Edgio Inc (EGIO) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to second quarter 2009 Limelight Networks earnings conference call. At this time, all participants are in listen-only mode. At the end of the pre-prepared remarks, we will provide instructions for those interested in queuing up for the question and answer session.

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 second 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 August 6, 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.

Thank you all for joining us. Today, Limelight Networks reported $32.3 million in revenue for the second quarter of 2009, representing 7% year-over-year growth over Q2 of 2008. Bottom line performance was well ahead of our expectations despite revenue that was at the low end of our guidance going into the quarter. We were able to maintain gross margins, expand adjusted EBITDA, and generate over $7 million in cash from operations as a result of disciplined execution as we navigate through an economic downturn combined with market dynamics that involve aggressive pricing activity.

We are selectively focusing our investments in areas that we believe will create sustainable, long-term value by differentiating Limelight from our competition and building repeatable cash earnings over time. We believe Q2 represented the trough of the tough business environment. Looking forward, today we reaffirm our view that we will see a return to sequential growth in the second half of 2009. The downturn in pricing environment I just mentioned is leading the content delivery market to consolidate around two or three global market leaders. Underlying this market's growth prospects is a strong demand driver in excess of 60% annual growth on internet traffic for the next few years, if you read industry reports.

We believe Limelight Networks is positioning itself by building our network with the capacity and scalability and features and services to deliver this growing traffic volume, and by expanding our solution set with value-added solutions that will solve complex problems like mobile content delivery and optimization. During the quarter, our customer base remained relatively flat, ending at approximately 1,368 excluding customers of the former Kiptronic.

We continue to sign up substantial numbers of new customers, over 100 in the quarter, but also eliminated many customers as we focused on quality, worked our DSOs down approximately 20 days, and drove aggressive collection activity. We have become more diligent with up front customer qualification and with how we address customers that are credit risks, which is the right thing to do in this business environment. Average annualized revenue per customer in Q2 was approximately $95,000 a year, which is about level with last year's second quarter.

Bookings were down slightly from Q1 as a few large deals delayed into Q3, but most of those have since closed and our pipeline is growing. So we believe we'll see a return to bookings growth, which is our best leading indicator in Q3. In the media and entertainment market segment, we continue to be a platform of choice for leading content internet brands. One highlight for this quarter was our work delivering the US Open golf tournament for MSNBC.

Another highlight, which demonstrates the value of a robust and scalable CDN partner was the recent experience of our customer, TMZ.com. TMZ is a Hollywood celebrity news site and was the first organization to break the news of Michael Jackson's passing. As soon as the news was posted to the TMZ website, millions of other global news stories, personal Twitter feeds, and blog posts referenced TMZ's report via a hyperlink. The result was a surge of traffic unlike anything they had ever seen. Limelight's global infrastructure absorbed this incredible traffic spike, which is what it's designed to do and kept TMZ open for business and reporting the news even as other sites and other CDN's choked on the sudden up tick in traffic.

This event also showed the value that our professional services organization, which provides consulting and technical support to online businesses, including TMZ, can deliver to customers. In this instance, our team had engaged in capacity planning and site optimization work to help TMZ's internal infrastructure reliably connect into ours and handle such unforeseen traffic spikes. This up front work is part of the initial customer engagement that resulted in rock solid performance throughout the entire system and the event period.

In the enterprise market segment, we signed 13 new customers including cash software designer, Bentley Systems, Casio Electronics, and Clifford Chance, the largest law firm in the world. We also continue to make good progress in the government market with three key wins at the federal level, the names all of which must be kept confidential. Also this quarter, we were pleased to announce Limelight's first acquisition with Kiptronic Inc., a privately held company that provides solutions for device optimized content delivery, as well ad insertion and monetization on mobile and connected devices. This acquisition represents a calculated expansion into value-added services outside of core bit delivery and provides us with an opportunity to have valuable strategic discussions with our customers. We are excited about the growth potential for these value added services, although we want investors to understand that revenue in this sector is small today, as we are in the earliest stages of content publishers developing their mobile content delivery monetization initiatives.

As you'll see in the details of our 10-Q that we will file in the next few days, we acquired substantially all the assets from Kiptronic for approximately $1 million. Additionally, revenue generated during the second quarter related to the acquisition was less than $100,000. However, this newly acquired technology gives our network more intelligence about how content should be delivered to connected devices, particularly mobile phones. This capability has become increasingly important to our customers as they consumer media consumption habits change.

A recent Nielsen study showed that consumption is happening not only on the TV and PC, but also on a wider variety of internet connected and mobile devices. And that mobile consumption rates are growing faster than TV and PC consumption rates. For Limelight's customers, the content publishers, this presents both an opportunity and a challenge. The opportunity is that publishers can more precisely target viewers on the device of their audience's choosing. The challenge is that distributing content to the wide variety of devices that are out there, and then monetizing that content is complex and difficult to implement in a scalable fashion.

Kiptronic's services, now integrated into Limelight's global computing platform, eliminate this complexity by integrating directly into a publisher's content management system, hosting trafficking and reporting platforms, providing a seamless workflow for building audiences wherever they are viewing content. The first service we offer, called Limelight Reach, also auto detects end-user devices and then adapts media files if necessary. This solution enables publishers to distribute properly formatted content to almost any media enabled mobile handset. From early video-capable phones to Smart Phones like Apple iPhone's 3GS, Palm Pre, and the latest Blackberry.

Limelight Reach delivers the right file over the right protocol network to the specific device that requested the content. The second service called Limelight Ads helps advertisers reach audiences and mobile applications, video games, widgets, and more, by providing an easy way to stitch targeted video and audio advertising into a media file before that file is delivered to a mobile or connected device.

Limelight Ads works seamlessly with the publisher's existing ad insertion process, integrating directly into leading ad decision engines like DoubleClick DART in Microsoft's Atlas, which means that publisher's maintain their existing management interfaces for measuring campaign success. Publishers can change ads dynamically and even rotate multiple campaigns and advertisers from the same content segment.

There are over 20 customers using these solutions today, including NBC.com, NPR, Fox, The Guardian, Conde Nast, The Economist, and Minnesota Public Radio. Every large global publisher we talk to today has mobile as a top priority for the next six to 12 months. With this solution now integrated into our portfolio, we believe we're on the leading edge of being able to provide the right blend of service and consultation to help publishers reach new devices with their content. You can go to reach.llnw.com if you'd like to see a demonstration on your multimedia phone.

In the second quarter, we continued to see our average traffic levels rise, and again experienced new records for peak traffic through the network. We also continue to build out our network capacity and expand our geographic footprint. We also announced the upgrade of our global computing platform to Internet Protocol Version 6, the next generation protocol that the internet community will use to address and communicate with each device connected to it.

This is an important milestone for Limelight and the CDN industry at large. The current protocol widely used on the internet, IP version 4, is running out of new addresses. As we move into device-centric access where every mobile phone, blu-ray player, netbook, and TV comes with an internet connection built in, as well as washers, and dryers, and refrigerators. We will very quickly deplete those remaining IP V4 addresses. The IP V6 protocol resolves this issue by adding literally trillions of new addresses, as well as improvements in areas such as bandwidth efficiency and routing, and network auto configuration. We're pleased to offer this service today to our customers so that they can begin planning and building applications for the next generation internet.

I'll now turn the call over to Doug Lindroth who will take you through the financials and other key points.

Thanks, Jeff. During the second quarter, we reported revenue of $32.3 million, up 7% compared to revenue from the same period last year, and down 3% from Q1. We reported second quarter adjusted EBITDA of $6 million compared to $4.7 million for Q1, and $3.9 million for the second quarter last year. Our adjusted EBITDA increased to 18% of sales, from 13% in the same period last year.

Our GAAP net loss was $5.3 million, or $0.06 per basic share. We also reported a second quarter non-GAAP net loss before stock-based comp and litigation costs, of $0.7 million, or $0.01 per basic share, compared to a non-GAAP net loss of $1.6 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 second quarter, Limelight's international operations represented 19% of total revenue, which was consistent with the previous quarter. Gross profit margin which includes both depreciation and stock-based compensation was 35% during Q2, flat to last quarter and Q2 of 2008. Cash gross margin was 56% for Q2, down from 57% in Q1 and in the same period last year. Cash gross margin declined in the second quarter from Q1 of 2009 due to slightly lower revenue and some of our previously discussed network expansion activities.

As Jeff highlighted earlier, we believe we have instituted the operational discipline to monitor our business based on the environment. We kept a close watch on our customer activities, the overall economic environment, and traffic levels across our network. Certain network expansion activities were pushed to Q3 based on these factors, and as a result our gross margins did not decline to the extent we had previously guided. However, in the third quarter of 2009 we anticipate a gross margin compression of approximately two to four points from Q2. We expect to see a sequential decline in our gross margin primarily as a result of the continued expansion of the scale and capacity of our network. We anticipate that gross margins will expand back to first-half levels in Q4.

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 $16.6 million in Q2, down $5.9 million from the first quarter and down to $3.5 million for the same period last year. Our operating expenses decreased during the quarter due to a decrease in litigation costs, reduced marketing expenses, lower bad debt expense, a reduction in compensation related expenses, and a decrease in sales and property taxes. Total depreciation and amortization for the second quarter was $6.7 million, down from $7.1 million in the first quarter, and up from $6.5 million in the same period last year.

Depreciation and amortization in the current quarter includes $6.1 million of network related depreciation. Stock-based compensation expenses for the quarter were $4.3 million, compared to $4.5 million last quarter, and $4.3 million for the same period last year. Second quarter interest earnings were approximately $300,000 compared to approximately $400,000 for Q1 and $1.3 million for the same quarter last year. The reduced interest income is associated with lower market interest rates and a lower cash balance from last quarter and the same quarter last year.

Moving onto the balance sheet, our combined cash and marketable securities balance on June 30 was $164.3 million, up from $162 million in the first quarter. The increase in cash and marketable securities is primarily related to the $7.5 million generated from operating activities, offset by our capital expenditures. Capital expenditures for the second quarter were $4.1 million, compared to $4.6 million for Q1 and $5 million for the same quarter last year.

Day sales outstanding for the quarter were 73 days, down from 93 days in the previous quarter, and up from 66 days in the second quarter last year. The decrease in our DSO from Q1 levels is related to our extensive collection efforts throughout the second quarter. We are pleased with the reduction in our accounts receivable balance and the corresponding reduction in bad debt expense during the quarter.

Regarding guidance for the second quarter of 2009, we expect to achieve revenues in the range of $32 million to $33 million. Stock-based compensation expenses for Q3 are expected to be approximately $4.5 million and capital expenditures are expected to be approximately $9 million.

With that, I will turn it back to Jeff.

Thanks, Doug. At this time, we have no further comments and will turn the call over to the operator to begin the Q&A section. Operator?

(Operator Instructions) Our first question comes from the line of Derek Bingham of Goldman Sachs. Please proceed.

Hi, this is [Seogju] on behalf of Derek Bingham. A couple of questions. First of all, could you give some guidance on how we should think of operating expenses, especially G&A, G&A and sales and marketing? Also, could you also comment on banded pricing changes versus how pricing is being affected due to competition on the (inaudible) play?

Was the first part of your question on operating expenses for Q3, G&A and -- ?

Yes.

Yes, what I would look at for operating expenses because of some of the items that I mentioned that were lower in Q2. So if you exclude, set aside litigation cost for a second and think about the other items, marketing, bad debt, and some of our compensation related, I would probably model Q3 total operating expenses excluding litigation more in line with the levels that we had in Q1. If you go back to where our Q1 results were, I would say operating expenses would be more in line with those levels.

Okay, Okay.

And then on the pricing question, gross margins were relatively consistent quarter to quarter, and so the underlining bandwidth cost you asked about is a reasonably substantial component of our COGS, and I think just in a quarter to quarter comparison, we'd say those two were relatively consistent, that the compression and bandwidth cost was roughly equivalent with the compression and pricing.

Okay, fine. Just one more question, could you comment on your headcount addition plans? Do you have any (inaudible) plans for the rest of the year?

We do. Believing that Q2 was the trough and believing that we'll see a return to sequential growth here in the second half. We're making calculated investments in areas of the business that are growing and in products, value-added services that we believe will create long-term value and we have certain geographic markets that are growing. We have certain lines of business that are growing and so we are planning on adding heads between now and the end of the year.

Okay, thanks.

Our next question comes from the line of David Hilal of FBR. Please proceed.

Great, thank you. First question is a bit of a follow-up. I mean, you guys did a good job this quarter on expenses and really came pretty darn close to break even on a pro forma basis. It sounds like EBITDA margins will go down a little bit in Q3, but Jeff you're talking about sequential growth returning in the back half of this year. When we think about expense growth, will that be kind of in line with revenue growth, or is there more leverage to that with another two quarters of sequential revenue growth we can get back to kind of break even levels?

Yes, so I would think of it in two buckets, Dave. I would think of the COGS cost and I'd think of the OpEx cost that Doug talked about. On the COGS side, as Doug said, we delayed a few things in Q2 and so we didn't see the gross margin compression we were talking about last quarter. There was real network build out work to do, expanding into new geographies, adding new backbone capacity because of the growing traffic, and so on and so forth. And so you should expect to see that uptick in Q3 and then that gives us a bunch more capacity that we will work to monetize as quickly as possible. We're only giving one quarter's guidance so we can't look too far out just because the economy is pretty uncertain still, the market's uncertain.

But, and then on the OpEx, I think Doug said consistent with sort of Q1 levels. But we're definitely focused on getting the business to pro forma profitability, but you also want to make sure you're investing for the long-term and not just trying to solve a short-term optics win, but actually making the right investments and striking the right balance there.

And the last point I would make there, David, is on when I referenced back to the Q1 levels, that would also include within the OpEx the ongoing cost related to the Kiptronic acquisition. So that's factored into what those levels would be for Q3 and going forward.

Okay, I understand. On the customer ads, if we're going to back into a churn number it looks pretty high, and I guess I wanted to understand how many of those are those kind of low end maybe unprofitable customers that you guys are voluntarily turning off versus those customers that leave on their own will and go somewhere else.

We haven't broken it out that way. I mean we always do have involuntary and voluntary attrition, and you try to minimize both. The involuntary where we would actually quote, sort of eliminate a customer, you'd really rather just have a front-end screening process that was rigorous enough that you didn't have those folks to begin with. Because there's too much cost in bringing someone on, realizing they're not going to pay their bills, and then shutting them down.

And then on the voluntary where we have some competitive loss or someone's just going out of business, or they stop using the CDN, you do see that and it does happen, and easily we are winning more than our fair share of those on the competitive situations and growing the customer base. And this, in this quarter I'd tell you that the major driver in the net customer growth was the basically extra focus on cleaning out the customers that aren't great customers to begin with.

And that was part of it in my remarks where I talked about part of our extensive collection efforts and us putting a more robust front end process in place that we did weed out a lot of smaller customers, unprofitable customers, and we made sure that on a go forward basis we're not going to have that type. There will still be more weeding to do, but we made a lot of progress during Q2.

Okay, and on pricing, Jeff, your comments on aggressive pricing or it was pretty comparable to what Akamai had said last week, and I don't think it's probably a surprise to anybody who's been covering the sector. But maybe you could talk to us about the pace of that aggressive pricing and I mean pricing wars sometimes can last a long time and sometimes can be short, and you obviously need to manage your business based on how you forecast that. So when you think out over the next year or so, do you think the pricing environment stays equally tough or starts to improve, or could possibly get worse from what you've seen recently?

Sure, so let's give you some historical context here. So three years ago we were modeling about 20% to 25% annual unit price decline and about a year ago we started looking at and talking to investors about probably you should model 25% to 30% annual price decline. What we saw in Q2 was in between 30% and 35%. So if you want to be conservative, you would model a 30% to 35% going forward. If you look back over a decade, that's much more rapid price decline than the industry has historically had, and so we do think that that is, that that will improve.

We think we should return back to a 25% to 30% and then ultimately back to a 20% to 25% per year and we think there's two root causes for the compression going to this level. Number one, the business environment, the economy, customers are putting dramatic pressure on all of their vendors, CDNs included. Number two, which we've talked about in the past is that large Telcos that begin to offer CDN services are able to get paid when they deliver those bids on the ISP side. And so to try to establish themselves in the business, they will subsidize CDN with either bit delivery services.

The effect of that second one, the entrance of the Telcos into the market, we believe, has now been felt and absorbed by the industry, and so we believe that from here forward we should be looking at a more return to normal. And what happened is that has caused a shakeout effectively. It's not secret that there are many smaller companies that were trying to make a run at the CDN sector have given up, shut down, or sold for $0.20 on the dollar, and we now have a market that as I said earlier, is solidifying around two or three market leaders.

So while it's short-term pain, we believe there will be a long-term benefit in that this is a business that requires global scale, and the analogy we use is the package delivery business where you have FedEx, UPS, and DHL. And if you're going to build a global infrastructure to deliver anything, whether it's packages or bits, you only need two or three platforms. And so with the wave of traffic that continues to grow, and with the complexity of all the new devices people are accessing content with, we think that those two or three global platforms are going to have an amazing opportunity and an amazing amount of work ahead of them. And so the shake out, when you look back a couple years from now, while short-term painful, you look back and say, well that was a good Darwinian shakeout and the market's now really healthy around these two or three platforms.

Okay, that's helpful. And then, Jeff, on some of the recent reseller agreements like with Rackspace and Global Crossing, any meaningful traction so far there that's worth talking about?

Well, we don't break out specific customers or specific resellers. So I would just say that we continue to focus on the channel. Recently signed another one that has not yet been announced and we think we have a pretty good opportunity there to leverage the platform that we have by selecting the right partners to take this service to market, bundled with a lot of the other things that they do.

Okay, thank you guys.

Our next question comes from the line of Sri Anantha of OPC. Please proceed.

Good evening, thank you. Jeff, just a follow-up on the earlier question about pricing. What gives you the confidence that pricing is going to stabilize? People have talked about bandwidth pricing. We have seen consolidation happen from time to time, and we have gone through periods where we saw bandwidth pricing stabilizing a little bit, but then it gets back to rational levels. What do you think is different with CDN services that gives you the confidence that it's going to, it will get back to normal levels?

Well, because, Sri, at the heart of it, the CDN business is a software business, not an infrastructure business. We've talked before about the complexity of what we do and very few companies build global content delivery, not just because of the scale and the CapEx required, but because of the IP required to actually build a platform, and run the content, and handle the complexity.

If you think about Flash, and Silver Lining, QuickTime, and SHOUTCast, and you think about all the geographies, and IPGO blocking, and all the different bit rates, all the different transcoding that you need to do to optimize a file to be consumed over thousands of different devices, both wired and wireless with different form factors. That is a -- oh, and then how do you monetize and integrating with the monetization systems like the ad networks, there is a massive amount of software that has to be written here and there are very few companies on the planet that can handle that complexity and have -- develop platforms, and we happen to be one of them.

And so you do get paid. When you solve complex problems and there's an ongoing treadmill of increasing complexity and increasing problems to solve, and that's what software companies do. When you solve complex problems, you get paid for it because it's a lot easier for people to work with you than elsewhere. So we do not equate this industry with the historical raw bandwidth business at all.

Second one. I know Akamai has talked about developing a pretty aggressive price strategy. Has that had any impact on your customer wins in this quarter or are you seeing -- or have you guys changed anything with respect to your strategy, how you approached the market? Thanks.

Well, look, we don't talk specifically about any particular competitors. I'm happy to talk about market dynamics and we have always taken a stance that we have the most efficient delivery platform because we do operate a more centralized network that is the right next gen architecture for content delivery as file sizes increase. And we are generally able to leverage that efficiency by winning business head-to-head with those guys or any of the other ones that you'd like to rattle off.

And we're here to grow, grow market share, and so that as traffic growth continues to grow and pricing stabilizes that we will emerge and grow faster than the general market. So our philosophy hasn't changed the eight years Limelight's been in business and any particular announcement from any particular competitor this quarter, or last quarter, or last year doesn't generally change our strategy.

Thanks a lot, Jeff.

Our next question comes from the line of Donna Jaegers of DA Davidson. Please proceed.

Hi, two questions for you guys. Did you -- I didn't, maybe I missed it, but did you talk about the number of customers you had for the LimelightSITE product and the contraction you're getting there?

We didn't say how many we have in total. We just talked about how many we added during the quarter.

In the enterprise sectors, that's more of a market sector comment, not a product specific comment.

Can you repeat that number again, then? I missed it, as far as the number of customers added in enterprise. I mean you only added two total customers, so --

Yes, we added 14 in the enterprise.

Okay, and then as far as the value, obviously with the pricing so competitive in sort of the commodity areas, at least your strategy is to move to these more complex areas. How much traction are you starting to get on the Kiptronic products? Or is it too early to tell?

So we're actually very pleased with the early reception of both the mobility and monetization solutions we acquired from Kiptronic and then put in our platform, and a few internal value-added services that we've been developing and piloting with customers. The revenue from these will start small but they're all in high growth areas, and so over a couple years you should see these become nice, substantial revenue sources and profit generators for us. Every one of our large global customers that we have taken the Kiptronic team into has been very excited about the problems they solve and about getting some kind of analysis under way so they can figure out if it works for them.

On your push out of the -- out of your cost of goods sold for another quarter, if the volume doesn't pick up in the third quarter, can it be pushed out yet another quarter, as far as taking the capacity from Global Crossing?

Global Crossing is just one small component of it, so that's not really the driver of it. The bigger drive for us is bringing up new locations so taking new POPs, new CoLo, and expanding some of our existing continuing operations-location facilities. So that's really the driver of the costs. The Global Crossing wave deal is just a small component of it.

Yes, and so those build out decisions are usually made on a 90-days at a minimum, six months usually in advance. And so those wheels are in motion. Now, sometimes we still might over perform, meaning have a lower cost on the COGS than normal because within the quarter we were able to negotiate down some of the costs of COGS. And it may be bandwidth, it may be CoLo, it may be a lot of different things. But that, that sort of that uptick in COGS we telegraphed the last two quarters it was coming, and believe that in Q3 now it well come. Maybe we'll over perform again, but I would not plan that. I wouldn't plan on that two to four points of margin compression in your model.

Okay, and then just one last follow-up on the big pricing controversy that's going on now. Obviously, a lot of the smaller players are getting shaken out, but AT&T is still very aggressive in this space and they're not exactly a small player. Why wouldn't they continue to price aggressively? So it gets back to why are you so confident that the second quarter is the trough in pricing?

Yes, so, well what we believe is second quarter is the trough of the business environment and in the second half will see a return to sequential growth, because we think you have -- the industry sort of has set a new baseline for pricing practices. And the, again, I'm not sure which particular -- we don't comment on any particular competitor, but we don't believe -- you're at the point where the activity we're seeing in the market would tell us that we think we should get back to more normal year-over-year unit price declines.

But we're only -- we're trying to give you one quarter out and it's a very dynamic environment. So it's very difficult to say we think this will happen in 2010 or anything like that. Each quarter we're trying to give you an update and that's how we see it right now.

Okay, thanks.

Our next question comes from the line of Michael Turits of Raymond James. Please proceed.

Hey, guys. Two questions. One, first, what was kind of the (inaudible) quarter (inaudible) last quarter? Hello?

Yes, I think, Michael, you're a little broken up. Your question was traffic growth rate?

Yes, I was just, was the traffic growth rate the same as last quarter?

No, I would say the traffic grew slower this quarter than last quarter and that's why we ended up with revenue at the low end of our range.

Okay, and so then the shortfall function, both in slower traffic growth rate and of worse prices?

It's probably more the traffic and the pricing. Pricing's kind of a forward indicator that deals you close in any given quarter don't dramatically change your numbers that quarter. So it's more the pricing environment would be what led us to guide to $32 million to $33 million for the quarter.

And then I guess one last question. I apologize, this is sort of the same question again is (inaudible) about what you think what you're seeing in the market that leads you to think (inaudible) and you should start to see, that you should see a trough and a return to growth (inaudible) quantitatively?

Well, we track go-forward bookings. We track the rates on bookings. We have a pipeline with deals, a certain percentage of which we believe will close. We have traffic forecasts from our customers, so on and so forth, and those are all contributing factors, and again what we're saying is a return to sequential growth. So that means we think we ought to grow Q2 to Q3 and then we're guiding $32 million to $33 million. So we're not guiding to dramatic growth, but we think that the economy and our customers feels like are no longer in emergency mode as far as trying to find every dime under every rock. So we think the business environment is a bit more healthy.

Okay, guys. Thanks very much and sorry for the rough cell connection.

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

Great, thanks for taking the question. Just first wanted to talk about your litigation expense. Some news in the first half about some legal victories. I'm just curious if you can give us some history of what the legal costs maybe were in 2008 and what your expectations are going forward? Should those continue to come down?

Also, just curious how much of your demand is coming from customers that are new to CDN services versus customers that are coming from competitors? So I would assume when you guys are winning business, you're realizing that when you talk to them. Just trying to get an understanding, are we at a point where the market is getting saturated for CDN services? Or is it just now that CDNs are swopping back and forth with customers? Are there still new potential customers to go after? Thanks.

So I'll take the last piece and then Doug can get into the litigation costs, but there -- every quarter we're signing up both, and we don't break it out, but there are definitely customers that are new to CDN. There are businesses that are new to CDN and companies that are successful and growing, and need something to help them scale. And then every quarter we also are in the existing accounts that use either one or multiple CDNs, and if there are multiple CDN customers, we're working to increase our market share within that account. And if they're using a competitive CDN 100% then we're working in there to win that account from that competitor. And you see, of those three buckets you see a little bit of that every quarter.

Has the trend shifted at all in the last quarter or two? Or has it remained relatively the same?

It's hard to say. We'd have to go deep down into a bunch of data to actually give you some kind of accurate, quantified answer to that, which we're not prepared to do today.

All right, so on litigation expenses, if you look at your question was, what did we spend last year. Last year, it was over $20 million, and remember that that was with one trial that occurred during the year in preparation for a second one that occurred in early this year. And so far in 2009 Q1, if you look on our press release schedules we're about $4 million in Q1, but then it was just under $400,000 in Q2. So as we have talked about for several quarters, the reason it's difficult for us to give full guidance is because of the uncertainty surrounding litigation expenses, and it's very difficult to predict what those litigation expenses are going to be.

What we can say is they're certainly not going to be $20 million like they were for trial. The appeal process, which we are in, in both patent litigations is going to be much less expensive but still very difficult to determine what those expenses are on a go-forward basis.

It seems to me, and correct me if I'm wrong, that then a lot of the up side from EBITDA in the second quarter came simply from reduced litigation expenses. Or was there really some operating synergies there that I'm just missing?

Well, I think you're looking at it a different way than we do because the $6 million that I talked about in the prepared remarks excludes litigation. So it's, set aside litigation, our adjusted EBITDA which adds back any litigation expenses was driven from operating cost savings that I talked about, which had to do with a reduction in our bad debt expense, reduction in sales and property taxes, and a few other items that I went through. So I think we drove that EBITDA leverage while we were operating the business very tightly and improving our collections, and therefore reducing our bad debt expense in the quarter.

Thank you very much.

Thank you operator. At this time, we have time for one final question.

Our next question comes from the line of Sameet Sinha of JMP Securities. Please proceed.

Yes, thank you. So just kind of go around the pricing question again. Now, Akamai, is that forcing -- do you think Akamai's moves to reduce pricing, will that force other people to reduce prices? Or will their actions, pricing coming down to more market rates?

You need to ask them that, Sameet. We don't really comment on any particular competitor.

Sure, okay. Second thing, in terms of your EBITDA, I know you don't give EBITDA guidance for the coming quarters, but you could give EBITDA guidance ex the litigation cost. Anything that you can provide from that context?

Well, I think part of, when you think about the range that we've provided at this point on gross margin compression for the quarter, we just feel with the difficult business environment that we're still facing, we feel that at this point we are still just going to give more top line guidance and then some color around that, but not going to be providing full adjusted EBITDA guidance at this point. I think as business conditions overall, economic conditions improve, and we feel a little more comfortable about the overall business environment, then I believe we will return to giving more full guidance.

Sure, one final question. So this increased talk about TV everywhere where all the MSOs, cable companies, everyone's announcing how they'll allow their customers to carry their cable service with them, today DIRECTV also announced something in that context. Wow, do you think that MSOs have their own net worth, they have their private net worth, and headwinds and everything, so they don't need to really use CDN services from someone like Limelight? Or do you think there'll be an opportunity for you then, and if you can also comment on how satellite companies would look to distribute this.

I think the MSO question is, you're probably better off asking them what their plans are. What we do, again, is very complex and requires a lot of software, and we think that anyone who's trying to solve the problem of delivering content in a broadcast quality manner over the IP networks to a myriad of consumers is going to be at a benefit from the technology that we had developed and are developing. And if MSOs have that objective then there certainly would be an opportunity for us to work with them.

Okay, can I squeeze in one more question? I know I said that would be my last one.

Yes.

Sure, any thoughts on the acquisition of On2 by Google? Does that change the landscape in any way that a new technology, which could be brought on board, any thoughts on that from that that acquisition?

No, we don't really comment on the M&A activity of others or stuff like that. We think Google's a big company.

I agree. Okay, thank you very much.

All right, thank you. So operator at this time that concludes the session. We thank all of you for joining the call and look forward to talking to you in other arenas. Have a good day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.