Edgio Inc (EGIO) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Limelight Networks' 2008 second quarter results conference call. At this time, all participants are in 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. I would now like to turn the call over to Paul Alfieri, Senior Director of Corporate Communications. You may begin, Paul.

Thank you and good afternoon. Thank you for joining Limelight Networks second quarter 2008 financial results conference call. Speaking today will be Jeff Lunsford, Chairman and Chief Executive Officer, and Matthew Hale, Chief Financial Officer. This conference call is being recorded on August 12, 2008 and will be archived on our website for approximately one week.

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 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. I would now like to turn the call over to Jeff Lunsford. Jeff?

Thank you, Paul. Good afternoon. Thank you for joining us today. Limelight Networks continued to demonstrate steady progress during the second quarter of 2008. Our business grew 22% year-over-year, generating revenue of $30.3 million, just above the high end of the guidance we've provided on last quarter's call. We also generated adjusted EBITDA before litigation cost and stock-based compensation in excess of our expectations and delivered three points of gross margin expansion over last quarter.

We experienced strong new business in relationship expansion bookings from some of the most innovative digital media businesses on the Internet as well as from many of the world's largest established entertainment and technology companies.

My comments today will cover three areas; the growth of our online customer base and network, general market trends, and a short update on our ongoing litigation. First, customers. During the quarter we grew our customer base to approximately 1,300.

Last quarter we told you that we are placing an emphasis on expanding our presence in the enterprise and e-commerce market segment, an area where we believe there is an opportunity for solid growth, revenue diversification and increased margin.

We added about a dozen new customers in this segment this quarter, including traditional enterprise businesses such as Textron and Hobart Corporation. We also did well in our traditional areas of strength, both domestically and internationally, adding high profile domestic customers such as CNET Networks and Checkpoint, and noteworthy international customers such as GREE, a leading Japanese social networking site and another major European broadcaster that we will announce later this quarter.

Additionally we renewed our expanded relationships with large strategic customers, including Netflix, BO, and the Walt Disney Internet Group. And as previously announced, we were selected by Microsoft as a primary provider of content delivery services for video content on NBCOlympics.com on MSN.

Limelight Networks was founded seven years ago on the belief that the Internet would some day enable experiences as immersive and high quality as traditional media outlets. The online streaming of these games is a coming of age event for this medium as a viable entertainment platform.

And our selection as the provider is further validation of the scale and reliability of the proprietary technology we have developed, which was purpose-built to deliver broadcast quality experience to online viewers, listeners and gamers. As further validation of our international expansion, we are also selected by other rights holders in Europe and Asia to deliver the Olympic Games.

Regarding network expansion, our average traffic levels have now, as of August, climbed above the average levels we saw in February. This is the result of both organic growth within our customer base and solid execution on the sales side.

We have booked a substantial amount of potential traffic for the second half and are embarking on an aggressive investment program for the second half of 2008 and future years, which Matt will discuss in his guidance section.

As of today's call, we have surpassed two terabits per second of total egress capacity, which we believe makes Limelight Networks one of the largest content delivery platforms in the world. As large as our network is however, it is exciting to contemplate the significant growth opportunity that still lies ahead for our industry. To put how early we are into context, two terabits per second is massive for a CDN, but it still represents only about two points of Nielson ratings in audience size.

As more and more audience moves online and as more and more young people weave new, asynchronous entertainment modes into their lives from the start because the IP network truly does enable a superior interaction paradigm, which allows them to watch the movie, show or sporting event they want when they want to watch it.

We believe we are going to continue to see exciting traffic growth. We believe that with Limelight Networks platform we are well positioned to capture more than our fair share of the large wave of new online content that will result from this long-term trend.

Regarding the business environment, we've received many questions about how the current economic environment might impact our customer base. We are seeing tighter venture funding for some of the types of start-ups the typically need CDN services.

As a result, we are beginning to emphasize quality of customer over quantity and are modifying compensation plans and tightening up our payment delinquency tolerances. With all that said, we still believe the emerging market segment is an attractive one and that managing a diversified portfolio of customers with disciplined operations is the right strategy.

In looking at our current business mix, we think we are appropriately, but not over exposed, to this segment. Some companies are going to do very well. We want them as customers. Others will [churn] out.

Other than this tighter funding in the emerging segment of the market, we do not see any lessening in demand for our services due to the economic environment; rather we see intense competition between traditional media and a new breed of online media portal for consumer mind share and advertiser budget allocations.

We believe we are in the early years of a decade long shift of media consumption to IP-based networks and have advertising dollars from offline to online. And we believe that as long as we continue to scale our network and provide world-class services, we are well positioned to benefit irrespective of which online entities or ventures eventually succeed.

Now a brief update about our ongoing litigation. First, related to Akamai. I'd like to remind you that approximately half of our business was not alleged by Akamai to infringe there 703 path. These non-impacted areas include software downloads, international business, live streaming and non-traffic related CDN services; all segments in which we demonstrate strength in Q2.

On July 1, the U.S. District Court for the District of Massachusetts issued release denying Akamai's motion for a permanent injunction as premature as well as denying their motions for partial summary judgment on certain of our defenses. Additionally, the court also denied our motions for a new trial judgment as a matter of law and obviousness.

A little over two weeks ago, we filed a motion for reconsideration of our motion for judgment as a matter of law based upon the new federal circuit ruling that occurred after the judge's original decision. Our equitable defense motions are also still pending. The court has scheduled a September 24 hearing date on the remaining matters.

Last quarter we told you that we will be in a position to report to you about our ability to mitigate the financial impact of accruing for potential damages. While we cannot discuss specific technical actions we've taken due to the ongoing litigation, I would like to report that over the last quarter we decreased the amount of traffic delivered using a method alleged to infringe on the Akamai battle from over 50% to approximately 36%.

And I'm pleased to report that we made further progress in the current quarter. Accordingly, you will notice we are providing guidance that potential damage accruals for Q3 will be less than $1 million before accrued interest, well below the levels of previous quarters. Matt will discuss this a bit further in his comments.

Second, regarding Level 3. A Markman hearing from which the court will construe or define certain terms used in the patents was settled in June and a ruling is expected sometime in the next 50 days. The Level 3 trial is set to begin October 14. Third, we are still early in the Two-Way Media patent case in which Limelight is named as a co-defendant among others including AT&T and Akamai.

Fourth, on a very positive note, with respect to the securities class action suite filed in August 2007, last week the Federal Court granted our motion to dismiss the law suit, dismissing certain claims with prejudice and allowing the plaintiff's lead to amend with respect to others.

As we have said previously, we believe the litigation that has been filed against us is without merit and we will continue to vigorously defend these matters and commit energy and resources to what we firmly believe will ultimately be successful conclusions.

Beyond this short update, we will not comment on ongoing litigation during the Q&A portion of this call. With that, I will turn the call over to Matt Hale.

Thanks, Jeff. During the quarter we reported revenue of $30.3 million, which is up 22% compared to non-GAAP revenue from the same period last year, and a net loss per share of $0.18. We reported second quarter adjusted EBITDA before stock-based compensation litigation costs and damage accrual of $3.9 million. That compares to $2.1 million for Q1 and $2.9 million for the same quarter last year.

We also reported non-GAAP net loss of $1.6 million or $0.02 per basic share compared to non-GAAP net loss of $2 million and $0.02 per basic share last quarter and to a non-GAAP net loss of $0.2 million or essentially break even per share for the same period last year. Please refer to the tables in our press release for a reconciliation of GAAP measures to these non-GAAP measures.

During the second quarter, Limelight's international revenue represented 16% of total GAAP revenue, an increase of 2% from last quarter. As Jeff mentioned during the quarter, our active customer account rose to approximately 1,300 for a net increase of approximately 60 customers from last quarter. Our average annualized GAAP revenue per customer was approximately $93,000 in Q2 and that compared with $98,000 for the previous quarter.

Gross profit margin, which includes both depreciation and stock-based compensation, was approximately 35% for Q2 compared with 32% last quarter. The increase in gross margin is primarily attributable to lower variable network costs as a percentage of revenue. Cash gross margin was 57% for Q2 compared to 53% last quarter. We expect to see gross margins compress in the second half of '08 as we decelerated CapEx and recurring COGS expenses for the reason Jeff mentioned above.

Operating expenses were $20 million in Q2 and that's down $3 million from the first quarter and compared to $17 million for the same period last year. If you look at operating expenses -- excuse me, the provision that we made for potential additional damages in the Akamai litigation is excluded from the general and administrative costs. We've broken that out separately.

Cash operating expenses, which are expenses before stock-based compensation and potential damage accrual, were $16 million in the second quarter compared to $19 million in the first quarter and $11 million for the same period last year. The $5.4 million increase in cap operating expenses from Q2 relates to an increase in G&A expense of $2.5 million, increased sales and marketing costs of $2.3 million, and increased product development cost of $0.6 million.

The higher G&A costs relate to increased litigation expense of $1 million with the remainder associated with increased public company costs and bad debt expense. As we continue to invest in our future growth, sales and marketing and product development expenses rose from last year due to increased headcount in marketing program.

During the second quarter, we recorded provision of 6.7 for additional potential damages and accrued interest associated with alleged and printing revenue. Approximately 36% of our revenue for the quarter was generated using a delivery method that is alleged to infringe and this is down from approximately 54% last quarter.

We expect the percentage of alleged and infringing revenue to decrease substantially as we continue to take specific technical and operational steps to mitigate the financial impact going forward. As a result of these measures, we expect the accrual for additional potential infringement damages to be less than $1 million in Q3 before provision for additional interests.

Total depreciation and amortization for the second quarter was $6.5 million. That's up from $6.3 million in the first quarter and up from $5.2 million in the same period last year. Depreciation and amortization in the current quarter reflects $6.2 million related to network depreciation and $0.3 million of operating expense depreciation.

Stock-based compensation expenses for the quarter were $4.3 million compared to $4 million last quarter and $6.3 million for the same period last year. During the quarter we completed a tender offer, whereby employees exchange stock options for the right to purchase approximately 2 million shares of the Company's stock for the right to receive approximately 1 million restricted stock units.

The Black-Scholes value of the forfeited options for most employees was greater than the restricted share units issued resulting in no incremental increase in stock-based compensation related to this important [employer] retention action.

Second quarter interest earnings were $1.3 million compared to $1.9 million for Q1 and $0.6 million for the same quarter last year. The reduced interest income from Q1 is associated with reduced market interest rates and a lower cash balance.

Moving on to the balance sheet, our combined cash and investment balance on June 30 was $184.5 million, down from $194.7 million in the first quarter. The reduction in cash is primarily related to payments for capital expenditures, increase in prepaid expenses, and the payment of substantial legal expenses accrued during the first quarter.

Capital purchases for the second quarter were $5 million, up from $3.1 million in the previous quarter and down $8.8 million in the year ago period. Days sales outstanding for the quarter were 66 days, approximately flat with the previous quarter and down from 77 days in the second quarter of last year.

Now for guidance. For Q3 we expect to achieve revenues in the range of $30 million to $32 million. Due to the variability associated with litigation costs and calculating potential damage accruals, we are not providing earnings guidance at this time, however we want analysts and investors to be aware that in the second half, based on substantially large traffic expectations for the second half, we are embarking on a project to substantially expand our network capacity so that we can continue to lead the market in supporting the industry defining large event.

This means we should model margin compression back to Q1 levels for the expanded levels of revenue we achieved in -- or back from the expanded levels we achieved in Q2 and should model adjusted EBITDA before legal and stock-based compensation charges to be down sequentially in Q3.

This investment program will primarily impact COGS and it will include run rate expenses like rack space, power and personnel, as well as capital expenditures for servers and network equipment. Please factor these comments into your models as you update with this quarters results and recap the second half of 2008.

Stock-based compensation expenses for Q3 are expected to be in the range of approximately $4.4 million to $4.6 million. As Jeff mentioned and I mentioned above, we're expanding the amount of our capital purchases related to anticipated traffic volume increases. As a result, capital purchases are expected to be in the range of $8 million to $9 million for the third quarter. With that I'll turn it back to Jeff.

Looking ahead, we believe that we will see continued growth in the media and entertainment segment throughout the remainder of the year and have accelerated the build-out of our infrastructure to accommodate. We believe Limelight is well positioned with the right product set to compete within this rapidly growing segment and this very dynamic marketplace, as well as to expand into the more mature [steady end] markets of e-commerce enterprise and government.

We believe our expanding service week, which attractively addresses the global scale quality and perform requirements of the top Internet properties, when combined with our focus on operational maturity, diversification and highly responsible customer service, positions us uniquely in the market for the long-term. Operator, at this time we'd like to open the line for questions.

(OPERATOR INSTRUCTIONS). And your first question comes from the line of David Hilal of Friedman, Billings, Ramsey.

Great, thank you. A few questions. First, Matt, in your commentary about guidance, you said you guys expect large traffic increases throughout the balance of the year and I guess I wanted to just drill down on that.

Is that coming -- I know the answer is probably both, but when you think about it coming from existing customers versus when you look in your pipeline at new potential customers, what really is driving other than the macro trends which we all know? Is there anything on top of that driving your expectations for large traffic increases in the back half of the year, because it sounds like that increase is going to be bigger than maybe what we've seen historically?

So David, this is Jeff. I'll take the first of that. It's really a blend. We've signed up some major new -- to use the words carefully, potential new traffic commitments, very large customers that have existing traffic flows over their own or other CDN networks.

And so these are not situations where we have to bet on their growth; these are situations where we just have to execute well and get that traffic shifted from some other network on to our platform. There are not large upfront commitments associated with most of these, but we believe that we will get a substantial portion of that traffic.

And in this business you need to build ahead of that traffic so that you'll have the capacity when it shows up. It really is a combo of new accounts, substantial accounts that have large existing traffic as well as existing customers that are working with us in sort of a capacity planning mode and giving us visibility into their growth and traffic shifting plans.

Okay. And maybe a related question. You guys in the past, at least in over the last 90 days, have talked about diversifying your business more into new verticals outside of kind of media and entertainment and into other things like small file distribution. Can you share some thoughts on how that diversification efforts are going?

Yes, as I mentioned, we signed up about a dozen what I'd consider sort of pure enterprise customers that aren't the traditional media entertainment types. And this is for stuff like small object deliveries, offer download.

And so we felt pretty good about the progress in the quarter and that's an initiative we really kicked off kind of four, five months ago and we are starting to see -- there were both platform requirements imposed upon our engineers that we've delivered on and go-to-market requirements as far as the accounts that we are calling on and -- in some of the implementation needs.

Okay. And then finally, you talked about changing some of the comp plans for the sales guys as your business direction changes. So, in addition to the incentive programs, is there any change in terms of the talent? In other words, do you need to add bodies with different kind of DNAs to what you currently have or do you feel what you have in house is appropriate?

Our current sales team is doing a great job and the profile hasn't really changed. And the comment on the comp plan is just you want to focus people on identifying and securing business with the high quality accounts that are growing and well funded and not pay them for -- too many emerging guys that don't have good funding that end up being sort of flash in the pan type customers.

Great, thank you.

Your next question comes from the line of Derrick Bingham of Goldman Sachs.

Hi, Jeff, congratulations on a solid quarter. On the gross margin commentary, Matt, specific to cash gross margins, I just want to make sure that we're clear. You expect the cash gross margins to come back down to kind of more like Q1 levels?

Yes, as we deploy that level of CapEx, which really started at the end of Q2 and then you can see from the guidance we're pushing out a lot of servers. We increased the fixed charges associated with the [colo] space that we [parked] that CapEx.

And do you currently expect to exit the year at a cash gross margin also below second quarter levels?

We're not giving that guidance yet, so I'm not going to comment further. We'll update the margin discussion on next quarter's call.

Okay. And on some of the kind of the new architecture that you're moving some customers to that is not alleged to be infringing, can you give us some color, maybe one, on what the capital requirements are to do that, and maybe number two, what the performance difference is if anything and how that's being received by customers who are being switched to the new architecture?

So Derrick, we do not believe there is any dramatic shift in capital requirements with any of the -- we run multiple platforms and what we're doing is we are constantly driving for efficiencies at the hardware level, at the bandwidth procurement level, at the rack space procurement level as we scale, and it's a blend of all of that that will continue to drive down unit costs, and this is a business that's characterized by decreasing unit revenue and decreasing unit cost, so you surf the margin down, but the number of units is growing at a pretty dramatic pace.

Okay. And on a performance basis, in terms of does it have any impact? I mean, is it the same, is it a little worse, is it better for customers when they move to this new architecture?

Well, anything that we put into production is an advancement. We wouldn't be doing anything to take our customers backwards. And I think if we did do that, you'd end up seeing that in the form of sort of slower growth trajectory and this is a reasonably transparent industry and there is a lot of talk out there. I think you would have heard if there had been any such issues.

Very good. Thank you.

Thank you.

Your next question comes from the line of Katherine Egbert of Jefferies.

Hi, good afternoon. A few questions. Just to be clear, so the new capacity that you're adding, is this for committed contracts or is this mainly for potential new contracts?

Katherine, it's primarily for signed contracts, but not ones that have massive upfront commitments. We execute, we'll get to business.

Okay, fair enough. And then your guidance for September, it looks like you're calling for about 10% revenue growth year-on-year at the midpoint, which is a deceleration from the 22%, why is that?

Are you talking about Q3 '08 over Q3 '07?

That's right.

I don't know, I'd have to look back in what was in Q3 '07. We're looking at it sequentially and if we believe we will be up sequentially from Q2 to Q3, remember we had big -- a couple of these large guys that ended up leaving shutting down the websites and stuff in Q1 and they were reasonably large last year towards the second half of the year. So that maybe something that's causing it. But from this point we're running the business and growing it forward, we're looking at sequential growth from Q2 to Q3.

Okay, and then just a couple more. You won the contract for the NBC, the Olympics, and you won some other contracts around the Olympics. Is that fully contemplated would you say in guidance and changes given an example of how you are calculating it if it is?

We [strive through] it in our guidance. And so we contemplate all the different commitments we have -- predictability of revenue would be when we set guidance. Does that answer your question?

I guess so, probably all I'm going to get. Just one quick one, did you generate 10% customers in the quarter?

Yes, Microsoft continues to be at 10% customer, there is no other customer.

How big were they, Matt?

We won't disclose that. Last quarter they were 14%. I don't have the percent right now. It will be in the Q that we'll file probably on Thursday.

Okay, thanks.

And your next question comes from the line of Sri Anantha of Oppenheimer.

Yes, thank you. Good afternoon. Couple of questions. Jeff, just from a top down level, one of the biggest concerns were investors seems to be the slowdown in IP traffic growth, could you guys about what kind of a growth rate are you guys seeing on your network? And if that's the case, do you think it's just being driven by the overall growth in the market of CDN or by market share gains?

So, what we said in the prepared remarks was that we had traffic decline at the end of February and we had a couple of large customers go off the network. And we have since seen very solid growth and as of August had exceeded those average levels from February.

So, on our network from sort of March forward we've seen very solid growth in traffic levels. Now you are -- there is a lot of talk out there about price competitiveness in the market. So that's what's held down top line growth a little bit.

As we said, we think that long-term works in our favor because we have scale and we have efficiency. And so it will force a bit of Darwinian process in the sector over the next year or two. And we think we're in a solid position to gain market share as that works its way through the industry. But we are not seeing a slow down in traffic.

We did see one very large, maybe the largest video site on the web at the time, just shut down; the Company just pulled the plug on and that happened back in Q1, but we are not seeing an overall slowdown in IP traffic Internet-wide.

And just on the second one, I know you guys previously talked about some of your online video business customers restructuring. Is there anyway to quantify what kind of an exposure do you still have if at all any to some of those doubtful customers today or are they out of the system totally?

No, we view that emerging segment as a portfolio. And we think we're, as I said, appropriately exposed to the segment, but not over exposed. In the past we might have had too much exposure and we've gotten much more aggressive about communicating with our customers on their own funding; the customers within this segment.

But when you look at our overall customer blend, the gaming companies, the game console manufacturers, the technology companies, the software companies, the traditional media companies, those are far and away of the majority of our revenue base. And then we have this one slice of our revenue that is focused on emerging businesses, but we are now being careful not to make sure that segment grows too rapidly.

And last question, I know you guys seem to be making pretty good progress on diversifying your revenue base. Could you talk about what percentage of revenue is now coming from other than media and entertainment and what do you expect that to be at the end of this year, if you're looking at your pipeline?

Sri, I don't have those numbers quantified at my finger tip, so I don't want to do that. But we will in our updated investor presentation, we do have a slide that breaks it out by market segment. And so as of our next investor presentation, which I'm not sure when it is, we'll have that update and that will be on our website [in a couple weeks].

Thanks a lot guys. Congratulations on the good quarter.

Thank you.

Your next question comes from the line of Michael Turits of Raymond James.

On the traffic question again, I want to be specific in asking about changes. What we are concerned about is not whether the traffic is growing or not we assume it is, but what's happening with growth rate and maybe if you can just be more specific instead, I think something with the same store sales in terms of growth rate.

Now, if you were to look at the growth rate of the traffic with existing customers, has that moderated at all, that growth rate? Or do you see the growth rate of traffic with existing customers is about the same?

Michael, I think -- so, you've got a couple of factors at play here. First of all, the law of small numbers. What people were comparing, their '06 to '07 growth rates versus their '07 to '08, I have said in the past, we were seeing 5x increases in event sizes and that was driven probably by a 2.5x increase in average encode rate versus combined with probably a doubling of audience size.

And it's kind of event-by-event and there are some events like the Olympics where there isn't a last year comparison, but we are still seeing encode rates increase and we're seeing audience sizes grow. And as you get more and more broadband penetration, consumers are filling up those pipes with [confidence].

So we also -- it's a little bit difficult to comment because for example you might take a large global media company where they're working with us and one or two other CDNs and our traffic from them may have doubled, but some of that may have been because they shifted it to us from another CDN.

So, most of the largest publishers work with multiple CDNs. So we don't have a comprehensive view, we just see what's happening on our own network. But we believe audience sizes are growing and encode rates are increasing and that we're not actually seeing a dramatic deceleration for our [bid] volume.

And on the pricing question, what you mentioned, you said that you'd be seeing more upside, but pricing is putting cap on that. What are the trends in pricing? Do you think you're seeing about the same rate of price decline or price pressures in the last couple of quarters?

To give you some very ballpark numbers, we I think historically were modeling about a 2% per month price decline. I think that's what we're modeling in sort of the '06, '07 time frame. And it's probably increased from there, but to specifically quantify for you is difficult.

You are looking at both new deals that are being signed, but they're all being signed at much higher volume, so they get a lower unit price. And you're looking at just sort of blended rates as we renew customers also usually at higher volumes for lower price.

And then last question is around the customer adds. The net was about what I was modeling. Can you give us some sense of what your gross adds and churn are like?

So, I think we added about a net 60 this quarter. I think last quarter we had added a net 70, something like that. The churn, as we are sort of decreasing our tolerance with some of the slower payers or the guys where we see funding risk, churn might go up a little bit. It's more of a customer count issue than a revenue issue. If you look at the revenue growth rates, I'd say that's 90% driven by price factors, not by churn.

Okay, thanks.

Your next question comes from the line of Kerry Rice of Wedbush and Morgan.

Just a couple of housekeeping questions. You previously -- previous quarters anyway you used to give out what the percentage of revenue that was from your top-20 customers?

Yes, Kerry, that was approximately 53%, which I think is about flat with last quarter.

And can you talk a little bit about seasonality? Do you see anything in Q3 that would indicate -- is there a little bit of bump up just as kids go back to school or do you expect any kind of seasonality in Q3?

We haven't -- I guess the answer is no. There is always each year a little bit lower Internet usage globally during the summer, at least in the Northern hemisphere and where the bulk of Internet consumption occurs. But with the traffic growth that we're seeing, it's a little difficult -- there are big events happening this summer, the Olympics is one example. So it's a little bit difficult to quantify.

Okay. And then, sorry to beat a dead horse, but kind of going back to the traffic volume and it's just kind of what you had just said, at least what I thought you said was, you didn't see a dramatic decline of traffic volume and I think that was really the existing customers. So, just to clarify, you are seeing some amount of decline in the rate of traffic volume growth?

What I said was, it's really hard to quantify and what we're seeing is overall growth, but the actual rate of growth is difficult to quantify because we don't have a comprehensive view across most of our larger customers' complete traffic base.

But what about for your existing customers?

That's what I mean. Our existing customers, the biggest ones where most of the traffic is are using multiple CDNs.

I understand, okay. Okay, thanks. I'll step out of line.

Sure.

Your next question comes from the line of Jennifer Adams with Cowen & Co.

Hi, thanks for taking my call. In the second quarter, sales and marketing expense kicked up a little from the first quarter levels. Do you see a similar pattern throughout the year, especially as you fill the new extended capacity on your network?

What we've said, Jennifer, is you should expect sales and marketing grow generally in line with revenue growth from here forward.

Okay. So it's staying at about Q2 level on a percentage basis moving forward?

Roughly, yes, that's an approximation. With the revenue volatility here, you put a hiring plan in place and a sales plan in place and the percentages may vary a couple of points here and there, but that's our general direction as to keep the same mix.

Okay, great. Then looking at the competitive landscape, earlier this year Level 3 launched a lot of new CDN products, streaming products and AT&T has announced plans to move into CDN. Are you starting to see these companies as competitors or is it still really traditional CDNs like Akamai that Limelight is competing with?

So, this market segment has been characterized with intensive competition at least for the two years I've been involved in it. And it seems like it's Akamai and Limelight competing for the larger accounts given the fact that we have the scale that is needed to deliver a broadcast quality experience to the growing audiences.

And there are always many other players that see this market opportunity that are building to try to capitalize on it. But when you get into the big deals, it's not 100% the case, but it's primarily the case that we're competing at Akamai.

Okay, great. Thank you very much.

Your next question comes from the line of Rai Archibold of Kaufman Brothers.

Thank you. I just want to go back on the sort of the capital spending. I guess you said it was going to be about $8 million, $9 million in 3Q with the idea that you've had some large customer bookings, but not the -- but you haven't had commitments to traffic.

So one, I'm just trying to get a sense, what's your confidence level that this capital is going to generate an appropriate return in terms of your ability to capture sufficient traffic to justify it? Or is this more an expectation of just building out in anticipation of scaling demand over a longer period of time?

So -- the investment decision is made both looking at the second half of 2008 as well as what we believe is going happen in the out-years. As you scale CDN, there are certain things that happen at a pretty steady pace. And an example of that would be adding servers and adding pops.

And then there are other things that happen where there is a reasonably large step function up in cost that you make a commitment that then you're able to monetize over a three-year period before you have to take the next big step function up.

And we are in the second half of this year embarking one of those step functions up with certain components of our COGS that we do not want to go into detail exactly what that is for competitive reasons.

All right, very good. Thank you.

Thank you.

Your next question comes from the line of Chad Bartley of Pacific Crest.

Hi, thank you. Just going back to your Q3 guidance that implies the deceleration in growth to I think about 7% to 14%. So I just want to be clear, it's not a traffic issue, so it's predominantly just a tough comp in the lost customers or did pricing get that much worse I guess in the last 90 days? And then my second question, in terms of that potential traffic that you're building out for, could that impact Q3 revenue or is that really going to be a Q4 and 2009 event, if you will?

Well, non-committed traffic, an over-performance in that could always impact a quarter, so that's potential. Can you ask the other part of your question?

Okay. So I guess that the first part, just again going back to the Q3 guidance that implies a pretty material deceleration in growth about 7% to 14% if I'm doing my math correctly, is this basically a tough comp and then the fact that you lost customers or is it pricing and things got that much more aggressive in the quarter, because if I'm understanding it, it's not a traffic issue?

Correct. I think the overall -- as I said, the overall factor impacting top line growth for the last three quarters has been price competition.

Okay, all right. Thank you guys very much.

Thank you.

Your next question comes from line of Katherine Egbert of Jefferies.

Hi, just wanted to ask a follow-up. Jeff, you referred a couple of times to encode rates, can you talk about how those have being going up and then also talk about what Akamai referred to in their call with last mile issues around HD streaming? Thanks.

Okay. So an encode rate is how many bits you're using to deliver a video file. And a year ago you might have seen an average encode rate of 400 kilobits per second and this year you are seeing higher encode rates, exactly what the averages are we don't know, but it's 50% or higher -- and 50% or more higher.

And that's because content publishers are realizing that end consumers watch more of higher quality contents than they do of lower jerky, grainy content. So, quality definitely brings viewership. And this isn't primarily an advertiser funded medium and advertisers want to advertise alongside high quality content.

So, that's the first piece of your question. The second is the last mile question. And we call this is the condo cul-de-sac problem. So, if you have too many people in one large condominium or in one cul-de-sac that are trying to use the same last mile connection to watch whether it's SD or HD content, you do run the risk of congestion on that last mile and there is really nothing that the CDNs can do to work around that.

So we are working -- as you know, we partner with around 800 last mile providers around the globe. And we were consistently with them to hopefully give them traffic and give them scale, which drives the compelling end consumer experience, which gives them good subscription revenues, with which they can fund build-out of their networks. Some are being more aggressive than others, but we don't view it as a major holdback.

We see it as something that's going to continually evolve. We do think the U.S. is behind other markets. We see, as I said, I believe on the last quarter's call much more content being consumed for end customer in a place like Korea where people have 40 and 100 megabit per second connections to the home, they are consuming much more content there per viewer than we are here in the U.S.

So, we do think the U.S. is behind a little bit, but we see aggressive investment from some last mile providers. And that's going to drive from a competitive standpoint the need that the others will have to invest as well.

So it will work itself out over time. The technology providers always find a way and it's a consumer pool phenomenon. If consumers can't get the kind of broadband connectivity they want from one last mile provider, they will move their dollars to others that have made those investments.

Okay. Thanks for that.

At this time we'll have one more question, operator.

Sure. Your final question comes from the line of Michael Turits of Raymond James.

Hi guys, this obviously is a follow-up. I've got a couple of questions about deceleration in revenue going into the next quarter. If you were to --I'm not sure you can do this off the top of your head, but to pull out MySpace, YouTube and [StageSix], which were the biggest customers you had still I think last year and completely off in the third quarter. And it seems to me that you should have -- I don't know, [quick guess is that] your organic growth might not have decelerated that much 2Q to 3Q this quarter, this year.

Well, I think the YouTube and the MySpace had already worked their way down to non-material levels. But we talked on the first quarter call about two large customers that we are not at liberty to name that were a substantial portion of traffic and revenue.

And if you back those guys out, then of course yes, you would get much higher year-over-year comparisons. We are not in the business of trying to go off things over though. We are going to go out and sign up good high quality customers and drive growth.

As I said earlier, we sort of look at it on a sequential basis. You know, here's where we are this quarter, let's go out and get more business and grow it from here, having learned what we've learned over the last couple of years in the dynamic marketplace that this is.

Let me just check one other thing then. At least in terms of the last quarter. I assume you still had a little bit of StageSix on your last quarter, some of that deceleration is affected by that?

Again, we're not at liberty to comment on particular customers.

When you say last quarter, you're talking about Q2, the one we're reporting?

No -- yes, Q2, exactly Q2, you're right. So 2Q, you still have some of that large customer on?

No, at the end of Q1, we said those customers had gone away.

Had gone away, yes.

So it's not completely off. All right. Thanks.

Okay. Thank you. At this time, operator, no further questions. Thank you for joining us today.

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have an excellent day.