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Limelight Networks (NASDAQ:LLNW)

Q4 2012 Earnings Call

February 19, 2013 4:30 pm ET

Executives

Gillian Reckler

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

Douglas S. Lindroth - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Treasurer

Analysts

David M. Hilal - FBR Capital Markets & Co., Research Division

Aaron Schwartz - Jefferies & Company, Inc., Research Division

Michael J. Olson - Piper Jaffray Companies, Research Division

James Wesman

Mark Kelleher - Dougherty & Company LLC, Research Division

Donna Jaegers - D.A. Davidson & Co., Research Division

Operator

Good day, ladies and gentlemen. Welcome to the Limelight Networks Fourth Quarter and Full Year 2012 Financial Results Conference Call. [Operator Instructions] I would now turn the conference over to Gillian Reckler, Limelight's Director of Investor Relations.

Gillian Reckler

Good afternoon, and thank you for joining the Limelight Networks Fourth Quarter and Full Year 2012 Financial Results Conference Call. This call is being recorded on February 19, 2013, and will be archived on our website for approximately 10 days. If you are online, we have updated our standard investor presentation, and you can find it in PDF format within the Investors section of our website.

Some portions of this conference call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are all statements that are not strictly statements of historical fact, such as statements regarding future events or future financial performance, including, but not limited to, statements related to Limelight Networks' market opportunity and future business prospects, guidance on financial results, statements concerning anticipated future growth and profitability, as well as management's plans, goals, strategies, expectation, hopes and beliefs, and statements concerning the anticipated effects of pending or completed business combination or other strategic transactions.

These forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those contained, projected, or implied in the forward-looking statements, including the inherent risks associated with litigation, particularly intellectual property-based litigation. Reported results should not be considered an indication of future performance. Factors that could cause actual results to differ are included in the company's periodic filings with the Securities and Exchange Commission.

I would now like to introduce Bob Lento, Limelight's Chief Executive Officer.

Robert A. Lento

Thanks, Gillian. Before jumping in to the quarter's results, let me take a few minutes to tell you about myself and why I joined Limelight. I'll follow that with my initial observations of our products, our people and our prospects.

After that, I will tell you about my priorities for 2013. Many of you, with years of patient investing, may know Limelight better than I do, but I intend to quickly bridge the learning gap. As many of you know, I took the role as Interim CEO at Limelight Networks on November 26, and was appointed CEO a little over 3 weeks ago. Prior to joining Limelight, I served as president of the information management division at Convergys, where I led the division's difficult turnaround, thus enabling Convergys to unlock trapped value through an eventual sale to NEC last May.

Over the interim of 2 months, I worked closely with the Board, met many of our employees and key customers, and gained perspectives on the inner workings of the company. Based on those findings, I have signed on and I'm excited to be leading Limelight. I believe there is unlocked potential in our company and opportunity in the market that can help us generate value for our customers, employees and shareholders. We operate in great markets; we need to focus on driving simplification and a high level of execution through our business.

Our customer base, product capabilities and secular tailwinds create market opportunities. Our vision is simple, a world of seamless connections between people and ideas. Our mission is clear: to help customers better engage their target audiences, we offer a suite of cloud-based services that aid in creating, managing and delivering exceptional digital experiences on any device anywhere in the world. And thanks to our Limelight employees' hard work, dedication and innovation, we have undergone a transformation in response to our customers' demands for integrated Digital Presence Management solutions.

We provide a portfolio of cloud-based services that we call Orchestrate, which are uniquely differentiated through innovation and integration. The Orchestrate services help our customers more effectively engage audiences by creating, managing and delivering an exceptional Digital Presence to any device anywhere. Our responsive business practices, exceptional service, deep domain knowledge and the massive power of Limelight's high-performance network, allow our customers to differentiate their offerings in the market.

Our bundled solutions allow us to develop more strategic relationships with customers, increasing the likelihood of renewal and extension to other services. These services are valuable and not easily duplicated. Market trends are driving the need for Digital Presence Management solutions and in particular, the demand for these services as cloud-based offerings. We are innovating to meet these needs and we'll target our efforts to capture a fair share of this opportunity.

By addressing the needs of our customers, we will drive value for our shareholders. Today, we reported fourth quarter revenue at the top end of our guidance. Analysis of our business and financial highlights affirms that our customers welcome our transition from a pure-play content delivery provider, focused on large object delivery, to a provider of integrated cloud-based Digital Presence Management solutions.

Revenue in Q4 was $46.5 million, of which 32% was generated by our value-added services. The value proposition for the integrated Orchestrate suite is attracting attention. We saw our new customers purchase an average of 2.2 products in Q4, as they established their initial relationships with Limelight.

For the full year, we also saw 32% of our revenue come from value-added services in our integrated Orchestrate Digital Presence Platform. We are pleased with the growth of our VaaS, as a percentage of our overall business, and while our year-end run rate fell short of initial expectations, 31% is a healthy year-over-year growth rate that shows we are making progress.

Core content delivery revenue declined approximately 4% year-over-year, both for 2012 and for the fourth quarter. Our intention, going forward, is to grow our CDN business on a profitable basis and as part of our integrated value proposition.

I'll now review business performance highlights. Our Video Platform business continues to charge ahead within the VaaS portfolio. With its short sales cycle, rapid time to implementation and strong value proposition, our video service offerings have proven to be a revenue growth leader this year, both helping our organizations deliver personalized and engaging video content and offering us an excellent entry point to new customers who can benefit from our broader set of services.

Combined revenue for our Video Platform, Mobility and Monetization Solutions continue to see strong growth. Online video traffic continues to grow. According to Cisco's annual report on Internet traffic, a majority of IP traffic by 2015 will be video. Video consumption is spreading to mobile devices and becoming increasingly important as a method for interacting with online content.

According to Google's, "The Multi-Screen World" report, approximately 56% of users start watching a video on their phones and they continue watching on a PC or a tablet. In order for these customers to remain engaged, their experience across devices must be consistent. Our video solutions enable customers to manage and publish video on their own websites and on sites like YouTube, ensuring that the video is provided in a manner optimized for the best playback and that the content renders, in mobile templates, with add integration regardless of device.

Key customers signed during the fourth quarter include Cadence Design, El Universal Campana and Horizon Blue Cross of New Jersey. We also continue to make good progress with Video Platform upsells into our existing customer base.

Our web -- our cloud-based web content management offering addresses the challenges organizations face in their efforts to capture, retain and convert customer attention online in today's global economy. We enable organizations to engage customers more effectively by delivering rich dynamic content on any device anywhere in the world. Our content management solutions are for mobile publishing, social media integration, search engine optimization, reporting, analytics and more, all while providing our customers with the benefits of SaaS economics and simplicity.

Limelight is the web content management solution of choice for leading brands such as Fluke, who wanted one integrated platform so they can provide a unique experience to each and every visitor to their regional and country websites.

Bazaarvoice also joined the Limelight web content management customer base upon a referral from their advertising agency. Year-over-year revenue growth for web content management slowed during the fourth quarter, due to the loss of the customer we discussed last quarter.

Limelight's acceleration services helped customers improve user experience by providing fast, consistent performance and decreasing the time it takes for users to interact with website content from any device anywhere. This time-to-action is critical because the speed and performance of an end-user experience leads to a high number of completed transactions, more successful conversions and increased visitor loyalty. Year-over-year revenue for our acceleration service grew strongly in the fourth quarter. Customer wins during the quarter include ViewStar, Canada Tourism, Dr Pepper Snapple, PSA Peugeot and e-commerce companies, KalioCommerce and Next Jump.

We continue to migrate new and existing customers to our cloud storage offering. The market opportunity for cloud-based storage continues to grow as enterprises seek to decrease infrastructure spending.

We provide a robust set of cloud storage functionality and features, which collectively simplify administrative overhead, reduce long-term IT cost and help ensure compliance to regulatory standards. Our storage customers benefit from fast uploads via localized ingestion points, flexible replication policy, support for large object libraries, and a wide variety of upload protocols.

Last quarter, we reported that the growth rate of our storage service was expected to be slower than the rest of our VaaS suite because it is still largely tied to CDN. Storage revenue was down slightly year-over-year for Q4. Customer wins this quarter included Voodoo and Sony Pictures digital productions, who both purchased more storage capacity, and CW networks and Broadridge Financial Solutions, who added storage services to their existing suite of other Orchestrate services.

As we discussed throughout the year, our global consulting and technical services group is expanding its offerings, from implementation services largely tied to CDN offerings, to higher value services, including helping organizations assess and optimize the creation, management and delivery of their Digital Presence.

Our global consulting services remains a lumpy business, which did not meet our expectations for the fourth quarter and was a key factor in the sequential decline in our value-added services revenue.

Global consulting revenue growth slowed year-over-year for the fourth quarter, which was disappointing, especially following 2 consecutive high-growth quarters where our team proved their ability to drive into higher value services, helping customers assess, design, plan and implement their Digital Presence strategies.

We continue to believe we have solid opportunities to grow our global consulting services on a year-over-year basis.

Limelight is proud to be a partner of choice for organizations focused on optimizing their Digital Presence. We have already highlighted a number of customers that began using each of our value-added service products during the fourth quarter. There are also several others who either extended their relationship with us by purchasing multiple products in the Orchestrate Digital Presence platform, and others who are harnessing the power of our consulting services to optimize the value they get from the integrated solution set.

We are helping our customers efficiently manage the many digital touch points they have with their online audiences. Grand Prix Sports is a great example of companies that are buying 3 or more of our integrated Digital Presence services. The Institute for Social Security and Services for state workers in Mexico purchased our web content management and Video Platform services, so they can publish video online using our end-to-end video solution and offer rich, fresh and personalized content.

Fluke, in addition to purchasing our web content management solution as previously discussed, engaged our consulting team to assess their Digital Presence maturity as they began their relationship with us.

Our high performance global content delivery network improves the reliability performance and user experience of our customer's online presence by delivering rich media files such as video, music, games and software, or streaming live, corporate or entertainment events. Our CDN provides highly available, highly redundant storage, bandwidth and computing resources in support of the online video platform, mobile, web content management acceleration and storage solutions discussed above.

During the year, we continued our drive for constant innovation, advancing existing services, making enhancements, adding speed and efficiency in the core content delivery platform, and rolling out updates to our suite of value-added services to help customers' implement their Digital Presence management strategies.

We also continued our quest to develop differentiated and relevant intellectual property, so that we can take full advantage of growing SaaS, content delivery and cloud storage market opportunities. We think that 2012 was a productive year for our innovation program, both in terms of the number of patent applications filed and the number of patents issued.

Now let me touch on our priorities for 2013. Let me start by thanking our great group of hardworking, innovative Limelight employees. I've met some really terrific people who are very focused on our customer's success and understand our business inside and out, and who are committed to helping me execute on our strategy. I intend to look for every opportunity to promote from within, while also strengthening with complimentary capabilities from the outside.

As you've just heard, we have a good product mix that is gaining traction and a rich market opportunity ahead of us. We need to drive greater productivity from our sales and marketing investments and have a clear linkage between our portfolios and our value proposition. To assist with this effort, we recently announced the appointment of our new chief sales officer, George Vonderhaar. George has worked with me over the past 15 years and has been working with us on a consulting basis for the last 45 days. He is ready to hit the ground running and I look forward to working with him again.

In addition, we appointed Jonathan Smith to lead our sales efforts in Europe, the Middle East and Africa. Jon is a seasoned executive whom I've worked with for several years. When he became available, it was an easy choice for me, as I'm very comfortable with his capabilities and he has proven himself many times. These changes, and other refinements we are making to our sales structure and processes, increase my confidence in our ability to increase our go-to-market effectiveness.

Next, let me talk about R&D. Research and development is the company lifeline. We must optimize our investments and have clear goals and discipline. We plan to increase investments in our product offerings, with the goal of accelerating market adoption, expanding addressable markets and meeting return objectives. We understand that not all investments create equal returns and we will balance our approach. In 2012, we spent approximately 11% of revenue on R&D. We expect this percentage to grow in 2013.

Moving on to our systems. With our recent acquisitions and rapid early growth, we have a mix of systems and processes that need rationalization. For example, we have numerous systems for our various provisioning processes, which provides opportunity for simplification. We have just completed a methodical cataloguing of all of our systems and over time, we will streamline and reduce our exposure to multiple systems. As we streamline, we will incur migration costs. My experience suggests that these costs will have a quick payback of 6 to 18 months in most cases, and we will be building our project plan in the first half of this year.

Before I hand the call over to Doug Lindroth, Chief Financial Officer, to review the financials in more detail and to further discuss the progress that we've made in the fourth quarter of 2012, let me say one last thing about my priorities for 2013, as they pertain to guidance.

I'm taking the reins at Limelight with a plan to manage our company for the long term, and while I'm still in the evaluation mode assessing the company's sales, R&D and systems, I think it prudent to withhold providing quarterly guidance. My intent is to create long-term value for Limelight shareholders and focusing my team's efforts on implementing our strategy. Now let me hand the call over to Doug.

Douglas S. Lindroth

Thanks, Bob. Please note, the following financial results that I will be discussing are for continuing operations and exclude EyeWonder and Corus from current and prior periods. For more information regarding discontinued operations, please see our earnings press release that we issued today and our Form 10-K that we will file in March.

During the fourth quarter, Limelight Networks recorded total revenue of $46.5 million, which was at the high end of our guidance and up 1% from the fourth quarter of 2011, and up 3% from Q3 of 2012. For the full year, we've reported revenue of $180.2 million compared to $171.3 million in 2011. Our CDN revenue for the quarter exceeded our expectations with stronger seasonal traffic growth from our higher-priced customers. However, revenue declined approximately 4% on a year-over-year basis, primarily due to a decline in our reseller revenue from Global Crossing, whose contract ended during Q2 of 2012.

As Bob mentioned, our value-added services revenue was 32% of total revenue during the fourth quarter. It fell short of expectations, with 14% year-over-year growth compared to fourth quarter of 2011.

While we had another strong quarter of year-over-year growth from the combined online video platform and mobile group and from our acceleration services, the lumpiness in global consulting, the slight decline in storage and the loss of a large content management customer that we discussed last quarter, contributed to the lack of sequential growth and also impacted our year-over-year growth in the quarter.

During the fourth quarter, Limelight's international operations represented 31% of total revenue, down from 32% in Q3, and up from 30% during the same period of 2011. For the full year, our international revenue was 31% and grew from -- and grew 8% from 2011.

We reported fourth quarter adjusted EBITDA of $2.4 million, compared to $6.5 million for the fourth quarter of 2011 and $2.8 million last quarter. For the full year, adjusted EBITDA was approximately $9.9 million, compared to $18.4 million in 2011.

During Q4, we recorded several nonrecurring charges that impacted our adjusted EBITDA, which I will discuss in detail in a few moments.

Our Q4 GAAP loss from continuing operations was $10.3 million or $0.10 per basic share, compared to a GAAP loss from continuing operations of $6 million or $0.06 per basic share in the same period in 2011, compared to $0.6 million or $0.01 per basic share last quarter.

For the sequential 2012 Q3 to Q4 comparison, keep in mind that our Q3 results included a $9.4 million gain, which we recognized on the sale of our investment in Gaikai Inc., which was acquired by Sony.

For the full year, we reported GAAP net loss from continuing operations of $30 million or $0.30 per basic share.

We also reported fourth quarter non-GAAP net loss before stock-based compensation, litigation costs, amortization of intangibles, acquisition-related expenses and discontinued operations of approximately $5.6 million or $0.06 per basic share, compared to a non-GAAP net loss of $0.6 million or $0.01 per basic share in Q4 of 2011.

Excluding the Q4 nonrecurring charges, our Q4 non-GAAP net loss would have been $0.04 per basic share. Our non-GAAP net loss for the year was $22 million.

Please refer to the tables included in our press release for the reconciliation of GAAP measures to these non-GAAP measures.

GAAP gross margin was 39% during Q4, compared to 40% in Q4 of last year, and up from 37% in Q3 2012. Gross margin increased over the last quarter, due primarily to the sequential growth in CDN revenue, while our cost of goods sold remained relatively flat in Q4. Cash gross margin was 55% for Q4, up from 54% last quarter, and down from 56% in the same period last year. For the full year 2012, cash gross margin was 55%, an increase from 54% in 2011.

During the fourth quarter, our total operating expenses were $28 million, up from $26.2 million last quarter, and an increase of $3.1 million from Q4 of 2011.

Operating expenses included nearly $2 million of onetime nonrecurring items, including an expense of approximately $740,000, due to a clarification of certain state regulations related to non-income base taxes, a bad debt expense of approximately $700,000 related to the outstanding accounts receivable from a customer that filed for bankruptcy subsequent to year-end, and approximately $400,000 related to the write-off of the remaining balance of certain patent licenses that were purchased in 2010. Excluding these nonrecurring items, our Q4 operating expenses were approximately $300,000 lower than our guidance for the quarter.

Total depreciation and amortization for the quarter was $8.5 million, flat compared to last quarter, and flat compared to the fourth quarter of 2011. Depreciation and amortization in the fourth quarter includes $7 million of network-related depreciation.

Stock-based compensation expenses for the quarter were $3.6 million, compared to $3.7 million last quarter, and $4.2 million in Q4 of 2011.

Moving on to the balance sheet. Our combined cash and short-term marketable securities balance on December 31 was approximately $128 million, down from $130 million in the third quarter of 2012.

During the fourth quarter, we repurchased approximately $4.6 million of our common stock and spent approximately $900,000 on capital expenditures.

Our cash flow from operations during the fourth quarter was approximately $4.5 million. For the full year, we generated $12.5 million in cash from operations and spent $18.4 million on capital expenditures and repurchased $20.9 million of our common stock.

We are fortunate to have a strong balance sheet and we'll be constantly looking at the capital structure in how best to utilize the strength of our balance sheet.

Day sales outstanding for the quarter were 52 days, down from 57 days in the previous quarter, down from 55 days in Q4 of 2011. As Bob mentioned, we are not providing specific financial guidance. However, we did want to mention that Q4 is our seasonally strongest quarter for both revenue and gross margin and we expect that seasonal pattern to continue. Also, for operating expenses, we typically see increased costs in Q1 over Q4, related to our annual sales kickoff meeting that occurred in January, annual merit increases for our employees and an increase in employee-related taxes.

With that, I will turn it back to Bob.

Robert A. Lento

Thanks, Doug. This update provides the status and what we have done to continue our transformation into an innovative provider of high-value, high-performance, integrated cloud-based services that help organizations, more efficiently and more effectively, manage and deliver their Digital Presence across all channels.

We are at the forefront of an accelerating Digital Presence Management movement. Customers are demanding solutions to help engage their audiences with superior experiences across all digitally delivered points of customer interaction. Our priorities for 2013 will help drive us towards a focused, simplified and efficient business organization, which will result in increased customer satisfaction across our business. I'm excited to be here and look forward to providing additional details over the coming quarters. I also look forward to meeting with many of you in person.

At this time, we'll open the line up for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from David Hilal from FBR.

David M. Hilal - FBR Capital Markets & Co., Research Division

A few questions. Doug, CapEx was quite low in the quarter. Is there something new going on in the business that we should model that from, or is this a temporary low point, so to speak?

Douglas S. Lindroth

Yes, hey, David. It was low, it was in the range of what we had guided to for the quarter. We tend to look at our CapEx on an annual basis and set our plan on an annual basis, and then it will vary from quarter to quarter, based on where we are in terms of capacity or build out on the network. So yes, I wouldn't look at it that that's kind of a quarterly level run rate. What we spent during the year is probably more like the type of run rate that you would expect us to have.

David M. Hilal - FBR Capital Markets & Co., Research Division

Okay. And Bob, just for clarification on the guidance, is that like a 1-quarter temporary thing while you kind of assess and put together the game plan? Or should we expect that to just be the new policy going forward?

Robert A. Lento

Well, I don't think at this point, we know. I think we can say that it's more than just 1 quarter, whether it's a sort of a permanent change to our view on guidance or not. I don't know that we're ready to make that proclamation, but you should think of it as more than just for 1 quarter.

David M. Hilal - FBR Capital Markets & Co., Research Division

Okay. And then let me ask you, you talked about increasing the R&D spend, certainly the percent of revenue. I guess from a headcount standpoint, where did you guys end the year in headcount? And what are the hiring plans this coming year? Obviously, you showed your hand a little bit on R&D, but would we expect increased sales capacity and more sales hedge as well?

Robert A. Lento

So from a total headcount perspective, we ended the year with just over 500 employees, and I would expect that this year -- next year at this time, that number is likely to be significantly higher than that, significant meaning sort of in the range of 50 to 100 additional employees within Limelight, globally. In terms of where those employees will be, it is less likely that they will be in the sales organization than in R&D and operations. Within the sales organization, the focus is going to be on gaining better productivity out of the existing spend, and once we get productivity at a level that we think is acceptable, then we will start adding additional spend in that area. But for this year, it's really about reorganizing the sales force, providing better support to them, providing a simpler compensation program and better sales training. So it's really all about making investments to drive productivity, as opposed to increasing the level of investment, although you will see that because the line is a sales and marketing line, we will increase our spending in marketing, nothing that's material, but you will see an increase. But the increase that you see year-over-year in sales and marketing, think of that as the large majority of it in marketing, as again, the focus in sales is increasing our productivity. And so obviously, if we're going to spend a higher percentage of revenue in R&D, the majority of the expenses in R&D are headcount-related and that is an area where you'll see us increase.

David M. Hilal - FBR Capital Markets & Co., Research Division

Okay, and then finally for me, what's in the CDN business? There's always a balance between getting enough traffic to drive utilization rates high, but also not entering into kind of uneconomical deals with customers. And at times in the past, Limelight has been somewhat disciplined on that, and Akamai will talk about it as well. Where are you guys today, and do you have a different philosophy on taking on business? But not necessarily business you're losing money in, but business that helps kind of support the growth of the network, albeit it might not be meaningfully profitable, but it helps keep capacity and utilizations up?

Douglas S. Lindroth

Yes. I mean -- I think what you've heard from us in the past is, we do try to be disciplined about it and there's different traffic and traffic profiles that we'll look at to say whether or not from -- either from a network capacity or utilization that makes sense to take, so we try and balance it, whether it's time of day-type traffic that we ought to take, or if it's strategic-type traffic that we think will help us longer-term from a profitability -- in the past, we've used the anchor multi-tenant analogy. So there will be some pieces of traffic. But we haven't -- it goes back to your first question, too, on the level of CapEx that we have. So we're balancing the investment in CapEx and balancing the traffic growth that we want. And as Bob said in the prepared remarks, he's really focusing on the CDN to try and grow it on a profitable basis and what we really want to do is then manage that, so what does that mean from a CapEx investment and what type of traffic do we want to take to help grow the CDN business.

Operator

Our next question comes from Aaron Schwartz from Jefferies.

Aaron Schwartz - Jefferies & Company, Inc., Research Division

I had a follow-up question on some of the material you just had on the sales organization. Presumably, a lot of what you talked about was communicated to the sales teams at the sales kickoff, but I just wanted to thoroughly understand that. And then, you did talk about increasing sales productivity here. Can you give us some specific sort of things you're thinking about changing, just so we can try to assess exactly what you're changing here to you have confidence in the productivity increasing? And is one of the reasons you're not giving guidance is related potential, near-term disruption from some of these changes before they really settle in and you have confidence that the pipeline of revenue is moving as smoothly as you think?

Robert A. Lento

Well, I think that's one of the points, but I think it's largely just sort of me, as a new CEO, getting more comfort with what our sustainable rates of growth are and what we can do to drive profitability. So I think it's more about that than any sort of concern over sales productivity going backwards before it goes forwards. Specifically within sales, so one of the areas that we are trying to manage better is customer retention. And while Limelight has done, I think, a very good job of adding new customers every quarter over the last several quarters, we've also had a fair amount of churn. And so one of the big restructurings that we talked to our sales teams about is that we are creating a dedicated account management function within the sales organization, specifically designed to better serve our customers with a goal of enabling them to understand how Limelight can add more value, allowing us to grow revenue within existing clients and better retention of those clients over the long term. So that is just being rolled out. We will have an inside sales team that will be based out of our Tempe headquarter location. That will be a high-touch, low-cost operation. And then, with our largest customers, we'll have dedicated account managers either on single account or some smaller number of accounts than we will have in Tempe. And in combination, the goal is to drive revenue growth, increase the value we provide for those customers and increase retention of those customers. So that's a specific example.

Aaron Schwartz - Jefferies & Company, Inc., Research Division

Okay, that's helpful. And then, I think we can understand you coming in and wanting to sort of put your fingerprints in the organization and making some changes here, which you think have near-term expense profile before the revenue comes in. But if you look at the business longer-term, how do you sort of think about growth versus profitability? And are there any structural things that you've seen in the company that will be a limiting factor there?

Robert A. Lento

I don't think there's anything structurally that's a limiting factor. There are certain things, structurally, that need to be addressed. We talk a little bit about the number of systems. We've done a fair number of acquisitions, I think they were all smart, on-strategy acquisitions. But now we have to do sort of the hard part of the back-end integration. So rationalizing those systems for -- this year will be the first year, for example, within our research and development organization that we're bringing product management and development together as a single organization. And so I don't know that there's -- they're limiting. I think change always creates some disruption and takes some time before you're sort of back to full speed. But I think it's sort of part of the company's evolution. These are things that are necessary. We're not blazing any new ground. This is an area that -- I've been through this before, we're not doing anything different or unique that there's any question as to whether it will work or not. It's just a matter of rolling our sleeves up and executing.

Operator

Our next question comes from Michael Olson from Piper Jaffray.

Michael J. Olson - Piper Jaffray Companies, Research Division

You mentioned that consulting services has been coming in exactly where you'd hoped. Would you think that was a result of more competition coming into the space, some sort of broader weakness? Or just some other reasons?

Douglas S. Lindroth

No, I would say it's more on our own side. We didn't have as good a bookings quarter in Q3 that we would have liked that set us up for Q4. And so we got off to a slow start in Q4 in terms of what projects we are working on and able to deliver. As the quarter went on, things got better, but our revenue recognition on our PS engagements is either done when the project is complete, or spread over the life of the engagement. So it's more about the way the quarter started off, and when I look back on the overall bookings then for Q4, that sets us up going forward, or it was much better in Q4 than what we saw in Q3. I think it was more specific to us. And again, we're really transitioning that professional services group, which was really tied to CDN implementations, being a much, much more value-added partner to our customers and helping them with their Digital Presence and looking at the service offerings that we have and picking the services that are best going to help them implement their workflow and their Digital Presence strategy, and which solutions that we have to offer them are going to be best for that. So I think overall, it was really us related to our Q3 that impacted Q4and, not anything industry-specific.

Robert A. Lento

Yes. And I would just add to that. We did some restructuring in mid-2012, brought in a new leader to lead our professional services organization, who we have a lot of confidence in. But he was just brought in mid-2012, so some of it is just -- we're getting the right resources in place, putting the right structure in place, and putting the right capabilities in front of our customers so that we can grow that revenue on a consistent basis over time.

Michael J. Olson - Piper Jaffray Companies, Research Division

Thanks. And then what's your take on just the pricing environment for kind of core volume CDN, and maybe what are your expectations for 2013? Is there any irrational pricing strategies or anything like that that's in the market right now?

Douglas S. Lindroth

I've looked at it based on what we saw in Q4. So from a year-over-year type of price decline, Q4 was around 30%, which was similar to what we have been seeing the last few quarters. So no real change there. There's always going to be deals here and there that you might say there's a price aggressor or a price disruptor, but we haven't really seen anything change significantly throughout the course of this year. So based on what we're seeing today, I don't sit here and say that I could see anything that would be different, one way or the other, with regard to what overall price compression looks like.

Operator

Our next question comes from Michael Turits from Raymond James.

James Wesman

It's James Wesman sitting in for Michael. Doug, just a question on the CDN business. You had talked about the Netflix roll-off that's coming up this year, and I was just wondering if there's an update on it about timing, size? Any color there would be helpful.

Douglas S. Lindroth

Sure. Yes, as we said in the past, we're contracted with Netflix through the end of the year. Bob's recently been on site at Netflix and having good discussions with them. And there's a couple of ways to look at it. Netflix is in the process, as you know, of building out their own CDN. And we look at it and based on what we've seen as history with other companies that had built out their own, just like what Microsoft had us build for them, and continue to use a multi-CDN strategy both with their own CDN, plus with third parties. When we look at what Netflix traffic is, we think, ourselves, that it makes sense that they won't be delivering 100% of the traffic themselves. Ultimately, that decision is going to be up to them, but we are having discussions with them for the period once this 2013 contract ends. So they're a great partner of ours today, and we certainly hope to continue to be a partner of theirs in the future. But as of today, our contract is through the end of the year, but we're having ongoing discussions.

James Wesman

Okay. And then just a follow-up on Mike's question for -- you had said you saw about a 30% decline in the CDN pricing. What did you see in volume growth the last quarter? I believe it was about 40% for Q3?

Douglas S. Lindroth

Yes, it was a little bit higher in Q4, in the mid-40s.

James Wesman

So it did accelerate slightly?

Douglas S. Lindroth

Yes.

Operator

Our next question comes from Mark Kelleher from Dougherty & Company.

Mark Kelleher - Dougherty & Company LLC, Research Division

Just a couple of follow-ups. On that last question about Netflix, were they a 10% customer in the quarter?

Douglas S. Lindroth

They were. Yes. They're about 11%.

Mark Kelleher - Dougherty & Company LLC, Research Division

Okay. And I might have missed it, but did you give out a churn number?

Douglas S. Lindroth

No. That's not a number that we've historically provided.

Operator

[Operator Instructions] Our next question comes from Donna Jaegers from D.A. Davidson.

Donna Jaegers - D.A. Davidson & Co., Research Division

On customer churn, can you give us -- obviously, your customer, your total customer numbers went down in the quarter, can you give us a little more color over what kind of customers you are losing and what kind you hope to keep with this increased retention effort?

Robert A. Lento

So I think if we look at it, the customers that we're losing tend to be the smaller customers. We are doing a much better job of sort of keeping the top half versus the bottom half, and obviously, to me, it's -- in the top half, it's less about did we -- although it's important, if we keep them or not, but are we growing with them? And so, as we look at the smaller customers, it is, how do we keep them longer because that's where the churn is tending to be, to trend towards, in terms of the size of the customer. And with our top customers, how do we do a better job engaging them, understanding their strategic plans, so that we can be a more valuable partner to them, allowing them to get better value out of the assets that we have and us to grow revenue.

Donna Jaegers - D.A. Davidson & Co., Research Division

Okay. And then, Doug, the legal expenses popped up in the fourth quarter. Is there something new going on there that we should be aware of?

Douglas S. Lindroth

No, there's nothing new. As you know, we filed our appeal to be heard by the Supreme Court based on the appellate court ruling, and so it's really the activity related to getting that on file.

Operator

I show no further questions. I would like to turn the conference back to Mr. Bob Lento for closing remarks.

Robert A. Lento

Great. Thank you. I don't really have any closing remarks. I mean, we're going to be hard at work trying to build shareholder value and increase our value to our customers, and we look forward to coming back after next quarter and give you an update on our progress. Thank you.

Douglas S. Lindroth

Thank you, everyone.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect at this time.

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