Edgio Inc (EGIO) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Limelight Networks First Quarter Earnings Results conference call.

At this time, all participants are in a listen-only mode. Later, we'll conduct a question and answer session and instructions will be given at that time. If anyone should require operator assistance, please press star and then zero on your touchtone telephone. As a reminder, this conference call is being recorded.

I'll now introduce your host for today's conference, Sajid Malhotra. You may begin.

Thank you, Ashley. Good afternoon and thank you for joining the Limelight Networks First Quarter 2014 Financial Results conference call. This call is being recorded on May 6th, 2014 and will be archived on our website for approximately 10 days. Some portions of this conference call may include forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are all statements that are not strictly statements of historical fact, such as statements regarding future events or future financial performance, including but not limited to statements relating to Limelight Networks' market opportunity and future business prospects, guidance on financial results, statements concerning anticipated future growth and profitability, as well as management's plans, goals, strategies, expectations, hopes and beliefs and statements concerning the anticipated effects of pending or completed business combinations or other strategic transactions.

These forward-looking statements are subject to risks, uncertainties and other factors that could actual results to differ materially from those contained, projected or implied in the forward-looking statements, including the inherent risks associated with litigation, particularly intellection property-based litigation.

Reported results should not be considered an indication of future performance. Actors that could cause these actual results to differ are included in the company's periodic filings with the Securities and Exchange Commission.

I'm joined today by Bob Lento, Limelight's chief executive officer, and Pete Perrone, Limelight's chief financial officer. We will be available during the Q&A session at the end of our prepared remarks. I would now like to turn the call over to Bob Lento.

Thank you, Sajid, and good afternoon. Earlier today, we announced the results of our first quarter of 2014. I will now discuss the overall performance and progress against our priorities. Pete will follow with a more detailed financial discussion before we take questions.

As a reminder, our 2014 initiatives targeted focused account management and driving share gains at key accounts, improved feature functionality for core products, lower customer churn, and employee turnover. We made progress against these initiatives and I'm confident we will gain further traction as the year unfolds.

With that backdrop, let me discuss our performance in more detail. For the first quarter, we reported revenue of 41.2 million, GAAP gross margin was 38%, and loss from continuing operations of 7.6 million or $0.08 per share. Adjusted EBITDA during the quarter was approximately 600,000. We ended the quarter with 112 million in cash, cash equivalents and marketable securities.

The reported numbers are a solid start to 2014; however we still have much work ahead of us. We continue to see progress. Customer satisfaction is improving and we have solid plans to further improve it. Voluntary employee turnover is significantly lower than last year, but still higher than we'd like to see. Our balance sheet remains strong.

As a company, we are focused on leveraging our core strengths to increase our market share. Customers are appreciative of the investments we are making to expand and improve our offerings. Out top 100 customers, as a group, are growing with us. At the same time, we are making substantial investments in improving our processes and infrastructure.

As I mentioned during calls in previous quarters, Netflix is scheduled to leave us by the middle of the year, as they make substantial investments to build out their own platform. Revenues from Netflix were below Q1 of 2013 levels, and on plan with our expectations for the quarter. With that backdrop, the strength in the revenue trends of the remaining customers was encouraging. In Q1 of 2013, Netflix was about 40% of our traffic. Currently, Netflix represents just over 20% of our traffic.

We continue to pursue profitable business in a disciplined way, purposefully deemphasizing unprofitable accounts and focusing on customers who value high-quality service. We are working hard to increase business philosophy, meaning we want to shrink the time we pursue deals we win or lose, allowing sales to increase productivity and throughput.

We have undertaken a major investment to improve our quote-to-cash process, including a new billing system. This reengineering process is on track. We are making these investments now and expect to see the benefits starting later this year. These improvements will increase our billing capability, allowing us to create flexible offers and permit us to be more creative with rate plans.

As you've heard me say before, new customers are important and keeping a desirable set of existing customers is equally important. To measure their satisfaction with Limelight, we started a regular survey of our customer base called Voice of the Customer.

We have just finished the third cycle of this comprehensive survey and while the survey is only 75% complete, the year-over-year improvement in our net promoter score is significant. We are pleased to see our continued strong focus on customer service paying off.

I recently visited with many of our customers in Asia and Europe. We have had good traction in these regions and a lot of interest in our services. We have very experienced and capably teams in these regions that do a great job of supporting our customers.

Let me spend a minute talking about what the Limelight team accomplished during the first quarter of the year. First, we continue to make progress with reducing customer churn, which is now the lowest we have seen in many years. While we made progress, we still have work to do to retain and grow out customer base. With our system improvements, outstanding people and new additions to our management team, I'm confident will continue to make progress.

We continue to make investments in our network and our software products and we are seeing them pay off. Over time, we have moved some development capacity to lower cost geographies and will continue to look for opportunities in this regard. We've made enhancements and upgrades to our network to expand capacity and improve quality, while increasing efficiency.

We've also been investing in our products. During the quarter, the enterprise strategy group released a report confirming that Limelight's performance is number one in accelerating delivery of dynamic web content. This validation came on the heels of real user measurement data from Cedexis, which also found that Limelight outperformed our key CDN competitors globally.

In addition, we released our advanced multi-device media delivery feature, offering enhanced functionality to orchestrate video and content delivery customers, by simplifying delivery of video on-demand in multiple popular formats. The live version will be released later this year.

We continue to strengthen our management team and our board. Effective May 1st, Gray Hall, CEO of Alert Logic, joined our board. On the management front, Harry Chiu has joined to head our product management group, Barb King will lead our sales operations team, Will Charnock now heads network architecture and engineering, [Melissa Moorhead] joined to lead financial planning and analysis, and Sajid Malhotra is responsible for Corp. Dev. Strategy and investor relations.

With continued progress, employee pride is returning and customer confidence is rising. Let me tie what we're talking about to real customer wins. A large global electronics manufacturer based in South Korea selected Limelight Orchestrate Content Delivery to power the distribution of software to their mobile devices to make software updated more cost effective and manageable.

A major U.S. pharmaceutical company selected Limelight Orchestrate Performance, our web acceleration service, and Content Delivery when they recently deployed a new website. They needed a deliver solution that would give all their visitors across the world similar high performance.

A major Middle East company, which allows any specific moment in a movie to be searchable and discoverable, chose Limelight Orchestrate Content Delivery to reach their customers on a global scale. A multi-billion dollar European-based satellite service provider chose Orchestrate Content Delivery and Cloud Storage to improve quality for their OTT and video on-demand services. These success stories and many others like them give me confidence that we're on the right path.

Before I hand the call to Pete for a deeper discussion of the financial performance, let me provide revenue guidance for 2014. We believe, for the full year, revenue will be between 152 and 158 million. In my view, this balances the pressures to the top line from the midyear departure of Netflix against healthy industry demand and improving customer relationships.

With that, let me hand the call to Pete to discuss the financials in greater detail.

Thanks, Rob.

For the first quarter, Limelight recorded total revenue of $41.2 million. Our GAAP gross margin was 38% and adjusted EBITDA was approximately $600,000. Adjusting for the sale of Clickability, our revenue decreased by 3%, compared to the first quarter of 2013, but increased by 5%, or $1.9 million compared to the fourth quarter of 2013.

Netflix revenue in the quarter was approximately 4.9 million, up 400,000 or 8% from the fourth quarter and represented 12% of total revenue. We are pleased with our sequential growth from Q4, as it resulted largely from increased traffic from our top media customers and core delivery product, where we've invested to improve network quality and customer service.

Visibility on traffic and revenue from these top customers will remain limited through the course of this year, as only a portion of our revenue is contractually committed. We are earning back customers' confidence and we expect this to increase visibility over time.

The average unit selling price for Orchestrate Deliver, our content delivery product, was up approximately 8% from Q4 and 9% from Q1 of 2013, reflecting a continuing shift in our customer base to those who value higher quality. Our goal is to continue to add higher [AST] customers to our network through the coming months and to remain disciplined in our business selection. This does impact revenue growth to some extent, but we believe is the right decision for long-term value.

Cash gross margin in the quarter was 49.2% versus 48.6% in Q4. Looking ahead, we've moved more of our cost to a variable basis on the bandwidth side, while increasing our network capacity levels. Rack and power expenses remain largely fixed on absolute dollar basis, but we continually add capacity through higher server efficiencies. We believe we had adequate infrastructure to support higher traffic levels and that gross margins can increase with higher network utilization.

GAAP operating expenses dropped 2.3 million in Q1 of 2014 compared to Q1 of 2013 and declined 1.3 million from Q4 of 2013. We expect to increase operating expenses, however, as we make significant nonrecurring investments in our quote-to-cash initiatives through the course of this year. GAAP net loss was $0.08 per share this quarter, consistent with Q1 2013, and improved from $0.09 per share net loss in Q4 2013, excluding a $0.04 per share impact from the gain on the sale of Clickability.

Moving to the balance sheet, cash and marketable securities were down $6.1 million to $112 million at the end of Q1. And as of March 31st, we had approximately 98 million shares outstanding. We have not repurchased any shares under our current share repurchase plan that was authorized in February of this year. Total employee count was 472 at quarter-end, down from 482 at the end of last year.

Finally, last week, the Supreme Court heard arguments in our long-running patent dispute with Akamai. We were pleased with our presentation of the issues and are hopeful that the Court will provide a decision regarding the status of our appeal by the end of their time in June.

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

Thanks, Pete.

In summary, we believe we are in a healthy market with competitive products. We are putting together compelling value propositions for our customers, we are driving improvements across a broad set of functions, and focused on replacing anticipated revenue loss, growing strategic products, improving customer satisfaction, and reducing customer and employee turnover. We are investing in our products and processes and focused on creating value for our stakeholders during this year.

At this point, we will open the line for questions.

(Operator instructions)

Michael Turits, Raymond James.

Hey, guys; good afternoon. It's James Wesman sitting in for Michael.

First question on the CDN business; I was wondering if we could get a little bit of color. I know you guys aren't breaking them apart anymore on the call between CDN and value-added services; just wondering if you could tell us if it grew this quarter or if it declined, whether it's year over year, sequentially And also the traffic you guys experienced; did you feel that the volumes accelerated this quarter or decelerated? Any color there would be helpful.

Yes, we're not breaking out VAS anymore and we don't go into a lot of detail on products, but on a sequential basis, the CDN, sort of our core product, was up sequentially, from a revenue standpoint. And as you saw from sort of what it did in terms of average price, that'll give you a sense of the traffic. So I think we really benefited from a mix of higher quality customers.

OK. And then, just taking at a look at Netflix; I know you guys, it sounded like you reiterated they were going to come off of the Limelight platform towards the middle of the year. I means in terms of how you feel it's going to come off, I think, Bob, last quarter, you had thought there'd be a sizable amount of revenue in Q2, then almost all of it would fade out in Q3 to none in Q4.

Do you guys still feel like that's a comfortable revenue decline for the rest of the year, in terms of Netflix?

That's the current plan. They will remain a customer through Q2 at similar levels that we've seen recently and there will be a small tail of revenue into Q3. And the current plan is to have that be zero in Q4.

OK. And then just one last question, then I'll hand it off to the rest of the group. Again, back to CDN, with the software download business, I know you guys had quoted a solid win with a customer there. Can you give us a little color on the software download business overall and do you feel like it's picked up recently with your customers? Does it feel like it's sustainable longer term? Can you just give us some color around that piece of the business?

So that has been a growing piece for us. It's not only software, as we think about it traditionally, but also gaming software as well; right? Lots of updates to that software and so between the two, we see that as a strong use of our network. We've got some very good relationships and we see that as a growth opportunity for us going forward.

Great. Thank you, guys.

(Operator instructions)

Aaron Schwartz, Jefferies.

Good afternoon; thank you very much. I just had a quick clarification question on a metric you gave. I just want to make sure I understood it correctly. But did you mention the Netflix volume, year-on-year, was down to about 20% of total? Do I have that correct?

That's correct.

OK. And so I guess the follow-up question is you're moving towards a plan for diversification. It seems like a lot of metrics you're tracking are putting you on a good path to backfill that revenue. But I guess a question I have is if the traffic volume for that particular customer is down as much as it was.

It seems like the revenue didn't tail off as much in terms of a percentage of revenue. I know the comp on the absolute dollar's a little different, but is there anything sort of different in the revenue composition, relative to the volume composition of that particular customer?

So I think the obvious answer is yes, so we, because they have been a greater-than-10% customer, we've always disclosed what the revenue was and so what you see in Netflix is that traffic -- and I think this is the point you're making, that traffic was down to a much greater expense than the revenue was and that's obviously due to the fact that the price has increased, year over year.

So the price for that particular customer, the Netflix, you're saying increased, year on year.

That's correct.

OK. And then I think you also said on the reinvestment side, you did -- and I think this is consistent with the way you talked last year, but you have made some investments to increase the capacity of your network for your broader business.

Is there any reason why, if you expect Netflix to be removed from your business by the end of the year, you wouldn't just be able to better utilize the capacity that they're freeing up, rather than add new investments separate from that, I guess available capacity?

Yes, so it is a good question. The way that we think about investments is, I guess, in two large areas that we've spoken about before.

One is on the network side and I think your point is well made there and I think as we have capacity and I think as I think we replace some of those high-volume customers with a different mix of customers, we can fill that with the existing infrastructure that we have. So the investments that we make on the network side are really driven by efficiencies and lifecycle for the equipment.

Then our next major category that we refer to as our quote-to-cash initiatives are really not COGS-related. They're really to improve our end-to-end customer service satisfaction provision and onboarding of our customers and that we're making investments in, to some extent, software, but processes and people.

And the other thing I would say is that Netflix is primarily a North American customer for us and so traffic is going to grow in different areas. And so, for example, this week, we're increasing capacity in one of our European POPs, basically doubling the capacity of that POP to accommodate the growth of a single client in Europe.

And so there's an example of having more capacity freed up by Netflix didn't really help us there and we needed to make that investment to grow in that region and, in this case, with that particular customer.

OK, that's helpful. And last question, if I could, I know, as you mentioned, you're not giving a whole lot of detail on products for the split in your business, but as your sort of existing customer base looks to grow and fill the revenue backlog in the back half, what product areas are you most optimistic in terms of seeing the growth to fill that back hole?

Is it going to be more on the CDN side or the other side of the business, or just any sort of color you can give on sort what you see in the pipeline from a product perspective, in terms of what gets you optimistic about the growth in the second half? Thanks.

Yes. So I would say the growth that we're seeing now is largely coming from our Deliver capability, our CDN capability. Excuse me. We're new in the storage -- pushing storage as a product. We have, literally hundreds of customers using our storage capability, but we really haven't gone to market with that, so the push in 2014 is to go to market with that.

And that same is true of our Performance or Web Acceleration product and we just announced the newer version of that in October and that's the testing we were referencing, where it performs better than any other product in the market, but again, it's new in terms of us bringing that to market.

So I think, when we look at 2014 results, most of the growth from a revenue standpoint will come from the CDN or Deliver capability, but our hope is that we're seeing faster growth in other products, although the revenue may not be as material. Pete, do you have any --?

No, I think that's it.

Thank you.

Thank you. I'm not showing any further questions in queue. That does end the Q&A session for today and that also ends the call for today, as well.

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

Thank you.

Thank you.