full-Year 2007 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

(OPERATOR INSTRUCTIONS)

Thank you, Mr. Alfieri, Senior Director, Corporate and Investor Communications. You may begin your conference.

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 related to Limelight Networks market opportunity and future business prospects, guidance on 2008 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. This conference call is being recorded today, February 19, 2008, and will be archived on the Company's website, www.limelightnetworks.com.

I'd like to introduce Jeff Lunsford, the Company's Chairman and Chief Executive Officer. Jeff?

Thanks, Paul. Good afternoon, ladies and gentlemen, and thank you for joining us. Today we're pleased to report the results of Limelight Network's fourth quarter and full year of operations in 2007, capping off a year in which we grew our business 63% year-over-year on a non-GAAP revenue basis.

During the fourth quarter, the market continued to embrace Limelight Networks as an innovative and 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 file 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 operational milestones in the global expansion of our platform, all of which contributed to 35% non-GAAP revenue growth over Q4 2006. This was at the high end of our expectations and was accompanied by solid earnings performance and cash generation. It is noteworthy that we grew our cash balance by approximately $10 million in the second half of the year.

Turning to sales, we generated record bookings in the quarter, signing new relationships with over 200 new customers. We grew our live production customer ranks by over 170 in the quarter, which is a Limelight record. Full year bookings ended over 90% higher than 2006. Customer additions in traditional media included the NFL, Blockbuster, BBC America, and Harpo. Additions in social media, interactive and online games included Webs.com, mio.tv, and Gaia Online.

We also expanded our relationships within multiple divisions of media and technology giants, Sony and Microsoft, and began working with multiple agencies, such as Ogilvy & Mathers and Digitas, representing major global 2000 brands.

Limelight Networks continues to empower its customers to forge new ground in the online media space. In Q4 we carried the majority of the traffic for what we believe to be the largest online live broadcast of professional football game footage to date, as well as served as the exclusive CDN for what we believe to be the first ever online release of a studio backed film.

Companies with compelling content that are developing new distribution models in the online world are turning to Limelight Networks as a preferred enablement partner to ensure that their end viewers enjoy a broadcast quality experience. We are proud of our role in these industry defining events, and look forward to enabling more innovation in the near future.

Before I turn the call over to Matt Hale for financial highlights, I would like to provide some color around growth rates and events within the industry. First, the writers' strike. We estimate that the strike will cost us over $1 million in revenue this quarter, and possibly a few million per quarter for the remainder of the year. New content is what draws viewers online, and there is simply less new content in the ecosystem this year because of the strike.

Second, we have a few large customers in the emerging business model category that are undergoing business model shifts that will involve decreased traffic levels starting within the first quarter. It is important to note that these are not competitive losses, but instead changes in operating profiles of these businesses.

As we've discussed on previous calls, we continue to aggressively work to diversify our customer base, as well as enter new segments of the market, so that particular customer situations will be less impactful.

You can infer from our bookings achievements that our diversified customer base is growing nicely. As we look at our model, we expect that this more diversified base will become the primary driver of growth in the second half of the year, and that because of its diversified nature, we will see more predictable growth from there forward.

Given the combination of these factors, we are projecting year over year growth of 28% to 37% in Q1, and 25% to 30% in Q2. Note that this Q2 growth rate is as compared to our Q2 revenue -- our non-GAAP Q2 revenue last year of $24.9 million. We expect to see growth then pick up from there in the second half, and expect to exit the year growing faster than the overall industry.

I will now turn the call over to Matt to walk you through specifics.

Thanks, Jeff. During the fourth quarter, we reported GAAP revenue of 21.1 -- $29.1 million, compared to $29.2 million for Q3. I'll remind you that GAAP revenue in Q3 included $2.6 million of traffic revenue that had been deferred from Q2. GAAP revenue in Q4 compared to Q3 without this deferred Q2 revenue was up $2.5 million, representing a 10% sequential growth and is up $7 million and 31% from the same period last year.

For the full year we reported GAAP revenue of $103.1 million, and for the quarter we reported GAAP net loss per basic share of $0.08, and for the full year the GAAP net loss per basic share was $0.41. We reported non-GAAP revenue $29.9 million, an increase of $1.9 million, or 7%, over the prior non-GAAP revenue -- prior quarter non-GAAP revenue, and 35% over revenue for the same period last year.

Revenue this quarter includes $0.7 million of non-GAAP professional services revenue associated with our strategic relationship with Microsoft, compared to $1.5 million last quarter. This professional services revenue is deferred and amortized over 38 months for GAAP purposes.

Recurring CDN services revenue in the quarter of $29.1 million is up 10% and 32% over the prior quarter and the prior year respectively. For the full year, we reported non-GAAP revenue of $106.2 million, compared to $65.2 million in the prior year, representing a 63% year-over-year growth rate.

For the quarter we reported adjusted EBITDA of $4.9 million, consistent with the prior quarter, and for the full year we reported $21.5 million of adjusted EBITDA. We reported non-GAAP income per basic share of $0.01 for the quarter and $0.09 for the full year. Please refer to the tables in our press release for a reconciliation of GAAP to non-GAAP measures.

During the fourth quarter Limelight Networks' international revenue represented 11% of total non-GAAP revenue, down 1% from the prior quarter and up 2% from the same period last year. During the quarter our active customer count rose to over 1,150 for a net increase of over 170 from the prior quarter. This compared to an increase of over 110 in the prior quarter.

Our active [in production] customer count differs from our actual customer count, primarily related to customers in our implementation queue. Our average annualized non-GAAP revenue per customer, which we refer to as ARPC, was $103,000 in Q4, compared to $114,000 in the prior quarter, and $131,000 for the same period last year. As I've said in the past, please note that while our business and customer base are growing as rapid as they are, variations in the ARPC, either up or down, will not necessarily be indicative of positive or negative trends.

Gross profit margin on non-GAAP revenue, which includes both depreciation of stock based compensation, was 38% for Q4, compared to 39% last quarter, and 40% for the same period last year. The reduction in gross margin from the prior year is primarily due to increased stock based compensation in cost of goods sold over the prior year.

Cash gross margin was 58% for Q4, compared to 60% for last quarter, and 59% for the same period last year. The reduction in cash gross margin this quarter relates to third party expenses associated with custom CDN services which are not expected to repeat in future quarters.

Operating expenses were $17 million in Q4, up $0.2 million from last quarter, and compared to $13.7 million for the same period last year. Operating expenses also include depreciation of stock based compensation charges. Excluding these non-cash charges, our operating expenses for the quarter were $13.9 million, up $0.6 million over last quarter, and up $6.1 million over the same period last year.

The sequential increase in operating expenses relates primarily to increased litigation costs, which were $2.8 million in Q4, compared to $2 million in the prior quarter, associated with intellectual property and shareholder litigation.

Total depreciation and amortization for the fourth quarter was $5.7 million, down from $5.9 million last quarter, and up $1.7 million from the same period last year. The current quarter included $5.4 million of network related depreciation, and $0.3 million of operating expense depreciation.

Net interest income of $2 million in Q4 related to interest on cash and investments, and compared to net interest income of $2.5 million last quarter. The Q4 interest earnings were offset by a charge of $0.4 million related to loss in the value of marketable security, which had previously been treated as a temporary decline with the adjustment running through equity.

Moving on to the balance sheet, our combined cash and investment balance on December 31 was $197.1 million, up from $194.2 million in the previous quarter, marking the second quarter since our IPO that we grew our cash balance.

Cash increased as cash flow from operations exceeded our CapEx. Cash flow from operations was aided by an increase in deferred revenue, and other liabilities offset partially by an increase in accounts receivable.

Capital purchases for the quarter were $5.1 million, down from $7.3 million in the previous quarter. CapEx in Q4 was lower than we previously expected as approximately $2 million of equipment ordered late in the quarter was not delivered by year end.

Day sales outstanding for the quarter were 69 days, up from 57 days in the previous quarter. The increase in day sales results primarily from a seasonal slowdown in collections associated with the holiday quarter.

Moving on to guidance, for Q1 we expect to achieve revenues in the range of $30 million to $32 million of GAAP revenue, and this reflects the impact of the near term market dynamics that Jeff discussed earlier. Going forward, we will only report on GAAP revenue from this point forward.

The net loss for Q1 is expected to be in the range of $0.08 to $0.09 per basic share, and while we don't expect to owe any cash taxes in 2008, our guidance reflects a tax expense equal to approximately 12% of our pretax loss. A substantial portion of our pretax loss results from stock based compensation charges, which will be deductible for tax purposes in periods beyond 2008. As a result, the tax benefit from these losses must be reserved under generally accepted accounting principles. This results in a tax charge despite a book loss.

Adjusted EBITDA for Q1 is expected to be in the range of $2 million to $4 million. Adjusted EBITDA for Q1 includes a $1 million offset related to reimbursements from our shareholder escrow account related to the litigation with Akamai, which fully depletes this shareholder escrow account.

Total litigation costs for the quarter and the full year for all intellectual property and shareholder litigation is expected to be in the range of $3.5 million to $4 million, and $10 million to $11 million respectively. These costs have a considerable drag on our near term adjusted EBITDA guidance. Non-GAAP earnings for the quarter are expected to be in the range of $0.02 to $0.03 per basic share, and we used 82 million basic shares when setting our per share guidance ranges above.

Stock based compensation expenses for Q1 are expected to be approximately $3.5 million to $4 million, and you can see details of the stock based compensation expense by category, which we've provided in our press release as supplemental disclosure. Capital expenditures are -- capital purchases are expected to be in the range of $8 million to $10 million in Q1, and they include the [approximate] $2 million of purchase orders carried over from Q4.

So with that, I'll turn it back to Jeff.

Thanks, Matt. Looking ahead, we feel good about the quality and strength of our platform, the sales momentum with which we enter 2008, and our competitive positioning in the market. We feel Limelight is the best positioned pure play content delivery provider to compete within this rapidly growing and very dynamic marketplace. We believe our service suite, which attractively combines scale, quality, operational maturity, performance flexibility, and efficiency is unique in the market.

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

(OPERATOR INSTRUCTIONS)

And your first question comes from the line of David Hilal.

Great. Thank you. A few questions. I guess first, Matt, on the CapEx for the quarter [of two]. I guess I got confused when you talked about capital purchases, and then CapEx only being $2 million, which was significantly below where it's been running. So I just want to understand the dynamic there. And then, I know you're not giving full '08 guidance, but when we think about CapEx for '08, relative to '07, maybe you can help us out directionally.

Yes, for the quarter, when you take into account our -- both our -- the net -- the gross change in fixed assets was, I think, $5.7 million, and that was about $2 million less than we had in the latter part of the quarter expected it to come in, and primarily we had a couple of large purchase orders with our vendors that, where the equipment that was expected to be delivered before year end, got moved into the first couple weeks of January.

So it's somewhat artificially low, and so the Q1 guidance is a little bit high. If you took out that $8 million to $10 million -- if you took $2 million out of that, [and] you were in the $6 million to $8 million range on an annualized basis, that's not a bad directional number for you to use.

So, if I take that midpoint of seven, so about $28 million CapEx for '08, is that what you're saying?

That'd be a reasonable midpoint. I think it could be as high as a little north of 30, and it could be a little bit below 28.

Got it. Okay. And, Jeff, on the pricing environment, I guess, could you help talk about that, and I'm particularly interested in whether the rate of declines has slowed, if it's been decelerating or kind of constant, or if it's gotten more exacerbated?

I'd say, Dave, the pricing environment is, for the last six months has -- I don't -- it's hard to tell. Everything happens deal by deal, and the most competitive pricing activity is on the largest deals.

It's a high growth marketplace, and every high growth marketplace I've been involved in has had aggressive competition like we have here, and there are certain deals where our scale differentiates us, and our scale and our performance capability allow us to extract a price premium, and -- but it's to say -- give you a general trend, because it's so varied between the large deals and then the middle market deals and the small deals.

Okay. And then I'll just squeeze in a final question here on the legal expenses. What is the breakout, roughly, between, I guess, the Akamai suit and the Level 3 suit in that number you gave us?

Well, David, the -- the only thing we can really say about that is we're about through the trial on the Akamai suit. It should be through trial this quarter, and we assume there's some ongoing spend associated with an appeal process. And that happens on either side of that -- of the decision.

The Level 3 -- the only thing we can say there is that the scope of that lawsuit is very similar to the Akamai suit, with the only difference being that the court docket where the Level 3 suit is located generally operates at a much faster pace than the docket where the Akamai case was.

Okay. Thank you.

Thank you.

Your next question comes from the line of Katherine Egbert.

Hi, guys. This is Eric Bukovinsky on the line for Katherine Egbert. Jeff, I wanted to ask you a little bit more here on the headwinds that you outlined at the start of the call. In particular, I was wondering if you can give a little more color here on the differences between the writers' strike effect and maybe some changes in these major customers' business models.

First off, I guess, are these truly independent events here, or are these somewhat related? I.e., are you finding major media customers taking advantage of, say, maybe the slowdown of expected traffic here to kind of change around what they're doing with the business models?

They are not related in our assessment. You have two things going on. One is you have the writers' strike, and there's clearly less new content out there, and new content is what draws people online. We see that when we see a major TV show or something air a new release, and the next day they have a massive spike in viewership. Or a new movie, perhaps, then we see big pickup in downloads on one of the sites that has a download model. So that's independent of the second trend.

The second trend is just -- we've mentioned on actually multiple calls here. We have customers, and Limelight has always supported the entrepreneurial types that are going to go out there and try new business models.

And from time to time you get some that grow traffic, but their monetization is behind their ability to fund the business, and so they have to shift their strategy a little bit, or a lot, in some cases. And it's really two -- the second is a function of the -- this rich media market segment that is our forte, and you get great growth, but you also get more volatility. Right?

And it's in our DNA to work with these guys, and some of them become the next Facebooks and the next MySpaces. We worked with them when they had less than ten employees, at least the guys at Facebook, and others don't. So it's more of a portfolio strategy, if you think about it.

Okay. And then secondly, here on the -- on your customer adds. You guys have definitely been adding a very healthy number of customers -- live customers and new booked customers, and obviously, this is kind of -- what leads to this is traditionally a drag on ARPC. At least from our understanding, there's a drag on ARPC. And -- but [what the] tradeoff is you generally potentially can get a little better pricing, a little higher margins on these [names].

In the quarter, gross -- cash gross margins were down a little bit here, and you were indicating that you're not seeing a lot of competition at this -- at that smaller new customer level per se. Are you starting to see a bit of an offset here, where the new customers added are still, I guess, a little too small here to kind of offset some kind of pricing competition you're seeing at the larger customer level?

Well, I think the cash gross margin, Matt, was mostly because of that build-out.

We had some third party costs associated with a custom CDN build-out, [but] I said in my prepared remarks that we wouldn't expect those. That accounted for nearly the --.

The whole 2%.

The whole 2%.

Oh, okay. Okay.

And so, then after all the puts and takes and the large and the small customers, at the end of the day you just look at gross margin and see what's going on with pricing, and we basically seem to be holding the line at that -- at the same level we have for the last couple quarters when you back out that build-out flow-through from this quarter.

Okay, great. Thanks, guys.

Thank you.

Your next question comes from the line of Brian Essex.

(inaudible) guys. I was wondering if you can add a little bit more color in terms of the large deal dynamics. Are you getting more visibility -- I know David asked a question about pricing, but from a contract length perspective, are you seeing any variance there? And then, within terms -- as a follow-up to that, for the change in business model, how much of that is occurring at the large customer level?

So the second half of your question is -- it's really -- if it's the little guys, you don't really see it, right, because it's all part of the over 1,000 diversified customer base, and it's just kind of baked in. If we look at our top 20 customers, Brian, out of those top 20 customers, there's only a couple that are not traditional businesses, and they're what I'd call this emerging business model category.

And so, we think that what we've sort of quantified in the guidance and the growth rates we've given you here, effectively take into account what's going on with those couple, and beyond that we've got a bunch of legitimate -- well, I'd say, just traditional businesses that have good, strong P&Ls that aren't trying out new things that are happily funding their own line initiatives.

Okay, and then --.

Yes. That's good. Go ahead.

I'm sorry, and then with regards to contract length, are you seeing, maybe, a mitigation of little bit lower prices for some of those larger customers of longer contract length?

We haven't seen any major change in -- we're doing a couple hundred deals a quarter, and we haven't seen any major change in the average contract duration.

Okay. And then with those -- just one last follow-up. With those large customers, I mean, is it safe to assume that they're operating at a relatively stable level, or could we expect maybe an exit of volume similar to a YouTube or a MySpace that we've seen in the past?

No, we feel pretty -- like the large customer base, absent the emerging business model category, is very stable.

Well, and I think it's worthwhile noting that we only have the one customer, Microsoft, that's an over 10% customer. And that relationship is backed up by a multi-year strategic partnership with multi-year commitments on traffic, as well as the continued custom CDN work that we're doing for them.

Okay. So was this custom CDN an expense that you saw [in] a quarter related to that customer, or was it a different customer that that was related to?

On that one it was related to a different customer.

Got it. Thank you very much.

Thank you.

Your next question comes from the line of Sarah Friar.

Hi, gentlemen, it's Derek Bingham on behalf of Sarah. On the cash gross margin, you said that was depressed a couple points by the third party expenses. Could you give a sense for what you're expecting as we go through the year? Do you get some leverage there, or do you just hope to hold the line on that cash gross margin front?

I think we can see it move around a little bit quarter on quarter, but for the -- if we look at the whole year in totality, we would expect to see it pick up a little bit. We expect to get a little bit of leverage during the year.

Okay, great. And then, Jeff, I wonder if you could comment a little more on if there's anything in particular that gives you confidence about the kind of reacceleration in the back half of the year that you were talking about.

Yes, Derek, it's very arithmetic if you look at the customer addition rate, and the average deal sizes and just that diversified base, and you just look at our bookings assumptions, which we continue to meet or beat, it ends up that these -- sort of, this writers' strike issue and these couple customers that will actually decline in the first half, this underlying business is growing through that.

So, the first half the underlying businesses' growth kind of counters those, and then in the second half it breaks through and becomes the primary driver of growth.

Okay, got it. That's very helpful. And then just one more, if I could. Wondered if you could comment on your plans for expanding your sales force this year, and how that pace is going to be relative to last year.

Yes, we've -- I'm not sure that we've gone out with the exact number of sales headcount we're going to hire this year. We basically -- I'd expect it -- the big ramp was last year, and I would expect to see sales' expenses sort of grow in line with the top line revenue. We think the mix of sales and marketing as a percentage of revenue that we hit in Q4 is about the right mix. It produced record bookings, record customer adds, and we think that's about the right mix to take into '08.

Perfect. Thank you very much.

Thank you.

Your next question comes from the line of Jennifer Adams.

Great. Thank you. I know you mentioned on the call that next year you do not plan to report non-GAAP revenue, but given the lumpiness we've seen in the past year, could you just give us a little flavor how you expect professional services revenues to ramp [out over] '08, and if we should be concerned about any lumpiness in GAAP revenue next year, or the constant growth that you seem to have alluded to at your year over year growth rates? Thanks.

Yes, the strategic partnership we have with Microsoft had a pretty significant amount of early, baked in revenue growth associated with the first few of the -- first few [nodes] that we built out with Microsoft. Going forward, it's a fairly routine addition of nodes at a relatively minor amount of value that just about equals what we will be recognizing from the deferred revenues we amortize.

So, I wouldn't expect to see any lumpiness going forward. Typically, prior to this, professional services was never a big component of our business, so I would -- I think the growth rates that Jeff provided we should feel pretty good about, and other than the occasional dynamic of a change -- the shift that Jeff talked about, we shouldn't see any lumpiness.

Great. Thank you.

Thank you.

Your next question comes from the line of Herb Weiss.

Hi, this is -- quick question on Q2. Why -- I know you have the writers' strike that's impacting Q4 and Q1, but why so extreme in Q2?

Well, it takes a while, Herb, for the writers to [spool] back up, and for content to get back to where it's actually getting released. And we saw major customers postpone initiatives, push out budgets, hunker down into a very defensive posture with their spending. And so, it's hard to tell whether they'll go back full steam ahead right away, and even then there will be some lag effect before we get new content out there. The actual release of the content is what drives our business.

I think it's important to also clarify that the impact in Q4 was minimal. We started to see some traffic drop off at the very end of Q4, but it's really been after -- those billings were pretty much set. So it's really Q1 we've seen the traffic, and then, as Jeff talked about, some of these initiatives. Frankly, since we don't know how it will play out, we felt [it was] in the best interest to guide, assuming that it doesn't really come back strong.

Okay, so aside from the writers' strike, is there anything else impacting Q2?

Yes, well, it's the -- I said that these couple of emerging business models are beginning to have their shifts in March or sometime this quarter, and we think it'll really occur in March, and we're working with these customers, and so that -- you really see partial impact in Q1 and full impact in Q2 of those couple customers.

Okay. And those -- are those competitive losses, or are those --?

No, [they're] absolutely -- that was -- it was important to note in the script. Those are not competitive losses. Those are business model shifts.

Where the customer just plans to reduce or to limit the amount of traffic that they'll deliver.

Yes.

Okay, great. Thank you very much.

Thank you.

Your next question comes from the line of Chad Bartley.

Hi. Thank you. Couple questions. Jeff, just doing some quick, back of the envelope math on your full year growth. It looks like that could be in the range of kind of the low 30s to mid 30s. Is that roughly in line with what you guys are thinking? And then, I had a follow-up for Matt.

I talked about Q1 and Q2, Chad, and we don't -- and then we believe that [at] this back half of the year, we'll be growing faster than the industry's growing, because our win rate is allowing us to gain market share, but we cannot tell you today how fast the industry will be growing as we exit the year.

So, it's hard to say what a full year number looks like. We feel like the numbers we gave you for Q1 and Q2 are ranges that we can plan on, and in the second half of the year we'll know a lot more. Next call we'll hopefully give you, maybe, a -- in 90 days from now, kind of more of a full year picture. We don't think it's prudent to go out and guess at this point.

Okay. Thanks for that. And then, Matt, I think you mentioned you're using basic share count for per share calculations. I wanted to ask, does that apply to even your pro forma EPS guidance?

Yes. Yes, I used [it all] -- just the basic share count on all of it.

Okay. Can you tell us what diluted share count was in Q4?

I believe it's about 86.5 million.

Okay. Thanks, guys.

Thank you. And, Operator, that's the last question. At this time, we thank everyone for participating, and have a good day.

And this does conclude today's conference call. You may now disconnect.