Edgio Inc (EGIO) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Limelight Networks second-quarter 2013 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 Gillian Reckler, Limelight's Director of Investor Relations. You may begin.

Good afternoon and thank you for joining the Limelight Networks second-quarter 2013 financial results conference call. This call is being recorded on August 7, 2013, and will be archived on our website for approximately 10 days. At the end of this call we will post an updated investor presentation online and you can find it in PDF format within the Investors section of our website.

Some portions of this conference call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are all statements that are not strictly statements of historical fact, such as statements regarding future events or future financial performance, including but not limited to statements relating to Limelight Network's market opportunity and future business prospects; guidance on financial results; statements concerning anticipated future growth and profitability; as well as Management's plans, goals, strategies, expectations, hopes and beliefs; and statements concerning the anticipated effects of pending or completed business combinations or other strategic transactions.

These forward-looking statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from those contained, projected, or implied in the forward-looking statements, including the inherent risks associated with litigation, particularly intellectual-property-based litigation. Reported results should not be considered an indication of future performance. Factors that could cause actual results to differ are included in the Company's periodic filings with the Securities and Exchange Commission.

I would now like to introduce Bob Lento, Limelight's Chief Executive Officer

Thanks, Gillian.

This afternoon we announced our second-quarter results. We reported revenue of $42.8 million, of which 36% was generated by our value-added services.

When I took the reins as CEO of Limelight and began implementing change, I knew that the road ahead would not be solely up and to the right. We are pleased with our progress accelerating time to market for our product releases, adding capacity to our network, and improving processes to drive sales efficiencies. We continued our selective approach to accepting business by establishing a clear process for identifying customers that value quality, performance, availability, and service, while moving away from contracts that do not provide long-term economic value. These changes, while necessary, contributed to continued customer and employee churn and led to revenue and gross margin declines.

This quarter we delineated three strategic intents -- create long-term customer relationships; become the employer of choice in our markets; and grow revenue and profitability. And we took steps to align our values and strategic priorities with these intents. We believe that all three of these intents are important and achievable. We believe that by driving toward these three intents we will create long-term value for our shareholders.

Long-term relationships with our customers will reduce churn and drive top-line revenue, while being the employer of choice will promote innovation and efficiencies. This combination of top-line revenue growth and operational efficiencies are the foundation upon which we believe we can grow profitably.

In addition to competing aggressively and delivering on our promises to our customers, we have worked internally this quarter to align resources, processes, and efforts through a common strategy and plan based on our vision, mission, values and strategic intents.

Within R&D we have made significant achievements in terms of synchronizing product releases and accelerating time to market. A few of the recent enhancements include support for the deployment of Google's Widevine digital rights management platform in our video solution so that customers can manage access rights across devices and formats.

We added new functionality to our Content Delivery's Media Vault feature to support the URL validation needs of iTunes and we moved into the visual design phase of developing our next-generation Content Management user interface.

We highlighted our progress in R&D at the beginning of the second quarter when we launched Limelight Orchestrate 2.0. The launch outlined a roadmap of innovation and we delineated our vision for our service offerings, our capabilities, and how our solutions align with the market. Limelight Orchestrate 2.0 offers new and enhanced capabilities designed to help our customers create consistent and compelling digital experiences, drive traffic, increase engagement and conversion rates, and ultimately drive better monetization.

The release included a broad range of innovations that assist our customers in leveraging video, rich media, Web, and social content to better engage digital audiences across channels, devices, and geographies.

The launch of Limelight Orchestrate 2.0 was a Company-wide effort, backed by the hard work and dedication of all of our employees, and especially highlights the alignment of our marketing and R&D teams. Our marketing team drove a comprehensive campaign to introduce rebranded products in the Orchestrate Suite to the market. The rebranding and renaming of services within Limelight Orchestrate Suite is part of our greater effort to drive focus and simplification or processes and systems across our business.

We spent roughly $4.5 million this quarter on capital expenditures and almost all of that was to increase system capacity in order to better fulfill our customers' needs with an eye toward anticipated future demand. We added hundreds of servers across our Global Content Delivery network, implemented improvements in architecture and configurations, and added over 2 terabits per second of incremental capacity that is now available for consumption by new and existing customers. Putting this into context, the 2 terabits per second of capacity that we added on its own is more capacity than all but two of the commercial CDNs with whom we compete.

Combined with the investments we are making in R&D, these network investments are increasing capacity, server efficiency, and throughput times. They are also making our network more cost effective, more resilient, and more efficient.

Within the sales organization we continued to implement changes to improve efficiency, which we believe will lead to increased productivity from our sales and marketing investments. We inventoried and assessed the systems and processes that we have in place to support our sales teams and began implementing a platform that will drive sales velocity and simplify work flow so that we can improve customer service.

As we discussed last quarter and at the beginning of the year, we clearly delineated the work of managing the retention and growth of existing customer relationships from the work focused on new customers. We also made changes to our compensation plans and put in place a comprehensive HR system to assist managers in identifying, hiring, and retaining top producers. We believe these changes are critical over the long term to improve our effectiveness in securing profitable new customers, increasing customer satisfaction, and reducing employee and customer churn.

At the beginning of the year I emphasized the renewed focus on Limelight's customers. This focus is now codified as one of our three strategic intents. Last quarter we launched our inaugural Voice of the Customer Survey, with the objective of better understanding aspects of our business that affect customer satisfaction. This quarter we received these results, identified opportunities for improvement, and began to put in place programs that we believe will lead to rapid improvements in customer satisfaction.

Analysis of our business affirms that customers welcome our continuing transition from a pure play content delivery network to a provider of integrated, cloud-based, digital presence management solutions.

In Q2 we saw new customers purchase an average of 2.2 products as they established their initial relationships with Limelight. Customer churn continued to be an issue for us in Q2, and despite adding many new customers during the quarter and losing fewer customers than we did in Q1, we ended the quarter with a net customer loss. Value-added services increased to 36% of our revenue for the quarter. However, the 10% year-over-year growth for our value-added services fell short of the growth rates we have achieved in the past and expect to achieve in the future.

Second-quarter content delivery revenue declined approximately 10% year over year and 9% sequentially. As we have said before, our intention going forward is to grow profitable content delivery revenue as part of our integrated value-added proposition. Doug will give you more details on our value-added services and content delivery services shortly.

Let's briefly review the business results of the Limelight Orchestrate platform. Limelight Orchestrate Video is our online video solution that enables customers to manage and publish video. Its intuitive interface lets customers upload video and then automatically convert, optimize, and deliver for the best viewer experience regardless of device.

Because of its compelling value proposition, short sales cycle, and rapid time to implementation, Limelight Orchestrate Video continues to lead within the value-added services portfolio. In the second quarter, we added 50 video customers. Just over half of these new video customers were existing customers who chose to expand their relationship with us. It has also proven to be a strong entry point for new customers who can later benefit from our broader set of services.

Customer highlights include a multiyear agreement with Hotpoint Media, a leading Web publisher of lifestyle websites, to help them tell their stories through video, using our Limelight Orchestrate Video solution. Hotpoint Media selected Limelight to help them organize their large video library, improve their current publishing workflow, and ensure that their traffic is delivered efficiently and effectively.

Limelight Orchestrate Performance is our suite of acceleration services that helps customers improve user experience by providing fast, consistent website performance and decreasing the time it takes for users to interact with website content from any device, anywhere. Year-over-year revenue for Limelight Orchestrate Performance services was strong for Q2 and sequentially flat. These services are gaining traction internationally and continue to be extremely important for our customers in the enterprise and e-commerce space. We believe this area of our business is a prime growth opportunity and we are focusing marketing, sales, technology and support resources here.

Zalora, Asia's self-proclaimed largest online fashion retailer, who has experienced poor performance during peak traffic periods and selected Limelight Orchestrate Performance to provide a more scalable and available solution to ensure responsiveness of nine rapidly expanding e-commerce sites serving countries across Southeast Asia.

We continue to migrate new and existing customers to our Limelight Orchestrate Cloud Storage offering. The market opportunity for cloud-based storage continues to grow, as enterprises decrease infrastructure spending. We provide a robust set of cloud storage functionality and features which collectively simplify administrative overhead, reduce long-term IT costs, and help ensure compliance to regulatory standards.

Standalone storage revenue was down slightly year over year for the second quarter, and was down sequentially. Our next-generation Agile storage was up both year over year and quarter over quarter by a significant amount.

Limelight Orchestrate Content Management is our cloud-based solution for creating, publishing, and managing Web content for global audiences. It is an end-to-end content management solution that enables customers to capture, engage, and retain customers more effectively by delivering rich, personalized, dynamic content on any device anywhere in the world.

Our Q2 2013 Orchestrate Content Management revenue was down sequentially and year over year. While we added several new customers, we were adversely impacted by churn this quarter.

Our performance in professional services was the primary driver of the deceleration in our year-over-year value-added services growth and was down slightly on a sequential basis. The professional services team is continuing its evolution from providing implementation services to providing higher value services that help organizations assess and optimize the creation, management, and delivery of their digital presence. The team has experienced a high rate of employee churn over the past year, and we recently realigned the team structure to more closely align with our strategic priorities.

Compounding the quarterly decline in top-line contribution from professional services, the near-term investments we are making to transform the services continue to drive lower gross margins. We continue to believe we have solid opportunities to grow revenue from this solution on a year-over-year basis.

Orchestrate Content Delivery is the core service delivered by our high performance, global Content Delivery Network. These critical services improve the reliability, performance, and user experience of our customers' online digital presence by delivering rich media files such as video, music, games, and software and by streaming live events.

As we already discussed, we've been investing in growing our delivery business. However, we continue our selective approach to growing this business profitably, focusing on customers that value quality, performance, availability, and service, while moving away from contracts that do not provide long-term economic value.

In early July, Limelight was one of the service providers to serve over 1 million online viewers the day Andy Murray became the British men's Wimbledon champion -- the first British men's Wimbledon champion in 77 years. Limelight maintained a high quality, 1.5 megabits per second stream throughout the match. During the coverage, we supported peak views of over 200,000 concurrent users.

Glastonbury is the largest music and fundraising festival in the world. Limelight helped stream the entire Glastonbury Music Festival, delivering over 250 hours of live and video-on-demand coverage. Over 1.5 million viewers watched digital coverage of Glastonbury over three days, with 42% watching from smartphones and tablet computers. The Rolling Stones headliner performance generated 700,000 requests, more than the most popular moments of the 2012 London Summer Olympics, another Limelight project.

In Japan, DMM.com Labo Co. selected Limelight Orchestrate Content Delivery to provide delivery services for their popular video content download service. DMM.com Labo Co. uploads new content every night. They needed a network that could accommodate large traffic spikes reliably and consistently as their paid subscribers download the new content during a two-hour period.

The Limelight Orchestrate platform continues to attract attention from customers looking to improve their overall digital experience. We signed a multiyear agreement with France Televisions that include multiple services -- Limelight Orchestrate Content Delivery, Video, Cloud Storage and Performance. When choosing Limelight as one of their preferred vendors, France Televisions cited the completeness of our offering as a significant differentiator versus the competition.

Meanwhile, in Korea, Samsung chose multiple services to power their global e-learning platform to handle the training for all Samsung employees. Samsung choose Limelight Orchestrate Video, Cloud Storage, and Content Delivery.

We also continued to make progress selling value-added service into our existing customer base, in line with our strategic intent of creating more valuable long-term relationships. SalePoint, a leading e-commerce solution provider that delivers over 100 million minutes of content to 55 million consumers annually, expanded their relationship with us by adding Limelight Orchestrate Content Management. SalePoint now uses three of our value-added services in addition to Orchestrate Content Delivery.

Meanwhile, another of our e-commerce customers, Rue 21, added Orchestrate Performance to their Limelight relationship to help them boost audience engagement and drive revenue.

These are just a few examples of our ability to expand based on the value of strong customer relationships.

We continue to sign customers in the rapidly evolving and accelerating over-the-top service space. This quarter we added NueView, an OTT service provider that is now using our Orchestrate Content Delivery and Cloud Storage solutions to power its services.

We believe the changes we are making -- investing in people, simplifying systems and processes, driving technical innovation, selectively securing profitable new business, and better engaging our existing customers -- are critical steps that over the long term will allow us to achieve our three strategic intents -- creating long-term customer relationships; becoming the employer of choice; and growing revenue and profitability. We believe these steps are necessary now to enable us to grow shareholder value in the future.

In addition to these business and operating highlights, we also announced a leadership change two weeks ago, when we appointed Pete Perrone to become Limelight's next Chief Financial Officer. Pete has been a board member for the past seven years and, in addition to his deep understanding of Limelight, he has a broad range of experience working with companies ranging from early-stage startups to established industry leaders.

I want to thank Doug Lindroth, who several years ago also moved from a seat on Limelight's Board to the CFO role, for his dedication and significant contributions to the Company. Doug will remain with us through a transition period and we wish him success as he leaves Limelight to pursue other business and professional interests.

With that, let me now hand the call over to Doug.

Bob, thank you for the kind words. The past five years at Limelight have been a terrific experience, working with a dedicated team of employees. And I look forward to working with you, Pete, and the rest of the Limelight team during the transition.

The following financial results that I will be discussing are for continuing operations. For more information regarding discontinued operations, please see our Form 10-Q that will be filed in the next couple of days.

During the second quarter, Limelight Networks recorded total revenue of $42.8 million, which was down 4% year over year and down 7% sequentially.

Our Content Delivery revenue for the quarter was down 9% sequentially and declined 10% year over year, primarily due to the decline in our reseller revenue from Global Crossing, whose reseller contract ended during Q2 of 2012; the decline in our transit and co-location services revenue; a decline in our average unit selling price offset by growth in traffic delivered over our network; and to foreign currency headwinds. Our core CDN traffic revenue, excluding items such as transit and co-location services, increased approximately 1% on a year-over-year basis.

The sequential decrease was driven primarily by decreases in traffic among some of our top accounts. The traffic declines were due to conscious choices we made to not renew contracts with certain customers that do not meet our profitability expectations, as well as other customers that decreased traffic prior to our capacity expansion.

In addition, we also saw a sequential decrease in the traffic we are delivering for Netflix, after an exceptionally high traffic level in Q1 of this year. As we have previously discussed, our contract was scheduled to end at the end of 2013. However, we have recently entered into an agreement to extend our relationship into 2014.

As Bob mentioned, our value-added services revenue was 36% of total revenue during the second quarter, or 10% year-over-year growth compared to the second quarter of 2012 and a sequential decline of 2% from Q1 2013. We had another strong quarter of year-over-year growth from our video and our performance services, offset by our content management and professional services solutions.

The decline in professional services revenue in Q2 was driven primarily by two large engagements completed in Q2 2012 that were not tied to our underlying Limelight digital presence solutions. As we have said previously, we are migrating the types of services that this team offers to services tied to our digital presence management solutions.

Our Content Management solution was down modestly on both a sequential and year-over-year basis, where customer churn impacted our recurring stream.

Our Storage revenue also had a slight decline, both on a sequential and year-over-basis. And, as we have said before, this is still largely tied to our CDN business. Our Agile storage revenue continues to show both strong sequential and year-over-year growth. It is now nearly 30% of total storage revenue, up from approximately 23% last quarter.

During the second quarter, Limelight's international operations represented 33% of total revenue, up from 31% in Q2 of 2012. During Q2 our international revenue was negatively impacted by approximately $600,000 due to the strength of the US dollar primarily against the yen.

We reported a second-quarter adjusted EBITDA loss of approximately $500,000 compared to adjusted EBITDA of $2.5 million for the second quarter of 2012 and $2.8 million last quarter.

Our Q2 GAAP loss from continuing operations was $11.2 million, or $0.12 per basic share compared to a GAAP loss from continuing operations of $9.4 million, or $0.10 per basic share in the same period in 2012 and compared to $8.1 million, or $0.08 per basic share last quarter.

We also reported a second-quarter non-GAAP net loss of approximately $7.2 million, or $0.07 per basic share compared to a non-GAAP net loss of approximately $5.5 million, or $0.05 per basic share in Q2 of 2012. 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 35% during Q2 compared to 38% in Q2 of last year and down from 37% in Q1 2013. Gross margin decreased from last quarter primarily due to the decline in Content Delivery revenue offset by the increase in value-added services revenue and the decrease in network depreciation. On a year-over-year basis gross margin decreased primarily due to the decline in Content Delivery revenue and increased professional services costs, offset by the increase in value-added services revenue and decreases in our network depreciation. Cash gross margin was 50% for Q2, down from 53% last quarter and 55% during the same period last year.

During the second quarter our total operating expenses were approximately $26 million, up approximately $400,000 from last quarter and a decrease of approximately $100,000 from Q2 2012. Operating expenses increased from Q1 primarily due to an increase in non-income-related tax expense of approximately $600,000, as we received a refund in Q1 and increased marketing expenses related to the launch of our Orchestrate 2.0. These expenses were offset by reductions in employee-related costs and the fact that we held our annual sales kickoff in Q1.

Total depreciation and amortization for the second quarter was $7.6 million, down from $8.1 million last quarter and down from $8.6 million in the second quarter of 2012.

Stock-based compensation expense for the quarter was $3.2 million compared to $3.4 million last quarter and $3.2 million in Q2 of 2012.

Moving on to the balance sheet, our combined cash and cash equivalents and short-term marketable securities balance on June 30 was approximately $119 million, down from $120 million in the first quarter of 2013. Our cash flow from operations during the second quarter was approximately $4.7 million. During the second quarter we spent approximately $4.5 million on capital expenditures.

Days sales outstanding for the quarter were 52 days, down from 54 days during Q1 of 2013 and down from 57 days in the same period last year.

With that, I will turn it back to Bob.

Thanks, Doug.

This provides a status update on what we've done during the second quarter as we work toward our long-term vision. We believe that we are poised to create shareholder value from the changes that we are making, and from the increasing demand for our services that we see from organizations who are looking for help engaging and retaining their target audience across all digitally delivered touch points.

At this time, we'll open up the line for questions.

Thank you. (Operator Instructions) David Hilal; FBR.

This is Samad Samana in for Dave. I'd like to follow up on the Netflix contract. Could you give us some details, whether there's minimum traffic commitments or what level they've agreed to for the 2014 extension?

Hey, Samad. Unfortunately, we're not going to go into contract details on specific elements of the contract, just like we never did in the past. All I can really say is that we've been working with them, as you know, for several months on helping them migrate to their own delivery platform. And so we're working with them now over an extended period of time.

Could you tell us what the reasoning was for them extending out? Is it their own build-out or they'd like the security of having a backup as well?

I think it's better for them to address that for you. We're the service provider for them and we've been great partners with each other and we're happy to continue a relationship with them. So that's what we're doing.

Okay. And then, on the headcount, what is the Company doing to retain and attract new sales people as it continues through this transition and hopes to drive new sales on the other side?

This is Bob. I'll answer that question. We actually have seen the turnover, specifically within sales, stabilize. And at this point, other than maybe an opening here or there we are at -- given our budget and our expectations, we're pretty much at full force right now. And so the focus is less on recruiting but more on training and driving productivity. And there's a lot of internal effort around that. George Vonderhaar, who is responsible for that, and his team, that's the focus, is really looking at -- now that we've got people on board that match the profile of what we're looking for, how do we provide them the right level of training, the right support, and the right systems to ensure that they're productive going forward.

Okay. And then, one last question for me. You've been working through contracts and not resigning customers that had unprofitable contracts. How much more of that is left as you look at your customer base? How much more churn do you expect from these type of customers?

I think it's hard to say that. I think the good news is that we're starting to see price rationalization in the market, which is encouraging. But there's always somebody out there who's willing to give a price that we may think is unreasonable. So I think that's, at this point, why we're investing so heavily in ensuring that we can delivery high quality on a reliable and consistent basis so that it becomes less about price and more about the quality of our network. And so it's hard to predict that. I think we'll have to wait and see. But the encouraging thing is we're starting to see some rationalization to pricing in the market.

Yes. The other thing I would say, too -- it doesn't mean that the contract that we had initially signed was unprofitable. Some of it is the level of the expectation of the customer what their new contract pricing ought to be. And that's where we've oftentimes said that is not going to be business that we want to continue with. And so that's where we make the decision to not renew that customer and we'll let them go somewhere else if they believe they can get the same level of service for a lower price. We don't necessarily think they can get that level of service, but that's where we're going to make that decision, is normally at renewal time.

Okay. And any consideration of bring the buyback back with the balance sheet having so much cash?

You know, it's often a discussion that we have at Board meetings, looking at the whole balance sheet structure and how to best deploy our capital. And that's a decision that's up to the Board and a decision that gets made yes or no with each Board discussion. So at this point in time we're not doing a buyback, but that's evaluated from time to time.

Okay, great. Good luck, Doug, in the future.

Thank you very much. Appreciate it.

Aaron Schwartz; Jefferies.

I just had a question on the revenue in the quarter here. The last quarter I think you sort of indicated this was going to be somewhat of a disruptive period. You made a bunch of sales changes, et cetera. But when you look at the revenue outcome, is there any way that you could sort of point to how much of it was maybe from some of the changes you made in the sales model and you should be maybe moving through that disruptive period? Or how much of it was from what you just spoke about in terms of not renewing contracts that were not favorable to you?

Go ahead, Doug.

Yes. I mean, it's definitely both. We certainly can see on our side the quantification of it. We don't go down into those levels of details, but it's definitely a mix. And as I said in the prepared remarks, it's really a split of things that is driving it down, both year over year and sequential. Some of it is those [top] accounts on a sequential basis that we chose not to renew. And then others, when they saw what our performance was end of last year and Q1 because of capacity constraints that we were running into, and so those customers said -- from a performance standpoint, we've got to move our traffic where we're going to get better performance, to make sure they're not disrupting their audiences and their customers.

So as we started adding capacity, we started moving into a phase going back to those customers. Because the good news was, we didn't churn a lot of those customers that dropped traffic. They just reduced the level of traffic that we are delivering on their behalf. So we are back engaged in conversations, showing them the performance of the network with the addition of the 2 terabits of capacity we added and talking to them about that migration of traffic back towards our network.

Okay. In those examples, have you seen the traffic rebound yet? Or is it just sort of still in a customer engagement [phase]?

Based on the conversations we've had, we see a desire on the part of those customers to reengage and look to put more traffic through our network. And several of them are doing testing as we speak. So it's not an immediate turn on of more traffic, but I think over the next quarter or two we'll see their confidence in our network rebound and therefore the traffic will as well.

Okay. And then -- go ahead, Doug.

And then, the other thing that maybe got lost and I just wanted to reiterate, too, what I had indicated too, when you look at it on a year-over-year basis on the pure CDN traffic, so when you strip out the co-location and the transit. So co-lo is our rack-and-stack services that we used to provide, and then transit services, when you take those out our CDN traffic revenue was actually up. It was only up slightly, 1%, but at least we are seeing traffic growth there and less price compression.

Yes. And then, one last comment on that, we had several contracts that contributed to Q1 revenue that came up for renewal and we were not willing to renew at the prices that were being requested. And so, obviously, that traffic comes out immediately and therefore the revenue. And the customers that are interested in doing more business with us and are now testing, there's a little bit of a timing issue. That traffic will come back over the next couple quarters. But we want to do business on a long-term profitable basis and we're willing to live through the short-term hit.

Okay. And, Doug, on that co-lo and transit, it seemed like that had a steeper decline here. Was the reason sort of similar, I mean, it's just an economic decision? Or is there any sort of thing different on that part of the traffic, of why it declined to the degree it did?

That's an area of the market that we've chosen not to participate in. It was a big piece of our 2012 revenue and has been declining. And we've made a strategic decision. There's revenue that we don't really add any value to. Therefore it's hard to build profitable, long-term relationships that have some stickiness to them. And so we decided to get off of that revenue based on the fact that we don't think it is revenue that we add value to, and therefore not sustainable over the long-term.

And if feeds into, as Bob said earlier, to getting the sales force really focused. Having them participate sometimes, not other times, in those certain types of deals, it was a distraction for them. So it's really about our focus and making sure people are focused on the primary products that we want to sell and selling just those products, not dabbling in something that's not value add for the long term.

Right. Going to be very clear with our sales as to what success looks like.

Okay. And maybe last question if I could, I know you're not giving guidance right now. But as we build our models and given you just -- the co-lo and transit is not a strategic area of interest for you, is there any way to sort of guide us a little bit in terms of when that bottoms or how much is left to go on that side of the house?

Yes, it's difficult without getting real specific, because we've never broken it down to that level. It is down to a level where it's not nearly as big a number as it was. There was one real big customer that we had in there that has now come off the network. So we're not talking about where we're going to see real big drops anymore like we saw in the past.

Okay. Terrific. Thank you.

James Wesman; Raymond James.

Just looking at the CDN business, how much visibility do you guys have into the quarter-over-quarter stabilization of that? Do you feel like there's a point this year where we could start to see it either flatten or grow again on a quarter-over-quarter basis?

Well, on the pure CDN, like I indicated, I think we are seeing that year-over-year growth. So purely looking at CDN traffic, that's really where the foundation starts and it's just the base traffic. When you take out some of the, like we said, the Global Crossing reseller, and the transit and the co-lo that base CDN traffic is growing. And what we would be hopeful of is that where we are today with the customer churn, the employee churn, that we're at or nearing that bottom in terms of seeing those levels of churn, and we start building from here.

So as we said, we're not guiding to it. All we can say is, at least at the level we saw in Q2, that was a foundation for seeing the traffic levels and price compression at reasonable levels that did drive a 1% year-over-year growth.

Right. And then, just looking at traffic growth, I know you'd mentioned a number, about 50% year over year last quarter. What did it grow this quarter, roughly?

It was lower and for the reasons that we said. The two primary ones are obviously the Netflix traffic that is migrating away. So they're -- if you even look at them individually their year-over-year growth was quite a bit lower than it had been the last couple quarters. So that's leading towards it being lower, as well as the other customers that either we chose not to do business with or that migrated some of their traffic away, waiting for our expansion. So that drove a lower growth year over year. So we're roughly in the mid-30s on traffic growth rates for the quarter and price compression was around the mid-20s. So we did see improvement in price compression. And we saw, as you would expect, given what we have talked about on traffic with customers, we saw a lower growth rate in traffic on a year-over-year.

Got it. Thank you, Doug.

Michael Olson; Piper Jaffray.

Couple quick questions. In order to bring some of the volume CDN customers back that may have gone elsewhere due to the capacity issues, what kinds of tactics are you able to use? Is price a strategy that you might use to win traffic, [get] some of those customers back? Or what other strategies can you use to bring them back into the fold?

I think our strategy at this point is less focused on price and more on network quality. And we think that for customers that are looking for quality, we can be price competitive and be profitable. And so when we talk to those customers, they are looking for additional capacity. The most important thing to them is that it is consistent, reliable, and at a level that they need. And therefore, that's why we're going through the testing period. And so we feel very confident that we can compete for those customers based on quality and drive a price that allows us to return the right value to our shareholders long term.

Okay. And given the rising tide in industry drivers for kind of the underlying components of your value-added services offerings, what do you think is the reason for a little bit of a deceleration in growth in that segment, or maybe it being just a little bit below what you were anticipating?

I'll let Doug comment on that. And I think the story is mixed within that portfolio. We're very pleased with the growth that we saw in and around our video product. We're pleased with the progress that we're making within our performance within storage. While overall the number was down, Agile is our next generation and we saw very good growth there. So, as we said, professional services was down. But I think that there's some very good opportunities for us in the market with the products that we have. And we're putting more of an emphasis on those products as we go forward.

Yes. I think you hit most of it. The other one that was down was in Content Management. And, as Bob said in his opening remarks on some of the R&D enhancements that we've delivered is working on the user interface in our Content Management product. And that's been definitely been an area of feedback from both potential customers and existing customers. But that is an area that we were lagging behind the market and needed improvement upon. So we're making good progress there. And I think as that gets rolled out to the customers we should see the levels of churn that we've seen in the customer base in the Content Management piece start to decelerate and the wins from new business accelerate as the product gets enhanced and that better user interface is out in the market.

All right. Thanks very much.

(Operator Instructions) Donna Jaegers; D.A. Davidson

On the customer losses due to capacity constraints, how closely do you monitor capacity? It seems like something that you guys really fell down on, to starve capacity so that you lose customers. So talk to us about how much you monitor capacity on a real-time basis.

So couple things. It's not just about capacity. There are certain software features that our customers were requiring that we were slow to deliver that we've now started to deliver. So we talked about one of them, as an example, which is the digital rights management. At the beginning of the year we did not have any capability around that. Today there are three big players in the market -- Google, Adobe, and Microsoft. We're covering two out of the three today and by the end of the year we'll have all three. That's an example of even if we had capacity, for certain customers where DRM is important, they were not going to put the traffic through our network. And so it's both the physical infrastructure as well as some of the software functionality. We feel very good about what we're doing to deliver both.

Specific to your question about the network, we're being much more proactive about our capacity planning in terms of trying to better understand the needs of our customers and planning for what we believe we'll need as opposed to reacting. And then, we've also changed some of the policies internally around the network. So, for example, instead of running at 95% capacity, we've moved that bar down to 80%. And that gives us, obviously, much better ability to handle any spikes in traffic.

And so we're doing lots of stuff around network planning, but also the way we do capacity planning, the way we monitor the network, and the way we manage the network.

Okay. And then, on the competitive front, obviously your two big competitors showed good results in the CDN world, so we know how they're doing. How much are you running into Amazon Web Services as a competitor?

I think for us and the type of customers that we are talking to, our competitors remain pretty much the same. It's Akamai and Level 3. We firmly believe that, from an architecture standpoint, and specifically for large object delivery video, that we are the best architected network in the world. And so we're competing quite well across that although obviously, as you pointed out, the results don't show that yet. Certainly there are other capable competitors out there that we run into from time to time. But I would say the two big competitors are still Akamai and Level 3, for the types of customers that we are talking to.

On the Netflix renewal, is that through the end of '14 or just into '14? And what assurance is given that -- you've had problems getting profitable customers in the past. What assurances can you give us that this new contract extension with Netflix will be a good one for you guys?

Well, we wouldn't do if it wasn't going to be good. Obviously, they wouldn't do it if it wasn't fair and reasonable on their side. So I would say that we're happy to be extending the relationship. And we believe that it's moving forward into 2014 based on terms that are fair and reasonable to both companies.

So not to the end of 2014, just into 2014?

That's correct.

Okay. Thanks, guys.

Thank you. And I'm not showing any further questions in the queue. I'd like to conclude today's program. Ladies and gentlemen, thank you for participating in today's conference. You may now disconnect and everyone have a great day.