Edgio Inc (EGIO) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Limelight Networks 2015 second-quarter financial results conference call.

(Operator Instructions)

I would now like to turn your call over to Sajid Malhotra, Limelight's Chief Strategy Officer.

Thank you. Good afternoon and thank you for joining the Limelight Network's second-quarter 2015 financial results conference call. This call is being recorded on August 3, 2015, and will be archived on our website for approximately 10 days. Let me start by quickly covering the Safe Harbor. We would 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 Q3 and 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 in our periodic filings, including our most recent annual report on Form 10-K. The 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'm 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 now like to turn the call over to Bob Lento.

Thanks, Sajid. Good afternoon and welcome. Limelight delivered a solid second quarter, with strong revenue and margin growth. Our current quarter shows progress is continuing and we believe it is sustainable. During the quarter, we made significant investments to expand the capacity of our network and we continue to aggressively invest in R&D. These investments add to our capabilities and are focused on improving our infrastructure and aimed at introducing new features and functionality.

Employee count is growing and our employee turnover is the lowest it's been in many years. Our reach is expanding, the relationships with our customers are strengthening, and the Company is growing revenue again. We remain confident in our ability to execute, and as a result of the increasing business momentum, we are again raising our revenue guidance, confirming our CapEx guidance, and tightening the range of our non-GAAP loss per share expectations.

Let me share the highlights from the quarter and some reasons for my enthusiasm about our future prospects. For the second quarter of 2015, we reported revenue of $43.8 million, ahead of our plans and ahead of our $40 million to $42 million guidance. This was the highest reported revenue in nine quarters. Excluding the impact from Netflix and currency headwinds, revenue was up a strong 25%. Sequential GAAP revenue was up 3%, after being up 4% sequentially last quarter.

This strength leads me to believe we have turned the corner and are regaining lost market share. We focused on the largest customers because that's where we believe the growth is highest and we are winning. In our revenues, the largest 100 customers are growing at a faster rate than the remainder. At the same time, we've lost some of our smaller customers. Some of this has been due to us sunsetting legacy products.

Having worked both extremes of the customer base, average quarterly revenue per customer is showing a healthy increase, up from $35,000 per customer a year ago to $42,000 per customer today. Yet no customer accounts for more than 10% of total revenue in the second quarter of 2015. Relative to last year's reported results, GAAP and cash gross margin in the second quarter improved over 300 basis points.

Even after the realignment of cost and expenses, which Pete will provide further detail on in his remarks, GAAP gross margins were up 130 basis points over last year's results. GAAP loss was $0.06 per share, non-GAAP loss was $0.04 per share, and adjusted EBITDA was a positive $900,000. This was a good quarter for us. On a qualitative basis, we hit a few milestones and successes that I would like to share.

First I'm proud to say that once again during this quarter we had a record-breaking traffic day, month, and quarter. If you remember, Q1 was also a record-breaking quarter for traffic. In the second quarter, we achieved a new record for both peak bandwidth and petabytes delivered; content is increasingly moving online and distribution is increasingly getting mobile. This is a healthy trend for our industry and for Limelight.

To confirm elements of this opportunity, in May, we released our State of Online Video research, which demonstrated a clear shift in video consumption trends. This research reveals that, under the right circumstances, 90% of consumers are open to cutting the cord of traditional cable and paid TV subscriptions in favor of over-the-top video services. In June, we launched the Limelight orchestrate solution for software and device manufacturers that optimizes end-to-end digital file delivery.

This solution addresses the challenges organizations face with the ever-increasing volume and size of files and software updates that must be delivered to end users. Limelight makes it possible to simplify the process of delivering software to end users with reliable, fast, secure, and scalable global delivery, anywhere at anytime. The solution, as with all of our industry solutions to date, was positively received by our customers, the press, and industry analysts.

Last quarter, I talked about a key feature of our March Orchestrate 3.0 announcement, our SmartPurge capability. Content publishers need to post, manage, and purge their content efficiently across the network at origin, storage, and cached endpoints. Our customers are seeing great results with this capability. Recently, an American entertainment company purged more than 4,000 objects from cache in under five seconds, getting detailed confirmation of the purge in 25 seconds.

It was also important for us to deploy this capability at scale. Recently, a multi-national technology company purged 2.6 million objects in less than five seconds. Normally, this would take hours across any large network and with no assurance of complete success. Now Limelight can provide service-level guarantee against this capability.

This is a non-trivial differentiation and an example of how we've used our R&D investments to develop and deliver best-of-breed capability for our customers. We believe our competitors can only do this in hours and on a best-effort basis. This capability is a direct result of us listening to our customers and working across Limelight to fill a market need. I want to take a moment to recognize and thank the many employees at Limelight who are making a difference.

Also during the quarter, the US Court of Appeals for the Federal Circuit issued a favorable ruling in our longstanding patent case with Akamai, affirming that we are not liable for patent infringement. Akamai has appealed that ruling. We invest in intellectual property and respect the rules governing its use and we will continue to protect the interest of our customers and shareholders. We are pleased that the Federal Circuit panel once again held in our favor. Today, we hold over 125 patents, up from 100 a year ago.

At this point, I'd like to highlight a few customer wins. One of the largest satellite radio services in the US chose our Orchestrate delivery and performance services to deliver to mobile devices. We are delighted to be delivering audio, text, and graphics for this customer.

A large media company based in northern Europe chose our Orchestrate delivery, video, and storage services to deliver their video content, predominantly in country, but with future global plans. We are proud that they chose Limelight because they wanted to have a single solution that would simplify their workflow and allow them to be agile in meeting their delivery means.

A multi-national electronics company based in South Korea chose the Limelight Orchestrate delivery service for global distribution of their software and firmware. This was a particularly nice win as we were able to provide higher quality support, as well as our differentiated SmartPurge functionality, allowing them to move to Limelight from their existing content delivery vendor.

An American digital advertising company chose our Orchestrate delivery and video services to deliver video and news clips within their social media application. We are pleased that they chose Limelight because they wanted a true partner that understood their business needs, provided exceptional customer service, and allowed them to scale quickly.

One of the biggest video platforms in the world, a European video sharing website, chose the Orchestrate delivery service to deliver globally, in particular, enable them to expand in the Asia-Pac region. They wanted a trusted global partner, and we are very pleased they chose Limelight. We are pleased that these customers and so many others like them chose Limelight for their business needs and we continue to work hard to exceed their expectations.

These are just a few success stories that reinforce we are on the right path, with the right products, priorities, and people. As I said in our calls earlier this year, our priorities for 2015 remain unchanged. We remain focused on our customers, improving operations, reducing customer churn and employee turnover, and delivering key product functionality, all while maximizing internal 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, and good afternoon. As Bob said, we had a good quarter. Second-quarter 2015 revenue was $43.8 million, cash gross margin was [52.7]% and adjusted EBITDA was approximately $900,000. During the second quarter of 2014, revenue from Netflix was $5.4 million, and we had no Netflix revenue in the second quarter of 2015.

Revenue was negatively impacted by foreign currency fluctuations by approximately $1 million year-over-year, and $300,000 sequentially. Excluding Netflix, our revenue increased 22% year-over-year, and adjusting for currency changes, increased 25%. Sequentially, our GAAP revenue increased 3%, and adjusting for the impact of currency fluctuations, sequential revenue growth was 4%.

In Q2, international revenue accounted for 38% of total revenue and approximately 16% of our second-quarter revenue was in non-US- dollar-denominated currencies. Our volume was at record levels in the second quarter of 2015, and our largest customers are growing the fastest. As you would expect, due to their volume, these large customers also have the highest volume-based discounts.

Because of this dynamic, we saw price compression at a higher than normal rate and we expect this dynamic to persist through the balance of the year. Despite this, we gained revenue at a strong pace, implying demand far outpaced the price compression, and we did improve GAAP gross margins year-over-year. We maintained a pricing discipline, and we reduced costs at a faster rate than our average price declined.

We had net customer churn of 45 in the second quarter of 2015, which included 18 customers with decommissioned product offerings. These 18 customers accounted for approximately $800,000 of revenue on an annualized basis. We continue to grow our business with our largest accounts. Our top 20 customers accounted for approximately 59% of total revenue in the second quarter of 2015. These customers continue to grow at a healthy double-digit rate, consistent with our strategy and focus.

Our deliver product family accounts for the vast majority of our revenue, and was 77% of our total revenue during this quarter. GAAP gross margin of 41.4% is up 300 basis points from 38.4% in the second quarter of 2014, and up 240 basis points from Q1. Effective April 1, we reorganized job responsibilities of certain employees, and as a result, such employee expenses have moved from cost of services to research and development.

This reorganization resulted in approximately $750,000, or 170 basis points, of payroll and related employee costs being recorded in research and development in Q2 2015, and we expect a similar impact in the future quarters. After adjusting for this reorganization, and in support of our growth plans, our operations headcount associated expenses did increase year-over-year.

We are making progress in our ongoing data center consolidation efforts, as co-location expenses decreased on a year-over-year basis, despite higher revenue and increased capacity. Total bandwidth expenses as a percent of revenue are essentially flat on a year-over-year basis, despite higher revenue and increased traffic volumes, including increased volumes in higher-cost international locations.

These bandwidth expenses are heavily dependent on customer, volume, and geographic mix. Together, these two items contributed 230 basis points to our margin expansion. GAAP operating expenses were $24.4 million, or 55.6% of our revenue in the second quarter of 2015, an increase of $1.5 million or 7% versus the second quarter of 2014.

R&D expense increased $2.8 million, or 57% year-over-year, primarily due to higher payroll and related costs, as we have added employees to support future product enhancements and increased network resiliency. This increase in expense includes the previously mentioned reorganization. Without that reorganization, research and development expenses would have been 42% higher on a year-over-year basis.

Sales and marketing expense increased by $600,000, or 7%, versus the year-ago quarter, as we have added new sales employees to drive our growth plans. G&A decreased by $1.6 million year-over-year, primarily due to reversal of a previously accrued legal expense, and to a lesser extent, due to a reduction in bad debt expense. On a sequential basis, operating expenses increased $300,000, or 1%. This increase is primarily due to higher R&D compensation expense.

Other income and expense decreased $100,000 from Q2 2014, and $1.9 million sequentially, primarily due to fluctuations in foreign currencies. Adjusted EBITDA was approximately $900,000 in the second quarter of 2015, down from $1.3 million in the second quarter of 2014, and up from $400,000 last quarter. On a non-GAAP basis, our net loss was $0.04 per share in the second quarter of 2015 compared to a non-GAAP loss of $0.04 per share in the second quarter of 2014, and $0.02 per share last quarter.

Moving to the balance sheet, cash and marketable securities were down $6 million sequentially to $75 million as of June 30, 2015. During the quarter, we spent $5.4 million in capital expenditures. DSO as of June 30, 2015, was 65 days versus 47 days at the end of 2014, and 57 days at the end of the first quarter. Although DSO increased due to the timing of payments received from our largest customers, we believe the quality of our receivable balance has improved along with our customer base. We target mid-50s for our DSO.

As of June 30, we had approximately 100 million shares outstanding. Total employee count at the end of the quarter was 563, up 30 from the end of the first quarter, and up 86 from the year-ago quarter. We expect headcount will continue to increase, but at a slower pace, as we expand our business and continue our investment in R&D and sales.

Based on these results, improving trends in our business, and our expectations for the balance of the year, we are updating our guidance as follows: The Company is expecting total revenue to be between $170 million and $174 million, up from our previous guidance of between $164 million and $170 million. Third-quarter revenue is expected to be between $42 million and $44 million.

As a reminder, in the third quarter of 2014, Netflix revenue was $1.2 million. We expect to increase GAAP and cash gross margins for the year, with some quarter-to-quarter fluctuations, as we work through capacity expansion in parallel with data center consolidations. For the full year, we expect to improve both measures by approximately 200 basis points, including the partial-year impact from the recently completed realignment of our people.

Our guidance for GAAP operating expenses remains unchanged. We expect G&A spending for the year should stay flat in absolute dollar terms, as compared to the full-year 2014, and we expect R&D and sales and marketing to increase in dollar and percent terms, as we invest to capture revenue opportunities. Non-GAAP net loss is expected to be between $0.10 and $0.16 per share.

We expect continued decreases in cash usage, even as we support the growth, and as we accelerate the upgrade of our infrastructure. While we are raising the revenue guidance, we're leaving the capital expenditure guidance unchanged at between $22 million and $26 million for the year. We believe we can deliver this incremental revenue through better utilization of our infrastructure and through software enhancements.

With that, let me hand the call back to Bob for some closing comments.

Thanks, Pete. In summary, Limelight delivered a strong second-quarter. Our top-line growth was strong and was coupled with margin expansion and expense discipline. With the improvements and return of customers comes pressure to perform even better. We're not perfect, but we are definitely moving in the right direction and at a respectable pace.

The stability of our strategy and our priorities provides clarity to our ambition. Overall, momentum is strong and we benefit from participating in an industry with broad-based demand for our capabilities. As always, we are thankful for the trust of our customers, the hard work of our talented and committed employees, and the support of our shareholders.

With that, we will open the call for questions. Operator?

(Operator Instructions)

Michael Turits, Raymond James.

Hey, guys. A couple questions. First of all, just anything going -- the guidance to actually slim it down sequentially at the midpoint, is there something that's happening there, in terms of pricing that you mentioned? Is there a stair-step there or something that would account for it?

There really isn't. We're -- first of all, the guidance and our commitment to make the guidance is obviously very important to us. The second thing I'd say is that we've increased the full year by $5 million, and just about one-half of that is coming in the second half of the year. The final thing I'd say is that there a lot of events in the second half of the year, and to some extent, both we and our customers don't have perfect visibility on the timing and magnitude of those events, so I think the guidance we put forth balances all of those factors.

The only thing I would add -- Michael, it's Bob, while we didn't give specific guidance for the third quarter up until today, the guidance that we have given is an increase over what was consensus.

It is, but obviously, we want to make sure that setting expectations and doing well relative to them, but is there anything that's happening sequentially that we should know about is what I want to make sure I have my arms around that? And the other question was, I don't know if you can comment on it, but obviously a big topic of discussion is the opportunity around large software operating system downloads, so anything you can say there would be helpful?

What I would say is obviously the latest one that has been announced has been Microsoft's delivery of Windows 10. We are participating in helping them deliver that to their end users. I can't speak for them in terms of whether it's meeting expectations or not, but we're happy to be a valuable supplier as part of that, and we are delivering that product -- helping to deliver it amongst other CDNs, as well. And that's a little bit of what Pete was talking about in terms of the volatility, the exact timing of other game releases or software updates, it's not exactly known so things are going to fluctuate from quarter to quarter.

Is it possible comment whether or not your CapEx, whether there was a significant portion that was due to building out capacity for Windows 10?

We don't break down the CapEx and we are not going to comment on it on any one particular client, but I will make a general statement that we're building for the overall growth of the traffic that we deliver, which is certainly for more than one customer.

Okay.

I would say our volume growth has been strong and we've had that outlook for a couple of quarters and we've been building in general for pretty strong volume growth, not a specific customer or event.

Okay. Great. Thanks very much.

Thanks, Michael.

Jon Charbonneau, Cowen and Company.

Great. Thanks for taking the questions. In terms of OTT, can you talk a little bit about when you would expect it to be a meaningful driver of demand and what assumptions around it you've made in guidance for this year? Thanks.

The assumptions that we've made for this year is that it is going to be a pretty small increase in traffic for the year. And we're certainly -- part of our buildout is that OTT services will increase, but I don't foresee -- let me put it to you this way, there isn't any material increase in revenue included in our current guidance for OTT.

Okay, great, thanks. And then just in terms of the balance sheet, obviously it continues to be very strong. Can you talk about how we should be thinking about the capital allocation over the next several quarters between CapEx, maybe stock buybacks and the potential M&A?

We have an expectation of decreasing our cash usage in the second half of the year. And then the other piece of the puzzle, and on one of your questions was CapEx and we gave some guidance on that. But we're still in the range that we had for the full year, so at the beginning of the year is probably going to be about the same as the second half of the year with respect to the CapEx. Stock buyback is something that we do opportunistically. We weigh that versus other uses of our capital for total shareholder returns at the end of the day. And we think we've got a good situation to deploy capital in our business and that's what we did over the last quarter.

With respect to the third part of your question, M&A, today we don't have any plans to utilize cash for M&A purposes. Obviously, we watch the market closely and if something were to come along, either in terms of new capability or the opportunity to roll up customer acquisitions, we would certainly look at it, but nothing -- it's not part of our plans in the foreseeable future.

Okay, great, thanks.

Mark Kelleher, D.A. Davidson.

Thanks for taking the questions. Pete, could you just reiterate your gross margin guidance? I just want make sure I got that. I thought I heard a 200-basis point improvement. Is that right?

Yes. For the full year, yes, versus 2014, for the full year of 2015.

On a cash gross margin basis?

A GAAP gross margin basis.

GAAP gross margin basis. Okay. Perfect. Then to follow up on that, you've been redoing your infrastructure and getting some nice improvement there. How far along are you in that process? How much longer can you continue to tune up your infrastructure to get higher gross margins?

I would say that we've got a long way to go there. We really just started rolling out those plans coming into this year, with a lot of that hitting in the second -- starting to hit in the second half. But I would tell you there's plenty left to do in the area, both from a co-location expense standpoint, but also part of the investment in our R&D is optimizing software to get greater throughput through our servers. So there's two ways that we're doing that, both optimization of our physical plant, as well as optimization for software engineering and let me tell you, we're just in the beginning of the stages of that.

Yes, and the actual realization of co-location expense reduction relative to revenue, it is very early in that.

Okay. And then just as another question, you've talked in the past about perhaps offering some security products, maybe some DDoS protection. Is that still on the drawing board? What's you thoughts about doing things in conjunction with your CDN, with your delivery?

In fact, we announced our DDoS offering late in the first quarter, in March of the first quarter. In the second quarter, we now actually have customers, some global brands, that are live on our DDoS offering, which in the second quarter was available on a limited availability basis. That will go GA as we going to the third quarter, so it's not a material part of our revenue today, and we don't think it will be for the foreseeable future. But we do see strong customer demand for DDoS and other security offerings, and we are pleased with where we are today in terms of our offering and customer interest.

Okay, great, thanks.

Will Clayton, Macquarie.

Actually, it's Kevin Smithen. Can you talk a little bit about your vast upsell in the quarter, the Orchestrate product, and other non-traditional revenue? How did it do in the quarter and what's your backlog for the rest of the year?

We don't really provide backlog information, Kevin. What I would tell you is, for us, the core of our business obviously is our delivery core CDN capability, and the other products are value-added products around that. So in particular, our storage and video delivery capability, we're seeing good leverage off our R&D investments there, but they're really -- all of those feature capabilities are in support of us being able to either deliver at a higher quality or deliver more and different types of use cases.

That's helpful. Thank you.

(Operator Instructions)

Sameet Sinha, B. Riley.

Thank you very much. You spoke about price compression. If we are to understand this better, were these competitive bids or just you gave higher price concessions just because of higher commitment that you could get from these customers? And the second one was, in terms of the non-CDN business. You launched Orchestrate 3.0, that's been in the market for a couple of quarters, DDoS for about a quarter so. How should we think about growth from those products coming in, if not in 2015, in 2016? Any thoughts on in that direction? And third question, Pete, you spoke about restating the numbers. You had a restatement previously, as well. I just wanted to see -- the new restatements, can we get a pending schedule for previous quarters?

Let me take them an order and you could help me if I miss something there. But on the pricing, the overall market price moves are in line with historical averages. The dynamic that we saw was a mix shift in having a higher percentage of our revenues from higher volume customers. That's what I was relaying on the call there. We're in line with historical averages from a contract renewal standpoint. Our overall average price went down a little faster than that due to a mix shift of volume customers.

Let me take the third one and then I'll hand it back to Bob and maybe he could clarify a little bit on the Orchestrate question, but let me take the third one. There isn't any sort of restatement. We literally had some employees' responsibilities change and now the appropriate location for them in our P&L has moved from cost of goods to, this quarter, R&D expense. It's a very small number. In fact it was $750,000, as I said in my remarks. That's a GAAP number. And those people, we expect them to be there in Q3, Q4, et cetera. So that will be the impact going forward and that number is enough to give you something to go backwards to do an apples-to-apples comparison.

So it's a geography change, no a restatement. Then -- and we can come back to get some follow-on questions to those, but in terms of Orchestrate 3.0, we are seeing a great response from our customers. We've talked about the new Purge capability that we have. We're getting lots of really good feedback on that. We announced our self-service capability in the fourth quarter. We did an uplift to that as part of the 3.0 announcement, and we have more customers today managing their configurations through our self-service capabilities.

We've uplifted our [adapt-a-bit] streaming for video delivery, increased our capabilities in digital rights management. So there's a lot of stuff that came out in 3.0 that our customers are adopting very quickly, either because they had been asking us for a while or they were on an older version and switched to the newer version in the case of Purge. So we're quite pleased with the customer adoption of the new technology.

Great. Thank you very much.

At this time I'm showing no further questions. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.