Q2 2020 Limelight Networks Inc Earnings Call
[music].
Good afternoon, and welcome to the Limelight networks second quarter 2020 earnings Conference call.
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I would now like to turn the conference over to Dan been sell Chief Financial Officer. Please go ahead.
Good afternoon, and thank you for joining the limelight networks second quarter 2020 financial results Conference call.
This call is being recorded on July 20, or 2020 and will be archived on their 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 facts.
Such as our outlook for 2020, M.B. I am I correct, our priority our expectation our operational plans business strategies secular trends and product and feature functionality announcement and the impact of coping 19.
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, our Bob Lento, our Chief Executive Officer, and Sajid Malhotra, our Chief strategy officer will be available during the Q in a session at the end of prepared remarks, I would now like to turn the call over the Bob Lento.
Thanks, and good afternoon.
Q2 was a strong quarter as we maintained our focus and steady execution. During these turbulent times, we continue to build on the first quarter strong business momentum and strengthen our financial and operational performance.
Revenue in the second quarter was $58.5 million up 28% year over year.
GAAP net loss improved 76% over the year ago quarter, and our non-GAAP net loss improved by almost 200% over the second quarter of 2019.
Adjusted EBITDA was more than six times higher than the prior year amount.
Our balance sheet remains strong.
Im, particularly pleased that our gross margin improved this quarter, both sequentially and year over year.
I'm proud of our ability to generate these strong results as the world continues to navigate these uncertain times from covert 19 pandemic.
During this challenging times, we had managed to add capacity delivered record traffic with high quality transition to a work from home model, well seamlessly supporting and optimizing performance for our customers.
We are fortunate that technology has allowed us to remain actively engaged with both our customers and employees and drive growth in Q2, along with significant progress toward our strategic goals.
Additionally, while commenting on meaningful elements of Q2. It is important to comment on the impact of the black lives matter move into our global community and our line my family.
I want to take this opportunity to express our full support of the Black lives matter movement and share briefly what we have got limelight.
Like many companies we have reflected on ways, we can be better further live up to our corporate values and act.
Internally, we are focused on broadening our commitment to diversity to a number of employee and policy based initiatives.
Further we engaged with our employees to select organizations they want to support.
Together, our employees and the company are participating in our financial donation and matching program to support organizations pushing to end racial injustices.
We recognize much more work needs to be done and we are committed to do our part.
Turning back to our quarterly results traffic levels in the second quarter reached record levels and we believe our traffic continues to grow much faster than overall internet growth rates.
As the World continues to navigate through these uncertain times, we play an important role in connecting people to information and entertainment.
Over 19 has created an increased global reliance on the internet and content delivery.
We are good traction with our video on demand customers and we are encouraged that some live events are starting to return.
Well uncertainty remains as the pandemic unfolds, we are confident in the underlying momentum in our business and expected to continue for the remainder of 2020.
One driver of higher traffic in the second quarter was our participation in the recent launches of new on demand offerings, including the initial launch it NBC Universal Peacock to Comcast only users in April.
As well as Warner Medias HBIO Max launched in May.
Most recently I'm pleased that we supported peacocks nationwide launch on July 15th.
Providing an excellent experience for their customers.
These companies continue to look to us as a trusted partner given our networks high quality performance global scale and strong value proposition.
Well business in traffic from existing customers in Q2 was strong new customer acquisition was slower given headwinds related to cope with 19. Despite some slowness I'm pleased that we closed the number of new logos across all regions and our pipeline of deals from new and existing customers is strong.
I'm, particularly pleased with our growing pipeline services as we continue to build out our edgekeeper abilities.
We're excited about some large customers that have completed successful proof of concept trials and we expect we expect to close several of these deals. This quarter. In fact, one is already closed global GDP provider, who will be using limelight video delivery and our edge services.
Customers choose us because of our unmatched global footprint and connectivity, which positions us to win in the growing hedge market.
As we have consistently done in 2020, we made significant progress in Q2 on our strategy and this years for strategic imperatives progress in these key strategic areas are key to driving our lead in video delivery and edge services.
Our first strategic imperative is expanding capacity to ensure we can meet the expected growth in traffic. We continue to actively pursue our aggressive plan for 2020 to expand existing pops and build new ones in geography in new geographies.
Our goal coming into the year was to achieve 100 terabits per second of the capacity and we expect to meet or exceed that goal, even while having experienced some supply chain issues and travel and operational restrictions, resulting from cobot 19.
The second strategic imperative is optimizing and expanding our proactive management of the network. We're in the process of deploying new next generation network management tools that we believe will provide industry, leading automation to address network saturation issues.
As a result with the great progress we made on this initiative in the second quarter, we're already seeing benefits through more efficiently managing our increasing traffic loads and delivering higher quality.
The significant optimizations will allow us to more quickly react to changes in the internet ecosystem around the world.
Our third strategic imperative is placing more control in the hands of our customers, which are in which we're doing through our newly created developer enablement portal coal developer central.
It has been in beta testing over the past few months and is scheduled to go GA at the end of this month.
It provides our customers with a one stop source of Apiay documentation code samples software development kits and innovative EPA explore experts to answer questions and a form to engage with other developers.
Looking forward to expanding this powerful resource in the coming months and we'll continue to share update that will be guided by a strong partnership with and feedback from our developer community.
And lastly, perhaps most important strategic imperative is driving innovation.
Even with a pandemic our employees continue to work hard and our new product initiatives during the second quarter and I'm excited to share some details of our progress.
During the second quarter, we've launched a new service called lives push ingest, which allows content providers to push live streaming video content to limelight for distribution across our CDN.
Well I push allows our customers to reduced latency better manage eager as costs and significantly scale live streaming event with no threat of overloading their content production or origins shirt servers.
It was a strong example of listening to and partnering with our customers to prioritize development of functionality further enabling them to provide high quality experiences for their customers.
Another area of significant progress in the second quarter was with the second major release of limelight real time streaming.
Building on our existing offering of the industry's first global scalable sub second five video streaming solution.
This new version will add greater functionality and scalability to better meet the significant demand we see in the marketplace.
We're on track to launch real time streaming version two data later this year and also expect to seamlessly move all of our current real time streaming customers to the new version by year end.
Lastly, during the second quarter, we made significant progress with our new service compute capabilities known as edge functions.
This offering currently in beta testing with several customers, who will provide a platform for our customers to deploy their own application functions on our network edge locations and run them on demand.
Which functions is designed to support the complex requirements of our video delivery customers and is expected to fully launch later this quarter.
I'm enormously proud of limelight team and their continued dedication to serving our customers. While also making significant progress on our strategic imperatives. During these difficult times.
Turning now to our management team, we recently announced changes to our senior leadership effective June Onest, we heard Christine Cross as our senior Vice President and Chief Marketing Officer.
Responsible for all aspects of our global marketing and product efforts pristine comes to limelight with a wealth of experience, including almost 10 years I'd go Daddy in a variety of roles, including Vice President of global customer development and marketing.
We're very excited about her contributions already and expect to capture and maximize more opportunities in our market to her leadership.
As previously announced effective July Onest Sajid transition from CFO to Chief strategy officer maintain their responsibilities for corporate strategy M&A and Investor Relations.
And by itself was promoted to the position of Chief Financial Officer.
This transition has been smooth and we look forward to the contributions from both sides of the end Dan in their new roles.
In summary, this was a strong quarter for limelight as we operated very well in an extremely challenging environment.
As I look forward at the remainder of 2020, while there are many uncertainties I'm confident in our future.
Our industry is healthy and growing our business momentum continues to strengthen and our financial position is solid.
We're excited about a number of new product launches capacity additions and new customer deals expected over the next few months.
We believe our strategy and disciplined execution will continue to drive customer satisfaction revenue growth and sustainable above market returns.
With that I'll turn the call over to socket.
Thanks, Bob and good afternoon.
I will review the results for the quarter and Dan will discuss guidance and his priorities and it is the future focus.
Let us review a strong second quarter performance.
Q2 revenue of $58.5 million is a highest reported second quarter revenue in history.
That continues a trend and makes set the third consecutive quarter, but the highest quarterly deported revenue and establishes the revenue run rate in the high Fiftys from low Fortys last year.
It'll be year revenue increased 28% and it exceeded our previous highest second quarter by over $8 million and beat analyst expectations.
International customers accounted for 38% before revenue in Q2 compared to 37% a year ago.
Approximately 10% of a second quarter revenue was in non U.S. dollar denominated currencies.
Foreign exchange headwinds in the quarter amounted to approximately $100000 driven primarily due to the fluctuation in the pop.
Average revenue per customer remained at approximately $100000. This is our entire revenue divided by our entire customer base and we continue to believe our average revenue per customer is the highest in the industry.
Compared to others our size in our industry the financial model focused on fewer and logic customers allows us to accept a slightly lower gross margin, but against a much the what operating expense profile, resulting in higher operating margin profitability and cash flows.
Within this revenue growth and as a result of the global and day. The video on demand business is growing at an above average rate on live events related traffic is well below normal.
Second quarter gross margin was 40.6% an increase of 30 basis points year over year end of very impressive sequential increase of 430 basis points on slightly higher revenue.
Increase was driven by improving asset utilization and negotiated lower costs.
As you may recall or otherwise stellar performance in the first quarter showed some weakness in the gross margin might.
While we are confident the first quarter was an exception it is particularly toward each other's assumptions confirmed in a very strong sequential improvement of 430 basis points.
Our cash gross margin was similarly, a strong 51.2%.
Depreciation and amortization and a small amount of stock based compensation make up the entire difference between GAAP and cash gross margins.
Looking ahead and as mentioned we continue to implement tools that will make on network, even more efficient while at the same time improving service quality.
Operating expenses decreased approximately half a million dollars.
We just wanted a GAAP loss of $1.7 million in the second quarter or one penny per basic share compared to a GAAP loss of $7.2 million or six cents loss in the year ago quarter.
Non-GAAP net income of three cents per share based the two cents loss in the second quarter of last year.
Adjusted EBITDA was the second quarter record high for us totaling $9.7 million compared to $1.4 million last year.
Sequentially operating leverage resulted in 100% flow through of revenue and gross margin increases quarter over quarter.
We ended with cash and cash equivalents of $18.2 million.
At the end of second quarter down about $2 million from the first quarter.
At the end of June this year do you still kept up to 70 days compared to 50 seat at the end of June last year, and 48 days at the end of December attributable to just a couple of slower payments all very better capitalized large customers. Despite this rise we feel very confident in the strength and overall quality off obviously.
For example, we have already received over $15 million off this outstanding accounts receivable balance.
Capital expenditures during the quarter or $8.1 million consistent with our plans for 2020.
As of June Thirtyth, we had approximately 321.7 million shares outstanding.
Total employee count at the end of the quarter was 627 up 11 from the end of last quarter.
Now before I hand, the call over Dan I, just want to see a word of.
To be the limelight deal on the last five years has been a great progress.
When Bob and the board appointed me on enterprise value was about $100 million on we had more questions and be head offices.
Well I didn't fully supported by the executive team have delivered what we believe then what is only possible.
We are growing possibly.
The breadth and quality all quite often is demonstrably better our customers employees and partners. Appreciate us we other responsible business entity in the communities, we serve and over this time, our shareholders had benefited from an almost 10 Ford rise in the enterprise value as it approaches $1 billion.
Looking ahead, we are fortunate to be facing the possibility of chromadex equaling the DS services opportunities without incredible starting point that gives us a competitive advantage over so many others.
As I mean to help laminate capitalize on those opportunities. It is personally gratifying to have that take over the Greens and beyond like CFO. He has helped us all get here and I have confidence you guys have limelight delivered on the opportunity we have.
With that I will turn the call overage debt.
Thank you Sajid before I begin I'd like to take a quick moment. The thanks Sajid for his strong leadership within this company.
As mentor ship to me professionally and most importantly, as friendship for me personally.
Limelight isn't a much different place today than it was when he began his CFO.
I am again excited for the opportunity to continue to build upon this foundation.
From a macro industry perspective, we operate in the $6.9 billion CDM market within that market and inline with our primary strategic focus.
Oh, PT video and online gaming represent they combined 5 billion dollar market.
We believe that growth within this market provides the underlying basis to achieve our long term annual growth target of 15%.
In addition to their organic growth in the CDN space, We believe edge services represents the logical next step in our evolution.
We offer an existing globally distributed network that is already connected to over 1000 Iotsp.
We have a sales teams dedicated to working with existing and new customers to provide ultra low latency capabilities for a developing and expanding suite of needs.
We are working with a growing pipeline of use cases to capitalize on this opportunity over the next several years.
As for the remainder of 2020, despite the continued uncertainty of where this pandemic takes us we feel confident enough to again rates 2020 guidance.
We expect sequential quarterly revenue growth for the remainder of the year and are raising the low and high ends of our revenue expectations to $230 million to $240 million.
We're also raising the low end of adjusted EBITDA guidance, resulting in an up in a revised range of $28 million to $35 million.
We see ourselves, making more investments to accelerate revenue growth in coming years.
The first half a 2020 has definitely been a time to remember on many different fronts.
I'm latest fortunate to operate in an industry that helps people stay connected during the pandemic, we are grateful to not only sustain like growth during these times.
It has also been a year, where many important social issues, specifically the push for equality and social Justice has been more pronounced.
Limelight is proud to support the black life matter movement through discussion and participation, we learn and can effect to change.
Limelight has put in place a program to match employee contributions to approved organizations and I am proud to work for a company that believes together, we can make a difference.
Before we jump into the Q, a nice session given due to the pandemic and other precaution. We are all taking this call from separate locations. Please bear with us as we direct questions as they come in with that I will turn the call over to the operator to begin the question and answer session operator.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
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Our first question comes from Lee crawl with B. Riley FBR. Please go ahead.
Great. Thanks for taking my question hope, everyone, there well and congrats on Sajid, we'll Miss you on your last call, but looking forward to working with them.
So I wanted to start off on the guidance for the second half.
Wanted to just get a sense kind of.
The key inputs to the gnomes and the unknowns and perhaps maybe just speak to as it relates to video on demand and live sports and perhaps some of the.
Some of the more unknowns that you might anticipate for the second half both says upside and potential downside risks.
This is Bob Thanks for your question we.
There are certainly more unknown unknowns.
We don't know.
What you know the future holds in terms of spread and severity of the.
The Kobin 19 virus.
And its effect on on the lifestyles of people around the world. So there is more than the usual unknowns for sure.
What we do know is that even without a pandemic.
The streaming services.
Well, there's more choices today within those choices is more content people are relying more on internet connected devices to consume that content and so we like the long term trend of.
Of the business, but it doesnt make it tough in the short Brian when you're trying to decide what should the guidance b.
You know just to bring it home with an example, you know we don't know for.
Is the NFL going to have a full schedule is it getting are there. There's a lot of unknowns and we've always said for example, when it comes to live events that anyone individual event, even one is because the Super Bowl.
Isn't that material from revenue perspective, but when you strip them all together all over the world everyday it isn't material part of our business and right now that's one zero.
You know in Q2 will pretty close to it and it's not much better than that right now, but we're hopeful and we're seeing signs that that will return, but it's hard to know exactly what the impact of that will be.
At same time.
Mentioned the old GT video on demand.
Continues to be.
Continues to be on the rise and we continue to do well in terms of share of wallet with delivering that so.
Again that you know all into consideration we've come up with the best guidance that we can given the level of uncertainty that exists.
So I don't know cider, Dan you have anything to add to that.
Yeah, I would just say that that limit that.
These OTI t. offerings.
Disney just rolled out to some locations at the end of last year. They continue to roll out throughout this year.
The other offerings like H.B.L., Max and Peacock.
Our just rolling out this year and so you know theres a lot of even unknowns in those assumptions, but we tried to be.
Cautious in what we've built into our numbers.
For the back half of the year, but if we feel confident that will will meet those numbers.
As we go forward here.
Got it and then you did kind of you kinda outlined that you expect revenue to see sequential growth throughout the second half.
On the margin front, you had some fairly significant gains sequentially and I think on the last call you guys.
Kind of outline, but there was a key drivers to see sequential improvement in gross margins throughout the year as well.
Given the games from Q1 to Q2 would you expect that to be the case or or is the bulk of becoming smarter and gains kind of encapsulated in that Q2 number.
Our hope is that that's just not start but let me pass that to budget, maybe give some perspective.
Yeah, I think what we try to doing you know this level. The five years that we started mass is yes, and give you the best possible information across the but.
If they're not significant changes within the quarterly cadence into then we try to explain what maybe causing that.
We feel very good about the progress we made by the first issue was to make it both of you year first quarter was of normal in the low margin that we bought at 36% so could extinct for that and collecting for it aggressively.
I would be a congratulating the team for the job they've done the multiples of getting us here and I think as the business begins to build from here, we would expect the second half margins to be higher than the first half margins.
And the goal is always kind of show sequential sequential sequential and you know it's almost made if it is a little bit lighter or little bit maybe if I wouldn't read you get caught up and that I want to make sure. We don't have another 36% quarter like we did in the first quarter and keep as the 40% art about their begin to move higher there, we'll see we're more focused on the.
Operating margin the cash generation, the three guys slow that EBITDA and our ability to predict our expenses and a cost is pretty good at the start of the best assay.
Got it and then last quick question for me do you guys expect any major renewals in the second half, perhaps as you lap. Some of these are T. T launch is maybe a true up on on traffic or pricing or anything such as such as that in the renewal.
Yeah.
That's not that I'm aware of most of the big ones are behind us.
Got it.
Great well, thanks for taking my questions guys nice job on the quarter.
Thank you.
Your next question is from Robert Magic with Raymond James. Please go ahead.
Thanks, just given that Amazon Prime video is a very large customer for you can you just give us more color on the revenue growth you're seeing with them how your share of their CRM Spanish trend, maybe maybe elaborate on your overall confidence in the long term partnership with them.
No no I know, we don't [laughter], we don't disclose and any of that what I would tell you is and by the way they don't disclose numbers to us in terms of share wallet or anything like that.
What I would tell you is the quality of their content is very good.
You know you've seen them become more aggressive in the area of live events that fits well with where we.
Our positioning ourselves in terms of capability.
And I would say that we're very pleased with the level of.
Interaction, we have with Amazon Prime video around their strategy.
Long term and how we fit into it but I don't think we can.
Kind of be more specific than that.
And can you elaborate on the interest you're seeing around edge functions, what sort of use cases or applications or customer beta testing right now.
We have not gone for.
General availability, so yeah. It will happen closer to the end of August I believe but for sure within the quarter and typically where people are doing with edge functions are cases like Watermarking ad insertion.
Things, where you can spend them up you need it for literally mills sections to seconds.
And then.
You know function sort of goes away as opposed to.
You know.
Serving up in an application that may live for hours or days or longer and so we're seeing some very interesting use cases, where when you try to do those functions in the cloud the latency gets in a way in the way of effectiveness and so.
Well edge surplus compute as sort of a horizontal offering the use cases that we are focused on a very much video centric and we're seeing our customers.
You know [noise].
Fine pine value in a lot of different ways for video delivery, including things as simple as AB testing.
And as complex as AD insertion watermarking and other things like that.
Great. Thanks, a lot.
The next question is from Mike Latimore with Northland Capital markets. Please go ahead.
Yeah, Great. Congratulations you analysts this great quarter.
So just wanted to touch on accounts receivable for second could you elaborate a little bit more you talked about maybe a couple of big customers there.
You know maybe paying already but just just maybe a little more detail around kind of what the customers are telling you why they maybe didnt pay quite quickly.
Yeah, and the in the first quarter, we mentioned that hey, we're willing to work with customers that and that that have been significant significantly impacted by the pandemic and their customers who weren't paying them. So.
A portion of this is is that but that's not the majority of it. The majority of it is just simply timing of payments.
Yeah, we as you know we have some significantly large customers and.
You know when those payments kinda span over the course of a month.
The the a our balance will fluctuate accordingly, and we've already received a significant amount of that cash that went over that month and and we're not worried about it at all our balance sheet and strong weekend, obviously support our customers in this way and so we feel confident that.
It's just a timing thing and it will resolve itself.
Yep, Okay, great and then on traffic what kind of traffic growth your year over year are you seeing and then have you can't can you talk just a little bit about by month, I mean, as it kind of continuing to grow sequentially or your traffic level.
You know again, we don't really disclose what those numbers are I can tell ya.
One of the reports out there is a report by Cisco Internet traffic. They expected this year to grow by 26 video by 35.
Around numbers.
We're exceeding that and then in terms of a month over month traffic I mean, we like what we're seeing from a trend standpoint.
And we continue to grow traffic on a year over year basis.
And I can tell your Q2 traffic was higher than Q1 for example.
But you know obviously.
Our belief on what it will be in Q3 in Q4 is tied to our guidance you kind of have our view on that.
Great. Thank you and then you like you want me to kind of triangulate to that and get a sense of how this is right. We talk about price compression no 15, 20% and you can see what the revenue numbers also the new kind of what's doesn't matter. It costs you referred to get to the numbers. If you want me to get a sense of what's going on in the business.
Got it just last one on edge does that does edge generally help gross margin.
Yes.
Yes.
Thanks, a lot but.
The its business is.
Good for us on multiple fronts phase one to get into the edge business anybody else would have to go ahead and put in place infrastructure, we have large components what that infrastructure already in place.
Unlike the CDN business the business should contact price compression in the industry like it does and the customer bases luck. Most stick here. So if the edge business is just about breaking out through the age not interesting to us, but when you add the dimension off security in private backbone and last mile conductivity.
This is a very Betty inc., and new industry and acquisition and it is really the marketable and we are seeing proof points, but the pipeline that we have the use cases that we have and.
And the position that you're starting to get and how we're performing so I think.
This is one of your space to watch and I expect that we need to where he was in the space.
Great. Thank you.
The next question is from Aaron Martin Newsy with Lake Street. Please go ahead.
You had a question on the edge services side, you talked about some of the initial initially what people are focused on here as examples where watermarking an AD insertion really kind of.
Spending up on demand services as you put it Bob I'm wondering it or do you have people kind of in process or beta on more steady demand that the gambling the gaming the autonomous vehicle is that starting to register.
So what we're seeing there you know to your point is more application driven in the application needs to be close to the edge and so we're actually going to be doing a build out with one of our customers and one of the larger deals that.
We hope to get contracts completed when the next month or so is exactly that where the application itself is being moved to the edge. So that they can deliver.
More.
No real time lower latency video.
Capabilities and so you know the value that we have to add is so you know our locations our infrastructure or kind of activity and then on top of that we are going to be building out.
Container as a service and some orchestration capabilities that will be on top of that so it's really serverless compute would be different than that so think of through his compute as namely things that need to fire up and milliseconds and will last for milliseconds to seconds.
You know the applications.
Might be fired up very quickly, but last for hours and days.
And in some cases never be brought down.
We are.
We are going down both path and we see.
Some exciting growth opportunities in both areas.
HM.
You didn't it maybe I missed it but the the Capex I think come out last quarter, you're still talking about 25 to 30 million for the year, that's still the case.
That is still the case and you know what is remarkable is that that remains the case, even as revenues going up. So we are driving efficiency and we're trying to make sure that we have the right amount of capacity at the right location at the right time for the customers needs and as we work through that we're able to manage.
Very well and make sure that unit all that capacity is deployed at the base right. So that remains unchanged, even though revenues continue to in China.
Got it thanks for taking my questions.
Yes. Thank you thanks or the next question is from Ricci jewelry with D.A. Davidson. Please go ahead.
Hi, guys. Thanks, so much for taking my questions I'm I'm definitely a really nice quarter.
Got a little at this stage.
Hey.
A couple ones first wanted to start with gross margin question, obviously nice to see a sequential improvement from Q1 limbs and even gross margins on a GAAP EPS was up 30 basis points year over year, just how do we think about gross margins first to help them for the full year.
And then you know going beyond that you've talked about a longer term GAAP gross margin target.
50% plus I'll I'll doesn't understand what are kind of the drivers to get from where we are today to that part of it just.
Having a better remedy mixes and network efficiency, maybe walk us through a feel the piece then I've got a follow up.
Yeah, I'll start and then and then if someone wants to add anything feel free to do so so so yeah. I mean, we mentioned that we were disappointed in the 36% number in the first quarter.
And that we had implemented a certain things with within our operations group. So take a look at ways that we could utilize our asset base better.
So I see that come through.
Within one quarter was pretty impressive by the team and so you know last year. We were about 40% margin. You are long term goal is to get into the fiftyth.
We think that you know with with the tools that were implementing to better manage traffic throughout the network.
As well as you know edge services as as Bob mentioned, we expect to have a little bit better margin on that then than the CDN business.
And as we devote more attention to the edge services business and continued to build out those capabilities.
And add to that revenue stream that it will all contribute to that longer term goal getting into the 50.
Okay got it though that's helpful. Then I'm not yeah, I'll Butler and on the call. You had mentioned that you had seen some supply chain issues can you expand a little bit more on that what what's going on there on a you know what's what's kind of the step to mitigate that will shows.
Yes. So the good news is they've largely cleared up you know in Q1, we started to see some issues. So for example.
You know.
One also largest factories for manufacturing solid state drives, which we use in all of our Pops.
We were initially told that that factory had a fire and they have to shut down production, but which actually was true but.
Beyond that.
It was affected pretty dramatically by coded.
And so while we could get servers from dollars Super micro we couldn't get the ssds that we needed to be able to put them into production and then we ran into some other issues down the road, but that's largely.
Has corrected itself as we got into sort of middle of Q2, and so as we look at our capacity build plan between now and the ended the year.
Feel very confident that we either have in inventory or.
Have availability.
To meet our plan. So it was not as productive our Q1 in Q2 as we had planned for but we believe that are planned for Q3 in early Q4 is very solid and we largely have most of that equipment already.
And so we're very confident in our ability to.
Build capacity to meet demand.
Got it that's very helpful. And then last one I think just squeeze it and I want to on a go back to the guidance question I asked earlier and I apologize. If that's this is making you repeat yourself, but just just wondering maybe understand what I I. If we look at the guidance right you're talking about 7% growth in the back half of this.
Versus 30% growth are you had so far in the first half obviously you face tougher comps obviously, there's a level of conservatism how much is clearly the right thing to do but but maybe just help us understand you know what.
What assumptions.
Or are you, making specifically when you're talking about that that level of different immco, while its maybe even macro level assumptions that might be built into that thanks.
Sure so.
First of all I think just keep in mind. This week, we have not grown 10% in our history as a public company.
And we gave guidance this year or some number that was closer to two toady.
Right and we are raising that number at the midpoint due to 25, so think about full year numbers as opposed to the percentages because that takes into account what happened in the prior year.
And I think for us to both from a 200 number which in itself was a Muslim for us to be thinking about a 225 to two toady to Malik from 35 midpoint number is what I consider to be the there the achievement of the hallmark for what we've achieved and I look at the run rate. So for me give last quarter.
How do your 20 the growth would have been dramatically different that to US is just a data point. What is most interesting is what is the run rate of the business.
And we are continually striving for the higher than higher run rate. So we've gone from 40 to 50 fees from fifties hopefully into 16, and then higher from there and that is the progression. We are looking and then we look at makes yet and we think about giving guidance for next year will again be thinking about what should the full years will soon be off the endpoint.
The full year number off this year and not so much quarter within quarter I. So that's how I want you at us.
So I want you to think about full year numbers, because that's how we think.
Oh.
Okay. That's helpful. So much that some people.
Yes. Thank you.
Your next question is from James Breen with William Blair. Please go ahead.
Thanks for taking the question I'd just first on on the edge compute side yeah. The motivation is your offering some of these things coming from your customer base now that's asking you get to put some of these things in place for these products in place and so that is you will see growth not just from your existing customer base, but also from.
It should do customers and then secondly, just on a live sports side, we've seen a few things come back here golf and a few others things given that there's no fans at the events and there's probably some pent up demand at the events that you'd have seen strained or are you seeing increasing usage.
Just because of the environment right. Thanks.
Well I think we're seeing increased use it just because people are starving for you know something your watch.
And hopefully you know that'll that'll continue I mean, you think about the number of concurrent streams that are.
We're being streamed whether this fans in the stadium or not whether there's 50000 fans in the stadium for an NFL game or 100000 for Big 10 football game, you know really.
You know that'll obviously helped the streaming numbers, but as it's not that dramatic.
I think that obviously.
The quality of Oh, the streaming has gotten better and is more available and more people are relying on.
Your cord cutters, relying on streaming services. So I think all that you know bodes well for for us.
In terms of the numbers going forward.
Your first question again was.
Just around the it services side, you know is the decision to get sort of get out aggression coming from your customer base asking for some of the stuff that you're offering.
Yeah, it's kind of interesting I mean, some of this is us triangulating a few it from a few different areas right. So lot of the analysts have been talking about you know compute moving to the edge now for a few years over the next wave.
You know we've started.
Hearing that from some of our customers in terms of having applications in the cloud, they're not quite operating with a wait and see that allows them to really.
Succeed in the market.
And.
So you know and then our ability from a development standpoint to actually get those products designed and brought to market and so we feel good about the opportunity the market place we feel good about our starting point right. So most people don't have size network, we have to kind of activity, we have and so for us it was developing.
Software capability and some of the partnerships to be able to bring it altogether.
But if you think about somebody that is in the cloud business or whatever trying to develop what we have at the edge I mean, that's a big hill to climb before you can match our capabilities. So we feel really good about how we're positioned from an infrastructure standpoint, our ability to develop the actual apple.
Patients to drive it.
And the reception, we've gotten so far from customers in terms of interest.
Yeah, and then as far as a live events go Yeah, we got MLB, starting hopefully next week, we have M. N B aid hopefully starting next week in hopefully those things can go off and along with that there is there's gambling and other gaming sites that are our customers.
And so we're hopeful that that can all contribute to a a strong second half, but we'll see how how things play out but the pandemic, but.
Yeah.
You saw a pretty good uptick in traffic from one of our customers that was streaming English Premier League games and as you know soccer for European football is not not that big in the United States and we actually saw a pretty pretty good increasing traffic you know kind of.
Supporting the point that people are just starving for stuff to watch and so I think it could get excited.
Great. Thank you.
The next question is from Jeff Van Rhee with Craig Hallum. Please go ahead.
Great. Thanks, Congrats guys real real nice numbers here.
A few questions for me, maybe starting at the edge.
The key is really quantify the interest level that you're seeing there, namely maybe what edge was as a percent of pipe, maybe 612 months ago versus what it is now somewhere you can sort of quantify.
The progress you're seeing and then along those lines I think you said that I'm new business, new bookings again were slow in the quarter I'm, just curious the progression through the quarter and post quarter.
Kind of initial shocks from Covidien after people kind of settled into the new norm and you just seems steady slowness or or sort of any changes in behavior month to month.
I think we're seeing steady slowness from a decision making standpoint, I mean, obviously people are making decisions that they deem as.
Critical.
But taking on new projects I mean, it's been it's been a little slower.
And so that's.
Really what's exciting about the edge because you've actually seem to your other question an increase in pipeline for edge and.
Those tend to be to an earlier question higher margin, but they're also larger deals and and so we're seeing the potential for that business.
Really starting to hit from the pipeline perspective, as I mentioned were to close one of the deals you know we've got.
Verbal agreement with a couple others that we hope to get in contract here in the next 30 days or less.
So we're pretty excited about the reception that we're getting from customers regarding.
No the match between their needs in our capabilities because there's still more to go I mean, we have to develop over the next year. So we'll be developing a container as a service.
Capabilities, and some orchestration, but even what we have today.
You know is solving business problems for customers and so we like to trend on on the pipeline and we like the fact that is solving business problems. We're not just.
Replacing some other edge proprietor right.
People are moving from either on prem or cloud to the edge.
To solve a specific business problem and I think that you know that bodes well for the future of that that market.
And then just to add to that made the point on kind of the slow decision, making like offset that we are seeing good traffic increase from people that are home because of the pandemic in the core business fourth CDN deliberately right. So there are aspects, which maybe a little bit slower than what we've talked it might be.
But did not competing aspects that are actually running ahead and overall it leads to an outcome, which causes us to go ahead and delivered a solid quarter and raised guidance.
Yeah, we've actually overall, we feel good about baby are within that if you were saying Hey, you know what part of this business do you think there's no what I think Bob just trying to give you some insight into that that isn't there some parts of the business.
Which I mean did a complete industries that have caught them decimated right and so we have to wait for it and once the Turner.
But but there are other parts of the business that is going well ahead of what we talked in might be just to close off.
The people staying home and caught up is that its distance learning on that it's consumption of video or whether its work from home you know the environment has seen so much that.
Business looks quite different than what we planned for at the end of last year.
Yeah.
Got it fair enough one down one last question for me then also along the lines of the edge just as you're getting more experienced with these deals are getting more of them the pipe in closing some of them.
Yeah, I realize you try to focus on on video related it use cases and as you know you open the eyes and all that features that you're you're starting to offer to developers how have you had to adapt you're selling motion to get those edge customers and get those edge deals through that through the pipe how is that.
How has that changed your motion if at all in terms of the sales push.
In terms of sales push we've we've put together a dedicated team I think of it as an overlay sales force that's very knowledgeable in it services and so you know we've we've put some dedicated focus experienced people to work with the larger core sales force.
But other than that you know the nice thing for US is most of the customers that we are working with our also either using we're interested in using our content delivery services right. So instead of traditional with edge services and a add.
On to it and so it provides a great opportunity for us.
Got it okay, great. Thank you again, Bob Let me just Jeff just one other thing right. This this is all part of a multiyear strategy. So when we decided what part of the CDN business. We wanted to concentrate on we've baked video because we thought that that is where we could add some differentiation.
That's part of the business had better is these that there was dear demand and we thought that growth in that part of the business would be more than the other parts of the CDN. So the selection I'll ask subcategory within CDN with the first step made a couple of usable and you saw that will be bought through to sum up what other revenues then and then this just visited with that so when.
We think about some of the functions that yes, we had tried to jump start and provide some use cases for our customers, but we expect others will come about and you know we will devote our response this year, but people than and go ahead and possibly write some functions that are not completely tied to the video business and that's fine. The idea is to give them a plan.
Before you go ahead, and develop and build and implement what they need for their businesses.
Got it sounds good again real nice numbers, great margins after John Yes.
Thank you Mr. Thank you.
The next question is from Colby Synesael with Cowen. Please go ahead.
Great. Thank you two questions. If any first off on margin you gave great color on with jump the gross margin being having the improvement in asset utilization and.
Hi, negotiate lower costs I'm, just curious again gifts and what color on improvement in operating costs.
And how much of that might it Dan I'd just improvement from some of the seasonal costs you may see in the first quarter how much of that May have been just one time in the second quarter I'd, just say the better sense in terms of how to think about that going forward and then secondly, and I apologize from belaboring the point, but as it relates to lied about maybe more specifically sports.
And is intact, yeah, we're seeing lapse fortunate consistent basis that would come to that would only be upside to how you're thinking about the business. Thank you.
Well, we hope when we look back well, we'll be able to say we were very conservative.
But in looking forward I mean, when we look backward.
Like sports was as I said pretty close to zero, we're not assuming that going forward. We're assuming some contribution from wives sports, but as you can imagine you know we're.
Carrying more on the conservative side, because we don't know you know.
What is going to happen as these team started playing to the players get Kobin, how do you know as a whole host of issues surrounding that and so I don't think it's going to be zero and we haven't assume that but we have tried to be appropriately conservative in our in our forecast.
And then on operating costs I think you should think of this kind of has a sustainable run rate. We've spent a lot of time and energy to kind of look at other operating costs and see exactly what are they are and I would tell you other ability to forecast in predicts that is particularly good so.
So I think we think that this is a good way to think about the business and I think that the operating costs have leverage so they should mark rise nearly as fast as revenue and revenue grows.
Plenty of leveraging that in that business model.
That's what I would tell you there.
Great. Thank you.
Thanks.
Again, if you have a question. Please press Star then one the next question is from Tim Horan with Oppenheimer. Please go ahead.
Hi, guys great quarter on edge can you give us a rough idea what you think the total addressable market will be must have some sense given that you know one of these applications come from other areas on your network and you know it's not that maybe how much incremental spend you do you think you can kind of see per some euro TG clients.
For edge.
I think it's too early to tell I mean, what we believe is and what we've seen evidence of visit the margins are higher.
The service is a stickier service so we like that.
Certainly you know when it is incremental revenue to what we're doing.
You know.
But it's just it's new right I mean, if you go by the numbers at the analysts are providing it is many times larger than the market for CDN.
How much of that is addressable.
Within our customer base remains to be seen but.
No matter, how we try to as I said.
It always comes out that the market for edge service is bigger than the market for CDN.
And on can you maybe just on edge.
How do you think your your capabilities compare to your peers out there, who you're kind of competing with.
And you know who would you say your primary competitor is for the such products.
Well the interesting thing is there isn't really that much out there I know two of our competitors have said there in beta.
Service compute but if you look at it it's really geared towards web developers and and and use cases around website acceleration.
Yeah, clearly some of the cloud providers like us as Lambda at edge, but there are big differences between what we're offering and what they're offering and so I think you know it is just starting to settle out.
This one.
Pretty good sized deals that we are you know hoping to get the contract signed the next Thursday is there a large enough company with.
Large number of resources that they were able to test four or five of the alternatives out there and we outperformed just on a performance spaces. We outperformed all of our competition. So we would obviously delighted to hear that was that holds up in every use case I don't know but.
Yes.
But.
Phil who was a lot of confidence when one of the larger opportunities you're working on those some pretty extensive testing.
With some traditional and nontraditional competitors for us and comes back with the feedback that from a performance standpoint.
Outperformed everybody. So we're pleased with that.
Thanks, Dan just a clarification on the guidance or two points I think one.
Did you say, maybe a question asked I'm well revenue be a positive sequentially for the next two quarters is that part of the guide or how you're thinking yes, okay, great and then.
The goal in the 15% revenue for OTI T. edge would be incremental to that goal to 15% revenue growth.
Included in that 15%.
Okay, Great and I know this has been asked a lot, but the guidance I mean basically 70% for the second half of this year that 2% longer term what gets us from the seven you know to the 15 I guess, you know, obviously, a pretty big step down but.
Yes, I mean will walk you know too easy thinking about 15 for the next couple of years or the second to take a couple of years before the 15 kind of kicks in or any more color roundup be helpful.
Sure. So like side, you mentioned you know with the we haven't grown at this growth rate ever before and what the new offerings that came out this year that that provided the tailwinds in order for us to get there.
Yeah, we think that those tailwinds continue at least for the for the for the near term.
And and while those Tailwinds are happening this edged services opportunity continues to kind of.
Develop itself as well and so you know the 15% isn't it may not be.
Your next year.
But within the relative three to five year time horizon.
Thank you.
This concludes our question and answer session and the conference has also now concluded. Thank you for attending today's presentation. You may now disconnect.
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