Edgio Inc (EGIO) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Limelight Networks first quarter 2009 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 Q&A.

I would now like to turn the call over to Paul Alfieri, Senior Director of Corporate Communications. Go ahead Paul.

Good afternoon, and thank you for joining the Limelight Networks first quarter 2009 financial results conference call. Speaking today will be Jeff Lunsford, Chairman and Chief Executive Officer, and Doug Lindroth, Chief Financial Officer. This conference call is being recorded on May 6th, 2009, 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 related to the Limelight Networks market opportunity, and future business prospects, guidance on financial results, 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, including the inherent risks associated with litigation, particularly intellectual property-based litigation. 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 introduce Jeff Lunsford.

Thanks, Paul. Thank you all for joining us.

Today Limelight Networks reported $33.2 million in revenue for the first quarter of 2009, representing 10% year-over-year growth over Q1 of 2008. Adjusted EBITDA before stock-based compensation, litigation costs, and the reversal of the damage accrual, was approximately $4.7 million. Bookings were slightly higher than Q4 of 2008, we are pleased with these results, and excited about investments we are making in scaling our platform, and expanding our suite of cloud-based services.

We are also pleased that the Court in Boston recently ruled that we do not infringe Akamai's patent, which allowed us to repurpose approximately $66 million in capital, we had set aside at the end of 2007. Even with solid revenue, adjusted EBITDA and other operating highlights, we are still taking a cautious view on near term results, as it is difficult to determine if business conditions have bottomed. You will hear in Doug's comments that we are still managing through some of the short term factors brought on by a tough economy, such as higher than usual bad debt, and higher than normal DSOs.

When thinking over the long term however, we have never been more exited about the prospects for this business. Limelight today operates at the intersection of two incredibly powerful and undeniable long-term trends. The first is the ongoing migration of consumer and business activity to the online world. Whether for entertainment, commerce, or general purposes, and whether through a computer, mobile device, Internet-connected television, or set top box.

The second trend is the steady and deliberate migration of computing activity out of enterprises, and into outsourced computing networking and telecommunication resources, commonly referred to in tech circles as 'the cloud.' To capitalize on this first trend ,we continue to scale our content delivery platform, and to extend our capabilities with new solutions, such as LimelightSITE, and our mobile platform. When combining our existing services with these new services, and factoring in our global scale and eight years of operating history as a leading pure-play content delivery company, we believe we are distancing ourselves from a shrinking group of competitors.

To capitalize on the second trend, we are investing to extend our standard delivery and storage capabilities, into other cloud based application service areas, that are synergistic with our core business, such as transcoding, and mobile device detection, and delivery optimization. And we are continuing to scale our platform, which is quietly become one of the largest distributed computing platforms in operation. These two trends provide great wind in our sails as we grow our business, and we feel fortunate to be operating in this market.

Regarding our customer base, during the quarter we added over 35 net new customers, average annualized revenue per customer in Q1 was $97,000, which was roughly flat from $98,000 in last year's first quarter. At the end of the first quarter, we had approximately 1,365 active customers. In the median entertainment market segment, we continue to be a platform of choice, for leading content and internet brands, as we added customers such as HBO, Public Broadcasting, and Japan's Gaitame.com. We also partnered with MobiTV to deliver the NCAA Men's College Basketball Tournament.

We also continued to build our channels and professional services businesses in the quarter, signing a multi-year reselling partnership with Global Crossing and seeing good traction with Iraq's based partnership, where our platform is an enabling component of their [MOSO] cloud computer offering.

Additionally at the end of the quarter we introduced our first solution specifically designed for the enterprise, government, and Ecommerce market segments, LimelightSITE. LimelightSITE formalizes our entry to the whole site and small object delivery markets. Just as we are seeing a fundamental shift of offline to online in the media and entertainment segment. We are also seeing this shift in the enterprise Ecommerce and government segments. These entities are designing their web presences to drive revenue, lower costs, and enhance visitor experience.

Sites are being designed for educating purposes, prospects, capturing leads, training partners, selling goods and services, and providing more efficient and effective customer service. Site owners are adding capabilities that allow them to create communities around their brands, and engage in dialogs with their customers and constituents.

They are incorporating an increasing array of features into their site architectures, such as social networking, personalized log ins, contests, dashboard, consumer generated video, on demand training modules, live events, and rich interactive web applications. All of these new capabilities expand complexity, which puts more strain on an already burdened IT department, which has to support these initiatives with more hardware, bandwidth, and personnel.

We believe this environment represents an attractive opportunity for our core content delivery business, and for LimelightSITE. Our platform is network based, meaning we operate a global fiber optic backbone that interconnects thousands of servers, CPUs, and storage, to over 900 last mile networks worldwide.

Our architecture looks to an IT manager, exactly like the infrastructure he or she would need to build as they scale our business. But instead of incurring the capital and operational expense to build such a platform, that would have to handle their site at peak load, they can use our platform on demand, and incrementally avail themselves of more resources, as they succeed and grow.

Additionally with a routing feature of LimelightSITE, known as Origin Direct, our customers can directly connect their servers to our private optical backbone, so our global network literally becomes an extension of their in-house network. Origin Direct helps to bypass those middle mile Internet bottlenecks, that often slow down website performance, allowing content to travel at CDN speed, from it's source to the user's last mile network. This is increasingly important as we get into the enterprise, where there is more dynamic content, rather than static content.

We beta tested LimelightSITE with several customers before announcing it, and so today we currently have 150 customers in the enterprise and government space. We are pleased to have added several premiere customers this quarter, such as Sharp Electronics, Morningstar, Casio Corporation, Fuji Xerox, and ING Direct, and we plan to continue focusing on acquiring high quality, long-term relationships in these important segments.

In the first quarter we also continued to see our average traffic levels rise, and yet again experienced new records for peak traffic through the network, that were set with the Presidential Inauguration in the United States. This quarter we are continuing build out our network capacity, and expand our geographic footprint, so that we capture a growing share of the traffic expansion we anticipate.

With that update, I will now turn the call over to Doug, who will take you through the financials and other key points.

Thanks, Jeff. During the first quarter we reported reach knew of $33.2 million, up 10% compared to revenue from the same period last year, and down 8% from Q4. We reported first quarter adjusted EBITDA before stock-based compensation, litigation costs, and the reversal of the damage accrual of $4.7 million, compared to $4.6 million for Q4, and $2.1 million for the first quarter last year. Our adjusted EBITDA increased to 14% of sales, from 7% in the same period last year.

Our GAAP net earnings were $55.1 million, or $0.64 on a fully diluted basis. Our GAAP net earnings include the reversal of our previously recorded damage accrual of $66 million, as a result of the Court finding that we do not infringe the Akamai 703 patent. We also reported first quarter nonGAAP net loss before stock-based compensation, litigation costs, and reversal of the damage accrual of $2.1 million, or $0.02 per basic share, compared to a non-GAAP net loss of $2 million, and $0.02 per basic share for the same period last year. Please refer to the tables included in our press release for a reconciliation of GAAP measures to these non-GAAP measures.

During the first quarter, Limelight's international operations continued to perform very well, and grew to 19% of total revenue, which was 2 percentage points higher than the previous quarter. Gross profit margin which includes both depreciation and stock-based compensation was 35% during Q1, up from 32% in Q1 of 2008. Cash gross margin was 57% for Q1, up from 53% in the same period last year.

In the second quarter of 2009, we anticipate a gross margin compression of approximately 2 to 4 points from Q1. We expect to see gross margins decline in Q2 as a result of the continued expansion of the scale, capacity, and performance of our network, and private fiber optic backbone, and pricing activity within our customer base.

As we discussed on our Q4 earnings call, we expect margins to rebound in the second half of the year, similar to the pattern we experienced in 2008. Although we are operating in a difficult economic environment, we are continuing to effectively manage our expenses, and as a result, our operating expenses were $22.5 million in Q1, down $4.4 million from the fourth quarter, and compared to $23 million for the same period last year.

First quarter operating costs exclude the reversal of the damage accrual related to the Akamai litigation. Our operating expenses decreased during the quarter due to lower stock-based compensation, decrease in litigation costs, professional fees, the reduction in compensation related expenses, and a decrease in sales and property taxes. Total depreciation and amortization for the first quarter was $7.1 million, down from $7.3 million in the fourth quarter, and up from $6.3 million in the same period last year.

Depreciation and amortization in the current quarter includes $6.5 million of network related depreciation. Stock-based compensation expenses for the quarter were $4.5 million, compared to $5.5 million last quarter, and $4 million for the same period last year. The sequential decrease in stock-based compensation is primarily related to the departure of our former CFO.

First quarter interest earnings were $400,000, compared to $700,000 for Q4, and $1.9 million for the same quarter last year. The reduced interest income is associated with lower market interest rates, and a lower cash balance from both last quarter, and the same quarter last year.

Moving onto the balance sheet, our combined cash and marketable securities balance on March 31st was $162 million, down from $175 million in the fourth quarter. The reduction in cash in marketable securities is primarily related to payments for capital expenditures, litigation fees, a large contract prepayment related to our global fiber optic backbone, and an increase in our Accounts Receivable. Capital expenditures for the fourth quarter were $4.6 million, compared to $5.2 million for Q4 and $3.1 million for the same quarter last year.

Day Sales Outstanding for the quarter were 93 days, up from 84 days the previous quarter, and up from 66 days in the first quarter last year. The increase in our DSO is related to both our implementation of a new billing system, and to businesses generally delaying payments in this environment. We believe that our DSO will decline over the course of the next few quarters, as we complete the implementation of this new system, and as the business environment improves.

Regarding guidance for the second quarter of 2009, we expect to achieve revenues in the range of $32.2 million to $33.2 million. Stock-based compensation expenses for Q2 are expected to be approximately $4.2 million, and capital expenditures are expected to be in the range of 7 million to $8 million.

With that, I will turn it back to Jeff.

Thanks, Doug. Before we conclude, and go to Q&A, I would like to point out a few initiatives that are shifting the delivery of content, from closed proprietary networks, to open IP-based networks, in support of the first macro trend I mentioned earlier. First is the BBC's Canvas Project, which is a joint venture with other broadcasters, whose mission is to find and promote a set of standards for digital television, delivered over broadband connections.

The service will allow audiences who do not wish to pay for subscription television services, to access a range of on demand and live content services, through internet connected televisions and set top boxes. The long-term implications of such initiatives are clear, and they are very positive for content delivery providers. We are also seeing similar initiatives around multi-platform open access programming in the US, where major Internet video sites are being granted increasing access to mainstream content.

In these instances, the consumer is in control and can access the content they want, when and where they want it, over an open network. We believe Limelight Networks is well-positioned to benefit from this shift, from closed to open networks, and towards multi-platform multi-device accessibility. We believe the world will only need two or three content delivery networks for delivering broadcast quality experiences, to the broadcast quantity audiences that will emerge on this open network.

Limelight is currently one of two or three market leaders, and is better positioned than our smaller competitors to continue growing and capturing market share. We have more experience delivering the largest Internet events in history, we have a world class engineering team that has built what we believe is the highest performance content delivery platform in the world, we have global sales and support infrastructure in place, we have scale that provides us with operating advantages, and we are very well capitalized to preserve that position through investment and innovation.

Earlier I mentioned our multi-year view, and the two macro trends whose intersection presents attractive growth opportunities for Limelight. More demand for content, commerce and applications online, and a consistent shift to outsourced usage-based cloud services for infrastructure computing. An analogous situation existed in the package delivery business a few decades ago, as international business growth accelerated, and the world began to flatten, to borrow a term from Thomas Friedman.

Today the world has UPS and FedEx, who combined have created substantial shareholder wealth, by thinking big, and investing for the long-term and executing well. We believe we are building a company that will capture a similar market position in global content delivery, to the ones these two companies have captured in the global package delivery business, and with only 15% of video content being consumed online on any given day, and approximately 10% of commerce transactions around the globe being conducted online, we believe we are in the very early stages of building to this very bright future.

Operator, at this time we would like to open the line for questions.

(Operator Instructions). Your first question comes from the line of Derek Bingham, Goldman Sachs.

Hi gentlemen, thank you very much. I wonder if you could give us some color on just kind of the financial profile of some of the small file deals, and the whole site deals, in terms of their size and even kind of their profit margin, versus what kind of your historical deal profile has been, just so we get a sense of how that is going to contribute going forward?

Derek, I don't think we get into parsing margins by segment. I think we are definitely on the record stating that we believe the enterprise and Ecommerce and government sectors, offer a margin expansion opportunity for us. There are oftentimes more services that are higher margin services, that these customers need in addition to the regular content delivery. But I don't think I could actually quantify that for you. There are though, the deals that we see, they are higher margin.

Well directionally, that is helpful. Internationally, it seems like that has been outgrowing the domestic business. What would you chalk that up to? More kind of investments you are making there? More of a greenfield opportunity right now? Or is the economy in a different stage right now? Can you give us your thoughts on that?

I would say it is simply because Limelight has more market penetration opportunity, or just growth opportunity to establish ourselves in the international markets. So we have recently expanded, brought in a new international manager out of the UK, expanded the Japan team, so this is just bringing, or beginning to generate revenue from the investments we have made in those markets, and we are opening more offices over in mainland Europe, where today Limelight has no on the ground presence from sales and account management standpoint. We definitely have a network presence, but not the go to market presence.

Okay. Thank you very much.

Thank you.

Next question comes from the line of Michael Turits from Raymond James.

Hi, guys. Can you tell me a little bit, do we know what either your churn or your gross adds were, and what is happening with customers at the lower end? Are you seeing any fall-off in emerging type business customers?

So Michael, the net add number of a little over 30, or approximately 35, is the number we talked about. I would say churn just as in Q4, churn has been higher than if you look at a five year average. And that is simply because yes, many of the smaller companies out there, that were in that emerging category, were unable to raise their next round of financing. Or have decided to pull a web initiative, to save costs, or whatever. But I can't really, I wouldn't quantify that, other than we just look at the net add number, which was was solid in Q1.

And then, can you talk about both traffic growth trends, and obviously, it is so that your traffic went up. But we are overly concerned on the second derivative side with the rate of traffic growth. Would you say that the rate of traffic growth rate, has been about steady, or is it declining, or increasing? And same on pricing?

I would say that those two have been over the last three or four quarters, growth and price unit compression, which is an ongoing dynamic of this business, bandwidth and CDN prices have been going down for 12 years, and they will continue to go down, as that traffic grows. But I would say that they have been generally consistent over the last three or four quarters.

Last was just a clarification. The 2 to 4 points down of gross margin, was that cash gross margin, or including depreciation?

It will factor into both. So the 2 to 4 will follow through on both the cash and the gross.

And I think you said that it tends to pickup in the second half? Is that on your assumption that you start scaling out the build? Or that the pricing, which is a component of that, starts to ease a little bit too?

Yes. I would say it is on the scaling of our buildout, both on our network buildout, our expansions, part of what Jeff was talking about, on some of our international growth has been our international expansion, plus the expansion that we talked about with our internal backbone. So as we get that deployed, and then start absorbing that with additional revenue, then we should start seeing the pick back up in our margin.

No assumption that price changes in any way?

Not a different assumption on pricing than we typically factor into our forecast, which is a typical assumption of price decline.

Great. Thanks very much.

Next question comes from the line of Colby Synesael from Kaufman Brothers. Please proceed.

Great. Thank you. I have two questions. The first has to do with legal costs. I think they were about $4 million this quarter. I know that Akamai has gone and appealed the decision by the Courts. But I was wondering if you could give some color on what your expectations are for that going forward?

Also my second question has to do with the LimelightSITE solution. Can you talk about what was required from an R&D standpoint to build that out? Maybe in terms of cost? Maybe in terms of timing? Maybe in terms of expertise? I guess what I am getting at is how difficult would that be for other smaller CDNs to replicate that, if in fact the market for CDN services is changing, and that is somewhere where they can go to expand their own growth? Thank you.

Sure. Well litigation expenses we do believe to go down, because we are post trial phase right now. And neither one of the cases has formally gone up to appeal yet. However when they do, we would expect to have a lower run rate of legal expenses. We have not gone out and ever forecasted exact legal numbers in a quarter, because they are so variable, but they will still be substantial, just not of the magnitude we saw when we were in the very expensive trial phases.

So below the $4 million that we saw this quarter is fair?

Yes again, we haven't ever quantified, because you just never know what is going to happen in a litigation process. But on a blended basis over the next year, we would anticipate that our legal bills would be lower than they have been over the past year.

Okay.

Then on the LimelightSITE, R&D, Limelight has a unique architecture for a CDN, one that we believe is a better architecture. That is a point of religious debate in the industry, but we think our customer success speaks for itself. Our ability to go out and win the best customers and the biggest customers. That architecture is very high performance for large object, large library traffic, and that is where we started.

It also happens to have some very interesting advantages for dynamic content, which is important in the enterprise, and the Origin Direct service that I mentioned earlier is very key there. As an example, in the world of dynamic content, you have more cash misses out on the edge. If there is a cash miss, a normal CDN without their own private network backbone, would source that content over the internet. Whereas we source it over our private network. And we believe that will prove out over time to be a better architecture.

There was a lot of R&D going into just handling more services that these sites need, than standard large object delivery. We have been investing working on this for over 1.5 years, and we have had the service in the market. So this is our formal announcement, there are over 150 customers using it today. And we believe as I said in the script, there is a great opportunity here to focus on this sector, and build good, long-term relationships, with many very high quality businesses.

Okay. Thank you.

Next question comes from the line of Sri Anantha from Oppenheimer.

Yes. Thank you. Jeff, maybe if you could just give us some clarification on the ARPU differential between your enterprise and Ecommerce sectors, versus your traditional media and entertainment customers. And secondly on the expenses, with gross margins down 2 to 4% for 1Q, is the run rate for 1Q, especially on cash operating expenses, a good run rate going forward? Thanks.

I will let Doug answer the cash OpEx. But again on the margin, we are not breaking out margins specifically for the enterprise segment. Nor will we break out ARPC, there are everything from the largest Ecommerce websites on the planet, to the smallest ones. So if you look at that sector, I think if we had the same type of penetration we had there in media and gaming, I would think that ARPC could potentially be higher, because as I said earlier, there are more products and services to sell them. But again, we aren't going to quantify what we think that would be.

Right. And on the operating expenses, I think if you use the Q1 operating expenses, that is good for thinking about the levels we will spend in Q2. There was nothing significant in Q1, that will or won't be around in Q2.

Thank you.

You are welcome.

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

Just a couple of quick questions. Sorry I had to jump off real quick. But could you talk a little bit about what you are seeing in April for the media and entertainment kind of trends in traffic and pricing, I know you previously had said they had been pretty consistent over the last three or four quarters? Has that been consistent so far here in April?

Kerry, I don't think we will get into monthly color. But what we are seeing in April was factored into the guidance that we provided the 32.2 to 33.2 in revenue.

Is there one area that is maybe outperforming or underperforming, I don't know if you can break it down into software downloads, versus videos, or streaming, or anything like that?

No. I think we have seen generally consistent trends across all segments. The only segment, the one I mentioned earlier, what we call the emerging business model category, where folks have raised capital, not yet gotten to profitability, that would be one sector, where I would say simply because of the lack of readily available capital, not so much because they didn't have great businesses, and don't have great businesses, it is just that it is very difficult to raise growth capital, that might be one segment I would highlight, as the most troubled, and it is as we pointed out before, a very small part of our revenue. But it is probably a higher number of customers, because they are small customers.

Yes the other way I look at it too is on customer mix, as you had said video, or social media, games, software how we typically break it out, if you look at that over the last three quarters, those categories have stayed relatively consistent. You get a move of maybe 1% from one category to another. So there hasn't been a significant move in one category versus another.

Okay. Great. Final question, on international you had mentioned that is about 19% of revenue. And there are just a lot of growth opportunities. Are they primarily in, can you break it down geographically, it is strength in Europe versus Asia for you guys? Is it generally just Europe?

No it is both. It is Europe and Asia, and we have a nice presence in Japan. I think we are performing well in both of those regions.

Okay. Thank you very much.

You are welcome.

(Operator instructions). Next question comes from the line of Katherine Egbert from Jeff tries.

Hi. This is Gregor Schauer for Catherine. I was wondering if you guys could maybe comment a bit about Facebook, I don't believe they were a customer of yours, but they announced a new technology following in the quarter called Haystack. It seems like it is a caching solution, which is, and they said explicitly designed to reduce their dependence on CDNs.

And I was wondering if you guys could comment a bit about this being a trend with, and I think it has been happening for a while already, some of the larger internet companies building out their own internal CDNs, or solutions that reduce their dependence on CDNs, do you guys have any thoughts to add on that? Either of you?

Well so we have always believed that the top five or so Internet sites on the planet, will build out most of their in infrastructure. But below that, it does not make sense, it doesn't make economic sense. We believe Facebook is an amazing business that may be one of those.

And so, we think that there has always been, for the eight years Limelight has been around, there are also folks who come along, and they will work with a CDN, and they will decide they think they can build it themselves, and generally what we see is they build it, they kick-off a project, they build it, they run it for about two budget cycles, and by the end of the second year they realize it is capital intensive and people intensive, and so they end up either keeping that infrastructure in place, and then shifting all of the growth traffic back over to an outsourced CDN.

But for the largest, it is not at all unnatural for those folks, especially those that are technology companies and Internet companies, to want to build a lot of their own infrastructure. We think the great opportunity is for companies whose core is not technology development, but who have to reach a broad base of customers around the globe to use CDNs.

Right. Okay. Thank you. If I could just add one question, regarding mobile. Are you guys seeing or expecting much of an uptick in demand, as a result of mobile traffic? There has been a lot of growth in wireless data?

We are seeing a lot of uptick in activity. Understand that the mobile, the amount of data that is delivered to a mobile device is smaller. So what we are seeing is, and I mentioned this in my prepared remarks. That we are seeing an uptick in complexity, as customers have to deliver experiences to all those devices. And that is a great business opportunity that we see.

The volume, the actual bit volume isn't that huge. But we are at the very, first of all, we are at the very early innings of just Internet-based content consumption. Second, we are still in the warm-up phase of mobile content. But we do believe it will be massive. And then, I think that answers your question.

Right. Yes. Thank you.

We have a follow-up question from the line of Derek Bingham from Goldman Sachs. Please proceed.

Hey thanks. Quick follow-up on LimelightSITE. You mentioned you have got a lot of customers already signed up. What is more often the case now, in terms of how you are targeting? Are these greenfield customers more often than not, that you haven't had before? Or is it mostly kind of upsell, cross-sell, in terms of a new product, or increased functionality to existing customers?

I am not prepared to quantify how many of the 150 were existing versus new. But I would tell you like the companies we named, those are new relationships, and that is one reason we are very excited about that market segment, is these are companies that heretofore we would not have called on, and now we can establish a relationship. We are also though, rest assured, going back to the 1,300 plus customers that we have, and offering these services to them as well.

Yes. Okay. Thank you.

You are welcome. Operator, I believe there are no further questions.

There are no further questions.

Okay. Thank you all for joining us today. We appreciate it. Have a good day.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Have a wonderful day.