Limelight Networks, Inc.
Q2 2015 Earnings Call Transcript

Published: 3 Aug 2015

[Operator:]

Good day, ladies and gentlemen. Welcome to the Limelight Networks 2015 Second 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 like to turn your call over to Sajid Malhotra, Limelight’s Chief Strategy Officer.

[Sajid Malhotra:]

Thank you. Good afternoon and thank you for joining the Limelight Networks second quarter 2015 financial results conference call. This call is being recorded on August 03, 2015, and will be archived on our website for approximately 10 days. Let me start by quickly 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 Q3 and the full year 2015 and beyond, our priorities, our operational plans 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 discussed in our periodic filings including our most recent annual report on Form 10-K. The forward-looking statements on this call are based on information available to us as of today’s date and we disclaim any obligation to update any forward-looking statements, except as required by law. 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 would now like to turn the call over to Bob Lento.

[Robert Lento:]

Thanks, Sajid. Good afternoon and welcome. Limelight delivered a solid second quarter with strong revenue and margin growth. Our current quarter shows progress is continuing and we believe it is sustainable. During the quarter we made significant investments to expand the capacity of our network and we continued to aggressively invest in R&D. These investments add to our capabilities and our focus on improving our infrastructure and into introducing new features and functionality. Employee count is growing and our employee turnover is the lowest it has been in many years. Our reach is expanding, the relationships with our customers are strengthening, and the company is growing revenue again. We remain confident in our ability to execute and as a result of the increasing business momentum, we are again raising our revenue guidance confirming our CAPEX guidance and tightening the range of our non-GAAP loss per share expectations. Let me share the highlights from the quarter and some reasons for my enthusiasm about our future prospects. For the second quarter of 2015, we reported revenue of $43.8 million ahead of our plans and ahead of our $40 million to $42 million guidance. This was the highest reported revenue in nine quarters. Excluding the impact from Netflix and currency headwinds, revenue was up a strong 25%. Sequential GAAP revenue was up 3% after being up 4% sequentially last quarter. The strength leads me to believe we have turned the corner and are regaining lost market share. We focused on our largest customers because that is where we believe the growth is highest and we are winning. In our revenues, the largest 100 customers are growing at a faster rate than the remainder. At the same time, we have lost some of our smaller customers. Some of this is being due to our trend setting legacy products. Having worked both extremes of the customer base, average quarterly revenue per customer is showing a healthy increase, up from $35,000 per customer a year ago to $42,000 per customer today. Yet no customer accounts for more than 10% of total revenue in the second quarter of 2015. Relative to last year's reported results, GAAP and cash gross margin in the second quarter improved over 300 basis points. Even after the realignment of cost and expenses which Pete will provide further detail on his remarks, GAAP gross margins were up 130 basis points over last year's results. GAAP loss was $0.06 per share, non-GAAP loss was $0.04 per share, and adjusted EBITDA was a positive $900,000. This was a good quarter for us. On a qualitative basis, we had a few milestones and successes that I would like to share. First, I am proud to say that once again during this quarter, we had a record breaking traffic day, month, and quarter. If you remember, Q1 was also a record breaking quarter for traffic. In this second quarter we achieved a new record for both peak bandwidth and terabytes delivered. Content is increasingly moving online, and distribution is increasingly getting mobile. This was a healthy trend for our industry and for Limelight. To confirm elements of this opportunity, in May we released our state of online video research which demonstrated a clear shift in video consumption trends. This research reveals that under the right circumstances, 90% of consumers are open to cutting the chord of traditional cable and Pay TV subscription in favor of over the top video services. In June we launched the Limelight Orchestrate Solution for software and device manufacturers that optimizes end to end digital file delivery. This solution addresses the challenges organizations face with the ever increasing volume and cyber files and software updates that must be delivered to end users. Limelight makes it possible to simplify the process of delivering software to end users with reliable, fast, secure, and scalable global delivery anywhere at any time. The solution as with all of our industry solutions to date was positively received by our customers, the press, and industry analysts. Last quarter I talked about a key feature of our March Orchestrate 3.0 announcement, our smart purge capability. Content publishers need to post, manage, and purge their content efficiently across the network at origin, storage, and cash endpoints. Our customers are seeing great results with this capability. Recently, an American entertainment company purged more than 4000 objects from cash in under 5 seconds getting detailed confirmation of the purge in 25 seconds. It was also important for us to deploy this capability of scale. Recently, a multinational technology company purged 2.6 million objects in less than 5 seconds. Normally this would take hours across any large network and with no assurance of complete success. Now Lime light can provide service level guarantee against this capability. This is a non-trivial differentiation, an example of how we’ve used our R&D investments to develop and deliver best of reach capability for our customers. We believe our competitors can only view this in ours and on a best efforts basis. This capability is a direct result of us working towards our customers and working across Limelight to fill the market need. And I take a moment to recognize and thank the many employees of Limelight who are making a difference. Also during the quarter, the U.S. Court of Appeal for the Federal Circuit issued a favorable ruling in our long standing patent case with Akamai affirming that we are not liable for patent infringement. Akamai has appealed that ruling. We invest in intellectual property and respect the rules governing its use and we will continue to protect the interest of our customers and shareholders. We are pleased that the Federal Circuit panel once again held in our favor. Today we hold over 125 patents up from a 100, a year ago. At this point I’d like to highlight a few customer wins. One of the largest satellite radio services in the U.S. chose our Orchestrate delivery and performance services to deliver to mobile devices. We are delighted to be delivering audio, text, and graphics for this customer. A large media company based in Northern Europe chose our Orchestrate delivery video and storage services to deliver their video content predominantly in country but with which future global plans. We are proud that they chose Limelight because they wanted to have a single solution that would simplify their workflow and allow them to be agile and meet their delivery needs. A multinational electronics company based in South Korea chose the Limelight Orchestrate delivery service for global distribution of their software and firmware. This was a particularly nice win as we were able to provide higher quality support as well as our differentiated smart purge functionality allowing them to move to Limelight from their existing content delivery vendor. An American digital advertising company chose our Orchestrate delivery and video services to deliver video and news clips within their social media application. We are pleased that they chose Limelight because they wanted a true partner that understood their business needs, provided exceptional customer service, and allow them to scale quickly. One of the biggest video platforms in the world, a European video sharing website chose the Orchestrate delivery service to deliver globally, in particular enable them to expand in the Asia Pac region. They wanted a trusted global partner and we are very pleased they chose Limelight. We are pleased that these customers and so many others like them chose Limelight for their business needs and we continue to work hard to exceed their expectations. These are just a few success stories that reinforce we are on the right path with the right products, priorities, and people. As I said in our calls earlier this year, our priorities for 2015 remain unchanged. We remain focused on our customers, improving operations, reducing customer churn, and employee turnover, and delivering key products functionality all while maximizing internal cost efficiency. Customer satisfaction was, is, and will remain our top priority. With that I will turn the call over to Pete to discuss the quarter's financial performance in greater detail.

[Peter J. Perrone:]

Thanks, Bob and good afternoon. As Bob said we had a good quarter. Second quarter 2015 revenue was $43.8 million, cash gross margin was 52.7%, and adjusted EBITDA was approximately $900,000. During the second quarter of 2014, revenue from Netflix was $5.4 million and we had no Netflix revenue in the second quarter of 2015. Revenue was negatively impacted by foreign currency fluctuations by approximately $1 million year-over-year and $300,000 sequentially. Excluding Netflix, our revenue increased 22% year-over-year and adjusting for currency changes increased 25%. Sequentially our GAAP revenue increased 3% and adjusting full impact of currency fluctuations, sequential revenue growth was 4%. In Q2 international revenue accounted for 38% of total revenue and approximately 16% of our second quarter revenue was in non-U.S. dollar denominated currencies. Our volume was at record levels in the second quarter of 2015 and our largest customers are growing the fastest. As you would expect due to their volume, these large customers also have the highest volume based discounts. Because of this dynamic, we saw a price compression at a higher than normal rate and we expect this dynamic to persist through the balance of the year. Despite this we gained revenue at a strong pace and client demand far outpaced the price compression and we did improve GAAP gross margins year-over-year. We maintained a pricing discipline and we reduced cost at a faster rate than our average price declines. We had net customer churn of 45 in second quarter of 2015 which included 18 customers with decommissioned product offerings. These 18 customers accounted for approximately $800,000 of revenue on an annualized basis. We continue to grow our business with our largest accounts. Our top 20 customers accounted for approximately 59% of total revenue in the second quarter of 2015. These customers continued to grow at a healthy double-digit rate, consistent with our strategy and focus. Our delivered product family accounts for the vast majority of our revenue and was 77% of our total revenue during this quarter. GAAP gross margin of 41.4% is up 300 basis points from 38.4% in the second quarter of 2014 and up 240 basis points from Q1. Effective April 1st, we reorganized GAAP responsibilities with certain employees and as a result such employee expenses were made from cost of services to research and development. This reorganization resulted in approximately $750,000 or 170 basis points of payroll and related employee cost during the quarter in research and development in Q2 2015 and we expect a similar impact in future quarters. After adjusting for this reorganization and in support of our growth plans, our operations headcount associated expenses did increase year-over-year. We are making progress in our ongoing data center consolidation efforts as co-location expenses decreased on a year-over-year basis despite higher revenue and increased capacity. Total bandwidth expenses as a percent of revenue were essentially flat on a year-over-year basis despite higher revenue and increased traffic volumes including increased volumes and higher cost international locations. These bandwidth expenses are heavily dependent on customer volumes and geographic mix. Together these two items contribute 230 basis points to our margin expansion. GAAP operating expenses were $24.4 million or 55.6% of our revenue in the second quarter of 2015, an increase of $1.5 million or 7% versus the second quarter of 2014. R&D expense increased $2.8 million or 57% year-over-year primarily due to higher payroll and related costs as we have added employees to support future product enhancements and increased network resiliency. This increase in expense includes the previously mentioned reorganization. Without that reorganization research and development expenses would have been 42% higher on a year-over-year basis. Sales and marketing expense increased by $600,000 or 7% versus a year ago quarter as we have added new sales employees to drive our growth demands. G&A decreased by $1.6 million year-over-year primarily due to reversal of a previously approved legal expense and to a lesser extent due to a reduction in bad debt expense. On a sequential basis, operating expenses increased $300,000 or 1%. This increase was primarily due to higher R&D compensation expense. Other income and expense decreased $100,000 from Q2 2014 and $1.9 million sequentially primarily due to fluctuations in foreign currencies. Adjusted EBITDA was approximately $900,000 in the second quarter of 2015, down from $1.3 million in the second quarter of 2014 and up from $400,000 last quarter. On a non-GAAP basis, our net loss was $0.04 per share in the second quarter of 2015, compared to a non-GAAP loss of $0.04 per share on the second quarter of 2014 and $0.02 per share last quarter. Moving to the balance sheet, cash and marketable securities were down $6 million sequentially to $75 million as of June 30, 2015. During the quarter we spent $5.4 million in capital expenditures. DSO as of June 30, 2015 was 65 days versus 47 days at the end of 2014 and 57 days at the end of the first quarter. Although DSO increased due to the timing of payments received from our largest customers, we believe the quality of our receivable balance has improved along with our customer base. We target mid-50s for our DSO. As of June 30th, we have approximately 100 million shares outstanding. Total employee count at the end of the quarter was 563, up 30 from the end of the first quarter and up 86 from the year ago quarter. We expect headcount will continue to increase but at a slower pace as we expand our business and continue our investments in R&D and sales. Based on these results, improving trends in our business, and our expectations for the balance of the year we are updating our guidance as follows. The company is expecting total revenue to be between $170 million and $174 million, up from our previous guidance of between $164 million and $170 million. Third quarter revenues is expected to be between $42 million and $44 million. As a reminder in the third quarter of 2014, Netflix revenue was $1.2 million. We expect to increase GAAP and cash gross margins for the year with some quarter-to-quarter fluctuation as we work through a capacity expansion in parallel with data center consolidation. For the full year we expect to improve both measures by approximately 200 basis points including a partial year impact in the recently completed realignment of our people. Our guidance for GAAP operating expenses remains unchanged. We expect G&S spending for the year should stay flat in absolute dollar term as compared to the full year 2014 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 $0.16 per share. We expect continued decreases in cash usage even as we support the growth and as we accelerate the upgrade of our infrastructure. While we are raising the revenue guidance, we are leaving the capital expenditure guidance unchanged of between of 22 million and 26 million for the year. We believe we can deliver this incremental revenue through better utilization of our infrastructure and through software enhancements. With that let me hand the call back to Bob for some closing comments.

[Robert Lento:]

Thanks Pete. So in summary Limelight delivered a strong second quarter. Our top line growth was strong and was coupled with margin expansion and expense discipline. With the improvements and return of customers, come pressure to perform even better. We are not perfect but we are definitely moving in the right direction and at a respectable pace. The stability of our strategy and our priorities provides clarity to our ambition. Overall, momentum is strong and we benefit from participating in an industry with broad base demand for our capabilities. As always we are thankful for the trust of our customers, the hard work of our talented and committed employees, and support of our shareholders. With that we will open the call for questions. Operator?

[Operator:]

[Operator Instructions]. Our first question comes from the line of Michael Turits with Raymond James, your line is now open.

[Michael Turits:]

Hey guys, couple of questions, first of all just anything going on, so the guidance to actually split it down sequentially to midpoint, is there something that has happened there in terms of pricing that you mentioned, is there a stair step there or something that would account for it?

[Peter J. Perrone:]

Well, really it isn’t. We are first of all, the guidance and our commitment to make that guidance is obviously very important to us. The second thing I would say is that we have increased the full year by $5 million and just about half of that is coming in the second half of the year. And the final thing I would say is that there is a lot of events in the second half of the year and to some extent both we and our customers don’t have perfect visibility on the timing and magnitude of those events. So, I think the guidance we put forward balances, balance with all of those factors.

[Robert Lento:]

And the only thing I would add Michael, it is Bob, while we didn’t give specific guidance for the third quarter up until today, the guidance that we have given is an increase over what was consensus.

[Michael Turits:]

I love -- obviously we want to make sure that some of your expectations and doing well relative to them, but if there is anything that is happening sequentially that we should know about, I just wanted to make sure I had my arms around that and then the other question was just, I don’t know if you can comment or not but obviously the big topic of discussion was the opportunity around large software operating systems download, so anything you can share there would be helpful?

[Robert Lento:]

Yeah, I would say is obviously the latest one that has been announced has been Microsoft's delivery of Windows 10. We are participating in helping them deliver that to their end users. And I can't speak for them in terms of whether continuing expectations or not, but we are happy to be a valuable supplier as part of that, and we are delivering that product and helping to deliver it amongst other CDMs [ph] as well. And that is a little bit of what Pete was talking about in terms of the volatility, the exact timing of other game releases or software updates. It is not exactly known and sort of things going to fluctuate from quarter-to-quarter.

[Michael Turits:]

Okay, and the possible confidence whether or not your CAPEX build was -- whether there was a significant portion that was due to building our capacity forward at this time?

[Peter J. Perrone:]

We don’t break down the CAPEX and we are not going to comment on it on any one particular client. But we will make a general statement that we are building for the overall growth of the traffic that we deliver which is certainly for more than one customer.

[Michael Turits:]

Okay.

[Robert Lento:]

I will just say [indiscernible] has been strong and we have had that outlook for a couple of quarters and it has been building in general for pretty strong volumes but there is not any specific customer with them.

[Michael Turits:]

Okay, great. Thanks very much.

[Robert Lento:]

Thanks Michael.

[Operator:]

Our next question comes from the line of John Charbonneau [ph] with Cohen and Company. Your line is now open.

[Unidentified Analyst:]

Great, thanks for taking the questions. In terms of OTT, can you talk a little bit about when you would expect it to be a meaningful driver of demand and what kind of assumptions around your remaining guidance for this year, thanks?

[Peter J. Perrone:]

So, the assumptions that we have made for this year is that it is going to be a pretty small increase in traffic for the year and was certainly part of our build out that OTT services will increase. But I don’t foresee -- well let me put it this way, there isn’t any material increase in revenue including our current guidance for OTT.

[Unidentified Analyst:]

Okay, great, thanks and then just in terms of the balance sheet obviously it continues to be very strong. Can you talk about how we should be thinking about the capital allocation over the next several quarters between CAPEX, maybe stock buybacks, and then potential M&A, thanks?

[Robert Lento:]

We have an expectation of decreasing our cash usage in the second half of the year and then the other piece of the puzzle and one of your questions was CAPEX and we gave some guidance on that but we are still in the range that we had for the full year. So I think at the beginning of the year it is probably going to be about the same as the second half of the year with respect to the CAPEX. Stock buyback is something that we do opportunistically. We weigh that versus further uses of our capital for total shareholder returns at the end of the day. And we think we have got a good situation to deploy capital in our business and that’s what we did over the last quarter.

[Peter J. Perrone:]

And with respect to the third part of your question, M&A, today we don’t have any plans to utilize cash for M&A purposes. Obviously we watch the market closely and if something were to come along here in terms of new capability or the opportunity to level up customers acquisitions, we would certainly look at it. But nothing -- it’s not part of our plans in the foreseeable future.

[Unidentified Analyst:]

Okay, great. Thanks.

[Operator:]

Thank you. Our next question comes from the line of Mark Kelleher with D.A. Davidson. Your line is now open.

[Mark Kelleher:]

Great, thanks for taking the questions. Pete, could you just reiterate your gross margin guidance, I just want to make sure I got that. I thought I heard a 200 basis point improvement, is that right?

[Peter J. Perrone:]

For the full year yes, versus 2014 for the full year of 2015.

[Mark Kelleher:]

On cash gross margin basis.

[Peter J. Perrone:]

GAAP gross margin basis.

[Mark Kelleher:]

GAAP gross margin basis, okay, perfect and then sort of to follow up on that, you have been redoing your infrastructure and getting some nice improvement there, how far along are you in that process, how much longer can you continue to tune up your infrastructure to get higher gross margins?

[Robert Lento:]

I would say that we got a long way to go there. We really just started rolling out those plans coming into this year with a lot of that hitting in the second -– starting to hit in the second half but I would tell you there is plenty left to do in that area both from a co-location expense standpoint but also part of the investment in our R&D is optimizing software to get greater throughput through our servers. So there is sort of three ways that we’re doing that both optimization of our physical plant as well as optimization for software engineering and I would tell you, we are just in the beginning stages of that.

[Peter J. Perrone:]

Yes and the actual realization of co-location expense reduction relative to revenue is very early in that.

[Mark Kelleher:]

Okay and then just another question, the -- you’ve talked in the past about perhaps offering some security products, maybe some DDoS protection is that still on the drawing board, what’s your thoughts about doing things in conjunction with your CD and with your delivery?

[Robert Lento:]

Yes in fact we announced our DDoS offering late in the first quarter in March of the first quarter. In the second quarter we now actually have customers, some global brands that are live on our DDoS offering which in the second quarter was available on a limited availability basis. And that will grow GA as we go into the third quarter. So it’s not a material part of our revenue today and we don’t think it will be for the foreseeable future but we do see strong customer demand for DDoS and other security offering and we are pleased with where we are today in terms of our offering and customer interest.

[Mark Kelleher:]

Okay, great, thanks.

[Operator:]

Thank you. Our next question comes from Will Clayton with Macquarie. Your line is now open.

[Kevin Smithen:]

Yes, actually its Kevin Smithen, can you talk a little bit about your vast up sell in the quarter, the Orchestrate product and other sort of non-traditional revenue, how did it do in the quarter and what’s your backlog for the rest of the year?

[Robert Lento:]

So we don’t really provide backlog information Kevin. What I would tell you is for us the core of our business obviously is our delivery, core CDN capability. And the other products are value added products around that and so in particular our storage and video delivery capability, we are seeing good leverage of our R&D investments there. But they really all of those future capabilities are in support of us being able to either deliver at higher quality or deliver more in different types of used cases.

[Kevin Smithen:]

That’s helpful, thank you.

[Operator:]

[Operator Instructions]. Our next question comes from the line of Sameet Sinha with B. Riley. Your line is now open.

[Sameet Sinha:]

Yes, thank you very much. Let’s talk about price compression, just to understand this better were these competitive bids or just you gave higher price concessions was because of higher commitment that you could get from these customers? And the second one was in terms of the non-CDN, your non-stock -- that’s been in the market for a couple of quarters, DD0S for about a quarter or so, how should we think about growth from those products coming in if not in 2015, in 2016, any thoughts on that direction? And third question Pete, you spoke about restating these -- the numbers, you had a restatement previously as well. Just wanted to see if these -- the new restatements can we get a pending schedule for previous quarters?

[Peter J. Perrone:]

Let me take me it in order and you help me if I miss something there but on the pricing, the overall market price moves are in line with historical averages. The dynamic that we saw was a mix shift and having a higher percentage of our revenues from higher volume customers. And that’s what I was relating on the call there. So we are in line with historical averages I guess from a contract renewal standpoint. Our overall average price went down a little faster than that due to mix shift of volume customers. Let me take the third one and then I’ll hand it back to Bob and maybe he could clarify what have been in the Orchestrate question but let me take the third one. There isn’t any sort of restatement. We literally had some employee responsibilities change and now the appropriate location for them in our P&L has moved from cost of goods to this quarter R&D expense. And it’s a very small number. In fact it was 750k as I said in my remarks that's a GAAP number and those people, we expect them to be there in Q3, Q4, etc. So that will be the impact going forward and that number is enough to give you something to go backwards to do an apples-to-apples comparison.

[Robert Lento:]

So the geography changes not a restatement. And we can come back to get some follow on questions to those but in terms of Orchestrate 3.0, we are seeing great response from our customers. We talked about the new purge capability that we have. We are getting lots of really good feedback on that. We did -– we announced our self service capability in the fourth quarter. We did an uplift to that as part of the 3.0 announcement and we have more customers today managing their configurations to our self service capabilities. We uplifted our adaptive bit rate stream for video delivery, increased our capabilities in digital rights management. So there is a lot of stuff that came out in 3.0 that our customers are adopting very quickly either because they have been asking it for a while or they were on an older version and switched to the new version in the case of purge. So we are quite pleased with the customer adoption of the new technology.

[Sameet Sinha:]

Great, thank you very much.

[Operator:]

At this time I am showing no further questions. Ladies and gentlemen thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.

[Robert Lento:]

Thank you.