Edgio Inc (EGIO) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Second 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 question-and-answer session.

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

Good afternoon and thank you for joining the Limelight Networks second quarter 2010 financial results conference call. Speaking today will be Jeff Lunsford, Chairman Chief Executive Officer, and Doug Lindroth, Chief Financial Officer. This conference call is being recorded on August 5, 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 related 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 as pending or completed business combinations or other strategic transactions.

These forward-looking statements are subject to risks, uncertainties and other factors that could cause 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. Limelight Networks continued to gain momentum in the second quarter of 2010. We generated $42.2 million of revenue and continue to see strong performance from our value-added services, which grew from 15% of revenue in Q1 to 28% of revenue in the second quarter including revenue from EyeWonder.

We are also forecasting continued growth for our value-added services in Q3. Doug will provide you with more color on our financial results later in the call.

First, I'd like to provide an update on the progress we've made in our strategic plan. A year and a half ago, we created a plan to expand our suite of services with solutions that are synergistic with content delivery and help fuel our customers' success. Today Limelight Networks is a much more diversified business offering high-value, high-margin services in multiple exciting growth areas that are rich with opportunity.

Limelight Networks has grown from a monoline CDN business with a telco-like business model into an innovative cloud software company that now addresses customers' needs as they work to address three large undeniable trends that we believe will continue for many years to come.

First, the ongoing shift of content and its accompanying advertising dollars to the online world; second, the explosive growth of mobile devices, mobile applications, and mobile constant consumption and, third, the migration of software applications data and IT services into the cloud.

Regarding the shift of content and advertising dollars online, Internet traffic levels continue to rise. Cisco is forecasting a 36% compounded annual growth rate of Internet traffic through 2014. We continue to scale our CDN business and by increasing share we are seeing in excess of 60% year-over-year traffic growth. And as we add scale per content delivery, we are also expanding the capabilities, performance, and global reach of the underlying computing platform upon which all of our other services run.

Today our CDN business is healthy, and in 2010 we have seen a return to more attractive growth rates. This business is our core engine and serves as a great technical and go-to-market enablement platform for the other revenue lines we've built and acquired.

In Q2, this business grew approximately 10% year-over-year, and we expect to see approximately 15% growth in Q3 and beyond. Analysts are forecasting 10% to 20% growth for the CDN sector, and we believe we will be able to grow as fast or faster than the market.

Accompanying the CDN business, EyeWonder, a key component of our value-added services business, is participating in the continued growth of online ad spending, which is forecasted by eMarketer to grow approximately 15% through 2010.

EyeWonder is specifically exposed to the growth of rich media online spend, with eMarketer forecasting to grow closer to 20% annually through 2012. EyeWonder's rich media ad formats provide advertisers with considerably higher engagement than traditional static ad formats such as banner or text-based ads.

Additionally, in late June, EyeWonder lost a dynamic creative optimization, or DCO, capability, which will further improve engagement and click-through rates for advertisers. The underlying targeting engine leverages Limelight's cloud computing infrastructure to dynamically analyze and then automatically optimize the performance of the creative elements that make up a display advertisement.

Ads can be modified in real time based on data we have internally and/or procured from third-party sources. We are encouraged about the early traction we are seeing with this DCO product.

We are also excited about early success cases we've seen where agencies using EyeWonder services are also interested in utilizing our CDN services when they create websites for their customers.

And the second area, regarding the explosive growth of all things mobile. Our mobility and monetization solutions group continues to enjoy success with major media companies and enterprise customers who desire to simply take their content mobile. The world of mobility is incredibly complex and growing moreso each day with the emerging tug-of-war between flash and HTML 5, proliferation of different handset operating systems such as Android, Apple's IOS, Blackberry's new OS6, Nokia's Symbian and so forth, the rapid increase in device choice, and increasing device capabilities.

As companies build applications and design experiences to engage consumers in this world, they are looking for partners to reduce the complexity that a diverse universe of devices and technical formats presents for them. This is what MMS does with our universal URL capability as just one example where customers can publish to one URL, and then we take care of all the heavy lifting.

Demand for our mobile services grew faster than 40% sequentially, and we expect continued rapid growth. We are also beginning to see demand for mobile advertising campaigns. Ad-supported mobile video revenue is projected by eMarketer to grow at a 60% compounded annual growth rate from 2009 to 2014. We expect to see mobile campaigns become a more meaningful component of the interactive advertising service mix in 2011.

In the third area, regarding the shift of software applications and IT services into the cloud. There is an expansive list of applications that used to be built and operating in-house, and which supported entire market segments of companies that are now actively migrating to the cloud.

Limelight provides corporate IT with cloud software solutions that address specific needs and allow them to forgo building expensive infrastructure in house. Applications and services such as storage, transcoding, site acceleration, content management, content protection, analytics, and D&S services. I'd like to talk a bit about each of these services.

Storage -- Limelight has, since inception, stored content libraries for our customers. Over the past year, we have extended our storage capabilities to include key enterprise features, such as geo replication and API-level access. We are seeing an increasing pipeline of storage deals and believe we have a core competency in storing, protecting, and delivering massive amounts of data. We expect to see continue growth an innovation from our storage service, going forward.

Transcoding -- media companies have historically done most of their transcoding in-house on expensive server clusters running complex software. Since early 2010, Limelight has been running an API-based transcoding service, which allows social media and traditional media companies to leverage our computing power and forgo these substantial investments. Our transcoding expertise and capabilities are core enablers for our mobile, our CDN, and our online video platform services, which we will discuss in a moment.

Site acceleration -- our Limelight website acceleration solutions saw increased traction in the quarter. SITE is a software solution, which provides customers with levers that enable them to tune their customers' experience. We plan to expand our Web acceleration offerings this fall, which will further improve our competitiveness. Our SITE pipeline has continued to grow, and as we diversify and advance our product offerings, we believe our success rate will continue to improve.

Content management -- earlier this week, after the quarter closed, we were pleased to announce the acquisition of Delve Networks, a privately held provider of cloud-based video publishing and analytic services. Delve serves over 100 customers in markets such as health care, financial services, eCommerce, and media publishing. Customers include the NFL, ESPN, Pokemon, Cleveland Clinic, American Hospital Association, Standard and Poor's, CDW, Hallmark, and Lego. Delve provides us with another high-margin, value-added software service that will help expand the conversation we have with customers.

Content protection -- Limelight has long offered our customers the ability to geographically fence their content, which is normally required by royalty agreements. Earlier this year, we lost a cloud-based, on-demand watermarking service to complement this offering. We are continually collaborating with our customers to design solutions that help protect the valuable content from the constantly evolving threat matrix.

Analytics -- Analysis of user behavior has, in the past, been conducted with in-house software run on expensive server clusters. Limelight is in the process of advancing our reporting systems to deliver real time analytics so our customers can tune and optimize their online offerings in real time. Real-time analytics will also provide timely data for the targeting solutions mentioned earlier. This is yet another area where customers can dramatically reduce their own in-house IT investments and improve business insight by working with Limelight Networks.

D&S products -- our data center services such as our Traffic Balancer product are today helping customers distribute site traffic among multiple origin sources, data centers, and even multiple content delivery service providers. These services improve customer infrastructure performance while lowering delivery risk.

In addition to these services I just mentioned, it is important to remember that our global consulting services builds custom solutions for corporate IT departments using the Limelight solutions I mentioned, along with partner products and the capabilities of our high-performance cloud computer platform.

In summary, all these cloud-based services comprise what we will report to you as our value-added services moving forward. These solutions leverage our global computing infrastructure to solve business and workflow-related challenges for customers. They help Limelight's sales team move further up the value chain in customer conversations. They reduce customers' CapEx requirements and ultimately return higher margins back to the overall Limelight business.

As a byproduct of all of the innovation mentioned above, we have also substantially expanded our intellectual property portfolio and have had six patents granted covering various inventions in the first half of 2010. We've also filed for 11 additional patents since the beginning of the year. Customers using our value-added services this quarter include real estate, website Zillow for site acceleration, Merrill Lynch for live in-advertisement video streaming, Zurich, Verizon, Wrigley, Olympus, GatorAde and Ore-Ida for rich media interactive advertising and numerous global media properties for mobile and traditional delivery of World Cup content.

Global Ad Impressions, delivered through EyeWonder service, were up 17% sequential in the quarter, as one example of growth.

One customer I'd like to specifically call out is TweetMeme, the website widely known for its re-tweet button, which is a clickable icon that allows Internet users to promote stories and blog posts by automatically publishing a link on Twitter. Although just a small Web graphic, the popularity of the button has grown rapidly to more than 600 million button impressions daily. A lot of network power is required to serve up that many impressions, and so TweetMeme is using Limelight's delivery infrastructure to scale their growing online business, dramatically reducing their own CapEx requirements as they grow.

Another example highlights the powerful combination of interactive advertising, connected devices, and mobile click to video and HTML 5 technologies. During the quarter, Glow Interactive, Ignite, the Sci-Fi Network, and The New York Times used EyeWonder services to enable the first interactive banner ad for Apple's iPad. The ad for the Sci-Fi show, Warehouse 13, allowed users to swipe through different information options, view show details and cast bios, and even watch videos leading up to the season premier episode. This is a powerful example of Limelight's value add and quarterly services working together to solve a complex business challenge for an advertiser agency and content publisher.

In summary, the investments we have made and continue to make in the software layer and the scale and capacity of our globally distributed high-performance computing platform are returning benefits to the business. As content consumption continues to grow, connected devices continue to proliferate, applications move to the cloud, and enterprises move their advertising activities online, we believe Limelight's shareholders will benefit from these investments.

Based on this optimism, we are guiding to increased growth in Q3. I will now turn it over to Doug, who will take you through our financial results.

Thanks, Jeff. During the second quarter we reported record revenue of $42.2 million, up 17% compared to Q1 and up 31% from the same quarter of 2009. Our core business grew approximately 10% from a year ago, and our non-Microsoft core business grew approximately 19% during the second quarter compared to the same period last year.

Our value-added services revenue grew to 28% of total revenue during the second quarter, which included two months of revenue from the acquisition of EyeWonder.

We reported second quarter adjusted EBITDA of $5.6 million compared to $5.1 million for Q1 and $6 million for the second quarter of 2009. Our adjusted EBITDA decreased slightly to 13% of sales from 14% in Q1 of 2010.

For the second quarter, our GAAP net loss was $2.3 million, or $0.02 per basic share compared to a GAAP net loss of $5.3 million, of $0.06 per basic share in the same period in 2009. Our GAAP net loss included a $5.8 million income tax benefit related to the partial release of our deferred tax asset valuation allowance as a result of deferred tax liabilities arising from the acquisition of EyeWonder.

In addition, our net loss included approximately $400,000 of acquisition-related expenses and $900,000 of intangible asset amortization related to our acquisitions.

We also reported a second quarter non-GAAP net income before stock-based compensation, litigation costs, amortization of intangibles, and acquisition-related expenses of $4.9 million or $0.05 per fully diluted share compared to a non-GAAP net loss of approximately $275,000 and breakeven per basic share for Q1 2010.

Please refer to the tables included in our press release for the reconciliation of GAAP measures to these non-GAAP measures.

During the second quarter, Limelight's international operations represented 30% of total revenue, which was an increase from 28% in Q1.

Gross margin, which includes both depreciation and stock-based compensation was 44% during Q2, up from 42% last quarter, and up from 35% in the same quarter last year. Our gross margin in Q2 increased as a result of the growth in our value-added services, which have higher gross margins than our core delivery services.

Cash gross margin was 58% for Q2, up from 57% in Q1 and up from 56% compared to Q2 2009. We anticipate our Q3 2010 gross margin to be in the range of 44% to 45%.

During the second quarter, our operating expenses were $26 million, an increase of $5.1 million from Q1 2010, and an increase of $9.4 million from Q2 2009. Our operating expenses increased over Q1 due to the addition of two months of operating expenses and amortization of intangibles from our EyeWonder acquisition as well as litigation expenses. These were offset by a decrease in our bad debt expense and stock-based compensation.

Our operating expenses increased from Q2 2009 due to ongoing operating expenses from additional headcount, amortization of intangibles from our recent acquisitions and litigation-related expenses.

We anticipate that our third quarter operating expenses excluding stock-based compensation, litigation expenses, amortization, and acquisition-related expenses will increase by approximately $3 million. The forecasted increase compared to Q2 is primarily the result of an extra month of EyeWonder operating expenses, two months of expenses related to our acquisition of Delve Networks, and an increase in professional fees for accounting and tax services and R&D-related investments.

Total depreciation and amortization for the second quarter was $6.9 million, up from $5.5 million in the first quarter and up from $6.7 million in the second quarter of 2009. The increase is related to intangible asset amortization from the EyeWonder acquisition and an increase in network-related depreciation from our recent capital expenditures.

Depreciation and amortization in the second quarter includes $5.3 million of network-related depreciation.

Stock-based compensation expenses for the quarter were $4.2 million, down from $4.3 million in both Q1 2010 and Q2 2009. Second quarter interest earnings were approximately $300,000.

Moving on to the balance sheet, our combined cash and short-term marketable securities balance on June 30th was approximately $83 million, down from approximately $149 million in the first quarter. The decrease in cash and marketable securities is primarily related to acquisition payments of $61.9 million for the EyeWonder acquisition net of cash acquired, as well as capital expenditures of $9.5 million. These were offset by cash flow from operations of approximately $5.5 million.

Day sales outstanding for the quarter were 69 days, up from 64 days the previous quarter and down from 73 days in Q2 2009.

Regarding guidance for Q3 of 2010, we expect to achieve revenues in the range of $46.5 million to $48.5 million. We estimate that value-added services, which are growing more rapidly than the core CDN services, will be in excess of 33% of revenue in Q3. Stock-based compensation expenses for Q3 are expected to be approximately $4.5 million. Capital expenditures are expected to be approximately $7 million to $8 million.

Finally, as mentioned earlier, for this revenue range, which includes a full quarter of EyeWonder, we would expect gross margins to be 44% to 45% and operating expenses, excluding stock-based comp, litigation expenses, amortization, and acquisition-related expenses to increase by approximately $3 million. Based on these amounts, we expect our third quarter adjusted EBITDA as a percentage of sales to be flat with Q2.

With that, I would like to turn it back to Jeff.

Thanks, Doug. At this time, we'll ask the operators to begin the Q&A session.

(Operator Instructions) David Hilal, FBR Capital Markets.

Great, thank you, a few questions. First, I can just back into roughly what EyeWonder contributed given the 10% growth in the core, but could you just provide us the EyeWonder rev number for the quarter?

We're not breaking out separately. What we're providing is our value-added services revenue. So we gave that what it is as a percentage. So we talked about what our core business was and then what value-added services, and that's how we're going to break out our revenues, going forward.

All right. On value-added services, so if they're going to go from 28% of rev to 33% of rev, and if they're a higher-margin business, how come your guidance for gross margin is flat to down?

It's actually flat to up for our guidance. And part of it is it just depends where we come in within that revenue range. So how much contribution comes from the value-added services versus the core is going to determine where we are. And since we're giving a couple-of-million-dollar range on revenue, that's going to determine a flat-to-up gross margin range.

All right. On customer count, how did you do in the core business ending the quarter net customers?

What we had in the press release schedules was our customer count went up to 1,655, which includes our EyeWonder customers. And within there, there were duplications because both EyeWonder and Limelight have similar customers. But on the Limelight, which we're not breaking out individual customers anymore because of the overlap of the businesses, but we did see customer growth in the quarter on the core Limelight piece, which, as you know, for the last couple of quarters that had remained relatively flat.

All right. Now maybe let me ask finally -- with EyeWonder penetrating the enterprise, that kind of initiative you guys have -- I know it's early days with EyeWonder, but outside of the agencies, which EyeWonder brings to you guys, getting into the enterprise any early success seen there?

I think what you're going to see, Dave, it's not specific to EyeWonder. Limelight has now an enterprise suite of services that covers the entire workflow that enterprise needs to go through to create a website, publish content, monetize and deliver that -- and analyze that content.

So the end-to-end workflow is the enterprise solution set that we'll be taking to market. Now, we'll take it to market in the open architecture. Someone using our mobile solution doesn't necessarily have to use our CDN. Someone using our OBP doesn't necessarily have to use our CDN and vice-versa. But we have an enterprise sales team that is focused on the enterprise, and they'll be discussing all of these solutions with customers.

Some EyeWonder's business -- kind of half-answering your question -- is primarily agency based, but they do have some major advertisers that work with them directly. Some of the larger advertisers have in-house rich media or interactive media experts who work directly with EyeWonder and direct their agencies to use EyeWonder technology because of the capabilities. And those folks, of course, our salesforces, are collaborating on also trying to sell those guys CDN services. But I think primarily what you're going to see is an overall enterprise suite of services that we take to market, and which includes all of the things I mentioned above plus strategic consulting to help folks set their strategy and implement it.

Sri Anantha, Oppenheimer.

Jeff, you said you folks are going a little bit faster than the overall CDN market. Maybe if you could just give us some color. What kind of a traffic growth are you really seeing in the marketplace and, two, if you could give us a little more color on your traction within the eCommerce vertical. I know that has been a big focus for you guys. Is that something we should still look for in the second half of the year? Or is there some progress being done there, too? Thank you.

Sure. So we are seeing, as I said, I think, in the script, traffic growth in excess of 60%, I think, overall, I'm not sure traffic is growing in the mid-30s and through both. There's two factors that lead to us seeing higher growth in the overall Internet. One is the traffic that we specialize in, which is primarily video and software downloads and that type of stuff is growing in overall Internet traffic. And then the second is that we believe we're taking market share. We don't have insight into our competitors, but we believe we're taking market share.

So that's sort of general color there on our growth rates. And it's a little bit different, quarter-to-quarter, year-to-year, but I think what you're seeing is, as I said, in excess of 60% traffic growth over the Limelight Network.

Related to eCommerce, we are with our SITE product, most definitely focused on regular enterprises and the eCommerce vertical, and with each new point release of SITE, we are increasing our competitiveness in that sector. We don't think you're going to see it as a major revenue line. The company is a good bit bigger now, so we're definitely adding customers in that area, but it's part of the value-added services revenue line that we're breaking out for you that we're guiding to 33% growth in Q3. And it is a growing line of revenue within the overall mix.

Jeff, not to (inaudible) you guys of giving any color on what the margins of your value-added services versus your core CDN service?

Doug, are we breaking out margins on value-added services versus core? No, we're just giving you the blended. I think we gave some color on EyeWonder gross margins, and we've said things like an OVP, in general, will get in excess of five times more dollars per bit than a pure CDN will. A rich media ad serving business will get dramatically even more than that revenue per bit. So they are -- I think, when we announced the EyeWonder acquisition, we talked about their gross margins being 70% or higher, and the historical Limelight was in the mid-30s to 40s range. So that gives you a little bit of color, if that helps.

Derek Bingham, Goldman Sachs.

One follow-up on the traffic question -- do you see traffic for your customers or across your network as that kind of excess of 60%? Does that represent an acceleration relative to last year or earlier this year?

It really is roughly what we've seen year-over-year for the four years that I've been here, Derek. As I said, some quarters you might see 100% year-over-year growth and some you might see 20, but it tends to blend out in the 60 or higher range.

Yes, Jeff's right. In Q2 we did see an acceleration.

Relative to Q1 on a year-over-year growth?

Correct.

Yes, and, Derek, on our standard investor deck, which we will be updating for the Pacific Crest conference in Vail next week, and we'll have it online, we had that traffic chart that shows you the slope. And, historically, we've seen from Q1 to Q2 a dip, and we did not see that this quarter. We saw a pretty big increase from Q1 to Q2.

Okay, terrific. Doug, on taxes, I just want to make sure that we had it right in terms of how to think about it going forward. Is this just kind of a one-time thing? And then assuming that you're breakeven or modestly profitable in the back half, what are you expecting in terms of your non-GAAP taxes?

Our non-GAAP taxes are still really going to be related to our foreign operations. So this quarter, when you back out the benefit from the deferred taxes, it was roughly $700,000 of tax expense. A lot of that is related to EyeWonder and some profitability they have in Europe. And we think for Q3 and Q4 it's probably closer to about $0.5 million a quarter of tax expense.

And that would show up on the -- in terms of a non-GAAP taxes paid?

Correct.

Okay. And then you're saying in the US you're shielded for the foreseeable future?

Yes, yes. With our NOLs that we've built up, that's going to last us for a while.

Just one more, if I could. You guys have been fairly active in M&A and curious what you're thinking about going forward. Do you expect to remain similarly active like this?

I think, Derek, we set out, as I said in the beginning, to build out the software-based solution set that we think complements the CDN business. And I think we feel like we're largely there right now, and the solutions that we have acquired. Mobile is now fully integrated. EyeWonder, we're continuing -- we're not completely integrated there. Delve Networks is a brand-new integration project. So we're making sure that we focused on high-quality and disciplined operations as we bring these folks onto the Limelight team. And these are growth acquisitions, not cost takeout acquisitions. So it's very important to make sure that the sales folks work together and product folks work together, the technical folks work together. And what I'd tell you is we're most focused on getting the growth rate back up into the 20s and optimizing the value of the assets that we have, the businesses that we have today. With that said, we don't really comment speculatively on any forward acquisition or activity.

And nothing significant to come in terms of headcount rationalization or anything like that post-acquisitions that you've made?

No. These are growth acquisitions. This is about acquiring great teams and great talent and there is not overlap or duplication of these businesses.

Okay. Except at the CEO level, right?

All three CEOs are still here, too, and their job -- their mission is to go build their businesses and I think -- I don't know if you've met any of them, but they're out there in the field selling and building value every day, we hope.

Well, hopefully, we'll see them in September at the Analyst Day. Thanks, guys.

Yes, you will meet them in September at the Analyst Day.

Donna Jaegers, D.A. Davidson.

On Delve, can you talk a little about what sort of sales level they are at, at an annual run rate?

It's not a material number, Donna, so we haven't actually broken it out. The guidance that we gave includes color for Delve revenue and expenses, but, again, it's a small business on a revenue run rate, a very large business as far as the breadth of the solution set that they had built. And they were just hitting real nice revenue ramp mode as we started talking to them. So we feel like between their organic ramp plus the distribution breadth that we add to it, that it's going to be an exciting part of our business.

Great. And then you guys threw out a stat early in the call -- non-Microsoft business was up 19% year-over-year. Is that just on your core CDN business, or was that looking over the whole company?

That's just on -- if you look at the business excluding EyeWonder, so it's what was traditionally just the Limelight standalone business.

Great. Can you give us some -- I know Microsoft is probably not a 10% customer anymore. Can you give us some detail about how big they still are?

All we can say is that they are still below 10%.

Great. And then the mobile business -- you called it out saying it was up, I think, 40% sequentially. I know it's a very small business, but is that $1 million yet?

Again, we're not breaking it out as a particular line item, but it's definitely becoming meaningful, and we're very excited about what we're seeing in the mobile sector in both the subscription mobile video businesses and the ad supported mobile video businesses. You're seeing forecasts of 60% CAGR in that sector through 2014. So we feel like there's pretty dramatic growth opportunity there, and our mobile team is actively looking at the space and working on expanding their service portfolio to make sure we can capture a lot of that.

Great. And then just a quick comment on pricing. Everyone is saying it's moderating. What are you guys seeing as far as CDN pricing?

We would concur with that. This is always going to be a business, the core CDN business, which is characterized by year-over-year unit price decline. But the business environment is more healthy this year than it was last year, and so we've seen consistent historical growth rates with some reduced price compression, which is leading to the increased growth rates. We said, I think, last year it was sort of 3% year-over-year, and this year, last quarter, it was 10%; Q3 is 15%. So, as I said in the statements, we're seeing an acceleration of growth back in the core business and feel good about that.

Kerry Rice, Wedbush.

Thanks. First question is on the average revenue per customer. Can you talk a little bit about that? It's kind of hard to ascertain whether that was up or down, depending on the overlap in customers and things like that. So I don't know if you can give some color around the core average revenue per customer and compared to maybe an overall revenue per customer.

If you look at it on the Limelight core, it was about steady with where it was the last quarter. And it gets a little bit confusing now with adding in the new customers -- first with EyeWonder, now with Delve. So we're going to analyze what it all means from having this influx of new customers and making sure that metric makes sense and how we're talking about the metric. So it's probably going to be something that we'll be looking at this quarter to determine what's the most meaningful metric in terms of our customers now that we have quite a bit more services that we're selling to customers and what are those right metrics that we'll be discussing with you.

And then one other question -- you talked a little bit about the size of Delve Networks. I was more curious about your strategy of why the acquisition now? You guys have historically partnered with other OVP providers, and why now you've decided that it was either necessary or a strategic fit or why to acquire one as opposed to just pick whatever customers wanted to use?

Sure. In Web 1.0 they called it [co-opetitian], in Web 2.0 they call them "frenemies." This world is evolving so rapidly that many companies grow into each other's turf. We are continuing to support many OVPs, and I've spoken with those folks, and the consensus is as long as you continue to provide me with the quality of service, and I don't see -- feel like you're somehow using my data against me, then we're going to continue to use Limelight because you guys are doing a great job.

We are running an open platform business, so we have customers using our mobile stuff that use other CDNs. We have customers using our CDN that use other rich media ad networks and other OVPs, and we're going to continue to do that. This particular company is run by a bunch of really smart engineers who have deep expertise in analytics and real-time reporting, and things beyond OVP, and we really like the team and felt like, as I said, you know, this is a huge space. So our strategy for OVP is to focus on the mass mid-market where there are about 300,000 websites out there that we think could hit our price point and be a very profitable business for us. And that market is probably 5% penetrated with OVPs if I had to guess right now. I'm not citing an analyst, I'm just giving you my sense of it.

And so it's a massive market opportunity. And this is a market segment that, you know, you remember back in Web 1.0, content management supported, you know, in excess of $10 billion of market gap. This is ATG and yet interwoven -- these are some massive companies and very successful companies, and we're solving that problem much more elegantly, much more efficiently, with a solution in the cloud that is also very video and mobile-savvy and provides real-time analytics. And so we believe we're going to be able to create substantial value in that OVP sector.

And we also believe there are going to be many other companies that are successful there because it's such a huge opportunity. And the old-school guys that are selling this heavy, complex, in-house software that has to run on millions and millions of dollars of CapEx and expensive data centers, that whole sector, we think, is going by the wayside. And we think a similar thing is happening with things like transcoding. Why in the world would 1,000 media companies around the planet each build their own transcoding farms to transcode all the same pieces of content, 85 different times. Why wouldn't you have that service in the cloud and leverage that computing capacity across multiple customers? It's a much more efficient way to do it. So we're very excited about that as well.

Katherine Egbert, Jefferies.

You said earlier in the call that you can outgrow the CDN market, you think, over the next few years. Why is that? I mean, you said you're taking share but is it more because you're seeing more traffic, or do you feel like you're getting better pricing than the competitors?

Oh, I think we're still not the largest provider in the space. I think, as you know, Katherine, the CDN market has sort of bifurcated into the large object and small object space, and we're still just getting started in the small object space. So even if we hold our own in the large object space and grow share in the small object space, which, by definition, if we're successful in that half of the market, we're going to grow share, then we will grow our overall market share.

So it's the introduction of SITE. We have some other SITE, you know, some branches of SITE solutions that are coming to market in the fall. It's that whole half of the market where Limelight, just a year ago, embarked on growing. That, you know, is where we believe we'll get the bulk of our growth.

With that said, this is a scale game, and what we're seeing is even on the large object side. a lot of the small folks who made a run at it with capital they raised back in '06, '07, because we and Akamai were enjoying a lot of success back then, and there were a lot of companies funded. Most of those guys are falling by the wayside, and the market is solidifying around two clear market leaders, which we believe are Limelight and Akamai.

Okay. And then on the EyeWonder -- can you talk to any success of cross-selling your product to their base or their products to your base? Any success there yet?

Yes, we can't talk about specific customers, but there are a couple of agencies, as an example, who have brought us in for CDN business for their customers, and it's a completely different entry point. You know, a traditional CDN sale would go into the IT organization, and we're working with a marketing organization, and they're saying, "Yes, I want to set up my website, and the agency can use our CDN to optimize that website as they're building it."

And so we've had a couple of success cases there, and on the other side of the equation we've definitely walked EyeWonder in at the very highest levels of many of our publisher customers and begun very interesting dialogs about helping those publisher customers better monetize their inventory.

Okay, and the last one for you, Doug. You showed a very nice profit this quarter, $0.05 of earnings. I couldn't do the math -- I couldn't type fast enough and put it in my (inaudible) fast enough. Will you stay earnings positive in Q3 and Q4?

Well, on the pro forma earnings that was positive was related to the tax benefit from recording deferred tax liabilities and the release of our valuation allowance. So that was about $5.8 million. If you back that out, we would have been negative on a pro forma basis in Q2. So I think from there, and what we said on the guidance, where we believe adjusted EBITDA will grow going into Q3, and we think we'll continue to expand in Q4. I know we talked about it on the last call. EyeWonder's revenues really ramped in the second half of the year, as that's when traditional ad spending really kicks up. So with their revenue of 60% coming in the second half of the year, we believe we're going to get a lot of operating leverage from them, really, in the last few months of the year. And so we will continue to get some of that expansion.

The bulk of that really comes in September, October, November, December. You see a big uptake in online ad spending across the sector. So the Q4 EBITDA expansion should be attractive.

Mark Kelleher, Brigantine Advisors.

Thanks for taking the question. Most have been asked and answered, but just a couple that are left over. Can you remind me what the value-added services were as a percent of revenue in Q2 last year?

Q2 of last year.

I don't believe we were breaking it out back then. I know in Q1 it was (inaudible) and I don't believe we actually were breaking it out, Mark, last year. But it was definitely sub-10%.

Okay. And on the CapEx for next quarter -- $7 million to $8 million.

Wait, I'm sorry. Let me correct back. Doug, you slipped back. It was 11% in (inaudible). It wasn't definitely sub-10.

On the CapEx for next quarter, $7 million to $8 million. What are you spending that on?

Typical growth. We deploy every week into new markets or expand our capacity in existing markets. We're in about 70 data centers around the globe, and we just monitor traffic flows, and sometimes we're shipping new servers. Sometimes we're shipping new core networking gear. Sometimes we're building server beds. Sometimes we're building transcoding forms. It really depends on where across the platform we need it.

So that's a steady -- pretty much a steady-state number we should look for per quarter?

Well, I think the steady state number we've talked about in the past is 15% of revenue, and I think you should think about that across the year. CapEx will be lumpy from quarter-to-quarter. But when you look at our target operating model slide in our investor deck, it talks about 15% of CapEx as a percentage of revenue, sort of steady state.

(Operator Instructions) Michael Turits, Raymond James.

Back to the traffic acceleration question -- you responded to Derek. You mentioned that it had picked up since last quarter. Just to be specific, has it been a couple of quarters now where your traffic growth rate has been accelerating each quarter, and what do you see as the primary contributors to that?

You constantly ask us about rate of growth and acceleration, and I think you need to look at it on a year-over-year basis, so that's sort of in excess of 60% number, Michael. It did go up nicely from Q1 to Q2. Normally, we'd see it sort of flattish because of the summer slowdown. We had World Cup traffic, as an example, as I mentioned in the script. Signed up some other big customers, have a couple of very large customers that are on amazingly impressive growth tears, and we're carrying a lot of their traffic. So it really is a blend of all of those.

Okay. Just a clarification for me. I'm sorry, what was your general guidance around the EyeWonder growth rate and how it related to the market?

I'm not sure -- are you talking about on this call? What we're doing now is -- ?

I think you mentioned at the beginning of the call what I expected EyeWonder to grow relative to the market?

Yes. Rich media ad spend is expected to grow at approximately 20% a year. And if we do our job right and ship the solutions, sell the DCO product, and ship a few other solutions we have in the pipe for EyeWonder, we should be able to grow faster than the market there.

And then just a small question -- what was the OpEx you spent on OpEx for EyeWonder this quarter?

We didn't break out their opex separately. I talked about it on the last call where I said where our increase for this quarter was going to be, roughly, $4 million. It came in less than that for them. But we're not going to get any more specific than that. But what I did say for this quarter, because we're going to have a full quarter, so we'll have three months of their expenses. So with the $3 million increase that I said for operating expenses for Q3 over Q2, they are a big chunk of that, having that third month.

Okay. That's the primary portion of the $3 million is just EyeWonder?

Correct. Yes, so we have them and then next in line from that would be having two months of Delve.

Donna Jaegers, D.A. Davidson.

I don't know if you guys look at your capacity utilization, but obviously, given the big network spend that you did last year, you're always -- I know you're always tweaking that with adding more servers and everything. But do you have any sort of rough numbers as far as capacity utilization that your network's at?

Not really, Donna. We tend to run it 25% to 50% utilization, sort of depending on the events that are going on. Utilization in the CDN platform business is an interesting question because you could have plenty of room in New York and congestion in Chicago if Oprah's doing a big event or something like that. It really is -- it's a bunch of connected medium-size buckets, not one big bucket of capacity. So we tend to try to build the platform and run it sub-50% in case there's a big event somewhere so we have the capability to shift traffic and provide the quality of service that our customers expect. But there's not really an exact number that we can give you that really dials it in.

And, for Doug, I don't know if you guys mentioned this, and I missed it. Was there a foreign exchange hit during the quarter because of the increased sales from Europe and the weak euro?

There wasn't much because the bulk of our revenue is still on the traditional Limelight piece. And the majority of Limelight revenue is denominated in US dollars. So our foreign exchange impact has still been relatively small. We are analyzing it more. EyeWonder does have a little bit more exposure in Europe than the traditional Limelight did, but at this point it's not significant and didn't have a significant impact on the overall business. But it did forward the EyeWonder piece. There was an impact but, overall, it was not that meaningful.

Okay, and then just on the World Cup, you mentioned it. I don't know if you can break down how much it meant as far as traffic acceleration or dollars or anything like that?

We delivered World Cup traffic in a couple of key markets in Europe for some key customers. And it wasn't a massive swing in revenue, but it definitely helped us a little bit, and we contributed to building a good, solid relationship with a couple of major publishers over there.

We also had folks using our mobile technology to deliver World Cup content here in the US and benefited from that as well.

Kerry Rice, Wedbush.

Just a quick question -- I think you guys also made an investment this quarter in an in-gaming advertising company. I'll probably butcher the name, but I think it was Gaikai. And I wondered if you could maybe talk about that and is that an avenue that you guys are looking at building out and building out more in advertising. Or is that just -- well, I'll just let you explain. Thanks.

Sure. Gaikai is the pronunciation, and is run by a very brilliant team of entrepreneurs and a proven team of entrepreneurs, and they approached us about leveraging our platform so that they could accelerate their go-to-market. And we really liked their technology, and we really liked their business strategy, which is that they are going to help game publishers acquire customers more rapidly. They're going to make it easy for customers to demo games on any browser anywhere on any device rather than having to have a heavy-duty console to enjoy the full experience of a game. And what that will allow more people to do is demo new releases, and then make the purchasing decision. And then Gaikai will benefit from helping the game publisher acquire that customer.

So we have many customers in the game publishing business today that are all publishers, and they use us for things like software downloads and software updates and accelerating on game experience. And Gaikai is complementary to all of them in that they will help those folks grow their businesses more rapidly. And the way Gaikai delivers that brilliant experience is by building some amazing technology themselves but also leveraging our global computing infrastructure. The partnership enabled them to deploy much more rapidly -- probably, you know, six months, nine months ahead of what they would have had to do if they went and did their own buildout.

And in exchange for that partnership, we did receive an equity stake in Gaikai, and we are very excited about that.

One more question.

That was the final question.

Oh, okay, I thought I saw one follow-up from Kerry Rice. I guess we answered it. All right, well, thank you for joining today, and we look forward to seeing you all, hopefully, at the Analyst Day in New York, and we'll be talking to you about that offline. Thanks.

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