Edgio Inc (EGIO) 2016 Q1 法說會逐字稿

Good day ladies and gentlemen, welcome to the Limelight Networks 2016 first quarter financial results conference call. At this time, all participants are in a listen-only mode. (Operator Instructions) I would now like to turn the call over to Dan Boncel, Limelight's Chief Accounting Officer.

Good afternoon and thank you for joining the Limelight Networks first quarter 2016 financial results conference call. This call is being recorded on April 27, 2016 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'll 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 2016 and beyond, our priorities, our expectations regarding pending litigation, 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.

Joining me on the call today are Bob Lento, our Chief Executive Officer; and Sajid Malhotra, our Chief Financial Officer. We will be available during the Q&A session at the end of prepared remarks from Bob and Sajid.

I would now like to turn the call over to Bob Lento.

Thanks, Dan and good afternoon. Today, we announced our first quarter results. This was a good quarter that demonstrated the progress we've made to improve our financial performance. Revenue in the quarter was $41.4 million, down 2% from the first quarter of 2015 and down 1% excluding the impact of foreign currency changes.

More importantly, our GAAP gross margin expanded to 40.2% this quarter, up from 39% from the year ago quarter. We also continued to manage operating expenses, which were down 6% year-over-year despite an additional $1.2 million of litigation costs this quarter. As a result of this financial discipline, our cash position increased by $1.1 million excluding our recent debt refinancing. We are very pleased with these results. While revenue this quarter was lower than expected, I'm very proud of our ability to expand margins and generate cash without topline growth.

As I said last quarter, our financial priorities this year are revenue growth, margin expansion, and cash generation. These priorities are not equally weighted. We consider cash generation to be the most important. I emphasize again that I want 2016 to be the year we generate cash. This is being achieved through margin expansion, discipline on operating expenses and CapEx, and revenue growth. We intentionally remain disciplined on pricing this quarter to ensure we [do] not generate revenue at the expense of margins and cash.

Our financial results indicate that the strategy is working. I'm optimistic about revenue growth going forward. I believe we are competing successfully in the marketplace for new business and doing a good job of renewing existing customer contracts. This is consistent with the significant improvement to date in our customer satisfaction levels as measured by net promoter score. We are seeing positive trends in both revenue per customer and revenue per employee, two metrics we pay attention to as indicators of productivity and momentum in the business. This aligns with our strategy to focus on the customers with the largest opportunity for significant revenue growth.

As I discussed last quarter, I believe revenue growth will be supported partly by our network capacity expansion. We are seeing positive results from the deployment of innovative software enhancements designed to increase capacity. Our edge servers are now 50% faster year-over-year and our cash retention has increased by over 30%, resulting in meaningful increases in network capacity. We expect to continue to improve our core delivery efficiency and capacity through our R&D software efforts. We believe these capacity increases will allow for solid revenue growth even while reducing our CapEx investments.

There have been recent developments on several fronts with respect to our ongoing litigation with Akamai. First, in the long-standing dispute involving the 703 patent. Back in early February, we petitioned the Supreme Court of the United States to review the Federal Circuit's decision to reinstate the 2008 jury verdict against us. Our request for review was denied on April 18.

In a February hearing in Massachusetts, Akamai waived its right to seek supplemental damages, which limits its maximum potential damages to approximately $63 million. This was a significant outcome for us since it represents a reduction of approximately $36 million from the damages Akamai was requesting in December of 2015. Although the District Court recently denied our motion challenging the validity of the 703 patent, we intend to appeal that decision to the Federal Circuit. If we are successful in our appeal, we could eliminate all potential damages in this case.

We secured a letter of credit for $63 million to bond this maximum downside scenario, collateralized with $50 million of our own operating cash and $12.8 million drawn on our revolving line of credit. In a completely separate matter, as you may recall, last November we filed a patent infringement case against Akamai and XO Communications in the Eastern District of Virginia for infringing six of our patents. The judge in the case recently denied Akamai's motion to move the case to Massachusetts and set the trial date for January 3, 2017.

We feel good about the quality of our patent and the merits of our claims in this case and we look forward to a swift resolution of this dispute in January of 2017. While we continue to fight vigorously to protect our intellectual property, we will not allow that to distract us from serving our customers across the globe.

Two weeks ago, we announced Sajid Malhotra as our Chief Financial Officer. Sajid had been serving as Interim CFO since December. Sajid joined Limelight two years ago and in that time has made significant contributions to the Company. His years of multi-industry and cross-functional experience combined with his knowledge of Limelight gained over the last two years made him the ideal candidate for this position. His appointment will ensure that we continue our focus on corporate priorities including creating shareholder wealth.

During the quarter, we hit a few milestones and successes that I'd like to share. This quarter, we continued to add important customers to our roster across all regions and across our key use cases of software download, video on-demand, and live streaming including delivery of website content and DDoS protection.

In March, we continued our thought leadership research with our State of Digital Download research. The study found that nearly half of consumers are more likely to download digital content than they were a year ago. In addition, multi-device delivery and download speed continue to be critical to providing a great experience for the user. We believe this research will help us and our customers better understand consumer trends and expectations and how those trends and expectations translate into requirements for our customers.

As I say every quarter, customer satisfaction was, is, and will remain our top priority. Customer demand is healthy, market trends are positive, and we have a strong team in place that is aligned and focused. I remain optimistic about Limelight's ability to meet our goals and generate shareholder value in 2016.

With that, I will turn the call over to Sajid to discuss this quarter's financial performance in greater detail and provide guidance for 2016.

Thanks, Bob and good afternoon. First quarter 2016 revenue was $41.4 million, cash gross margin was 52.6%, non-GAAP EPS was negative $0.01, and adjusted EBITDA was approximately $4 million. In the quarter, the impact of foreign exchange fluctuations decreased revenue by approximately $600,000 year-over-year. Excluding foreign exchange rate fluctuations, our revenue decreased less than 1% year-over-year. In Q1, international customers accounted for 42% of total revenue, up from 36% a year ago and approximately 17% of our first quarter revenue was in non-US dollar denominated currencies.

In Q1 2016, our Top 20 customers accounted for approximately 62% of total revenue and over 90% of total traffic. We've remained focused on generating revenue growth with our largest customers. Revenue related to these customers grew year-over-year at a much higher rate than the Company average. At the same time, no customer accounted for more than 10% of Company revenue in the quarter.

GAAP gross margin of 40.2% is up 120 basis points from 39% in the prior-year quarter. Cash gross margin of 52.6% is up an even more impressive 260 basis points from 50% in the first quarter of 2015. Contributing to this improvement, co-location fees decreased almost 20% year-over-year due to the consolidation upgrade of our network equipment in our data centers. I detailed some of these efforts during the fourth quarter call and we continue to make solid progress in the first quarter.

On the other hand, bandwidth expense was higher than the first quarter of 2015 due to the increased traffic volume. In the first quarter of 2016, GAAP operating expenses were $22.7 million or 54.7% of our revenue and included $1.2 million of litigation-related expenses. Even with these incremental litigation expenses, total operating expenses decreased $1.4 million or 6% versus the first quarter of 2015. G&A expense decreased by $1.2 million or 17.8%, excluding the above mentioned litigation expense. Payroll and related employee cost decreased due to the disciplined hiring and a reduction in [force] in the fourth quarter of 2015.

Bad debt expense decreased as well due to continued collection efforts and an improving quality of our customer base. Sales and marketing expense decreased by $1.4 million or 13% versus the year ago quarter. These decreases are primarily related to lower payroll and related expenses. R&D expense was essentially flat. Other income was $400,000 in the first quarter of 2016 compared to $1.8 million in Q1 2015. Fluctuations are primarily driven by changes in foreign currencies although Q1 2016 also included a state tax refund of $260,000.

Adjusted EBITDA was approximately $4 million in the first quarter of 2016, up from $400,000 in the first quarter of 2015. This is a really good start to the year. On a non-GAAP basis, we lost $0.01 per share in the first quarter of 2016 compared to a non-GAAP net loss of $0.02 per share in the first quarter of 2015.

Moving to the balance sheet, during the first quarter of 2016, we drew $12.8 million on our revolving line of credit in order to collateralize the letter of credit issued to support payment for the upper-end of the range of potential loss in our ongoing patent infringement lawsuit. Excluding this draw, our cash balance increased $1.1 million to $74.1 million as of March 31, 2016. This is the first increase in consecutive quarters since at least [2007]. I think it is important to know that it resulted from normal operations. By that, we had receivables inching up and payables declining.

During the quarter, we spent $1.4 million in capital expenditures and acquired additional assets with a cost of $1.5 million through capital leases, bringing the total cash paid and financed for CapEx to $2.9 million. DSO as of March 31, 2016 was 59 days versus 57 days at the end of the first quarter of 2015 and 52 days at the end of the fourth quarter. As of March 31, we had approximately 103 million shares outstanding. Total headcount at the end of the quarter was 501, down eight from the end of the fourth quarter 2015 and down 32 from the year ago quarter.

Let me spend a minute on the primary priority for our near-term financial performance. It is cash generation and strengthening our capital structure. To achieve this, we intend to keep our operating expenses essentially flat and we are working towards an approximate 200 basis points improvement in our GAAP gross margins and an even larger increase in our cash gross margin. If successful, this discipline should result in near breakeven non-GAAP EPS and will add to our cash position for the year, which at the end of 2015 was $73 million.

If we are able to grow revenues above our current guidance, these numbers could improve further. What is not lost on me is that our cash and marketable securities balance has declined over $20 million each at the end of the last two years. We are working hard to change that trend at the end of 2016 with a cash balance higher than $73 million.

So how did we do in the first quarter? Typically, our first quarter is the heaviest use of cash driven by the annual bonus payments and other payroll related expenses. This first quarter, even with the usual seasonal demands on cash, we actually added over $1 million to our cash balance. We started the quarter with $73 million and grew $13 million from our SVB credit line for a total of $86 million. At quarter-end, we had $63 million in the letter of credit to cover any potential litigation outcome regarding the 703 patent and we had $24 million in unrestricted cash for a total of $87 million, $1 million more than we did at the end of 2015. In comparison, last year our cash balance decreased by $12 million in the first quarter. If we can sustain it, this elimination of our dependence on the Company balance sheet to run operations would be a major milestone and one that has eluded us in our short history.

With that, let's move to forward guidance. Based on the first quarter results, we have revised our guidance as follows. We expect revenue to be between $180 million and $188 million. We will try to be disciplined in our approach to revenue acquisition. We believe industry traffic will continue to grow at a healthy rate for the foreseeable future. There may be periods of excess capacity in the industry and it is important for us not to chase revenue with rock-bottom pricing.

With industry demand, excess capacity in the market will get consumed quickly. We have multiple levers to pull and we will use these periods to better manage our capital structure and improve our asset efficiency and productivity. We believe this will better position us for the future.

Turning to gross margin, we believe even with slightly lower revenue, we will still deliver gross margin improvements in excess of 200 basis points for the year. Same is true for non-GAAP EPS and the guidance is unchanged at between negative $0.05 and positive $0.05 per share for 2016. We expect CapEx to be below $20 million for the year and we will detail any vendor financing and include it in this number and we expect to increase our cash position for the full year.

So these are the five elements we spend our time on. In the first quarter, except for slightly lower revenue, we did well in my opinion against these elements. A solid start to 2016. We believe the Company valuation remains compelling and because of this, believe Bob, Mike, and I are taking half our salary in equity at market price every month and we are committed to continue to do so for the remainder of 2016. Net-net, we believe the market is healthy with good growth in traffic. That should continue for the foreseeable future. Our position in the market has improved and should continue improving. Our financial and operational performance has improved significantly and we believe -- and we expect to build on this foundation moving forward. With that, we can open the call up for questions. Operator?

(Operator Instructions) James Wesman, Raymond James.

Bob, I wanted to touch on a comment that you had in the press release where you said that revenue was slightly short of your guys' expectations for 1Q despite the EBITDA and the EPS performance. Can you talk to us about what fell short? And then, just looking at the customer churn metrics cause maybe there's a connection, seemed like churn was up slightly quarter-over-quarter. Can you give us some more color around that? Thanks.

Well, let me start with the churn. Based on the way we look at churn, it was actually down both year-over-year and sequentially quarter-to-quarter both in terms of number of customers churning and what percent of our revenue they represented. So, maybe we can follow-up with you on some detail on that, but in terms of how we're looking at that. So churn, we were actually pleased with the direction that, that's going and the numbers that we achieved for that.

The miss for us was largely tied to North America, our Asia-Pac and EMEA groups actually had positive growth year-over-year and then within North America, there's some events that some customers that just didn't materialize the way we had originally thought that they would, which doesn't mean that the relationships are bad or that the future with those same customers isn't positive, but for sure, of the three regions, we had two that were positive. North America fell short of our expectations and it's largely with customers that we have ongoing business with, just that Q1 was less than we had planned it to be.

Got it and then just a follow-up for Bob and Sajid. Sajid had said in his guidance that he expected healthy traffic growth for the year. Can you guys just talk about traffic growth in the quarter? Do you feel like it accelerated versus last quarter? Did it decelerate? Any color there? And then, with the pricing environment, did you guys feel it was pretty stable with 4Q? Was there some competitors maybe that were more aggressive? Any color there would be helpful. Thanks.

So, traffic grows at a healthy rate quarter-over-quarter and year-over-year and I think that, that trend is long-term and sustained in our business. I don't feel -- part of what gives us confidence about our ability to do everything else is because what we see in terms of the traffic growth in our industry.

In terms of what happens from time-to-time and we saw it this quarter and it's no surprise, there is excess capacity at some level in the marketplace and we have a choice to go ahead and chase another $1 million, $2 million worth of revenue coming on track, but that additional revenue does not translate into anything for us on the rest of the P&L and if that's the case, then I don't think it's a worthy cause for us to pursue that revenue.

And so it's okay if it gets filled at rock-bottom prices by somebody, because if we take it, they are still left with that capacity that they need to go fill. And so the quicker we get over this, the better off we are. Our own experience if you remember from the days, our largest customer was Netflix and losing 14% of our revenue, we replaced it in roughly six to nine months and if that's the time that it takes, we're well into that process. Let it work its course. In the meantime, we continue to serve customers well and we'll just go focus on the rest of our business and I think we did very well on every other dimension.

Thank you. Rishi Jaluria, JMP Securities.

Couple of quick ones. So first, I wanted to talk about CapEx in the quarter, bit lower than I think we may have thought it would have been. Was this primarily just an excess capacity issue so there may not have been as much need for CapEx or are there other drivers behind that?

So the big driver for us was, and I think we talked about it last quarter, a big part of our capacity gains this year were planned to be achieved through our R&D operating expense and our efforts through software development. And those efforts are really paying off for us. In fact, in Q1, most of the capacity increase that we realized was through software and so that really allows us to reduce the CapEx spending, but achieve the same capacity goals. So I have to give a lot of credit to our development team in terms of the efficiency and capacity gains that we got through the deployment of the new software.

And in terms of your largest customers, right, one of your competitors, they announced their results yesterday, noted they had kind of a big headwind from a little bit of traffic, largest customers going away. Have you seen any sort of headwinds like that from your largest customers especially with your Top 20 being over 60% of revenue?

Yes, interesting, I asked that question myself as we were preparing and there really wasn't any sort of big miss in a single or to your example, two customers that were mentioned by one of our competitors. It was really broad-based, meaning a little bit kind of in a lot of places in terms of what we saw.

Okay, got it.

It seems to be localized in North America.

And -- right, specifically within North America.

And last one from me and I'll jump off, but Bob, you had mentioned that some events and customers didn't materialize in the quarter the way you thought that they would. I mean were these issues of competitive losses, was it a pricing issue or are these potentially customers that are still in the pipeline right now and just it was a timing issue that came in?

More of a timing issue. So, we had some, for example, a major customer that was supposed to be moving traffic over to us in the quarter. They started, but at a much, much lower rate and a slower pace than we had originally thought would happen and so it will take longer, but it will happen and so as I said in my earlier comments, it wasn't based on us losing any major customer or some things didn't happen because they went to our competitors versus us, just things moved a little bit slower than we thought they would.

Okay, is that I guess the primary driver behind bringing down the high-end of full-year guidance?

I mean in our business what happens is if your run rate at the end of one quarter is slightly lower, then that basically impacts and has an effect on the balance of the quarters going forward. And so it's just prudent for us that if you're going to start behind in Q1, then we have as much incremental business to go get as we had previously imagined from Q1 to Q2, Q2 to Q3 and so on, but the make-up of that becomes harder to go do. And so we just kind of said, here's the right thing to go do.

Jon Charbonneau, Cowen and Company.

Just in terms of how we think about our models over the next couple of quarters, how should we be thinking about the impact from some live events like the Olympics that are taking place? Are events like this big enough to have a notable impact to revenue for you guys? And then just as kind of like a housekeeping question, in terms of legal costs, they were about $1.2 million in the first quarter. Is that a run rate you think we should assume for the rest of this year given where you stand with the Akamai lawsuit? Thanks a lot.

So, some of that depends on how things play out in the courts. Obviously, given the trial date of January 3 means most of the work for example in the case in Virginia is going to happen this year and it will accelerate through the year. So costs are likely to go up in quarters two, three, and four versus quarter one. And then we're going to appeal the ruling in Massachusetts. So it depends on when that gets docketed. So they are a little bit unknown, but I think the [short] of that is that they will be higher in two, three, and four than they were in Q1. Go ahead, Sajid.

And then, I mean the flip side of that is, it could have been even higher given the Supreme Court, which then -- reaches a conclusion. So that could have been an expensive proposition fighting it uphill if we were going to not succeed over there. To get to a quick conclusion is probably a good thing.

So that's on the legal front. In terms of events, for our business, of course, we like the idea of events, but in terms of needle movers, it is the sustained day after day, when you think about software, when you think about content and rich content et cetera, that is the business that is bread and butter and really moves the needle for us.

I think the events kind of cause a good marketing play, but you know for me to be carrying a fantastic horse race in a couple of weeks gets me to marquee customer and doing that job well is worth the marketing, but in terms of moving dollars and revenues, these are small events even when you get to an Olympic-sized event, it is good, it helps the quarter at some level, but it's not something that makes or breaks the year.

Thank you. (Operator Instructions) Sameet Sinha, B. Riley.

So I guess a question for Sajid. Your CapEx was low during Q1 and your guidance was for $20 million or so, under $20 million, that means that we should expect CapEx to increase through the year and the question there is, are you assuming that the productivity benefits due to the software that you've implemented in your data centers and most of the productivity enhancements are they done?

And secondly, your free cash flow guidance for the year at least you expect to be breakeven, does that include your litigation costs or does it exclude the litigation cost?

Final question, you mentioned the DDoS product as one of the drivers or at least something that's seeing an uptick. Can you elaborate on that and can you talk about that product? Since it was announced, we haven't heard much about it. So can you talk about what sort of customers are utilizing it and how does it stack up against competitors?

So for us DDoS is an add-on product sold to our existing client base. So we're looking at it as an attachment to an existing relationship. We're getting good interest and some decent uptick with our existing customers on that. It's still not a significant portion of revenue and I don't think it will be this year. We've got a couple of interesting things we're working in that space that we'll be able to talk more about in the coming months, but right now DDoS is something that all our customers are talking about. We've implemented it within many of them. It's not yet at the point where it's significantly or materially moving the needle on revenue.

And then Sameet, in terms of CapEx first, yes CapEx was less than the $5 million, but keep in mind, our CapEx goes for a couple of different purposes. So one is just to kind of add capacity, then there is a refresh of infrastructure. So you've got that going on. Then there is the geographic expansion, which doesn't --you can't add a new site or you first need to have a site to kind of use software to expand the capacity at that site. And then, of course, there is just kind of little amounts that get used inside the Company.

So the CapEx that is required and the biggest saving over last year's $26.7 million that we spent in CapEx, the bulk of that delta is to the capacity expansion. The rest of the CapEx what we need to do in terms of adding more sites as well as in terms of just a refresh of our infrastructure that we continue to spend, it will move around a little bit here and there. We watch it very carefully. There is no desire to go spend any more than we have to. $20 million is a nice bogey for us to go achieve and obviously, we won't give up if we can go ahead and find another $1 million or $2 million and stay below, we will, but I think that this is the starting point of the year. We'll see how it moves further from here.

And then, I think your last question was around cash and litigation-related cash. So we are going to -- you saw in the quarter, we were able to go ahead and absorb the litigation related expenses and still raise cash a little bit and that intends to be kind of our mantra and that's what we'll try to keep doing is deal with the litigation expenses within our guidance, but at the same time, to help you understand what that business is, we'll keep breaking those out so that you know when those eventually peel off, what the business really looks like because I do consider them to be rather large in terms of the amounts and at some point, they will get to an endpoint.

James Wesman, Raymond James.

Sajid, first question, just looking at revenue guidance and modeling it out for the rest of the year, it seems like you have to be pretty above seasonal in 2Q through 4Q to hit the midpoint of guidance. I mean I'm getting around 7% sequential growth for each of the next three quarters. It's pretty decently above what you guys have done in the past couple of years. Is there anything in the pipeline or any particular catalyst you can point to on why you have such above seasonal growth?

So I think that revenue for us is second half story and it's not even across the four quarters, but it is predicated on us having view to and being in the middle of some fairly large-sized deals where we believe that if we got our fair share of that business in those deals, we'll be able to go ahead and deliver a number that's somewhere in line with that guidance.

Okay, you're thinking that in the second half, you guys should be fairly above seasonal assuming those deals [come].

Yes, and I do have an easy comparison in the third quarter. So keep that just in mind that both on gross margin and on revenues, et cetera, I've got a comparison in the third quarter that skews kind of the numbers because it is ultimately a comparison against last year third quarter included.

Okay and then Bob, just a question on the competitive environment. Can you talk about how it was versus 4Q15? Are you guys seeing the usual guys, [Pinnacle] and Verizon, EdgeCast, Level 3, Akamai. Any chance are you guys seeing Amazon more. I know you've called it out last quarter. Just give us some color on the overall competitive environment.

Sure, happy to do that. While I've got you on the line, let me -- just so that everybody can hear it as well. Correct my comments on churn, it was down sequentially, but you were right year-over-year, there was a slight uptick, a net of 59 in the first quarter last year and 62 in the first quarter this year, but the revenue -- the impact of those customers from a revenue perspective was way down year-over-year. So just wanted to clear that up.

From a competitive standpoint, not much change. Obviously, Akamai by far are still the largest player that remains very aggressive in the marketplace. They've got relationships with everybody given their tenure in the industry. So that doesn't change. Level 3, EdgeCast are still out there in most of the customers that we are involved with and then, not any different than what I said in Q4, but Amazon is out there. They continue to grow their network. I continue to study them and watch what they're doing. I wouldn't say they are any different though as we sit here, three months later from the last comments that I made.

Have you guys seen any more from Comcast or Google? Have you guys had [to bake off] against them in the past couple of months?

No, I think obviously Comcast has an advantage with Comcast customers, right. So they're in their own last mile and they've got an advantage there, but there's pretty limited capability outside of that and so for customers looking for global distribution and quality outside of just the Comcast network, we don't really --haven't see much from them. Google, we don't really compete with for the deals and the use cases, types of customers we're looking for, we haven't really competed against them yet.

Thank you and I'm showing no further questions at this time. Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.

Thank you.