Limelight Networks, Inc.
Q4 2014 Earnings Call Transcript

Published: 3 Feb 2015

[Operator:]

Good day, ladies and gentlemen. Welcome to the Limelight Networks 2014 Fourth Quarter and Full Year Financial Results Conference Call. At this time, all participants are in a listen-only mode. At the end of prepared remarks, we will provide instructions for those interested in entering the queue for the question and answer session. I’ll now turn the call over to Sajid Malhotra, Limelight’s Senior Vice President of Strategy, Corporate Development and Investor Relations.

[Sajid Malhotra:]

Thanks Eric. Good afternoon, and thank you for joining the Limelight Networks fourth quarter and full year 2014 financial results conference call. This call is being recorded on February 2, 2015, 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 regarding -- 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. Bob?

[Robert Lento:]

Thanks, Sajid, good afternoon and welcome. Earlier today, we announced the results for our fourth quarter and full year of 2014. This was a good quarter capping a year of hard work. Equally important, we're entering 2015 confident we can build on these results. Let me share with you the details from the quarter just ended and our priorities for 2015. This time last year, our margins were stabilizing and we've just sold our Web Content Management or Clickability business. We shared details around the expected departure of Netflix, our then largest customer and a relatively new management team within place to take the business forward. We guided to a revenue run rate expectation of slightly below $155 million. At the same time, we shared our priorities for 2014. Customer focus, improved operations, reduced customer churn, and employee turnover, delivery of key feature functionality, and focus on internal cost efficiency. Customer satisfaction was and remains today our top priority. One year later, I am proud of the progress we've made. Our customer satisfaction levels as measured by Net Promoter Score, has improved significantly. This is in large part due to emphasizing all things customer facing; account management, network reliability, quote-to-cash processes, and delivery of customer requested features. As a result, our existing customers gave us more business and new customers joined our ranks. As operational improvements took hold, customer churn continued to improve. Combined with a tightened reign on expenses, we delivered improving financial results and raised our guidance over the next three quarters. We also enjoyed a reduction in employee turnover and rising price. In less than two quarters since the departure of Netflix, we've replaced its year-over-year lost revenue and consistent with our rich tradition of innovation, we received our 100th patent, and our patent portfolio stands today at 114. We had a good year and we have more to achieve in 2015. Let me now talk about the fourth quarter. For the fourth quarter of 2014, we reported revenue of $40.7 million. Excluding Clickability and Netflix, our fourth quarter revenue growth on a year-over-year comparison was 17%, which we believe is consistent with industry growth rates. Sequential growth of approximately 8% we believe is at the high end of industry growth rates. Gross margin and cash gross margin improved over last year's reported results by 340 and 200 basis points respectively. We kept G&A expenses in check, while expanding our research and development headcount and spend. GAAP loss was $0.05 per share, non-GAAP loss was $0.02 per share, and adjusted EBITDA was $1.5 million. These improvements are a direct result of the improving revenue mix, increasing customer satisfaction, price discipline, and our ability to better manage infrastructure and G&A spend. With our climbing confidence and with our Board's authorization, we returned cash to shareholders through the buyback of $4.7 million, retiring 1.7 million shares over the course of 2014. During the fourth quarter, we achieved some additional milestones. Early in November, we announced the result of a CDN industry customer survey that we conducted in partnership with TechValidate. The survey looked at how companies are handling the operational challenges of delivering large amount of object data globally. The key finding was that global content delivery is essential. With growing customer bases worldwide, CDN customers require effective global delivery of their digital content, no matter where the requester resides, a great reinforcement of the need for Limelight Networks and our capabilities. In mid November, we launched our file-based solution for gaming that offers an integrated approach supporting the development, promotion, distribution, play, and updated game for global audience, and in conjunction with our gaming launch, we also released our first annual gaming trends report. In December, we initiated a new customer engagement event called the Executive Forum. At our inaugural event in New York City, we heard from leading companies in media and broadcasting, online retail, financial services, and other industries who expressed their gratitude from improvement they're seeing in network availability, service responsiveness, and account management. We plan to host additional Executive Forms around the world in 2015. At this point, I’d like to highlight a few customer wins. A video streaming website based in Singapore that offers on-demand streaming of TV shows, movies, and music videos from around the world chose Limelight to replace their existing cloud storage vendor. They were driven by the performance advantage they received with the tight integration between our content delivery network and our cloud storage offering. A leading men's clothing retailer based in North America chose Limelight Orchestrate Performance to power their website. They needed faster delivery of their dynamic content to improve the user experience. A multinational HR solution provider based in Europe is using the entire suite of Limelight products, content delivery, cloud storage performance, and video. They moved to Limelight from their existing CDN provider to improve website performance and customer engagement. In December, a very large electronic commerce company based in the U.S. chose Limelight for their digital content delivery. They’re utilizing our delivery service paired with our cloud storage, a combination which is providing a unique performance advantage for their global customer base. A professional sports team based in the U.K., selected Limelight content delivery and performance services to power their website. They needed global delivery and high performance to ensure the best possible experience for their website visitors. December brought about a watershed event in the delivery of digital content when a major studio released its movie directly to video-on-demand. For the first time, over four million people were able to experience a first run major Hollywood release at home. I’m very proud to say that Limelight contributed to the success of this historic event. We are proud that these customers and so many others like them chose Limelight for their business needs. Success stories like these make us more confident than ever that we are on the right path with the right products, right priorities, and the right people. We are determined to build on these successes. With that, I'll turn the call over to Pete to discuss the financial performance in greater detail.

[Peter Perrone:]

Thanks Bob. Fourth quarter 2014 revenue was $40.7 million, cash gross margin was 50.6%, and adjusted EBITDA was $1.5 million. During the fourth quarter of 2013, revenue from our divested Web Content Management business was $2.9 million, and Netflix revenue was $4.5 million. Netflix revenue during the third quarter of 2014 was $1.2 million and we had no Netflix revenue in the fourth quarter of 2014. Adjusting for the impact of these items, our revenue increased by 17% compared to the fourth quarter of 2013 and 8% compared to the prior quarter. We also experienced foreign currency headwinds during the fourth quarter of 2014. Revenue was reduced by $400,000 as compared to the fourth quarter of 2013 and $500,000 compared to the third quarter of 2014. 16% of our fourth quarter revenue was in non-US dollar currencies. We did see some price compression in Q4 in line with the historical averages. While hard to sustain, for the full year 2014 in an industry with price compression begin the norm our average selling price per delivery improved by 10% over 2013. We believe our continued improvement in operating effectiveness and customer service that Bob mentioned is working. We're generating revenue growth and increased traffic from our largest customers, as their confidence in Limelight strengthens. Our top 20 customers accounted for approximately 50% of total revenue in 2014 and the average revenue of these customers excluding Netflix is growing at a health double-digit rate and at a faster rate than the corporate average, consistent with our strategy and focus. International revenue accounted for 38% of total revenue in 2014 and 40% in the quarter. We approach the market with four solution sets delivery, performance, storage and video. For the full year, our delivery offering accounted for 75% of our total revenue. GAAP gross margin of 39.6% is up 340 basis points from 36.2% in the fourth quarter of 2013. Depreciation expense decreased by over a 175 basis points due the decreased CapEx since 2012. We do expect depreciation expense to rise modestly in 2015. Bandwidth fee decreased by an additional 150 basis points, primarily due to higher utilization of our bandwidth spend and we’re very pleased to have increased margins on a year-on-year basis despite lower total revenue. I discussed on previous calls, we are continuing our focus to more closely align our cost with our capacity levels. For example over the course of this last quarter in London we increased our capacity while at the same time reducing our data center expense. GAAP operating expenses were 54% of our revenue in the fourth quarter of 2014, a decrease of $2.5 million or 10% versus the fourth quarter of 2013. On a sequential basis, operating expenses decreased 400,000 or 2%, non-GAAP operating expenses were down 8% or $1.8 million, compared to the fourth quarter of 2013 and drivers of this improvement were lower bad debt expense, lower deprecation and lower marketing expenses. G&A expenses also continued to trend down. We’re begun to capitalize our quote-to-cash and other process improving initiatives that had been previously discussed, resulting in lower consulting expenses this quarter. These projects are a component of the increased capital expenditures expected from 2015. Adjusted EBITDA was $1.5 million up from a negative $100,000 in the fourth quarter of 2013 and is now the highest level we've experienced in seven quarters. We’re seeing the benefiting of being selective in our customer base, better utilization of our infrastructure and tighter management of our operating expenses. On a non-GAAP basis our net loss was $0.02 per share in the fourth quarter of 2014, compared to the loss of $0.05 per share for the fourth quarter of 2013 and the same as we had in Q3, 2014. Moving to the balance sheet, cash and marketable securities were down $8.3 million sequentially or $93.1 million at the end of 2014. During the quarter, we spend $4.6 million in capital expenditures and $2 million in the share repurchase program. DSO at the end of 2014 was 47 days versus 45 days at the end of 2014 and at yearend 2014, we have $33.5 million of net operating loss credit carry-forwards that do not begin to expire until 2027. Through December 31, we’ve repurchased approximately 1.7 million shares at an average price of $2.72 per share for a total cost of $4.7 million under our current share repurchase plan authorized in February of 2014. As at December 31, we had approximately 98 million shares outstanding. Total employee count at the end of the quarter was 520 up 11 from the end of the third quarter and up 38 from the year ago quarter. We expect headcount will continue to increase as we expand our business and continue our investments in R&D and in sales. Now let's provide some guidance for the full year of 2015. Based on current conditions, we’re expecting total revenues to be between 156 and $164 million. We expect to deploy more capital in 2015 as compared to 2014 to support the revenue growth opportunity and to further upgrade and improve our network and systems. At the same time we expect to continue to improve gross margin on a full year basis. G&A expense should stay flat in dollar terms and we expect R&D and sales and marketing to increase in dollar and percent terms as we invest to capture revenue opportunities. Non-GAAP net loss is expected to be between $0.10 and $0.20 per share. We are expecting a seasonal decrease in the first quarter of 2015 as compared to the fourth quarter of 2014 and expect that fourth quarter of 2015 will be our strongest quarter. With that let me hand it back to Bob for some closing comments.

[Robert Lento:]

Thanks, Pete. So here are the key takeaways. This is a healthy market growing in the mid-to-high teens. After years of surrendering share, we’re finally growing at rates we believe are in line with market growth. We’ve captured this growth while improving our GAAP and cash gross margin through disciplined pricing and improved operational efficiencies. As a result, our financial profile has been steadily improving. We’ve improved network reliability and performance, introduced new capabilities based on customer feedback and we will continue to build on this. These results clearly demonstrate the importance and relevance of our strategic and tactical priorities. There is a lot more work to be done. We feel confident enough to raise our guidance for the fourth time in as many quarters and as always we’re thankful to have talented and committed employees and we will continue to have a relentless focus on customer satisfaction. With that, let’s open the call for questions. Eric?

[Operator:]

[Operator Instructions] And our first question comes from Mark Kelleher of DA Davidson. Please go ahead.

[Mark Kelleher:]

Great. Thanks for taking the question. Wanted to just ask about the vertical market strength. Are you seeing any particular areas that you're seeing particular success in, in terms of media delivery? And then, when you segment your revenue from delivery and video and storage, are any of those particular segments going stronger than others?

[Robert Lento:]

So this is Bob. I'll take the first crack at that. Clearly, given the launch that we did around the gaming solution, we led into that based on strength that we had in that vertical, and we feel that, that provides unique combination of our cloud storage delivery, and in some cases our web acceleration performance products, and so we think that that is -- and continue to be a strong market for us. Within media as well, we’re seeing that the combination of our cloud storage and delivery, really provides unique opportunity for our customers to provide better performance to their customers. So with a combination of those two things, it seems to be working well and so those two markets, but in addition to that, we’re doing a lot of website acceleration for retailers. We’re starting to see some real traction in that market. So we're trying stay focused on fewer markets within those markets on the medium to large size customers versus focusing on small customers, and we’ll continue to focus in that way, and we think that's the best opportunity to leverage our capabilities.

[Mark Kelleher:]

Okay. And just one quick question, the capital that you said you’re going to deploy more of, what are you going to be spending that on? What are you going to buy building up a network?

[Peter Perrone:]

A component of it is going to be to increase resilience and availability initiatives within the network infrastructure itself, and then there is a component that is to support the revenue growth. Those are the two. And I mentioned a small piece of it will be for the continuing process related initiatives that we're doing, those things are the three components that I mentioned.

[Mark Kelleher:]

Okay. Great. Thanks

[Robert Lento:]

Thanks.

[Operator:]

Our next question comes from Kevin Smithen from Macquarie. Please go ahead.

[Kevin Smithen:]

Thanks. First a housekeeping item, can you let us know if there is 4X impact in Q4 for the international exposure, and then what the implied impact would be on a revenue and EPS basis in 2015?

[Robert Lento:]

At a high level, I can give it for you. As I said in my prepared remarks, we had a little bit of -- on the revenue side, a little bit of an impact which was 400,000 to 500,000 negative impact.

[Kevin Smithen:]

Yeah.

[Robert Lento:]

On the expense side, it actually worked for us more than the revenue side as we have some of our cost of goods sold denominated in foreign currencies as well as our employees there. So, on balance, it actually helped us, although it hurt us on the top line a bit.

[Kevin Smithen:]

Okay and for ’15 full year, what do you think the impact would be at the mid-point of guidance?

[Robert Lento:]

Well, I’m hoping that the impact is neutral. I can’t say that we're the most sophisticated foreign currency hedging operation. So, we have -- we’re pretty naturally balanced between revenue and expenses. So I think that we're fairly neutral.

[Kevin Smithen:]

No I’m just wondering what the revenue growth would be on a constant currency basis?

[Robert Lento:]

Well, I think we gave it to you for Q4, so are you asking for '15…

[Kevin Smithen:]

For '15 yes, on a constant currency basis what would be the mid-point of your revenue growth?

[Robert Lento:]

I think it’s neutral.

[Kevin Smithen:]

Okay. And then how should we think about -- you had it seems like -- most of your growth in Q4 has been from your existing top customers. How should we sort to think about the addition of new customers and what will that mean for margins and CapEx as we move through 2015?

[Robert Lento:]

I think for us if we look at the progress that we made in 2014, the growth was really driven by customers that were for the most part already customers, but fairly small, and so the growth that we highlighted on the existing accounts was strong. And I expect that that will continue to drive 2015. Some of the new customer acquisitions that we’re making, and particularly on our performance product line have an average deal size, average annual revenue that are a bit smaller that are important from a number of other reasons in terms of diversification into that segment as well as being higher margin. So that’s the first sort of point I would make.

[Kevin Smithen:]

Are you picking up share from EdgeCast?

[Robert Lento:]

It’s hard to say on specific competitors whether we are picking up share or not picking up share. To close off the second part of your question, whether it's an existing customer or a new customer, the capital that we deploy to increase capacities sort of ties to that revenue guidance that we gave you.

[Kevin Smithen:]

Got it.

[Operator:]

Our next question comes from Michael Turits of Raymond James. Please go ahead.

[James Wesman:]

Hey guys good afternoon it’s James Wesman filling in for Michael. First question on the competitive environment, can you give us some more color whether there are any significant changes you saw in 4Q or was the environment pretty similar to 3Q?

[Robert Lento:]

Pretty similar environment -- we’re competing against the same group of companies that we have been over the last couple of years. They are strong competitors, but obviously we feel good about our ability to win in the market. From a competitive standpoint, I don’t really see any significant change as we look back over the last quarter.

[James Wesman:]

Thanks and then Pete, I’m sorry if I missed this earlier, did you guys say what your CDN traffic growth was in the quarter and what your ASP growth was? I heard the 2014 comment on ASPs, but I think I missed it for 4Q? Do you have those numbers?

[Peter Perrone:]

The comment I made was that ASP actually went down and I didn’t give the specifics. We had price compression but in line with historical trends versus the prior quarters where I said we had some increase due to customer mix shift. And then the traffic I didn’t specifically break out.

[James Wesman:]

Got it, but traffic did grow year-over-year.

[Peter Perrone:]

It did.

[James Wesman:]

And then, I’m sorry, just your ASP is down year-over-year that was a fourth quarter comp right.

[Robert Lento:]

Fourth quarter comment, yes for the full year it was up, was 10% 2013 to 2014 was what I covered in the prepared remarks.

[James Wesman:]

Got it. Thanks. Then just a question on the G&A line, the G&A expenses came down about a $1 million quarter-over-quarter. I know you guys had talked about some of the new processes you're implementing. Can you give us some more color just around what specifically brought down the expenses so much in one quarter, the quote-to-cash system or other improvements you guys are making internally?

[Robert Lento:]

Yes, specifically we’ve got some third-party consultants that are working on various systems related to the quote-to-cash and through the course of year, we’ve been expensing that, because that’s where these projects were in stage of -- in the stage of their development. We’re now at a point where we’re capitalizing those as we get them finalized and ready to be put into production

[James Wesman:]

And Pete, do you feel like going forward -- this is run rate for G&A, we can expect from you guys, sort of this $4.8 million and building up from there?

[Peter Perrone:]

I think that debt was particularly low in Q4, but it’s -- that would just be probably up modestly on a run rate basis.

[James Wesman:]

Okay. Right. Thank you, guys.

[Operator:]

[Operator Instructions] And our next question comes from Sameet Sinha from B. Riley. Please go ahead.

[Sameet Sinha:]

Yes. Thank you very much. If I heard it correctly, I think you mentioned that the CDN business was about 75% of revenue for 2014. What was the number in 2013 in terms of how you’re thinking about '15? Is it that part of the business that’s going to grow or more of the value added pieces? Second in terms of CapEx, would you be able to quantify the increase in CapEx this year? And as a follow-up to that, I just wanted to know kind of what your thoughts are about in the long run? Any sort of goal that you can share with us about reaching free cash flow profitability. Thank you.

[Robert Lento:]

So that are three questions there that I think were for me. On the delivered growth for 2014 versus 2013, I don’t have that specific '13 number in front of me. But deliver product family for us grew faster than our overall average in 2014. So that's what I would say about that. If you have a follow-up, we could take that. And 2013 number would have included our WCM business and the other?

[Robert Lento:]

On the CapEx, we’re going to modulate that with the business that we see coming in and the growth in the revenue coming in, because when I went through the three components, a couple of them are sort of non-discretionary if you will with respect to revenue, but the third one is directly related to revenue. So it’s hard to pin it down given where we are in the year and what we’re looking at through the range, through the course of the year. So I hope to provide a tightened range as we go through the course of the year and the same comment I’d really make on your third question, which is about free cash flow is it's going to be dependent on business outlook, because if you continue to have success in the market, which we -- that’s why we’re here, that’s what we’re working on, obviously that consumes capital to put in capacity as we’re operating expenses and investing in forward expenses for sales and marketing customer acquisition. So it’s little tough to point you to a specific quarter.

[Sameet Sinha:]

Great. Thank you very much.

[Operator:]

And there are no further questions at this time. Ladies and gentlemen this does conclude today’s conference. Thank you for your attendance. You may now disconnect. Everyone have a great day.

[Robert Lento:]

Thank you.

[Peter Perrone:]

Thank you.