Limelight Networks, Inc.
Q1 2015 Earnings Call Transcript

Published: 30 Apr 2015

[Operator:]

Good day, ladies and gentlemen. Welcome to the Limelight Networks 2015 First Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. At the end of the prepared remarks, we will provide instructions for those interested in entering the queue for the question-and-answer session. I’ll now turn the call over to Sajid Malhotra, Limelight’s Senior Vice President of Strategy, Corporate Development and Investor Relations.

[Sajid Malhotra:]

Thank you. Good afternoon and thank you for joining the Limelight Networks first quarter 2015 financial results conference call. This call is being recorded on April 30, 2015, and will be archived on our website for approximately 10 days. Let me start by firstly covering the Safe Harbor. We’d 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 Q2, the full year 2015 and beyond, our priorities, our business lines and business strategies. 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 discussion of periodic filings including our most recent annual report on Form 10-K. These 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. I’m joined today by Bob Lento, our Chief Executive Officer; and Pete Perrone, our Chief Financial Officer. We will be available during the Q&A session at the end of our prepared remarks. I’d like to turn the call over to Bob Lento.

[Bob Lento:]

Thanks, Sajid. Good afternoon and welcome. Earlier today, we announced our first quarter 2015 results. This was a good quarter and builds on the already improving trend we saw in 2014. As we will detail here, revenues were strong, gross margin was higher, customer churn was lower, employee turnover was lower, customer satisfaction is higher and buildings momentum is stronger. With this backdrop, we are raising our revenue and earnings guidance, which Pete will take you through in a moment. Let me now share with you the details for the quarter just ended. For the first quarter of 2015, we reported revenue of $42.3 million. Excluding Netflix, our first quarter revenue growth on a year-over-year comparison is 17%. Sequential growth of approximately 4% we believe is consistent with industry growth rates. Both measures include the impact of a stronger dollar. Our largest customers continue to grow with us, and the total customer count is stabilizing. On a GAAP basis, this is the first quarter with year-over-year revenue growth since I become CEO. GAAP gross margin and cash gross margin improved over last year's reported results by 194 basis points and 121 basis points respectively. We continue to expand our sales and by a larger margin our R&D workforce. GAAP loss was $0.06 per share, non-GAAP loss was $0.02 per share and adjusted EBITDA was approximately $400,000. On a qualitative basis, we had a few milestones and successes that I'd like to share. First, I'm proud to say that during Q1, we had a record breaking traffic day, month, and quarter. We also achieved new records for speed and petabytes served. In the fourth quarter of 2014, we set a record that stood from the first quarter of 2013, when Netflix volumes were at their peak. It only took one quarter to establish a new record. As we were delivering record traffic, we were also engaging in our customers -- in our semi-annual customer satisfaction study. This was conducted by a third-party and I'm extremely pleased with the results. The net promoter score and overall measure of our customer satisfaction with Limelight showed a remarkable 52 point improvement since our first survey in the spring of 2013. I've made customer satisfaction a priority for us, and we have shown continuous and steep progress in this area. I'm thankful for the hard work of our team members that have helped to sustain these levels and look forward to further improvement. In March, we announced the results of a global survey of top security concerns related to the delivery of digital content. The research shows that nearly half of respondents are most concerned with the impact of Distributed Denial of Service or DDoS attacks on their delivery of digital content. Additionally, more than half believe their content delivery network provider is the best resource to help them detect and mitigate DDoS attacks. On the heels of that survey in mid-March; we launched the Limelight Orchestrate 3.0 platform. Over two years in the making, this next generation of the Orchestrate platform marks the most comprehensive set of enhancements to our infrastructure, software, and services in our history offering improvements with virtually all aspects of our customer experience and expanding our offerings to include a new set of services focused on security and usability. As part of the Orchestrate 3.0 launch, we announced a solution for proactive DDoS detection and rapid mitigation of attacks, while maintaining excellent performance. Another key feature of the announcement was our SmartPurge capability; content publishers need to post, manage and purge their content efficiently across the network at origin, storage and cash endpoints. With this new feature, we believe we have best in class capability that is easy to implement and can start serving the specified content almost instantaneously and with high reliability. DDoS attack prevention, purge and self-service configuration management were some of the items that our customers were asking for in our first Voice of the Customer survey. These capabilities are now generally available and incorporated into our product and service offerings. Orchestrate 3.0, including our DDoS solution and SmartPurge were positively viewed by our customers, the press and industry analysts. It’s also worth mentioning that during the quarter, Limelight become an active member of the MIT-(IC)3 Cybersecurity Consortium. (IC)3 is focused on the need to improve the cyber security of critical infrastructure through an improved disciplinary research approach. On the personnel front, Mike DiSanto recently joined my staff as Chief Administrative and Legal Officer. Mike comes to us with more than 16 years of experience representing publically traded and emerging growth companies and I look forward to his contributions. At this point, I'd would like to highlight a few customer wins. A large financial services company based in the U.S., chose our Orchestrate Video Service to aggregate their marketing videos into a single solution for management and delivery, which is particularly nice win as it is a multi-year deal. A large multinational computer security company based in New York chose our Orchestrate Storage and Delivery services to deliver their content globally. We are supporting weekly software updates distributing them globally. This is also a multiyear deal. A South Korean mobile and online game development and publishing company is using our Orchestrate delivery service to deliver content globally. Canada's largest news site chose our Orchestrate delivery and video services to facility a high-performance experience for their new tablet application. A large manufacturing company based in the US chose our Orchestrate performance service to power all of their websites globally. They needed fast deliveries of their dynamic content ensuring exceptional user experience. This was a particularly good win as they moved some of their existing vendor to us for better website performance. We are pleased that these customers and so many others like them chose Limelight for their business need and we are working hard to exceed their expectations. Success stories like these especially those who are customers moved from incumbent vendor 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. Our priorities for 2015 remain unchanged. Customer focus, improved operations, reduced customer churn and employee turnover, deliver key feature functionalities and focus on cost efficiency. Customer satisfaction was, is and remain our top priority. With that, I will turn the call over to Pete to discuss the quarter's financial performance in greater detail.

[Pete Perrone:]

Thanks, Bob. First quarter 2015 revenue was $42.3 million, cash gross margin was 50% and adjusted EBITDA was approximately $400,000. We had no Netflix revenue in the first quarter of 2015 or the fourth quarter of 2014. During the first quarter of 2014, Netflix revenue was $4.9 million. Revenue was negatively impacted by changes in foreign currency of approximately $800,000 as compared to the first quarter of 2014 and $300,000 compared to last quarter. Approximately 15% of our first quarter revenue was in non-US dollar denominated currencies. Adjusting for the impacts of Netflix and changes in foreign currency, our revenue increased by 19% compared to the first quarter of 2014 and 5% compared to the fourth quarter of 2014. Traffic volume was at record levels in the first quarter of 2015 and price compression was in line with our historical averages. Double digit unit price declines are a part of this industry and indeed helps unlock new opportunities for growth. We are continuing to lower our customer churn both in terms of number of customers as well as revenue dollars. Our quarterly customer churn in the first quarter was the lowest since 2009. We continue to grow our business with our largest accounts. Our top-20 customers accounted for approximately 56% of total revenue in the first quarter and the average revenue of these customers continues to grow at a healthy double-digit rate and at a faster rate than the corporate average consistent with our strategy. Our bottom quartile of our customers represent less than 2% of our total revenue this quarter. International revenue accounted for 36% of first quarter 2015 revenue and our deliver product family accounted for 77% of our total revenue during this quarter, which is consistent with the fourth quarter of 2014. GAAP gross margin of 39% is up 190 basis points from 37.1% in the first quarter of 2014 and down 60 basis points from last quarter. We are making progress in our ongoing data center consolidation efforts and co-location expenses decreased by 6% on a year-over-year basis despite higher revenue and bandwidth levels. Relative to Q4 2014, our operations compensation expenses were up by 11%, driven by increased headcount associated with our growth plans. Bandwidth expense in Q1 2015 increased as a percent of revenue as we added capacity and served a higher percentage of traffic internationally. As we said on our last earnings call, we expect to increase GAAP and cash gross margins through the course of this year. GAAP operating expenses were $24 million or 56.8% of our revenue in the first quarter, an increase of $1.1 million or 5% versus the first quarter of 2014. The increase is due to a $1.7 million increase in research and development expenses, primarily in payroll and related costs as we had added employees to support future product enhancements. G&A expense decreased [ph] by 3% and sales expenses were flat from last year. On a sequential basis, operating expenses increased $2 million or 9%. The increase is primarily due to higher sales compensation expense as a result of higher revenues. In addition, G&A increased by approximately $600,000 due primarily to bad debt expense, increasing from an unusually low-level last quarter and other one-time events. Adjusted EBITDA was approximately $400,000 in the first quarter, down from $600,000 in the first quarter of 2014 and $1.5 million last quarter. On a non-GAAP basis, our net loss was $0.02 per share in the first quarter of 2015 compared to a loss of $0.04 per share in the first quarter of 2014 and is flat from last quarter. Moving to the balance sheet, we had $81 million in cash and marketable securities as of March 31, 2015. Our cash usage of $12 million was high this quarter as expected. As we mentioned last quarter, we expected capital expenditures in the first half of the year to be higher than second half. And during this quarter, we spent $6.7 million on CapEx expanding network capacity. Working capital account movements also lowered our cash balance. Our net accounts receivable balance as of March 31 increased by $4.7 million from Q4 2014 as a result of higher revenue and timing of payments with our largest customers. DSO as of March 31 was 57 days versus 47 days at the end of 2014. We also paid our 2014 annual corporate bonus during the quarter, which contributed to a $3 million decrease in other current liabilities. Additionally, we spent $1 million on the share repurchase program. In the first quarter of 2015, we repurchased approximately 293,000 shares at an average price of $2.79 per share under our current share repurchase plan authorized in February 2014. As of March 31, we had approximately 99 million shares outstanding. Total employee count at the end of the quarter was 533, up 13 from the end of 2014 and up 61 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 sales. Now, I would like to update guidance for the remainder of this year. As Bob indicated, we are seeing improving trends in the industry and in our business. As a result and based on current condition, we are expecting total revenue to be between $164 million and $170 million, up from our previous guidance of between $156 million and $164 million. Second quarter revenue is expected to be between $40 million and $42 million, which is higher than current consensus’ estimates. As a reminder, in the second quarter of 2014, Netflix revenue was 13% of total revenue of $5.4 million. We expect again to increase GAAP and cash gross margins through the course of the year. Our guidance for GAAP operating expenses remain unchanged. We expect G&A spending for the year should stay roughly flat in absolute dollar terms as compared to the full year 2014 and we expect R&D and sales and marketing to increase in both dollar and percent terms as we invest to capture revenue opportunities. To support to grow, and as we accelerate the upgrade of our infrastructure, we expect capital expenditures to be between $22 million and $26 million for the year. And finally, full-year non-GAAP net loss is expected to be between $0.08 and $0.18 per share. And with that, I will hand the call back to Bob.

[Bob Lento:]

Thanks, Pete. So in summary, we are fortunate to be a key player in a fast-growing segment of the Internet. Our year-over-year financial performance, customer satisfaction, customer churn and employee turnover is improving and should continue to do so for many quarters. These Company-wide improvements have led to top line growth. Our network is more resilient and our new product offerings further differentiate us from our competitors. We have a clear and stable set of strategic and practical priorities. There is more to be done and we remain confident. With that we are raising our revenue guidance for the fifth time in as many quarters. As always, we are thankful to have talented and committed employees and to our shareholders who have been supportive as we work to create sustainable long-term value. With that, we will open it up for questions. Operator?

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Michael Turits of Raymond James. You may begin.

[James Wesman:]

Hey, guys, good afternoon, its James Wesman filling in for Michael. Bob, the 17% growth here and I’m sure you guys are doing better in terms of the competitive environment, I just wanted to get your color on the space as a whole as you guys went through the quarter. Did you -- how was the competitive environment in 1Q and in the last month versus say 4Q or the last couple of months?

[Bob Lento:]

I would say unchanged. I mean, we’re not competing against anybody new. We’re -- the competitors that we do compete with are very strong and has done a good job of providing value in the marketplace. We’re obviously proud of the growth that we were able to achieve and the improvement in our infrastructure and our relationships I think are feeling that. So, I think that we’re pleased with where we are, don’t see any increase from the competitors and the good news for us is that we’re seeing that growth come across many customers. It’s not just the one customer that’s driving the growth or even appear [ph] but it’s spread out amongst a larger group of growing relationships.

[James Wesman:]

Got it and that’s very helpful. And Pete, I know you have said that price compression for the delivery family was about in line with the average. The environment as a whole again, are you seeing any people being overly aggressive in their pricing or did you feel the environment is pretty stable there?

[Pete Perrone:]

I think it was pretty stable.

[James Wesman:]

Got it, okay. And then just last question, in the security business, Bob, I appreciate the color, I’m just wondering if you could elaborate or give us a little bit more. I know it’s only been out since March, but maybe something on wins such as data points in the security business that you can point us to?

[Bob Lento:]

We don’t really have any data points that are disclosable. What I would tell you is, as you know we just announced it in the first quarter, we have some customers that are using it in as part of our limited availability program. We expect several of those in this quarter to move to general availability and the interest from our existing client base is quite high. So, we’re encouraged by the early results in terms of interest from our customers, but it is -- it’s very early days.

[James Wesman:]

Got it, thank you guys.

[Operator:]

Thank you. I’m showing no further questions at this time. As a reminder, a replay will be available for ten days following today’s call. Thank you for your participation. This concludes today’s conference.

[Bob Lento:]

Operator, was there -- before we end it, was there question from Sameet Sinha. Yeah, I think we have one more question.

[Operator:]

I’m showing that we do have one more question from Sameet Sinha with B. Riley & Co. You may begin.

[Juan Molta:]

Hi, good afternoon. This is Juan Molta on for Sameet. I have three questions for you and the first one is regarding the video and the gaming market as you’ve seen good momentum. Can you -- are you seeing acceleration in volume and when do you expect the OTT and the 4K to start to inflect?

[Bob Lento:]

Well, I think -- so, OTT and 4K I think are really two separate issues. We’re seeing a lot of our customers with a high degree of interest in delivering 4K streams, but not a lot of that has been happening yet. OTT, we’re just coming off of the NAB Show that’s happened in Las Vegas last month and I would tell you from all the conversations we’ve had with our customers and prospective customers, OTT is, feels like it’s reaching an inflection point where there is likely to be a lot more activity in that space in the near future than there has in the recent past. There I think, everyone has seen the headlines with HBO and others and I think that's only going to continue to accelerate based on the conversations that we've had recently with many of the major broadcasters. So, we think that's good obviously for Limelight and for the industry. In terms of the game, I mean we certainly don't see any deceleration in that. If anything, there continues to be an acceleration in terms of the number and quality of games that are being released, but also in terms of updates to existing products that are in the market and we participate in that with many of our major customers.

[Juan Molta:]

Okay. Perfect. Thank you. And next question, is there any way for you to help us understand the economics, the profitability between the CDN and the value added services?

[Bob Lento:]

Really, it's a product offering that we have. This is obviously running on the same infrastructure and really the products are complementary and help each other and as we look at it as a business, we think about it in that regard.

[Juan Molta:]

So no difference?

[Bob Lento:]

No difference.

[Juan Molta:]

Good. And then the last question is, I know you touched on the security product at the, I think the last question, could you elaborate maybe qualitatively the differentiator in this market with the security products and what type of customers you're targeting with it?

[Bob Lento:]

So, the differentiator for us is that obviously it's tied to and very closely aligned with our CDN capability. There are lots of choices for DDoS in the market, not many of which have the breadth and scale of our network to be able to absorb the tax and to handle them efficiently. And so that's the real differentiator for us. In terms of the type of customers that are interested in that, I mean if any of our customers could meet all of them, that website, I mean just going to be protected against DDoS.

[Juan Molta:]

And the feedback, the initial feedback on it?

[Bob Lento:]

As I said earlier, it's been very positive, there is a high degree of interest. Again, it's early days. Some of the customers have DDoS through other companies and are looking for alternatives and some don't have any at all and are looking to add that as a new layer of security and so really, it’s kind of a mix of the both, but again, very early days for us in terms of our participation in that market.

[Juan Molta:]

Okay. Thank you very much.

[Operator:]

Thank you. Our next question is a follow-up from Michael Turits with Raymond James. You may begin.

[James Wesman:]

Hey, guys. It's James Wesman again. Thanks for the follow-up. I just wanted to drill a little bit more in to the growth drivers in delivering the quarter, was it mostly from online video, was gaming a big contributor, was it software download like you guys spoke about earlier, anyway you guys can stack right them or give us some color there?

[Bob Lento:]

Yeah. Really, there was -- I mean, there was three basic types of delivery that we participated in, live streaming, video on demand and software updates, which include the gaming stuff and you’ve really seen good growth across the board. And we have several customers, more than several but several customers that will use us one or more of that type of traffic and so I don't know that, there is a standout in terms of, oh, it was really driven by growth in software, you never move in that gaming, I don't know that we could point to that, we've really seen good growth across our customer base. What I can tell you is that our largest customers are growing faster than the corporate average. So a lot of the growth came from our top 100 customers.

[James Wesman:]

Got it. And then just my last question, in terms of overall traffic growth for the quarter, did you guys feel like it accelerated or decelerated versus fourth quarter, just overall?

[Bob Lento:]

Well, I think in general, for us, it's accelerating. If you think about the example I gave you, where we set a record for traffic in the first quarter of 2013, it then took us till the fourth quarter of ‘14 to break that record and then one quarter later, we broke it again and so for us, traffic has been accelerating, obviously offset by price decreases, and given the increase in our guidance for the full year, we are obviously expecting that trend to continue.

[James Wesman:]

Got it. I am sorry, I just wanted to flip in one more. Obviously you know, customer churn of only down 15 quarter-over-quarter, that’s an improvement over 4Q. Was that in-line with your expectations or above or below?

[Bob Lento:]

Well, in-line with our expectations, and I guess, I will take this opportunity to say that we are less focused on the number of customers versus the quality of customer. And so what I am really concerned with is the net adds versus gross disconnects, are the customers coming in more valuable in terms of revenue and profitability than the ones that we are losing. I think we spend more time looking at that and setting a target for this quarter of 15 or 16 net loss. I am more concerned with which customers are we losing, are they high revenue, are they high profitability, which types of customers are we winning, are they higher revenue than the ones we are losing. We still have over 1,000 customers. So the interesting thing about this business, talked about the growth in our Top 100. Our bottom 25 percentile customers account for less than 2% of our revenue. And so obviously losing a customer that’s in the bottom 25% is a lot of different than losing a customer that’s in the Top 100. So I am more focused on that than the absolute number.

[James Wesman:]

Great. Thank you, guys.

[Operator:]

Thank you. Our next question is from Kevin Smithen of Macquarie. You may begin.

[Will Clayton:]

Hi, guys, this is Will on for Kevin. My first question is, you were talking about the difference in revenue generation from your Top 20 customers versus bottom quartile. Is there – I know, there is a focus on changing the profitability profile of customers. Is there a difference in the margin profile of the Top 20 versus that bottom 25 that is material?

[Pete Perrone:]

We think so. When you consider everything, not just obviously the gross margin aspect and the use of our infrastructure, but when you consider costs into our network operation center and consider back office costs, and things of that nature, then obviously the smaller customers become higher to us as a percentage of revenue than our large customers. So as Bob said, the focus we will add is on, the growth rates that we have on our existing customer portfolio is more important to us at the revenue level than the customer account level, and obviously attracting new customers to Limelight across our product suite is also very important to us, and so internally [ph] we are very focused on.

[Bob Lento:]

Attracting the right customer.

[Pete Perrone:]

Right.

[Bob Lento:]

So, we are not necessarily looking, for example, just to replace a lot of small customer with a – again a small customer, right. So we are kind of a balancing the portfolio the right way relative to the size of customer, profitability as well as in terms of our focus in the marketplace.

[Will Clayton:]

Absolutely. I assume more of the first words on the – if you quantify the impact of data center consolidation and if you have a data point at a given point to you? And then the second one is, the implied capital intensity for fiscal ’15, is that the new run rate as it looks to be about 300 basis points higher than for your ’14 ? We knew some of that was coming, but as the implied capital intensity, what you would expect going forward?

[Pete Perrone:]

On the first one in terms of quantifying some of the data center consolidation savings we could have, other than that guidance that I gave that we expect to continue to increase gross margin, probably you won’t quantify further do knock. But I would say though, looking backward, we were able to decrease that expense as I said in my prepared remarks by 6%, all of those traffic levels are higher. And I think it’s early for us in terms of executing against that consolidation. I think from a planning standpoint, we have come a long way, but realizing the savings, I think it is fairly early for us. With respect to the next question, the guidance that we gave, we feel good about. It’s an increase of CapEx guidance, it’s an increase from last year and we think it reflects both the growth opportunities that we have as well as adding resiliency to our network. And in addition, I think we are planning for of that total amount to be heavier in the first half than it is in the second half.

[Will Clayton:]

Okay, that’s very helpful. Thank you.

[Operator:]

Thank you. I am showing no further questions at this time. As a reminder, a replay will be available for 10 days following today’s call. Thank you for your participation. This concludes today’s conference. You may now disconnect and have a wonderful day.

[Bob Lento:]

Thank you.

[Pete Perrone:]

Thank you.