Web content delivery firm Limelight Networks (LLNW) posted impressive Q2 results, beating the Street’s revenue expectations, and posting a slightly smaller loss than analysts expected. And Limelight says Q3 will be solid, too — its guidance is slightly above the Street’s expectations.
What could potentially cause Limelight stock to hang Wednesday? The company says margins will be dinged in the second half of the year as it starts a major stage of building out its network to handle more traffic — for potential big clients that haven’t guaranteed the company any traffic yet.
Also of note: The company says pricing continues to be competitive — it’s the primary factor affecting Limelight’s revenue growth, CEO Jeff Lunsford said on the company’s earnings call.
And how is the softer economy impacting Limelight? Not directly, Lunsford said. But some of his potential customers — primarily riskier startups — are getting less venture funding, which means less cash to spend on CDN services from Limelight. Lunsford says he’s coping with that by focusing on quality customers — and tightening Limelight’s collection policies.
Revenue: $30.3 million vs. $28.89 million consensus
Adjusted EPS: -$0.02 vs. -$0.03 consensus
Customers: 1,291 vs. 1,317 (Jefferies)
Q3 Revenue: $31 million midpoint vs. $30.8 million consensus
LIVE Conference call notes:
5:00 Call begins.
5:03 CEO Lunsford going over results. Comments today: Growth of customer base, general market trends, litigation. Working on enterprise; added about a dozen new ones in this area. Added CNET Networks, Checkpoint, Gree, major European broadcaster. Renewed with Netflix, Veoh, Disney.
5:06 Tighter venture funding for “emerging” (startup) CDN customers, emphasising quality vs. quantity, tightening up payment policies. Still thing good to be exposed; appropriately, not overly exposed to emerging segment. No lessening demand for services, intense competition between traditional media and Web. In the beginning of a decade-long shift, think as long as we can maintain our network, will continue to benefit.
5:08 Akamai patent update: On July 1, US Dist court issued rulings denying permanent injunction as premature.
5:09 More stuff pending; Sept. 24 hearing. Can’t discuss technical actions, would like to report that we decreased traffic infringing from 54% to 36%. Less than $1 million damages in Q3.
5:09 Level 3 trial set to begin Oct. 14. Class action suit: Federal court dismissed. Will not comment on litigation during Q&A.
5:10 Matt Hale CFO joins. Net loss per share of 18 cents.
5:12 Better margins from lower variable network costs as a percentage of revenue. Expect margins to compress in second half as capex cranks up.
5:14 Expect infringing revenue to shrink substantially as take technical steps going forward. Accrual to be less than a million in Q3.
5:17 Revenues $30-32 million expected in Q3. Not providing earnings guidance, want analysts and investors to be aware, based on substantially large traffic expectations, going to substantially expand network. Model margins back to Q1 levels, model adjusted EBITDA to be down sequentially in Q3.
5:18 $8 million to $9 million of capital purchases in Q3. Lunsford: Continued growth in media and entertainment. Right product set to compete, and to expand into ecommerce, enterprise and government.
5:19 Q&A begins.
5:20 Where’s large traffic coming from? Existing customers, new potential customers? Jeff: Blend. Signed up some major new “potential new traffic commitments” very large customers that use their own or other CDN networks. Just have to execute well, get that traffic shifted to LLNW platform. Believe will get a substantial portion of that traffic, you need to build ahead of that traffic so you’re prepared when it shows up. Others working in capacity planning mode.
5:22 Signed up about a dozen enterprise customers for stuff like small object delivery, software downloads.
5:23 Customer profile hasn’t really changed. Don’t want to sign up too many flash-in-the-pan type customers, emerging without much funding.
5:24 Cash gross margins back to Q1 levels? Yes.
5:25 What are capital requirements for non-infringing infra? Performance? Do not believe any dramatic shift in capital requirements with any of the platforms. Anything into production is an advancement. Wouldn’t do anything to take customers backwards.
5:27 Why calling for decelerating y/y growth? Would have to look back at Q3 ’07, believe will be up sequentially. A couple large guys who ended up leaving in Q1, reasonably large in second half of last year. From this point, running business, looking for sequential growth.
5:28 Microsoft continues to be a 10% customer.
5:29 Since seen very solid growth, exceeded average levels from Feb. From March forward, very solid growth in traffic levels. Lot of talk out there about price competitiveness; that’s what’s held down top-line growth. We have scale, think that’s fine long-term. Think we’ll gain market share as works its way through industry. One very large video site just shut down back in Q1. No overall slowdown in IP traffic internet-wide.
5:31 Exposure to “doubtful” customers? View emerging segment as a benefit, appropriately exposed, but not too much. Maybe had too much exposure in the past. More aggressive about communicating with customers about their own funding. Gaming companies, game console manufacturers, etc. Those are far and away majority of revenue base.
5:32 Don’t know % of revenue that’s non M&E, will in updated investor presentation, do have a slide. As of next investor preso, will have updated.
5:35 Not seeing a dramatic deceleration in raw bit volume.
5:35 Can’t really quantify price decline.
5:36 As decreasing tolerance for risky customers, churn might go up. More of a customer count than a revenue issue. Revenue growth rates driven by price factors, not by churn.
5:37 About 53% of revenue from top 20 customers, flat. Any seasonality in Q3? No. There is always lower Internet usage globally during the summer, but with traffic growth we’re seeing, big events happening this summer, a little bit difficult to quantify.
5:40 Seeing AT&T as competitors? Market segment has been characterised with intense competition at least in the two years I’ve been involved. Akamai and Limelight competing with larger accounts. Always many other players that see market oppty that are building to try to capitalise on it. But primarily head to head on big deals.
5:42 Investment decision based on 2H08 and beyond. Adding servers, POPs at steady base. Other stuff you make commitment that you’re able to monetise over 3-year period. Second half of this year, big step up, can’t go into detail.
5:43 Noncommitted traffic could always impact a quarter. That’s potential. Pretty material deceleration in growth: Not traffic issue. Pricing? Overall factor impacting top line growth has been price competition.
5:45 400 kpbs last year, 50% or more higher this year; publishers realising that end consumers watch more of higher-quality content than grainy. Last mile? Condo cul de sac problem: Too many people in one condo, cul de sac using last mile to watch SD or HD, run the risk of congestion.Nothing CDNs can do to work around; partner with 800 last-mile providers, working to give them traffic, scale, etc. Not a major holdback. US is behind. Korea is ahead.
5:48 YouTube and MySpace had worked their way down to nonmaterial levels. But two large customers that were a substantial amount of revenue and traffic; not trying to gloss things over, going to drive growth with good HQ customers.
5:50 Call over.
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