Edgio Inc (EGIO) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the first quarter 2010 Limelight Networks earnings conference call. At this time, all participants are in listen-only mode. At the end of the prepared remarks we will provide instructions for how to enter the queue for the question-and-answer session.

I would now like to introduce Paul Alfieri, Vice President of Corporate Communications. Please go ahead, Paul.

Good afternoon and thank you for joining the Limelight Networks' first quarter 2010 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, 2010, 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 financial results, statements concerning anticipated future growth and profitability as well as management's plans, goals, strategies, expectations, hopes and beliefs, and statements concerning the anticipated effects of pending or completed business combinations or other strategic transactions.

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'd now like to introduce Jeff Lunsford.

Thank you for joining us today. The first quarter was a positive turning point for Limelight Networks as we generated $36 million in revenue. Our strategy of moving up the value chain and cloud services, showing results as value-added service revenue grew from 13% of revenue in Q4 to 15% of revenue in the first quarter.

This expansion of our value-added services business is a direct result of Limelight's strategic objective of building value and differentiation at the software and data layers in addition to continuing to scale our global content delivery platform. This is important for our shareholders because these software-based services are higher-growth, higher-margin and less capital-intensive than core CDN, and they complement the financial profile of the CDN business quite nicely.

We think of our CDN platform as actually being a globally distributed, high-performance computing platform, and what we call value-added services are simply software as a service's offerings that run on that computing platform. In addition to these initiatives, we are continuing to grow our strategic consulting business, which helps customers migrate and build businesses on our platform and around these offerings.

The acquisition of EyeWonder, which we completed last Friday, April 30th, will further expand our value-added services business to over 20% of revenue in the second quarter. EyeWonder is a software business with higher capital efficiency than the CDN business. Last year, as an example, EyeWonder generated over $35 million in revenue and grew 38% from 2008, and this growth required less than $1 million in capital investments.

Three years ago, Limelight was a great large-object CDN with no value-added services. Today, Limelight is still, we believe, the highest performance large-object CDN, but we can also do small-object and whole site delivery, and have a full suite of value-added services to offer media, technology and general enterprise companies.

Our strategy, given the attractive opportunities we see in the marketplace, is to continue to grow these businesses while selectively continuing to expand our value-added services portfolio. Today our list of value-added services includes website, business portal and ecommerce storefront acceleration, Web and enterprise application acceleration, mobile content delivery, online and mobile ad-serving, rich media ad unit design and creation, cloud storage, transcoding and computing functions, and strategic consulting.

To grow and expand these service lines, we're continuing to scale our R&D talent across the Company, and now have over 70 software engineers on the Limelight Networks team. This number represents over 10% of our headcount, and we intend to keep growing it as we work to build value at the software and data layers. We believe we have a unique opportunity as applications migrate to the cloud. We operate in one of the most advanced distributed high-performance cloud computing platforms in the world, and we have talented engineers that understand how to develop software-based solutions that can perform at the scale of traffic produced by that computing platform.

We also believe we are uniquely positioned to capitalize on the shift of online ad spending into the rich media category by leveraging the data we have access to from our computing platform, and our experience in analytics to enable more precise targeting of online ads.

Additionally, the proliferation of mobile and Internet-connected devices is creating more demand for content publishers and enterprises for mobile distribution and monetization. We see this as an area full of attractive opportunities to innovate and add value.

Now I'd like to provide some highlights from Q1. We saw the content delivery business grow nicely in Q1. We set another traffic record and also enhanced performance and scaled our total network capacity. Customers using our value-added services during the quarter included NBC Sports and Olympics, B&H Photo and ESPN mobile. We were seeing very good traction for these services as they helped to solidify relationships with our content delivery customers, which is, of course, a positive thing.

As mentioned, one of our fastest-growing areas is the mobile space as the challenge of reaching the hyper-connected consumer is top of mind for almost every publisher and enterprise. A recent Morgan Stanley report on Internet trends said that in less than three years there will be more mobile users than PC desktop users.

Through Limelight's mobility and monetization solutions we are well-positioned to help customers reach users as they go mobile. During Q1, NBC Sports and Olympics used Limelight Reach and Limelight Ads to deliver the 2010 Vancouver Games to a record number of mobile viewers. Reach supported over two million mobile video views for NBC by delivering properly formatted video to each end user device.

Additionally, the ad service helped NBC dramatically rotate advertisements from many mobile campaigns throughout those video plays. We also announced in the quarter support for video delivery and ad insertion for the Apple iPad on day one of the product's availability. We updated our cloud with profiles for this new device and customers of our Reach and Ads services were automatically ready for the iPad.

I'd like to highlight specifically the elegance of our cloud-based approach to mobile, which made this iPad upgrade seamless and almost transparent to our customers. Reach and Ads handled the complex tax of device detection, content formatting, ad-serving logic, mobile delivery and tracking from the Limelight cloud. The products use our cloud software to make decisions about how to deliver content to a specific mobile device at the specific time of the request.

Whether an iPhone, BlackBerry, Windows Mobile or any one of the number of Android devices, we return properly formatted content to that same URL. This mobility and monetization platform significantly reduces complexity for our customers and software companies benefit when they reduce complexity for their customers.

Our customers don't have to worry about encoding content for any specific device, they don't have to build out special websites, media players or ad-insertion workflows for each device they want to support. They simply use the universal URL in their development. When a new device like the iPad is introduced, there's nothing a customer needs to do. All the updating occurs in the cloud.

In short, Reach is about publishing once to Limelight and then having Limelight deliver to almost anywhere. I encourage you to try it for yourself by visiting a website from your mobile device, like m.Disney.com, ESPN.com or our own demo at Reach.LLNW.com.

Another area where we are providing value-added solutions is to the enterprise. During the quarter we announced expansion of many of our services that are relevant in this space. First we announced an upgrade to the Limelight site Web acceleration service, which helps customers increase visitor loyalty and reduce operating costs by providing a consistent Web experience from any location.

This upgrade added customer-requested features, such as more control over cash management, SSL support, increased failover options and integrated content security options. The service includes Origin Direct technology, which accelerates traffic by routing it over Limelight's private optical network rather than through the congested middle mile of the Internet. This enables consistent, high-fidelity performance of static, dynamic, personalized and rich media content.

We also announced content storage, Limelight's new high performance cloud storage architecture. This service provides customers with a virtual continuous environment for storing content.

We also introduced Traffic Balancer, a new service that moves us into the area of providing data center services to corporate IT managers. Traffic Balancer helps corporate IT load balance and distribute their IP traffic among multiple origin sources, providers or geographic locations.

We also enhanced our mobile solution, Limelight Reach, for enterprise use cases such as communications with remote or offsite employees, enhancing an in-store purchase experience with on-demand mobile video and providing a rich media experience to mobile customers.

Finally, the closing of the EyeWonder transaction provides a new opportunity for Limelight to provide value to the enterprise. EyeWonder currently services the interactive advertising of many of the world's largest marketers and agencies, and helps publishers increase their advertising revenue by creating more effective advertising experiences to their sites. These services are complementary to the broadcast quality experiences across three screens that Limelight is helping enable.

Before acquiring EyeWonder, Limelight helped customers deliver brilliant online and mobile experiences. Now with EyeWonder, we can help customers monetize those experiences. In adding services like MMS and EyeWonder to our business, we've changed the conversation with many of our customers to one that contemplates helping them grow revenue rather than just a buy versus build cost conversation around content delivery.

This is a deliberate and core component of our growth strategy. We're excited about the future potential for our content delivery business and all the growing value-added services areas mentioned earlier. The market is full of opportunities and we believe we have selected those that allow Limelight's shareholders to best benefit from the investments we have made in our globally distributed high-performance computing platform.

Now I'll turn the call over to Doug, who will take you through the financial results.

Thanks, Jeff. During the first quarter we reported revenue of $36 million, up 7% compared to Q4 and up 9% from the first quarter of 2009. Our non-Microsoft business grew approximately 20% in Q1 2010 over Q1 2009, and our top 10 customers now represent approximately 32% of our total revenue.

Please note that our first quarter revenue included approximately $400,000 related to two months of revenue from the German acquisition we completed in January of 2010. We reported first quarter adjusted EBITDA of $5.1 million compared to $3.3 million for Q4 and $4.7 million for the first quarter of 2009. Our adjusted EBITDA increased to 14% of sales from 10% in Q4 of 2009, and flat from Q1 of the prior year.

For the first quarter our GAAP net loss was $5.8 million, or $0.07 per basic share, compared to GAAP net income of $55 million or $0.64 per fully diluted share in the same period in 2009. As a reminder, our 2009 Q1 GAAP net income included the reversal of $65.6 million of a previously accrued provision for litigation.

We also reported a first quarter non-GAAP net loss before stock-based compensation, litigation costs and acquisition-related expenses of $400,000 or $0.01 per basic share, compared to a non-GAAP net loss of approximately $3.1 million and $0.04 per basic share for Q4 of 2009. Please refer to the tables included in our press release for the reconciliation of GAAP measures to these non-GAAP measures.

During the first quarter, Limelight's international operations represented 28% of total revenue, which was an increase from 27% in Q4. Gross margin, which includes both depreciation and stock-based compensation, was 42% during Q1, up from 34% last quarter. Our gross margin in Q1 increased more than we had anticipated as a result of higher-than-expected revenue in our reseller channel as well as value-added services. In addition, we were also successful at reducing our average cost of bandwidth during the quarter.

We anticipate our Q2 gross margin to be in the range of 41% to 43%, including the contributions from the EyeWonder acquisition. Cash gross margin was 57% for Q1, up from 52% for Q4 and flat compared to Q1 of 2009.

During the first quarter our operating expenses were $20.9 million, an increase of $100,000 from Q4 of 2009 and a decrease of $1.6 million from Q1 2009. Our operating expenses increased over Q4 due to increases in personnel-related costs from the addition of sales and marketing headcount, annual bonus and merit increases, employer-related taxes and two months of operating expenses from our German acquisition.

These increases were offset by decreases in transaction costs related to the EyeWonder acquisition, litigation expenses and professional fees related to our annual audit. Our operating experiences decreased from Q1 2009, excluding the previously accrued provision for litigation, due to a decrease in litigation costs offset by increased sales and marketing expenses and ongoing operating expenses from our acquisitions of Kiptronic and the German acquisition.

We anticipate that our second quarter operating expenses, excluding stock-based compensation, litigation expenses and acquisition-related expenses, will increase by approximately $4 million. The forecasted increase is primarily the result of closing the EyeWonder acquisition on April 30th, 2010.

Total depreciation and amortization for the first quarter was $5.5 million, down from $6 million in the fourth quarter and down from $7 million in the first quarter of 2009. Depreciation and amortization in the first quarter includes $4.8 million of network-related depreciation.

Stock-based compensation expenses for the quarter were $4.3 million, flat to last quarter, and down slightly from $4.5 million in Q1 2009. First quarter interest earnings were approximately $300,000, flat to Q4, and down from $400,000 in the first quarter of 2009. The reduced interest income is associated with lower average cash balances when compared to Q1 2009.

Moving on to the balance sheet, our combined cash and short-term marketable securities balance on March 31st was approximately $149 million, down from approximately $154 million in the fourth quarter. The decrease in cash and marketable securities is primarily related to acquisition payments related to our German acquisition of $2 million, net of cash acquired, and capital expenditures of $4.3 million, offset by cash flow from operations of approximately $700,000.

During Q2 we expect to make payments of $63 million to $64 million related to the EyeWonder acquisition. Capital expenditures for the first quarter were $4.3 million, compared to $3.8 million for Q4. Day sales outstanding for the quarter were 64 days, down from 71 days the previous quarter and down from 93 days in Q1 2009. For Q2 we anticipate that our DSO will increase when combined with EyeWonder, as their DSO is approximately 90 days.

Regarding guidance, for the second quarter of 2010, we expect to achieve revenues in the range of $41 million to $43 million. For Q2, we anticipate that our traditional CDN and value-added services revenue will experience similar year-over-year growth rates that we achieved during Q1. In addition, we expect the EyeWonder business will grow approximately 20% or potentially higher on a year-over-year basis.

Stock-based compensation expenses for Q2 are expected to be approximately $4.5 million. Capital expenditures are expected to be approximately $8 million to $9 million.

Finally, as mentioned earlier, for this revenue range, which includes two full months of EyeWonder and a full quarter of the German subsidiary, we would expect gross margins to be 41% to 43% in operating expenses, excluding stock-based compensation, litigation expenses and acquisition-related expenses, to increase by approximately $4 million.

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

Thanks, Doug. I have no further comments. At this time, operator, we will open the lines for Q&A.

(Operator instructions).

Your first question comes from the line of David Hilal from FBR. Please proceed, sir.

Great, thank you. First, housekeeping -- Doug, you had said 2Q cash disbursement for EyeWonder $63 million to $64 million. I thought the cash value got modified down to a $49.6 million. What's the delta there?

The delta was paying off at the (inaudible—background noise) balance sheet.

I couldn't hear you, there was something -- say that again?

Yes, most of the delta was debt that they had on their balance sheet.

Okay, so paying off their debt.

Yes.

Okay, got it, understood.

Yes, so the $63 million to $64 million is really what we're trying to give you some guidance on in terms of the total payments that we'll be making related not just what went directly to their shareholders but also what is going out the door in total. So part of that estimate includes us paying other legal fees and other bills associated with the transaction.

Okay, okay. On the value-added services, that was one of the few items that helped drive gross margins higher. What type of margin structure are you seeing within value-added services, and then a quarter -- what percent of the business did that represent?

Well, it was 15% of the business, Dave, and we really aren't breaking out a separate gross margin for value-added services, but they are, as I said, they are higher growth, higher margin than the core CDN enablement platform business.

Okay. The linearity with EyeWonder, I know it's probably back-end loaded to Q4, but when you think about the linearity across the four quarters, is that a 20-20-40 type of move or how should we think about that?

They've traditionally gotten 60% to 70% of their revenue in the last two quarters. That's a pattern across that business, which I think you're familiar with a number of other interactive marketing businesses. It's definitely back-end loaded, but it's a growing business also, so.

Yes, that exacerbates it, I get it. Then finally, Microsoft, you made the comment that the non-Microsoft business is up 20%, which is great. Can you just remind us of the Microsoft contracts? Obviously that would imply that's tailing off. Could you just remind us what's happening there?

Well, it was a five-year strategic partnership that involved licensing and consulting and traffic commitments, and the whole idea -- I can only talk about what's been publicly discussed, which is they have been talking at industry conferences and everything else, you have to ask them.

But the whole idea was to help them build a content delivery platform within Microsoft, which they've successfully done, and obviously some of the traffic then gets carried by them internally.

I guess maybe more specific was the contract you have with them, how much longer -- I know the five-year part, but does it continue? Should we expect continued decline in contribution from Microsoft over the coming quarters, or is it now kind of steady where it's at?

We're not giving guidance on any particular customer, Dave, and since they're sub-10%, but the contract goes into 2011 and we hope and expect to have Microsoft business for many years to come. Just not as much, since they have an internal CDN. But they're one of the largest deliverers of content on the planet, and they have a multi-CDN strategy.

Okay, great. Thank you, guys.

Your next question comes from the line of Derek Bingham from Goldman Sachs. Please proceed.

I wonder if you could just characterize in a little more depth what you saw in terms of traffic in the quarter. It looks like it was acceleration, but just want to get your take on that. Were there any particular one-time events, were there new large customers, or was it just run-rate business from existing customers accelerating? Just wonder if you could give some more color.

Sure, Derek. There was no huge traffic, spiky revenue event, just general health across the business of good bookings, good customer additions, good traffic growth within existing customers, and as you pointed out, very solid traffic growth.

Okay. Doug, you mentioned core CDN business growing similarly year-over-year. Not to put too fine a point on it, but it was down sequentially last year in June. Is there any reason why that might be the case, or should we be up sequentially for the core business?

What we were saying was -- my comment was that we would expect it to grow with similar growth rates that we saw in Q1.

Yes, and he meant the Limelight business sans EyeWonder.

Right.

Right, so I wasn't saying look to Q2 types of rates from last year, so you would see a decline, I was saying similar growth rates that we experienced in Q1.

Year-over-year growth rates.

Right, but I'm saying sequentially last year, revenue stepped down from March to June, so if it's the same year-over-year growth rate, then revenue would be down sequentially this June in the core business. Again, not to put too fine a point on it, but that just -- normal seasonality would be up for that business, right? Is there anything going on that would make that not the case?

Well, you have the June effect, the June, July, and half of August are the slower months across the Internet, but we gave you the guidance on the quarter of $41 million to $43 million, and there's some contribution from EyeWonder there, and the CDN business, as Doug said, would grow year-over-year.

In Q1 it was what, 9% year-over-year, and we said we'd expect it to grow year-over-year roughly the same. So that could be roughly flat, that could be slightly up, slightly down. But if you look at the numbers, it's kind of a generally steady Q1 to Q2, and then this business is Q3, Q4 back-end loaded.

Yes, okay, fair enough. Jeff, on the value-added services that make up the percentage that you gave, would you mind just telling -- you guys listed a lot of different things in there, and I wonder if you can just maybe give us some -- or just remind us kind of the biggest two, three or four of those that are really contributing revenue, just so we have a good conception of what are really contributing to that value-added service.

Yes, sure. Well, I think one thing that's important to understand about this business is that value-added service business also solidifies core content delivery business, and so the highest visibility success is all in the mobile sector, where we have the revenue from the mobile stuff is still small because the volumes are small, but it's growing rapidly.

But we're now working on very strategic projects for some very strategic customers, and that helps to solidify the relationships there. So the mobile stuff I would definitely highlight, and the technology there is very sophisticated and doing some great things for many great customers.

In Q1, none of the rich media stuff obviously contributed, because we hadn't closed EyeWonder. Then I'd say our enterprise business and the Site stuff is again still small, but we're growing it and we got Site 2.0 out into the market, and as we had said before, Site 2.0 is an important release for us to add some of the more sophisticated features.

Cloud storage is a popular and growing solution, and then the strategic consulting business, customers working to implement these various services and implement their Web presence, tune their Web presence, is also a large contributor.

Just one more, just housekeeping -- Doug, the deferred revenue was a bigger drag, I think, than typical, a $3 million -- not drag, but it contributed to the revenue. There was a negative balance on the cash flow statement. Just wondering if there was any dynamic there that you could [trust]--

No, nothing unusual. What's moving around on the balance sheet was related to Microsoft because we're moving things from long-term all into short-term. But it was kind of our normal amortization on our Microsoft license business that it's roughly flat quarter-to-quarter. It does change if we add a new pop, where it does increase a little bit. But there was nothing significant in there that was different this quarter.

Okay, super. Congratulations, guys.

Thank you.

Thanks.

Your next question comes from the line of Donna Jaegers from D.A. Davidson. Please proceed.

Hi, good quarter, guys. Two questions -- on the German acquisition, was that profitable in the quarter and do you expect it to be going forward?

We're not breaking them out separately, Donna, so they were an acquisition that was taking place with EyeWonder, that because of the nature of the deal we ended up closing on that piece of it first. So that is going to be just a component of EyeWonder, and it won't be broken out separately.

Okay.

It would not have been material either way, Donna.

Okay, so it's not a big drag.

No.

No.

Then the number of customers, I noticed that's still flat, so that indicates, obviously, you're growing with your existing customers. Any more color that you can give there? Obviously with Site 2.0, I'm hoping that you're in front of some new customers. But can you talk a little about your customer count and what you're hoping for going forward?

Sure. We're still seeing some attrition from the raising of the quality filter and the washout of some '09 businesses that just didn't make it through '09 healthy, and we are definitely in more and more conversations in the enterprise and with Site, and it's not just a site conversation, it's an enterprise conversation that includes Site and Storage and Mobile and much more of a solution sell than a point sale, and absolutely having some very good conversations. We're seeing very strong demand in that market.

Okay, thanks.

Thank you.

Your next question comes from the line of Sameet Sinha from JMP Securities.

Thank you. Can you spread some more light on the pricing and traffic dynamics? I know you said traffic was good, but the pricing dynamics on the media side. Secondly, can you help us think about EyeWonder, and I know it's just been a couple of days since you acquired the company, since you closed the acquisition, but if you can talk about any sort of advanced work that has been done, at least conceptualizing the synergies that you have with this acquisition? Thank you.

Sure. So in reverse order, the EyeWonder business, and we talked about this on the announcement call, there are multiple points, revenue and growth and product synergy. This is not a combination about cost synergy. We're investing in their business and we're investing in our business. Both are healthy and growing.

EyeWonder has great agency relationships, 800 around the globe. Agencies are major decision-makers in design and deployment of websites, and so there's CDN business that they can pull through there. Then on the publisher side, their business, we help them bring a lot of value because half of Limelight's largest customers are publishers that are focused on improving the monetization yield of their inventory, and if you can serve up rich media ad inventory, you will get a higher CPN than if you're doing static banner inventory.

We work with the agencies to create the campaigns and they serve them over the EyeWonder platform, which runs on the Limelight CDN platform. So there's a lot of synergy to go around.

Has advance work been done in that regard or will it start now?

Well, we've been tuning their platform to work with our platform. They just released a next-gen release of their architecture and there's a lot of work going on. Then there are also initiatives that are under way that are not on the market yet that are designed to help them with enhancing targeting capabilities based on datasets that are available to an ad-serving platform.

Okay, thank you, and a second question about (inaudible—background noise) pricing and volume this quarter.

Yes, pricing activity in the market remains aggressive, but as you can see in our numbers, we had margin expansion and top-line growth, and so we feel like we are able to compete and grow and be healthy here, and the more value-added services business that we have and the more broad our relationships are with our customers, the less one point-pricing conversation about CDN really has an impact.

Okay, great. Thank you very much.

You're welcome.

Your next question comes from the line of Srinivas Anantha from Oppenheimer. Please proceed.

Yes, good evening, and thank you. Hello?

Hello.

Hello, Srin.

Jeff, I know you talked quite a bit about value-added services. How should we think about value-added services as a percentage of your total revenues for this year and even for 2Q?

How should we think about it?

Yes, is it going to be 10% or 12% of revenue? How should we think about --

Yes, it'll be in excess of 20% of revenue for Q2, and then EyeWonder is a value-added service also, so it's obviously adding to that. They are effectively a SaaS business that runs on top of a CDN. It will also, in Q3, when we have a full-quarter of EyeWonder, it'll grow more, but also the other lines that I mentioned are all growing as well.

Is it possible to disclose what the margin contribution from the value-added services is going to be?

I don't believe we'll be breaking that out. We'll give you an update on value-added service as a percentage of revenue, and I think you'll see EyeWonder is a separate reporting segment.

For 2010, for 20 separate reporting segments.

Got it. When we look at, broadly, say for the next 12 months, Jeff, what are some of the key growth areas? I know you mentioned mobile is one, you mentioned value-added services. Are there any other industry protocols that are contributing that you expect to be big contributors towards the growth rate going forward?

Sure. I'd say the growth opportunities for Limelight are any enterprise with Site and all the other enterprise offerings that I mentioned, pushing into classically the large CDN customers where the technology business and the large software download needs and the media companies with large video and music needs. There is, however, a fantastic CDN business in the enterprise where you just have, as an example, a government entity or a large pharma-type company that wants to get content out to their employees, and they're willing to pay you a very fair wage for that.

So moving into the enterprise is our number one focus of organic growth. Continuing to build out in the mobile space, growing the EyeWonder business in the rich media space and launching some integrated products with the EyeWonder platform. The consulting business and the storage business are also growing, so I'd sort of say all of those, and we're investing and we're also opening, continuing to invest in new markets.

There are certain countries where we have two people today, where we could easily have 20 people in a year that would pay for themselves, because we're just beginning to get established in those markets.

One last one -- I know in the past when we asked about customer count you said you don't focus much on it, but given all these growth areas, shouldn't one expect the customer count should begin to grow at some point this year?

Yes, I would expect it to. We're also, though, just focused on more share [while we're] within our existing customers, and as we have more solutions to sell, we'll be tracking how many customers have one solution versus how many customers have bought an additional service from Limelight.

Got it. Thanks a lot, Jeff.

You're welcome.

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

Hi, thanks very much. I wanted to go back to the initial conference call in the EyeWonder acquisition. I think you guys talked about 30% growth or higher in 2010. You just guided to about 20% growth for the June quarter for EyeWonder. So does that imply that actually the growth outlook is not as strong as you thought or what makes up that delta, and then a quick follow-up.

Well, I'd say this is the first time we're giving guidance that includes them in a quarter, and we wanted to give you guys something to model against. As Doug said, it would be approximately 20% or it could potentially be higher, but it is a very -- and you follow companies in that space, right? It's not so much volatile as it is a very campaign-by-campaign business.

You can have one campaign that's a $2 million revenue generator for you one month and not the next, and so as the business grows, that smoothes out of course. But we don't want to set the bar too high and have you guys be disappointed the first quarter out.

So I think last year, calendar 2009, they did about $35 million in revenue. Should we think about that growing closer to 20% for the full calendar year 2010, or are you saying 30% is still possible?

Well, I'd say you have two data points, both of which we've given you, and it depends on how you want to model it as far as the projection. What we said today is kind of expect 20% or higher.

Okay. Then just a follow-up on pricing. Probably don't want to quantify it, but you have in the past so maybe you will. I think you've talked about 30% to 35% year-over-year declines in pricing. Is that about what you're seeing, or maybe did those declines get higher or lower in the quarter?

That's just a metric that we think could be misleading and scare people. We had a great quarter and the business is healthy and growing, so we're going to give you color commentary on pricing. It's still aggressive, and there's also pricing activity by service lines.

So breaking out that one metric I think can be misleading to the positive or the negative, and especially as your mix of value-added services revenue increases and you have other solutions and you have large-object business and small-object business, which price are you referring to?

Because it's a lot more resource-intensive for a CDN to deliver a lot of small-object traffic than it is for a large-object traffic. So you go out and do one big large-object deal and that drives down your price artificially, or if you did a high-price, small-object deal, it could artificially sway that metric.

So I think what's important is to look at the gross margins and to look at the revenue growth rate, and then make your investment decision from there.

Okay, thanks very much.

You're welcome.

(Operator instructions).

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

Hey, guys, sorry to interrupt there. So just to clarify, will you be breaking out EyeWonder each quarter as you report as a separate line item?

Yes, we'll break them out as a separate reporting segment.

Okay. Let me ask this a different way -- on the pricing, I guess the pricing in terms of rate of decline, did you see it get either meaningfully better or meaningfully worse in the quarter?

You want me to give you the same answer I just gave?

I'm not sure. Probably not. (Inaudible—multiple speakers)

I think you can't just take one number. There literally are -- we have I don't know how many --

I don't want the quantitative number, just the general feel. Do you feel like the general environment's about the same, better or worse?

I'd say the general environment's about the same, trending potentially slightly better, given the gross margin expansion we saw. We didn't get any contribution from EyeWonder in that, that was the CDN business and the value-added services that ride the CDN business that drove that margin expansion and the revenue [outperform].

Great, that's very helpful. Same kind of question on volume growth. Obviously, revenue growth picked up for you this quarter. Is it your impression that -- I call it the same-store volume growth for individual customers -- is that beginning to accelerate, if somebody was growing, one of your customers was growing their volumes at 40% last quarter, is it 50% this quarter? Is that meaningfully different?

Well, ARPIC did go up slightly quarter-to-quarter. I think that was your question. That's how I'd -- that'd be the same-store equivalent number for a CDN business.

The same on volume as on dollar? Growth rate seems to have gone up. Then last quarter you talked from a competitive perspective about things that made you optimistic. Two things you said was that you thought that you would, quote, see less encroachment from the telcos going forward and less CDN competition in general. Has that played out, each of those two things that you thought would improve?

It's hard to quantify exactly, but we definitely are in a -- it feels to us like a mano-y-mano battle with the other company in our sector, and this is a Fed-Ex/UPS kind of analogy, we're both building global scale and we'll both probably have real solid businesses five, 10 years from now.

The smaller guys, it's just a scale business, and there will be some folks who are getting funded and they're going to focus on a niche here and be really good at that and pick up some business. You always have that the same way you have Air Equine that delivers horses. They're very specialized, but you have Fed-Ex that delivers packages all over the globe.

So you're going to have some of that, but we really feel like this is a mano-y-mano kind of battle here but that the market is so huge, we are -- today less than 5% of the video consumed in the average home is delivered over the IP networks and we believe that within five years that number could be as high as 40%, 50% in many homes.

I know in my home I have a bunch of kids and they watch stuff on Netflix and Amazon and that's coming over the IP networks. We're probably -- 15% or 20% of the content we consume in our home is over the IP networks already, and that number is only going to grow.

If you look at the scale, the platform that has to be built up globally to deliver all of that content, there's room for a couple of players to build to scale and have very healthy businesses.

What about the telcos? You mentioned again encroachment from the telcos coming. How did they behave in the market this quarter?

We still see level three here and there. They have a different strategy than us for business and it fits with a few customers out there. But for the broad-base set of customers, it doesn't appear to fit as well. That's really the only telco we see out there that has I guess a market presence that's a factor.

Last question -- COGS actually went down, cost of service actually went down sequentially on a dollar basis. I wouldn't have thought it would, even though it is the first quarter following the fourth, especially with revenues going up so significantly. Did you make less investment? I know you thought about talking about gross margin going up slightly, but I guess I'm surprised to see a meaningful decline in the dollar amount of COGS.

No, because the investment is really driven by the CapEx, not so much the OpEx, in the COGS, and the decline you're talking about I think was primarily in the OpEx. Also, we had some lumpy CapEx three years ago that's rolling off the books now, right after the founders raised the private round, and we had a big investment spurt.

So you're probably seeing the effect of those two, but no, we're still opening up new data centers, expanding our backbone, ramping investments, but we at year end sometimes, or even during the year, but at last year's end we were able to drive down some of our costs in the COGS line by stepping out to some larger commitments for longer periods of time. But you see a short-term benefit of that, and we're buying ourselves the ability to grow.

Okay. Thanks a lot, guys, appreciate all the questions.

You're welcome.

Your next question comes from a follow-up question from David Hilal from FBR. Please proceed.

Great. Just to clarify, Doug, you said next quarter you are going to -- are you going to segment report EyeWonder just revenue or expenses as well?

There's certain required GAAP disclosures on reporting segments, so it will likely be revenue and operating income. There's a few other things that we have to, but from an important metric it will be revenue and operating income.

Okay, and so I'm just thinking as we model out that business, the German subsidiary is going to be part of that as well, correct?

That's correct, yes.

Okay, but you didn't segment report that in Q1.

We didn't, it was immaterial.

Okay. Okay, that's what I had. Thank you.

Okay, you're welcome.

There are no more questions at this time. This concludes the question-and-answer portion of the call.

Okay, thank you for joining us today, folks. We'll see you out there.

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