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Limelight Networks Inc (LLNW) Q2 2019 Earnings Call Transcript

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Limelight Networks Inc (NASDAQ: LLNW)
Q2 2019 Earnings Call
Jul 17, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the Limelight Network's Second Quarter 2019 Earnings Conference Call and Webcast. [Operator Instructions]

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

Daniel Boncel -- Chief Accounting Officer

Good afternoon, and thank you for joining the Limelight Networks' second quarter 2019 financial results conference call. This 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 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.

Joining me on the call today 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.

Robert A. Lento -- President, Chief Executive Officer and Director

Thanks, Dan, and good afternoon. Today we announced the 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 inline with analyst expectations. Our revenue in the second quarter continue 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 for growth and the 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 it's 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 are very pleased with Kyle's engagement and enthusiasm for our partnership and we are already seeing improvements and 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 eight 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 and locations that were previously hard for us to reach. We're excited that Edge Gravity is a very strong pipeline of the next generation pop deals with service providers. They 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 two 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 terabytes per second of edge server capacity. Our goal for the year was to achieve 50 terabytes 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 two years. We've begun deployment in May and are now over 80% complete, resulting in an increase of at least 10 terabytes per second of edge server capacity without additional CapEx spend.

We were also pursuing an aggressive network capacity expansion plan that includes increasing 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 three times 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 terabytes 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 were at 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 who recently won exclusive rights to broadcast some English Premier League matches in the UK 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 the 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, The 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 a high degree of interest in Limelight, real time streaming, which is the industry's first global

scalable sub-second live video streaming solution that is natively supported by major browsers and devices. During the second quarter, we closed several more real time streaming deals and have the 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 are the only provider that can do this at scale. Real time streaming is a long-term opportunity for us and we are pleased at this new offering, clearly establishes Limelight as the industry leader and sub-second 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 and 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 inline with analysts expectations, and we continue to be on track to generate the four 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 the product in 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 new and better 2020. I'm pleased with the hard work of our global team and we'd 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 research and our future.

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

Sajid Malhotra -- Chief Financial Officer

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 at 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 a second quarter revenue was the non-U.S. dollar denominated currencies.

A 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 at 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 with local ISP 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 terabytes 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 $100,00. Interest income, expense and other income and expense netted to immaterial income -- our second quarter compared to $100,00 of expense last year, excluding the $14.9 million of my 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 of 2019. We had cash and marketable 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 our 54 million [phonetic] 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 on 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 non-customer 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 the 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 tax spend, even as most of it is advertised over the life of the lease. There are no onetime charges called out related to this as we're absorbing all of this within our operating results.

Next, in the second quarter of 2018, we renegotiated six major contracts representing well over 50% of our revenue base. Some investors are 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 three customers. The content and price points did not align with our strategy. It was a tough decision as all three 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 revenue, traffic and customers aligned with a video and edge strategy. It's not, I'm just struggling and the best way to measure and monitor our future expectations is to look at the exit rate of the previous quarter and multiplied by four. And then add the expected industry growth rate. For example, we ended 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 it's consistency, it's predictability establishes the baseline for coming quarters. And for this reason, sequential growth is very relevant.

When I look at analyst 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 prior [phonetic] 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. The single digit growth in the third quarter and very high possibly industry leading growth in the fourth quarter.

This even at 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 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 a 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 the 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 any questions.

Questions and Answers:

Operator

We will now began the question-and-answer session. [Operator Instructions] The first question comes from Michael Turits with Raymond James. Please go ahead.

Robert Majek -- Raymond James & Associates, Inc -- Analyst

Good afternoon, this is actually Robert Majek filling in for Michael today.

Sajid Malhotra -- Chief Financial Officer

Hi, Robert.

Robert Majek -- Raymond James & Associates, Inc -- Analyst

Hi, you addressed in your prepared remarks, we're 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 real time 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 already signed, they're ramping, give you strong visibility?

Robert A. Lento -- President, Chief Executive Officer and Director

Well, it's a combination of a number of things, right? One, we are gaining momentum at real time streaming. We are gaining momentum with our Edge services business, customers that we on boarded in the first half of the year will obviously be stronger in the second half because we will get the full second half value of that and they typically ramp up as you go into the fall. And then there are some major projects, you know, Disney and Apple, for example, both announced very, 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 in 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 market with their own initiatives. We feel very confident that we can continue sequential growth quarter-to-quarter and drive pretty significant year-over-year growth.

Robert Majek -- Raymond James & Associates, Inc -- Analyst

That's 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?

Sajid Malhotra -- Chief Financial Officer

There's only one adjustment, to our EBITDA number, which is stock based comp, so we really gone ahead and adopted the GAAP accounting measures and so I'll go ahead and I mean, it's easy to just map to that.

Robert A. Lento -- President, Chief Executive Officer and Director

And then the stock based comp number for the year is about $5 million.

Sajid Malhotra -- Chief Financial Officer

$5 million.

Robert Majek -- Raymond James & Associates, Inc -- Analyst

Got it. Thanks, Bob.

Operator

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

Jonathan Charbonneau -- Cowen and Company -- Analyst

Great. Thanks for taking the questions. Just to clarify, how much of the decline in 2019 revenue guidance would you say is coming from, I guess, some 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 the talk recently between our Fastly and others given their IPO. How would you talk about that in terms of this competitive environment?

Robert A. Lento -- President, Chief Executive Officer and Director

So let me start start and then Sajid can add to this thoughts. I mean, we actually, we look at the difference today relative to our expectations and our forecast to where it might have been three or six months ago. There's always, tons of moving pieces, but there's really three big movers in that are somewhere in the $10 million to $15 million range. Now, the good news is they didn't -- there are not projects or initiatives that we've 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 as strong about their ability to succeed in their marketplace and our ability to help them succeed in our position -- in terms of delivering for the impact was fairly material. Ericsson is a good example of that. You know, we came into the year, including our original forecast with a number of that, think of it this way we hedge their number by about a third before going into our plan, and we hedge that by 20%, 30% or concluding it in our analyst guidance and even with all that, hedging will be half of what we thought it would be.

But at the same time, there that contract is still, exclusive, it's still multi-year, 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 2019 has changed pretty dramatically. What 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, there's a handful of people out there that can do what we do at scale that hasn't really changed much over the last few years. We see more of some from time -- it's shifted a little bit in terms of who's more aggressive this quarter of this year versus last quarter -- last year. But we don't really see much of a change in the competitive environment. And we -- you know 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?

Sajid Malhotra -- Chief Financial Officer

Yeah, and I'll just clarify little bit, because I think you're trying to figure out we had said that we had expected somewhere between $7 million and $9 million from Ericsson. I think, from going from high single digit, I think now the expectation would be low-single digits. And it's the question because one around, you know, where were in the guidance before, because we had arranged 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 a couple of things that are taking more time. For example, we talked about our relationship with $0.10. $0.10 is now a revenue generating customer for us. So, we had to kind of break that. It was really important to get from zero to one, 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.

Robert A. Lento -- President, Chief Executive Officer and Director

At the same time that was about two quarters or three quarters.

Sajid Malhotra -- Chief Financial Officer

Correct.

Robert A. Lento -- President, Chief Executive Officer and Director

We should have been better than long [phonetic]

Sajid Malhotra -- Chief Financial Officer

Right. Than we originally thought with it. But -- 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 building an API that needed to be done for their customers from the way we presented our data, etc. 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. The base business continues to perform well. You get a report on a quarterly basis, you know, we'd be 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, with the projects 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 under way 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 two 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 quarter 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 the CDN industry. They operate in one sub-segment. 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 that maybe larger. We had seven 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're 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 don't trying to understand. And then there's a question of capital intensity with the business, and at a smaller scale, they're spending a lot more capital go around the business and beyond. So those are kind of the financials then comes OK, 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, little testing that, we have the ability to purge data. I mean, we put a press release out in terms of our ability to do subsequent purge two years ago. So it may be relevant with some of the other players 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.

Jonathan Charbonneau -- Cowen and Company -- Analyst

No, that's great. Thank you very much.

Operator

The next question comes from Rishi jaluria with D.A. Davidson. Please go ahead.

Robert A. Lento -- President, Chief Executive Officer and Director

Rishi, welcome.

Rishi Jaluria -- D.A. Davidson -- Analyst

Hey, guys. Thank you. Good to be back on the name. Couple of questions from my -- and I think let me just start with the guidance and I don't want to to delay, [Indecipherable] make sure, fully understand. So you're bringing the full year guidance down about $15 million, you know, there's we can call it somewhere around a 5 million type impact from the Ericsson partnership. Can you just maybe give an exact numbers, just how quantify the other factors for bringing down the guidance?

Sajid Malhotra -- Chief Financial Officer

So, I think where we started at the start of the year, we had a range of outcomes. Some of the things we needed to go really, really well for us to hit the upper end of the guidance. On the other things, we thought, you know, if things would just kind of take the ordinary course of business, we should be -- at the lower end, as we talked to the analyst community and we talked about what was built into that guidance. I think the group as a whole, at least the sales said, kind of say you know what? This is all 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 seven to eight number, which is within our refreshed 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 of 250. And then how far north was a question on how well and what is the rate of adoption, etc?

Included in that were the things like the business from Ericsson included in that was what we could do with $0.10. And then there were a couple of large Edge deals. We had, a very large customer with an Edge deal that instead of there is 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.

Rishi Jaluria -- D.A. Davidson -- Analyst

Okay. Got it. That's helpful. And Sajid from a gross margin perspective, right and 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 the revenue growth in Q3 and definitely in Q4?

Sajid Malhotra -- Chief Financial Officer

Yes.

Rishi Jaluria -- D.A. Davidson -- Analyst

Okay. That's helpful.

Sajid Malhotra -- Chief Financial Officer

We had made material improvements in our gross margin, that's took a big hit with the repricing, and we were left with standard infrastructure underutilized and price point with customer it was very different. That's what of 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 then -- you know, I don't I don't have any major price renegotiation at the same time, we continue to tackle our COGS. And so, yes, I expect improvements across the quarters.

Rishi Jaluria -- D.A. Davidson -- Analyst

Got it. Okay. And then I think two from a housekeeping perspective, and 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 this year or is that all starting next year?

Sajid Malhotra -- Chief Financial Officer

No, they are staring this year. And there is, other -- their expenses associated -- that would be taken straight off the items on the income statement side we thought -- I think pretty candidly, at least I believe so about all of the items and the [Indecipherable] that are taking place. The one item that was not there and the largest -- of the unknown items that you might not be able to reconcile to was this one item. It's a significant move for us we plug-in over almost 250 people in the area, and so moving them physically along with you can well imagine, brand newspapers this morning through your pictures and then --

Rishi Jaluria -- D.A. Davidson -- Analyst

Okay. We expected --

Sajid Malhotra -- Chief Financial Officer

So, the cash is getting spent now, which is seeing the cash flow statement. And of course, much of it is advertised over the length of the lease and then there are some expenses that are not, and not taking in period.

Rishi Jaluria -- D.A. Davidson -- Analyst

Got it? Okay. That's helpful.

Robert A. Lento -- President, Chief Executive Officer and Director

From an expenses standpoint, we're roughly inline with expenses that we have in Tempe, right. Moving forward right in that.

Sajid Malhotra -- Chief Financial Officer

This is not going to add to the major rent up degree or any increase.

Rishi Jaluria -- D.A. Davidson -- Analyst

Alright. Okay. And then I'm think last one just Amazon with their 10% customer in the quarter?

Okay. Got it. All right, well, thank you so much, guys. Appreciate the time.

Sajid Malhotra -- Chief Financial Officer

And they were the only 10% customer.

Rishi Jaluria -- D.A. Davidson -- Analyst

Thank you.

Operator

The next question comes from Tim Horan with Oppenheimer. Please go ahead.

Timothy Horan -- Oppenheimer & Co Inc -- Analyst

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

Sajid Malhotra -- Chief Financial Officer

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 points for delivering quality video are higher than delivering, non-discriminate software, for example, in the middle of the night. So, we think that we are participating in the right part of the market where the growth rates are particularly high the move to OTT all of these subscription may services coming on board, you 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 experienced the same kind of breakdown between their businesses. What is video versus non-video? I don't have any idea. But because we build an infrastructure to care for that and because we focused on that part of the market, whether it's low latency, ultra low latency, video on demand, streaming video, store video, you know, we are participating in every element of this industry and it both well for us, for our customers, we've been 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 industrial role.

Timothy Horan -- Oppenheimer & Co Inc -- Analyst

And on -- it's debating [phonetic] because you think you're going to be gaining share also, it sounds like.

Robert A. Lento -- President, Chief Executive Officer and Director

Within the video market for sure, we are.

Timothy Horan -- Oppenheimer & Co Inc -- Analyst

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 and the vines are growing up a little bit. But can you just give a little bit more color there?

Sajid Malhotra -- Chief Financial Officer

Well, I mean, the underutilization occurred with the price changes that happened last year. Right, so you'll get rid of three customers and you'll have pricing negotiations and so -- we were you'll see that in the gross margin, of course, price that will [phonetic] renegotiations don't impact utilization, but they do impact gross margin. But the departure of customers till that replace absolutely hits the utilization. At the same time we've been building back into the network and we've been doing of -- we've actually placed a lot of effort on our R&D teams to come up with the necessary software and the necessary, you know, 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 to 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, you know, 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 are 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 investing and get ready for the demand coming on board. And I'll just leave it at that.

Timothy Horan -- Oppenheimer & Co Inc -- Analyst

Well, I get some -- I'm trying to get -- you mean it's like doubled capacity this year and your revenues are down 10%. I mean, are you at with you, is 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 out do we need a lot more CapEx to meet that 30% revenue growth for next year?

Robert Majek -- Raymond James & Associates, Inc -- Analyst

So 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 or 26. But, you know, 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.

Timothy Horan -- Oppenheimer & Co Inc -- Analyst

Thank you.

Robert A. Lento -- President, Chief Executive Officer and Director

Thanks.

Operator

The next question comes from Jeff Van Rhee with Craig-Hallum. Please go ahead. Mr. Van Rhee, your line is open.

Jeff Van Rhee -- Craig-Hallum -- Analyst

[Indecipherable] unmute sorry, I'm here. So just a couple for me, guys. Thanks, the RTS product, the features. I think you referenced the yet some upcoming features that you're going to bring that we're somewhat allocating factor to really blown it open there. Can you expand on that a little bit?

Robert A. Lento -- President, Chief Executive Officer and Director

Customers are always as they get into it, asking for more feature functionality. But the two big things that. We -- you already come out whether in the process of coming out with were mobile SDK and so that we could cover that capability that's already in customers hands and then AVR [phonetic], which is automated bit rate. So we could accommodate, adjustments a bit rates often apply and that's already been completed. So, in the first half of the year, we brought on customers, the feedback was, these areas are important to us, we now have them in the third quarter available with customers. I mean, obviously, there's always a roadmap. But those were two what I would call revenue blockers that we have addressed.

Jeff Van Rhee -- Craig-Hallum -- Analyst

Got it. And could you talk just a bit -- then with respect to retention, I think you touched on it last quarter, which you were hitting record levels of customer retention and in that context, looked like the total customer account had somewhat stabilized. I understand that focused on the higher quality slash larger customers. But you just talked to retention and talk about thoughts about total customer accounts going forward?

Robert A. Lento -- President, Chief Executive Officer and Director

So, we'd like to see the customer account grow, but we're less focused on that than we are 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 lost, and obviously with that applies and which is true is that the average revenue per customer of the customer you are signing is much higher than those that we're losing.

So, we're pleased with that performance to your point. We have seen a stabilization in our customer churn in the years I've been here is improved year-over-year-over-year. And at this point, we're really looking to add more HBO's 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, medium sized customers. There are lots of places that people can go to get that capability and capacity. But for customers that are looking for lots of capacity with global reach, there's only a few places that they can go, and typically the larger customers are interested in having multiple suppliers. And so we believe once we get a seat at the table, despite having competition in the mix, that we can win not only as the customer grows, but because of our proven ability to take market share.

Sajid Malhotra -- Chief Financial Officer

And so the couple of data points -- that I just pointed when I think we talked about it on both we say them as script, but our top 20 customers account for about 72% of the total revenue stream. Right. So that even with the departure of three customers out of the top 20 within last year. If that number had dropped down to, let's say, 65 or 63 you've got to tell me you're having trouble replacing them. But one year later, our top 20 customers, just like last year, still stable, accounting for 72%. So we're replacing big with big -- along the lines of what we want.

And -- 650 customers and 20 customers that accounting for 72% of the total kind that gives you an idea of why we place so much importance at the very, very high end. But even with that, I haven't seen numbers from anybody that suggests that they've got a higher ARPU on revenue per customer is the best and highest in the industry. And if I was to sub-segment that, I'll say OK, what is my revenue per enterprise customer needless to say it would be even higher.

Jeff Van Rhee -- Craig-Hallum -- Analyst

Got it. And then just one more actually two 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 signal that -- is that more related to -- 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?

Robert A. Lento -- President, Chief Executive Officer and Director

What's about existing customers and more about what we're expecting from new side we got a $0.10 as an example it's taken a lot longer to get the first bit of revenue from them than we thought. It required a lot more development work on our side than we initially bought and now we're just starting with them. And so we are -- where we are today we thought we would be six to nine months ago and building from there. And then there is one project for example, whether the company just made a decision to launch -- to one or two 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 doing 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.

Jeff Van Rhee -- Craig-Hallum -- Analyst

Got it.

Sajid Malhotra -- Chief Financial Officer

[Indecipherable] If I look at a customer or two that I could point to and say, you know -- here it is you know one customer departure cost made more million or something that I have none of that and I'll be nothing.

Jeff Van Rhee -- Craig-Hallum -- Analyst

Got it. And then just one one clarification on the Capex, I think the guide was about 20 to 24, if I recall last quarter and it's 25 now. Kind of what's topping 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, you know, your expectations on spend changed?

Sajid Malhotra -- Chief Financial Officer

So I'm still saying approximately 25, I mean, hopefully we come in slightly below that. It could still be within, you know, 20 to 24. I would just try to put a number out there, you know, to make sure that I think of that is 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's a little bit more of Catholics that related to, you know, the build out of our moves 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 demand that is being requested of us.

Jeff Van Rhee -- Craig-Hallum -- Analyst

Got it. Great.

Sajid Malhotra -- Chief Financial Officer

I'm not building capacity in regions anticipating demand. I'm 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.

Jeff Van Rhee -- Craig-Hallum -- Analyst

Got it. Good deal. Okay. Thank you.

Operator

[Operator Instructions] The next question comes from Lee Krowl with B. Riley FBR. Please go ahead.

Lee Krowl -- B. Riley FBR -- Analyst

Hey, guys, thanks for taking my questions. [Indecipherable] Can I just want to take everyone's questions on the second half guide and maybe ask, it's slightly different. But, you know, taking it all in together and just, you know, who gets 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? You know, operating at status quo versus prior expectations?

Robert A. Lento -- President, Chief Executive Officer and Director

So let me ask what maybe a different question. I mean, as we go into the second half, we obviously know which customers are, you know, have been on boarded and where they're trending toward our expectations or not in terms of risk in the second half customers that we have yet to sign and are counting on revenue from, we by bringing the guidance down, we've 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 is dramatically reduced from where it was to -- what we're expecting to meet the current range of outcomes.

Sajid Malhotra -- Chief Financial Officer

So, and we I just kind of add, I mean, we've gone out of away to derisk 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 into a situation where I'm reporting third or fourth quarter results. And while the results on their own are really, really good, but because they are 0.5 million or 2 million, you know, the questions deviate to why did you missed by 1 million which is why, where 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-on-year in the third quarter. And then at a very high rate, possibly the highest in the industry in the fourth or a months to highs in the industry.

And the other community was not as it is, as reflected in the contested numbers. You know, putting much faith in our numbers so it was just prudent, take the risk out of the plan, they can identified all 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.

Lee Krowl -- B. Riley FBR -- Analyst

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

Robert A. Lento -- President, Chief Executive Officer and Director

As it is less than we expected at this point, but it is generating revenue.

Sajid Malhotra -- Chief Financial Officer

There is a major milestone that needed to be hit, we needed to do a conversion of the Gen-1 process done. We needed to convert the Gen-2 parts done, start to see revenue flows back and forth between the two businesses done. Begin to make sure that the billing etc was fully integrated -- go ahead and tie that all together. Take in care of, do the customer conversions. So, I think, things that had to be done or getting done. I think it's again, it's not unnatural when you have a leadership change business, take 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 -- plus rule in that entity. And I think good things will happen. Like I said, I mean, we're having conversations that are broader in schools than when we began. I mean, keep in mind, they have a big play in 5G. They have a big play on the edge and IOT side of the business. So this conversation with a partner will virtue well engaged with can become much broader than just the senior conversations that we had.

Lee Krowl -- B. Riley FBR -- Analyst

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?

Sajid Malhotra -- Chief Financial Officer

I think we build 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. When we're entering the Latin America market, we want feel on the street and presence there. When we're 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're attacking a breast of the marketplace sometimes with very unique capabilities for example, what we're doing with low latency with the gaming customers. So as we 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.

Lee Krowl -- B. Riley FBR -- Analyst

Got it. Thank you for taking my questions.

Sajid Malhotra -- Chief Financial Officer

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

Operator

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

Sajid Malhotra -- Chief Financial Officer

Great. Thanks. Just before we close, I just want to let you know if you'd like to schedule a visit, you're 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.

Robert A. Lento -- President, Chief Executive Officer and Director

Thank you.

Operator

[Operator Closing Remarks]

Duration: 55 minutes

Call participants:

Daniel Boncel -- Chief Accounting Officer

Robert A. Lento -- President, Chief Executive Officer and Director

Sajid Malhotra -- Chief Financial Officer

Robert Majek -- Raymond James & Associates, Inc -- Analyst

Jonathan Charbonneau -- Cowen and Company -- Analyst

Rishi Jaluria -- D.A. Davidson -- Analyst

Timothy Horan -- Oppenheimer & Co Inc -- Analyst

Jeff Van Rhee -- Craig-Hallum -- Analyst

Lee Krowl -- B. Riley FBR -- Analyst

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