Edgio Inc (EGIO) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Limelight Networks 2015 first 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 a queue for the question and answer session. I will now turn the call over to Sajid Malhotra, Limelight's Senior Vice President of Strategy, Corporate Development, and Investor Relations.

Thank you. Good afternoon and thank you for joining the Limelight Networks first quarter 2015 financial results conference call. This call is being recorded on April 30, 2015 and will be archived on our website for approximately 10 days.

Let me start by quickly covering the Safe Harbor. We'd like to remind everyone that we will be making forward-looking statements on this call. Forward-looking statements are all statements that are not strictly statements of historical fact, such as our outlook for Q2, the full year 2015 and beyond, our priorities, our operational plans, and business strategies. Actual results could differ materially from those contemplated by our forward-looking statements and reported results should not be considered as an indication of future performance. For more information, please refer to the risk factors discussed our periodic filings including our most recent Annual Report on Form 10-K. These forward-looking statements on this call are based on information available to us as of today's date and we disclaim any obligation to update any forward-looking statements except as required by law.

I am joined today by Bob Lento, our Chief Executive Officer, and Pete Perrone, our Chief Financial Officer. We will be available during the Q&A session at the end of our prepared remarks. I would like to turn the call over to Bob Lento.

Thanks, Sajid. Good afternoon and welcome. Earlier today we announced our first quarter 2015 results. This was a good quarter and builds on the already improving trends we saw in 2014. As we will detail here, revenues were strong, gross margin was higher, customer churn was lower, employee turnover was lower, customer satisfaction is higher, and business momentum is stronger. With this backdrop, we are raising our revenue and earnings guidance, which Pete will take you through in a moment.

Let me now share with you the details for the quarter just ended. For the first quarter of 2015 we reported revenue of $42.3 million. Excluding Netflix, our first quarter revenue growth on a year-over-year comparison was 17%. Sequential growth of approximately 4% we believe is consistent with industry growth rates. Both measures include the impact of a stronger dollar. Our largest customers continue to grow with us and the total customer count is stabilizing. On a GAAP basis, it is the first quarter with year-over-year revenue growth since I became CEO.

GAAP gross margin and cash gross margin improved over last year's reported results by 194 basis points and 121 basis points respectively. We continue to expand our sales and, by our larger margin, our R&D workforce. GAAP loss was $0.06 per share, non-GAAP loss was $0.02 per share, and adjusted EBITDA was approximately $400,000.

On a qualitative basis, we hit a few milestones and successes that I'd like to share. First, I'm proud to say that during Q1 we had a record-breaking traffic day, month, and quarter. We also achieved new records for speed and pedabytes served. In the fourth quarter of 2014 we set a record that stood from the first quarter of 2013 when Netflix volumes were at their peak. It only took one quarter to establish a new record.

As we were delivering record traffic, we were also engaging in our semi-annual customer satisfaction study. This is conducted by a third party and I'm extremely pleased with the results. The net promoter score, an overall measure of our customers' satisfaction with Limelight, showed a remarkable 52-point improvement since our first survey in the spring of 2013. I have made customer satisfaction a priority for us and we have shown continuous and steep progress in this area. I'm thankful for the hard work of our team members that have helped us attain these levels and look forward to further improvement.

In March, we announced the results of a global survey of top security concerns related to the delivery of digital content. The research shows that nearly half of respondents are most concerned with the impact of distributed denial of service, or DDOS, attacks on their delivery of digital content. Additionally, more than half believe their content delivery network provider is the best resource to help them detect and mitigate DDOS attacks.

On the heels of that survey, in Mid-March we launched the Limelight Orchestrate 3.0 platform. Over two years in the making, this next generation of the Orchestrate platform marks the most comprehensive set of enhancements to our infrastructure, software, and services in our history, offering improvements to virtually all aspects of our customer experience and expanding our offerings to include a new set of services focused on security and usability. As part of the Orchestrate 3.0 launch, we announced a solution for proactive DDOS detection and rapid mitigation of attacks while maintaining excellent performance.

Another key feature of the announcement was our SmartPurge capability. Content publishers need to post, manage, and purge their content efficiently across the network at origin, storage, and cached end points. With this new feature, we believe we have best-in-class capability that is easy to implement and can stop serving the specified content almost instantaneously and with high reliability.

DDOS attack prevention, purge, and self-service configuration management were some of the items that our customers were asking for in our first Voice of the Customer survey. These capabilities are now generally available and incorporated into our products and service offerings. Orchestrate 3.0, including our DDOS solution and SmartPurge, was positively viewed by our customers, the press, and industry analysts.

It is also worth mentioning that during the quarter Limelight became an active member of the MIT IC3 Cybersecurity Consortium. IC3 is focused on the need to improve the cybersecurity of critical infrastructure through an interdisciplinary research approach.

On the personnel front, Mike DiSanto (ph) recently joined my staff as Chief Administrative and Legal Officer. Mike comes to us with more than 16 years of experience representing publicly-traded and emerging-growth companies and I look forward to his contributions.

At this point, I'd like to highlight a few customer wins. A large financial services company based in the U.S. chose our Orchestrate video service to aggregate their marketing videos into a single solution for management and delivery. This was a particularly nice win as it is a multi-year deal.

A large multinational computer security company based in Europe chose our Orchestrate storage and delivery services to deliver their content globally. We are supporting weekly software updates, distributing them globally, which is also a multi-year deal.

A South Korean mobile and online game development and publishing company is using our Orchestrate delivery service for their content globally.

Canada's largest news site chose our Orchestrate delivery and video services to facilitate a high-performance experience for their new tablet application.

A large manufacturing company based in the U.S. chose our Orchestrate performance service to power all of their websites globally. They needed fast delivery of their dynamic content to ensure an exceptional user experience. This was a particularly good win as they moved from their existing vendor to us for better website performance.

We are pleased that these customers and so many others like them chose Limelight for their business needs and we're working hard to exceed their expectations. Success stories like these, especially those where a customer moved from an incumbent vendor, make us more confident than ever that we are on the right path with the right products, right priorities, and the right people. We are determined to build on these successes.

Our priorities for 2015 remain unchanged; customer focus, improve operations, reduce customer churn and employee turnover, deliver key feature functionality, and focus on cost efficiency. Customer satisfaction was, is, and will remain our top priority.

With that, I'll turn the call over to Pete to discuss the quarter's financial performance in greater detail.

Thanks, Bob. First quarter 2015 revenue was $42.3 million, cash gross margin was 50%, and adjusted EBITDA was approximately $400,000.

We had no Netflix revenue in the first quarter of 2015 or the fourth quarter of 2014. During the first quarter of 2014, Netflix revenue was $4.9 million. Revenue was negatively impacted by changes in foreign currency of approximately $800,000 as compared to first quarter of 2014 and $300,000 compared to last quarter. Approximately 15% of our first quarter revenue was in non-U.S. dollar denominated currencies. Adjusting for the impacts of Netflix and changes in foreign currency, our revenue increased by 19% compared to the first quarter of 2014 and 5% compared to the fourth quarter of 2014.

Traffic volume was at record levels in the first quarter of 2015 and price compression was in line with our historical averages. Double-digit unit price declines are a part of this industry and, indeed, help unlocked new opportunities for growth.

We are continuing to lower our customer churn both in terms of number of customers as well as revenue dollars. Our quarterly customer churn in the first quarter was the lowest since 2009.

We continue to grow our business with our largest accounts. Our top-20 customers accounted for approximately 56% of total revenue in the first quarter and the average revenue of these customers continues to grow at a healthy double-digit rate and at a faster rate than the corporate average, consistent with our strategy. Our bottom quartile of our customers represent less than 2% of our total revenue this quarter.

International revenue accounted for 36% of first quarter 2015 revenue and our deliver product family accounted for 77% of our total revenue during this quarter, which is consistent with the fourth quarter of 2014.

GAAP gross margin of 39% is up 190 basis points from 37.1% in the first quarter of 2014 and down 60 basis points from last quarter. We are making progress in our ongoing data center consolidation efforts and co-location expenses decreased by 6% on a year-over-year basis despite higher revenue and bandwidth levels.

Relative to Q4 2014, our operations compensation expenses were up by 11% driven by increased headcount associated with our growth plans. Bandwidth expense in Q1 2015 increased as a percent of revenue as we added capacity and served a higher percentage of traffic internationally. As we said on our last earnings call, we expect to increase GAAP and cash gross margins through the course of this year.

GAAP operating expenses were $24 million or 56.8% of our revenue in the first quarter, an increase of $1.1 million or 5% versus the first quarter of 2014. The increase is due to a $1.7 million increase in research and development expenses primarily in payroll and related costs as we have added employees to support future product enhancements. G&A expense decreased by 3% and sales expenses were flat from last year.

On a sequential basis, operating expenses increased $2 million or 9%. The increase is primarily due to higher sales compensation expense as a result of higher revenues. In addition, G&A increased by approximately $600,000 due primarily to bad debt expense increasing from an unusually low level last quarter and other one-time events.

Adjusted EBITDA was approximately $400,000 in the first quarter, down from $600,000 in the first quarter of 2014 and $1.5 million last quarter. On a non-GAAP basis, our net loss was $0.02 per share in the first quarter of 2015 compared to a loss of $0.04 per share in the first quarter of 2014 and is flat from last quarter.

Moving to the balance sheet, we had $81 million in cash and marketable securities as of March 31, 2015. Our cash usage of $12 million was high this quarter, as expected. As we mentioned last quarter, we expected capital expenditures in the first half of the year to be higher than the second half and during this quarter we spent $6.7 million on CapEx, expanding network capacity.

Working capital account movements also lowered our cash balance. Our net accounts receivable balance as of March 31 increased by $4.7 million from Q4 2014 as a result of higher revenue and timing of payments with our largest customers. DSO as of March 31 was 57 days versus 47 days at the end of 2014.

We also paid our 2014 annual corporate bonus during the quarter, which contributed to a $3 million decrease in other current liabilities. Additionally, we spent $1 million on the share repurchase program. In the first quarter of 2015, we repurchased approximately 293,000 shares at an average price of $2.79 per share under our current share repurchase plan authorized in February of 2014. As of March 31, we had approximately 99 million shares outstanding.

Total employee count at the end of the quarter was 533, up 13 from the end of 2014, and up 61 from the year-ago quarter. We expect headcount will continue to increase as we expand our business and continue our investments in R&D and sales.

Now, I'd like to update guidance for the remainder of this year. As Bob indicated, we are seeing improving trends in the industry and in our business.

As a result and based on current conditions, we are expecting total revenue to be between $164 million and $170 million, up from our previous guidance of between $156 million and $164 million. Second quarter revenue is expected to be between $40 million and $42 million, which is higher than current consensus estimates. As a reminder, in the second quarter of 2014 Netflix revenue was 13% of total revenue or $5.4 million.

We expect, again, to increase GAAP and cash gross margins through the course of the year. Our guidance for GAAP operating expenses remains unchanged. We expect G&A spending for the year should stay roughly flat in absolute dollar terms as compared to the full year 2014 and we expect R&D and sales and marketing to increase in both dollar and percent terms as we invest to capture revenue opportunities.

To support the growth and as we accelerate the upgrade of our infrastructure, we expect capital expenditures to be between $22 million and $26 million for the year. And, finally, full-year non-GAAP net loss is expected to be between $0.08 and $0.18 per share.

And with that, I'll hand the call back to Bob.

Thanks, Pete. So, in summary, we are fortunate to be a key player in the fast growing segment of the internet. Our year-over-year financial performance, customer satisfaction, customer churn and employee turnover is improving and should continue to do so for many quarters. These company-wide improvements have led to top-line growth.

Our network is more resilient and our new product offerings further differentiate us from our competitors. We have a clear and stable set of strategic and tactical priorities. There is more to be done and we remain confident. With that, we are raising our revenue guidance for the fifth time in as many quarters. As always, we are thankful to have talented and committed employees and to our shareholders who have been supportive as we work to create sustainable long-term value.

With that, we will open it up for questions. Operator?

Thank you. (Operator Instructions). Michael Turits, Raymond James.

Hey, guys. Good afternoon. It's James Wesman sitting in for Michael. Bob, the 17% growth here, it appears you guys are doing better in terms of the competitive environment. I just wanted to get your color on the space as a whole as you guys went through the quarter. How was the competitive environment in 1Q and in the last month versus, say, 4Q or the last couple of months?

I would say unchanged. I mean we're not competing against anybody new. The competitors that we do compete with are very strong and have done a good job with providing value in the marketplace.

We're obviously proud of the growth that we were able to achieve and the improvement in our infrastructure. And our relationships, I think, are feeling that. So, I think that we're pleased with where we are; don't see any increase from competitors.

And the good news for us is that we're seeing that growth come across many, many customers. It's not just one customer that's driving the growth or even a few. It's spread out amongst a larger group of growing relationships.

Got it. No, that's very helpful. And, Pete, I know you had said that price compression for the delivery family was about in line with the averages. The environment as a whole, again, we're you seeing any people being overly aggressive in their pricing or did you feel the environment was pretty stable there?

I think it was pretty stable.

Got it. Okay. And then, just last question. In the security business, Bob, we appreciate the color. I was just wondering if you could elaborate or give us a little bit more. I know it's only been out since March, but maybe something on wins or just data points in the security business that you could point us to.

We don't really have any data points that are discloseable. What I will tell you is, as you know we've just announced it in the first quarter, we have some customers that are using it as part of our limited availability program. We expect several of those in this quarter to move to general availability. And the interest from our existing client base is quite high. So, we're encouraged by the early results in terms of interest from our customers, but it's very early days.

Got it. Thank you, guys.

Thank you. I'm showing no further questions at this time. As a reminder, the replay will be available for 10 days following today's call. Thank you for your participation. This concludes today's conference --

Operator, before you end it, was there a --

A question from Sameet Sinha.

Sorry. Yes, I think we have one more question.

I'm showing that we do have one more question from Sameet Sinha, B. Riley and Company.

Hey. Hi, good afternoon. This is Juan Molta. I'm on for Sameet. Hey, I have three questions for you. And the first one is regarding the video and the gaming market since you're seeing good momentum. And are you seeing acceleration in volume and when do you expect the OTT and the 4K to inflect?

Well, I think -- so, OTT and 4K I think are really two separate issues. We're seeing a lot of our customers with a high degree of interest in delivering 4K streams, but not a lot of that has been happening yet.

OTT, you know we're just coming off of the NAB show that happened in Las Vegas last month. And I will tell you from all the conversations we've had with our customers and prospective customers, OTT feels like it's reaching an inflection point where there is likely to be a lot more activity in that space in the near future than there has in the recent past. So, I think, everyone has seen the headlines with HBO and others and I think that's only going to continue to accelerate based on the conversations that we've had recently with many of the major broadcasters. So, we think that's good, obviously, for Limelight and for the industry.

In terms of game, I mean we certainly don't see any deceleration in that. If anything, there continues to be an acceleration in terms of the number and quality of games that are being released, but also in terms of updates to existing products that are in the market and we participate that with many of our major customers.

Okay, prefect. Thank you. And next question; is there any way for you to help us understand the economics, the profitability between the CDN and the value-added services?

Really it's the product offering that we have -- this is Pete, obviously -- is running on the same infrastructure. And, really, the products are complementary and help each other. And, as we look at it as a business, we think about it in that regard.

So, no difference.

No difference.

Got it. Okay. And then the last question is I know you touched on the security product with, I think, the last question. Could you elaborate maybe qualitatively the differentiator in this market with the security products and what type of customers you're targeting with it?

So, the differentiator for us is that, obviously, it's tied to and very closely-aligned with our CDN capability. There are lots of choices for DDOS in the market, not many of which have the breadth and scale of our network to be able to absorb the attacks and to handle them efficiently. And so, that's the real differentiator for us.

In terms of the type of customers that are interested in that, I mean it's any of our customers, which means all of them, that run websites are interested in being protected against DDOS.

Okay. And the feedback, the initial feedback on it is good?

As I said earlier, it's been very positive. There's a high degree of interest. Again, it's early days. Some of the customers have DDOS protection through other companies and are looking for alternatives and some don't have any at all and are looking to add that as a new layer of security. And so, really, it's kind of a mix of the both. But, again, very early days for us in terms of our participation in that market.

Alright. Thank you very much.

Thank you. Michael Turits, Raymond James.

Hey, guys. It's James Wesman, again. Thanks for the follow-up. I just wanted to draw a little bit more into the growth drivers in delivering the quarter. Was it mostly from online video? Was gaming a big contributor? Was it software downloads like you guys spoke about earlier? Any way you guys can stack rank them, or give us some color there?

Yes. Really, I mean there was three basic types of delivery that we participate in; live streaming, the video on demand, and software updates, which would include the gaming stuff. And we're really seeing good growth across the board. And we have several customers -- more than several -- but several customers that will use us for one or more of that type of traffic. And so, I don't know that there's a standout in terms of; oh, it was really driven by growth in software and, within that, gaming. I don't know that we could point to that. We've really seen good growth across our customer base.

What I can tell you is that our largest customers are growing faster than the corporate average. So, a lot of the growth that came was from our top-100 customers.

Got it. And then, just my last question; in terms of overall traffic growth for the quarter, did you guys feel like it accelerated or decelerated versus fourth quarter just overall?

Well, I think in general, for us, it is accelerating. If you think about the example I gave you where we set a record for traffic in the first quarter of 2013. It then took us until the fourth quarter of 2014 to break that record. And then, one quarter later, we broke it again. So, for us, it's the traffic has been accelerating obviously offset by price decreases. And, given the increase in our guidance for the full year, we're obviously expecting that trend to continue.

Got it. I'm sorry. I just want to slip in one more. Obviously, customer churn of only down 15 quarter over quarter; that's an improvement over 4Q. Was that in line with your expectations or above or below?

No, in line with our expectations. And I guess I'll take this opportunity to say that we are less focused on the number of customers versus the quality of customer. And so, what I'm really concerned with is the net adds versus the gross disconnects. Are the customers coming in more valuable in terms of revenue and profitability than the ones that were leaving? I think we spend more time looking at that than setting a target for; this quarter it was 15 or 16 net loss. I'm more concerned with which customers are we losing. Are they high revenue or are they high profitability? Which types of customers are we winning? Are they higher revenue than the ones we're losing?

We still have over 1,000 customers, but the interesting thing about this business, and I talked about the growth in our top 100, our bottom 25 percentile customers account for less than 2% of our revenue. And so, obviously, losing a customer that's in the bottom 25% is a lot different than losing a customer that's in the top 100. So, I'm more focused on that than the absolute number.

Great. Thank you, guys.

Thank you. Kevin Smithen, Macquarie.

Hi, guys. This is Will on for Kevin. My first question is; you were talking about the difference in revenue generation from your top-20 customers versus the bottom quartile. I know there was a focus on changing the profitability profile of customers. Is there a difference in the margin profile of the top 20 versus that bottom 25% that is material?

We think so, when you consider everything. Not just, obviously, the gross margin aspect and the use of our infrastructure, but when you consider calls into our network operations center or when you consider back office costs and things of that nature that, obviously, the smaller customers become higher touch as a percentage of revenue than our large customers. So, as Bob said, the focus we really have is on the growth rates that we have on our existing customer portfolio is more important to us at the revenue level than the customer account level. And, obviously, attracting new customers to Limelight across our product suite is also very important to us and something internally we're very focused on.

And attracting the right customers. Right. So, we're not necessarily looking for example just to replace a lost small customer with a gained small customer. So, we're trying to balance the portfolio the right way relative to size of customer, profitability, as well as fit in terms of our focus in the marketplace.

Absolutely. I had two more. The first was on the; if you quantify the impact of data center consolidation and if you have a data point that you could point to.

And then the second one is the implied capital intensity for fiscal 2015, is that the new run rate? It looks to be about 300 basis points higher than full year 2014. We knew some of that was coming, but is this implied capital intensity what you would expect going forward?

On the first one, in terms of quantifying some of the data center consolidation savings we could have, other than the guidance that I gave that we expect to continue to increase gross margin, I probably won't quantify it further than that. Let's say, though, with looking backward, I think we were able to decrease that expense, as I said in my prepared remarks, by 6% although all of our traffic levels are higher. And I think it's early for us in terms of executing against that consolidation. I think, from a planning standpoint, we've come a long way, but in realizing the savings I think it is fairly early for us.

With respect to the next question, the guidance that we gave, we feel good about. It's an increase, the CapEx, it's an increase from last year. And we think it reflects both the growth opportunities that we have as well as adding resiliency to our network. And, in addition, I think we're planning for, of that total amount, for it to be heavier in the first half than it is in the second half.

Okay, that's very helpful. Thank you.

Thank you. I'm showing no further questions at this time. As a reminder, a replay will be available for 10 days following today's call. Thank you for your participation. This concludes today's conference. You may now disconnect and have a wonderful day.

Thank you.

Thank you.