Edgio Inc (EGIO) 2014 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Limelight Networks second-quarter earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would like introduce your host for today's conference, Mr. Sajid Malhotra, Senior Vice President of Strategy and Investor Relations. Sir, you may begin.

Thank you, Amanda. Good afternoon and thank you for joining the Limelight Networks second quarter 2014 financial results conference call. This call is being recorded on August 4, 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 managements 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 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'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.

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

As a reminder, at the start of 2014 we set initiatives to focus on account management and drive share gains at key accounts, improve feature functionality for our core products and lower customer churn and employee turnover. We continue to make progress in the second quarter against these objectives and I'm pleased with the overall outcome.

Having said that, I want to be clear we still have a lot of work still to do and will stay focused and our efforts to improve our operating performance. With that, let me discuss our current performance in more detail.

For the second quarter we reported revenue of $41.3 million, GAAP gross margin was 39% and loss from continuing operations was $7.1 million or $0.07 per share. Adjusted EBITDA during the quarter with approximately $1.3 million.

Adjusting for the divestment of Clickability, which accounted for $3.1 million in the year-ago quarter, our revenues were up 4% on a year-over-year basis. The first increase since the first quarter of 2013.

We ended the quarter with $107 million in cash, cash equivalents and marketable securities. Our balance sheet remains strong.

As we end the first half of 2014 we are pleased with our progress. We continue to see progress in non-financial measures as well.

Customer satisfaction is improving significantly and we continue to invest to improve the customer experience. Employee turnover, while still too high, has improved year-over-year.

The favorable Supreme Court ruling in our case versus Akamai have significantly reduced, but not entirely eliminated, the exposure associated with that long running case. At the same time, we continue to make material investments in improving our processes and infrastructure.

As you've heard us say repeatedly, Netflix is on plan to leave our Network in the current quarter as they continue to build out their own platform. Netflix aside, the remaining revenue trends and profile was encouraging.

On a year-over-year basis revenue from our top 100 customers grew by 9%. And at the same time, our growth from new customers exceeded our expectations.

As I've said before, new customers are important and keeping a desirable set of existing customers is equally important. To measure their satisfaction with Limelight, we recently finished our third global survey of our customer base called Voice of the Customer. The year-over-year improvement in our net promoter score is significant.

I'm very proud of the progress we've made since the launch of this survey last spring. The survey also validated that our priorities and investments are aligned with customer expectations. The numerical trends follow these improvements.

Our net customer churn was 22 in the second quarter and improvement from last quarters net churn of 37 net of Clickability and last year's Q2 net churn of 48. Importantly, we had a net increase in customers using our core CDN services on a sequential basis for the first time since the fourth quarter of 2009.

Equally encouraging is how we got there. Our win rate is improving and the contract value of our wins is higher than a year ago. We are pleased to see our continued strong focus on customer service is paying off.

During the quarter we achieved some milestones that I want a spend a minute on. We were awarded our 100th patent by the US Patent and Trademark office underscoring the rich tradition of innovation at Limelight. Which is resulted in advancements that have benefited and continue to benefit our customers and our Company. I'm proud of these innovations and the employees who contributed to them.

Locally we were recently named as a CareerBuilder top Company to work for in Arizona. This statewide workplace awards program recognizes organizations that are creating quality jobs and work environments in Arizona. We were particularly pleased to invest in our home state.

Also in the quarter, as most of you know, we received a favorable decision from the Supreme Court of the United States in our lawsuit with Akamai. The Supreme Court issued an opinion holding that Limelight Networks is not liable for inducing infringement. We were pleased with the Supreme Court's unanimous decision and believe this is not only a win for Limelight, but for innovators across the country.

The case is now back with the Federal Circuit Court of Appeals for further proceeding consistent with the Supreme Court's opinion. And as I mentioned, we remain hopeful and optimistic that the Federal Circuit will bring this matter to a swift and successful completion.

We continue to strengthen our management team. During the quarter Sandy Brisentine joined Limelight Networks as Vice President, Human Resources.

Sandy will be focused on helping us accelerate the reduction of voluntary employee churn. And she will also implement initiatives that provide development opportunities for employees and promote Limelight as an employer of choice. We continue to see employee pride returning and customer confidence rising.

We had a great deal of energy and excitement in our network operations center during the World Cup games. We were especially proud to have delivered live coverage of the games to our broadcast customers. Even with millions of online spectators tuned in from every region of the world, Limelight customers provided a broadcast quality experience to viewers on mobile and ultra HD screens alike.

Our networks saw massive utilization peaks during the games, reaching well over 4 terabits per second during match play. Watching from a multitude of devices, thousands of concurrent users tuned in online. In fact, during the United States versus Germany final qualifying game, over 750,000 users connected at the same time and enjoyed a flawless game experience.

One of our customers single-handedly hit close to one terabit per second as the US advanced into the quarter finals. This is a fine example of the expertise of our people and our technology as we deliver a flawless audience experience.

Let me also talk about a few customer wins. A large global electronics manufacturer based in South Korea, added our dynamic web acceleration service this quarter after having selected our content delivery service in Q1 to power the distribution of software to their mobile devices, to make software updates more cost-effective and manageable It is a great example of our engagement model and our ability to expand the value we can provide to our existing customers.

A leading US sports and entertainment solution provider chose our content delivery service to distribute both live and on-demand content. They chose Limelight to ensure they can deliver a world-class digital experience to fans worldwide. We had a very successful live streaming event for them, which our customer described as smooth as glass.

A European video games retail company selected our video and content delivery service to support distribution of all their video trailers to customers across the globe. Additionally, a financial institution in the Middle East chose our video and content delivery service to support video on their website and live streaming. These success stories and many others like them gives me confidence that we are on the right path.

Moving to guidance, last quarter we had provided full-year revenue guidance of between $152 million and $158 million. With another quarter behind us, we feel comfortable raising both endpoints of the guidance and tightening the range. We now believe total revenue for the full year will be between $155 million and $159 million.

We expect our third quarter revenue and gross margin will be down versus second quarter almost entirely due to the departure of Netflix. We also expect our Q4 revenues to be slightly higher than our Q3 revenues and we will build from this point as we exit 2014 and enter 2015.

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

Thanks, Bob. For the second quarter Limelight Networks recorded total revenue of $41.3 million. Our GAAP gross margin was 39%. And adjusted EBITDA was approximately $1.3 million.

Adjusting for this sale of Clickability, our revenue increased by 4% compared to the second quarter of 2013, and increased slightly compared to the first quarter of 2014. Our international revenue now accounts for 37% of our total revenue. Currency fluctuations impacted revenues positively during the quarter by less than 0.5%.

Revenue from Netflix at 13% of total revenue this quarter, was approximately $5.4 million, essentially unchanged from a year ago and about $500,000 higher sequentially. At the same time their network usage was materially less than a year ago providing some tailwind to our overall gross margin. We expect Netflix revenue to be approximately $1 million in the third quarter.

Excluding Netflix, our average selling price for our core delivery products was down only 3% on a year on year basis and our traffic was up in low double digits, again, year on year. We are very pleased with these metrics.

Gross margin at 38.9% was up 520 basis points from 33.7% a year ago, driven by a decrease in network depreciation. Cash gross margin in the quarter increased slightly to 49.8% versus 49.2% in the second quarter of 2013, despite lower revenue levels. And this was driven by lower bandwidth and headcount related costs that were partially offset by higher co-location expense.

We do expect our gross margin to drop in the third quarter as revenues decline and our cost remained largely fixed in the short-term. But I am pleased with our effort to make structural changes to improve this measure and the result is evident this quarter.

We will continue to look at opportunities to move more of our infrastructure costs to a variable basis as we review our network capacity and our infrastructure deployment. Will continue to expand globally, especially to growth geographies and we will continue our efforts to build out network capacity.

GAAP operating expenses dropped 11% or $2.8 million in Q2 2014 compared to Q2 2013. And declined slightly from last quarter. Non-GAAP operating expenses were down 10% or $2.3 million year over year. Drivers were lower headcount, facilities expense and marketing expense.

We do expect operating expenses to be higher in the second half of 2014 compared to the first half, as we make significant nonrecurring investments in our [quota] to cash and other process improvement initiatives.

Adjusted EBITDA was $1.3 million compared to a negative $500,000 a year ago and is the highest level we've experienced in five quarters. The impact of losing low-margin customers, focusing on infrastructure costs, and better managing operating expenses resulted in across-the-board improvements in financial metrics. And validates the progress associated with our operating priorities.

GAAP net loss was $0.07 per share in Q2 2014 compared with a loss of $0.12 per share in Q2 2013 and improved from $0.08 per share loss from last quarter. On a non-GAAP basis our net loss was $3.6 million, half the $7.2 million loss in the year ago period, even as revenues were down $1.4 million year-to-year.

Moving to the balance sheet. Cash and marketable securities were down $4.9 million sequentially to $107.5 million at the end of Q2. During the quarter we spent $1.2 million to buy back our shares. Through June 30, we have repurchased approximately 500,000 shares at an average price of $2.47 per share, under our current share repurchase plan authorizing February of this year.

As of June 30, we had a proximally 99 million shares outstanding. Total employee count was 477 at the end of this quarter, up slightly from 472 at the end of Q1.

With that I'll hand the call back to Bob.

Thanks, Pete. We are pleased with the progress we are making and there is still much work to be done. I'm proud of our employees and their focus on driving customer satisfaction.

With that we will over the line for your questions. Amanda.

(Operator Instructions) Michael Turits, Raymond James

It looks like some good improvements. Can you just comment a little bit on the competitive environment? And if those are any moves or if it's primarily things that you're seeing, let's saw on an income standalone basis that are picking things up?

From a competitive environment, Michael, I don't think things have changed much. We still see our primary competitors as EdgeCast, now part of Verizon, Level 3 and Akamai. Clearly it changes a little bit around the globe with CD Networks being more in play in Asia-Pacific region and some various, smaller competitors there that might be regionally focused.

I don't think that the competitive landscape has changed that much. Obviously for Limelight, the biggest thing that we can do is stay heads down focused on satisfying our customers and winning new business in the market. And there's plenty -- the market's growing fast enough and there's plenty of opportunity for us out there.

And then can you drill down a little bit on the value added side of business? And what some of those trends are?

We're not breaking out the overall --the vast components in the basket like we did previously. I'd say we had a really strong performance in the cores CDN and Bob highlighted something that was a really encouraging trend both on the churn side and to have net adds on the CDN side.

We're also pleased with our website acceleration, where it was, with respect to its meeting expectations. And then I think with respect to the other products, I think probably a little behind our expectation in storage. But I think that was uniquely related to a few customers that themselves have their own Cloud storage offering. But pretty pleased overall with the basket, but I think especially in the core CDN.

And then if I can just one verification, you talked about low double-digits traffic growth. I think it was ex-Netflix, I can't remember, what's been the trend and how does that relate to last couple of quarters?

It's pretty consistent with the last couple of quarters. We called out Netflix specifically but we also have a mix on some other customers that are at lower price points that we actually don't want to continue with.

So we had both good growth with our top customers, and we also have some volumes coming off with some other customers as we're making some of the decisions that we talked about in prior quarters. Overall it's consistent with last quarter.

Okay. Thanks guys.

Sameet Sinha, B. Riley

Yes thank you very much. A couple of quick questions. Just in terms of, -- you spoke about the benefits of FIFA World Cup, can you elaborate on how much that was so that we can, in our value model in third quarter we be cognizant that some of it will not replicate?

Secondly, just in terms of expenses in the second half, what's -- where are some of the expenses are going? If you can help us quantifying it, that would be helpful.

Third, there were some news about some network outages in the second quarter. Do you think that's an issue in terms of churn and in terms of just how you think about your infrastructure? And what more needs to be done to stabilize it in case that -- this item was referring to you? Thank you.

Sameet, this is Bob. We take a couple of the questions and maybe Pete could give some color on the second half expenses.

In terms of the World Cup, I think it's more of a showcase for our network in terms of the quality we can provide and our ability to handle volume. In terms of revenue, it's not a very material to the overall results. So I wouldn't specifically look to model that out as a large one-time event or anything like that.

With respect to at network outage, obviously, we are aggressively investing in our network. And the world that we live in is not perfect. There is stuff happening on the Internet everyday. Some of it within our control, some of it not within our control.

I will tell you in the last 30 days, well, in about the last 30 days, so for most the month of July, one of our largest customers actually commissioned a third party to analyze the reliability of our network versus one of our large competitors and the results were very encouraging.

So while there's stuff that happens every day, and obviously we're striving to be better than we are, there's always room for improvement, the actual results were very encouraging. They measured us globally and in the US and in the US we were better 22 of the 30 days than our largest competitor.

Globally we were better 19 of the 30 days. And on the days that we were behind, we were behind by less than they were when we were ahead. So that maybe a longer answer than what you're looking for, but outages happen from time to time.

We're very focused on investing in both of our physical infrastructure and our software. And we think there's obviously room for improvement there. But we know from talking to our customers that no one is perfect. There's lots of stuff that goes on that you just can't control and our job is to minimize that as best we can. And we think we're making progress.

So relative to the second half expense, I don't know, Pete, any comment from you?

Yes, from what we see at this point I think it's going to be up slightly, as I said. We do have, obviously, an ability to look at what our revenue and traffic levels will be. As we talked about on the last call, there is some volatility, especially with respect to the big customers. So we'll manage it to some extent as you might imagine. But it's going to be up slightly in aggregate.

And in terms of the switching over from more fixed costs infrastructure to more variable costs, do you think that's -- as you see your revenues right now, that's optimizing to a large extent, or are you optimizing better versus kind of your previous cost structure?

I'm not one to be specific, as you know. Colocation is a much more fixed expense then bandwidth, and there's a variety of commercial relationships on the bandwidth side.

The primary thing that we're tuning is on the bandwidth side, so that we can keep in place a lot of physical capacity, but have it be priced on a variable basis. So I do think that's going to have an impact in the second half of the year. But, it's only a component of our overall cause, as you know.

(Operator Instructions) Donna Yagers, D.A. Davidson

Two questions. On customer net adds you were down about 22 quarter over quarter. Is that an apples-to-apples comparison now the numbers that you've had in your release without Click -- . So does that exclude all of the Clickability in the last quarter?

Hey Donna it's Bob. Thanks for the question. I think -- I didn't -- I don't think we did a good job last quarter of highlighting that. So the answer to the question is yes.

When we went from the fourth quarter to the first-quarter, the fourth quarter of 2013 did include the Clickability customers. The first quarter did not. So, the net churn looked greater than it actually was. Looking at it now, the 22 customers that we're down from the first quarter, that is an apples-to-apples comparison

Okay. And then on sales force churn. You talked about overall employee numbers went up, but what's happening to the size of your sales force on a, say, quarter over quarter basis or year-over-year, however you want to address it?

Quarter to quarter it's pretty flat. And year-over-year it might be up slightly, but not materially. So the turnover in sales is not higher than it is for the rest of the Company. In fact, I think it's lower. But the numbers in terms of our investment dollars are roughly the same. Maybe up slightly.

Okay. And then -- you said that the core CDN business did a little better this quarter. Is that sequentially you're talking, as far as a revenue basis? I know you don't break out core CDN versus value-added products I'm just trying to get a little more color there.

Actually in both year on year and sequentially. And in particular we were quite pleased with the top accounts' growth, both from a revenue and a volume standpoint. Where a lot of our focus has been in our field and some of the reorganizations that we've made and talent hires we've made in the field to really focus on top accounts, we were very pleased with that.

And next question comes from Kevin Smithen, Macquarie.

Hello. This is Will Clayton for Kevin. You mentioned that the dollar value of contract signed exceeded CDN billings in the quarter. Can you elaborate on this and what was the trough on book-to-bill and how long this has been negative? And then also how should we think about the incremental gross margin in 2015 as you begin to comp out the Netflix revenue?

Let me take them one at a time. First question, if I caught it, was around average deal size going up. Is that right?

Correct.

Which we -- I mean, there's not a lot of additional detail and color underneath that. I think it's kind of consistent, again, with our focus a little bit at the higher end of the market and the out performance of the CDN.

Just our overall deal sizes went up in the quarter and that's what Bob referred to. With respect to part, I think you were talking about gross margin in 2015? Was that the question?

Correct.

I don't have anything for you in 2015. The comment that we did make with respect to the second half of the year and then sequentially, was we do expect gross margin to go down as a result of Netflix coming off and overall revenues declining. And our overall cost from an infrastructure standpoint are basically, not completely, but fixed in the short term.

All right. So the second half comes down, but as Netflix disappears into 2015 there's no real material change from what we will see in the second half to 2015?

Just to be clear, because maybe you're not clear, but Netflix we expect to transition off the network this quarter.

Yes.

Okay. I'm sorry, just kept saying 2015 so -- Netflix is a Q3 impact and a Q4 impact in addition, obviously, to a 2015 impact.

I'm not showing any further questions at this time. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.