Edgio Inc (EGIO) 2016 Q4 法說會逐字稿

Good afternoon, and welcome to the Limelight Networks fourth-quarter 2016 earnings conference call.

(Operator Instructions)

Please note this event is being recorded.

I would now like to turn the conference over to Dan Boncel, Chief Accounting Officer. Please go ahead.

Good afternoon, and thank you for joining Limelight Networks' fourth-quarter 2016 financial results conference call. This call is being recorded on February 8, 2017, 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 statements that are not strictly statements of historical fact, such as our outlook for 2017 and beyond, our priorities, our expectations regarding pending litigation, and our operational plans, business strategies, and feature functionality announcements. Actual results could divert 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 fourth-quarter and full-year results. This was an excellent quarter, capping a year of hard work and improving financial and operating performance. We are confident that we will build on these results in 2017.

Revenue in the quarter was $43.8 million, up 2% from the fourth quarter of 2015, and up 11% sequentially. This includes absorbing a negative impact from foreign exchange of approximately $500,000 sequentially, and $300,000 year over year.

Our GAAP gross margin expanded to 44.9% this quarter, a record for the Company, and up 390 basis points from 41% in the year-ago quarter. We continue to manage our operating expenses, which were flat versus the year-ago quarter, excluding litigation costs. Our performance this quarter resulted in record adjusted EBITDA of $7.5 million and non-GAAP earnings of $0.02 per share, which is the highest quarterly non-GAAP earnings since 2007.

We set a high bar for ourselves with our guidance for the fourth quarter of double-digit sequential revenue growth, continued margin expansion, and positive non-GAAP EPS. I am proud to say we accomplished these ambitious goals.

During 2016, we made the conscious decision to maintain pricing discipline in the face of aggressive competitive pressure, as part of our focus on placing growing margins and profitability as a higher priority over revenue growth. The result of our effort was significant financial improvement below the revenue line.

Our 2016 gross margin was 42.4% for the full year, improving 250 basis points over 2015, even with revenue being relatively flat year over year. Also, our adjusted EBITDA for 2016 was $22.8 million, which was over 3 times the prior-year amount. We have built a strong foundation, and I expect this trend to continue.

I'm also very pleased with our cash and marketable securities position of $66.2 million at the end of the fourth quarter. This was down only $8.2 million from the end of the third quarter, despite making our second $4.5 million payment to Akamai, related to our 703 patent settlement, and investing $4.9 million in CapEx during the quarter. Even with these relatively large payments, our cash position remains strong, and we continue to have a solid balance sheet.

We made progress on our other priorities, as well. Customer satisfaction levels, as measured by Net Promoter score, improved significantly from 2015 to 2016, and was up over 70 points since 2013.

We generated meaningful revenue growth with our top customers, added over 100 new customer logos across the globe, and reduced customer and revenue churn in 2016 to its lowest level in many years. Employee turnover declined in 2016, and is in a range that we believe is sustainable. Our co-location savings efforts reduced our COGS expense run rate over $6 million annually, while we increased our server capacity by 76%, our network capacity by 54%, and lowered our capital expenditures by 54%.

We also introduced many new key software capabilities and enhancements. We generated a record level of traffic in 2016, that was up 10% over 2015, while reducing incident tickets by 22%. We are now handling less than half of the trouble tickets than we did just two years ago, a very solid performance.

There have been recent developments with respect to our ongoing litigation with Akamai. As you know, we filed a claim of patent infringement against Akamai and XO Communications in the Eastern District of Virginia in late November, 2015. The trial, which was originally set to commence on January 3, is now set for May 1. We continue to believe that we are net plaintiffs in the case, and we intend to vigorously enforce, protect, and defend our intellectual property rights.

We are also announcing changes to our Board of Directors. Joe Gleberman has announced his intent to resign from our Board before the next annual shareholders meeting. I can't say enough about Joe's contributions, and thank him for his years of service.

Joe joined our Board in 2006 as the Goldman Sachs representative, upon their initial investment. He remained in that role until 2015 when he left Goldman, but stayed at our Board as an independent Director. We appreciate Joe's contributions and wise counsel over his decade-long tenure, and we know that he will remain a friend of Limelight.

With Joe's departure and the current vacancy, we are pleased to announce two new additions to our Board, Doug Bewsher and Scott Genereux. Doug is CEO of Leadspace, a leading venture-backed company in the predictive analytics and data management space. Doug was previously CMO at both salesforce.com and Skype, and prior to that was at McKinsey, where he led the North American CRM practice.

Scott Genereux is currently Executive Vice President of Veritas, where he is responsible for worldwide field operations. Most recently, Scott headed up cloud infrastructure as a service sales for Oracle. Prior to Oracle, he served as CEO of cloud storage pioneer Nirvanix, and also held global sales leadership roles at QLogic and DataDirect Networks. Together, they have over 50 years of relevant industry experience, and we look forward to their contributions.

During the quarter, we had a few successes that I would like to share. The convergence of several Internet events, including popular video game release and software downloads drove record traffic levels from for Limelight in December. We exceeded 2015 peak traffic levels by 23% and December 2016 was our highest traffic month of all time.

Limelight also played a key role in the successful live streaming of all three presidential debates, and the inauguration, which according to sources was the most-viewed political livestream of all time. We continue to add new customers to our roster across all regions during the fourth quarter, including one of Europe's largest broadcasters. Limelight continues to innovate and enable customers to do business online with greater speed and reliability.

Our top priority in 2017 remains customer satisfaction. We now believe that we are in the top quartile for Net Promoter score, compared to other technology service companies, based on third-party provided data, and I expect this progress to continue. Our financial priorities for this year continue to be revenue growth, margin expansion, and cash generation, and we have specific plans to deliver on each of these goals.

We have a multi-pronged strategy to achieve revenue growth in 2017. We plan to invest in our network to further expand capacity, and improve our already-strong performance and reliability. We are positioned to announce new feature functionality throughout the year, shifting our development efforts from paying catch-up with key competitors to offering unique capabilities that differentiate us.

We are also focused on geographic expansion, to deliver at higher levels in more locations around the world. For example, we plan to expand our capacity in India this year by 5 to 10 times our 2016 capacity levels. This effort will create a dense local presence that can deliver more throughput and quality to India's huge and growing market. We will also focus on growing capacity in Latin America, an increasingly important region for our customers.

Sales and marketing spend will increase in 2017 versus 2016, after having reduced our spend compared to 2015. Having built a strong financial foundation in 2016, we are focused on revenue growth and plan to hire into our sales force, and expand our most effective marketing programs in a disciplined and targeted manner.

To generate margin expansion in 2017, we will continue to drive our efficiency program, improving our underlying cost structure, while optimizing and expanding our network through software enhancements and targeted CapEx investments. These efforts in 2016 gave us the ability to dramatically improve our gross margin, and build capacity at 1/6 of the cost versus a year ago. We expect to build on this momentum.

Our focus on cash generation this year includes our efforts to generate revenue growth and margin expansion, as well as continued discipline around operating expenses and effective balance sheet management. We generated $6.6 million of cash from operations in 2016, despite making $9 million of payments related to our 703 patent settlement. We will remain focused on maintaining a strong cash position, and solid balance sheet.

As we have said, we have built a good foundation. We have a structural advantage, we are seeing momentum in our business, and we are focused on profitable growth. I would like to thank our global workforce for all their hard work in making Q4 one of the best quarters in Limelight's history.

We will continue to invest in our employees through training, expanded responsibilities, and strategic hiring, as we work toward meeting and exceeding our goals. With that, I'll turn the call over to Sajid to discuss this quarter's financial performance in greater detail, and our guidance for 2017. Sajid?

Thanks Bob, and good afternoon. I have been looking forward to sharing the results of a quarter like the one we just reported.

A quarter in which we grow, this growth delivers incremental margin, the expenses stay in check, and the leverage of higher revenue becomes evident. A quarter where with little impact on the balance sheet, we invest in meaningful geographic expansion, break traffic records, operational improvements continue. Our software investment further separate us from our competition, and a quarter where our performance metrics and financial trends outpaced the reported results of our primary competitor. This generates pride in our employees, pleases our customers and partners, and should add to the recent returns we have generated for our shareholders.

So let's dig into the financial performance. Fourth-quarter 2016 revenue was $43.8 million. Gross margin was 44.9%, and cash gross margin was 56%. We had a GAAP EPS loss of $0.04, and non-GAAP EPS of positive $0.02. Adjusted EBITDA was positive $7.5 million.

First let me start with revenue. Revenue in the quarter of $43.8 million increased 2% year over year, and a very strong 11% sequentially. We experienced foreign exchange headwinds in the quarter, on revenue of approximately $300,000 year over year. This was primarily due to the devaluation of the South Korean yuan, Japanese yen, and British pound.

International customers accounted for 40% of total revenue in Q4, compared to 44% a year ago. And approximately 20% of our fourth-quarter revenue was in non-US dollar denominated currencies.

Our top 20 customers accounted for approximately 64% of total revenue in Q4. Delivered revenue with our top 20 customers in the fourth quarter of 2016 grew 14% compared to the prior-year period. We also grew delivered revenue in the fourth quarter of this year from our top 20 customers from the fourth quarter of the prior year. Included in our results is growth from Amazon, Apple, Microsoft, and Google, who as a group grew double-digits year over year and sequentially.

This demonstrates we are winning market shares in the CDN segment we serve, and are participating in the growth our customers are experiencing. Pricing in the market continues to be aggressive; however, we believe the declines we have experienced are on the low end of the industry averages. Our largest customers value the performance, reliability, and service Limelight provides.

Moving to gross margins. We increased gross margin by a very strong 390 basis points to 44.9% from 41% in the prior-year quarter. Cash gross margin of 56% is also up 240 basis points from 53.6% in the fourth quarter of 2015. We reported significant margin improvement compared to the prior year in every quarter this year. This is a tremendous accomplishment, given the aggressive pricing environment.

The improvement was driven by the realization of cost reductions due to the consolidation and upgrade of our network equipment in our data centers, and lower payroll and related employee costs. We believe further reductions in these areas and in our bandwidth costs give us confidence the opportunity for additional margin expansion in 2017 and beyond, and will be reflected in the gross margin guidance we provide.

Total GAAP operating expenses was $22.9 million, which is an increase of $1.6 million from the fourth quarter of 2015. Our operating expenses are unchanged at $20.9 million, excluding litigation-related expenses in the fourth quarter of 2016 and 2015.

G&A expense increased by $2.5 million; however, excluding litigation expense incurred this quarter of $2 million and $400,000 in the fourth quarter of 2015, G&A expense only increased $900,000. Sales and marketing expense increased by $100,000 versus the year-ago quarter. These increases were largely due to payroll and related expenses.

R&D expense was lower by $600,000 or 9%, versus Q4 of 2015, a benefit of increased employee productivity. Depreciation and amortization expense decreased by $400,000 year over year.

Interest and other was $500,000 of expense in the fourth quarter of 2016, compared to expense $300,000 in Q4 2015. The fluctuation was primarily driven by changes in foreign currency rates.

GAAP net loss was $0.04 per share in the fourth quarter of 2016. We achieved positive $0.02 in non-GAAP earnings per share in the fourth quarter of 2016. In the fourth quarter of 2015, we reported a $0.04 GAAP net loss and breakeven non-GAAP earnings per share.

Adjusted EBITDA was approximately $7.5 million in the fourth quarter of 2016, up from $5.3 million in the fourth quarter of 2015. Full-year adjusted EBITDA was $22.8 million, compared to $6.9 million in the same period in 2015. This was an increase of $15.9 million, more than 3 times the prior year.

Moving to the balance sheet and cash flow, we had cash and marketable securities of $66.2 million at the end of the fourth quarter. Cash flows used in operations would have been $100,000, excluding the $4.5 million payment under our settlement agreement with Akamai, driven largely by the increase in our accounts receivable balance, due to timing of payments from our customers.

We spent $4.9 million in capital expenditure during the quarter. We've ramped up capital expenditures in the second half of 2016, in anticipation of increased traffic requirements in our fourth-quarter of 2016, and for further expansion in growing geographies.

DSO as of December 31, 2016 was 55 days versus 52 days at the end of the fourth quarter 2015. We typically expect DSO in the range of 50 to 55 days, based on our global revenue distribution. We had approximately 107 million shares outstanding as of December 31.

Total headcount at the end of the quarter was 510, up 8 from the end of the third quarter of 2016, and essentially unchanged from the year-ago quarter. We confirmed our guidance for 2017 in late December, based on the strong end to 2016, and the operational and financial improvements made during the year. We expect revenue of between $175 million and $180 million, continued GAAP gross margin improvements of greater than 150 basis points, a 2 to 3 times improvement in non-GAAP EPS of between $0.02 and $0.06. We expect adjusted EBITDA of between $22 million and $27 million. We also expect to spend approximately $20 million in capital expenditures.

So let me summarize the fourth-quarter results in relative terms. We reported 11% sequential revenue growth, which is the highest in 24 quarters. Our 390 basis point GAAP gross margin expansion was the highest in nine quarters, and resulted in our highest GAAP gross margin ever of 44.9%.

Our cash gross margin of 56% is the highest in 20 quarters, and adjusted EBITDA of $7.5 million is the highest ever. Our non-GAAP earnings per share of positive $0.02 is the highest since 2007. Positive non-GAAP EPS for the year is a first for us, and all achieved on relatively flat revenues for the full year.

We again increased our Net Promoter score in 2016 for the third consecutive year. Our customers recognize the 24/7 customer service they receive from Limelight. We continue to achieve greater operational efficiencies than our servers, increasing capacity over 300% over the last two years, delivering more bytes per server and delivering more revenue per server than ever before.

I believe and hopefully you will agree, we are stronger operationally and financially, gaining share in our use cases, and the transition to profitable growth is underway. During the quarter we launched our new investor page at Limelight.com. Please visit this site to get a view onto our upcoming events, and to access investor presentations.

With that, we will open up the call for your questions.

(Operator Instructions)

Michael Turits, Raymond James.

Solid quarter. Question, you called out that you had double-digit growth but a bunch of the large Internet providers, it's well-known that your largest competitor has been seeing declines there. Can you talk about the market dynamics and what maybe happened, that you're seeing growth where the bigger guy is not?

Michael, it's Bob. We really can't speak for what is happening, relative to their relationship. What I can tell you is that they are obviously important customers to us. We are focused on delivering high quality at a fair and reasonable price, and the relationships are important and growing.

I know you can't comment even about specific customers, but the general understanding, some of them, regardless of what your competitor might be doing, is some of the desires of these large Internet providers is that they are doing it DIY, or insourcing or however you want to put it. What is your perception on how that impacts you and what they are trying to do?

I think that there is plenty of room for Limelight to work with those customers, even as they build in-house capabilities. I think they have accomplished that. It is their intention to continue to do that, but I don't think that they view that initiative as meeting 100% of their needs, and there will always be a need to partner with people like Limelight to ensure that they can deliver the capacity and quality that they want to their end users. So I think there is a place for us, even as they undoubtedly will continue to build out their own capabilities.

And if I could get one follow-up, I think that last quarter you mentioned that there was a lot of aggressive pricing in the market. When you came back with your pricing discipline, caused you to lose share or at least lose some of those deals. That was part of the miss last quarter, but you didn't miss this quarter.

Has that situation changed? Were you still faced with those situations where you had to either lose business or come in lower? How is that going?

There is certainly more business to be had if you are willing to chase the lower-priced business. That's still the case. What is still the case is that our competitors are very aggressive, but I think that in one particular case, where we had a large competitor who had a tremendous amount of excess capacity, some of that must be being used up, because we are seeing more rational pricing come to the market.

I wouldn't say that the competitive forces are any less. It is certainly a very, very competitive space and price competition is a big part of it, but certainly there seems to be more rational pricing coming to market. Sajid, any other observations?

I think what you saw us report, 11% sequential growth, is a very strong number. And without having the benefit of looking at competitors results, which were posted yesterday, we were quite pleased with that because, with that revenue growth we were able to deliver a fairly significant improvement in our gross margins, and a fair amount flows through to the bottom line.

What is really is important is when I look at our results now, in light of what the competition reported, and keep in mind there is only one public competitor here that reports results and discusses this in detail. We were pleased before, and I think I am extremely pleased now looking at these results, because in comparison, it shows not only did we do well, but I think we took share, and I think we took share maintaining a good price discipline in the industry.

And I think, just one other follow-up comment. I think you will see, or our customers and competitors will see us get much more aggressive in 2017, but that is more about the cost structure that we have been able to develop and put in place through the work we did in 2015 and 2016, and we are better positioned today than we ever have been.

We all talk about the fact that every year there is price compression, and then the price compression less or whatever it is in terms of what you go ahead and witness by way of growth in the industry, results in the revenue growth for the industry. As I look ahead, and you have seen us project our business forward, again, all I can tell you is the largest competitor is the proxy for the industry, just because they have such a large share, compared to the rest of us.

What I heard was revenues in this part of the business are in decline for them, and the rest of the business will make up for it. To show up with a 5% or 6% growth in revenue, we are talking about a 5% or 6% growth in this business, without having any of those other growth, or without making the excuse that this business is in decline.

Got it. Thank you.

Jon Charbonneau, Cowen and Company.

Thanks for taking the question. Can you provide a bit more color on how you recommend we think about revenue quarter over quarter, for the first quarter of 2017, especially given what was a seasonally strong fourth quarter? Thanks.

Well one, I think you have seen the seasonality that we have historically. And I believe that this is consistent with them, when I look at the analyst estimates for the quarter. No reason for me to call out that this is too high or too low. It is it within the range of outcomes that we have.

Things cause changes, but those should be explainable. When there is a large game release, when there is a large software release, when there is a large update to a handheld device, all of that if it happens in March, it results in one thing, in April it results in another outcome. But absent any of those, which should be explainable, I think the estimates that are on the Street are roughly in line with the expectations we have, and same is true for the full year.

Great, and then really quickly in terms of the Akamai XO lawsuit getting pushed out a couple months. At this point, how do you recommend we think about legal expenses this year?

Sajid, why don't you take the legal expense question?

So legal expenses we have said will be lower than what they were in 2016, and we believe that will still be the case, even with the case getting pushed out. We had indicated in the past that we expect a fair amount of that expense for the total year to be front-end loaded. We still expect that. If something were to change, I think we will come back and provide you with an update on that. But as things stand now, we spent a little less than $8 million last year, I think we will spend less than that this year, and we expect it to be front-end loaded.

Great. Thank you.

(Operator Instructions)

Rishi Jaluria, JMP Securities.

It's nice to see some continued operating margin expansion here. A couple ones for you. It looks like you called out in the prepared remarks that headcount picked up a little bit this quarter, back to where we were at this time a year ago. Just curious how should we be thinking about headcount going forward, especially as you make the investments in sales and marketing?

I think, Rishi, when you look at the end of the year, same time, it won't surprise me if headcount is about 5% higher than where it is today. We are at 510, so add another 25 people or so, thereabouts. There is no reason for us to believe that headcount addition is anything but evenly spread out across the four quarters, I think we may add a little bit more in the first half, but that is the trajectory that we are on.

Okay. Got it. And touching on the topic of litigation, on Akamai's earnings call yesterday, management did talk about them actually increasing their litigation expenses relating to patent infringement cases with Limelight.

I am just trying to understand how to best think of the legal situation. I know you said that you feel you are a net plaintiff here, and given us some base to work with, and what the legal expenses should be. What is the right way to think about the ongoing legal situation in all lawsuits between you and Akamai right now?

I would not like to lay out what our legal strategy is. Having said that, from a financial modeling standpoint, we've indicated what those expenses are, and when they occur during the course of the year. And if something were to change, we would update, but this is the best information I have today. That is the path we are down.

In our reconciliation between our GAAP and non-GAAP, I saw the laundry list of what it takes to reconcile for some companies between those two numbers. For us we have this one item. We call out stock-based equity, and we call out litigation expense.

The good news is, by the time we have our next conference call, we will have a much better visibility in terms of where we are against the lawsuit, at least in Virginia. And based on where we are, we will be able to provide maybe some better visibility on expenses.

Okay great. And Sajid, like you said, it was a bit of a negative free cash flow quarter, even excluding litigation, after four quarters in a row of positive free cash flow. You discussed the increase in AR in the quarter but just how should we be thinking about free cash flow and net working capital changes on a going-forward basis?

I think again, it is just the calendarization of the way our cash flow works. In the first quarter, we do have the huge payout for the employee bonuses, the annual event that occurs every year will occur again this year. That has been a driver of one use of cash in the first quarter.

And other than that, there is not much to do. The receivables we don't control. We don't try to accelerate in any way, we don't give our customers any incentive to pay us early so this number looks better or worse. The payables are pretty consistent with where they are. They are very range bound.

The one item that we have is the $4.5 million payment that we have been making, and we have already made the January payment, and that shows up in the quarter. So I think it is fairly smooth. This does not have the gyrations or the variations that you might expect, given we are running such a small business. I think we have been running it as tightly as I would expect it to.

Got it. So do you think that you could be free cash flow positive for the full year of 2017?

I expect to be, yes. We have given guidance but we are trying as a company -- all the employees are working hard to make sure that we achieve those numbers, but if we do achieve those numbers, we are not stopping, right? We're just trying to go ahead and do the best we can, and get as far ahead as we can.

Got it, okay. Last one for me and I will hop off. Just in terms of geographies. Bob, you called out India as an area where you are making investments, but are there any other particular geographies where you think you are maybe not under invested in, but beyond India and Latin America, that are maybe longer-term investment opportunities, going beyond 2017?

We try to look at where the demand exists, and what we don't do is spread our CapEx evenly. For example, in the UK between the work we did in 2015 and 2016, we grew the capacity there by almost 1,000%, and as we have indicated for next year, we are going to focus on India. A, because a lot of our customers outside of India have a desire to enter and deliver into that market, but we also have a pretty good pipeline of deals within India, and so we know there is demand there.

Latin America is something our customers have been asking for, for a while, and we are going to start to invest in there, so I think of India as a first half initiative, Latin America as a second half initiative. And then one area that we are looking at, and we also know there is demand is Middle East, and not quite sure how that will fit into this year's plans yet, so that is the reason why we didn't talk about it. But clearly India, Latin America, and them, are going to get a lot of focus this year, and then to your question, probably the Middle East would be the next place that we would look.

Okay. Great. Thank you so much.

Sameet Sinha, B. Riley & Company.

Couple questions. First, I don't know if you could talk about, you mentioned 64% of the revenues came from the top 20 customers, which implies that outside of the top 20, those customers are seeing year-over-year revenue decline, which indicates most of the year, but I just wanted to see what the dynamics there are. Obviously, you're gaining shares in the top 20, but can you talk about the dynamics in the other tier?

The second question was continuing with the trend, the question about geographic expansion. Can you talk about what the strategies in those markets, what are the dynamics, what set of ARPU and margins that we can think about from those geographies?

In terms of the revenue dynamics, what I would tell you Sameet is that going from third quarter to fourth, to experience the growth we did, we had to have experienced growth pretty broad-based growth, and which we did. Now within that, there is 100 stories within the story, so when you look at beyond the 20, you can keep breaking this up into the next 80, and then the next 400, and the remaining 500, and all of this -- some of this we are very focused on.

We want them to grow, they are growing, they are early stage. There is relatively new customers coming on board. Some of them are still legacy customers, some of them on older platforms, some of them on remaining products that we are still trying to figure out what happens as a next stage to them.

I think we have been fairly consistent in saying that the market and the opportunity for us is with the largest customers in any given industry, and we do very well in that category. And I think that to me is the proof point of how we are doing, and are we really doing well.

Because to do well with these 20 customers, and get a little bit of growth here, if I had a choice, we're trying to do both for all segments, but some growth with these 20 versus a lot of growth with the last hundred -- I don't think in dollar terms adds up to being anywhere close to the same number. So that is a dynamic that you should just be aware of. We have been talking about this, so we continue to.

Your second question was in terms of geography. There are catalysts that occur. For India as a market, everybody knows it is a very large population base but you are going from the availability of 2G to 3G and 4G on handheld devices, handheld devices and smartphones becoming more prevalent.

And all of a sudden those become catalysts for a lot of mobile traffic, for a lot of phone upgrades, for a lot of media to be delivered to people that are mobile, and the underlying infrastructure is finally catching up to the point where it can deliver, and those become catalysts for us to move into those markets and help the local customers. In addition, the international customers want to service that market as well, which we have continued to do, and so we just add to that.

This is not new for us. We have been in that market for a long time, a physical presence. We have had employees there, so we're just going to go ahead and add to that, and now in a very meaningful way, because I think the opportunity there is truly exploding.

If I could have one more follow-up question, talking about the dynamic. You pointed out gaming and software downloads as two key drivers. Yesterday Akamai spoke about OTT and how that is seeing steady growth. If you look out a year or two years from now, what are some of these trends, apart from OTT, virtual reality.

How do you see these developing? Should we expect to see steady growth, or should it be an inflection point? What are your customers indicating or telling you?

We've seen good growth across both software and video which includes on-demand, live streaming, over-the-top, and we expect that to continue. I think in the foreseeable future, we expect to see OTT add to that growth in a pretty sustained manner, but we don't see any near-term inflection point where OTT starts going through the roof. We are focused on that market. We are working with some of the largest OTT providers in the world.

So the good news for us is, we are in that game. We are seeing growth. But we don't expect it to be off the charts if you will, in the near term, but more of a steady grower for us.

And again you heard me mention this before. The amount of time people spend in front of the screen may still be the same, but as the quality of experience improves, the amount of bits required to deliver that experience just keeps growing, and growing exponentially. So going from standard definition to high definition, from high definition to DVD, to 4K, to 6K, to 8K, to augmented reality, to virtual reality.

It is the same movie. It's the same 90 minute movie, the same three-hour game, the same whatever sport you want to pick. But because of the richness of the experience, the amount of bits required to deliver that experience just grows exponentially. That's good for the whole industry, and that is good for us.

I think you see the same thing on the game side of the software download business. Those games and software patches are getting larger and larger, as the games get more sophisticated. Both of them are moving in the same direction with sophistication and quality adding to size of files.

Thank you.

Mark Kelleher, DA Davidson.

This is Luke Morison on for Mark. I was hoping you could perhaps provide some color on your security products, your cloud-based security, and basically just how perhaps it has impacted your top line, and how it has been received?

It hasn't impacted it in a material way, yet. As you know, in the last year or so announced DDoS capabilities, as well as more recently WAP capabilities, so we know that is important to our customers, and we are excited to be able to offer them that capability and protection. We also announced in the third quarter of last year a partnership with Neustar, that we are equally as excited about.

We are still in the process of building out that capability within our network, and we expect that towards the second half of this year. That will start to kick in with some revenue as well, and so, we believe we are on a good path. We know that our customers are interested. We know that our products stand up well to the competitor offerings, but at least as we currently sit here, it is not having a meaningful impact to our revenue.

By the way that second half was the original plan. We are consistent with what we expected in how much time it would take, and we believe that when we go ahead and provide and build out the infrastructure for them, that will give them probably the ability to handle DDoS attacks larger than anybody else in the industry.

Okay, great. Thanks.

This concludes our question-and-answer session, and the conference is also now concluded. Thank you for attending today's presentation. You may now disconnect.

Thank you.

Thank you.