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Executives

Paul Alfieri – Senior Director, Corporate Communications

Jeff Lunsford – Chairman and CEO

Doug Lindroth – CFO

Analysts

David Hilal – FBR

Sri Anantha – Oppenheimer

Katherine Egbert – Jefferies

Kerry Rice – Wedbush Morgan

Michael Turits – Raymond James

Derek Bingham – Goldman Sachs

Mike Goldstein [ph]

Limelight Networks, Inc. (LLNW) Q4 2008 Earnings Call Transcript February 26, 2009 8:00 AM ET

Operator

Good day, ladies and gentlemen and welcome to the Limelight Networks Inc. fourth quarter 2008 earnings conference call. My name is Shanel and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference. (Operator instructions)

I would now like to turn the presentation over to your host for today's call, Mr. Paul Alfieri, Senior Director of Corporate Communications. Please go ahead.

Paul Alfieri

Good morning and thank you for joining the Limelight Networks’ fourth quarter 2008 financial results conference call. Speaking today will be Jeff Lunsford, Chairman and Chief Executive Officer, and Doug Lindroth, Chief Financial Officer.

This conference call is being recorded on February 26, 2009, and will be archived on our website for approximately one week. 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 facts, such as statements regarding future events or future financial performance, including, but not limited to, statements relating to Limelight Networks’ market opportunity and future business prospects, guidance on 2009 financial results and statements concerning anticipated future growth and profitability, as well as management’s plans, goals, strategies, expectations, hopes and beliefs.

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 and 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 Jeff Lunsford, Chief Executive Officer. Jeff?

Jeff Lunsford

Thank you all for joining us this morning. The fourth quarter was a stellar quarter for Limelight Networks. We delivered $36 million in revenue, 23% year-over-year growth over Q4 of 2007, and drove multiple points of gross margin expansion in the quarter, as the investments we made in capacity and sales resources in the first half of 2008 paid off in the second half.

We achieved these results despite the very tough business environment in the quarter. Consumers continued to flock to the Internet, and perhaps increase our online activity even while they were scaling back other expenses. Our over-performance in revenue led to adjusted EBITDA before litigation costs and stock-based compensation of approximately $4.6 million. We exited 2008 with over 25% video CDN market share. And looking back, we see 2008 as the year where we built a solid financial footing in the first quarter and grew the business from there. We expect the same general pattern to repeat in 2009, although we believe we will see deeper retrenchment during Q1 of 2009 than we did in Q1 of 2008, given the current business environment.

In Q4, and continuing into Q1, we took the opportunity to proactively adjust some of our major contracts so that they were more reflective of the budgetary pressures being felt by our large customers. We also saw a few emerging-market customers scale back their operations. As a result, we expect to see a sequential revenue decline from the strong Q4 levels into a more rationalized Q1 base. And from this base, we expect to put together another growth to the year like 2008, where revenue will build from a Q1 base throughout the year and where we will pick up a few points of gross margin expansion between Q1 and Q4.

Like most other businesses, we do not have great visibility at this time, but in general, we believe we are operating in a market with a healthy underlying demand driver that should allow us to continue to grow. Internet traffic continues to grow and while we have the good challenges of pricing pressures and operating efficiencies to deal with, we also have demand growth unlike many other segments, where demand itself has deteriorated.

In addition to these high-level financial highlights, today I would like to update you on Limelight’s customer base, where we continued to grow the quality of our relationships, Limelight's network growth, our ongoing litigation and guidance.

First, Limelight’s customer base. During the quarter, we added over 30 net new customers and continued to grow the overall value of our customer relationships as AARPC, average annualized revenue per customer, grew from $102,000 last quarter to $107,000 this quarter. At year-end, we had over 1,330 active customers. We have previously discussed a proactive shift from a number of customers towards building higher quality relationships within our accounts. In the quarter, we also worked to diversify the markets in which we do business, continuing our expansion into the enterprise and corporate segments, adding customers such as Deutsche Bank and Toyota of Japan, and into the government and public sector segment adding customers such as the University of Virginia and Ford Institute of technology.

We also advanced the ball on our channels program, where we announced a very strategic partnership and reseller relationship with Rackspace in which we will provide scalable content delivery and application acceleration services for their innovative Cloud files product. This partnership enables us to address the self-service pay-as-you-go market space by leveraging the resources and relationships of Rackspace. We continue to build out the channel in Q1, where we recently signed a large multi-year reseller partnership with Global Crossing, a global cell communications provider. In Q4, we also continued to expand our already strong presence in the media and entertainment segment, winning business and deepening relationships with some of the largest Internet businesses in the world. And we are pleased to be supporting customers like Netflix and Amazon as they innovate in direct digital distribution of consumer entertainment to the PC and to new Internet connected devices like Blu-Ray players and IP set top boxes.

And to highlight a high-profile event that spanned both Q4 and Q1, we received many questions regarding what some are calling the broadband election of 2008. Limelight Networks CDN platform and Live Events services team were an integral part of making both the election and inauguration huge online successes. During election night back in Q4, Limelight Networks delivered live streaming video for five major news networks including MSNBC. For the presidential inauguration, which happened in Q1, we delivered over 2.5 million unique simultaneous video streams related to the ceremony. At one point on inauguration day, we had over 9 million total unique multimedia streams being delivered by the Limelight Network. It is interesting to note that the inauguration occurred at noon on the east and at 9 AM Pacific, when most Americans were sitting in their offices and not their living rooms. As such, the Internet became the most convenient and readily accessible method for watching these historic ceremonies. Companies like Limelight Networks were relied upon by content publishers to deliver a high-quality experience to those desktops. Our network performed well when it is needed most and under extremely stressful conditions. We did not cap the bandwidth of any customer during these heavily trafficked events and we did not place any customer who wanted to watch the ceremonies into a waiting room. We delivered 2.5 million concurrent streams for the five or six primary customers that needed us to deliver the inauguration and we continued to support the 1300+ other customers that rely on our platform for their online businesses everyday.

We have spoken recently about passing the milestone of broadcast quantity audience delivery capabilities. The significance of our network-based CDN architecture and our continued investment in expanding our capacity to meet the ever growing demand for traffic events like the election inauguration provide real-world validation of the value of Limelight Networks scale and differentiated architecture.

Regarding network growth, while these are certainly challenging economic times, we have not to date seen a slowdown in online activity. In the fourth quarter, we continued to see our average traffic levels rise and we set new records for peak traffic through the network, a trend that seems to be continuing into Q1. To put things into perspective, our traffic has more than tripled since Q4 2006. The traffic growth of certain customers has sometimes surprised even us. Our challenge as operators and technologists is to deliver that amount of traffic at the rate the industry can afford and to work diligently to deliver margin expansion to the investment community.

Given the traffic growth we see ahead, you should expect us to continue to build out our network platform throughout 2009. This is a business where scale and technical innovation win and help sustain and hopefully deliver that margin expansion. While others may be scaling back their investments, we believe the right long-term decision is to invest smartly to distance ourselves from our competition in this environment. Given this investment cycle and the Q1 revenue retrenchment mentioned earlier, you should expect to see gross margins compress in the first half of 2009, followed by margin expansion in the second half, as we saw last year.

Now regarding litigation; we are very pleased that right after the close of the quarter a Federal court jury found that Limelight Networks does not infringe any asserted claims of the patents at issue in the level 3 communications trial. We believe that this non-infringement verdict affirms that we respect the intellectual property of others and that our ability to fairly compete in the marketplace is due to our own hard work and innovation.

Regarding the Akamai litigation, there remains pending before the trial court our motions relating to certain equitable defenses and a renewed motion for judgment as a matter of law. Following conclusion of the trial court proceedings, the case will likely proceed to the appeals process. As of year-end, we're happy to report that we have concluded we need no longer accrue for potential damages related to alleged infringement on the patent at issue in the Akamai trial. Due to the ongoing litigation, we cannot discuss with you any of the specific factors which led to this conclusion, and we should also advise you that this situation could change in the future.

Finally on guidance; we are guiding the year-over-year Q1 revenue growth in the high single digits, due mainly to the factors I mentioned at the beginning of my remarks this morning. As occurred in 2008, we anticipate that Q1 revenue levels will form a solid base for the year built on revised business terms that are reflective of the current business environment and that help our customers achieve long-term success. If our customers succeed, we will benefit over the long term. Also, as we saw in Q4 of 2007 and carrying into Q1 of 2008, when we embarked on a major expansion, we expect gross margin and adjusted EBITDA compression in Q1 and possibly into Q2, followed by margin and adjusted EBITDA expansion later in the year as we fill up our newly added capacity with revenue-generating activities.

With that update, I will now turn the call over to Doug Lindroth, who will take you through the financials and specifics on those. Doug?

Doug Lindroth

Thanks, Jeff. During the fourth quarter, we reported revenue of $36 million, up 23% compared to revenue from the same period last year and up 8% from Q3. For the full year, we reported revenue of $130 million compared to $103 million in 2007, representing a 26% year-over-year growth rate.

We reported fourth quarter adjusted EBITDA before stock-based compensation, litigation costs and damage accrual of $4.6 million, compared to $5 million for Q3 and $5.6 million for the fourth quarter last year. For the full year, our adjusted EBITDA was $15.5 million compared to $24.5 million in 2007.

Our GAAP net loss per basic share for the fourth quarter was $0.17 and for the full year was $0.76. We also reported a fourth-quarter non-GAAP net loss before stock-based compensation, litigation costs and damage accrual of $2.6 million or $0.03 cents per basic share compared to a non-GAAP net loss of $0.5 million and $0.01 per basic share last quarter and to non-GAAP net loss of $0.1 million and breakeven per basic share for the same period last year. Our non-GAAP net loss for the full year was $6.7 million or $0.08 per basic share compared to a non-GAAP net income of $4.1 million and $0.07 per basic share in 2007. Please refer to the tables included in our press release for the reconciliation of GAAP measures to these non-GAAP measures.

During the fourth quarter, Limelight’s international revenue represented 18% of total revenue, which was two percentage points higher than the previous quarter. For the year, our international revenue increased by 62% and represented 16% of total revenue compared to 13% in 2007. Gross profit margin, which includes both depreciation and stock-based compensation increased to 39% during Q4 compared to 35% in Q3 and 37% in Q4 of 2007. Cash gross margin was 60% for Q4 compared to 57% in both Q3 and in Q4 of 2007. Our gross margins increased over Q3 as a result of our over-performance on revenue, lower average bandwidth costs, VAT adjustments on our international subsidiaries.

In the first quarter of 2009, we anticipate a gross margin compression of approximately 3 to 5 points from Q4 levels to a drop in Q1 or Q2. We then expect to work diligently to build margin back to Q4 levels around year end. Certain items likely to contribute to the first half decline in gross margins are: The forecasted decline in revenue from the record levels we achieved in Q4, the continued expansion of the scale, capacity and performance of our network and private fiber-optic backbone, and the impact of the overall economy and pricing activity within our customer base.

Operating expenses were $27 million in Q4, up $1 million from the third quarter and compared to $18 million for the same period last year. Fourth-quarter operating costs exclude the provision we have made for potential damages and interest accrued in the Akamai litigation. Our operating expenses increased during the quarter due to increased headcount, stock-based compensation and increase in our provision for (inaudible) accounts and professional fees, offset by a decline in litigation costs.

During the fourth quarter, we recorded a provision of $1.3 million for additional potential damages and accrued interest associated with Akamai litigation. Approximately 4% of our revenue for the quarter was generated using a delivery method that is alleged to infringe the patent issue, down from approximately 11% for the last quarter. As we have previously mentioned, we concluded that. As of November 1, we no longer need to accrue for ongoing potential damages related to the alleged infringing methods. Therefore, we expect to accrue only more potential interest.

Total depreciation and amortization for the quarter was $7.3 million, up from $7 million in the third quarter and up from $5.7 million in the same period last year. Depreciation and amortization in the current quarter includes $6.9 million of network-related depreciation. Stock-based compensation expenses for the quarter were $5.5 million compared to $4.3 million last quarter and $3.6 million for the same period last year. The increase in stock-based compensation expense is primarily related to the departure of our former CFO.

Fourth quarter interest earnings were $0.7 million compared to $1.2 million for Q3 and $2 million for the same quarter last year. The reduced interest income is associated with lower market rates and a lower cash balance from both last quarter and the same quarter last year.

Moving on to the balance sheet, our combined cash and marketable securities balance on December 31 was $175 million, down from $177 million in the third quarter. The reduction in cash and marketable securities related to payments for capital expenditures, and we're pleased to report that we generated positive cash flow from operations during the fourth quarter.

Capital expenditures for the fourth quarter were $5.2 million; and for the full year, our capital expenditures were $20 million, representing approximately 15% of sales. Days sales outstanding for the quarter were 84 days, flat to the previous quarter and up from 65 days in the fourth quarter last year. The increase in the DSO over the prior year was related to the timing of sending out invoices to customers as a result of our implementation of a new billing system during the fourth quarter.

Regarding guidance, for Q1 2009, we expect to achieve revenues in the range of $32 million to $33 million. Stock-based compensation expenses for Q1 are expected to be approximately $4.3 million and capital expenditures are expected to be in the range of $6 million to $7 million. We also expect to use an additional $11 million to $12 million of cash for a large contract prepayment and litigation expenses related to the level-3 trial held in January of 2009. We believe litigation-related payments will be lower in the future, but cannot provide any color beyond that.

With that I will turn it back to Jeff.

Jeff Lunsford

Thanks Doug. Before we conclude, I want to take a moment to talk about the value that we believe we provide to customers in these economic times; value that could be measured through real business productivity and not just in the cost of delivering bits across the Internet. In 2009, businesses of all shapes and sizes are being challenged to be more with less, decrease CapEx and OpEx, improve and enrich customer experiences, establish more productive profitable one-on-one relationships with consumers. One of the benefits of working with a network-based CDM like Limelight Networks is that customers can offload much of their infrastructure burden to us. Our core asset is a highly-scalable, highly-efficient network computing platform. It is designed with a goal of 100% uptime is directly connected via fiber optics to nearly all the major internet access networks around the world and links together extremely powerful computing resources, petabytes of storage, all managed by a highly complex and capable software layer for managing and delivering content.

In essence, Limelight Networks is operating an on-demand computing platform in the Cloud. They can help IT professionals scale their business without their scaling their own data center, network and software operations. We are seeing customers want to do business with us, not because we can deliver traffic, but because we can save them the cost of building out or adding to their IT infrastructure. This enables customers to have their IT staff focused on what they do best, build products. If members of their IT staff on delivery or Flash or Silverlight or traffic shaping experts, it is tough for them to build or acquire these skill sets, whereas by partnering with Limelight, they can get all of that plus our advanced delivery platform immediately.

As I have said before, only a select group of engineers have the experience and know-how to scale events or web applications to reach broadcast quantity audiences. Limelight Networks brings this all together for our customers, the platform, the operational expertise, the continually updated suite of services and support, and integrated partners and third-party solutions, all at a cost that is much more attractive than building or maintaining these capabilities in-house. From our customer's perspective, they gain time to market and launching services, reduce infrastructure cost, more focused internal IT resources and of course an unparalleled end user experience.

So as you think about our business in 2009, don't just see us as a company winning business because we can deliver bits. See us as a company that delivers real ROI by helping customers reduce costs and complexity through a compelling network-based on-demand computing platform, which is very appealing in this market.

Operator, at this time, we would like to open the line for questions.

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from the line of David Hilal of FBR.

David Hilal – FBR

Great. Thank you. A few questions. First, Jeff, on the gross margin, we saw a pretty nice sequential jump, particularly if I remember last quarter, you said you have got to be down sequentially. So I would assume you guys were surprised by it as well and maybe you could just talk about what contributed to the sequential jump.

Jeff Lunsford

Sure. The bulk of it was the over-performance on revenue. We had I believe guided $33 million to $34 million; and in this business I think as you and I have discussed before, when you over-perform on revenue, you don't have much incremental expense. You have some incremental expense but it is pretty much your variable bandwidth costs, which is 20% of cogs or 25% of cogs and the rest of your cogs are fixed. So when you do over-perform on revenue, as related to where you guide, then you are by definition, probably going to over-perform on gross margin.

David Hilal – FBR

Did the Global Crossing partnership contribute to any of that?

Jeff Lunsford

No, we announced that partnership as something that we just solidified in this quarter. The other thing as I mentioned during the prepared remarks was some of our VAT adjustments on our international subsidiaries. That had an impact of about a point of gross margin.

David Hilal – FBR

Okay. And on the customer additions, we have a bounce back there on net adds. Can you shed some color on churn/gross adds for the quarter?

Jeff Lunsford

Churn was – we talked I think it the end of Q3, we were seeing a pickup in churn in the small accounts as sort of funding conditions worsened and I would say we were still seeing that. A lot of the smaller customers – they are less of a focus for us to begin with. We have raised yet again the minimum contract size upon which we pay sales commission. So we're trying to drive the business up the value chain and deeper into larger strategic enterprise relationships and you see that this quarter in the AARPC increase is an example.

David Hilal – FBR

Okay and then Jeff, bigger picture, I'm sure you saw the merger between CD Networks and Panther; and I want to get your take on what that means in the competitive environment.

Jeff Lunsford

We don't really think that will impact the competitive situation. This has always been an intensely competitive market segment, and we think that some consolidation in the sector is inevitable because there were multiple smaller guys that were funded in sort of the 2007 timeframe, when valuations were dramatically different and we think it is going to be difficult because this is a very capital-intensive business, where you have to scale before you can even be roughly cash flow breakeven like Limelight is at our scale. So, we believe that there will be consolidation and most of the smaller folks will end up having to find a partner.

David Hilal – FBR

And then lastly on CapEx, why the sequential increase from Q4 to Q1 and can you give us some color on CapEx for the year?

Jeff Lunsford

Sure. I will talk sequential, Doug can talk the year. The sequential as we have spoken before we – it is a leading indicator of what we expect traffic to be and also whether we are doing a step function investment in the backbone of the network is an example and so we are – we believe that the level of 6 to 7 is the right level for Q1 and as I mentioned earlier, we don’t have a – nobody has much visibility right now. So, we truly are as a management team and a board building the business plan and modeling quarter-to-quarter and recasting month to month depending on what we see happen, but right now that looks like the right investment and Doug on the year.

Doug Lindroth

Well on the year, I would say the same and we are going to monitor how each quarter is looking going forward and will be projecting our CapEx based on that. We are going to monitor it based on how we are doing, from our bookings our pipeline, the traffic on our network. So, it is little bit difficult as Jeff said, we had given the visibility that can give you a forecast for the year. So, I think it is going to really be a quarter by quarter and based on how we are seeing then proceeds.

Jeff Lunsford

And David, we anticipate over time on a blended basis about 15% 16% of revenue as the CapEx steady state.

David Hilal – FBR

Great thank you.

Operator

Your next question comes from the line of Sri Anantha of Oppenheimer.

Sri Anantha – Oppenheimer

Yes thank and good morning. You know Jeff you had talked about some of the retrenchment as you look into 1Q, maybe if you could give some color, is it because of (inaudible) cash flow at economy related retrenchment that you are seeing in the marketplace? Second one is, what percentage of your revenue today comes from the “small customers” that you had talked – that you had mentioned on the call? Thanks.

Jeff Lunsford

Sure. The single most material factor on the sequential Q4 to Q1 decline is renegotiations of large contracts with large customers that as I said we think more properly reflect the business environment. So, even the healthiest of our customers who have great growing traffic have their own budget challenges in this environment and are turning to us as a partner and saying can you do more? Can you do, will lengthen our relationship with you – give us a lower unit cost that will allow us to grow, and so we consciously in multiple large relationships decided to do those renegotiations and have those take effect in Q1. There are other factors as well, Doug. I think Doug covered some of those in his script. Do you want to give them more color there?

Doug Lindroth

Yes I mean the other thing I would say, just, if you are looking at between large and small are, our top 60 customers account for roughly 60% to 65% of revenue. So it gives you kind of the perspective of where the large ones versus the smaller ones are. So, I would say that’s really how you can separate between the big and the small for us.

Sri Anantha – Oppenheimer

Jeff, one just follow-up question. I know you seem to be now focused on some of the larger customers. Maybe could you just talk about your pipeline, you know we are seeing a number of announcements whether it is NetFlix or some other traditional media companies, you know talking about putting more content online. Maybe if you could just talk about what is the market opportunity and how has that changed, just within the past three to six months.

Jeff Lunsford

Certainly, we look – if the growth we are seeing some of our customers is any indication with the even limited libraries that they have today, the market opportunity is massive. We talked before about, we really view this as a shift so were content consumption is going to happen over an IP network, primarily in an on-demand mode except for live events. Even then a lot of those live events will be consumed over handheld devices and on desktops as we discussed earlier. So, traffic will continue to grow because consumers will continue to access more content online and libraries will continue to grow. Music and video libraries as the audiences grow the content producers have to allow their content to be accessed where the audiences want to access them and in their various monetization strategies some subscription, some ad based, some paper view, all of which are growing and people are experimenting with different business models, but it seems like most of the early businesses that were distributing content and whether the rights issues have worked through those issues and studios and the labels are now, you know their results have worked with online entities and they have sort of settled on models to do so. So, it is a consumer pulled phenomenon and there is going to be a lot more content consumed and as long as the monetization is there, people will get a fun delivery over a CDM because it is very clear that a CDN adds quality and reduces risk and provides fault hours. So, we feel great about the long-term market opportunity and great that the trends that we believe existed two years ago when we brought the business out that they remain in tact.

Sri Anantha – Oppenheimer

Thanks guys.

Operator

Your next question comes from the line of Katherine Egbert of Jefferies.

Katherine Egbert – Jefferies

Hi good morning. I was wondering about your success in the corporate and the government and education markets what are you offering there and then has there in the market? Thanks.

Jeff Lunsford

Sure. I think Kath as we discussed before with – this platform was designed and optimized around large object delivery, but in the last 24 months we have made significant advances to where – on the small object side to where we can now in a performance break-up go toe-to-toe with the more distributor architecture so to small object for the CDNs. And so we are not calling on customers for whole side delivery, for small object delivery and those customers in addition also have large object needs, but the addressable market where in out platform can be competitive expanded and then if you look at other companies in our business, you know we are talking about on the order of 40% to 50% of their revenue that we have up until about six months ago, not really been pursuing. So, we see that the e-commerce and enterprise sectors and government sectors is very good opportunities for Limelight. It takes a while to penetrate and build to go to market resources, the platform is there and the platform is ready.

Katherine Egbert – Jefferies

Okay and then a little bit longer term Jeff. I mean you said gross margin EBITDA will come down in the first half then expand in the back half of the year. Can you give us any metrics or any profile of when you can – your head of steady state for both growth in EBIT, meaning like when does it bottom and then you kind of get a sustainable pattern going forward of expansion? Thanks.

Jeff Lunsford

Sure. I think part of that is just the scale of the business itself. Because you know, when we make a major backbone commitment is an example right now. You know there is a step function up that still does see – you still it in the numbers, when we invest in the new a geography there is a big step function up in OpEx hit within COGS and so as we get bigger those investments relative to the overall COGS run rate will be smaller and margins will smooth out. You know, I think a lot of the gross margin up and down over the last couple of years that Limelight has also been just revenue volatility as I said earlier, sometimes you do more than you anticipated because this business is one where roughly 50% of our revenue is committed and the other 50% is variable above those commit levels. And you know there is more seasonality in it and you see, you know then there obviously all sorts of economic fluctuations that have happened over the last six months. So, I think the COGS billed is reasonably straight-forward and predictable it is the revenue variability on the top end, but what we believe you don’t want to do is react to a one-quarter if you have a couple of points to compression just because slightly less revenue because as we have learned over the years, if you build the capacity with the network that performs the BPs will show because the large consent publishers need companies like us when things like the inauguration, like the Olympics come along, they are only one or two places they can go.

Katherine Egbert – Jefferies

Sure. Okay thanks good quarter.

Jeff Lunsford

Thank you.

Operator

Your next question comes from the line of Kerry Rice of Wedbush Morgan.

Kerry Rice – Wedbush Morgan

Thanks. Just a couple of questions and they kind of Doug told between the contract adjustment that you spoke of in the operating environment, you are obviously spending more in CapEx, so traffic trends seem to be very strong. Can you talk a little bit if you kind of take out or exclude your bigger customers coming to you and saying giving the business environment, can you give us a little break on pricing will extend the link of the contract? Taking that out, would you say that pricing in general in the market is fairly stable or do you think it is all coming down so we are seeing compression across the board?

Doug Lindroth

Well, we have always seen unit price compression in the CDN business and we always will see it, it is really just a question on rate of compression. It is a market segment characterized by unit price compression, which is outrun by unit growth and like many tech markets. So, we would say that in 2008 you might have seen an increase in per unit price compression that was driven by a couple of factors, you know Telco is trying to get into the business in subsidized CDN with Telco services, smaller CDN that had raised money, raised capital, and we are trying to get to scale and then got a little desperate in their business practices. We think that – most of that will clean our self up over the next probably six months. And then the – overall, if you think about a large media company, who plans for their Internet traffic to be x and it ends up being 50% higher than x, these guys are used to a fixed delivery cost because they are used to the satellite delivery model. They are not used to variable delivery cost and they don’t budget for that variable delivery. So, we have a dynamic where when online usage grows faster than these folks anticipated which is happening in many cases. The don’t have the budget dollars and they turn to us and then we use that as an opportunity to say alright lets link in the relationship because if we can allow them to operate within budgets they can have dollars to advertise, which brings more people online and over the long-term it becomes self recurring success.

Kerry Rice – Wedbush Morgan

Would you say with the contract adjustments, I don’t know how many obviously were exclusive customers of yours versus those that use multiple CDNs, but would you say that you – could you characterize it as you got more traffic as well for each contract or how would you characterize any other concessions that you are – benefits that you got by giving a price in session? Just link the contracts?

Doug Lindroth

Well usually you will get a higher commit over a longer period of time and for more bids and you hope that you are sweeping traffic from either an in-house platform or from other providers. It is really – I don’t think we should get down on the granularity of each one we did in Q4, but that is the general benefit.

Kerry Rice – Wedbush Morgan

Okay. Just a couple of house keeping, enterprise you guys have obviously been pretty successful there, can you give us any indication what revenue generation is coming from enterprise today?

Jeff Lunsford

We haven’t broken that out. I don’t think we are ready. We’ve broken out international revenue, but not enterprise.

Kerry Rice – Wedbush Morgan

Okay and then on the NetFlix relationship, does NetFlix, do you get paid by NetFlix only for that relationship but a lot of that comes through Microsoft and the Xbox, which they download which obviously Microsoft is a big customer, so you then kind of get a secondary benefit as that traffic gets pulled down through Microsoft as well?

Doug Lindroth

We can’t really get into this talking about specific customers so I apologize for that.

Kerry Rice – Wedbush Morgan

Okay, thank you.

Doug Lindroth

Thank you.

Operator

Your next question comes from the line of Michael Turits of Raymond James.

Michael Turits – Raymond James

Hi guys couple of questions around revenue. First of all the revenue beat on this quarter, can you just see anymore specifics about where did the upside come from? Where there any truly one-time events, was it higher traffic with existing customers, high traffic levels. Secondly, just if you could talk a little bit about the mechanics behind the contract research did, where these contracts a lot of them up for renewal or did customers come to you, how did all that work and then the third thing is also related as – single digit revenue growth in the first quarter. Should we think of this as a high-single-digit growth pattern for the full year?

Jeff Lunsford

So, in reverse order. We are not giving any revenue guidance for the full-year. You know and we are going to guide you here quarter-to-quarter because we think it is your responsible to guess what is to be happening in the second half of 2009, but we can, we did give you some full-year color on margin because we can modulate COGS to where ever revenue ends up. On the second part of your question, the mechanics, you know we have 1,300 customers, so just in general our sort of business posture in Q4 was to be just to think about ’09 and set a base the same way we did in ’08 with the first half of the year and then build from there and we felt like in the negotiations we are having conversations of our customers to take that stands would be the right thing to do, to help – hope to position us as a preferred provider for ’09 and get the benefit of that growth and the – throughout the year really and then I will let Doug comment on the over performance of revenue for Q4.

Doug Lindroth

I mean I would say there is a couple of ways to look at it, one is geographically and as I mentioned our international operations had a very good year as well as they had a very strong Q4. So, we are real happy to see that you know our continued expansion – our geographic and global expansion is working out really well. The other way to look at it would be on a segment basis and we did see good across the board activity in all of our segments. I would say one that was very strong in Q4 was the software download business. So that was really strong.

Michael Turits – Raymond James

And with that said one follow-up, last quarter I think you said that your gross ads above a 100, can you give us a rough sense of what the gross ads were this quarter?

Jeff Lunsford

Also above a 100.

Michael Turits – Raymond James

Same thing, roughly in that range?

Jeff Lunsford

Yes. Exactly, Michael. And at this time we have time for two more questions. Operator I think Derek Bingham is next.

Operator

Yes your next question is from the line of Derek Bingham of Goldman Sachs.

Derek Bingham – Goldman Sachs

Hi thanks for giving in Jeff. Got to push hard for that one. My first question was you talked a little bit about kind of the enterprise business little bit of the new architecture for you, anything outside that you have been really focusing on from kind of new product or technical advancement point of view you wanted to highlight?

Doug Lindroth

I would say that there are always new format sizes. So, new flash release, new silver light release, and there is a constant flow of new capabilities that are pretty granular when you look at CDNs roadmap and some of its operational stuff things like self-provisioning allowing customers to be more self helped, so that they can, that actually improves the customer experience and drives down our support cost. So it is a win-win and so we are investing in a lot of that self provisioning, self-support technology dealing with new media formats and opening new geographies and then constantly working on enhancing performance that – probably the most stubborn component of COGS is rack cost in the way you win on rack cost is by getting more out of a server and potentially more out of a lower power foot print server. Right, so we are – we have a bunch of work going on in R&D constantly and driving performance management.

Derek Bingham – Goldman Sachs

Related to that on CapEx, they actually went down in absolute dollars from 2008 and as a percentage of revenue was 14%, I think if I am calculating right and it looks like – and you mentioned kind of it the ratio on a steady stay basis being more 15% to 16%. I kind of – in 2008 actually did a lot of investing, so why should that ratio come back up again?

Doug Lindroth

I think we were about 15% for 2008. Each quarter sometimes what to have a little bit more, little bit less and is adjusted and some of it is dependent upon where we are expanding on our network and the timing of those expansions. So, there might be some that we are working on and depending on and whether we can actually get that CapEx received and then deployed in the quarter. So, you could have some ups and downs, but I think where we were for ’08 at about 15% and then based on some of the stuffs that we are working on in the second half of the year and for our expansion plans we will be hitting in Q1 and thus the guidance we gave of about $6 million to $7 million. So, but I think just right that steady state of about 15% to 16% and then it maybe a little bit lumpy on a quarter-to-quarter basis, but longer term that’s kind of the range we are targeting.

Derek Bingham – Goldman Sachs

Okay. Thanks guys, congratulations.

Jeff Lunsford

Thank you we will see you in a few hours.

Derek Bingham – Goldman Sachs

Yes great thank you again.

Doug Lindroth

And last question, operator, I think comes from Mike Goldstein [ph].

Operator

Yes, sir.

Mike Goldstein

Alright, thanks. Good morning. I just want to follow-up on what you guys said there on international. I think you said it grew 62% for the year and can you tell us what it was up for Q4 and then also just where is that going to go as a percent of revenue kind of over the next year, do you think what are kind of the limiting factors for international growth and then what are the margins look like on international compared to domestic? Thanks.

Doug Lindroth

I don’t know that we would guide any differently beyond the quarter for international that we would for the rest of the world or for the US. There is just not enough visibility, but in general we would anticipate it would grow as a percentage of Limelight’s revenue as we establish more go-to-market resources in countries in Asia and in Europe. On the margin question, what we see is there are certain markets where you got to a telecom duopoly or a large Telco that owns over 50% of a last mile connectivity and it is more difficult to run a profitable business in those markets, but not impossible and so in some cases you need to wait to get to a certain scale so you can go to those duopolies or folks who have control to connectivity into a country. Once you are big enough, then you can strike the right deal with them. But in general, when we open a new geography, margins are lower and then as we scale, we can drive down cost pretty quickly and then it blends in with the rest of the business. And your question on the growth in the quarter was about 20% from Q3 to Q4.

Mike Goldstein

Okay, thanks a lot.

Jeff Lunsford

Thank you. So operator, at this time, we will conclude the call. We thank everyone for joining us today and look forward to any follow-ups.

Operator

Ladies and gentlemen, that concludes the presentation. Thank you for your participation; you may now disconnect. Have a wonderful week.

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Source: Limelight Networks, Inc. Q4 2008 Earnings Call Transcript
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