Limelight Networks, Inc.
Q4 2018 Earnings Call Transcript

Published: 31 Jan 2019

[Operator:]

Good afternoon, and welcome to the Limelight Networks Fourth Quarter 2018 Earnings Conference Call. At this time, all participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the call over to Dan Boncel, Vice President of Finance and Principal Accounting Officer. Please go ahead.

[Dan Boncel:]

Good afternoon, and thank you for joining the Limelight Networks fourth quarter and full year 2018 financial results conference call. This call is being recorded on January 30, 2019, and will be archived on our website for approximately 10 days. Let me start by quickly covering the Safe Harbor. We would like to remind everyone that we will be making forward-looking statements on this call. Forward-looking statements are all statements that are not strictly statements of historical fact, such as our outlook for 2019 and beyond, our priorities, our expectations, our operational plans, business strategies, secular trends and product 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.

[Bob Lento:]

Thanks, Dan, and good afternoon. Today, we announced our fourth quarter and full year results. While 2018 was a record year this was a disappointing quarter driven by weakness in revenue relative to our strong performance in the first three quarters of 2018. Revenue in the fourth quarter was down 9% year-over-year, which resulted in the decline in GAAP gross margin of 700 basis points from the year-ago quarter. As a result, our GAAP net loss and non-GAAP net earnings also deteriorated significantly year-over-year and our adjusted EBITDA was down 47% from the fourth quarter of 2017. Revenue was impacted by a combination of factors. We made the conscious decision to move away from a few large customers that did not align with our strategic objectives. Also, as discussed during our last two earnings calls, we successfully completed contract renegotiations with six of our top 10 customers in mid-2018 resulting in expected price compression while removing uncertainty around these contracts and solidifying our position with these important customers. While these decisions impacted our fourth quarter results, we believe that we made the right decisions for our long-term success. Additionally, we expected new customer revenue to contribute more meaningfully to our fourth quarter. However, new customer bookings materialized much later in the year than we had anticipated limiting their impact on the fourth quarter and full year 2018 results. Even with these headwinds in the fourth quarter, we generated solid financial performance for the full year. Revenue in 2018 was up 6% year-over-year and our 2018 gross margin held flat to 2017 levels despite our more pronounced price compression in the second half of the year. Non-GAAP earnings for 2018 were up 29% year-over-year and our adjusted EBITDA for 2018 was up 6% from the prior year amount. At the end of 2018 our cash and cash equivalents totaled $50.5 million up over $1 million from 2017 year-end. Our full year results were not as strong as they could have been as the solid performance in the first three quarters of the year was partially masked by the fourth quarter. Nonetheless, we are pleased with our financial progress in 2018 as our full-year revenue, gross margin and adjusted EBITDA were the highest ever as a public company. Additionally, we made tremendous progress in 2018 on many other fronts. We saw numerous signs of improving customer satisfaction, new customer bookings on a dollar basis were up 45% year-over-year. The number of new customers signed was up 20% from 2017. We increased our network capacity by over five terabits per second. We expanded our network footprint to key locations important to our customers. Our network performance continue to improve, we announced important strategic partnerships. And we launched new products and feature functionality that we expect to benefit our customers and drive revenue growth in the future. I believe that our efforts through 2018 have established solid foundation and position us well to achieve our financial goals in 2019 and beyond. We exited 2018 with record traffic in December, which we expect to strengthen throughout 2019 and we have momentum on a number of fronts. I’m more excited than ever about the opportunity that lies ahead of us. In the fourth quarter, we announced a strategic partnership with Ericsson. As part of this partnership, we will be the exclusive provider of content delivery capabilities on the Ericsson Unified Delivery Network or UDN, which is an edge cloud platform with points of presence within more than 40 service provider networks. We will install our software technology in their existing and future pops. This year we will more than double our delivery footprint globally and increase our delivery capacity in strategic areas for our customers. This expansion along with our efforts to expand our existing network should result in about a 40% increase in capacity this year. Together with Ericsson, we began to execute on our project plans shortly after signing the agreement early in the fourth quarter. And while we have costs for the first few quarters without meaningful revenue, we expect significant revenue from this partnership in the second half of 2019 and beyond. It’s a huge win for Limelight, Ericsson, the service provider partners on the UDN platform and for all of our customers. We believe this partnership will be a game-changer for us in the future as it represents a completely different business model, one that includes revenue sharing versus the traditional model of us paying for space, power and bandwidth. We’re pleased to see a high degree of interest in our recently announced Limelight Realtime Streaming, which is the industry’s first global, scalable sub-second live video streaming solution that is natively supported by major browsers and devices. We have built a growing pipeline of over 100 realtime streaming opportunities across industries such as broadcasting, gaming, auctions and more. We have made investments in a recently launched this product and this is the best reception for a new product we’ve seen in Limelight’s recent history. This new offering clearly establishes Limelight as the industry leader in sub-second global video delivery and we’re excited by the growing level of interest and revenue potential. We’re pleased with our continued progress in edge services which leverages our infrastructure to address our customers’ needs at the edge for low latency and connectivity. In 2018, we added a number of new customers in edge services and ended the year with a strong and growing pipeline. In the fourth quarter, we hired Mike Palackdharry as Senior Vice President of Strategic Solutions to maximize our opportunities in edge services and accelerate our momentum in 2019 and beyond. Mike joins our team from Aquiire, who was President and CEO. He successfully rebuilt the SaaS company and greatly increased revenue before the successful sale of Aquiire to Coupa in the fourth quarter of last year. We continue to be excited about the opportunity in edge services and our position in this new and growing market. In December, we announced the change in sales leadership to drive revenue growth. I’m excited to bring Tom Marth on as Senior Vice President of Sales. Tom will focus on increasing our revenue growth rate, expanding our customer base and further establishing Limelight as a market leader. Tom has a solid history of leading sales organizations. He worked for Oracle for more than 15 years with increasing responsibility with it and its sales organization and most recently worked for Workday as its revenue grew from under $200 million to over $2 billion. Tom is a great asset to our team. Last month, we also announced two strategic additions to our board of directors to support our focus on future growth; Patricia Hadden and Marc DeBevoise, who both bring a wealth of experience in the media industry to Limelight. Patricia is Senior Vice President of Audience Development and Partnerships at NBCUniversal Digital Enterprises. She is responsible for growing viewership and monetization for NBCUniversal content on existing and emerging digital platforms. In this role, Patricia also manages the relationships with the company’s key digital investment partners including Snapchat, Buzzfeed and Vox. Marc is President and Chief Operating Officer for CBS Interactive, the world’s largest publisher of premium digital content and a perennial top 10 Internet company. In this role, Marc leads strategy and operations for all of CBS Interactive businesses. We expect our customers and shareholders to benefit from both Patricia and Marc’s strategic knowledge of the media landscape and we look forward to their contributions. In summary, we generated a solid full year 2018 financial performance, despite revenue weakness in our fourth quarter. We managed the business for the long-term and took deliberate steps in 2018 to secure our position with top customers and free up capacity utilized by customers that did not align with our strategic goals. We recognize then and now that these decisions would impact our near-term performance, but I’m confident that we are now better positioned for growth and long-term financial success. We address a significant level of exposure in our customer base in 2018 and I do not foresee very large customer re-pricing in the same way this year. In 2019 we will continue to execute our long-term strategic priorities to create customers for life, grow profitable revenue while generating cash, deliver significant and innovative features and capabilities, and improve our position as employer of choice. We are focused on building on our 2018 progress on many fronts and we are very pleased with our positioning as the start of 2019. We like the opportunity in the marketplace, the product offerings we have and are developing, the customers in industries we serve, the strategic partnerships we’ve created, the new management now in place and the expansion of our board. We’re in an opportunity-rich environment and we see tremendous growth potential over the next few years. In 2019 we expect increasing momentum throughout the year. We recognized that we will have tough comps in the first half of 2019, but we expect strong revenue and traffic growth in the second half as new deals begin to contribute more meaningful to our financial performance. In anticipation of this growth, we’re investing heavily in our business to ensure that we are well positioned to serve the demand we anticipate over the next few years. We believe this will translate into sustainable above market shareholder returns. This is all made possible by the hard work of our global team and I’d like to express my gratitude for a job well done in 2018 and their enthusiasm and dedication as we enter 2019. As I’ve said, I’ve never been as excited as I am at this moment about Limelight’s future. With that, I’ll turn the call over to Sajid to discuss the fourth quarter and full year financial performance in greater detail and our guidance for 2019.

[Sajid Malhotra:]

Thanks, Bob, and good afternoon. Fourth quarter results came in slightly above our revised guidance. Strong seasonal traffic from existing customers contributed to a record month of volume in December. And while the performance across 2018 was uneven, it was the best year in Limelight’s history across many operational and financial metrics. We are investing to build on 2018, increase the role of growth and further improve overall performance. New products, initiatives and relationships give us an opportunity to quickly overcome the shortfalls from the latter half of 2018. Let me review the results for fourth quarter and full year 2018 and the future we see. Starting with revenue, in the fourth quarter we reported revenue of $44 million, down 9% from Q4 last year. In the second and third quarter, we expected our traffic volumes from new customers to compensate for the decisions we were making in certain contract negotiations. The delay in acquiring this volume impacted the fourth quarter results. Seasonal growth in the base business was strong and new customer pipeline is healthy. On the other hand, new customers are understandably cautious and turn-ups take a backseat in Q4. Foreign exchange headwinds in the quarter amounted to approximately $200,000 or less than 0.5%. International customers accounted for 41% of total revenue in Q4 compared to 38% a year ago, approximately 19% of our fourth quarter revenue was in non-U.S. dollar denominated currencies. Full year revenue increased 6% to $195.7 million. This is the highest annual reported revenue ever. Amazon is our only customer exceeding 10% of total revenues. We serve Amazon across multiple geographies as one of the premiere distributors of video content and one that awards traffic based on quality. We are pleased with the performance based growth resulting from our investments in this relationship. We provide CDN services to some of the largest customers in the world and believe we have one of the highest ARPUs in the industry at $68,000. Our top 20 customers account for approximately 70% of our total revenue compared to 69% last year. We remain disciplined on the type of customers and revenue we pursue and protect. Following our major customer contract negotiations, our pricing has stabilized. We have seen increased volumes exiting December and see significant interest in Limelight realtime streaming. We have expanded our strategic initiative team to capitalize on our existing infrastructure in the edge compute market. Work is under way to integrate our network with Ericsson to deliver against the promise of our partnership. We believe all these things will contribute to lower customer churn, adding sticky customers and will fuel revenue growth and profitability in 2019 and beyond. Moving on, GAAP gross margin was 40.7% in the fourth quarter and 47.8% for the year. Margins in the fourth quarter were negatively impacted by the under utilization of a high fixed cost early in the quarter. In addition, we continue to make investments in our network and infrastructure related to our edge services as well as securing additional global capacity in anticipation of increased traffic volumes. For the full year, gross margin still short, a modest increase and the train of improving margins remained intact. Total GAAP operating expenses was $23.2 million, which is a decrease of $1 million from the fourth quarter of 2017. G&A expense decreased $1.2 million due to lower variable compensation and litigation related expenses. R&D decreased $200,000 due to lower variable employee compensation. Offsetting these was an increase in sales and marketing, tied to a planned expansion of these teams and higher cash and non-cash compensation related expenses tied to the addition of our board member and leadership changes. Interest income, expense and other income and expense netted to income of $300,000 in Q4 this year, consistent with last year. On a GAAP basis, we lost $0.5 per basic share this quarter compared to a $0.1 per share loss last year. We were break even on a non-GAAP basis compared to income of $0.4 per share last year For the full year GAAP EPS was positive $0.9 per basic share compared to a $0.7 loss last year, 2018 included $0.12 related to a onetime settlement and patent license agreement with Akamai recorded in the second quarter of 2018. Non-GAAP EPS increased 20% to $0.12 per share for 2018, compared to $0.10 in 2017. Adjusted EBITDA was $4.6 million, down from $8.7 million in the fourth quarter of 2017 Adjusted EBITDA was up 6% from $30.7 million in 2017 to $32.5 million in 2018. We had cash and marketable securities of $50.5 million at the end of the fourth quarter, up from $49.3 million at the end of last year. Cash and marketable securities were $52.6 million at the end of the third quarter. We continue to generate cash from operations. During the fourth quarter, cash provided by operating activities was $2.9 million. This marks of fourth consecutive quarter of positive cash flow from operations. I’m especially pleased with our ability to manage our cash position over the course of the past few years. Since 2013 our cash position has declined $68 million. However, during the five year time period we have repurchased over $9 million of stock, mid net payments of $36 million to Akamai incurred $16 million in litigation fees, had $90 million of capital expenditures and funded $120 million of losses all while rebuilding our business and network. This is a good outcome and we will continue to manage our cash with great diligence going forward. Having stabilized the business and screen for inorganic prospects, we believe investment in the pursuit of organic growth opportunities provides the best risk adjusted return. We are investing to realize these opportunities. We continue to maintain and improve upon a very strong balance sheet. Our current ratio improved over 30% year-over-year. Our DSO remains at strong levels, in December 2018 DSO was 52 days compared to 62 days at the end of last year and 49 days at the end of Q3. We normally expect DSO to be in the 50 day to 55 day range. As of December 31, we had approximately 114.2 million shares outstanding. As a reminder, we have an additional 8 million shares in a fully diluted share count. Total employee count at the end of the quarter was 563 up 12 from the end of last quarter, and up 30 from the end the last year. The increase primarily relates to additional R&D and sales personnel and is consistent with our strategy. We expect to continue to add to these numbers. Employee count in G&A functions should remain stable. We have been and will continue to add talent to operations, sales, marketing and new business pursuits. Moving to 2019 and guidance, we believe revenue for 2019 will be between $215 million and $225 million. The core business is growing in the high-single digits and our recent initiatives like Edge and Ericsson are expected to contribute to the incremental growth. In a sharp contrast to 2018, we expect the four quarters to get progressively better and we are anticipating the second half 2019 growth rates to be in excess of 30% year-over-year, setting us up well for 2020 and beyond. For 2019 we expect GAAP EPS of between breakeven and $0.10 per share and non-GAAP EPS in the range of $0.10 and $0.20. Adjusted EBITDA is expected to be between $30 million and $40 million. And we expect capital expenditures to be between $20 million and $24 million. Gross margins and operating margins as well as EBITDA will be lower in the first half. We believe these investments in the form of personnel and infrastructure will provide a foundation for strong double-digit growth in 2019 and beyond. In summary, as we’ve said before, across multiple measures, 2018 was another record year for Limelight. With that we were disappointed with our performance in the back half and recognizing this, we took quick and decisive steps to correct course and speed. Based on a much stronger foundation and a confidence in our customers, employees, products, partners, and the industry we have chosen to invest in order to build and grow. We cannot cut our way to growth and in this opportunity rich environment, we don’t believe we need to. We have set aggressive but achievable revenue targets for 2019. The blend of this revenue will drive the contribution margin. We expect momentum will continue to build throughout the year and 2019 will pivot us to higher growth rates, diversified revenue streams, and put us closer to our long-term goals. With that, let me open the call up to your questions. Operator?

[Operator:]

[Operator Instructions] The first question comes from Mark Kelleher with D.A. Davidson. Please go ahead.

[Mark Kelleher:]

Great. Thanks for taking the questions. You’ve talked about the six of the top 10 that you renegotiated pricing last year. Where do you stand on the other four of the top 10.

[Bob Lento:]

They are in a normal cadence Mark, I mean, we renegotiate contracts as you can imagine every month of the year. The reason why we pointed out those six is because it was unusual combination of those naturally occurring at that time and others that just kind of went beyond the normal time sort of hit all at once. So the other four or the other 400 or whatever the number, will continue to be renegotiated. And we’ll have those every quarter. But we don’t, we don’t see, any of our large ones, for example, that haven’t been renegotiated in multiple years where we would expect sort of a catch-up to market pricing that would cause a big disconnect from one quarter to the other. So, those will continue to happen. They’re happening every day of every month of every quarter. But we don’t see any unusual alignment of big ones all happening at the same time or any of them that are different than kind of traditional or normal price, price compression.

[Mark Kelleher:]

Okay. And I think you said the kind of the strategy behind the renegotiation was to acquire new traffic and that traffic did not acquire as soon as you thought. Did I understand that correctly? And, and has that played out subsequently? Are you picking up new traffic from those price negotiations?

[Bob Lento:]

Not exactly. That way Mark I mean, what happens is, you take, any one customer, we’ll renegotiate based on their forecast for the coming year, which in the case of our customers usually means higher growth year-over-year. And so the price cut is immediate, but the difference between, make it up between July and August, for example, isn’t meaningful enough in traffic to justify the price decrease. And so it takes you always sometime to grow into that meaning that it takes sometime to get back to sort of the zero point on the revenue before the incremental traffic can then give you incremental revenues. And so there’s always that disconnect that happens. It’s just more pronounced when six of 10 are all happening at once. So Sajid I don’t know if you have any additional comments to that.

[Sajid Malhotra:]

No, I mean there are contract renegotiations and resignings going on all the time to your earlier question Mark. But the reason why we called it out was that in our time here, this seemed to be like the biggest block happening over a quarter in terms of the total impact on revenue and so we did. I think the second point I think you’re trying to get to is in terms of the replacement revenue. So this contract gets renegotiated. The expectation is that the total dollar value that you get over the next 12 or 18 month, two-year timeframe will be greater on higher volumes. But it takes time to cycle that through. But you’re also hoping that you’ll get other customers and we were slow in getting other customers, primarily the reason for kind of the miss in the quarter that – what we expected from these six customers that’s laid out. It’s fully expected. You know what it is, you’ve negotiated, you’ve kind of done what you had to, but you’re expecting other business to come on board. And that was slow to come on. And the impact of that, I mean, if you miss by $500,000 in October, that customer base then is just based on seasonality $600,000 in November and $800,000 in December. So a $500,000 miss in October, while it may not seem so large in October, it becomes a $2 million miss for the quarter. And when you miss it, you kind of hope and want and you don’t want to surrender and just are anticipating that you’re going to get there. But again, at some level, the shortcoming on my side was not seeing that we have the holiday season coming on and customers even if you win them, even if they promise, they are shy to move traffic over in the fourth quarter. It just is seasonally so strong and important for anybody that even if they want to move traffic, they’re slow to do it.

[Mark Kelleher:]

Okay. Just one more question then I’ll turn over the floor. On Erickson you mentioned some investments that you’re going to have to be making in the first couple quarters. Can you size that? What’s the CapEx that you had to invest in to Ericsson?

[Sajid Malhotra:]

It’s less CapEx and it’s more adding people across a number of functions. So we are putting together, for example in R&D we are going through the necessary steps to integrate their software, APIs reporting on ours. We are working hard to go ahead and get the necessary sales coverage so that when we have that we’re hitting the floor running. We are putting in place additional people in ops to go ahead and manage the infrastructure that we will be also reporting on and managing and so it’s all that work that is going on, getting people trained, getting software written, getting it tested, getting it up and running. And as you can imagine, this is a pretty diverse infrastructure across every geography. So it’s literally like combining, two companies in an M&A scenario where you’re trying to go ahead and get to one architecture and that’s what we’re doing.

[Bob Lento:]

Yes. Keep in mind while we talk about 40 service providers that are the initial group, each of those service providers 10 and in fact, do have multiple POPs up and running. So, we’ve been doing this planning and some execution since October. We really started next month turning over the POPs, after having gone live with APOP [ph] successfully and gotten the process down and, know how their hardware interacts with our software and ironed out all those details. We’re literally, we currently have about 80 POPs today. There’s going to be another 80 to a hundred POPs that have to come online between now and the end of the year. So most of the costs in setting that up, has already occurred and we’ll continue, we’ll continue to occur, but we’ll start to see some revenue against that as, as those POPs, transitioned over in our live on the Limelight Network.

[Sajid Malhotra:]

Let me just kind of repeat that number because it is so significant. I mean, in the last 10 years as a public company, we’ve gone ahead and built 80 points of presence. We are about to add 80 more this year or more than that. So this is very consequential for us. It’s a major undertaking. And with it comes, revenue streams, access to some geographies where we didn’t have presence, access to some customers and our ability to do some things that we couldn’t before. It also is really good for us for the next step of a journey where you want pervasive presence for your edge business. And so that is kind of the second step and the opportunity that we’ve seen all this.

[Bob Lento:]

Yes, 100% of these pops are inside the carrier network, which is something that has been elusive to us, all of our pops, our independent third-party locations like Equinix or others. So that’s a huge change for us. So lots of work to be done but to answer your question, we’ve started – the people end of this work starting in October when we signed this agreement.

[Mark Kelleher:]

Okay, great. Thanks.

[Bob Lento:]

Thanks Mark.

[Operator:]

The next question comes from Sameet Sinha with B. Riley FBR. Please go ahead. Sameet, your line is open on our end, is it muted on yours?

[Sameet Sinha:]

Sorry about that. So a couple of questions around guidance, Sajid, if you could just talk to, you did bring down the low end of guidance slightly, what changed in the last 30 days? And also within that you spoke about that cadence for the year and that was very helpful. Just trying to figure out what – apart from the newer businesses of what sort of trends are you seeing in the core business, has that deviated – excluding of course, the customer losses and maybe a couple of customers’ slowdowns that you saw in the fourth quarter, any other changes that have happened since then? And then last question is you also hinted that kind of capital allocation. And it seems like with this sort of guidance that you have is sort of investment I can see why you are not announcing a buyback. But is that still a potential as the business grows and/or is there like a metric that you use for making an assumption how much cash you need in the balance sheet? That’ll kind of help us assess at what point you could get a buyback? Thank you.

[Sajid Malhotra:]

Sure. So Sameet, a couple of different – let me just try to answer them in order. One, first around guidance, I think what I’ve tried to do is just broaden the guidance a little bit more in terms of the range of outcomes because I think, it can be. And so not everything is down, for example, on the EPA side, we went from guidance range of $0.02 to $0.07 to breakeven to $0.10, right. So we kind of just expanded it on both sides of that equation, some of it is clearly loading the lower end of that guidance, but all still within the range of outcomes, I’m comfortable with what the Street is suggesting in terms of the numbers that are out there. So for us that’s really not a meaningful change and as we’ll be working hard to try and deliver those numbers are better or try to achieve the high end of the range. So all that is very much in place, its January and I got good feedback from including shareholders and including sell-side that it’s okay. I mean, it’s January and you guys can – you have a very tight range and give yourself some room. So we did. But all of this is still well within the realm of what we suggested back then, not much has changed since then. If anything we feel better about the business and more confident in it from December. Your next question around the capital allocation and share buyback, that is always on the table. We are opportunistic around it. We have $50 million, having scoured the space. I don’t see M&A as kind of a requirement for us to kind of go build a business or a need that we have to have from the standpoint of completing our offering. And so we’ve kind of said the best use of our capital is to invest in the business to grow and the opportunities that we see. And you can see the CapEx, I think the OpEx will go up some. But together with that, we still have sufficient cash to run the business and we still have cash to go ahead and do a buyback on an opportunistic basis if we choose to. Did you have a third question?

[Sameet Sinha:]

Yes, actually, I’ll replace that one, a question on Ericsson. So obviously, it sounds like it’s a good deal is coming, but you start getting the revenues in the second half of the year by the investments being incurred right now. So in terms of profitability, what sort of a crossover point should we expect because it seems like the investments will continue for an integration of stats scale. And I’m just trying to figure out, is it like a second half 2020, where we can see a profitability or earlier than that?

[Sajid Malhotra:]

No. So you should see the business began to contribute to the overall profitability in the latter half of this year when revenue comes on full stream by the fourth quarter for sure. What I’m investing in right now and what you’re seeing us talk about is the startup investment that’s required for the conversion, not so much for the operation, right. So we have to take their billing system and their recording system and how they display the APIs and the integration of that with what we have. And to get to one commonality because our customers when they go on, for example, a self-service portal, they can’t be looking at traffic from Ericsson in one way from us and other way with different presentation style, just the presentation layer if you think about that. So to try and unify that, to get that to a common place, to get the ops team and then not to be able to look at the same alerts and measures and monitoring and deploy the same software across. It’s all of that that’s taking the investment. Once that is done right and we are offering this to the market, then what you have is just a much bigger network that you begin to operate, like you were operating yours. And so the business begins to get the leverage and you get to the profitability metrics from there. Now what is the – do a crossover into profitability on the first million? I don’t think so. But once we get to $5 million, $6 million run rate on a quarterly basis, we’ll clearly be there.

[Bob Lento:]

And just as a reminder, right. I mean, there’s two things going on here from a revenue standpoint. So we’re going to be able to, once these new points of presence are interconnected into our global network, we’ll be able to use them to deliver traffic on behalf of our customers. So that’s a win because we’ll have more locations in more countries. And there’ll be inside carrier networks, so presumably, better connectivity and therefore better performance. But both Ericsson and the service providers are also looking at using this, for example, within Ericsson, their IoT strategy and edge services strategy is based on not only having the Unified Delivery Network pops on our software but tied into our global network from an expansion standpoint. So, the revenue is going to be coming from two different places as well.

[Sameet Sinha:]

Got it. Thank you very much.

[Operator:]

The next question comes from Michael Turits with Raymond James. Please go ahead.

[Robert Majek:]

Hi, this is actually Robert Majek on for Michael today.

[Bob Lento:]

Hi, Robert.

[Robert Majek:]

Just following up on a prior question, and I understand you’ve touched on it already. But can you just give us some more color on what’s giving you the confidence and/or visibility to guide to accelerating revenue for next year?

[Sajid Malhotra:]

Well, the rate of change, right and the acceleration, I mean one is kind of the base business, how we are doing. So if I look at our run rate of $195 million for the year that’s growing at, somewhere between 8% and 10% is kind of the standard run rate for our business, right. We’ve done it for a couple of years and we think we’ll be able to repeat that. The additional business, which is incremental and is a step function increase starting in the second half is another $6 million to $10 million that comes from Ericsson, Ericsson-like initiatives, right. So you add that to what normal run rate is. That’s how we get to the total number for the year that we’re suggesting. On top of that, the growth rate that you’re talking about or we’re talking about like when I say second half at 30% plus, the growth rate percentage is become a function of the denominator just as much as what it is. And we have very easy comp, for example, in Q4 next year, by the time we get to, being compared against 44 and a very tough comp against the 52 number from Q1 last year, as we report Q1 this year. So that those growth rates are an anomaly and they become a function of what they’re being compared against. But from a run rate standpoint, that’s how we see the year pan out and that’s where we see the revenue contribution coming from.

[Robert Majek:]

That’s really helpful. Thank you.

[Bob Lento:]

Yes.

[Operator:]

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

[Jon Charbonneau:]

Great. Thanks for taking the questions. Can you provide a bit more color on how exactly you have or how will you change your go-to-market strategy with a new head of sales in place? And then just in terms of the record traffic in December, how broad based was that or did it come from maybe one or two just big customers? Thank you.

[Bob Lento:]

So December traffic was pretty broad based. I mean, as you know, most of our revenue comes from our top 20 customers, so most of the traffic increase came from them as well. So it wasn’t like we just hit it out of the park with one customer and so we saw good growth across the customers. And then from a go-to-market standpoint, what Tom is bringing is a level of focus, a level of energy, a level of knowledge in terms of how to move the sales force in a long – at a faster path, how we operate our sales operations group from a sports standpoint, how we utilize our sales force automation tools. And Tom is bringing a level of the sense of urgency and discipline that I think is going to enable our sales productivity to go up. What we’re not doing is saying we’re going to have a completely different go-to market strategy. And so Tom’s focus is really on sales productivity and making sure that we’re very disciplined about the customers that we target from a new business perspective and from the opportunity to grow. Now, Mike has been brought in and that’s where we have a little bit of – maybe a different or more focus from a go-to market standpoint. As you may know, we don’t really have a broad based partner program. And when we brought Mike in, one of the things we’re providing from a focus standpoint for him is to expand the business with our partners. So, for example, with Tencent, we’ve done a good job of utilizing their capacity in China for our customers, but we really haven’t received the revenue through the partnership by selling to Tencent’s existing businesses and customers. And Mike and team are focused on growing that, working alongside our core sales team. The work we’re doing with Ericsson is in that group. And so – and there are other partnership opportunities. So we’re not saying that we’re going to try to recruit 100 different partners, but we think this year we’ve got a handful or so of partners either already under contract for – that we’re working with, that can add meaningfully to our second half revenue. And so if there’s any sort of change, it’s more on the Mike side than Tom. With Tom, it’s just having the sales force be focused, disciplined, and having a greater sense of urgency.

[Sajid Malhotra:]

Yes, I completely concur with that. I would tell you, Jon, because you have asked this before. Maybe our – there is kind of a bringing somebody from the industry with industry knowledge and a Rolodex and you’re trying to quickly hitting the ground. For us, that is not really been the issue. I think they are known in the industry, I think our coverage is good, I think our organization knows how to get to the people. For us the question has been one around effectiveness and we’ve just gotten off the sales kickoff. I am convinced that Tom will be able to do a lot more to help us be a lot more effective in terms of our selling. And that will just increase where we are today to an even higher level and that’s good for everybody.

[Jon Charbonneau:]

Great. Thank you.

[Operator:]

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

[Tim Horan:]

Hi, guys. I have two questions. Can you just elaborate on the competence that you have in demand right now? We’ve been hearing it from the industry for a couple of years, but revenues have been coming in kind of light. What is it now that it’s such an opportunity-rich environment that’s changed in the last 12 months to 24 months?

[Bob Lento:]

Well, I think the industry has been talking about it for years, the OTT offerings, right? What we’re seeing is more devices coming online, people utilizing those devices to consume more content. And then the third thing, that’s an important item is the bit rate of that content when it’s being delivered, it’s been going up. And so we’re seeing more HD, super HD, UHD being consumed and more content available in that format and more of that being consumed as the device quality and bandwidth quality goes up. So, the math is pretty easy when you have more devices, more content and higher bit rate. The demand for bandwidth just continues to go up and we’re seeing whether industry reporting or one of our competitors reporting various events through the year, you’re seeing more and more users consuming those events on Internet-enabled devices, and again, at higher bit rate. So, I think there’s just more and more coming online. You look at Amazon Prime video five years ago. They had very little content and were not widely looked at as a key driver to Internet overall demand. And today they’re one of the top pushers of content through the Internet. And they’re a good example because like Netflix, they’re exclusively – through the Internet-enabled devices as opposed to broadcasters that offer both cable or satellite connected TVs, or Internet. They’re exclusively delivering through the Internet. And I think their volume has continued to grow pretty dramatically. And so we’re seeing demand across the world. I mean, even look at a country like India; a few years ago, they were not on our radar from an operations perspective in terms of the amount of delivery. And now we’re seeing through the work of people like Reliance with their Jio offering and others that, in a country where there’s very little existing infrastructure on the broadcast side that the delivery – the availability of content and the delivery of that content is largely through Internet-enabled devices. And so that’s starting to snowball throughout the world. And I think that’s the difference.

[Tim Horan:]

That’s helpful. And Sajid, on your guidance, you’re basically implying for 2020 somewhere in the order of 20% revenue growth as you exit 2019. So, obviously, you’re pretty confident about stuff, but that’s kind of fairly strong growth into 2020. I know you’re not giving guidance now, but the math kind of just works out that way, exiting 2019. But I just want to make sure that type of ramp through 2019 is what you’re thinking because it seems like you got to exit around 240, 250 run rate give or take for this year to hit the guidance.

[Sajid Malhotra:]

I think I said 30% for the latter half of the year, not 20%.

[Tim Horan:]

So 2020 would be more like in the closer to the 30% range you’re talking about for second half 2019?

[Sajid Malhotra:]

No, no, no.

[Bob Lento:]

Let’s walk back a step, right. So the second half of this year versus the second half of 2018, we are expecting the year-over-year growth rate to be in about the 30% range.

[Tim Horan:]

Right.

[Bob Lento:]

I think your comment about sort of the run rate going into 2020 is still valid though, in terms of what that means in terms of Q4 times four.

[Sajid Malhotra:]

Yes.

[Tim Horan:]

And I guess the question is how much visibility do you have on the second half number? Are these customers that you’re talking about, yes, how much visibility do you have in these new customers in this new Erickson business to hit that type of growth going run rate into 2020?

[Bob Lento:]

So, look, overall the business is volatile business, right? So on Erickson and answer your question, we have very good visibility because we know what their revenues are and we know what the project plan is in terms of moving their pops into our network and what our share of those revenues will be. So on that we have very good visibility, but we have some very large customers that, if there are traffic stalls or our position with them from a relationship standpoint changes in some way, those things can still happen, there’s nothing guaranteed. And so from a planned perspective, we feel very comfortable with the business and the guidance that we’ve just given. But even just the range is pretty large, right? I mean, I was watching CNBC this morning and you look at like a Boeing, right? Their guidance is they’re going to ship from – I maybe misquoting, from 895 planes to 905 planes, right? So that’s a pretty tight range that they probably have really good control over. Our traffic forecast has a lot of variability to it, it depends on how popular certain things are and our position would certain – content providers and we’ve signed some very good contracts in the fourth quarter that are supposed to ramp up through the year. And so we have to execute against that and the customer has to do what they say they’re going to do. And so we’re comfortable with the range, but the range is as wide as it is because there’s a lot of moving pieces.

[Sajid Malhotra:]

Even though we’ve got a base business like we said that behaves a particular way, and if we are able to expand our physical infrastructure like we’ve suggested and get into all these new geographies that should increase just the available choices that we can give to our customers. Add to that the new products we have, the new relationships, the new presence in the market. And then on top of that, what should happen in the edge space, right. And, and then all of a sudden, we feel good. I mean we’ve said for some time that our longer term growth objective is in the 15 plus kind of range. So we’d like to get there and we’d like to get there quickly and we’re seeing signs now that things should start to come together, starting in the second half of this year.

[Tim Horan:]

Thank you very much.

[Operator:]

[Operator Instruction] The next question comes from Jeff Van Rhee with Craig-Hallum. Please go ahead.

[Jeff Van Rhee:]

Great. Thank you. Just a couple from me. Excuse me. On the sales side in particular as it relates to the new business that you’re expecting in Q4 now that you had a little more time to do a post mortem. And I’m really interested on the deals that were expected and pushed and obviously made some changes on leadership. You want more focus, more urgency, more efficiency. But as you’ve looked in those deals, what was it that happened to the deals? Was it a missed call on, on how quickly they get the volume? Was it a – was it a competitive loss, where they just overall delayed cycles. And I guess there’s a lot of reasons why those deals that were assumed to be closed could’ve pushed, but just start there if you will. Give me a little more color on the new business pipeline and what happened in Q4?

[Bob Lento:]

Yes. So as you know Q4, it’s tough to bring up new customers in Q4 because nobody has time or energy for it. And so in order for us to have that revenue in Q4 those deals would have had to close, Q3 and in fact, early in Q3. So the good news is the deals closed. They closed in Q4 versus Q3, so you say, okay, big deal, one quarter is left. But it’s meaningful because you don’t come out of the fourth quarter freeze until usually the middle of January and then customers aren’t going to just flip switches, it takes us time to build that up. So for example, we signed a contract with a major broadcaster in late November, maybe early December. It has contract minimums in it, and they have huge amounts of volume but even a minimum commitment doesn’t start till February and they’re not just going to flip the switch overnight. It’s going to build over time. But that’s an account that we’ve been working for years, at least a couple of years. We had assurances from the customer themselves if they were going to try to get this done in Q3. And so it’s not like we were not working with a willing participant, but they have lots of subsidiaries and lots of people that got to review it and everybody that reviews it has comes back with a question or two and time, time moves. Another example, with a very large broadcaster where we were trying to get a contract done, we’ve been working on the last bit to this contract since Q2 of last year. We have finally this week, the customer has executed the contract. I’m not even sure that we sent it back yet, but that is a formality. I’m so we’ll execute that contract this week, and they will open it up to all of their different properties and they – we’ve already had a meeting with all of them. They’re all anxious to start working with us, which is the good news. But again, the switch is going to take us several months to ramp those up. And so, the good news is I can’t point to, and certainly our close rate is not 100%. One of the big deals that I’ve been watching, I can’t point to any that were lost to a competitor. They’ve either been delayed, longer than we thought they would, but signed or delayed and in the process of being signed. So we feel good about the momentum coming in. But when you look at the first half of this year, many of them are just starting to turn traffic on with us. And we have the combination of that in addition to some year-over-year comps as we said, that we know are pretty tough. So we feel good about the position we’re in. I like the momentum. We’ve got varying degrees of visibility from almost perfect visibility with Ericsson, assuming again that we execute against our project plan, to we’ve done test events, for example, with this one large broadcaster, they compare us to their existing provider. They were – I’ve personally met with the Chief Technology Officer, who was blown away, in his words by our quality versus what they’re used to and can’t wait to turn this on and committed to a minimum starting in February. But that doesn’t mean he’s going to put his business at risk by just on, very quickly moving to a ton of traffic to us. It’ll be measured and it’ll be over time. So like anything else, there’s lots of different stories, but those are the general themes.

[Jeff Van Rhee:]

Okay. And then Sajid, as it relates to the model, on the gross margin side, I just a obviously well below us on the quarter, even after the revisions and just curious and maybe if you would frame it in the context of how you’re thinking about 2019 for gross margins?

[Sajid Malhotra:]

Gross margins, I think, we thought what the fourth quarter was more a function of the under utilization and mostly from October and November. I mean that’s basically what hit the gross margin. It had been improving at a pretty good rate for the year. It was still a small increase and I still expect growth margin to improve. We just need to get through with the investment that we are making because some of it is on the R&D and on the sale side and, and so that – I need to make sure that we know where the leverage is and how that’s falling. So I’m focused on the bottom line, the profitability and the cash generation of the business. With the focus that the gross margin will continue to improve this year over last, I think, should that be 100 basis points, I think, we’ll try for all that, but I want to be further along in the year to give you a clear picture of where that might be.

[Jeff Van Rhee:]

Okay. And then as it relates to sales, understanding a big focus was around efficiencies and partners and other things. Just boiling it down to direct reps. How are you thinking at this point? Where are you on reps and where do you think you’ll end the year? Understanding it could change, but what’s the – what’s the expectation on direct reps?

[Bob Lento:]

So we’re at a higher number of direct reps today than we had a year ago at this point. I don’t remember the numbers exactly on top of my head. And we’ve given Tom a budget that has increased spend your-over-year and 90% of that is going to go to quota carrying reps, either in the new business area or a existing account management area. So it’s an investment area for us and we’re not pulling back on that spend.

[Sajid Malhotra:]

When you see our headcounts increase either over the last couple of quarters or as we report the quarter this year, you should basically think that, they’re going into three broad buckets, almost equally, operations, R&D and then sales and marketing.

[Jeff Van Rhee:]

Okay. All right. Last one, traffic. You’ve made some comments about December traffic records, et cetera. January, just closing out any observations on January?

[Sajid Malhotra:]

Traffic is strong.

[Bob Lento:]

Yes, it’s continuing. We haven’t seen any – obviously, in December you get a big boost around the holidays and despite that coming into January, I think that momentum is continuing.

[Sajid Malhotra:]

Has it is historically, I mean this is – the December to January traffic trends are pretty consistent year-over-year, and no anomaly this year.

[Jeff Van Rhee:]

Okay, great. 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:]

All right, well, thank you all for joining us this afternoon. I hope you all stay warm and away from the store. And I’ll be back on the road in Chicago, Minneapolis. I think it’s next week. In the meantime, we will be available to answer any calls later on today, tomorrow, so feel free to just call me directly. All right. Thank you everybody. Talk to you soon.

[Operator:]

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