Limelight Networks (LLNW) Feeling Pricing Pressure, Q1 Misses

A stinker for Limelight Networks: The company missed Wall Street’s expectations for revenue and EPS, and weak revenue guidance will disappoint. We expect shares to trade down. (Sure enough, they’re down after-hours. First 12%, now 4%.) Release.

What’s hurting Limelight? One of its biggest customers — we assume Divx’s (DIVX) Stage6 site — which was around $1 million a month in bandwidth bills, shut down at the end of February.

And CEO Jeff Lunsford says an industry-wide price war, specifically for big-client, rich-media content like video, is hurting them. He hopes to make up for it with more enterprise, e-commerce, and government business, where there’s less pricing pressure. No commentary on the Hollywood writer’s strike, which Lunsford said would cost Limelight millions during his Q4 earnings call.

One bright spot: The company’s patent war with Akamai Technologies (AKAM) hasn’t yet killed Limelight’s ability to sign up new customers. Limelight (LLNW) says it signed up 183 new customers during the quarter, up from 84 in Q1 2007. They said 77 of those new customers signed on in March, after the verdict came out.

These seem like gross additions, not net additions, so we don’t know the full impact of the patent situation — these numbers don’t take customer losses into effect. (Nor do they tell us anything about the size/pricing of the deals.) We also don’t know if any of Limelight’s big, important customers are considering taking all (or more) of their business to Akamai.

Key metrics:

Revenue: $30.2 million, vs. $31.3 million Street consensus

Non-GAAP EPS: ($0.02) loss, vs. $0.02 Street consensus

Q2 revenue guidance: $28-30 million, vs. $31.9 million Street consensus. Flat-to-down sequentially in Q2. Not good.

Non-GAAP Q2 EPS guidance: None given, vs. $0.02 Street consensus


5:03 Call begins. Lunsford talks up revenue growth.

5:04 MySpace, Viacom renew. Oprah, Sun Microsystems join as subscribers. More than 1200 active customers.

5:05 Elimination of one customer (Divx Stage6?) allowed to reduce capex, but also contributed to margin compression. Revenue flat from Q1 to Q2 (or down) because of large customer disappearance. Expect new customers, diversification, to help.

5:07 Talking up new branding, etc. First patent for DRM.

5:08 Continued to see “aggressive pricing in the high-volume media sector by carriers and CDNs.” This trend is contributing to slower top-line growth. Looking to diversify with new products. Not seeing price pressure in enterprise, e-commerce, and government. Looking to expand further into them.

5:10 Approximately half of LLNW’s business not alleged to infringe Akamai patent, including software downloads, international, live streaming, non-traffic CDN services. Think they will prevail in courts over long-run. As of call, court has not set definitive schedule for resolving motions. Appeals may follow. Taking tech and operational steps to mitigate financial impact of accruing for potential damages. Accrued for damage award. Will not comment on ongoing litigation during Q&A.

5:12 CFO going over numbers from release. Decline in gross margin from a year ago primarily attributed to higher fixed network costs as a percentage of revenue. Related to expansion of network infrastructure because of higher anticipated traffic/revs. Expect to see margins get better.

5:15 Expect percentage of infringing revenue to decrease; 54% now.

5:17 Guidance includes market price dynamics in rich media sector and shutdown of large customer. Not providing earnings guidance at this time.

5:18 “Feel good about quality and strength of platform and sales momentum” says CEO Lunsford.

5:19 Q&A begins.

5:21 No more commenting on more specifically about workarounds. At end of Q2 will get an update, and will see in financials whether needed to accrue for additional penalties.

5:22 Large site, rich media sector, seeing pretty aggressive price moves. Quite well equipped to compete with. Large customer — last quarter weren’t sure they were going to shut down site, but they did.

5:24 On low end of market a bit higher churn than we’ve seen during the quarter. It’s very common: In social networking space, folks are struggling with monetization. Always purposefully exposed ourselves to emerging sector. Sometimes they don’t get their funding because businesses aren’t viable.

5:28 When will bit rates increase? (HD) Last mile still can’t handle big stuff. Seeing in Korea almost 3-4x the amount of average data consumed per end client device. When those pipes open up, believe there will be a substantial growth in consumer pull? How is litigation affecting sales cycle? Obviously a topic of conversation. Doesn’t seem to be impairing choice customers are making.

5:30 Normally renewing customers at higher overall revenue rate. Getting better unit price with more volume. Existing customer base = growth upon renewal. Don’t have exact quantification but it’s growing. Has it changed over last several quarters? How much more service buying, etc.? No big change in amount of bandwidth people are buying other than sort-of typical growth rates we’ve seen in the past.

5:32 We don’t break out routinely average new contract size. Perhaps could back into it. But avg contract size hasn’t changed radically from where it’s trended in past. Not going to break out enterprise as separate reporting, but will give investors milestones as we expand.

5:33 Traffic growth on network slowing? When growing as fast as LLNW adding customers, sort of look at overall growth. One very large customer went dark. But I’d say that within blended customer base haven’t seen any dramatic slowdown in their growth rates.

5:35 Seeing AT&T’s presence in the market? No comment.

5:38 Big customer went dark March 1. (Divx Stage6, which was full of pirated stuff.) Close to a million a month.

5:44 About 100 customers in enterprise biz.

5:45 Q&A over. Call over.

See Also:
Akamai Legal Victory Could Also Be Big Business Win
Limelight CEO: Writers Strike Costing Us Millions
Limelight Networks (LLNW) Q4 In-Line, Guidance Disappoints

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