Q3 2021 Limelight Networks Inc Earnings Call
[music].
Yes.
Yeah.
Hello, and thank you for joining today's call and for your patience the limelight.
Networks Q3 G fast towards you on financial results Conference call.
Couple of things when I was Victoria another corner of your call today, if you'd like to ask a question. During the presentation you might decide by pressing star one on your telephone keypad I'll now hand over to your host to meet see enough from limelight networks to begin to meet please go ahead.
Thank you operator good afternoon. Thank you for joining limelight third quarter financial results Conference call. This call is being recorded today November four 2000.
'twenty, one and will be archived on our website for approximately 10 days.
Let me start by quickly covering the safe harbor, we'd like to remind everyone that we will be making forward looking statements on this call.
We're looking statements.
Since there are not strictly statements.
Thanks Jess.
Our expectations, our operational plans business strategies.
A key feature.
These pro forma results.
Acquisition activities contributions from acquired businesses.
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 <unk>.
Risk factors discussed in our periodic filings.
Our most recent annual report on form 10.
K and quarterly reports on Form 10-Q.
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 statement, except as required by law joining me on the call today, Bob Ryan, Our President and Chief Executive Officer, and Dan One sale.
And CFO.
Well I will start today's call with a brief discussion of the results and an update on our improve expand and extend initiative. Dan will then review financial results and guidance.
Following that Bob will use the remainder of the call to discuss aspects of our strategy and corporate initiatives going forward. We will then open the call for Q&A I will now turn the call over to Bob.
Thank you Sammy and welcome everyone as.
As expected the third quarter marked a reversal from the second quarter for us as we saw strong sequential growth and margin expansion.
Revenue for the quarter came in at $55 2 million.
A 40% quarter over quarter cash gross margin was 40% up more than 7% quarter over quarter and adjusted EBIT margin was 11% up from breakeven in the second quarter.
Consistent with our previously outlined strategy to regain and grew our competitive position, we have taken meaningful steps to improve the performance and cost of our globally scaled network expand our client relationships and extend our edge enabled solutions.
These efforts have allowed us to improve our revenue gross margin adjusted EBITDA and free cash flow despite normalization of streaming patterns post COVID-19.
We remain confident in our ability to continue building on this progress going forward.
And our strategy summit in August we presented a vision for limelight to Dido and they plan to execute against it we are on track to deliver on that plan and remain encouraged with our initial traction and momentum.
As a quick reminder, our approved program is focused on network performance and operating costs are expand program is focused on revenue growth with existing and new clients and our extend program is focused on introducing new edge enabled solutions that increase network utilization growth and gross margins.
Let me highlight the progress we have made in the third quarter against our improved expand and extend framework.
Under our <unk> program, we have Remediated. The previously discussed network performance issues and we continue to improve our cost model highlights include <unk>.
Third party load balancing and data analytics firm per Bobs is rated limelight is demonstrating operated performance globally in North America, South America and Europe.
This is a great achievement, especially when compared to January of this year. When we were not listed in the top 20. This is an important proof point of the improvements we are making to our network.
We have completed 90% of our $30 million in planned annualized cost savings, we have identified additional opportunities and we will continue to pursue these to help fund our planned growth initiatives.
And this last quarter, we improved our client sentiment scores by 13 points quarter over quarter across our global top 20.
Fittingly or expand program benefits from these operational and cost improvements by supporting the addition of new clients and expanding existing clients highlights this quarter include.
In the third quarter, we closed two tier one wins one a win back of a large software clients, who left US a couple of years ago and the second a large gaming company. We now support the three largest gaming console companies. Both of these clients began to ramp in late third quarter, providing additional momentum into Q4.
Previously we had discussed with two of our top 20 clients and meaningfully reduce our traffic due to performance concerns both have begun to return traffic, albeit slower than we would've desired.
You may recall that our largest client uses algorithms to allocate traffic based on performance and has been down year over year, we did not see the traffic rebound as rapidly as we hoped but we do continue to see growth. We will continue to optimize our network performance to address their prioritize kpis with the intent of gaining traffic share faster with this client we have signed two new.
Contracts for additional live sports venues and remain an integral strategic partner to them with ongoing discussions on additional initiatives.
For the second quarter in a row 18 of our top 20 customers grew revenues by more than 20% year over year.
We have closed more than 30, new opportunities in the third quarter with 10 of those averaging more than $100000 in annual contract value and two customers with <unk> of more than $1 million.
We are ahead of plans to expand our growth capacity and have grown our sales team by 25%, including a generally or to help us create more leverage in our sales organization.
We saw a strong pipeline growth in the quarter and our focus on new logos is paying off with new logo bookings up more than three times quarter over quarter.
As highlighted during our strategy session edge extend as a key initiative that helps us extend our network edge platform and solutions into a service Provider's network and portfolio of offers is key element of our strategy has outperformed our plans in this third quarter.
I went to our extend program. We are pleased to announce the closing of our acquisition of layer zero. This acquisition is critical to our evolution from a network company to a performance software technology company highlights of this acquisition include.
We now have the world's first Javascript Configurable CDN that gives developers control over the edge from within their application.
Layer zero utilizes server side, rendering edge caching and optimizations across the browser edge and service tiers to guarantee the best performance.
All of this with self service provisioning at Onboarding.
This all supports our ability to deliver a best in class edge enabled app solution designed for the outcome buyer with integrated performance productivity and protection.
Layered zero also brings us a highly talented applications and product development team. We're excited to be building products on a global private edge platform.
I think a poor layers zeros founder has joined limelight as Chief Technology officer, and taken technology product and operations and discharged.
We will be announcing and launching new security and develop our solutions in November and December. These solutions enabled with our world class edge network position us to be a compelling competitor in the multibillion dollar App ops market stay tuned for more exciting news to come on this one.
The combination of limelight global network and layer zeros edge and application assets have quickly demonstrated value during the quarter. We had a new logo win with a large mattress retailer a global travel industry leader tripled the number of sites with US we renew the business of a top ranked U S Bank and launch the site of a $6 billion retail giant.
The pipeline is growing and we are adding resources to accelerate this momentum.
Overall, we are very happy with the progress. The team has made in such a short time that being said much work remains to be done we are steadfast in building on our recent progress and remain focused on the significant opportunity in front of US we are committed to creating unmatched value for our clients returning value to our shareholders and building a company culture that inspires our employees.
We thank our investors for their continued support and look forward to together building a company we can all be proud of.
At this time I will turn the call over to Dan to report third quarter financials.
Dan.
Thanks, Bob revenue for the third quarter was $55 $2 million the growth of 14% from the second quarter of 2021.
<unk> zero contributed less than $1 million based on the September close date.
As Bob noted, we believe the operational improvements implemented over the last several months and the alignment of our client success team with the metrics that matter most to our clients.
Additionally, as well to participate in the expanded market share in traffic gains as more and more new content is released.
While we have temporary headwinds with a couple of our clients and how fast we ramp traffic back.
The actions, we are taking are increasing our ability to grow profitable revenue over the long term.
Our top 20 clients accounted for approximately 77% of total third quarter revenue compared to 79% last year.
Gas gross margins expanded to 39, 8% from 32, 7% in the second quarter due to revenue growth and previously announced cost cuts.
Total cash operating expenses were $15 6 million a decrease of 27%.
$6 million year over year restructuring and transition related costs and acquisition and legal costs totaled $4 million in third quarter.
We have started to realize the savings anticipated from the actions taken in March of this year as well as improved management of all operating costs.
We expect restructuring and transition related charges to be approximately $1 million for the fourth quarter as we continue to evaluate opportunities to further optimize our performance and cost structure.
The aforementioned operational improvements resulted in a meaningful sequential increase in adjusted EBITDA to $6 $1 million from slightly above breakeven in the second quarter.
Cash and marketable securities totaled $75 6 million a decrease of $44 million.
Paid $31 million for the acquisition of layers zero and $2 3 million for capital expenditures.
DSO at the end of the quarter was 77 days compared to 47 days at the end of June the increase in accounts receivable is related to timing of payments received as well as adding layers euro receivables to our consolidated accounts, we have already collected a significant portion of the receivable balance and anticipate DSO to normalize within our usual range of 50.
Up to 60 days.
And the guidance.
Based on forecast from our larger clients and their view of their content and post COVID-19 traffic patterns. We believe the range of $60 million to $65 million represents the most likely fourth quarter revenue for limelight and we feel it prudent to adjust our full year guidance accordingly.
This represents a record revenue quarter for us with a return to organic year over year growth.
With existing products seen traction in new products to be launched over the next few months. We are also accelerating investments and rebuilding our sales team.
On a full year basis, and accordingly are adjusting our guidance as per the following.
Revenue from $220 million to $230 million and $215 million to $220 million.
Adjusted EBITDA from $20 million to $30 million.
$12 million to $15 million and non-GAAP EPS loss range from five to 15.
Loss range of 12 to 17.
This adjusted guidance aligns to consensus and falls within a range of what we view as highly likely expected outcome.
Our adjustment includes handicapping, a few events for timing risk.
Our conservative view of traffic ramps and post COVID-19 fourth quarter seasonality traffic patterns.
Fourth quarter is seasonally the strongest quarter of the year and we believe this year will be no different but wanted to be thoughtful and helping the investment community understand the dynamics of the business and capture the variances, especially as our revenue diversification efforts gain traction in the third quarter.
And adjusted EBITDA guidance, we are adjusting to reflect our better than expected progress in expanding our sales team.
Given our improved sales traction as demonstrated with new logo bookings up 300% in the third quarter, our planned new product launches in November and December.
Our success with edge extend we feel it is in our shareholders' best interest to accelerate our growth expansion plan ahead of our offsetting cost saving initiatives.
All of this lays a solid foundation to build on in 2022.
A couple of housekeeping item, there is $2 3 million of acquisition and related legal fees and G&A, which is nonrecurring in nature and separate from the $1 8 million in restructuring and transition related expenses.
Second we closed the acquisition of layers zero in September and part of their compensation in stock.
So for modeling purposes, you should end the year with 134 million shares outstanding and based on current assumptions for layer zero performance based our views. We expect about 141 million shares outstanding at the end of 2022.
We continue to expect layered zero to contribute about $4 million to $5 million to our revenue for the year from its September close approximately $20 million in 2022.
With that I will turn the call back to Bob.
Thanks, Dan.
We are seeing secular growth in our content delivery business and with layer zero, we are expanding into the application CDN market with our existing and soon to be extended products that leverage the strength of limelight and layer zero, we will be a leading provider of edge enabled SaaS solutions. This comprehensive set of tools for App ops simplifies operations for the outcome buyers offering <unk>.
Our load performance and integrated security, along with superior unit economics and margins.
While we closed the acquisition of layer zero, just a few short weeks back we are seeing material synergies across both companies. We continue to look for similar assets that makes sense as a part of our portfolio and would benefit from our infrastructure. We have an underutilized network with significant capacity that we can put to work for our customers and our shareholders. We have a strong balance.
<unk> and access to capital and we'll continue to look for assets that will bolster our value proposition and platform.
With that operator, please open the lines for the question and answer session.
Thank you, we'll now move on to the Q&A session.
If you'd like to ask a question. Please press star followed by one on your telephone keypad now does it change your mind. Please press star followed by two to withdraw your question. Please.
Please ensure that when comparing to ask your question your telephone is muted likely.
First question comes from Frank Louthan from Raymond James Frank. Please go ahead. Your line is open.
Great. Thank you just a couple of quick questions, one talk to us a little bit about what you've been working on with the color around the sales force. When do you think you can start to see some of that traction and then similarly, when when do you think later.
Against it gets fully integrated it starts helping but.
Selling the base business and.
Driving new customer revenue.
Yes, Thanks Frank.
Start with the latter as far as integration it really was a pretty seamless integration, we're almost fully integrated at this point.
Before the deal we spent a lot of time through the according process really I'm thinking through that and so and most of the acquisition as it revolves around the product and technology in the engineering side.
And so that largely has been fully integrated.
She is our CTO now and he is normalized that team and sort of everything out. So you pretty much you wouldn't even know the difference at this point.
We're here and in the office as far as building out the sales team we talked about the fact that we paired sales back earlier in the year, given the lack of productivity and other challenges there and we really had to do two things we had one.
Youll get more products to sell that we thought would drive the performance of financial performance that we wanted and then secondarily, we wanted to build that back with a little bit of a different profile than what we had hired historically and so with the the argument players zero as well as some of the other things like edge extend that we've launched we have a really nice portfolio of things to sell and we've been hiring accordingly, we've been.
<unk> four over Q2 or Q3 about a higher a week.
Four quota carrying sales reps and so the goal is really we decided we were having so much good success with that we would accelerate that a little bit in this quarter. So that we can get the full year run rate of that capacity next year. So we're having pretty good success there.
Alright, great. Thank you very much.
Okay.
Thank you Frank our next question comes from Jeff Van <unk> from Craig Hallum. Please go ahead.
Great. Thanks, Congrats on call. It a couple for me guys.
While you're on layer zero, I mean, I'm interested in and the anecdotal that you've seen you've heard in the field about you or your customers.
Reaction to the App ops strategy.
Any anecdotal that.
We're calling out at this point.
Yeah, Hey.
Hey, Jeff how are you not a problem at all we've got plenty of those I'll give you one the most recent one we had a meeting on Monday with a.
Top 10 bank, who is not a current customer is a customer one of our competitors and was exploring.
This whole App ops category that we talked about we spent a full day with him off side, we had the CSO CTO and CIO and we went through the full strategy, we talked about what theyre doing and at the end of the conversation and the feedback was while we really think this is cool we can have immediate impact we went through when we measure their websites as an example, and we found that we can get.
Them to be Google compliant with performance and speed within 30 to 60 days, which they werent today and secondarily to that we can really help them with their digital transformation. So the outcome from the conversation was well we can do some things immediately and have an impact and then obviously over the next few years as we really transform our digital footprint. We think that this approach that you guys are taking us.
Absolutely the right approach for us and so we're obviously excited to continue those types of conversations.
That's helpful on the sales side, it's such a quick pivot here two things.
Progress out of the sales team on the new edition customers, we're not we're not calling the overall count pretty steadily bleeding off.
Just to be clear that that momentum is primarily at this point in the base business.
Quired layer zero or is it and talk a bit more about just what's changed there why the success. So quickly in terms of new type of exposure.
Yes, I think a couple of things I think one layer zero was actually growing pretty rapidly, although albeit small numbers and largely.
In the U S and so.
Actually what we've been able to do is take their product, which was very hot and desirable and build more capacity around that so in some cases, where we have like in Asia Pac. Our sales team is doing a phenomenal job always has by the way. That's one of the areas. We didn't have to touch and they've taken this new product and run with it.
Some of the other regions, we have to build out capacity and so so it's really the combination of in places where we've already had a pretty good process in place.
Really nice shot in the arm to have this kind of product and then in the places where we have a need for more capacity. We are building that enable to do that pretty quickly.
So it's a little bit of.
Our momentum that they brought in with them and then also expanding on that momentum going forward.
Great at the strategy day, you talked a lot about the outcome firing you get a lot of homework to go find those people and describing they were what they were and that.
We have not sort of targeted offerings would be perfect for those people.
To what extent have you had the ability to pivot our sales efforts in the pipeline build at those customers any feedback on the miracle progress there.
Yeah, I think it's hard really at this stage attract progress other than because really the way you do it as it's really how you build your pipeline thats, how youre going identify that we've done a lot of work in understanding exactly how to.
Target those customers and build the pipeline and create leads and demand Gen.
And so we're seeing that our pipeline is growing pretty rapidly.
From best we can tell it's growing at the rate we expect it's going to take a couple of quarters for us to see if that translates into higher close rates and more productivity from that the other thing youll start to see is us we're refreshing the brand and Youll see a lot of things starting probably as soon as next week all the things that we'll do to refresh the brand that really kind of speaks.
Speaks to that kind of customer.
Messaging branding and so forth and so I'm pretty confident we're doing all the right things, we're getting the right traction.
Let's see how the next few quarters Pan out and.
To put some numbers behind that but all the leading indicators that we see are supporting our thesis.
Yes.
One last just a numbers question Dan Dan.
In both Q4, and then and then out into 'twenty to the extent you're willing to share just am.
Q4, and 22, how do we think about gross margins and then 22 can you put any bounds around.
Initial thoughts on revenue.
Yes, we won't get into 'twenty two revenue just quite yet we're still going through the budgeting process right now and we'll have an update.
Once we come out with Q4 numbers.
As far as gross margins for Q4, we expect to see continued expansion in our margins sequentially from Q3.
We had a really good sequential expansion in margins from Q2 to Q3 of over 700 basis points and we expect at least another couple of hundred basis points from Q3 to Q4.
Okay, great. Thanks for the call appreciate it.
Hey, Jack one more data point I'll give you and the last question in regards to the <unk> Interestingly. We also saw report come out from Gartner in the last months and they basically did their own analysis came to the same claim which is that over half of the buyers in this market and are looking for an outcome type solution. So that was a great validation of our strategy as well.
Okay I appreciate it.
Sure.
Okay perfect. Thank you Jeff for your question, we will now move on to Eric Martinez from Lake Street.
Please go ahead.
Yeah, I like the way you pronounce that.
I had a question regarding the.
Just the I.
I guess the change in head count here. So if we go back to the March restructuring, we shed 96 employees and then between the end of June and the end of September we had 70 employees.
Is the bulk of that.
Field sales reps and with the new sales reps.
I don't need to go down you know kind of department by Department, but help me understand the 96 gone in the 70 new arrivals.
Yes so.
The quarter over quarter expansion as with the with the layers zero folks coming on board and so.
It sounds like a the the two large customers didn't come back with the same vigor that we had originally forecast they are coming back just not as quickly as we thought does that explain.
Playing the bulk of the seven and a half and then I want to follow up on the.
Just to be with us.
Yeah, you got that right I think.
Those two the two customers that we've highlighted in the past we continue to see a slower Ramsey expected, but we're also very encouraged by 18, though the other top 20 that you'll are expanding at a at a very quick rate and quicker than what we've experienced here historically and so on one hand.
We're going to and we expect to be continued strategic partner with those other two but at the same point. We're happy that we are able to not only diversify our product offering with layer zero acquisition and some of the other things that we're doing with edge extent, but diversify into other customers as well.
The decrease the concentration Bruce that we've had over the years.
Yeah.
Erica.
Yeah, and I'll add to that I've had a number of conversations with both of those those clients in both very strong and bullish on us but.
But as you know.
Between these around cost savings and the company and run more productively. The first was more of an operational that is largely the 30 million that we are capturing this year, we think the number actually that much higher potential related to how we can improve our architecture and improve the technology overall on our pops into utilization, but that takes a little more time, you've got to make an investment you've gotta put stuff in the field and.
So that's how we get confident that we're going to continue to see those savings as we go into next year for a number of quarters in the in the future. It's really identified things that where we have projects focused on they just take a little bit more time, we actually in our plan had initially a slower ramp of salespeople in almost in line with those ability to capture those savings, but we had the <unk>.
Tended to get more quality salespeople, we thought that says you know much better asks for next year. So so we decided to to take advantage of that.
Yeah, and and thanks for working in that point that gross margin expansion continued to be a couple of hundred points, you'll corner over Carter that was gonna be my next point to you.
[laughter] alright, yeah, sorry, Yeah, Martin and it just.
Yeah, Yeah, we we do feel confident that India.
Yeah, I was gonna say, we do have confidence that the progress in the last quarter. This quarter will continue into next quarter for the same reasons and in fact, the other piece of your question will gives us confidence in it can you can grow with you know the the the two tier one wins that we had in Q3, which we only captured probably about a few weeks to a month of those and then of course later zero.
Only captured about a month that as well so all three of those things, which are all very material, we get the full benefit up in Q4 and the three of those you know.
Could range up to you know anywhere from $8 million to $10 million in queue for.
So if if you just EBITDA margins go up cause 400 basis points sequentially from the third quarter for core about half of that is coming from the gross margin line and the other half is coming from leveraging G N a sales and marketing in our day.
I think that's right.
Okay, great. Thank you.
Thank you.
Perfect. Thank you James.
Well normally furniture coffee since you have a phone call and in K coffee. Please go ahead.
Alright, great. Thanks, I was wondering if you could just expand your mind us the potential emanate targets are types of targets to what you're looking at it sounded like you remain pretty active.
In in in that can get bolt more things on and then secondly, as it relates to the new products that you are intending to launch in in November and December how quickly do you think it does could actually start to have an impact in terms of Bob Avenue.
With the new features in December since effectively these are.
Products, which you're already selling your customers are already familiar with what you're doing with those you're expecting to do the upsell if you will to be.
Fairly quickly in terms of if it's a success.
Yeah, Yeah exactly yeah.
The leading indicators that we're seeing with client conversations pipeline growth all supports that thesis.
Okay. Thank you.
Okay.
Thank you called they either mine.
To ask a question. Please press star followed by one or two pads.
And your telephone keypad.
And our next question comes from Mike Latimore from Northland Capital. Please go ahead.
Yes.
Hi, This is other deal on behalf of Mike Lattimore.
Could you tell me how much did your top five customers contribute as a percentage of overall revenue.
Yeah.
Yes, we don't we don't break out the top five as we mentioned you know our top 20 is roughly 77% versus 79% in the year ago quarter.
And and we do have a couple of customers that are over 10% and those have.
As we're required to disclose in our SEC filings and those have remained consistent year over year.
Alright.
And regarding your 18 off yet when do you guys still most that are growing at a 20 plus in data revenue.
We do expect the other two customers to catch up on what timeframe would you expect the other two customers to grow at 20% as revenue estimate.
Well, what I would say is they both have the potential to grow at that rate for sure and so we were asked to do that I think in one case, it's largely going to be contingent on.
Content coming out they they rely heavily on new releases.
So it wasn't a lot of content created during the Covid season. So so that's going be a big factor there are they're trying to offset that with live events, but early stages with that and then the second one is really just us earning their trust back we were doing a good job doing that conversation I had with them was in fact the word you used was it's kind of remarkable what you guys have done in six months keep up the good work, but just.
Know that we're going to be a little bit more patient coming back with you than than we were last time for obvious reasons. So so we're confident in doing all the right things it's just.
It's just a matter of a building that trust back and continuing to grow so.
I, it's hard to have a crystal ball on both of those cases I'd love to say next year, but that would be kind of irresponsible to do so but definitely that's what we're shooting for.
Alright, alright, thank you.
Okay.
Thank you, Mike and as a reminder, if you'd like to ask a question. Please press star followed up on the telephone keypad.
We currently have no further questions I will now pass over to Barb lives for final remarks.
Okay.
Thank you operator, and thank you everyone for joining US today, we look forward to communicating our progress in enhancing our communication with analysts and investors, we will be presenting at several investor Bester conferences in the fourth quarter and details can be found on the Investor Relations section of our website. Thank you for joining us today.
Thank you everybody you may now disconnect your lines.
Goodbye.
Yeah.
Okay.