Limelight Networks, Inc.
Q1 2014 Earnings Call Transcript

Published: 6 May 2014

[Operator:]

Good day, ladies and gentlemen, and welcome to the Limelight Networks First Quarter Earnings Result Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I'll now introduce your host for today's conference, Sajid Malhotra. You may begin.

[Sajid Malhotra:]

Thank you, Ashley. Good afternoon, and thank you for joining the Limelight Networks First Quarter 2014 Financial Results Conference Call. This call is being recorded on May 6, 2014, and will be archived on our website for approximately 10 days. Some portions of this conference call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are all statements that are not strictly statements of historical fact, such as statements regarding future events or future financial performance, including, but not limited to, statements relating to Limelight Networks' market opportunity and future business prospects, guidance on financial results, statements concerning anticipated future growth and profitability, as well as management's plans, goals, strategies, expectations, hopes and beliefs and statements concerning the anticipated effects of pending or completed business combinations or other strategic transactions. These forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those contained, projected or implied in the forward-looking statements, including the inherent risks associated with litigation, particularly intellectual property-based litigation. Reported results should not be considered an indication of future performance. Factors that could cause these actual results to differ are included in the company's periodic filings with the Securities and Exchange Commission. I'm joined today by Bob Lento, Limelight's Chief Executive Officer; and Pete Perrone, Limelight's Chief Financial Officer. We will be available during the Q&A session at the end of our prepared remarks. I would now like to turn the call over to Bob Lento.

[Robert A. Lento:]

Thank you, Sajid, and good afternoon. Earlier today, we announced the results of our first quarter of 2014. I will now discuss the overall performance and progress against our priorities. Pete will follow with a more detailed financial discussion before we take questions. As a reminder, our 2014 initiatives targeted focused account management and driving share gains at key accounts, improved feature functionality for our core products, lower customer churn and employee turnover. We made progress against these initiatives, and I'm confident we will gain further traction as the year unfolds. With that backdrop, let me discuss our performance in more detail. For the first quarter, we reported revenue of $41.2 million, GAAP gross margin was 38% and loss from continuing operations of $7.6 million, or $0.08 per share. Adjusted EBITDA during the quarter was approximately $600,000. We ended the quarter with $112 million in cash, cash equivalents and marketable securities. The reported numbers are a solid start to 2014, however, we still have much work ahead of us. We continue to see progress, customer satisfaction is improving and we have solid plans to further improve it. Voluntary employee turnover is significantly lower than last year, but still higher than we'd like to see. Our balance sheet remains strong. As a company, we are focused on leveraging our core strengths to increase our market share. Customers are appreciative of the investments we are making to expand and improve our offerings. Our top 100 customers, as a group, are growing with us. At the same time, we are making substantial investments in improving our processes and infrastructure. As I mentioned during calls in previous quarters, Netflix is scheduled to leave us by the middle of the year, as they make substantial investments to build out their own platform. Revenues from Netflix were below Q1 of 2013 levels and on plan with our expectations for the quarter. With that backdrop, the strength in the revenue trends of the remaining customers was encouraging. In Q1 of 2013, Netflix was about 40% of our traffic. Currently, Netflix represents just over 20% of our traffic. We continue to pursue profitable business in a disciplined way, purposefully deemphasizing unprofitable accounts and focusing on customers who value a high-quality service. We are working hard to increase business velocity, meaning we want to shrink the time we pursue deals we win or lose, allowing sales to increase productivity and throughput. We have undertaken a major investment to improve our quote-to-cash process, including a new billing system. This reengineering process is on track. We are making these investments now and expect to see the benefits starting later this year. These improvements will increase our billing capability, allowing us to create flexible offers and permit us to be more creative with rate plans. As you've heard me say before, new customers are important, and keeping a desirable set of existing customers is equally important. To measure their satisfaction with Limelight, we started a regular survey of our customer base called Voice of the Customer. We have just finished the third cycle of this comprehensive survey. And while the survey is only 75% complete, the year-over-year improvement in our Net Promoter Score is significant. We are pleased to see our continued strong focus on customer service paying off. I recently visited with many of our customers in Asia and Europe. We have had good traction in these regions and a lot of interest in our services. We have very experienced and capable teams in these regions that do a great job of supporting our customers. Let me spend a minute talking about what the Limelight team accomplished during the first quarter of the year. First, we continue to make progress with reducing customer churn, which is now the lowest we have seen in many years. While we made progress, we still have work to do to retain and grow our customer base. With our system improvements, outstanding people and new additions to our management team, I'm confident we will continue to make progress. We continue to make investments in our network and our software products, and we are seeing them pay off. Over time, we have moved some development capacity to lower-cost geographies and will continue to look for opportunities in this regard. We made enhancements and upgrades to our network to expand capacity and improve quality while increasing efficiency. We've also been investing at our products. During the quarter, the enterprise strategy group released a report confirming that Limelight's performance is #1 in accelerating delivery of dynamic web content. This validation came on the heels of real user measurement data from Cedexis, which also found that Limelight outperformed our key CDN competitors globally. In addition, we released our advanced multi-device media delivery feature, offering enhanced functionality to Orchestrate Video and content delivery customers by simplifying delivery of video-on-demand in multiple popular formats. The live version will be released later this year. We continue to strengthen our management team and our board. Effective May 1, Gray Hall, CEO of Alert Logic, joined our board. On the management front, Harry Chiu has joined to head our product management group; Barb King will lead our sales operations team; Will Chernak [ph] now heads network architecture and engineering; Melissa Morehead [ph] joined to lead financial planning and analysis; and Sajid Malhotra is responsible for corp dev, strategy and investor relations. With continued progress, employee pride is returning and customer confidence is rising. Let me tell you what we're talking about the real customer wins. A large global electronics manufacturer based in South Korea selected Limelight Orchestrate Content Delivery to power the distribution of software to their mobile devices to make software updates more cost-effective and manageable. A major U.S. pharmaceutical company selected Limelight Orchestrate Performance, our web acceleration service, and Content Delivery when they recently deployed a new website. They needed a delivery solution that would give all of their visitors across the world similar high performance. A major Middle East company, which allows any specific moment in a movie to be searchable and discoverable, chose Limelight Orchestrate Content Delivery to reach their customers on a global scale. A multibillion European-based satellite service provider chose Orchestrate Content Delivery and Cloud Storage to improve quality for their OTT and video-on-demand services. These success stories and many others like them give me confidence that we are on the right path. Before I hand the call to Pete for a deeper discussion of the financial performance, let me provide revenue guidance for the -- for 2014. We believe, for the full year, revenue will be between $152 million and $158 million. In my view, this balances the pressures to the top line from the mid-year departure of Netflix against healthy industry demand and improving customer relationships. With that, let me hand the call to Pete to discuss the financials in greater detail.

[Peter J. Perrone:]

Thanks, Bob. For the first quarter, Limelight recorded total revenue of $41.2 million. Our GAAP gross margin was 38% and adjusted EBITDA was approximately $600,000. Adjusting for the sale of Clickability, our revenue decreased by 3% compared to the first quarter of 2013, but increased by 5%, or $1.9 million, compared to the fourth quarter of 2013. Netflix revenue in the quarter was approximately $4.9 million, up $400,000, or 8%, from the fourth quarter and represented 12% of total revenue. We are pleased with our sequential growth from Q4 as it resorted largely from increased traffic from our top media customers and our core delivery product where we've invested to improve network quality and customer service. Visibility on traffic and revenue from these top customers will remain limited through the course of this year, as only a portion of our revenue is contractually committed. We're earning back customers confidence and we expect this to increase visibility over time. The average unit selling price for Orchestrate Deliver, our content delivery product, was up approximately 8% from Q4 and 9% from Q1 of '13, reflecting a continuing shift in our customer base to those who value higher quality. Our goal is to continue to add higher ASP customers to our network over the coming months and to remain disciplined in our business selection. This does impact revenue growth to some extent, but we believe is the right decision for long-term value. Cash gross margin in the quarter was 49.2% versus 48.6% in Q4. Looking ahead, we've moved more of our cost to a variable basis on a bandwidth side, while increasing our network capacity levels. Rack and power expenses remained largely fixed on an absolute dollar basis, but we continually add capacity through higher server efficiencies. We believe we have adequate infrastructure to support higher traffic levels and the gross margins can increase with higher network utilization. GAAP operating expenses dropped $2.3 million in Q1 of '14 compared to Q1 of 2013 and declined $1.3 million from Q4 of 2013. We expect to increase operating expenses, however, as we make significant nonrecurring investments in our quote-to-cash initiatives through the course of this year. GAAP net loss was $0.08 per share this quarter, consistent with Q1 2013, and improved from $0.09 per share net loss in Q4 '13, excluding the $0.04 per share impact from the gain on the sale of Clickability. Moving to the balance sheet. Cash and marketable securities were down $6.1 million, to $112 million at the end of Q1. And as of March 31, we had approximately 98 million shares outstanding. We have not repurchased any shares under our current share repurchase plan that was authorized in February of this year. Total employee count was 472 at quarter end, down from 482 at the end of last year. Finally, last week the Supreme Court heard arguments in our long-running patent dispute with Akamai. We were pleased with our presentation of the issues and are hopeful that the court will provide a decision regarding the status of our appeal by the end of their term in June. With that, I'll turn it back to Bob.

[Robert A. Lento:]

Thanks, Pete. In summary, we believe we are in a healthy market with competitive products. We're putting together compelling value proposition for our customers, we are driving improvements across a broad set of functions and focused on replacing anticipated revenue loss, growing strategic products, improving customer satisfaction and reducing customer and employee turnover. We are investing in our products and processes and focused on creating value for our stakeholders during this year. At this time, we will open the line for questions.

[Operator:]

[Operator Instructions] Our first question comes from Michael Turits of Raymond James.

[James Wesman:]

It's James Wesman sitting in for Michael. First question on the CDN business. I was wondering if we could get a little bit of color. I know you guys aren't breaking them apart anymore on the call between CDN and value-added services. Just wondering if you could tell us if it grew this quarter or if it declined, whether it's year-over-year or sequentially? And also, the traffic you guys experienced, did you feel that the volumes accelerated this quarter or decelerated? Some color there would be helpful.

[Peter J. Perrone:]

Yes, on -- we're not breaking out VAS anymore, and we don't go into a lot of detail on products, but on a sequential basis, the CDN, sort of our core product, was up sequentially from a revenue standpoint. And as you saw from sort of what it did in terms of average price, that'll give you a sense of the traffic. So I think we really benefited from a mix of higher-quality customers.

[James Wesman:]

Okay. And then just taking a look at Netflix. I know you guys -- it sounded like you reiterated they were going to come off of Limelight platform towards the middle of the year. I mean, in terms of the -- how you feel it's going to come off, I think, Bob, last quarter, you had thought that there'd be a sizable amount of revenue in Q2, then it -- almost all of it would fade out in Q3 to none in Q4. Do you guys still feel like that's a comfortable revenue decline for the rest of the year in terms of Netflix?

[Robert A. Lento:]

That's the current plan. They will be -- remain a customer through Q2 at similar levels, and we've -- that we've seen recently. And there will be a small tail of revenue into Q3, and the current plan is to have that be 0 in Q4.

[James Wesman:]

Okay. And then just one last question and I'll hand it off to the rest of the group. Again, back to CDN. With the software download business, I know you guys had quoted a solid win with a customer there. Can you give us a little color on the software download business overall? And do you feel like it's picked up recently with your customers? Does it feel like it's sustainable longer term? Can you just give us some color around that piece of the business?

[Robert A. Lento:]

So that has been a growing piece for us. It's not only software as we think about it traditionally, but also gaming software as well, right? Lots of update to that software. And so between the 2, we see that as a strong use of our network. We've got some very good relationships, and we see that as a growth opportunity for us going forward.

[Operator:]

[Operator Instructions] Our next question comes from Aaron Schwartz of Jefferies.

[Aaron Schwartz:]

I just had a quick clarification question on a metric you gave. I just want to make sure I understood it correctly. But did you mention the Netflix volume year-on-year was down to about 20% of total? Do I have that correct?

[Robert A. Lento:]

That's correct.

[Aaron Schwartz:]

Okay. And so I guess the follow-up question is, certainly, you're moving towards a plan for diversification that it seems like a lot of metrics you're tracking are -- put you on a good path to backfill that revenue. But I guess the question I have is if the traffic volume for that particular customer is down as much as it was, it seems like the revenue didn't tail off as much in terms of a percent of revenue. I know the comp on the absolute dollar is a little different, but is there anything sort of different in the revenue composition relative to the volume composition of that particular customer?

[Robert A. Lento:]

So I think the obvious answer is yes. So we -- because they have been a greater-than-10% customer, we've always disclosed what the revenue was. And so what you see in Netflix is that traffic, and I think this is the point you're making, that traffic was down to a much greater extent than the revenue was, and that's obviously due to the fact that the price has increased year-over-year.

[Aaron Schwartz:]

The price for that particular customer, the Netflix, you're saying, increased year-on-year?

[Robert A. Lento:]

That's correct.

[Aaron Schwartz:]

Okay. And then I think you also said on the reinvestment side, you did -- and I think this is consistent with the way you talked last year, but you have made some investments to increase the capacity of your network for your broader business. Is there any reason why, if you expect Netflix to be removed from your business by the end of the year, you wouldn't just be able to better utilize the capacity that they're freeing up rather than add new investments separate from that, I guess, available capacity?

[Peter J. Perrone:]

Yes. It's a good question. The way that we think about investments is, I guess, in 2 large areas that we've spoken about before, one is on the network side, and I think your point is well made there. I think as we have capacity and as I think we replace some of those high-volume customers with a different mix of customers, we can fill that with the existing infrastructure that we have. So the investments that we make on the network side are really driven by efficiencies and life cycle for the equipment. Then, our next major category that we refer to is our quote-to-cash initiatives, are really not COGS related. They're really to improve our end-to-end customer service satisfaction and provisioning and onboarding of our customers, and that we're making investments in, to some extent, software, but processes and people.

[Robert A. Lento:]

And the other thing I would say is that Netflix is primarily a North American customer for us, and so traffic is going to grow in different areas. And so, for example, this week, we're increasing capacity in one of our European pops, basically doubling the capacity of that pop to accommodate the growth of a single client in Europe. And so there's an example of having more capacity freed up by Netflix didn't really help us there. And we needed to make that investment to grow in that region and, in this case, with that particular customer.

[Aaron Schwartz:]

Okay, that's helpful. And last question, if I could. I know, as you mentioned, you're not give a whole lot of detail on products for the split in your business. But as your sort of existing customer base looks to grow and fill the revenue backlog in the back half, what product areas are you most optimistic in terms of seeing the growth to fill that back hole? Is it going to be more on the CDN side or the other side of business? Or is there any sort of color you can give on sort of you're what seeing in the pipeline from a product perspective in terms of what gets you optimistic about the growth in the second half?

[Robert A. Lento:]

Yes. So I would say, the growth that we're seeing now is largely coming from our deliver capability, our CDN capability. We're new in the storage -- pushing storage as a product. We have literally hundreds of customers using our storage capability, but we really haven't gone to market for that, so the push in 2014 is to go to market with that. And the same is true of our Performance, or web acceleration product, and we just announced the newer version of that in October. That -- and that's the testing we were referencing, where it performs better than any other product in the market. But, again, it's new in terms of us bringing that to market. So I think when we look at 2014 results, most of the growth from a revenue standpoint will come from the CDN or deliver capability, but our hope is that we're seeing faster growth in other products, although the revenue may not be as material. Pete, do you have any?

[Peter J. Perrone:]

No, I think that's it.

[Operator:]

I'm not showing any further questions in queue. That does end the Q&A session for today, and that also ends the call for today as well. Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.

[Robert A. Lento:]

Thank you.

[Peter J. Perrone:]

Thank you.