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Edited Transcript of LLNW earnings conference call or presentation 17-Jul-19 8:30pm GMT

Q2 2019 Limelight Networks Inc Earnings Call

TEMPE Jul 18, 2019 (Thomson StreetEvents) -- Edited Transcript of Limelight Networks Inc earnings conference call or presentation Wednesday, July 17, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel R. Boncel

Limelight Networks, Inc. - VP of Finance & Principal Accounting Officer

* Robert A. Lento

Limelight Networks, Inc. - President, CEO & Director

* Sajid Malhotra

Limelight Networks, Inc. - CFO

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Conference Call Participants

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* Jeffrey Lee Van Rhee

Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst

* Jonathan David Charbonneau

Cowen and Company, LLC, Research Division - VP

* Lee T. Krowl

B. Riley FBR, Inc., Research Division - Associate Analyst

* Rishi Nitya Jaluria

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Robert S. Majek

Raymond James & Associates, Inc., Research Division - Senior Research Associate

* Timothy Kelly Horan

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

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Presentation

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Operator [1]

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Good afternoon, and welcome to the Limelight Networks' Second Quarter 2019 Earnings Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Dan Boncel, Limelight's Chief Accounting Officer. Please go ahead.

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Daniel R. Boncel, Limelight Networks, Inc. - VP of Finance & Principal Accounting Officer [2]

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Good afternoon, and thank you for joining Limelight Networks' Second Quarter 2019 Financial Results Conference Call. This conference call is being recorded on July 17, 2019, and will be archived on our website for approximately 10 days. Let me start by quickly covering the safe harbor. We would 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 2019 and beyond, our priorities, our expectations, our operational plans, business strategies, secular trends, and product and feature functionality announcements. 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 our 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.

Joining me on the call today are Bob Lento, our Chief Executive Officer; and Sajid Malhotra, our Chief Financial Officer. We will be available during the Q&A session at the end of prepared remarks from Bob and Sajid.

I would now like to turn the call over to Bob Lento.

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Robert A. Lento, Limelight Networks, Inc. - President, CEO & Director [3]

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Thanks, Dan, and good afternoon. Today, we announced our second quarter results. We made good progress on multiple priorities during the quarter, setting the foundation for a strong second half across many operational and financial measures.

Revenue in the second quarter was $45.9 million. GAAP net loss was $7.2 million. Non-GAAP net loss, $3.5 million, and adjusted EBITDA was $1.4 million.

These results were largely in line with analysts' expectations.

Our revenue in the second quarter continued to be impacted by the decisions we made last year to secure our top customers and align our customer base with our strategy. We continue to invest in opportunities expected to drive revenue growth in the coming quarters. We believe those decisions have better positioned us with growth and long-term financial success.

Many financial and operational metrics improved sequentially this quarter, and we expect this trend to continue in the second half of 2019, with particular strength in the fourth quarter when many of our new deals and initiatives are expected to have a more substantial impact.

One such initiative is our partnership with Ericsson Edge Gravity, where we are the exclusive provider of content delivery capabilities for its global scale edge cloud platform, with points of presence within more than 40 service provider networks. While the partnership remains strong, momentum on executing our plan with Edge Gravity slowed in the second quarter after the departure of its CEO in March. However, new leadership is now in place as former Verizon executive, Kyle Okamoto, stepped in at the end of June as Edge Gravity's new CEO. We're very pleased with Kyle's engagement and enthusiasm for our partnership, and we are already seeing improvements in execution and momentum.

While we are behind plan with Edge Gravity, we still made good progress during the quarter. We have now converted 19 existing Edge Gravity locations across 8 countries to Limelight's infrastructure and operating software. We also recently reached an important milestone in the partnership, turning up our first next-generation PoP, which is a new build by Edge Gravity within a service provider utilizing our software and hardware specs. This new PoP is significant as it is a proof point for other service providers that our partnership is working.

It also provides Limelight with a low CapEx model for expanding capacity closer to the edge within service providers in locations that were previously hard for us to reach. We're excited that Edge Gravity has a very strong pipeline of next-generation PoP deals with service providers. We have agreements in place with several operators already and discussions in process with many more. We expect momentum to now accelerate.

In addition to the capacity added through the converted and new Ericsson Edge Gravity locations, we continue to focus on expanding our capacity through software enhancements and expansion of our network footprint into new locations that are important to our customers and support key initiatives. There are 2 major components of capacity that are important to us. There is server capacity at the edge and network capacity, which is the access we have connecting us with local ISPs. At the beginning of 2019, we had 28 terabits per second of edge server capacity. Our goal for the year was to achieve 50 terabits per second. We are on track to exceed that goal at this point through the year. We expected half of the increase to come from a new version of our software that is designed to drive the increased performance and throughput.

This new software innovation has been in development for the past 2 years. We begun deployment in May and are now over 80% complete, resulting in an increase of at least 10 terabits per second of edge server capacity without additional CapEx spend.

We are also pursuing an aggressive network capacity expansion plan that includes increased capacity in existing PoPs and building new PoPs in new geographies that are important to our customers. We have expanded capacity across the globe and in some regions by more than 3x where we started the year. As a result of these initiatives, and our work with Edge Gravity, we now have 105 PoPs and over 50 terabits per second of network capacity. We expect these efforts to have a positive impact on our customers and drive revenue growth in the future.

Customer acquisition was solid in the second quarter with numerous new logos added across all regions. I'm especially pleased that expected revenue from new bookings in the second quarter record highs, which we expect will drive revenue growth in the second half of 2019 and beyond.

We're seeing significant opportunities to drive revenue growth, in line with our strategy of being the leading provider of delivering low latency, high-quality video on a global scale. Examples include Amazon Prime Video. We recently won exclusive rights to broadcast some English Premier League matches in the U.K., or with Apple and Disney who are both expected to launch their own direct-to-consumer offerings this fall. We are pleased to be one of the CDNs working closely with these customers to address their delivery capacity needs. We believe that initiatives like these are indicative of a longer-term trend that supports our strategic focus. We're excited about these opportunities as well as others we expect to share with you in the near future.

During the second quarter, we delivered record traffic, which was over 10% higher than our previous record set in the first quarter. While we participated in some major customer events during the quarter, including HBO's Game of Thrones in April and May, I'm particularly pleased that we generated record traffic in June without any major customer events. We're excited about this momentum in our baseline business and expect it to continue in the second half.

We continue to see high degree of interest in Limelight Realtime Streaming, which is the industry's first global, scalable, subsecond, live video streaming solution that is natively supported by major browsers and devices. During the second quarter, we closed several more realtime streaming deals and have a number of new deals actively engaged in trials. We also continue to have a robust pipeline. We're working on additional software releases to introduce new feature functionality important to our customers, which we expect will accelerate our momentum.

While this offering is not yet driving a material increase in revenue or traffic, it is a differentiator for us that is changing the nature of our discussions with broadcasters as we're the only provider that can do this at scale. Realtime Streaming is a long-term opportunity for us, and we're pleased with this new offering, clearly establishes Limelight as the industry leader in subsecond global video delivery.

We're also pleased with our continued progress in edge services, which leverages our infrastructure to address our customers' needs at the edge for low latency and connectivity. In the second quarter, we closed a number of new edge service deals and have a strong, growing pipeline. We continue to be excited about the opportunity to grow our edge services business.

In summary, our financial performance in the second quarter and first half of 2019 was largely in line with analysts' expectations, and we continue to be on track to generate 4 quarters of sequential growth.

Since the beginning of the year, we have generated momentum across multiple dimensions with much activity and expansion across all regions, multiple product lines, both existing and new customers and at our various partnerships, which we believe has positioned us for a strong second half.

As I look forward, I remain confident that 2019 will be our best year ever on many fronts. We believe our industry is healthy and growing, and we are in an opportunity-rich environment as new and existing customers come to us with major events, new launches, innovative offerings and other important low-latency, high-quality video delivery needs.

We continue to build our capacity, expand our footprint, drive product and network innovation and invest in people to serve customer needs. And we believe our efforts and decisions will yield the right results and lay the foundation for an even better 2020.

I'm pleased with the hard work of our global team and would like to express my gratitude for the momentum they together have generated in the first half of 2019. I've never been as excited as I am at this moment about the industry we serve and our future.

With that, I'll turn the call over to Sajid to discuss the second quarter financial performance in greater detail and our guidance for 2019.

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Sajid Malhotra, Limelight Networks, Inc. - CFO [4]

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Thanks, Bob. Good afternoon. Starting at the top. Revenue in the second quarter was $45.9 million, down 9% year-over-year but increased 6% sequentially. The sequential growth is our third highest in the last 30 quarters. Foreign exchange headwinds in the quarter amounted to approximately $300,000, almost 1%. International customers accounted for 37% of total revenue in Q2 compared to 38% a year ago. Approximately 16% of our second quarter revenue was in non-U. S. dollar denominated currencies. Our top 20 customers account for approximately 71% of our total revenue compared to 72% last year.

Second and third quarter revenue is typically lighter than the first and fourth quarters. Knowing that, we are very pleased with the sequential growth. The core business continues to grow in volume delivered, and we believe we had a faster pace than industry growth. We are adding capacity. It is getting consumed. And our edge services continue to see good momentum as we've added new customers during the quarter and the pipeline is strong.

Our relationship with Ericsson and the work both our teams are performing will allow us to expand the localized fee networks in new geographies. This project is a huge undertaking, and while we are slightly behind in its implementation, we see many opportunities to broaden its scope.

Moving beyond revenue, at the end of the second quarter, our total network capacity reached approximately 50 terabits per second. Our continued network expansion is necessary to deliver the record amount of traffic we delivered in the second quarter. We saw a steady increase in traffic throughout the quarter and we expect that to continue.

G&A expense increased $800,000, and sales and marketing increased $1 million. R&D decreased $100,000. Interest income expense and other income and expense netted to immaterial income second quarter compared to $100,000 of expense last year, excluding the $14.9 million Akamai settlement income recorded in the second quarter last year. On a GAAP basis, we lost $0.06 per basic share this quarter compared to earnings of $0.14 per share last year. $0.13 per share coming from the Akamai settlement.

Adjusted EBITDA was $1.4 million for the second quarter 2019. We had cash in multiple securities of $29 million at the end of the second quarter. Cash generated from operations was $1.1 million in the second quarter. We expect that to increase in each of the remaining quarters in 2019. During the second quarter, we made a final payment to Akamai related to a $54 million settlement in 2016. We spent approximately $11.5 million in capital expenditures in the second quarter, bringing the total for the year to $16.5 million.

As you can see, we are spending to meet the demand of our customers and prospective customers are requesting in the back half of the year. At the end of the second quarter, DSO was 53 days compared to 52 days at the end of last year, within our expected range of 50 to 55 days. Our balance sheet remains very strong. We remain debt free. Receivables are up on higher revenue, while payables are down compared to the previous quarter. As of June 30, we had approximately 115.8 million shares outstanding.

Total employee count at the end of the quarter was 594, up 45 from the end of second quarter last year. The increase primarily relates to additional sales personnel and is consistent with our strategy. Employee count in noncustomer functions should remain stable.

Before getting to guidance, let me highlight a few key points. First, we are moving our headquarters from Tempe, where we had been since inception, to Scottsdale. We signed a 11-year lease for a new location, which is currently under construction. Occupancy begins in September, and we are currently in temporary quarters. The construction, move and occupation carries with it some significant cash spend, even as most of it is amortized over the life of the lease. There are no one-time charges called out related to this as we are absorbing all of this within our operating results.

Next, in the second quarter of 2018, we renegotiated 6 major contracts, representing well over 50% of our revenue base. Some investors were concerned that their anniversary now would yield a similar result again this year. Meanwhile, we've said, we don't expect any material renegotiations of that magnitude and continue to believe that to be the case. We have no major price renegotiations to address at this time.

Then at about the same time last year, we parted ways with 3 customers. The content and price points did not align with our strategy. It was a tough decision as all 3 were among our top 20 customers. It hit our results hard, but starting in the third quarter, that impact is fully absorbed. Taken together, the price renegotiations and customer departures impacted our first half results to the tune of over $13 million. In about a year, we've replaced it all with the revenue, traffic and customers aligned with our video and edge strategy.

It's now time to start growing, and the best way to measure and monitor our future expectations is to look at the exit rate of the previous quarter and multiply it by 4 and then add the expected industry growth rate. For example, we ended the 2018 at $195 million in revenues, but we also exited 4Q 2018 with $44 million in revenues or a run rate of $176 million.

When you provide infrastructure as a service or platform as a service, as we do, this run rate, its consistency, its predictability, establishes the baseline for coming quarters. And for this reason, sequential growth is very relevant. When I look at the analysts' consensus numbers for our competitors, it appears we are projecting the highest sequential growth within the group.

We believe we will continue to exhibit sequential growth for the coming quarters that we will be higher than the peer group. And we believe we have turned the tide from revenue declines of 17% year-over-year in the first quarter to 9% from the second quarter to single-digit growth in the third quarter and very high possibly industry-leading growth in the fourth quarter. This even as some of the more significant revenue generating events we expected to take place have been delayed for reasons beyond our control. We fully expect these projects to come to fruition, and some are even expected to expand in scope from what we originally envisioned.

Based on our current view, we expect revenue to be in the range of $200 million to $210 million. We expect Q3 to show sequential improvement over Q2 and year-over-year growth.

At the midpoint of our updated range, this implies a 30% second half increase over the first half of 2019 and almost 25% growth rate over the second half of 2018. We see this growth rate exceeding -- extending into 2020, but more about that when we give 2020 guidance. We expect GAAP loss to be around $0.10 per share and non-GAAP EPS to be around breakeven. We expect capital expenditures to be approximately $25 million.

With that, let's open the call up for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Michael Turits with Raymond James.

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Robert S. Majek, Raymond James & Associates, Inc., Research Division - Senior Research Associate [2]

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This is actually Robert Majek filling in for Michael today. You addressed it in your prepared remarks, but I was just hoping you could give us some -- further reiterate what is driving your confidence in the back half? I know part of that is from Realtime Streaming and some of that is from the new partnerships you've made, like Edge Gravity. But just wondering if in the core business there are some large contracts that you've already signed now ramping give you strong visibility?

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Robert A. Lento, Limelight Networks, Inc. - President, CEO & Director [3]

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Well, it's combination of a number of things, right? One, we are gaining momentum with Realtime Streaming. We're gaining momentum with our edge services business. The customers that we onboarded in the first half of the year will obviously be stronger in the second half because we'll get the full second half value of that and then typically ramp up as you go into the fall. And then there are some major projects, Disney and Apple, for example, have both announced very strong initiatives to go directly to consumers. And there are others out there -- other projects out there as well. And so -- as we look at the growth in our traffic from our existing customers and the new customer layering on top of that, the new customers that we've already signed on top of that customers that we've done business with for a long time but are now going to the market with their own initiatives, we feel very confident that we can continue sequential growth quarter-on-quarter and drive pretty significant year-over-year growth.

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Robert S. Majek, Raymond James & Associates, Inc., Research Division - Senior Research Associate [4]

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That is helpful. And just one more from me. I don't see an EBITDA guide in the press release. Can you just give us some additional color on what EBITDA or margins might be for the year?

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Sajid Malhotra, Limelight Networks, Inc. - CFO [5]

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Yes. There's only one adjustment to our EBITDA number, which is stock-based comp. So we've really gone ahead and adopted the GAAP accounting measures. And so I'll go ahead and -- I mean it's easier to just map to that than the stock-based comp number for the year is about...

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Robert A. Lento, Limelight Networks, Inc. - President, CEO & Director [6]

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About $5 million.

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Sajid Malhotra, Limelight Networks, Inc. - CFO [7]

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$5 million.

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Operator [8]

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The next question comes from Jon Charbonneau with Cowen and Company.

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Jonathan David Charbonneau, Cowen and Company, LLC, Research Division - VP [9]

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Just to clarify, how much of the decline in 2019 revenue guidance would you say is coming from, I guess, major customer delays versus the Ericsson partnership? And then can you also just give us an update on the competitive environment in the pricing environment. There obviously has been a lot of talk recently between Fastly and others given their IPO. How would you talk about that in terms of competitive environment?

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Robert A. Lento, Limelight Networks, Inc. - President, CEO & Director [10]

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So let me start and then Sajid can add to this. I mean we see -- actually, when we look at the difference today relative to our expectations and our forecast to where it might have been 3 or 6 months ago, there's always tons of moving pieces, but there's really 3 big movers in that, that are somewhere in the $10 million to $15 million range. And the good news is, there isn't -- they are not projects or initiatives that we lost. They're just either behind in their implementation or the implementation has been pushed by a couple of quarters for corporate reasons. And so while we still feel strong about their ability to succeed in the -- in their marketplace and our ability to help them succeed in our position in terms of delivering for them, the impact was really material. Ericsson is a good example of that. We came into the year, included in our original forecast with a number that -- think of it this way, we hedged their number by about 1/3 before going into our plan, and we hedged that by 20% to 30% or including it in our analyst guidance. And even with all that hedging, we'll be half of what we thought it would be.

But at the same time, their -- that contract is still exclusive, it's still multiyear. With new leadership in place, we're seeing a reenergizing of momentum, and so our view hasn't really changed in terms of the value to Limelight. Its impact to 2019 has changed pretty dramatically. But we feel as we go into 2020, it's still going to be material for us.

In terms of competition, we really don't see much of a change in the landscape as there's a handful of people out there that can do what we do at that scale. It hasn't really changed much over the last few years. We see more of some -- it's shifted a little bit in terms of who's more aggressive this quarter of this year versus last quarter of last year. But we don't really see much of a change in the competitive environment. And we -- based on the feedback we get from our customers, we like our ability to deliver high-quality video versus our competition, and we like the position that we have today with our major customers. Sajid?

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Sajid Malhotra, Limelight Networks, Inc. - CFO [11]

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Yes. And I'll just clarify a little bit because I think you're trying to figure out. We have said that we had expected somewhere between $7 million and $9 million from Ericsson. I think from -- going from high single digits, I think now the expectation would be low-single digits. And if the question becomes one around where we've given the guidance before because we had a range before. So from the low end then to the high end now, you can actually attribute all of that change to one customer or one situation. But I would tell you, I mean, there are couple of things that are taking more time. For example, we talked about a relationship with Tencent. Tencent is now a revenue-generating customer for us. So we had to kind of break that. It was really important to get from 0 to 1, get their base of customers on, begin to generate some revenue, which we started to do, and that now opens up field of other opportunities within their ecosystem.

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Robert A. Lento, Limelight Networks, Inc. - President, CEO & Director [12]

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With delayed time, that was about 2 or 3 quarters...

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Sajid Malhotra, Limelight Networks, Inc. - CFO [13]

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Correct, further along...

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Robert A. Lento, Limelight Networks, Inc. - President, CEO & Director [14]

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Than we originally thought it would be.

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Sajid Malhotra, Limelight Networks, Inc. - CFO [15]

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So it's taken more time, but it's very much there. The opportunity is still very large. And it required some specialization in terms of billing and APIs that needed to be done for their customers from the way we present our data, et cetera. But the integration is done, we are moving forward, right? So that's kind of what I would say about the guidance in terms of where it is. But this business continues to perform well. You get a report on a quarterly basis, we pay a lot of attention on a monthly basis. The run rate on a monthly basis has continued to improve from April to May to June in Q2 over Q1. We expect the June rate to continue to improve into July, August, September and the third quarter to be better than the second quarter. And then the project that Bob talked about coming on from the significant events that are happening in the marketplace, we expect a lot of opportunity. These are all existing customers for us, and we expect to get a sizable share of that whether it's with Amazon or Disney or with Apple.

So there is real understanding belief, I mean, the project work is underway, and we're trying to get that done. When we talk about the new IPO in the marketplace and how do we compare ourselves, I mean, listen, we are very cognizant of the difference in the valuation between the 2 companies. But as I sit back and look at it, I think I can explain some of that to the growth rates and those attributes. And I think we will be there as we approach fourth quarter going into first and second quarter next year. I feel pretty good about our growth characteristics, which I think is the biggest delta. Otherwise, we both operate within a CDN industry. They operate in one subsegment, we operate in another, but we are all part of that CDN business.

Within that, we both have edge businesses. I believe ours is as large as theirs, maybe larger. We had 7 digit numbers coming from this business in 2018. It's grown significantly in '19 over that. It'll grow again in 2020. We have a strong pipeline on the edge business. And so that growth continues.

Beyond the revenue growth, when I look at the financials, I think our financials are much stronger. I mean, we are able to generate positive EBITDA, we are able to generate free cash flow. We have been doing it for some time. We intend to do it for the foreseeable future. So that details I don't kind of understand. And then, there is a question of capital intensity with the business. And at a smaller scale, they're spending a lot more capital to go run the business than we are. So those are kind of the financials, then comes, okay, feature functionality, I mean, we can pick on anything we like. I'm just going by what's available from a public disclosure standpoint, I mean, look at things that -- we have the ability to purge data. I mean, we put our press release out in terms of our ability to do sub-second purge 2 years ago. So it may be relevant with some of the other place in the marketplace. But that capability really does not separate them from us. So I think there is a real opportunity for us to correct our business, our trajectory and get back on track to actually reporting what we are saying, making our numbers and delivering against those, and we're working hard to go get that done. Sorry for the long answer, but I think it needed to be addressed.

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Operator [16]

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The next question comes from Rishi Jaluria with D.A. Davidson.

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Rishi Nitya Jaluria, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [17]

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Couple of questions from I -- and I think let me just start with the guidance, and I don't want to deliver a point, I just want to make sure we fully understand. So you're bringing the full year guidance down about $15 million. There is, we can call it, somewhere around $5 million type impact from the Ericsson partnership. Can you just maybe like give an exact number? Just help quantify the other factors that are bringing down the guidance?

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Sajid Malhotra, Limelight Networks, Inc. - CFO [18]

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So firstly, I think where we started at the start of the year, we had a range of outcomes. Some of the things needed to go really, really well for us to hit the upper end of the guidance. On the other things, we thought if things would just kind of take the ordinary course of business, we should be at the lower end. As we talk to the analyst community, and we talked about what was built into that guidance, I think the group as a whole, at least the sell side that had said, you know what, this is so back half-loaded, and we'll wait for when that actually begins to transpire. So the sell side community as a group has been closer to the dual 7 to 8 number, which is within our refresh guidance, whereas we were hoping that if all of these things happen in a timely fashion and get executed as well as they do, we could be north up to 15. And then how far north was a question of how well and what is the rate of adoption, et cetera. Included in that were the things like the business from Ericsson. Included in that was what we could do with Tencent. And then there were a couple of large edge deals. We had a very large customer within edge deal that instead of a launch happening in the fourth quarter is pushing the launch into the first quarter. It is very significant. We were hoping it would happen in the fourth. I think it would have been a game changer for us. But that's the customer's prerogative. And if they decide to go ahead and put together their digital strategy and want to do a bigger launch at a later date, that's fine. But we got selected from a pool of companies to be the provider. We did the alpha with them, we did the beta with them, the testing is continuing. It is expanding. But instead of being in the millions and millions of dollars of revenue, it is going to be small single-digit millions. So we have, I mean, it's business. I think we just have to take it in stride and move on.

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Rishi Nitya Jaluria, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [19]

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Okay. Got it. That's helpful. And Sajid, just from a gross margin perspective, right, I mean, we did see a sequential improvement from Q1 to Q2. Should we expect there to be continued sequential improvements through the year, especially now that you're talking about returning to revenue growth in Q3 and definitely in Q4.

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Sajid Malhotra, Limelight Networks, Inc. - CFO [20]

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Yes. I -- we had made material improvements in our gross margins that took it basically with the repricing, and we were left with standard infrastructure underutilized and price point with customers that was very different. That's what took the gross margin down over the course of last year. And we'll just go build that back. So the absorption of the infrastructure helps, and I don't have any major price renegotiations, at the same time, we continue to tackle our COGS. And so yes, I expect improvements across the quarters.

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Rishi Nitya Jaluria, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [21]

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Got it, okay. And then I think 2 from a housekeeping perspective and then I'll hop off.

First with the new headquarter build out, when should that start to show up on CapEx? Is any of that going to be in this year? Or is that all starting next year?

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Sajid Malhotra, Limelight Networks, Inc. - CFO [22]

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No, there is some this year. And there is -- other -- there are expenses associated with it that would be taking stride. Like of the items on the income statement side, we talk, I think pretty candidly, at least I believe so about all of the items in the puts-and-takes that are taking place. The 1 item that was not there and the largest of the unknown items that you might not be able to reconcile to was this 1 item. It's a significant move for us. We've got over almost 250 people in the area. And so moving them physically along with -- you can well imagine, brand-new space with furniture, fixtures and...

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Robert A. Lento, Limelight Networks, Inc. - President, CEO & Director [23]

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All the cash has been spent this year.

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Sajid Malhotra, Limelight Networks, Inc. - CFO [24]

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Yes. So the cash is getting spent now, which we stated in the cash flow statement and of course, much of it is amortized over the length of lease and then there are some expenses that are not and are taken in period.

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Robert A. Lento, Limelight Networks, Inc. - President, CEO & Director [25]

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From an expense standpoint, we're roughly in line with the expenses that we had in Tempe moving forward, right? So yes.

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Sajid Malhotra, Limelight Networks, Inc. - CFO [26]

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Right. Yes, this is not going to add to the major rent uptick or an increase.

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Rishi Nitya Jaluria, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [27]

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Okay. And then I think last one, just Amazon, were they 10% customer in the quarter?

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Sajid Malhotra, Limelight Networks, Inc. - CFO [28]

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Yes. And they were the only 10% customer.

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Operator [29]

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Your next question comes from Tim Horan with Oppenheimer.

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Timothy Kelly Horan, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [30]

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Sajid, do you think the whole industry is going to accelerate to the type of growth you're seeing in fourth quarter into next year? Or do you think you're just going to be kind of gain the material share? Or are you just in the right segment of the market?

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Sajid Malhotra, Limelight Networks, Inc. - CFO [31]

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I think that the video segment is growing at a much faster rate. And I think that the quality that those customers want matches up better with our capabilities. And obviously, the price point for delivering quality video are higher than delivering non-discriminate software, for example, in the middle of the night. So we think that we're participating in the right part of the market where the growth rates are particularly higher, the move to ODT, all of these subscription-based services coming on board, kind of lend themselves well to the strategy that we adopted, and we'll see. Now for us, our video business is more than 50% of our total business. I think we told you that last quarter. So as that is the case, I don't know if other companies experience the same kind of breakdown between their businesses, what is video versus non-video, I don't have any idea. But because we have built an infrastructure to care for that and because we've focused on that part of the market whether it's low latency, ultra-low latency, video-on-demand, streaming videos, stored video, we are participating in every element of this industry, and it bodes well for us, for our customers, we pay a lot of attention to this. And I think that will yield results as we go on. I look forward to seeing what others have to say about this, but I think it's a healthy trend for the industry. I continue to believe we'll do better than the industry overall.

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Timothy Kelly Horan, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [32]

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And because you think you're going to be gaining share also, it sounds like?

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Sajid Malhotra, Limelight Networks, Inc. - CFO [33]

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Within the video market, for sure, yes.

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Timothy Kelly Horan, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [34]

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And then, can you talk about your asset utilization on the network, you've added a massive amount of capacity and you've lost a lot of customers, I know buy-ins are growing a little bit big, can you just give a little bit more color there?

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Sajid Malhotra, Limelight Networks, Inc. - CFO [35]

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Well, I mean, the underutilization occurred with the price changes that happened last year, right? So you get rid of 3 customers and you have price renegotiations. And so we were -- you see that in the gross margin. Of course, price renegotiations don't impact utilization, but they do impact gross margins. But the departure of customer is still that's replaced, absolutely hits the utilization. At the same time, we've been building back into the network, and we've been doing -- we've actually placed a lot of effort on our R&D teams to come up with the necessary software and the necessary environment where we can maximize how much we can get from industry standard servers. So the whole idea is not to get purpose-built servers, to somehow deliver 40 gigabits per server or 50, but to be able to take generic off-the-shelf servers and push as much traffic through them as possible. The price point between those servers is a lot, and if we can squeeze as much capacity as we've been able to get out of them, I think that's what lends itself to better capacity and asset utilization and return on the capital expenditures. And so that's what we've been focused on. Now as this has happened, we've seen the benefit from software coming about and help us increase our capacity in a very, very significant way. At the same time, we've been adding capacity by securing more because we're getting a very good idea from our customers, telling us how much capacity they need, when they need it and where they need it. So because of that, we're willing to go ahead and invest in and get ready for that demand coming on board. And I'll just leave it at that.

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Timothy Kelly Horan, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [36]

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Well, I guess, I'm trying to get that you needed like doubled capacity this year and your revenues are down 10%. I mean are you at -- was your -- does that imply that you have a lot of excess capacity in the network? Because you're implying essentially 30% revenue growth next year, and I'm trying to get that, that we need a lot more CapEx to meet that 30% revenue growth for next year.

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Sajid Malhotra, Limelight Networks, Inc. - CFO [37]

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No. As things stand right now, I do not envision our CapEx going beyond the 20s. I don't know if it's going to be $22 million or $26 million, but the range of our capital expenditures and the guidance we've been giving for the last few years has been in the 20s range, and I suspect that should be sufficient for us to meet our growth demand.

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Operator [38]

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The next question comes from Jeff Van Rhee with Craig-Hallum.

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Jeffrey Lee Van Rhee, Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst [39]

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So just a couple for me, guys. The [RTS] products, the features, I think you referenced the -- you had some upcoming features that you're going to bring that were somewhat of a gating factor really bound and open there. Can you just expand on that a little bit?

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Robert A. Lento, Limelight Networks, Inc. - President, CEO & Director [40]

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Customers are always that they get into and asking for more feature functionality, but the 2 big things that we have already come out with or in the process of coming out with were mobile SDK, and -- so that we could cover that capability that's already in customer's hands and then ABR, which is available bit rate. So that we get to accommodate adjustments of bit rates and apply. And that's already been completed. So in the first half of the year when we brought on customers, the feedback was these areas are important to us. We now have them in the third quarter available to customers and then obviously, there's always a road map. But those were to what I would call revenue blockers that we have addressed.

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Jeffrey Lee Van Rhee, Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst [41]

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Got it. And could you talk just a bit then with respect to retention. I think you touched on last quarter that you're hitting record levels of customer retention in that context, look like the total customer count had somewhat stabilized. I understand the focused on higher quality/larger customers. But just talk to retention and talk about -- thoughts about total customer counts going forward.

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Robert A. Lento, Limelight Networks, Inc. - President, CEO & Director [42]

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So. We'd like to see the customer count grow, but we're less focused on that than we are on revenue. And so the thing that I like is in the second quarter, for example, there were customers that we lost for sure. And then obviously, customers that we've signed up as new, the expected revenue from new exceeds the revenue from the ones that we've lost. And obviously, what that implies and which is true, is that the average revenue per customer of the customers who were signing is much higher than those that we're losing. So we're pleased with that performance to your point, we have seen stabilization, customer churn in the years I've been here has improved year-over-year-over-year. And at this point, we are really looking to add more HBOs of the world as opposed to small customers. And we'll continue to focus, we believe that we'll have greater success with customers that need the highest quality and global scale and so that's where we're focusing on. And the customers, as we look at customer segmentation, small and small and medium-size customers, there are lots of places that people can go to get that capability and capacity.

But for customers that are looking for a lots of capacity with global reach, there is only a few places that they can go and typically, the larger customers urge it'll have multiple suppliers. And so we believe once we get to see at the table despite having competition in the mix, that we can win not only as the customer growth but because of our proven ability to take market share.

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Sajid Malhotra, Limelight Networks, Inc. - CFO [43]

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And so couple of data points that I'd just point you to, and I think we talked about it on both -- we say it in the script. But our top 20 customers account for about 72% of the total revenue stream, right? So that even with the departure of 3 customers out of our top 20 within last year, if that number had dropped down to let's say 65% or 63%, you kind of say, well, you're having trouble replacing them. But 1 year later, our top 20 customers just like last year, still stable, accounting for 72%. So we are replacing big with big along the lines of what we want. And 650 customers and 20 customers are accounting for 72% of the total kind of gives you an idea of why we play so much importance at the very, very high end. But even with that, I haven't seen numbers from anybody that suggest that they've got a higher ARPU, our revenue per customer is the best and highest in the industry. And if I was to subsegment that and say, okay, what is my revenue per enterprise customer, needless to say, it would be even higher.

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Jeffrey Lee Van Rhee, Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst [44]

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Got it. Got it. And then just 1 more -- actually 2 more, the $15 million roughly reduction in the guide, let's call it half is the Ericsson delay. Of the remaining half, I just -- can you segment that, is that more related to just couple of these very large deals that just took a little longer to get going. They were new but took longer to ramp, or would you say that's more due to just the existing base maybe not hitting volume targets. Just something more related to sort of existing legacy customers versus new projects.

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Robert A. Lento, Limelight Networks, Inc. - President, CEO & Director [45]

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Less about existing customers and more about what you're expecting from new, Sajid brought Tencent as an example, it's taken a lot longer to get the first bit of revenue from them than we thought. It require a lot more development work on our side than we initially thought. And now we're just starting with them. And so we are -- where we are today, we thought we would be 6 to 9 months ago and building from there. And then there is 1 project, for example, where the company just made a decision to launch 2 -- 1 or 2 quarters later than what they originally told us to plan for, and so stuff like that happens. But largely, new initiatives with existing customers or new customers versus the existing base during less than we thought they would or us losing traffic to a competitor or flat out losing deals, it's more about taking longer to achieve the revenue goals that we had originally set.

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Sajid Malhotra, Limelight Networks, Inc. - CFO [46]

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If I had to looked at customer, to that I would point to and say, here is 1 customer departure cost maybe more million or something like that, I have none of that in our base, nothing.

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Jeffrey Lee Van Rhee, Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst [47]

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Got it. Got it. Yes. And then just one clarification on the CapEx, I think the guide was what $20 million to $24 million if I recall, last quarter, it's $25 million now. What's top of the list? You talked about a lot of things you're spending on but what's the delta from April to here in terms of where your expectations on spend changed?

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Sajid Malhotra, Limelight Networks, Inc. - CFO [48]

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Yes, so I'm still saying approximately $25 million, I mean hopefully, we'll come in slightly below that. It could still be within $20 million to $24 million I was just trying to put a number out there to make sure that -- I think of that as largely unchanged as I look at it. And I think there is nothing out of the ordinary from what we set out to do at the start of the year to how we are progressing over the course of the year. There is a little bit more of CapEx that's related to the build-out of our move that you would not have known about before. But other than that, I think it is largely to go ahead and add capacity for the demands that is being requested of us. I'm not building capacity in regions anticipating demand, actually most of my capital or a lot of my capital now is against demand that has been articulated to us that this is the region and this is the time and this is the amount that they would like to see.

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Operator [49]

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(Operator Instructions) The next question comes from Lee Krowl with B. Riley FBR.

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Lee T. Krowl, B. Riley FBR, Inc., Research Division - Associate Analyst [50]

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Kind of just wanted to take everyone's questions on the second half guide and maybe ask it slightly different, but taking it all in together, and just you guys talked about you had some new customers in the first half that were additions. And I just wanted to figure out if what part of the second half guidance is contingent upon customers that you've recently added versus just the existing customers' operating status quo versus prior expectations.

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Robert A. Lento, Limelight Networks, Inc. - President, CEO & Director [51]

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So let me ask what may be a different question. I mean, as we go into the second half, we obviously know which customers are -- have been onboarded and whether they're trending towards our expectations or not. In terms of risk in the second half, customers that we have yet to sign and are accounting on revenue from, we -- by bringing the guidance down, we have minimized that in a pretty dramatic and material way. And so what is true is we are expecting to close some business and have some revenue contribution in the second half. But what I would tell you is that it has dramatically reduced from where it was to the -- but we're expecting to meet the current range of outcomes.

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Sajid Malhotra, Limelight Networks, Inc. - CFO [52]

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Yes. So -- and Lee, I just kind of add -- I mean, we've gone out of our way to de-risk the plan for those variances because I think the back-half story is good on its own as it is today. And I don't want to get to a situation where I'm reporting third or fourth quarter results, and while the results on their own are really, really good, but because we are off $1 million or $2 million, the questions deviate to why did you miss by $1 million versus why were your results not great. And I think we've got a good story to tell as we put the first half behind us and going into the second half. I think revenue begins to grow sequentially. It begins to grow year-over-year in the third quarter and then at a very high rate, possibly the highest in the industry, in the fourth or amongst the highest in the industry. And the analyst community was not as it is as reflected in the consensus numbers, putting much faith in our numbers. So it was just prudent. Take the risk out of the plan, take the unidentified out of the plan, focus on what we feel certain about and then just go ahead and execute and tell the story as it is as that transpires.

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Lee T. Krowl, B. Riley FBR, Inc., Research Division - Associate Analyst [53]

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Got it. And then just a point of clarification. I know you guys previously expected UDN to begin contributing revenue in 2Q. Just kind of curious is it generating revenue for you currently, or has it yet to come online.

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Sajid Malhotra, Limelight Networks, Inc. - CFO [54]

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It is.

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Robert A. Lento, Limelight Networks, Inc. - President, CEO & Director [55]

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It is. Less than we expected at this point, but it is generating revenue.

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Sajid Malhotra, Limelight Networks, Inc. - CFO [56]

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It is. There are some major milestones that needed to be hit. We needed to do a conversion of the gen-1 (inaudible); we needed to convert the gen-2 process, done; start to see revenue flows back and forth between the 2 businesses, done; begin to make sure that the billing, et cetera, was fully integrated (inaudible); go ahead and tie that altogether, taken care of; do the customers conversions. So I think things that had to be done are getting done. I think -- again, it's not unnatural when you have a leadership change, business takes a little bit of a pause and then just restarts as that gets behind. And we are having good conversations with them, and we are really happy about Kyle's role in that at [BN] and I think good things will happen. But like I said, I mean, we're having conversations that are broader in scope than when we began. I mean, keep in mind they have a big play in 5G and have a big play on the edge and IoT side of the business. So this conversation is with a partner with which you are will engaged with, can become much broader than just the CDN conversation that we had.

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Lee T. Krowl, B. Riley FBR, Inc., Research Division - Associate Analyst [57]

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Got it. That makes sense. And then just kind of an OpEx question. You guys have been adding some sales headcount to address some of these newer products. Is the expectation that you've built the headcount you need? Or do you expect to continue hiring the rest of the year?

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Sajid Malhotra, Limelight Networks, Inc. - CFO [58]

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I think we've built fast initially, so don't expect the rate of change to continue at the same pace but expect incremental additions. And some of it is also for not just adding volume, but also covering more geographies. So when we are entering the Latin America market, we want feet on the street and presence there. When we are entering China, we would like to be able to have presence there. When we are entering into some new geographies in the Middle East, we'd like to have physical presence there. At the same time, we are attacking a breadth of the marketplace, sometimes, with many unique capabilities, for example, what we are doing with low latency with the gaming customers. So you look for industry expertise in that area. So we've gone ahead and added on that and we'll continue to support the business and the plan that we have.

And again, welcome to you and to Rishi. Congratulations on the appointment. And any other questions?

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Operator [59]

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This concludes our question-and-answer session. I would like to turn the conference back over to Sajid Malhotra for any closing remarks.

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Sajid Malhotra, Limelight Networks, Inc. - CFO [60]

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Thanks. And so just before we close, I just want to let you know if you like to schedule a visit, just write or call me. I mean, we'd be happy to visit with you for a face-to-face meeting or happy to get on a phone call. I'm available for the rest of the day today, tomorrow. And thanks, again. And as always, and we are available to answer any questions after the call. All right, with that, we'll conclude the call. Thank you all.

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Robert A. Lento, Limelight Networks, Inc. - President, CEO & Director [61]

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Thank you.

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Operator [62]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.