Edgio Inc (EGIO) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Limelight Networks 2011 third-quarter financial results conference call. At this time, all participants are in a listen-only mode. At the end of the prepared remarks, we will provide instructions for those interested in entering the queue for the question-and-answer session. I will now turn the call over to Doug Lindroth, Chief Financial Officer.

Good afternoon and thank you for joining the Limelight Networks third-quarter 2011 financial results conference call. This call is being recorded on November 7, 2011, and will be archived on our website for approximately 10 days. If you are online, we have updated our standard investor presentation and you can find it in PDF form within the Investors section on our website.

Some portions of this conference call may contain 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 which could cause actual results to differ materially from those contained, projected or implied in the forward-looking statements, including the inherent risk 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, Limelight's Chief Executive Officer.

Thanks, Doug. Good afternoon and thank you for joining us. In the third quarter, Limelight Networks continued to innovate and evolve as global content shifts online, Internet access devices proliferate and more and more enterprises turn to cloud solutions to solve their technology and business problems. On the innovation front, we introduced new releases of the Limelight Video Platform, Limelight Dynamic Site Platform, Limelight Mobile, Limelight Accelerate and Limelight Agile Storage, our uniquely differentiated cloud storage solution. These are fast-growing software-as-a-service and platform-as-a-service solutions, which we believe will deliver growth and higher margins over time. In addition to advancing these value-added services, we also continue to expand the capacity and capabilities and to enhance the performance and efficiency of our CDN platform. CDN revenue was roughly flat in the quarter, whereas value-added services revenue increased over 70% year-over-year after backing out EyeWonder and chors.

We saw exciting VAS growth in the following key areas. Combined revenue for the Limelight Video Platform and Limelight Mobile grew more than 170% year-over-year, or about 2.5 times last year's Q3. Our talented engineers have developed differentiated and competitive solutions in both of these areas and we expect LVP and Mobile to be big growth drivers for us in 2012. Revenue for Limelight Site Acceleration solutions grew in excess of 50% year-over-year. As we have discussed in the past, 1 of our key growth initiatives has been to expand into the whole site and small object half of the CDN market. These results do not yet reflect the impact of our AcceloWeb acquisition, which has led to substantial pipeline growth and which should start contributing to accelerate bookings in Q4. We believe that the whole site and small object half of the CDN market represents a $1 billion market opportunity and we are focused on gaining market share in this area.

Cloud Storage revenue grew in excess of 35% year-over-year. Most of our storage today is still content storage aligned with our CDN business, but our engineers have also innovated here and we are starting to get into the deal flow for enterprise cloud storage solutions due to Agile storage's differentiated capabilities. Agile leverages our massively provisioned compute and storage platform that runs in over 70 data centers around the globe and is connected by a 10 to 50 gigabit per second of back bone, and has approximately 7 terabits per second of download and upload capacity with last-mile providers.

We view cloud storage as a multi-billion dollar market opportunity where we are just getting started and where we offer much better performance and capital efficiency than in-house solutions chewing up IT budgets today. The high growth we enjoyed in these areas was balanced with flat revenue in CDN and web content management, and a decline in consulting revenue, consulting being lumpy and large product based. Let me break this down for you further.

In CDN revenue, we had healthy traffic unit growth of over 70% year-over-year, but that was offset by unit price compression of over 40% and a decrease in network pop build out revenue and a decline in transit and co-location revenue, both of which are non-strategic to Limelight. On a positive note, however, when we look at price trends over the nearer term, over the last 6 months, we have seen pricing trends return to more attractive pre-2008 levels of 20% to 25%. If we can achieve similar traffic growths in 2012, that would bode well for revenue growth in 2012 in the core CDN business.

web content management revenue was flat on a pro forma basis as Clickability was not growing when we acquired it and it takes a few quarters to see the benefit of our added sales capacity flow into the recurring revenue base of that software-as-a-service business. We are, however, seeing nice pipeline growth here and believe that cloud-based web content management is also a large and attractive market opportunity that is just getting established and where we offer an innovative and differentiated service. Together with our LVP, Mobility and Accelerate offerings, we are the only company that can deliver a fully integrated feature rich solution for enterprises to build and operate their web and mobile sites in the cloud. We expect to see accelerating growth rates for web content management similar to what we delivered with our Delve and Kiptronic acquisitions in the quarters to come.

Consulting revenue was down about $800,000 year-over-year in the quarter. This business can be lumpy as revenue recognition is sometimes keyed off of large deliverables. On a full year basis, we are expecting our consulting business to grow approximately 15% year-over-year.

In Q3, we made the decision to sell EyeWonder where growth had stalled and competitive dynamics were going to require substantial investment to reinvigorate growth. As discussed during that announcement, we felt a better strategic direction was to focus all of our resources on the online video, mobile, web content management, site acceleration and cloud storage areas that were growing nicely at the time and which continue to grow. We announced and closed that transaction on September 1, and expect to receive over $70 million in net cash from the transaction. Together with this announcement, we also announced that we would deploy $25 million in a stock buyback. As of last Friday, November 4, we had repurchased 7.5 million shares, approximately, at an average price of $2.50 per share. As you heard in my comments earlier, we are bullish on the prospects for our CDN platform combined with our software-as-a-service and platform-as-a-service solutions, and believe that purchasing our own stock at these prices will turn out to be a great long-term investment decision.

The sale of EyeWonder has not changed our thinking around the long-term target model we've been discussing with investors for 2 years, though. We're still building to the point where CDN will represent half of our revenue and where value-added services will represent the other half. We believe that blend will generate cash gross margins of 68% and EBITDA margins of 33%. Our software-as-a-service solutions run at cash gross margins of nearly 80% on a blended basis. Our CDN business runs at cash gross margins of nearly 50%. We expect to see some margin expansion in CDN as we expand our customer base and fill valleys of unused capacity, but we expect the bulk of our margin expansion to come from software-as-a-service solutions and platform-as-a-service solutions as they increase as a percentage of revenue. Now, I'd like to review some customer success stories.

Our Mobility services continue to lead the industry in delivering innovative solutions that meet the needs of this growing sector. Many of our customers have embraced the new mobile social world and are using Limelight Mobility and monetization services to deliver brilliant experiences to a multitude of devices. As an example, with the launch of football season in the US, we have multiple customers who are directly or indirectly, through partners, offering package promotions to their viewers to watch games on their iPads, iPhones, Android devices, Samsung Galaxy's, Internet-enabled TVs, and other devices.

Broadcasters and syndication partners, partner with Limelight to leverage our distributed network for delivery and our reach and ads services to optimize the viewing experience regardless of which device a consumer has, and to monetize that experience by dynamically inserting mobile advertisements into the mobile experience. Mobile ad units are some of the hottest inventory in ad sales these days, and broadcasters are racing to put more content online, which attracts more viewers, which creates more content, which grows revenue leading to a virtuous cycle.

Whether for professional sports events like professional football or college football or the America's Cup, which we will be delivering exclusively for Tinopolis who is a new customer in the UK, the Olympics, music events like South by Southwest or Daystar International, one of the largest religious broadcasters, the demand for consuming Internet experiences on mobile connected devices continues to explode.

In Q3, we continued to see dramatic growth of our mobility and monetization solutions platform with 285 million media requests, which represents a greater than 120% year-over-year and greater than 40% quarter-over-quarter increase. Our customers were increasingly able to monetize content and we're now seeing greater than 75% ad fill rates on mobile content, and many customers are telling us their mobile ad inventory is flat sold out.

At the end of Q3, Limelight had over 300 customers leveraging our mobility capabilities across MMS, LVP, and web content management platforms, including digital media companies like CBS, Comedy Central, ESPN, HBO and enterprise businesses like [Ciena], PR Newswire and WorldVision. As we indicated last quarter, we've been expanding our mobile focus into international markets and see a significant green field opportunity for our suite of mobility capabilities across EMEA, Asia-Pac and Japan. We added leading media companies such as ARTE in France, and India Today in the quarter as an early look at executing on this opportunity.

Turning to the Limelight Video Platform, LVP continues to grow adding over 40 new customers in the quarter, about half of whom were upsells and about half of whom were net new customers to Limelight. These new customers span the digital media and enterprise markets, including QVC, one of the largest e-Commerce and home shopping studios in the US, the Hartford Insurance Company, Avon Corporation, the City of New York, BBDO Advertising Agency and many others. Our LVP team set new records in total number of videos played, total traffic and total number of visitors in Q3. We launched a number of new LVP features also, including live chat, closed captioning and delivery to IOS devices. Recent market statistics indicate that the total market for online video platform is 2.3 billion in size today and expected to grow to an estimated 5.8 billion by 2015. We believe the online video platform category, in which LVP sits, is a very attractive value creation opportunity for our shareholders.

Turning to web content management, our web content management service, which we acquired as Clickability in the middle of Q2, delivered a record quarter for bookings in our first full quarter of operations together. We completed rebranding in Q3, formally launched Limelight's Dynamic Site Platform and formed our web content management group. The web content management platform is a critical component of our go-to-market plans for both our digital media and our enterprise market segments.

In our digital media customer base, our sales teams have been successful in cross selling and upselling our core delivery storage and compute based offerings at a lower discount when sold in conjunction with our cloud-based software-as-a-service and platform-as-a-service solutions. Last quarter, we shared the highlights of the Minneapolis Star Tribune where they went from 1 Limelight service to 4 as part of their web content management renewal. In Q3, we continued this trend by expanding our relationships with Gray Television, PR Newswire, Broadcast Interactive Media, and Journal Communications among others.

Our web and application acceleration services continued to expand in Q3 and we made good progress in integrating our presentation layer acceleration technologies into the edge of our global content delivery, storage and compute platform. Limelight is the only CDN to have embedded these patent-pending front end optimization technologies at the edge of the Internet, enabling an easy to use and very compelling acceleration service that optimizes the last Internet performance bottleneck, the browser.

We are pleased with the compelling test results this service is delivering to large Internet retailers, such as CSN Stores, which saw a 17% increase in page views and a 1.5% decrease in abandonment rates upon deployment of our Accelerate Express service. This performance enhancement translates into increased conversion rates, incremental revenue and, because it's delivered as software-as-a-service, there were no code changes or integration work required by the customer. During the quarter, we added a number of high profile customers such as Nokia, Intel, and BT Fresca in the UK and we anticipate continued growth in this key area.

I'll now turn it over to Doug for the financials. Doug?

Thank you, Jeff.

During the third quarter, Limelight Networks recorded total revenue of $47.3 million. Please note that included in this revenue was approximately $4.9 million from the discontinued operations related to the sale of EyeWonder and chors. The following amounts that I will be discussing are for continuing operations and exclude EyeWonder and chors from current and prior periods. For more information regarding the discontinued operations, please see our earnings press release that we issued today and our Form 10-Q that we'll file in the next few days.

Revenue from continuing operations was $42.4 million, up 6% from the third quarter of 2010, and up 2% from Q2. Our value-added services revenue, which includes our mobility, web and video content management, web application acceleration, cloud storage, and consulting services grew over 70% year-over-year on an as-reported basis, and increased to 29% of total revenue during the third quarter, compared to 18% in the same period of 2010 and up from 27% in Q2. All percentages I mentioned are without EyeWonder and chors.

Per forma organic of VAS slowed this quarter to 27% year-over-year as we added in the slower growing Clickability numbers, but as Jeff mentioned earlier, pipeline for web content management is growing and we expect Clickability to start contributing to growth by Q1 of 2012. During the third quarter, Limelight's international operations represented 32% of total revenue, which is up from 30% in the same period of 2010.

We reported third quarter adjusted EBITDA of $3.6 million, compared to $3.3 million last quarter and $6 million for the third quarter of 2010. Our Q3 GAAP loss from continuing operations was $6.4 million or $0.06 per basic share, compared to a GAAP loss from continuing operations of $5.3 million or $0.05 per basic share in the same period in 2010. We also reported third quarter non-GAAP net loss before stock-based compensation, litigation costs, amortization of intangibles, acquisition related expenses, and discontinued operations of approximately $2.2 million or $0.02 per basic share, compared to a non-GAAP net loss of approximately $800,000 or $0.01 per basic share in Q3 for 2010. Please refer to the tables included in our press release for the reconciliation of GAAP measures to these non-GAAP measures.

GAAP gross margin was 36% during Q3, up from 32% last quarter. Gross margin increased in Q3 as a result of increase in our bandwidth cost, a decrease in third party cost of sales, a reduction in network depreciation and higher gross margins from the increased revenue contribution of our value-added services. Cash gross margin was 53% for Q3, up from 51% in Q2.

As we mentioned during the earnings call last quarter, throughout 2011, we have been securing paid peering contracts with the major US access networks, which garner us direct, high quality access for delivering broadcast quality video to their end customers. These contracts and our relationships with these networks are a strategic asset for Limelight as the industry runs into capacity problems in last-mile access. This led to a minor margin squeeze in Q2, but positions us well with fixed bandwidth costs on a large portion of our delivery in the future as we fill up this capacity. We will continue to negotiate these contracts in the US and internationally as we expand our network.

During the third quarter, our operating expenses were $23.5 million, a decrease of approximately $700,000 from last quarter, and an increase of $3.5 million from Q3 of 2010. Our operating expenses decreased over Q2 as a result of decrease in stock-based compensation of $1.7 million, and a reduction in acquisition related expenses of approximately $600,000, offset by an increase in operating expenses for Clickability and AcceloWeb of approximately $400,000 as we owned both companies for the full quarter and an increase in intangible asset amortization related to those acquisitions of approximately $200,000, severance costs incurred of approximately $800,000 and an increase in litigation expenses of $200,000.

Total depreciation and amortization for the third quarter was $8.5 million, flat to the second quarter and up from $6.5 million in the third quarter of 2010. The increase compared to Q3 of 2010 is related to increased network depreciation and intangible asset amortization from our acquisitions. Depreciation and amortization in the third quarter includes $7 million of network related depreciation. Stock-based compensation expenses for the quarter were $3 million, compared to $4.9 million last quarter and $4.1 million in Q3 2010.

Moving on to the balance sheet, our combined cash and short-term marketable securities balance on September 30 was approximately $150 million, up from approximately $113 million in the second quarter. The increase in cash and marketable securities is primarily related to the proceeds from the sale of EyeWonder and chors of $61 million, and cash flow from operations of $1.7 million, offset by capital expenditures of $7.5 million and purchases of our common stock of $9.2 million. Day sales outstanding for the quarter were 59 days, up from 57 days the previous quarter and down from 62 days in Q3 of 2010.

Regarding guidance, for the fourth quarter of 2011 we expect to achieve revenues in the range of $44 million to $46 million. Our value added services revenue will be approximately 28% to 30% of total revenue in Q4. For this revenue range, we would expect gross margins to be 36% to 37%. Stock based compensation expenses for Q4 are expected to be approximately $4.2 million and capital expenditures are expected to be approximately $3 million to $4 million. We anticipate our fourth quarter operating expenses, excluding stock-based comp, litigation and acquisition related expenses will be flat with those of Q3.

Finally, I wanted to briefly describe the accounting treatment for the sale of EyeWonder and chors. We sold EyeWonder and chors for an estimated net proceeds of $70.5 million. The sale resulted in a gain of $14.3 million net of income taxes. We operate as a single reporting segment and as a result, $27 million of goodwill was written off as opposed to the $93 million that we had originally estimated when we filed pro forma financial statements. Goodwill of $66 million from the original acquisitions of EyeWonder and chors will, therefore, remain on our balance sheet, along with goodwill from our other acquisitions. We will perform our annual goodwill impairment test during Q4 and at such time that conditions may lead to an indication of impairment.

With that, I will turn it back to Jeff.

Thanks, Doug.

This update hopefully gives you some good insight into our progress in building a world class higher margin software-as-a-service and platform-as-a-service business on top of our market-leading CDN, as measured by performance, global scale and efficiency. In thinking through value creation at Limelight, we believe our best strategy for value creation is to engage in calculated investments in our SaaS and PaaS stacks to deliver 30% plus growth, with a design on helping our customers achieve efficiency and success in a world where content and advertising dollars are shifting online and where enterprise IT dollars are shifting into the cloud.

In parallel with this, we will continue to scale our CDN platform, which represents a unique strategic asset that allows us to differentiate in our chosen service areas of SaaS and PaaS worlds. Today, we believe we operate one of the largest cloud-based delivery storage and compute platforms in the world. This platform is at scale with other mega web companies like Google, Facebook, and Microsoft and is larger than any of the platforms being operated by the global telcos that we are aware of.

At this time, operator, we'd like to open the line for Q&A.

(Operator Instructions) Our first question comes from David Hilal with FBR Capital Markets.

Thank you, few questions. Jeff, I thought your comment on the storage piece was quite interesting in that I believe you said 50% were net new customers or customers buying it outside of their CDN needs, and so it sounds like this is a little bit of a different sale. Obviously, it diversifies your business, but I wanted to understand the go to market strategies there. Does this require a different sales force and is it, maybe you can just confirm, is it part of your goal to sell this almost as a standalone business product outside of CDN services?

Yes, it is, Dave, so let me give a couple clarifying responses. Number one, the 50% new customers and 50% upsales was as it related to the Limelight Video Platform. LVP, which is our OVP, sorry to throw so many acronyms at you, that is our online video platform. But what we said is that we are now beginning to, with the launch of Agile Storage, we are now beginning to sign up enterprise customers to use Limelight's Cloud Storage solution for pure enterprise purposes, whereas historically, our entire cloud storage business has been people score storing content with us, which is directly part of the CDN business. As an example, we store all the origin files for our movie customers.

To your question on the go to markets, so the way we view the world today is we have our digital media customers, which you would think of as the classic tech media customers with large object, video, music, software download business, and then we have enterprise, and the enterprise are businesses that are using any of our cloud-based solutions, not just the CDN, and we are actively in conversations with customers. We have prospects in the pipeline and we have sold deals to enterprise customers that are just using our cloud storage solution.

What's very interesting about Agile, Dave, is there are, of course, a number of cloud storage providers out there. We're not aware of any that use the global footprint of a CDN the way we do. And what we have is an API-driven, policy-driven, geographically distributed cloud storage solution. That's a lot of words, but what you can have is an enterprise customer who might want to store 20 copies and they can specify through the API where they want those 20 copies stored and for how long. And then, we have massive bandwidth. The dirty secret in cloud storage is you can't move terabyte and petabyte files around very easily. It takes days if you're a smaller cloud storage start up, whereas Limelight has 7 terabytes a second of connectivity around the globe and this 50-gig back bone. We can move the files around rapidly. We can populate them anywhere geographically that we have a storage, which is basically over 25 pops for the CDN, and enterprise, that really resonates with enterprise, the industrial strength back bone, the ability to upload and download rapidly and the ability to have control, geographically, over where your files are stored.

And the pricing, Jeff, works out?

Absolutely. The pricing is -- gross margins for our cloud storage solution are higher than they are for the CDN business. They are lower than they are for the pure SaaS offerings. If you look at like the Limelight Video Platform, that's a gross margin of north of 85%, let's just say, and cloud storage will be lower than that, but it will be higher than the CDN gross margins.

All right. Then I wanted to ask, last quarter -- I should say when you sold EyeWonder, you said in Q2 you had $12 million of revenues came from the value-added services business and that grew over 40%, and so I'm just trying to do an apples-to-apples. This quarter, what would those numbers be? Because can I just take the 29% of total rev? Going to end up at $12 million, $12.3 million. I'm just wondering if I'm making an apples-to-apples.

Yes, you are and that was during my portion, Dave, where I said that the growth in the VAS slowed on a year over year basis to 27%. So Q3, the VAS grew 27% versus 47% in Q2. The reason for that slowdown is what we had mentioned was on the Web content management, the Clickability that we bought, that now we had the full quarter of that revenue in Q3. So, the waiting of that and that business did not grow on a year over year basis as, as Jeff mentioned in his portion of the prepared remarks is how we brought that in at a time where we acquired them, at a time that they weren't growing and the sales cycle is a little bit longer in that business to get them up to speed. But we are seeing good bookings and therefore, we expect to see it contribute to growth in Q1 of next year.

All right. And then my final question, maybe some clarification, Jeff, around pricing, over 40% negated the traffic growth. Were you suggesting that you think we'll get back down to 20%, 25% unit price declines for '12? And, obviously, if that happens and you assume probably a higher number on the traffic, you get back to revenue growth in the CDN business or do you think the 40% price erosion may be here for a little bit longer?

No. So, the good news here, Dave, and we've been saying on the last two or three earnings calls that we're beginning to see signs of price compression improvement and over the last two quarters in the last six months, so forget about year over year. Let's look at the near term trend. Over the last six months, we saw annualized price compression of only around 20%, so that is a very good sign. Of course, we need to do our job in sales and customer relationship to still get 70%, 75% traffic growth like we have over the last 12 months, and if we can do that in 2012, then you can do the math. At 20% price compression, that 70% traffic growth would lead to 36% revenue growth in CDN.

Now, that might be a rosy scenario, so then you could back it down, say it was 30%, 70% traffic growth at 30% would lead to 19% CDN growth. And these are all forward-looking statements. I'm trying to give investors, because they've all been worried about pricing for years and rightly so, some visibility into what we're seeing which is that over the last six months, things have really improved. And the other thing is we do not -- we had one very material customer that we repriced in January of 2011, and we do not have any major customers like that, that are in line for any major repricing going into 2012. So, when you add all that up, we feel like the CDN business has sort of bottomed out with respect to growth times price compression, and should have a brighter future.

Okay. That's helpful. Thanks, guys.

Our next question comes from Aaron Schwartz with Jefferies.

Good afternoon. I just had a clarification question, maybe, about the guidance and I know consensus maybe wasn't fully updated, maybe certainly for the seasonality of EyeWonder. Is there any way you can give us the EyeWonder revenue in Q4 of last year so we could look a little bit more at organic growth trends heading into this Q4?

It was about $12.5 million.

Terrific. That's helpful. And then I'm sure you're not probably talking too much about the financial model for next year yet, but I don't know if you can provide any more maybe higher level color on the way you see either margins or cash flow given the recent divestitures?

I think what I'd point you to is the target model that we talked about where at 50% CDN revenue and 50% value-added services where you get that blended, everything drops to the bottom of a line of a 30% EBITDA margin, and we believe that as VAS increases and as we fill valleys in CDN, we should to be able to track towards that target model.

Okay. Then last real quick question for me, maybe for Doug, on the balance sheet in the pre paid expenses line, was there -- that increased quite a bit sequentially. Could you walk us through what was in that?

So, in the Q3 what really drove it is the receivable that we have from DG related to the sale of EyeWonder. The way the agreement was negotiated is that we got an up-front payment plus we get to monetize the working capital from that business, and so that moved into a pre paid as they have to pay us as cash collections come in over time in the monetization of the other assets that were on the balance sheet of EyeWonder.

And any sort of guideline for time frame around that? Is that 12 months or will it extend out further than that?

No, it won't extend out that long. From the receivables, which was the largest asset, over 50% of that have has already been collected by them and we need to settle up our accounting and their accounting. I would say the majority of it ought to be cleaned up by the end of the year and then it should be pretty much finalized in Q1 of 2012.

Terrific. Thanks for taking the questions.

You're welcome.

You're welcome.

Our next question comes from the line of Sameet Sinha with B Riley.

Jeff, I might have misheard you, but did you say that pricing was down 40% this particular quarter? I think previously on this call you mentioned 20% to 25% that's in decline, [as well as the temporary increase]. Second is, number of customers seem to have come down sequentially. Does that include EyeWonder and that's why you have see that impact? And that's it. Two questions.

What we said on traffic and pricing is traffic growth was in excess of 70% year over year and unit price compression was in excess of 40% year over year. And then that was a 12-month number that in excess of 40%. Over the last six months, it's been approximately 20%. So, in other words, 10% down over six months, annualize that to 20%. That's what we saw in our actual pricing numbers. That's what I said, over the nearer term we think that things have turned much better and we also -- one of the big things driving that year over year price number is the fact that we took a major customer in January of 2011 and signed a three-year deal with them and -- which took their unit price down substantially, so we don't have any other major customer like that, that's going to happen in January 2012. So, the current kind of run rate on pricing compression is more likely to be what we see in Q4 and going into 2012.

Well, into 2012, because we still have the impact of that price negotiation affecting the year over year for Q4.

Correct.

Yes.

Yes. And then on your second -- what was the second part of your question?

On the customer count, yes, we went from, in Q2, 1,630 customers to 1,602 at the end of Q3. It was down slightly. That does not have any impact from the EyeWonder chors sale because those number excludes EyeWonder and chors from them. What we look at is we have gross adds and customers terminating our revenue from attrition from customers still remain very low, below 1% and our average annual revenue per customer was up just slightly in the quarter. We don't see it as a big issue that our customer count dropped, although it is an area of focus internally that we want to continue to push that pipeline of new customers, whether they're small or big, but they are customers that can help us fuel growth in the future.

Yes, we've been on -- we certainly would prefer to see customers growing. In the last sort of year, as you know, we've launched a bunch of new products and we've been very focused on cross sale, upsale. We've increased the average number of products per customer to over two. And, we'll -- we're going forward here. We're focused on both expansion of the customer base and deeper penetration within the customer base of multiple products, because that obviously -- I didn't give you the metric in the script, but each quarter we've also reported to you on how much less price compression we experience when we sell CDN bundled with a value-added service, and in this quarter it was about 12 points less price discounting when you bundle CDN with a value-added service. So, there is real value created by those value-added services.

Okay. One final question, 6% sequential growth at the mid point of guidance, anything -- it seems like it is a little slower than previous quarter, fourth quarter is a big seasonally strong quarter for you. Anything you can tell us about big customers or anything to do with pricing?

No. That's based on what we see today. As of today, that's where we felt it was appropriate to set guidance. If you followed Limelight for a while, it's a dynamic marketplace and Q4 is always the big question mark on how much holiday traffic are you going to get and we're not heavily exposed to e-Commerce, but we do have an increasing amount of exposure there. We're more exposed on the media side where a lot of games get downloaded in the Christmas holidays, a lot of new people sign up their online subscriptions to video services. A lot of people buy new phones and start consuming content on the phones, so -- but based on what we saw as of today, we felt like that was the appropriate range for guidance.

Okay. Thank you.

You're welcome.

Our next question comes from Donna Jaegers from DA Davidson.

One quick question and then a bigger question. On the mobility revenues, am I right in assuming that, that's a little more than 50% of your value -added services now?

The mobility by itself?

Yes.

We don't break out the individual components of each one, but no, it's not that big.

Okay. And then a bigger philosophical question, Jeff, what have you learned from the EyeWonder misstep?

Well, we learned that revenue in the digital media space is not subscription revenue, it's not recurring revenue and it's really a campaign-by-campaign business. We knew that going in, but the strategic plan for EyeWonder was to build out a platform where you started getting more platform revenue from the advertisers, and it's an intensely competitive space. When we talked about it on the call, when they fell behind in their product cycle, some competitors, because you don't have long-term revenue commitments, if you get a little bit behind a competitor, then your growth stops. EyeWonder beat their numbers for us -- they didn't beat them, they performed our growth expectations for the first three quarters and then for the last two, they did not and we elected rather than invest and get the product back up on stop because our SaaS initiative was going so well, that would be a better use of proceeds.

And as far as keeping management on a tight leash, it sounded like with EyeWonder they had incentive goals in place, so it didn't sound like you were watching over them every step of the way. Have you changed your management practices with some of these other value added service areas?

I think we were definitely watching over EyeWonder. I don't think oversight or lack of Limelight involvement had anything to do with it. It was the platform product road map and the delivery expectations we had when they delivered that platform, called the EyeOne platform, it was buggy and had issues. It really didn't have anything to do with monetary incentives, it was technical delivery in the trenches and we work with all of our acquired companies at the platform level, at the operational level, at the sales level. We didn't integrate sales forces, if that's what you're referring to. That was by design because the sale to an agency is different than the sale to a customer of these other enterprise or digital media customers.

Okay. Thanks.

You're welcome.

Our next question comes from the line of Rod Ratliff with SunTrust Robinson.

Good afternoon, everybody. If you guys would, Doug, quickly repeat for me the target cash gross margin EBITDA targets for the 50-50 target business model?

Sure. It is, let me just make sure I give you the right ones.

No worry.

And by the way, it's out on the Web site, too.

So, for the target for cash gross margin is 68% and EBITDA margin 33%.

Okay. Couple of more housekeeping here. Will you guys be -- you gave us some nice pro forma statements exing out the discontinued ops for June and September quarters of this year and last. Is there any plan before the filing of the 10-Q to give us the fourth quarter of last year?

No. You'll see in the Q that we file in the next couple of days, some additional details on the EyeWonder components, but you won't have a Q4 of 2010 stand alone number, but there will be -- that information will come with the K.

Okay. Lastly, where does the intellectual property case in the DC circuit stand? Are there any milestone dates coming up?

There's an oral argument -- is it this week or next week?

November 18, next week.

There's an oral argument next week and then it will go back in the process of internal revenue which could take six to nine to 12 months based on what our attorneys tell us.

Great. Thank you very much.

Our next question comes from Richard Fetyko of Janney Capital.

A couple of questions with regard to the CDN business. After CapEx, with that business still losing money, but perhaps I'm not thinking through it appropriately, obviously, you're running the value-added services on top of it as well, but I was wondering if you think of the CDN on the cash flow profitability basis of separate segment, if that's something you think that you can achieve or only on the combined value-added services and CDN basis you think it could be profitability. Secondly, just curious, we were talking about the sales process, with respect to EyeWonder that you would combine the two because the customer targets were different. I was just wondering for the rest of the other remaining value-added services if the sales process is integrated with the CDN business?

Yes. The second answer -- the answer to the second question is yes. We have one global Limelight sales force organized by geographic territory and focused on enterprises and focused on digital media, and they sell everything. We do have product specialists on LVP, on Web content management, on Mobile, that get involved on Accelerate, that get involved when that geographically focused sales force finds an opportunity.

On the first part of your question, on the cash gen potential for CDN, we talked about this a couple quarters ago, if you go back and look at Akemi, which today is generating a lot of cash, when they were at sort of at a $200 million revenue scale, they weren't throwing cash off either. The CDN business really is a business where if you want to be one of the global market leaders, you have to build that global footprint. That requires deploying a lot of CapEx, a lot of servers and routers around the globe. But once you get that footprint out there, you then -- and you sign up a couple of key anchor customers that fund your scale builds, you then can fill valleys of unused capacity and drive up profitability. So, if we have a daytime customer here in the US, because we peak in the evenings, that daytime customer does not cost us very much more than their incremental cost of sales. Meaning, the incremental selling costs, what we are paying the sales team to close that business. And so as the business scales from a $200 million to let's say a $400 million run rate, you're going to start to see that CDN basis, again, this is a forward-looking statement, but our believe will be based on patterns we've seen with other guys who have gone through this process of scaling in the past, that we should see cash gen out of the pure CDN business.

But what has changed over the last decade is that the CDN platform is really a globally distributed, high performance, delivery, compute and storage platform and with all apps and services or many moving into the cloud, to your point, we think that you can augment that core CDN strategy with differentiated software and platform as a service solutions that leverage the CDN. They differentiate on a competitive basis in the market, like our cloud storage because it's running on that global CDN platform. Our site acceleration technology, which optimizes HTML, the presentation layer, is now running at the edge of our network, which is differentiated from the way other guys in that market work. So, the CDN gives you that platform for differentiation.

And if I may one follow-up on the value-added services side, particularly on the small side delivery and whole side delivery, just curious what sort of pricing patterns are you seeing there?

We don't see -- our value-added services business is primarily a software as a services business and the dynamics inside that business and pricing and sales and contract structure are much more like you'd see in SaaS businesses where you don't get year over year unit price declines, your year over year unit prices tend to be stable. You do give customers volume discounts if they -- like at a salesforce.com model, the more seats, you can get some discounts, so with more views or more ad insertions, one of our value-added services customers should get some pricing advantage based on their own growth. But you don't have this sort of fundamental Moore's Law driving price down every year because your customers know your costs are going down every year. You do not have that dynamic in the SaaS products.

All right. Okay. Thanks.

You're welcome.

Our next question comes from Chad Bartley with Pacific Crest.

Thank you. I wanted to go back to the commentary on traffic growth and price declines and make sure I'm understanding the math and numbers. If traffic growth is up around 70 %, price declines are down about 40%. The core CDN business declined about 2% year over year after adjusting for Microsoft, so what's making up that difference? It seems like the CDN business should maybe be growing faster.

We had, within there -- so the traffic-related component of our revenue was up a little bit, and that was offset by some non-traffic items that Jeff mentioned in the script, a pop build out that we did in Q3 of last year and then some other [colo] and hosting type services that we don't consider real strategic, but we had more of that in Q3 of 2010. So, we did have pure traffic-related revenue growth in the quarter, but that was offset, and as you said, was, therefore, in what we're calling pure CDN, which includes those other components was a year over year slight decline of about 1.9%.

That group of services, if you look at it sequentially, how did that trend in the third quarter and what's the expectation for the fourth quarter?

So, on the CDN traffic there, there was, again, some slight sequential growth on just pure traffic base and then there was non-traffic related items that declined from Q2 to Q3 that kept it relatively flat on a sequential basis on pure CDN. So, the real focus for us is on growing the traffic and traffic-related portions of the business. We will still have some lumpy type revenue from time to time, whether that's coming from one of our resellers where we do a new reseller deal or as a result of one of those deals, we'll build a pop for them and that's part of our professional services, as well as selling them network-related equipment that is not a sustainable piece or a continuing recurring revenue. So, what we really focus on is getting that recurring revenue component that's really the traffic piece.

That should, obviously, grow sequentially in the fourth quarter?

Correct. Yes.

Thanks very much.

At this time, I'd like to turn it over to our speakers for any closing remarks.

Operator, we have no closing remarks. Thank you all for joining us today. I think we'll see some of you folks in New York Wednesday. Thank you for your time.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.