Limelight Networks, Inc.
Q2 2018 Earnings Call Transcript

Published: 20 Jul 2018

[Operator:]

Good day, ladies and gentlemen. Welcome to the Limelight Networks 2018 Second Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. At the end of the prepared remarks, we will provide instructions for those interested in entering the queue for the question-and-answer session. I would now turn the call over to Dan Boncel, Limelight's Chief Accounting Officer.

[Daniel R. Boncel:]

Good afternoon and thank you for joining the Limelight Networks Second Quarter 2018 Financial Results Conference Call. This call is being recorded on July 19, 2018 and will be archived on our Web-site 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 2018 and beyond, our priorities, our expectations, our operational plans, business strategies, and feature functionality announcements. 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.

[Robert A. Lento:]

Thanks, Dan, and good afternoon. Today we announced our second quarter results. This was another excellent quarter, building on the strong momentum of our record performance last quarter. Revenue in the second quarter was up 11% year over year, continuing our recent trend of double-digit revenue growth. GAAP gross margin was up 230 basis points over the year ago quarter and was second only to our record high performance last quarter. I'm very pleased that we were profitable again this quarter, generating GAAP net income, both with and without the one-time legal settlement gain. Our non-GAAP earnings and adjusted EBITDA were also second only to our record high performance last quarter, with non-GAAP income up 39% year-over-year and our adjusted EBITDA up 16% from the year ago quarter. We are proud of these quarterly results and the continued momentum in our business. We have established a solid foundation for future financial performance and we continue to believe we are well positioned to achieve our financial goals in 2018 and beyond. During the quarter we executed well on our long-term strategic priorities; creating customers for life, growing profitable revenue while generating cash, delivering significant and innovative features and capabilities, and improving our position as employer of choice. We made progress on creating customers for life and growing profitable revenue during the quarter with our strong focus on serving our customers' needs in various ways. For our customers, we continued to expand our capacity and improve our performance during the quarter, both through software optimization and deployment of our new server technology throughout our network. We also expanded our geographic reach by adding new locations in countries that are important to our customers. We are currently scoping new locations across all regions based on the needs of our customers, which we believe will provide an important opportunity for growth. Also for our customers we continue to develop and launch feature functionality across our product portfolio to improve customer experience and better position us as the market leader. We have exciting new technology coming out soon, which I'll discuss in a moment. As we continue to focus on our customers, traffic volumes grew to near-record levels while incident tickets continued to decline year-over-year. We're pleased that our efforts to meet customer needs has resulted in more traffic as the quality and performance of our network continues to improve. These efforts also had an impact on customer churn, which declined this quarter to its lowest level on record. Our focus on customers during the quarter also included successful contract renegotiations for six of our top 10 customers. The expected price compression from these negotiations is a norm in our industry and may limit revenue growth in the already seasonally low third quarter. The new pricing for most of the contract is effective really in the third quarter. We are pleased with the outcome, having successfully removed uncertainty around these contracts and solidified our position with these important customers. We expect more traffic from this group of customers going forward, which our infrastructure can absorb given our expanded capacity and improvements in network efficiencies and performance. During the quarter we made progress on other strategic priorities. We coupled our focus on customers with continued improvements in cost of service to drive more efficiencies across our network, resulting in our margin improvement year-over-year. We also maintained strong discipline in expense management and increased our cash position during the quarter. Employee morale remained healthy and turnover was stable and at satisfactory levels. Our employees continue to impress our customers with their dedication and hard work. We believe our core business has hit its stride. These highlights demonstrate solid momentum on our long-term strategic priorities and we are proud of these accomplishments. Looking back at the first half of 2018, we gained momentum in our core business, even while managing other significant demands on our attention. Earlier in the year we assisted Goldman Sachs, then our largest investor, in exiting their ownership position. Also, as announced last quarter, we successfully concluded our long-standing legal dispute with Akamai. With stability in our core business and these distractions behind us, we now have more management bandwidth to look at investment opportunities across the marketplace in key areas to accelerate growth and profitability, namely Edge services and video. In Edge services we continue to make progress. It's a new space for us that leverages our existing infrastructure to address our customers' needs at the Edge for low latency and connectivity. We are pleased with the traction we are gaining in this market and expect to gain momentum as the year progresses. In video, we are investing heavily to become the leading provider at scale. We believe in the strong future of the OTT market and its potential to drive significant growth in video. We see strong demand in video and the potential to increase our market share with our existing customers as well as expand beyond our current customer base. This market is especially attractive given its focus on quality first, and while price is important, customer decisions are driven by quality, scale, support, and then price. We are confident in our strong capabilities and are working hard to enhance our product offering with new technologies and feature functionality. We are most excited about our soon-to-be released WebRTC-based real-time streaming solution, which we believe will be a differentiator for us. We expect to be first to offer scalable, global, sub-second live video delivery using open and scalable technology that is supported on standard Web browsers. This offering will allow content distributors to easily implement scalable live video streaming workflows that require the lowest possible latency, such as gaming, sports broadcasting, live auctions, and gambling. In addition to low latency, we will also deliver features as part of this release that will provide greater control by the end-user, creating a much richer user experience. We intend to continue to build out our video capabilities. In summary, we generated a great second quarter and we are on track to meet our financial goals for the year. Customer demand is healthy and our competitive position is strong. We believe that we are well-positioned for continued revenue growth and margin expansion and we'll remain disciplined in managing cost and pricing across our customer base. We intend to continue to drive momentum in our core business while making strategic investments in Edge services and video to expand our technologies and customer base. We believe this will translate into sustainable above-market shareholder returns. With that, I'll turn the call over to Sajid to discuss the second quarter's financial performance in greater detail and our guidance for the remainder of 2018.

[Sajid Malhotra:]

Thanks, Bob, and good afternoon. I'm happy to discuss another great quarter for Limelight following a very strong first quarter results. I will cover the second quarter results, our 2018 forecast, an update to our long-term strategic priorities, and the resulting impact on our long-term financial goals. Let's get right to it. Starting with revenue, in the second quarter we reported revenue of $50.2 million, up 11% from Q2 last year. This is the fourth consecutive quarter of double-digit revenue growth. We experienced minor foreign exchange tailwinds in the quarter of approximately $100,000, or less than 0.5%. International customers accounted for 38% of total revenue in Q2, compared to 37% a year ago. Approximately 18% of our second quarter revenue was in non-U.S. dollar denominated currencies. Over the last several years, we have said we want to focus on large customers who value quality, performance, availability, and services, all while maintaining price discipline. We believe this methodology has paid off, as we continue to show revenue growth with these largest customers. In Q2 2015, revenue from our top 20 customers was 59% of total revenue. Our top 20 customers in Q2 of this year accounted for approximately 70% of total revenue. Furthermore, we have seven new customers in the top 20 that did not achieve this distinction a year ago. In Q2 this year, our ARPU has increased to $73,000, from $58,000 last year. It is my belief that we command the highest ARPU in the industry. While we will continue to focus on these largest customers, we are also turning more attention to customers of all sizes in the video and OTT segment. This requires higher quality, has a higher average price point, and separates us further from our competition. At a Company level, revenue from video delivery has increased from about 40% of total revenue at the start of 2017 to roughly 50% of total revenue today. Video customers are a growing percent of total customers and a growing proportion of total revenue and volume. They continue to grow at a faster rate than the remaining base of business. In addition to these dynamics, we have intentionally shed some volume and some customers in the non-video category. Our Edge services initiatives also continue to progress well. We are very optimistic about the possibilities with these customers and I will return to this in a bit. Gross margin was 49.4% in the second quarter, an increase of 230 basis points over the same quarter last year. Cash gross margin was 58.5%, an increase of 60 basis points year-over-year. We believe the adoption of OTT products as well as new revenue streams from Edge services and low-latency live video streaming will continue to contribute to overall margin expansion for years to come. Total GAAP operating expenses were $24.2 million, which is an increase of $1.1 million from the second quarter of 2017. G&A expense increase of $700,000 is primarily due to a state sales tax refund being received in Q2 last year, partially offset by lower legal expenses in the second quarter this year. Sales and marketing expense increased, as expected, by $1 million due to increase in salary and variable comp as we expanded our sales force. R&D decreased $700,000. Interest income/expense and other income/expense netted to a loss of $100,000 in Q2 this year compared to income of $300,000 last year. Upon a favorable resolution of the patent infringement lawsuit against Akamai, we recorded a $14.9 million settlement gain below the operating line in the second quarter of this year. Akamai is required to pay us five quarterly payments of approximately $3 million per quarter. These payments co-terminate with our $4.5 million payment to them and the last quarter with impact will be the second quarter of 2019. On a GAAP basis, we again reported net income this quarter, our second consecutive quarter of achieving profitability. GAAP EPS was $0.14 per share, per basic share. Non-GAAP EPS was $0.04 per basic share, compared to $0.03 in Q2 2017. As a reminder, the only reconciling items between our GAAP and non-GAAP results, other than the previously mentioned settlement, are stock-based compensation of $3.6 million and Akamai-related litigation expense of $200,000. As the Akamai litigation expense ends, GAAP and non-GAAP results will be close to each other and the only reconciling item would be stock-based comp. We have worked hard to make our results cleaner and clearer to understand and limit the adjustments and reconciling items between gap and non-GAAP results. Adjusted EBITDA was $9.2 million, up 16% from $7.9 million in the second quarter of 2017. Moving to the balance sheet and cash flow, we had cash and marketable securities of $45.6 million at the end of second quarter, up from $43.7 million at the end of Q1. This was a very strong quarter for cash generation, one of our best based on operating results. As discussed, we had a net outflow to Akamai of $1.5 million. In addition, accounts receivable was down $600,000 and accounts payable was down $4.2 million. We expect to see continuing increase to our cash balance and I believe the Company has transformed itself from a continuous user of cash to a sustained generator of cash, a major, major milestone. DSO as of June 2018 was 55 days, one day higher than Q1. As of June 30, we had approximately 112.5 million shares outstanding. Some of you commented on the sudden jump in basic versus fully diluted share count last quarter. No, we did not just hand out a bunch of shares. When we were losing money, GAAP accounting does not allow us to include the fully diluted share count as it would artificially reduce per share losses. On the other hand, now that we are profitable, all in-the-money distributed options are accounted for in the fully diluted share count. The distribution of these over the last 10 years adds approximately 8 million shares to our fully diluted share count. Total employee count at the end of the quarter was 549, up five from the end of last quarter and up 16 from the second quarter of last year. The increase relates to additional operational support and sales personnel. Moving to forecast, we believe revenue for the full year will now be between $200 million and $203 million, an increase from our previous guidance of between $198 million and $202 million. We continue to expect gross margins to increase by more than 150 basis points over 2017. GAAP EPS is expected to be between $0.07 and $0.11 per share and includes the positive impact of approximately $0.12 per share from the litigation settlement with Akamai that concluded in April. We expect non-GAAP EPS to be between $0.13 and $0.17. Adjusted EBITDA is expected to be between $33 million and $37 million and we now expect capital expenditures to be below $20 million. Long-term priorities; first priority is of course to finish the year strong, let me also shed some light on the other long-term priorities. Within the organic CDN business, video delivery continues to be a great opportunity and with a traffic growth trajectory that we do not see ending anytime soon. To capitalize on this opportunity we have deployed capital and human resources and our efforts are yielding results. Later this year we will launch our real-time streaming offering, further establishing our position in this space. Look for it at the IBC Conference, starting September 17. This then takes us to the next initiative around Edge. Let me just say, all CDN providers should be at an advantage when serving Edge content. The premise is, move information closer to the user and reduce latency. But think about it. This is what we have been doing for years. We take the central copy of a software, the master copy of a video, the gold copy of a game, and push it to the Edge where it is closer to the consumer where it is cached and thereby reduces latency. Consequently, we also dramatically reduce Internet congestion. Imagine life without CDN, 1 billion devices wanting to do an iOS update, hitting a server in [indiscernible], you would eventually get your update but months later and the Internet would be congested with the entire cross-traffic. To that add another 125 million users trying to download Fortnite from a server in South Carolina and all the while competing with 500 million users trying to access the FIFA World Cup final stream online from Russia. You get the picture. It is in our DNA to move content to the Edge, and because of our global presence and location density and secure backbone amongst the CDN providers, we believe our architecture is better suited to provide Edge services at low latency. So far we've helped businesses deliver their content to their consumers at the Edge. Now we see the opportunity to deliver dynamic content from businesses to other businesses and consumers. And it is not just delivering content, it is also making decisions at the Edge, it's analyzing at the Edge, it's computing at the Edge, all with a singular purpose of reducing latency. We have a head-start and are better prepared than some cloud companies that build a central cloud infrastructure and never develop the network and communications channels to connect with every last mile provider. This is why this is exciting and this is why we believe we will be able to build a sizable business in this space. We have been Edge all along. The focus on reducing latency is now become a paramount driver of many new business models. Many will struggle to build a solution. We have a great start. We are working towards becoming a recognized leader in this space. So what does that mean for our long-term goals? About 12 months ago, we established some long-term goals for the Company. These were based on three to five-year time horizon. Included in were top line growth of 10% and GAAP gross margin greater than 50%. In light of the early achievement of some of these targets, we would like to update these targets. We believe top line growth of 15% and gross margins in excess of 55% are attainable over the long-term. Just as we did today, as we achieve elements of our long-term goals, where appropriate we will update them. These are not date-certain, they are goals we want to attain over the next three to five years. We continue to look at inorganic opportunities that would further differentiate our business, add scale, and a customer base to our existing offerings, and help us realize our financial goals at an accelerated pace. In summary, we continue to perform well, both financially and operationally, double-digit revenue growth on increasingly larger comps, continued margin expansion over the prior year, achieve profitability for the second consecutive quarter, and generating cash. We are excited about our upcoming offerings and the market opportunity they create. We want our customers to do better than their competitors. This is how we will do better than our competitors. This is a healthy industry with well-established trends, a finite set of competitors, and an opportunity to create customer and shareholder value. We are doing both. With that, we'll open the call up for your questions. Brandon?

[Operator:]

[Operator Instructions] Our first question comes from Michael Turits with Raymond James. Please go ahead.

[Michael Turits:]

I know you don't break it out quantitatively but can you talk about the trends in volume growth and also any changes in the competitive landscape at all?

[Robert A. Lento:]

Competitive landscape, Michael, sort of from last quarter or even looking over the last year is pretty similar to the [cast of] [ph] companies that we compete with, both within our existing customers for share of wallet and in the market for new customers, really hasn't changed in any material way. And the other part of the question was around…

[Michael Turits:]

Volume growth, volume growth trends, and I mean there were some bigger – I don't know if you were involved in the World Cup but there were some big events, and just what you're seeing in terms of volume growth trends relative to the last couple of quarters?

[Robert A. Lento:]

So, obviously there are events that happen from time to time. We were involved in the FIFA World Cup. We've been involved with Fortnite and things like wedding and – but as you know, they tend to be burst traffic for a couple of hours, in the case of World Cup for a series of events, in a short period of time. But I think the thing that's interesting is the number of people consuming that content online versus on a broadcast device. TV is continuing to grow year after year. But what's more important to us is the ongoing use of our network for video-on-demand and a string of live linear programming as well as live events. We do see that growing and really in the near-term don't see any slowdown in the growth of that traffic.

[Michael Turits:]

So, overall traffic growth rates, are you commenting on whether they accelerated, decelerated, or stayed the same?

[Robert A. Lento:]

For us or for the Internet in general?

[Michael Turits:]

For you guys.

[Robert A. Lento:]

Yes, so for us it's a little different because we are constantly looking at our mix of traffic, and so we may choose to take less of one type of traffic so that we can perform better and take more of another kind. So, I don't know that we are a good proxy for what's going on in the industry because we're trying to be very focused in certain areas, very disciplined about our approach. All of those caveats aside, traffic is growing for us both sequentially and year-over-year.

[Sajid Malhotra:]

And traffic is growing for the industry I think at the rates it has been and price compression is as one would expect, like nothing out of the ordinary.

[Robert A. Lento:]

Nothing out of the ordinary.

[Michael Turits:]

Okay, thanks a lot.

[Operator:]

Our next question comes from Mark Kelleher with D.A. Davidson. Please go ahead.

[Mark Kelleher:]

I was wondering if you could talk a little bit more about the Edge computing opportunity. I know you spent some time there discussing it, but maybe some use cases, maybe when you expect some revenue ramp, was there any revenue from that in the quarter, does Neustar count in that category, just some more details on what your expectations are? Thanks.

[Robert A. Lento:]

It is Bob. Thanks for the question, Mark, and let me sort of start with my view on that and then ask Sajid to weigh in. Part of what we are discussing internally is, how do we best define this? We have seen some of our competition for example now all of a sudden start talking about everything they do as Edge services and they are an Edge service company, and overnight they have gone from saying 'we are a CDN' to an Edge services company. So that gets a little bit confusing because I think Gartners and others talk about it as if it's a new industry. So we are trying to figure out how do we communicate this in a way that's meaningful. Specifically to your question, we are seeing more of our customers come to us with specialized applications that require low latency that today for example might be running in a cloud provider data center looking to move it closer to the Edge. And so, we are seeing more business that is different than our traditional business, I guess is the best way to say that. And then with respect to Neustar, as you know we have a two-way relationship with them. We provide the infrastructure that their offering runs on. And then in addition to that, we resell their capabilities to our customers that are looking for security types of capabilities. And they are not exclusively – we don't sell them exclusively, but they are a key partner for us from that perspective as well. Sajid, any additional comments?

[Sajid Malhotra:]

No, I think you said it well, Bob. This is an exciting place to be, and I think when you think about the use cases, for example we can talk about the ones that we published for example, so we talked about GE Avitas. You have a company, I mean you can go read about them, but basically what they're doing is using drones to capture high-definition videos of infrastructure.

[Robert A. Lento:]

Industrial inspection.

[Sajid Malhotra:]

Right, and then they come back at the Edge, they store that content, they compare it to content over some timeframe, they look for exceptions, structural fatigue, metal fatigue, corrosion, leaks, whatever, send messages out, come back in, and you know – so, you've got an entire industry being built around brand-new use cases.

[Robert A. Lento:]

And think about the use case of, for example, even something like sugar surveillance. One of the problems that was reported, the last unfortunate incident in Florida was the latency between what their surveillance software was reporting was about 30 seconds. Obviously in a crisis situation like that, 30 seconds is a lifetime. And so, we're seeing there are lots of applications where milliseconds matter. And so, there are many different use cases coming to us for that reason.

[Mark Kelleher:]

So, just to clarify, this is an opportunity for next year, you are not looking for much revenue this year?

[Robert A. Lento:]

That's correct.

[Sajid Malhotra:]

Yes. So, we started to invest – you've been following us, Mark – we started to talk about this last year.

[Robert A. Lento:]

Second half of the year.

[Sajid Malhotra:]

Right. I think we really like the idea that others in the industry also started to talk about this. I mean you need a groundswell and we want to convince the world that CDN providers in general and us in particular provide something rather unique in this space because of the infrastructure that we have, and we've noted that others have kind of caught on to that and are also repositioning themselves. And I think as we think about this, you are talking about building a brand-new business that may go from hundreds or thousands of dollars or a million to many times that over a fairly short period of time with very little new infrastructure being deployed, very high margins consequently from that business against the sales force that's looking for new use cases. So, there's plenty of excitement. I have no doubt if this was independent and stand-alone and visible, people would really appreciate what's happening here because the customer base is rather unique and marquee names. The use cases are where all of the money flow is going and we are right in the middle of it, and I think we'll make our mark in due course and I suspect we'll be talking to you more about this in the coming quarters.

[Mark Kelleher:]

Okay, great. Thanks.

[Operator:]

Our next question comes from Jon Charbonneau with Cowen and Company. Please go ahead.

[Jonathan Charbonneau:]

I appreciate you don't provide quarterly guidance but can you give us a bit more color on how we should be thinking about revenue in the third quarter, given contract renewals and the seasonality maybe versus the second quarter? And then in terms of your new long-term revenue growth goal of 15%, what percent of that would you say, would you expect to come from newer products? Thanks.

[Robert A. Lento:]

Sure. So, here's what I would say. I think if you roll back to the start of the year when we gave guidance for this year, we said this is what we do and we said that it was our hope that our quarters would get closer to each other, because if you go back two years, three years, you see a lot of variation in our quarters, and particularly the third quarter kind of really sinking down and recovering to a strong fourth quarter and then back again, and we were kind of in that cycle. So, we have gone ahead and we put a stick in the ground saying, we would very much like our quarters to be as close to the $50 million mark, roughly thereabout, for the four quarters, and I think at the end of two quarters we have kind of achieved that. I think for the next two quarters we hope to achieve that too. That's how you kind of get to a blended answer that looks for the baseline of $200 million or somewhere thereabout. So, I expect less variation between the quarters. I actually expect third quarter to be our weakest quarter out of the four, if I have to think about that, but I don't expect it to have the huge dips that we've had historically in some of our third quarters. And then as I think about the future, take for example Edge, if we are able to get let's say somewhere between 5 and 10 or 10 and 15, we'll let you know what the numbers are, but for a $200 million business, to add any number to that from a new business using the existing infrastructure, existing sales vehicle, existing marketing plans, existing presence in the market, et cetera, that has a margin flow but adding $10 million, $15 million of revenue changes the revenue trajectory. So, I think as that becomes a reality, we should be able to get to the numbers that we are suggesting over the long-term timing horizon.

[Operator:]

Our next question comes from Tim Horan with Oppenheimer. Please go ahead.

[Timothy Horan:]

Can you maybe just give a little more color around the quality versus your peers, and I'm assuming this is mostly for real-time, and how much of a premium are your customers willing to pay for quality now, just a little bit more color would be great?

[Robert A. Lento:]

So, on real-time, I mean today there aren't any real products that exist at a global scale. So, we are going to be GA with our product September or October timeframe. We have done POCs with about half a dozen customers who have all very favorably – we've got very, very favorable response, both in terms of their desire to move forward with the product once it is GA and the willingness to deploy it very rapidly. And so, we are encouraged with what we are seeing so far. Today the challenge is, you had a Flash technology out there that's been sunsetted. The ability with [HOS] [ph], they do very small chunks but that gets expensive from a resource standpoint, not that reliable, and it's still a 5 to 10 second delay. So, sub-second capability is new. But more importantly or as importantly is the feature functionality that we are coming out with from a business perspective beyond just technical capability around latencies. So, think about the opportunity because it is WebRTC and you can have both a video and audio and a data channel, the ability to watch a live event and be able to place a bet, if that's what you want to do, or communicate with a group and basically creating social media on a real-time basis around an event. So, to me it's more than just the low latency. It's what does the platform give you the ability to do. Can we have instead of one camera that everybody looks at, can we give the user two or three or four different cameras that they themselves can choose from to see the event from different angles. And so, there are some use cases like options in gambling where low latency is just required from a fraud protection security standpoint. But there are others like gaming and live sports where it's really about enriching the user experience, that I am most excited about and that I think our customers will be most excited about. In terms of your question about how much they are willing to pay for that, that's yet to be seen. Hopefully, in a couple of quarters from now we'll be able to report out on the number of customers that have initially taken it and how the price point varies from our traditional video delivery. But what I would tell you is, to us it's more than just real-time streaming. It's all of the feature functionality and all the investments that we are making to create an improved user experience, not only over what exists today in broadcast but what exists today on Internet-enabled devices. And so, look for us to be announcing more and more capability around helping our customers enrich their user experience through our video delivery.

[Timothy Horan:]

And have you talked to the wireless carriers about this capability, because it seems like 5G is a key component of this enabling machine to machine IoT and all the things that you're talking about as they start to build these networks out?

[Robert A. Lento:]

We obviously were close with all of the wireless providers around the world, but we haven't – if you are asking, are they involved in helping us develop this or do we have a partnership we are announcing this together, we have not gone there.

[Sajid Malhotra:]

And Tim, we went out of our way. One, we are already pushing the limits of physics, right, because we are talking about taking data for example from Amsterdam and getting it to Boston in less than 0.5 second, alright. So you are approaching speed of light kind of – this is premium, ultra, whatever you want to call it from an offering standpoint. And the second important thing to us as we develop this was that we did not want to lean on a device or a carrier for software or something that had to be deployed in addition to our offering. So we've gone out of our way to kind of stay agnostic in that. So, if a consumer wanted, if a business wants it, if an individual wants it, they should have to do as little by way of incremental stuff. They should be able to rely on their standard browsers to get information.

[Robert A. Lento:]

So think about it this way, just go back to Flash, any time you wanted to use Flash, you got an indication that you had to go download Flash and you had to put a plug-in. This is going to work natively in all of the standard browsers. So, it gives us a lot of flexibility in terms of how we deploy this.

[Operator:]

Our next question comes from Greg McDowell with JMP Securities. Please go ahead.

[Greg McDowell:]

I want to ask you a couple of questions. First, you mentioned successful price negotiations with I think six of your paid customers and removing uncertainty around contracts. I was just hoping you can expand a little bit on what that uncertainty was and how we should think about how you are negotiating contracts with your big customers today compared to how you would negotiate contracts two, three, four years ago? And then I have one follow-up. Thanks.

[Robert A. Lento:]

Okay. So, I don't think there was anything unique about this other than the fact that they all hit at the same time, and obviously every quarter we have contracts that are being re-negotiated. But some of our contracts are multi-year contracts, some after the initial year will go month to month and it may take us 14 or 15 months till we get to the price negotiation. So, the cadence is usually that they are a little bit more spread out, especially within our top 20. Last quarter it just so happened that all of these negotiations came together at once, which is a little bit unusual. So, that's the unusual part. What wasn't unusual was the competition. What was unusual was the amount of price compression, largely in line with our expectations for that. And so, there was nothing unusual about that compared to maybe the last time we did a contract renegotiation with that same customer. It's just unusual for us to have that in any of our top 10 in a single quarter, and as I said in the prepared remarks, a lot of them – some of them the pricing took effect in quarter two, but for most of them, that's sort of a July 1 start to the pricing. So, obviously traffic will continue to grow, both based on us outperforming our competitors and the customers themselves growing, so the pie itself getting bigger. But it could take a little bit of time for the traffic to catch up to the decline in the price. But there is nothing unusual about the price compression other than, again I don't want to just keep repeating myself, but other than the fact that an unusual amount of our revenue hit the renegotiation point at the same time.

[Sajid Malhotra:]

Also just getting it done is good. I mean till it's not done, it's [indiscernible] over its head that it's not done, don't know what to expect at some level, what the competition might do, how irrational might they get, when is the start point, what kind of volume commits will you get. So, it's like there's plenty that goes into every contract negotiation and that becomes larger and larger from a variability standpoint as you get to customers that are very large. So, when you get to our top 10 customers, top 20 customers, it is really good for us to have these behind us. That's the way I look at it. It's done, it's signed, it's sealed, we know what to expect, we know what our charge is, what the model needs to look like, and there's less to get done and less uncertainty about what remains for the balance of the year.

[Robert A. Lento:]

And I think the good news for us, as I think as you know if you sort of kept track of what our focus has been, we've been very, very quality focused and really trying to drive market share growth based on quality and our ability to support our customers, our performance. And while I wouldn't say that we have perfect intelligence, we are fairly certain that in every case we are not the price leader in these re-negotiations. So, we are pleased with the acknowledgment that we are getting from customers that because of our performance, they want to renegotiate and re-sign, and did. And again, while price is always important and we need to be competitive, Limelight doesn't need to be the price leader to stay in the game.

[Greg McDowell:]

That's really helpful, thank you. And one quick follow-up and a nice segue from your quality commentary is, you mentioned the lowest customer churn, lowest level on record, and I'm sure some of that has to do with quality and improving NPS scores, but I was just hoping you can talk a little bit about some of the factors that have led to the lowest record of customers. Thanks.

[Robert A. Lento:]

I appreciate the question and it's really sort of – you have to get it right on multiple dimensions. And so, we have spent a lot of time in our sales organization building up our account management capabilities. And if I go back to our original, you mentioned NPS, if we go back to the original NPS survey, there were very negative comments about the support we provided for our account management organization. That's very different today. Most of our customers have what we refer to as ASA services, Advanced Service Architects. The customers that have ASAs tend to have higher NPS and our market share tends to be higher. So, we have some really strong, very strong group of ASAs around the world working with our customers, and so we understand what's important to them and we can fine-tune through our configuration capabilities how we deliver that traffic to maximize for quality in their particular use case or scenario. Obviously the network at its core has to operate at a very high level, and not only at a high level but you have to have capacity in a location that the customer cares about, connected to the ISPs that the customer cares about, sort of 7/24. So, when we look at what does it take to have a successful relationship with a customer, it's the personal interaction that we have with them, both day to day and on executive level, the performance and capacity of the network, the feature functionality of our software, and when things go bump in the night, because they invariably do, what is our ability and our culture around supporting our customers. Do our customers feel like their problem is important to us and we are attacking it as if we worked for that company versus just another call that we receive. And we've been working very hard across all those conventions and we may not be perfect across all of them every single day, but we are obviously much improved over where we were, which may or may not be the right bar. The right bar is, how we perform against our competition, and based on the feedback we get from our customers, we have made really, really positive strides in that area and we are very proud of what our employees have achieved.

[Greg McDowell:]

Very good. Thank you.

[Operator:]

Our next question comes from Sameet Sinha with B. Riley FBR. Please go ahead.

[Sameet Sinha:]

Couple of questions, first is regarding guidance. Sajid, as you mentioned, $50 million equally distributed for the rest of the – for the four quarters. If I put $50 million for the third quarter, that kind of implies just about $51 million in the fourth quarter, which is seasonally the strongest quarter for you. And I guess if you can provide more clarity around does this re-pricing, as it happen, as it impacts the third quarter, when do we start to see where overall revenue starts to exceed the volume growth, I guess just one of the explanations for it? The second thing is, towards the end of your prepared remarks, did you mention organic growth opportunities or inorganic growth opportunities? If it's the latter, then can you provide more clarity around it? It is the first time I heard you say something like that. And then I have a follow-up question.

[Sajid Malhotra:]

Sure. So, first let's just talk about revenue distribution, right. I think I've said this before, and this is primarily the reason why we don't give quarterly guidance, is because we don't manage through the quarter. We manage through the year. And so, things can happen within quarters that can cause $1 million to $2 million to move around between one quarter or the other. An iOS upgrade happening in September versus October, big event. A software download, a game introduction, how often or when Fortnite does an update, all of these things can cause – and our revenue is not large enough where we can accommodate that and give you the precision of a guidance by quarter and then get penalized because we missed by $0.5 million or $1 million. So we go ahead and try to manage through the year. As you think about that, the revenue has gone from $168 million, $171 million, to $184 million, to a guidance that we gave, and now we have raised that guidance twice. So, there is strength in the business compared to where we were at December, then in April, and where we are now. I mean three times we have given guidance for this year and all times we have raised the guidance. And so, I feel like the business is on the right trend. I think – you know us, I mean we don't stop because we achieved results. We go ahead and continue on and try to see what else and where and how and when and as quickly as we can. So, that's kind of the nature of our people and our business and the culture that we have, that you want to go ahead and get everything. Based on where things stand for the year, we have raised guidance. I think we feel good about where we are. I think Q3 is seasonally our weakest quarter. There is no reason why this will be any different. I also think that the weakness that we have seen historically, we should not see this quarter, and this quarter should be closer to the $50 million number than for example being at a big dip compared to Q3, like we had in 2015 or 2016, if you just go back and look at the numbers. So, that's where that fits, right. Then we get to the point on organic and inorganic. For the longest time we could not afford to take a look at stuff that was inorganic. We are focused on organic. That is the best opportunity. We are in a good neighborhood. We have connected our house on many fronts and we feel good about where we are. We haven't become – but that doesn't mean that over the course of the last two years, three years, we haven't gotten opportunities to participate in some small acquisition here or build a capability here or acquire some people here or there or some technology, and we've always been looking at that and we continue to look at it. So, that's really not changed. I feel a little bit more confident about our capabilities, about our balance sheet, about the state of our business, about our customer base, about the revenue trajectory in the base business, then I can kind of say, yes, these are things that all companies should always be looking at and we can now finally start looking at them. I mean, we can't put blinders on and say, no, not going to do that, not going to look at that. But there was a time here where all of that would just have been a bad idea because our base business was – we would not even wonder like is it capable of surviving. You remember the days when we were at $0.90 just a year and a half ago. So, we are at the point today where I think we have the benefit of having achieved what we have to go ahead and at least stay aware of what's going on in the marketplace and [indiscernible].

[Sameet Sinha:]

So, if you were to look into M&A opportunities, which specific sectors would you be looking at, can you provide us some more information, would it be more product or technology or both?

[Sajid Malhotra:]

I could tell you what we would not do. Don't expect us to go ahead and get into some adjacency and try to explain to you why that's a really good idea. This Company has done that before and not really done well when it has done that. But for example if the customer base of a CDN company became available where we could go ahead and layer it on our infrastructure, we would absolutely go look at that. I mean that would be crazy not to jump on that opportunity to go ahead and take on a customer base and use our infrastructure to go deliver services to that base. So, think of us where it's very, very tightly aligned with all of the things that we've been talking to you about.

[Robert A. Lento:]

So, video, Edge services, right. I mean in video there is a lot of capabilities that our customers utilize that are beyond what we do. We'd look at those opportunities, we'd look at Edge services, and then Sajid's point, in the core CDN market there was an opportunity to add expansion, both at the physical infrastructure layer as well as the customer, that would be important to us. So we are not trying to signal like, hey, we are in a rush to go spend a bunch of money. But with Goldman Sachs out and Akamai settled and the core business in good shape, for the first time cash moving in the right direction, for the first time since I've been here we have the luxury at least of reading the e-mails that continue to come our way or take some of the calls that continue to come in. We're obviously going to be very careful, very choiceful and very disciplined about pulling the trigger on anything. And to your point, it's the first time you ever heard us say that, this is the first time we felt that we had the bandwidth from a management perspective to even look at it. And two, that the foundation of the business was strong enough that we could integrate something in and have one plus one be greater than two.

[Sameet Sinha:]

Okay. My final question, when you speak about these renewals, and I know you kind of shy away from providing classic figures, but can you give us a sense of what maybe average or median traffic minimums that you have signed for this cohort of six customers, traffic growth?

[Sajid Malhotra:]

I wouldn't give you a minimum, but I would tell you this Sameet that the industry basically behaves where the minimums carry very little meaning, and let me explain that. Somebody will in the procurement departments of the companies or the customer base has been trained to go ahead and sign up for as small a minimum as possible over as long a time horizon as possible at the lowest possible price. That's kind of built-in, that's what they set out to do. So, if you sign some kind of a minimum or whatever the threshold is, sometimes customers run through that in six months, four months, eight months. It doesn't even extend out through the length of the entire contract. So, I don't want to give you a feeling that this time the minimum, we had a big minimum signed with a customer that didn't have a minimum. Now all of a sudden you can draw many inferences from that, but I would say, stay focused on the broader guidance which is the trajectory of the revenue is actually improving. We raised our revenue guidance by more than our beat guys. That's what's important. We feel confident about the business and where it's headed.

[Sameet Sinha:]

Perfect. Thank you.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Sajid Malhotra for any closing remarks.

[Sajid Malhotra:]

Thanks Brandon. So, net-net, we had a strong quarter, a strong first half, and we are on track to make 2018 the best ever on many operational and financial fronts. We are advantaged in the emerging Edge opportunities because it is in our DNA, and having quickly realized some long-term goals, we are raising both this year's guidance and our long-term targets. We will be at an industry infrastructure analyst Dan Rayburn's Edge Next Summit taking place October 15 in New York City, which will focus on content distribution at the Edge and all that is taking place with low latency, CDN, security, and more. I look forward to seeing some of you there. In addition, we are presenting at the Oppenheimer 21st Annual Technology, Internet & Communications Conference in Boston on August 8, and at the D.A. Davidson 10th Annual Technology Forum in New York on August 9. Please visit the Investor Relations Web-site at www.limelight.com for dates and venues of upcoming events. Of course we appreciate all your support and thank you for joining us today and that concludes our call. Have a great day.

[Operator:]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.