Limelight Networks, Inc.
Q3 2014 Earnings Call Transcript

Published: 11 Nov 2014

[Operator:]

Good day, ladies and gentlemen. Welcome to the Limelight Networks 2014 Third Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. (Operator Instructions) I’ll now turn the call over to Sajid Malhotra, Limelight’s Senior Vice President of Strategy and Investor Relations. Sir, you may begin.

[Sajid Malhotra:]

Thank you, Turia. Good afternoon, and thank you for joining the Limelight Networks third quarter 2014 financial results conference call. This call is being recorded on November 10, 2014, and will be archived on our Web site 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 actual results to differ are included in the Company's periodic filings with the Securities and Exchange Commission. I am 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’d now like to turn the call over to Bob Lento.

[Robert Lento:]

Thanks, Sajid, and good afternoon. Earlier today, we announced the results for our third quarter of 2014. We reported third quarter revenue of $39 million. GAAP gross margin jumped 41.4%, a strong performance on a sequential and year-over-year basis. GAAP loss of $0.05 per share or $5 million with less than half of the year-ago period. On a non-GAAP basis, the loss narrowed to $0.02 per share from $0.07 per share a year-ago. We reported adjusted EBITDA of $1.4 million compared to breakeven in the year-ago period. The balance sheet remains strong with a $101 million in cash, cash equivalents and marketable securities. In a few minutes, I’ll talk about what we expect for the fourth quarter. But first, let me share how we’re getting this done, where we see opportunity to improve, and why we believe we’re well positioned for future growth. It’s been a good quarter on many fronts. Let’s start by talking about revenue and our customer base. Netflix revenue in the quarter was $1.2 million, compared to $5.4 million in the second quarter and $4.2 million in the year-ago quarter. Excluding Netflix from second and third quarter of 2014 revenue, the business grew 5% sequentially. Similarly, excluding the divested Clickability business in 2013 and Netflix revenues in both periods, the year-over-year growth rate was 7%. We are very pleased with our overall revenue traction. Our base business is growing and we’re narrowing the gap between our growth rate and that of the industry. Net customer churns a negative with the associated dollar amount with this negative churn with lowest in many years, implying the loss customers with small amounts of revenue. Importantly, the expected revenue from new wins is greater than the lost revenue from customer leaving. At the other end of the spectrum, we performed extremely well during the launch of an operating system upgrade by a leading smartphone manufacturer. Improving operational performance has been recognized by our customers. We recently completed our fall customer satisfaction survey and our net promoter score confirms another meaningful increase in this measure. Over the last two years, we’ve completed four customer surveys and have seen a steady increase in this measure and are very proud of the teams’ accomplishments. There has been a steady improvement in how customers view the relationship with us and the value we provide. This improvement resonates in the recent customer meetings I’ve had. During the quarter, I travel to Europe and Asia Pac, and in both regions I was able to confirm an improving confidence in our solution offerings and the growing market opportunity for our Company. To support the emerging opportunities, we’ve opened a sales office in the United Arab Emirates, specifically Dubai; a sales office in Israel where we already have a development team and added sales coverage in Italy. Our focus on gross margin improvement where we’ve a significant opportunity is also delivering results. We uncovered and settled a billing error with one of our vendors resulting in a third quarter credit details in the financial tables. Even without this vendor settlement and on lower sequential revenue, we had gross margin improvement. We will continue to look for every means to drive efficiency in our network and Pete is personally leading this effort. And as we improve our margins and address costs, we’re simultaneously improving our network capacity and resiliency. A number of third-party sources now confirm these improvements and acknowledge us as a top performer for large object delivery and throughput. In previous calls, I’ve talked about the investments we’re making to streamline our processes. Let me give you two specific examples. We’ve made tremendous progress in our billing process. We recently developed a new system called EdgeQuery. This system gives us the ability to bill based on complex usage patterns and specific customer needs and maybe one of the best in the industry. This capability allows us to offer greater value to our customers for unique circumstances, such as extreme traffic peaks experienced during live events. Similarly, we’ve shaved days off our accounting period close cycle. We’ve gone from 15 to 17 days on average to about 5 days over the last quarter. The ability to have monthly financial data, intent fewer days, results in better business decision-making and as a direct impact on our performance. The positive impact to our business from these investments will continue to benefit us over the near and long-term. During the quarter, we achieved some milestones that I would like to briefly discuss. In early July, we released our first annual state of user experience report. This thought leadership report explores key trends in our users engaged with digital experiences. One of the key finding was that performance is the most important expectation for digital experience and can directly affect our customer’s revenue, a continuing validation of our opportunity in the Web performance arena. In early September, we launched our solution for media and broadcasters. This solution highlights our integrated workflow which empowers broadcasters and media content owners to deliver broadcast quality video to online audiences globally just after the launch, we participated in the IBC show in Amsterdam. At the show, we had very positive feedback from press, analysts, our customers and prospects. I mentioned all the energy and excitement in our network operation center during the world cup games last quarter. We were especially proud to have delivered a broadcast quality experience to viewers across many devices. The momentum carried into this quarter when we flawlessly delivered for our customers at peak volumes during large spike events in internet traffic. As you might remember, numerous large events, device firmware updates, game releases, and sporting events converged in the first half of September. I am proud to say that, we delivered superb digital experiences for our customers to millions of online users, while the Internet itself was virtually saturated with traffic. This is a testament of the team work within Limelight coupled with the improvements we’ve made in our network, our processes and our execution. Let me also talk about a few specific customer wins. A large internet search company based in North America chose Limelight content delivery service to distributed live events globally. A large electronic design automation company based in Japan chose Limelight to replace their incumbency, the end vendor as they were not satisfied with the performance or consistency of the delivery of their global sites. This company chose our Web acceleration and cloud storage services to power their global support Web site as well as their corporate Web sites. A leading apparel and home product retailer based in the U.S chose Limelight to replace their existing CDN provider. The customer needed to speed up static end dynamic content delivery and improve their users’ experience. Limelight’s Web acceleration and cloud storage services dramatically improved their Web performance resulting in overall better user experience. A European-based brewing company that had been experiencing slow delivery of online promotional content, resulting in low engagement level, they look for a world-class provider to help solve this issue and we are pleased they chose our Web acceleration service to solve this problem. These success stories from around the world and many others like them, give me confidence we’re on the right path. We strive to keep customers provide, we want to enable their growth and we’re proud of our association with them. Across the globe, we continue to improve our position within key accounts, delivering new features and capabilities within our product suite, reduce employee and revenue churn, both of which are showing improvements, but still too high and we continue to narrow the gap with the market leader by improving our operating and financial performance. Last quarter we said we expect third quarter revenue and gross margins to be down sequentially, largely due to the departure of Netflix. Even with that, if you recall, we had raised both ends of our revenue guidance to a range of $155 million to $159 million. Given our performance in the third quarter and the prospects we see for the fourth quarter, we are again raising our full-year guidance and tightening the range. We now expect 2014 revenues to be in the range of $159 million to $161 million and again after adjusting for $1.2 million of Netflix revenue in the third quarter, we believe we will show sequential growth in the fourth quarter even against the strong third quarter. We are in the midst of detailed planning for 2015, and we look forward to sharing our plans during our Q4 earnings call. At this juncture, we believe our Q3 run rate times four is a reasonable estimation of the full-year revenues for 2015. Keep in mind, 2014 full-year revenue includes $11.4 million of Netflix revenue. Now let me hand the call to Pete to discuss the financials in greater detail.

[Peter Perrone:]

Thanks, Bob. Third quarter 2014 revenue was approximately $39 million, cash gross margin was 53.3% and adjusted EBITDA was positive $1.4 million. During the third quarter of 2013, revenue from our divested web content management business was $3.3 million and Netflix revenue was $4.2 million. Netflix revenue during the third quarter of 2014 was $1.2 million versus $5.4 million in the second quarter. Adjusting for the impact of these two items, our revenue increased by 7.5% compared to the third quarter of 2013 and 5.1% compared to the second quarter of 2014. Excluding Netflix, our average selling price for our core delivery products was above 2% compared to the third quarter of 2013 and 1% sequentially. We are particularly pleased with increasing our revenue growth rate while remaining disciplined with respect to business selection. Today more than 40% of our revenue comes from our Top 20 customers. The average revenue with these 20 customers is growing at a healthy double-digit rate and at a faster rate than the corporate average. This is a good indicator of the operational improvements that Bob just talked about, and also reflects our increasing focus on larger accounts. International revenue now accounts for approximately 40% of our total revenue which is up from 37% last quarter. GAAP gross margin of 41.4% is up 570 basis points from 35.7% in the third quarter of 2013. First, bandwidth and co-location fee decreased 350 basis points primarily due to a $1.1 million non-recurring credit received from one of our vendors in co-location, as well as our focus on shifting more of our bandwidth contracts from a fixed basis to a variable basis. Second, depreciation expense decrease 160 basis points due to the decreased capital expenditures since 2012. We are very pleased to have increased margins year-on-year. While our cost of revenue remains primarily fixed in the short-term, we are making progress on structural changes to more closely align our costs with movement in traffic growth and expect to increase both our cash and GAAP gross margins over the next one to two years. GAAP operating expenses were 57.3% of our revenue and dropped $3.1 million or 12.2% this quarter versus the third quarter of 2013. On a sequential basis, operating expenses decreased $0.5 million or 2%. Non-GAAP operating expenses were down 8.1% or $1.8 million compared to the third quarter of 2013. Drivers of these improvements were lower headcount and facilities expense partially offset by higher consulting expense as we continue to make significant non-recurring investments in our quote-to-cash and other process improvement initiatives. Adjusted EBITDA was $1.4 million up from essentially breakeven in the third quarter of 2013 and is now the highest level we have experienced in six quarters. We are seeing the benefit of being selective in our customer base, better utilization of our infrastructure, entire management of our operating expenses. On a non-GAAP basis our net loss was $0.02 per share in the third quarter 2014 compared to a loss of $0.07 per share last year and improved from a loss of $0.04 per share last quarter. GAAP net loss was $0.05 per share in the third quarter 2014 compared to a net loss of $0.11 per share in the third quarter of 2013, and $0.07 per share loss last quarter. Moving into balance sheet. Cash and marketable securities were down $6.2 million sequentially to $101.3 million at the end of this quarter, and during this quarter we spent $5.1 million in capital expenditures. We expect a modest increase in capital spending in Q4. Through September 30, we have repurchased approximately 947,000 shares at an average price of $2.64 per share for a total cost of $2.5 million under our current share repurchase plan authorized in February of this year. And as of September 30, we had approximately 99 million shares outstanding. Total employee count at quarter end was 509 up from 477 at the end of the second quarter, and we expect headcount will continue to increase as we expand our business and continue our investments in R&D and sales. And with that, I'll hand the call back to Bob.

[Robert Lento:]

Thanks, Pete. In summary we are very pleased with the quarter we just delivered. The growth in base business, the operational improvements and resulting positive gross margin impact, our expense discipline and the impact of the bottom line give us confidence. Additionally the feedback from the voice of the customer program confirms that our investments are well aligned with customer requirements and priorities. This confidence translates into our improving guidance and we believe will translate into meaningful shareholder returns. We have a lot of hard work to do to stay on this trajectory for we are in a growing market and our position in this industry is clearly improving. With that, we’ll open the line up for your questions. Operator?

[Question:]

Certainly. (Operator Instructions) Our first question comes from the line of Mark Keller of DA Davidson. Your line is now open.

[Mark Keller:]

Great. Thanks for taking the questions. Just first a clarification. You said that you’re looking for next year to be four times the run rate of Q3. Is that $39 million or is that 39 minus Netflix times four?

[Peter Perrone:]

$39 million.

[Mark Keller:]

Okay. Great. And then you got some good operating leverage in G&A, and it looks like some of that went over to R&D. Are those kind of the percentage levels we should look at going forward? Were there any onetime events moving those around or is that kind of where we should be going forward?

[Peter Perrone:]

I’d say it’s probably where you should be going forward. I think we’ll continue to very modestly increase R&D as we continue to improve the feature functionality of the products, but roughly in line.

[Mark Keller:]

All right. And last question, just on your network utilization with Netflix gone now, do you have a lot of utilization? Can you use that? Does that reduce some of the CapEx that you have to spend? How much leverage can you get from your existing infrastructure?

[Peter Perrone:]

I wouldn’t tie it to Netflix specifically. I think as we look in some of the comments I made in my remarks were about getting more out of the infrastructure. So, I think both from the efficiencies on the server side and some of the things we’re doing on the network side as well as better use in some of our co-location. I think it’s sort of across the board if we can make some improvements independent of Netflix.

[Mark Keller:]

Okay. Great. Thanks.

[Operator:]

Thank you. And our next question comes from Michael Turits of Raymond James. Your line is now open.

[James Wesman:]

Hi, guys, good afternoon. It’s James Wesman sitting in for Michael. First question, Bob, Can you guys just give us some color on the competitive environment in the quarter. Were there any significant changes in the quarter? Or did you feel like it was pretty similar to 2Q?

[Robert Lento:]

I feel like it was pretty similar to Q2, I mean, no sort of material change across sort of the list of who we compete with on a day-to-day basis or how those competitors are positioning themselves. I’d say it’s a pretty similar state.

[James Wesman:]

Okay. Great. And then, Pete I believe last quarter you had commented how much traffic had grown on your network year-over-year ex-Netflix. Forgive me if I missed it, but how much was it this quarter?

[Peter Perrone:]

Yes, I didn’t specifically say, but it was roughly the same that we experienced last quarter. We had revenue increases that we articulate in a little bit on the pricing side if you take out Netflix, so that should give you a sense of the volumes.

[James Wesman:]

Okay. And then, just a quick clarification Pete, your 5% sequential growth comment for revenue ex-Netflix that was for the CDN business, right? That wasn’t all-in?

[Peter Perrone:]

Correct. Yes, the core CDN business.

[Robert Lento:]

No, I apologize for that. That is [ph] [mistaken], that’s all in.

[James Wesman:]

That was all-in, okay. Do you know what it was ex-Netflix with the CDN business?

[Peter Perrone:]

I don’t have that separately.

[James Wesman:]

Okay. Fair enough. Thank you, guys.

[Operator:]

(Operator Instructions) And at this time, I’m showing there are no further participants in the queue. Ladies and gentlemen, thank you for your participation on today’s conference. This concludes the program. You may now disconnect. Everyone have a great day.

[Peter Perrone:]

Thank you.

[Robert Lento:]

Thanks.