Q4 2021 Limelight Networks Inc Earnings Call
Okay.
[music].
Good day, ladies and gentlemen, welcome to the Limelight networks 2021 fourth quarter financial results Conference call. At this time all participants are in a listen only mode at the end of the prepared remarks.
We will provide instructions for those interested in entering the queue for questions and answer session. I will now I'll turn the call over just to meet a VP investor relations and corporate development.
Good afternoon. Thank you for joining the limelight networks 2000, <unk> fourth quarter financial results Conference call. This call is being recorded today January 28, 2022 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 priorities our expectations, our operational plans business strategies secular trends.
Feature functionalities pro forma results acquisition activity and contributions from acquired businesses.
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 report annual 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 statements, except as required by law.
Joining me on the call today above lines, our president and Chief Executive Officer, and then bond sale.
And CFO , Bob I'd start today's call with a brief discussion of the results and an update on our improve expand and extend initiatives.
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 Bob.
Thank you Sammy and welcome everyone in the fourth quarter, we continued to build on the momentum started in the third quarter.
We had strong sequential revenue growth gross margin and adjusted EBIT margin expansion. Additionally, we delivered positive non-GAAP EPS and generated over $3 million in free cash flow for the quarter.
Revenue came in at $62 $9 million up 14% quarter over quarter and year over year.
Organic revenue growth was 7% year over year.
Our core content delivery revenue returned to year over year growth for the first time in six quarters.
Cash gross margin was 44, 6% up almost 500 basis points quarter over quarter, and 380 basis points year over year.
Adjusted EBIT margin improved to 15% up from 11% in the third quarter.
Ladies zero contributed $3 8 million in the quarter, bringing their total contribution in the year to $4 5 million in line with our guidance of $4 million to $5 million for the year and this despite the fact that deal closed three weeks later than expected.
The underlying momentum of the business supported by leading indicators validates our strategy and demonstrates we have in fact achieved positive momentum in the business.
The growth of our pipeline is one of those leading indicators and is much more diverse thanks to our product roadmap and technology strategy.
Delivery of our edge enabled solutions through James deck, and layers zero platform appeals to a broad range of customers be startups banks consumer product companies or telecom.
The evolution of limelight from a media CDN focus to an edge enables software solutions company anchored by the high growth high margins F Op solutions is well underway.
We have been reporting our progress using the improve expand extend framework as a reminder, our improved program is focused on network performance and operating cost or 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 in <unk>.
Gross margins, let me highlight the progress we have made in the fourth quarter against this framework.
Under our improved program, we have meaningfully improved overall network performance and have fully remediated. The performance problems identified in the beginning of last year. Additionally, we continue to make operational and architectural improvements toward reducing our cost footprint and.
Improve highlights include as reported in our last call third party load balancing and data analytics firm <unk> continues to raise <unk> performance at number one or number two for global CDN for the second quarter in a row.
When compared to January of 2021, we have improved from not being listed in the top 20 to now being consistently ranked number one in the highly competitive North American market. This is an important proof point of the performance improvements, we have and continue making through our network.
December 5th was a record traffic day with traffic exceeding the previous record by 18%.
Remember was our highest traffic month up 14% from our previous record almost a year ago customer confidence is back and we continue strengthening our customer relationships.
We have completed our $30 million of planned annualized cost savings.
Additional opportunities remain largely within the gross margin line and we will continue to pursue these to help fund our planned growth initiatives.
Our client sentiment scores saw very material gains in 2021, increasing by double digits in the second half of the year across our global top 20, we continue to see sustained customer satisfaction and confidence in our improved performance and increase value as a strategic partner.
Network utilization continues to be a focus given its impact on gross margin and EBITDA we.
We have improved overall utilization from the mid teens in the second quarter, two approaching 20% in the fourth quarter.
Fittingly or expand program benefits from these operational improvements by supporting the addition of new clients and expanding existing clients highlights this quarter include.
In the fourth quarter, we grew traffic with the two customers that have meaningfully reduced traffic in late 2020, and early 2021 due to performance concerns we continue working with them on additional opportunities to further expand our partnership.
For the third quarter in a row 18 of our top 20 customers grew revenues by more than 20% year over year.
Total bookings increased 45% quarter over quarter, we have closed many new opportunities in the fourth quarter with more than 10 of those averaging more than $100000 in annual contract value.
We are ahead of plan to expand our growth capacity and we continue to invest.
The pipeline for both solutions content delivery and App ops continues to grow.
For our core content business. It is the best we've seen looking back several years. The overall mix of our pipeline is also unprecedented.
We continue to attract large media companies for content delivery, but with a wrap up solution. We are also relevant to a variety of company sizes and types, who are looking for a better solution for their high Stakes web applications.
These companies were out of reach with our previous strategy.
Onto our extend program, we have fully integrated our layer zero acquisition.
We launched layers zero by limelight in November delivering a best in class edge enabled App op solution designed for the outcome buyer with integrated performance productivity and protection.
This leading solution will be further bolstered with additional security offerings to be announced in the coming weeks.
A key differentiator for our layer zero solution isn't as jam stack routes.
This next generation architecture is gaining traction as demonstrated with two James Tech focused private companies funded debt Unicorn valuations.
Our layer zero solution, coupled with our World class Global edge network and robust professional services enables us to deliver blink of an eye speed reduced operational costs and a reduced attack surface for mission critical web applications.
We are seeing that outcome buyers are not just mid market companies, but also large enterprises. Our strategic thesis has been that tool proliferation is creating complexity and confusion and edge enabled solutions can address this complexity.
We are seeing validation of the strategy across companies of all sizes and scopes.
The combination of limelight as global network and layer zeros edge and application solutions have quickly come together and demonstrated value during the quarter. We had a new logo win with a large global consumer products company that owns about 100 household name brands in their product portfolio.
Just two months back we would not have been in consideration for this RFP and today, we are not only in the conversation, but more importantly are winning and taking business from our competitors.
We have many similar opportunities in our pipeline and are adding resources to accelerate our sales efforts.
On the third quarter results call. We indicated that we will continue to invest in rebuilding our sales team at that time, we were tracking at about one hiring week.
In the fourth quarter that pace accelerating we leveraged our internal network to attract others, who saw the turnaround at limelight and we're excited to jump in.
Our pivot from a media CDN to an edge enabled solutions company and our best in class layers zero solution is resonating with people that want to be part of something unique and growth focus we expect to continue our pace of investments and now expect mostly complete our hiring goals for this year by the end of Q1, a full quarter ahead of plan.
There remains a lot to be done, but we continue to be energized by the progress we have made and the opportunity in front of us that trajectory and outlook of our business supported by measurable leading indicators organic revenue growth gross margin and adjusted EBIT of progress is positive we promised our clients shareholders and employees, a new and improved <unk>.
<unk> of limelight and these proof points confirm we are in fact, demonstrating our ability to execute on that promise.
At this time I will turn the call over to Dan to report fourth quarter financials.
Thanks, Bob revenue for the fourth quarter was $62 9 million a growth of 14% from the fourth quarter of 2020 layer zero contributed $3 8 million, which implies 7% organic growth in the quarter.
This is a significant recovery from revenue declines of 17% and 8% in the last two quarters.
We have returned to year over year quarterly revenue growth and expect that to continue throughout 2022 of more on guidance in a moment.
We delivered this performance despite global supply chain headwinds barring the macro event, we would have come in at or above the high end of guidance.
Our top 20 clients accounted for approximately 74% of total fourth quarter revenue compared to 75% last year.
Cash gross margins expanded to 44, 6% from 39, 8% in the third quarter due to revenue growth higher traffic and realizing cost reduction measures.
Total cash operating expenses were $18 4 million or 29% of revenue down from 34% of revenue in the fourth quarter of 2020.
We continue to realize the benefits from our improved management of operating costs. As previously mentioned, we continue to invest in sales and marketing and have hired ahead of plan given our ability to attract qualified talent.
The aforementioned operational improvements resulted in a meaningful sequential increase of adjusted EBITDA to $9 7 million from $6 1 million in the third quarter.
This represents approximately 60% improvement sequentially.
Also scaling revenue and the corresponding operating leverage in the business allowed for 46% flow through of the sequential revenue growth.
Cash and marketable securities totaled $79 3 million, an increase of $3 $5 million, we spent $3 7 million for capital expenditures.
DSO at the end of the quarter was 64 days compared to 77 days at the end of September and as expected. It is migrating back to our historical range of 50 to 60 days.
And the guidance.
Just on a rigorous budgeting process forecasts from our larger clients and being cognizant of hardware supply chain constraints as well as COVID-19 related traffic patterns. We are guiding 2022 revenue in the range of $240 million to $250 million.
Implying a 10% to 15% top line growth.
Based on our previously provided guidance of $20 million in 2022 revenue per layer zero. This implies our organic business growth of 3% to 8%.
With the existing products gain traction in new products to be launched over the next few months. We are also accelerating investments and rebuilding our sales team and as previously mentioned, we expect to complete most of the hiring in the first quarter.
As a result, we are guiding to an adjusted EBITDA range of $24 million to $28 million for 2022.
This implies GAAP EPS loss in the range of 22% to 27.
And non-GAAP EPS loss in the range of one to <unk>.
This range of guidance is what we view as a highly expected outcome.
One final note for modeling purposes, we expect about 141 million shares outstanding at the end of 2022.
That I will turn the call back to Bob.
Thanks, Dan I thought it would be helpful to take a few minutes to talk about three topics that are important to us and im sure are important to you our long term vision M&A strategy and 2022 priorities.
Let's start with our long term vision.
There is one thing to take away from this call. It is that the transition of limelight from a media CDN to an edge enabled solutions company is in full swing.
We have one of the largest and best performing edge networks in the world.
In support of this strategy, we continue to invest in modernizing our edge platform beyond cash to include compute capabilities able to deliver various types of edge enabled solutions.
This supports our business improvement objectives, and a few meaningful ways.
Our total addressable market expands from $12 billion to beyond 37 billion.
Within this Tam we can address a more diversified set of clients and solutions supporting improved growth in network utilization.
With improved utilization and SaaS solutions, we can continue to improve our growth rates and our gross margins.
Accelerating growth with higher gross margins enables us to further invest in more growth.
Later zero was the first of what will be many meaningful steps in support of this strategy. We will continue to extend our solutions with investments in security and connectivity solutions at the edge.
Our edge enabled solutions, we will continue to focus on helping outcome buyers address the cost complexity and security issues associated with handling large complex and distributed high Stakes web applications and by the way. The pandemic is only exacerbated this problem now companies have to manage the performance cost and security of.
<unk> workloads that are accessed by distributed workers.
While these are exciting growth opportunities for us. We also see an opportunity for continued growth in our content delivery business. We believe there are some secular tailwind most notably the rise of advertising video on demand or Avon live events and increasing adoption of <unk>. We are now well positioned to benefit from these headwinds given our <unk>.
<unk> performance and lower operating costs.
In total these improvements enable us to transition from a low gross margin usage based model with customer concentration to a company grounded in recurring revenue, having a diversified customer base and maintaining high gross margins that can support further investments in growth.
Let me take a minute to highlight our M&A focus we have seen tremendous success with layers zero and we continue to look for assets that can be action in a way that will both accelerate our strategy and create immediate shareholder value.
Many of the capabilities required in our long term vision will be organic but some will be through acquisition. We are and will continue to be both inquisitive and disciplined in our approach. We have an underutilized network with significant capacity that we can put to work to create shareholder value and we continue to look for partners, who can also benefit from <unk>.
Third vision similar to what we have done with layer zero.
We do have a strong balance sheet and access to capital for the right deal.
To answer your question on the types of acquisitions, we look for first assets that help us expand our overall industry scale position second assets that bolster our security and App op solutions and third assets that will help us launch and accelerate our edge enabled connectivity strategy.
Now.
Let me highlight a few of our key priorities for 2022.
First productive growth capacity.
We have seen meaningful productivity improvements, resulting from our redesigned land perform and expand model. We are also pleased with the caliber of new salespeople, we have been able to attract in the last few months.
With this improved productivity and our ability to attract top talent, we can now accelerate the expansion of our commercial growth capacity.
Edge architecture.
Network performance is and will continue to be a key focus of ours.
We will continue building on our recent progress with architectural improvements as an example, we have identified a set of architectural opportunities that could increase capacity and overall throughput by as much as 30%. The progress made in 2021 was meaningful and we will continue to build on that progress.
Third automation.
We are leveraging the deep software skills attained with our layer zero acquisition to increase automation across our business. This will improve efficiency quality and increase productivity.
Fourth developer ecosystem.
Our developer first focus with layer zero is critical to our product roadmap, we are making investments in marketing to the developer community focused on integrating their preferred tools with our <unk> solution.
Our solution is currently fully integrated with over 40 popular developer frameworks. This is more than two times that of our leading competitor.
Fifth edge enabled solutions.
We are building a profitable growth oriented company in support of that Youll see a steady stream of new and improved product announcements from us some of it will be obvious.
Such as the security features to be launched this quarter and some of it will be more subtle such as the graph you will that was launched last month, each announcement will be grounded in our new continuous customer value focused product delivery mentality.
But all of this we will focus on having core IP that delivers the best price performance feature set for the outcome buyer by leveraging our edge platform.
Overall, we are very happy with the progress. The team has made in such a short time, our energy and optimism remains high and we are steadfast in continuing this momentum we remain committed to creating unmatched value for our clients.
Returning meaningful value to our shareholders and building a company culture that inspires and grows our employees.
We thank our investors for their continued support and look forward to working together to achieve what we all know is uniquely possible for us.
With that operator, please open up the lines for the question and answer session.
Certainly if you would like to ask a question. Please press star followed by one on your telephone keypad. If for any reason you have bank term missed that question. Please press star followed by two again to ask a question press Star one.
A reminder, if you are using a speaker phone. Please remember that pick up your handset before asking a question we'll pause here briefly as questions are registered.
The first question is from the line of Colby <unk>.
The AFL with Cowen and company you May proceed.
Hi, This is Michael on for Colby two questions. If I may I think you may have addressed this earlier, but I just wanted to clarify last quarter. You had noted that two of the top 20 CDN customers that you had not fully rebounded or didn't rebound as quickly as expected.
<unk> seen the traffic from these customers rebounded fully now and instead of back above what was the prior high watermark for those customers.
You talked about additional cost savings opportunities that you can drive in 2022 any color on how much.
Of that is baked into your current guidance. Thank you.
Hey, Michael Thanks, Bob how are you two great questions.
The first one in regards to that too.
Came back we started to see that traffic come back in Q4.
We plan conservatively for this year. So we have them in flat year over year, but I would tell you coming out of the gates.
They are proving to be ramping faster than we have in plan and so that's a positive thing. It's early obviously and so we'll see how the whole year plays out, but we see them as the strong relationships they are coming back.
And if they come back at a rate that we're seeing right now that'll be goodness for us, but it's still in January so, we'll see but we're feeling pretty good about those relationships.
And the second question.
With the cost saves and the second question. So there are a number of things you might recall back in previous quarters, we talked about the fact that there were operational savings that we wanted to get last year, which we did that was a $30 million. We've also identified a number of architectural savings that essentially youre going to hit the gross margin line and we have.
So as identified we have some of that baked into the plan. What we think is a reasonable number there is an opportunity to outpace those savings but.
Tom Youre doing architectural changes to your network you want to be very thoughtful slow methodical and so we took a pretty conservative approach to that based on the fact that we don't want to go too fast and get savings and then go back to some performance problems. So so we took a very cautious approach in the plan.
But there there are meaningful opportunities for us to improve our gross margins to numbers that will allow us to support continued growth going forward.
Investments in growth.
And if I could squeeze one more question and you just talked about margins and the opportunity to expand that and then also in the press release you highlighted that.
You see yourself driving higher margins as he transitions out engine and boat business. How are you currently thinking about the long term margin potential for this business as you complete the transition. Thank you.
Yes I.
I think I touched on this one.
The analyst day, a little bit and I'll go back to that conversation I. Appreciate you were there if I remember right.
<unk>.
The way, we think about it.
Really think about it in two businesses think about US is our core content delivery business. We have historically had challenges in that margin, we'd like to get that north of 50%. So somewhere between 50 and 60% we see a path to get there based on the things I just talked about it's not going to happen Super quickly, but it's not a Sunday conversation either it's a very thoughtful over the next 12 months to 15 months kind of thing when you look.
At our App ops business, that's more of a SaaS like business and those margins are north of 70%.
And so when you blend those two things together will improve our overall margin just by running the business more efficiently with the things we have planned for this year, but as we.
Have more App ops revenue is a part of that kind of weighted average our overall margins will go up as well. So when you take that as we improve that number.
You should see us looking at north of 60% kind of on a strategic basis, but we're not going for any timelines around that at this point.
Perfect. Thanks, so much guys.
Okay.
Okay.
Thank you Mr Sarmiento.
The next question is from the line of Mike Latimore with Northland Capital. Please proceed.
Sure.
Thanks, Scott congratulations on the solid results there.
In terms of layer zero in the quarter can you provide any color just on the bookings the bookings quarter for layer zero.
Sequentially.
Sequentially or year over year, and then is this.
New logo or expansion had announced.
Yeah sure I'll take that thanks, Mike.
It's nice getting the congratulations on the quarter. So I appreciate that.
I'm layer zero.
We.
We came out with the with the guidance of roughly $4 million to $5 million of layers zero revenue for the year.
We would have exceeded that number had we closed the deal in the timeline that we originally thought it was going to happen.
And so we feel really good about the layers zero momentum that's being developed the product launch that came out a couple of months ago that we announced and continued feature functionality announcements around that product.
In next year's guide, we have approximately $20 million of layer zero revenue and so if you just.
Take a look at the run rate right now at roughly 13% to $14 million and model that out to the number that we're expecting in 'twenty two.
We feel very strongly about the potential and the growth that we have in the model.
And even an opportunity for some upside there.
Great and then.
With regard to the sort of the two big customers I think you said you've modeled that.
Flat, but they are exceeding our expectations. So far I think one of the drivers of that was just more new content coming online.
I guess is that still one of the key drivers and how has that gone.
Yes, that's a component of it new content always helps.
That helps everyone, who is involved with the delivery of that particular customers content, but I think the bigger opportunity and what we're starting to see here in Q4 and into Q1 already is the performance improvements I think are actually contributing to some market share gains that we're seeing there is still not.
On the.
New content.
Coming up for particularly.
Our largest customer but.
We're still seeing some some pretty nice traffic gains from where we were in Q2, and Q3 and I think thats solely based on our performance and our relationship with that customer that we feel very strong.
Yes, I'd like to add to that.
Yes, one more addition to that might be.
Coming out of the gates pretty strong and one of the questions I asked the team and say, what's driving that and and the answer when we did the research was it's a number of customers across the board. So it's just general.
Good performance across the board, which is also a nice there's no concentration that performance.
Okay.
Okay got you.
Thank you and good luck.
Yes.
Thank you Mr Latimore.
Next question is from the line of James Breen with William Blair You May proceed.
Thanks for taking the question just a couple of questions on traffic you noted in the press release that you hit new traffic Records.
On December 5th.
Some thoughts there around was it a broader market expansion.
Yes.
Gain back share or are you sort of growing your share in line with where the market is.
And any comments you have just around pricing in general.
How much would you have to give up with from a pricing perspective to gain the traffic. Thanks.
Yes on the traffic I mean December was really strong for us.
And as you can imagine some of our larger customers, especially some of the larger download customers.
The holiday season, they see a significant uptick in traffic as new gaming consoles and new games come out and we participated in that.
Especially on the customer that.
Wed like go up a couple of years ago based on some price points that.
They wanted to get to that we didn't feel were profitable, but based on how we're structured now the cost savings that we have in place.
The load balancing that we have in place with that particular customer we're able to make that.
An attractive proposition for both parties.
So I think that was primarily the driver of traffic as well as.
As Bob mentioned, the broader base of our customer that 18 of the top 20 continues to grow at significant pace like that grew at over 20% for the third quarter in a row and so we're very excited about that.
First vacation of our customer base continues to.
Move along and it's because of those 18 of the top 20 customers.
Continue to grow their traffic with us based on our performance improvements.
And then your second question was related to.
Remind me what your second question was.
Yes, just on the practices enrolled in the market.
Yeah pricing.
In 2020 I think.
With Covid and the significant amount of.
New direct to consumer options that were available.
Saw a little bit higher about price compression.
Then what we had in previous years and so I think that's starting to normalize we can model in.
Yes.
The 15% to 20% price compression generally.
And we feel pretty comfortable with that within our 22 guidance.
That being offset by significant continued growth with primarily those 18 of the top 20 customers.
Yes, and one other thing I would add about pricing and I alluded to this a couple of quarters ago. When we built our plan. This year, where we had clients that would have a material impact on our stock price were to change, we actually had conversations with them and tried to bake in to the best extent, we can any anticipation we have in the plan that we put into guidance so to the best of our ability we're trying to.
Pricing a non factor in the conversations it's a normal course of our business that we have to manage proactively and not have it.
For us and I think we've done a good job of that this year leading into the year.
Great and then just maybe just strategically around as you highlight the value of the network.
How do you bring more developers into the fold in terms of getting them on your platform.
Providing.
Yes, there's a couple of things we're doing there and that's a really important part of our strategy. In fact, we have a prisoner and dedicated driving that strategy in the company wakes up every day focused on that and Theres. A couple of things that we're doing number one making sure that we are pre integrated with a number of the development frameworks that they use and so we have today 40 different frameworks that we're integrated with our leading competitor is half of that.
So we're pretty excited about that and that just makes it easy out of the box secondly, there are.
Full of open source tool.
<unk> that really dominate the market.
And we are making sure that we contribute to those and that our tools are pre integrated out of the box so that when people use those.
Essentially just extend right into our capabilities seamlessly with that and so that's a part of what we're doing so basically we're just embracing their communities and the way they in their ecosystem and the way they work and making sure that our tools.
Resonate and then of course training in PR and stuff like that as well, but it's largely getting to where they are in their communities and with their tools in their ecosystem.
Great. Thanks.
Thank you. Thank you Mr Breen.
The next question is from the line of Jeff Van roughly with Craig Hallum. You May proceed.
Great. Thank you congrats guys real nice numbers here a number of questions for me.
On the bottom on the sales side it sounds like the hiring has gone very well and you said you may hit your target a quarter early by the end of Q1, what's the catalyst and how are you considering or thinking about either the next tranche of sales hiring what do you need to see how do you think about that.
Yes, I think so the way we're doing it is we built the plan that we wanted to get to a certain capacity that will support the numbers.
We built an asymmetric plan, so theres, probably a 70% chance of Overachieving the plan and a 30% chance of energy to the plan and we wanted to build the sales capacity to match that risk profile and so we will get to that at the end of Q1, which is a quarter ahead of where we expected and then we're going to kind of digest that gives us a chance to really prove those numbers out and then if we see the productivity that we expect to see.
We can go back and look to do that again, but we really plan the company in 90 days sprints right now.
And so we will continue monitoring that we're really happy with the caliber of people. We're getting I think people really love the story and are buying into the strategy.
It's a great place for salesperson to be with a product that they really know they can sell so but.
You want to take a step forward measure.
Observed make any adjustments and then take your next big steps so as we get to the next quarter.
We'll probably have more information about how that's working and what our steps going forward are and where we want to.
Press forward our goal quite frankly is to be able to have a conversation to say hey, what we're going to spend some of our EBITDA and expanding our sales because we are doing so well with it but we'd like to actually have that success under our belt before we actually have that conversation.
Fair enough gross margin was quite a bit ahead of me this quarter Dan.
How do you think about that playing as we kind of jump through the quarters in this fiscal.
Yes, yes, I mean, we're very pleased.
With the gross margin improvement quarter over quarter, that's the second consecutive quarter that had significant momentum in that line.
Utilization as we've been talking about is the key driver.
And so that's.
That is the key driver in the quarter.
As we head into next year, we continue to see gross margin expansion as we get the full year benefit of some of these cost savings that we've implemented.
As well as.
Continued.
Growth within the layers zero product line that.
That we get better margins on than the.
The existing core CDN business, given the asset light sort of SaaS platform.
Revenue stream that that relates and so.
We're we're estimating another $4 to 500 basis points of margin improvement.
Going into 'twenty two.
Based on that.
That diversification of the product offering as well as continued realization of our cost savings as we go throughout the year.
That's helpful.
Bob You mentioned securities coming.
Pretty fast and furious I guess with the new launches and introductions, but just can you level set expectations, what kind of impact do you think security can have to the margins revenues just how do you how do you level set it.
Yes, I think so there's a couple of ways, we're thinking about security I think initially it's really making sure that all of our products, particularly app ops and our CDN has very robust native security as I talked about before it's like having seatbelts and airbags in your car or you kind of expect it and then the second phase of that is where we can really start to robustly growing social security is an enterprise solution.
Both of those are on the slate for this year.
And so youll see some announcements here in the next next.
A few weeks this quarter for sure we will do.
First big release around security and then probably every quarter after that youll start to see meaningful announcements around that.
Looking both organically as well as inorganically as well.
Yes, Okay, and then last from me that you referenced and I missed it.
Earlier in the call something about supply chain could you just revisit that supply chain headwinds yes.
Yes.
The supply chain impacts us is getting hardware servers.
Whether it's on our CDN network or whether we needed for our edge extend product. We had a number of deals that we could have closed in Q4 and Q3 for that matter, but.
We're really managing that theres, a huge backlog with servers and so we're not everybody's channels with that we're navigating through that and we've got a balance deals that we can close versus capacity, we need for peak time in December and so we did a pretty good job in December but we definitely left some deals on the table because of that and we'll pick them up in the next few quarters.
And that's just something that we're all dealing with it's the industry, where we are right now we have deep relationships. We are a big buyer and so we've been able to navigate that pretty successfully and we anticipate we still will but it doesn't it does sometimes force us to have deal slide into the next quarter that we didn't expect to.
Yeah, Yeah, Okay, Yeah real nice progress here guys. Thanks for taking the questions I appreciate it.
Thank you.
Thank you Mr. Dan Murphy.
The next question is from the line of Brett Feldman with Goldman Sachs. You May proceed.
Great. Thanks for taking the questions.
You, obviously are expecting some solid growth from the layered year acquisition. This year I was curious if you could give us a little more insight into the visibility in other words, how much of that forecast do you already see in the funnel and also be interested in understanding of the growth that youre expecting to what extent is that leveraging the combination of.
There.
Existing capabilities.
You're seeing yet in other words youre selling the solution you expect to sell solutions that are capitalizing on both of them or is it still just really the funnel and the capabilities that layer is here who came in with such that you would still have all of that incremental upside as you further integrate the business.
Yeah. Thanks, Brett.
We feel really good about the visibility into the revenue projections going into 'twenty two.
Their product is something that customers.
God in buy versus.
The opposite where we have to go and sell in.
Yeah.
Our salespeople in front of their technology people to sell it like this is a product that people come to buy and Thats evidenced in.
As well as the partnership with layers zero coming into the limelight, we closed a significant opportunity with the.
Well known large consumer product company that we wouldn't be able to have.
Wouldn't have gotten on our own with limelight and I don't know if layer zero would have gotten on their own and so the partnership of the two companies coming together and offering an integrated product with the with the CDN product attached to it.
<unk> gives us the confidence that the $20 million number that we're putting out there for 'twenty two.
Is achievable with some upside there so.
We feel really good about that acquisition and the technology that it brings to the platform.
Yes, Bret the way the way I would think about it is there's really kind of three broad set of capabilities that we need to have to really play at the full value. One is obviously the edge network, which we've addressed this past year.
As the latest <unk> capabilities, which we also addressed so those two things are fully integrated and we get the full value out of both of those solutions and it is a one plus one equals four story, but in addition to that security is also a part of that conversation and that's why we're really focused on that and the announcements that we'll have here. This quarter will really shore up that part of that third leg of the stool. If you will and then we'll continue to building on all three of those things.
Yeah.
Okay. Thank you.
Thank you.
Thank you Mr Feldman.
The next question is from the line of Eric Martin Newsy with Lake Street Capital You May proceed.
Hey, congrats on the quarter and really like the 2022 guide there I just have a question about seasonality.
Not sure if I missed it or not but historically.
I know history is little bit distorted here between covenant and the company's own issues, but we would have seen about a sequential step down about 10% or so between Q4 revenue in Q1 revenue does that still hold true given all the other puts and takes that we expect.
Lawrence here over the last 18 months.
Yeah, Thanks, Eric I think youre right on that number.
And that's what.
That's what we're projecting and then for.
Progression throughout 'twenty, two we expect as we continued to build the pipeline of the layers zero product and as we continue to make performance improvements and continued to gain the growth.
With those larger.
Direct to consumer streaming products on the CDN side.
We feel that there's progression throughout the year.
And as we continue to build on the SaaS type revenue stream that the layers zero platform provides us then that seasonality that seasonality will become a little more muted.
But where we're at right now is I think 10% is a good number going into Q1.
Okay and then one other question I took a look at the Capex that you spent for the year.
$15 8 million and then looking at your forecast for 2022, let's say it looks like roughly $7 million.
At the midpoint incremental spend where you're pointing those incremental capex dollars in 2022 versus 2021.
Yes, yes, I would say that two major areas.
We wanted to improve our caching.
Capabilities and increase that because when we are able to store more content closer to.
The end users that just provides better performance more reliability.
And so we're looking at new servers that will increase those capabilities for us.
And then I would say the other item is as we're looking at transitioning our operating system from its current Freebsd.
Base to a Linux space and Thats going to require some capex spend as well and so we're looking at that and building that into the into the forecast.
That'll that'll lead to the incremental dollars that we're spending in 'twenty two.
And Eric just to put some color on that incremental spend to give you some dimensions.
<unk> that Dan talked about we've identified opportunities, where youre seeing less than 12 month payback on that Capex. So it's very good IRR very good return and then on the Linux, that's where we get there.
That 30% productivity lift that we referenced that will obviously hit the gross margin line and we're really focused on gross margins. We think that's an important thing to fix and so that's where that additional capex goes what will drive revenue in.
And the other one will drive gross margins.
Understand.
That covers it for me.
Great. Thanks.
Thank you Mr. Martin Newsy.
The next question is from the line of <unk> <unk> with D. A Davidson you May proceed.
Hey, guys. Thanks for taking my question.
Dan If I go back to Eric's question, if we assume a 10% step down from Q4 to Q1.
<unk>.
Clearly imply kind of several million dollars of growth sequentially from Q1 to Q2 to Q3, which are historically seasonally tough quarters, just with traffic trends et cetera, and so what gives you conviction.
Even excluding layers zero, which might grow sequentially without the seasonality, but what gives you conviction that in the core CDN business.
To grow in those historically tough quarters.
Yeah.
Yes walking through the math, so with that 20 million guide that we have on layered zero.
Built into the numbers.
We're guiding for somewhere in the neighborhood of 3% to 8% growth on the <unk>.
Our CDN business and I think.
With the progress that we're seeing on performance and we did see growth in the largest.
18 of our top 20 customers and Thats been consistent over the last several quarters.
As we as we.
Worked our way out of this drop.
That we came into the year with.
That.
Those couple of items gave us the confidence that.
That sequential growth quarter over quarter is achievable.
And then kind of.
Maybe with the <unk> top 20 customers I guess with customers, we've spoken to they'll kind of look at you guys and other <unk> out there in the first start with your capacity that you have available and then allocate traffic based on your performance, but keeping that ceiling based on your capacity I guess, what those 18 of the top 20 that you've been growing 20% year over year with the last couple of quarters are you are you.
Anywhere close to kind of your ceiling with those customers based on their capacity or do you still see.
Plenty of runway to continue gaining share with them.
Yes, I think Theres a couple of things to think about there I think when you look talk about capacity. There is overall network capacity, which is how we've traditionally thought about it but the other capacity is things like cash and cash is really what drives performance when somebody has a big library.
More of that library, we can get closer to the end user the better the performance is going to be and that's why we're making those investments we talked about capex around cash. So so we look at capacity, we're looking at our cash capacity, we're making investments there that's actually going to have a much better improvement in performance and.
Revenue then gross capacity, but gross capacity also when we do the architectural improvements we think we'll get a 30% lift in capacity.
The existing footprint that we have and so that to your point when you have the performance improvements with the cash combined with the additional capacity we should see the revenue come in we're also improving the utilization overall, we highlighted that we went from middle teens to approaching 20, we think we can get past that particularly when we're doing these things.
Which we're starting to sell a lot more of them now as well. So those three things combined allows us to get the growth without having to go crazy on capacity, just manage our capacity better and make expansions where it's appropriate.
Can make.
Got it and then just lastly, because I guess on security.
With some of your competitors that some security products out there for a while so just how do you think about.
At this stage coming out with security products that are differentiated and maybe have some advantages versus your peers.
Yes, I think generally.
The way to think about it as security historically has been very preliminary oriented when you have all your assets sitting in a data center or in a corporation you build a big moat around those and with everything moving to a distributed world with cloud and SaaS and micro services and how people are working virtually.
That model has a lot of challenges and so well a lot of our competitors have been in security for a long time.
Where security is going is quite a bit different than where it has been and so we have the opportunity to come in at a point, where there is quite frankly, a big inflection point in the security industry.
So we have to do those premier things, which we're doing.
But we have some ideas of where we can really differentiate.
And edge based on Euro cloud based era, where we can really excel, particularly when you combine it with our App ops solutions I would expect that much like we did last year, we will come out sometime midyear. This year and have a deep strategic conversation analyst day, if you will and will cover things like security in more depth.
We have all of our story buttoned up there and have a little bit more to talk about.
But we do feel confident we can be relevant in that space.
Thank you Mr. Kevin Berry.
The next question is from the line of Frank Louthan with Raymond James You May proceed.
Great. Thank you back to the Capex, if you get the higher end of your range of guidance, what would that translate to in terms of new growth or would it be more more acceleration of the projects that you have underway.
Yes, yes, I would say that.
It is primarily related to the project that we highlighted with cash in the transformation of the operating system to Linux, but with those as Bob mentioned.
One the Linux is designed to improve throughput, which will drive gross margin and the catching.
Improve our performance we have done some trials with.
Several pops.
Of the footprint that we're moving toward.
And it had very favorable outcome, which is leading us to the.
Expectation that as Bob mentioned that ROI on that equipment is less than a year to turn that around and so we feel really good about those opportunities in expanding both the top line as well at the margin line.
Through that Capex.
Great.
Apologize if you addressed this earlier in the call.
I missed it.
Walk us through where you are with getting some layers youre software engineers and automating some of the legacy highlight network and can you translate that into any of that four to 500 basis points of margin benefit that youre talking about being able to achieve.
Yes, so we are fully integrated now.
<unk> zero team is fully integrated.
It's all one team.
<unk>, our CTO and his engineers are.
Embedded with our development and product teams and there are a couple of different pieces and Ajay has been very focused on how we can improve the revenue and performance in gross margin and there's a couple of areas you hit on one automation so youll start seeing.
Starting this quarter in second quarter, I'm going to start to be very aggressive with automation. They are already working on things that stuff and kind of testing and pilots overall that out.
And then obviously, we talked about the caching and we talked about the Linux upgrades and all those things really also part and parcel with some of the skills, we picked up combined with our infrastructure team.
Really the beauty of that.
Okay.
We gained a significant amount of software skills combined with our significant infrastructure and scale skills and together, they've really been able to figure out ways to be much more efficient as a company.
But to answer your question, that's happening now and Youll start to see those improvements we actually have improvements every quarter built into the plan based on that automation.
Alright that sounds great. Thank you.
Thank you Mr. Walton.
There are no additional questions waiting at this time, so I will pass the call over to Bob Lyons for any additional remarks.
Thank you operator, and thank you everyone for joining US today, we look forward to communicating our progress in continuing our transparent conversation with analysts and investors. We wish you good health and happiness in the new year. Thank you.
That concludes today's call. Thank you for your participation you may now disconnect your lines.