Limelight (LLNW) continues to begin to put the first-quarter-as-a-public-company debacle behind it. The pre-announcement of a better-than-expected top line in Q3 cheered Morgan Stanley’s Peter Kuper, who is still neutral on the stock
Comment: Limelight’s preannouncement yesterday implies that more robust customer adds and slightly higher revenue per customer are offsetting some seasonal pressure. Improved guidance is not quite back to the level we forecast for Q3 when we initiated [before the Q2 disaster] but it does represent some forward momentum. Detail around performance below the revenue line was not offered so we will need to wait until November 5th for confirmation that operating margin did not suffer at the expense of revenue.
What’s New: Limelight now estimates Non-GAAP for Q3’07 between $27.5 and $28 million, above previous guidance of $25.5 to $26.5 million…. Net new customer adds were also stronger than we anticipated in the quarter with the active customer base growing to approximately 1,000 versus our estimate of 986. Preliminary results indicate average revenue per customer higher than our forecast with an estimated annualized revenue per customer just 1% lower than Q3 last year. So if Limelight is experiencing pricing pressure, it appears to have offset it with volume in the quarter.
Implications: We remain Equal-weight on the stock as the preannouncement represents improvement but not quite to levels we expected a few quarters ago. We look for indications on the earnings call that better revenue growth translated into better operating performance as well. Evidence of operating leverage over top line growth would get us more positive on the stock at a time when investors are nervous about competition in the CDN market pressuring margins.