Q2 2022 Edgio Inc Earnings Call
$2 5 million well ahead of plan.
All of these are planned to be net run rate savings.
We have also completed the first detailed 2023 bottom line profitability and revenue outlook for the combined companies. There is more work to be done before we can lock in our 2023 plan and provide some guidance. However, we do feel it is important to provide some clarity on our current outlook, we expect 2023 revenue to be similar.
We're between 550, and <unk> $60 million with an adjusted EBITDA $65 million. This would imply year over year revenue growth of approximately 44% and adjusted EBIT margin expansion from 4% in 2022% to 12% in 2023.
Currently this outlook does not include commercial synergies or platform utilization improvements, providing additional upside opportunity and downside risk hedge.
At last year's Analyst day, we committed to taking bold steps to become a leading edge enabled solutions provider.
We outlined what we believe to be a large unmet market opportunity to provide as enabled solutions that simple quiet development for builders and meaningfully improve speed and security for operators. We have in fact delivered on that commitment.
We currently offer three solution angio at ups, which include security NGL delivery NHL streaming each solution, both best in class capabilities and each benefits from a massively scaled edge platform.
At box currently representing approximately 20% of revenue is expected to support significant high margin work for US. This solution is made up of our edge App security and App platform products collectively they provided the most powerful comprehensive cloud security suite development platform and application of CDN in the world.
We believe this solution will be highly disruptive in the emerging high growth with rehab sector.
We have successfully completed the first phase of our broader security strategy and have the most complete whether application and epi protection product in the market. Our solution includes Jos WAF and Bot management capabilities, and we have displaced competitor solutions Accenture, Scripps domestic Verizon and Citibank to name a few.
In mid July our security product.
355 million packet per second Ddos attack one of the largest ever recorded the client had no impact at all.
Our delivery solution boast approximately 230 terabytes per second of edge capacity delivered through more than 300 pops across the globe, making us the second largest and most performance in the world. We have also added 10 terabytes of additional capacity this quarter and are able to work with combined limelight and hedge gas capacity seamlessly to our clients.
It enables us to provide clients with high performance capacity that was previously not possible and positions us well for continued organic growth going forward.
Streaming may prove to be the most unrated solution in our portfolio, representing approximately 25% of our revenue NGL screaming handles mission critical applications for some of the most demanding and well known company our screening solution can capture viewer usage and experience data wherever the bureau goes enabling us to continuously improve Europe .
In real time in fact, we will manage more than 30000 live events and circle or $50 billion ads for clients this year alone.
Conversations with Australian clients indicate our solution is meeting or exceeding their evolving needs as new content and seasonal event rosters rapidly expand we continue to work through our strategic planning process and look forward to unpacking our strategy for this compelling set of capabilities in greater detail at our analyst day.
Our best in class solutions powered by a nationally scaled and highly performing edge platform positions us well to benefit from sector tailwind such as with <unk> security threats cord cutting linear streaming television and games.
In short we continue to successfully execute on our multi year transformational plan.
In the past 12 months, we have successfully completed two acquisitions overhaul all aspects of our operating model removed $50 million of costs and implemented a new blueprint that.
Commercial team our solutions are demonstrating proof of value our clients continue to do more with us and our strategy benefits from spectra tailwind.
We believe all disproportionately business that will continue to capture market share and sustained growth as we look beyond our planning period, we remain confident in our ability to be a growth oriented technology company with a greater than 60% gross margin, 50% EBIT and positive free cash flow, we will continue to be unwavering in its pursuit.
At our upcoming Analyst day, we will go into greater detail Unpacking, our strategy operating plan and financial roadmap. We plan on announcing more details and are finalizing that day. So you can mark your calendars at this time I will turn the call over to Dan to impact second quarter financials.
Thank you Bob.
Revenue for the second quarter was $74 3 million up 54% from the second quarter of 2021, and our third consecutive quarter of double digit percentage revenue growth over the prior year.
Limelight contributed $61 5 million supporting a 27% year over year growth and edge cap contributed $12 $8 million for the 16th the results were included.
Pro forma gross margins expanded to 38, 4% up from 32, 7% in the second quarter of 2021, an increase of 570 basis points.
We added over 10 Terabits per second of capacity during the second quarter in order to support the expected growth in traffic as traffic ramps and utilization improves and we realized synergies from the integration of bench pads. We expect continued gross margin expansion over the next few quarters.
Pro forma operating expenses, excluding stock based compensation restructuring and acquisition related expenses were $28 9 million or 39% of revenue up from 32% last year. The increase in operating expenses driven by the inclusion of <unk> expenses.
June 15th clubs.
Second quarter acquisition and legal related charges in connection with the edge cast transaction were approximately $14 million.
Also immediately following close we began taking steps to implement our target operating model, resulting in a restructuring charge of approximately $4 4 million.
Primarily related to severance benefits for 51 employees across the business.
This will result in estimated annualized savings of over $10 million.
As Bob mentioned, we already have realized $17 $5 million annualized synergy savings and expect to realize an additional $40 million plus synergy.
Second quarter 2022, adjusted EBITDA was slightly below breakeven due to the incremental spend on capacity added during the quarter as well as additional operating expenses from edge cats.
Cash and marketable securities totaled $76 million, an increase of $15 $4 million from the first quarter of 2022.
We have an existing unused $25 million credit facility and the ability to upsize that based on the added edge that collateral.
Spent $13 million for capital expenditures in court.
Our liquidity position today is stronger than it was before the acquisition, we believe that our current balance sheet and target operating model provide adequate liquidity and the strength to continue investing in our business and capital markets continue to tighten and recessionary fears continue.
We have and will continue to take aggressive cost actions further strengthening our balance sheet.
Accounts receivable increased to $108 million due to the approximately $50 million of receivable from edge cats.
We have reviewed the agent in detail and as expected. It is composed of high quality Blue chip customers with strong credit history, we expect DSO to be in the 50 to 60 day range post integration.
For the full year 2022, we are updating our guidance as follows we expect a revenue range of 380 million to $390 million and adjusted EBITDA range of 13 million to $16 million. These.
These numbers captures the previously disclosed streaming client loss and assumed 45% of overall revenue will be from high margin App ops and screening solutions.
We expect gross margins and adjusted EBITDA to continually improve throughout this year and next year as we realize the benefit of planned synergies increased utilization and diversified revenue mix.
As we look beyond this year, our preliminary outlook for 2023 indicate the revenue range of $550 million to $560 million and adjusted EBITDA of at least $65 million.
Beyond 2023, we continue to have confidence in our ability to achieve our longer term objective of double digit revenue growth, 60% gross margins and 15% adjusted EBITDA and with sustained positive free cash flow.
With that I will turn the call back over to Bob.
Thanks, Dan we committed to taking bold steps were greatly improving client and shareholder value and we continue to deliver on that commitment.
While we are no doubt proud of the progress we have made in short order. We remain focused on the opportunities in front of us and what is required of us to capture those opportunities. We are now one of the largest independent edge platforms in the world with unparalleled performance security live event and streaming capabilities.
We're a client first company our products are in fact best in class.
I'll close by sharing some observations, we have across our industry and how that shapes our outlook.
We currently do not see any weakness in a number of hours a day people have eyeballs on glass, we do see some subtle shifts in where they are viewing but I believe our current portfolio, which includes streaming applications gaming and social media again positions us well to fund. These eyeballs wherever they go our growth is no longer tied to streaming trends, but rather than our ability to capture.
Market share.
The aforementioned Ddos attack is indicative of a continued environment of risks for clients around the world larger more sophisticated high Stakes cyber security attacks make headlines every day delivering a secure experience is the only way to meet consumer expectations and continues to help differentiate NGL across our app ups delivery.
Streaming solutions.
We continue to see a large unmet need for outcome based solutions versus tools. The tool sprawl is detrimental to productivity speed and security and we are firmly positioned to address those needs for outcome buyers.
Economic environment creates opportunities for companies that have momentum and a strong balance sheet, we have both as well as a strong partner in Apollo who believes in our value creation strategy, we believe that our strengthening performance coupled with the challenging capital markets will provide us additional expansion opportunities to consider.
We will remain acquisitive and as always we will focus on deals that expand our relative scale extend the use of our edge platform expand our security capabilities and that will immediately be accretive to shareholder value.
We have made meaningful progress in the past six quarters and has delivered three quarters of year over year positive revenue growth are leading indicators support a continuation of this momentum with expected year over year growth of 44% in 2023 and continued improvement to gross margins and adjusted EBITDA.
We continue to strengthen our team from the board and management. We are very excited to have added three of board members and the talent and expertise they bring to hedge you. We're also excited about the recent appointments such as our Chief information Security Officer, and our Chief legal officer.
NGL is quickly realizing our transformative vision and demonstrating our ability to improve profitability and growth. We have assembled the building blocks and establish a foundation of solutions that have a clear right to win in a highly attractive $40 billion market. Our company continues to strengthen.
We thank our investors for their continued support and look forward to working together to achieve what we know to be uniquely possible for us with that operator. Please open up the lines for the question and answer session.
Thank you for our Q&A, if you'd like to ask a question. Please press star followed by one on your telephone keypad now.
Change your mind, Please press star followed by two.
One for French ask your question. Please ensure your devices.
Okay.
Our first question today comes from Mike Latimore from Northland Capital markets. Your line is open. Please go ahead.
Great. Thank you congratulations and all the other news here.
Yeah.
Diversification is an important part of the acquisition I guess as you look to the second half of the year.
What would you expect your largest customer to contribute as a percent of revenue.
Hey, Mike how are you doing it's Bob I'll, let Dave weigh in but that was one of the key parts of this acquisition is that not only do we diversified our product revenue and have a higher mix of high margin revenue, but also client diversification moving to have one client above 10% and that client will be around 13% you can probably guess who that is true.
Actually a very large customer for us so.
Typically they've been running closer to 30% so it's significant.
The concentration of the large client.
Great.
Yes, the only other thing I would add there is.
The other large clients from edge counts with Verizon and we have them locked into a three year contract based on.
<unk> that we put in place along with the acquisition. They continue to be very strong and traffic not only with their delivery service, but with their streaming service.
And so that could be another one that gets up to that level.
That's a good thing.
On the traffic, we're delivering for them and how we are performing for them.
Great great.
Then.
You touched a little bit on the potential influencing their recession or inflation on consumer activity, what about just kind of.
Enterprise sales cycles have you seen any changes there.
Yes, that's a great question Mike.
Historically my experience and what we've seen here as well is that as winter.
Jen tend to see enterprise sales cycle slowdown I mean people are not spending money to holding onto it.
Interestingly with us our thesis on that is we definitely are seeing that but when you look at our solutions. Our solutions are really focused on giving more for less and then reducing GTO. So we actually believe that there is an opportunity for us to come in and provide a better answer where people can trim their budgets and still move their companies forward with better security better performance and better productivity.
So we've actually spent a lot of time with our marketing team putting together campaigns that we started launching about 30 days ago that are really focused on that.
You can have more for less kind of campaigns and so we're going to try to take advantage of that to the best of our ability, but that is a traditional thing in the enterprise sales as the sales cycles extending out basically.
Alright.
Great. Good luck. Thank you.
Thank you.
Our next question comes from Frank Louthan from Raymond James Your line is open.
Okay, great. Thank you.
Hey have you as you've looked at the sort of the.
Portfolio of business out of edge cast any concern either CDN customers may want a diverse file a little bit more now that they may be at some higher concentration of our business with you and then on.
For next year on the Capex is it in a similar range as a percentage of revenue would we expect or would it be running a little higher initially how should we think about that thanks.
Yes, Greg Thanks for the Frank too.
I'll take the first one that was actually one of the really important parts of this deal is that there was very almost no overlap at all <unk> customers and so we don't see that at all you might recall, we had one client that overlap in that client actually wants to do more with us they weren't a big client on either side and actually like the stability of Edgier better. So we're actually expanding that quite meaningfully.
And so we've had actually the opposite effect, we had no overlap other than that and I would say that probably overall the sentiment is geez mgo as a much more stable company than the two individuals who were given where they were and so they're willing to lean in more they look at us as a true alternative to maybe somebody else in the market that they are heavy.
Are you related on today.
That was that one im sorry, what was the second question again.
On the Capex.
Sure, yes that could be similar to similar percentage of revenue or will it start out a little higher before you get into the longer term.
Yes, I'll tell you, how we think about it.
<unk> and then how it shows a quantity we will come out as we get better guidance later in the year, but if you think about the two factors, we definitely expect the company to get better at reducing our capital intensity historically as you know we've run at 10%.
That will reduce for two reasons. One is we have a higher concentration of revenue does non CDN related those are low capex businesses and so you generally are going to have a lower percentage of revenue on Capex number one and then number two the investments that we've been making analytics and other things.
Actually reduces that and then the third thing is our edge extend product actually allows us to have more capacity without having to spend the capex. So those are the three things that we're driving we see very good early indicators and early success in all three of those things and as we go into next year.
There is a point in which we definitely get better at Capex and get more efficient at that we're not really willing to call. It yet because there is so many opportunities available to us to invest in the short term to get very quick payback and we want to make sure. We capture all of those things because it translates into getting that gross margin, where we want to get it too. So I would say as we get closer to the end of the year.
Have a better idea there, but but generally speaking we will get more efficient with capex. The only question really is the timing and how much.
We're not ready to call that yet.
Okay, and where are you as far as a percentage of complete on the Linux conversion.
So we've actually done.
The completion of putting it in production and really now as a rule of conversation and so it's a combination of getting the equipment and then also making sure that we roll it out without creating any kind of impact, particularly going into Q3 Q4, we're having more traffic we've got to do that thoughtfully and take advantage of that so.
As far as a specific timeframe.
I would say we're in that probably.
Second or third inning of a nine inning game.
Got it okay, great. Thank you very much.
Yes.
We now turn to David Matson interchange from Lake Street. Your line is open. Please go ahead.
Hey, Eric.
From Lake Street.
Question regarding the gross margins in the quarter. It seems like you made a success.
Expansion, but with that actually given the outlook for the quarter or was this already baked in.
As you as you came out of Q1.
Yes so.
We added capacity.
Huge amount of capacity the corners, 10, terabytes, and so coming out of last year, we didnt have clear visibility into when we're actually going to get the equipment in order to add that capacity that we felt we needed for the second half.
2022 in order to support the volumes to support the revenue.
Forecast that we were we were rolling out and so it just happened that we had.
A lot of our a.
A lot of Capex that actually came in in order for us to build that out.
During the quarter and so we took that opportunity to roll that out.
Without knowing exactly when the edge cat deal was going to close.
As Bob mentioned, we think that.
Capex can come down.
The second half of the year 23 by better utilizing the.
The capacity that we've recently rolled out but also better utilizing the etch gas capacity that we now have that.
We didn't know we're going to get it as quickly as we did and those are kind of almost vendors.
Gotcha, and then as far as you talked about a sequential improvement of better utilization Q3 Q4.
What are we looking at.
Or is.
Can you kind of narrow things down for us as far as debt.
That noncash gross.
The cash gross margin expansion opportunity, if youre talking bps, we talk.
Thank you to 100 bps or is it larger step up in that.
Yes, I think we're pretty safe in saying that we expect the greater than in.
In the triple digit bps worth up sequential gross margin improvements.
We continue to increase and build on that utilization and then increase the.
Amount of revenue that is coming from the higher higher margin App ops revenue as well as streaming too.
Uh-huh.
Okay and then last question for me is around the incremental synergies, it's terrific to hear $60 million of synergies from the edge guest acquisition up from $15 million, whereas what's the source of that incremental synergy.
So it's a combination of a couple of things a big part of that synergy is actually going straight to the gross margin line. When you look at we have a snack a server sitting in the same building as edge Cas had maybe two rows of apart from each other in the data center, we can collapse those.
A lot more pricing power now in these centers as well and so it was really before we could close there was only so much information we can get our hands on and once we were able to close we were able to let the engineers really get under the covers and dig in and look in <unk>.
Good news was is that we found that our initial estimate was a little bit more conservative and so we were able to take more of that bottom line. So it is largely just taking advantage of.
The redundancy the natural redundancy in the system and other opportunities that related to them.
Bandwidth costs and then obviously.
Colo savings.
Yes, thanks for taking my questions.
Thank you Sir.
As a reminder to ask any further questions. Please press star one on your telephone keypad now.
Our next question comes from Jeff Van <unk> from Craig Hallum. Your line is open. Please go ahead.
Great. Thanks for taking my questions guys. Congrats look some looks really good so a couple from me.
I wanted to follow up on Eric's a second on the gross margin side I think you outlined a number of things you thought you could grow 10% to 15%, 50% gross margins 10 to 15 on EBITDA margins and positive free cash flow over the near term. When you originally talked about edge cast. Obviously you have you've had some lumpiness in terms of the timing of the capex and other items.
But I guess simply put.
Has the timing to 50% gross margin changed based on your best estimate right now.
No I don't think so I think there's really a few things that are probably a little different than where we came in I think one we as you know we had the.
The large streaming customer leave right before closing so that certainly didn't help.
We came to learn that there was lower utilization on the HTS network than we expected that's not a terrible thing it is in the short term but.
It gives us the capacity, we need to really grow the business. So that's an okay conversation and.
And those are really the two biggest drivers and then of course the capacity that came online that we had anticipated last year that we need to buy to make sure that we can support the revenue numbers that we want to hit in the back half of the year. So those are really the three things that came together, although it's very manageable. What we've done is we've basically put our target operating model in place that gets us to that 50% gross margin.
And we've laid against that all of the savings that we have planned we have Alex partners in helping us do that and we've got a very tight process around savings and how it ties into these gross margins and we track it on a weekly basis in a war room kind of PMO call. So we're pretty confident we can get there a little bit of a different starting point for those reasons that I mentioned, but we will get to the same.
Yes.
And then you mentioned a pipeline number I think if I caught it up 50% just to be clear was that ex edge cast and then on that same topic overall bookings did they meet your expectations and any variance within what you booked.
Yes, so the pipeline, 50% when you actually unpack this online like pipelines. So that doesn't include anything with edge cast.
The App ops pipeline is actually up triple digits. So it's heavily concentrated towards the app ops side of things, which we want for the reasons that we all know.
So that's good.
And then bookings yeah, we actually I think we slightly beat our bookings against plan in the quarter and then ramping up to do the same thing in this quarter. So we our bookings are tracking where we expected it to track.
Nothing other than watching sales cycle times, which hasnt impacted us yet, but it's a natural thing to watch is pointed out earlier we.
We really don't see any headwinds there.
Okay, Great I'll leave it there thanks for taking my questions.
No problem. Thanks.
Our next question comes from Rudy Kessinger from D. A Davidson. Your line is open. Please go ahead.
Yes.
Hey, guys. Thanks for taking my questions.
So on gross margins I'm curious for 2023 within that preliminary outlook that you gave is.
Is there kind of a gross margin on the cash gross margin range.
You can expect that's baked in there for 2023 that you can share.
In 2023, we're not ready to go into that level of detail, we do believe that.
We will leave the year end.
50% margins it'll be a gradual step up in order to get there.
And so.
You can you can take that at 30 year, how that rolls out.
Got it and then with I think it's at 45% of the business now.
Being more recurring just can you update us on what the kind of seasonality will be from here as we think about kind of the Q4 to Q1.
Q1 to Q2, and et cetera, and then secondly.
Edge cash do you have the revenue number that they did in the first half of 2022 and how much came from that streaming customer that left.
For the month as well.
Yes, I'll take the first one Rudy.
Take the second one.
So first of all on seasonality.
As you know our business historically has been kind of pruning to seasonality given the limited.
The nature of our focus strategic focus there are really two factors that are going help us offset that one is obviously the recurring revenue <unk> business, 50% that makes a big impact but in addition to that when you look at the traditional streaming revenue that <unk> had is largely focused on live events live events have a complementary seasonality people wise.
Sporting events in the summer.
Spring and our peak time was largely in the wintertime. So so those two factors will help us smooth out seasonality I don't think we're ready yet to say how much but but we do anticipate that we will see a more smooth revenue profile going forward for those two reasons.
Yeah, and as far as the streaming customer goes.
So that they were about 25 $26 million last year.
We had them in the plan through our diligence procedures at a little bit over 30%.
And so it was ramping from the end of last year into this year.
And so it was probably.
Less than $1 million in the first half and greater in the second half.
Got it that's helpful. Thanks, guys.
Yeah.
This concludes our Q&A.
Okay.
Sorry, I was just going to say one other point of view, we talked about in previous calls that our.
Our objective is to get to sequential quarter over quarter consistent growth and so far we've been able to do that and that's kind of what we're trying to go towards so seasonality doesn't mean become a factor in the conversation too much.
This concludes our agenda.
Now back to Paul Lang CEO for final remarks.
Okay, great. Thank you Elliot. Thank you everyone for joining US today, we look forward to sharing our progress in continuing our conversations with analysts and investors and have a great day.
Today's call is now concluded much country. Your participation you may now disconnect your lines.
Okay.
Yeah.