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Limelight Networks, Inc. (NASDAQ:LLNW)

Q2 2009 Earnings Call Transcript

August 06, 2009 at 4:30 pm ET

Executives

Jeff Lunsford - Chairman and Chief Executive Officer

Doug Lindroth - Chief Financial Officer

Paul Alfieri - Senior Director, Corporate Communications

Analysts

Analyst for Derek Bingham - Goldman Sachs

David Hilal - FBR Capital Markets

Srinivas Anantha - Oppenheimer & Co.

Donna Jaegers - D.A. Davidson

[Michael Burtist] - Raymond James

Colby Synesael - Kaufman Brothers, LP

Unidentified Analyst - JP Morgan Securities

Operator

Good day ladies and gentlemen and welcome to the second quarter 2009 Limelight Network earnings conference call. At this time, all participants are in a listen-only mode. At the end of the prepared remarks, we will provide instructions for those interested in queuing up for the question-and-answer session.

I would now like to turn the call over to Paul Alfieri, Senior Director of Corporate Communications. Go ahead, Paul.

Paul Alfieri

Good afternoon and thank you for joining the Limelight Networks’ second quarter 2009 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 August 6, 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 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, 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 including the inherent risks associated with litigation particularly intellectual property base 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 Jeff Lunsford.

Jeffrey Lunsford

Thank you all for joining us. Today, Limelight Networks reported $32.3 million in revenue for the second quarter of 2009, representing 7% year-over-year growth over Q2 of 2008.

Bottom line performances well ahead of our expectations despite revenue that was at the low end of our guidance going into the quarter, we are able to maintain gross margins, expand adjusted EBITDA and generate over $7 million in cash from operations as a result of disciplined execution as we navigate during economic downturn combined with market dynamics that involved aggressive pricing activity.

We are selectively focusing our investments in areas that we believe will create sustainable long term value by differentiating Limelight from our competition and building repeatable cash earnings overtime. We believe Q2 represented a trough of the tough business environment.

Looking forward, today, we reaffirmed our view. We will see a return to sequential growth in the second half of 2009. The downturn in pricing environment I just mentioned is leading the content delivery markets to consolidate around two or three global market leaders.

Underlying this market growth prospect is a strong demand driver, an excess of 60% annual growth and internet traffic for the next few years if you read the industry reports. We believe Limelight Networks is positioning itself by building our network with the capacity and scalability and features and services to delivery this growing traffic volume and by expanding our solution set with the value added solutions that will solve complex problems like mobile content delivery and optimization.

During the quarter, our customer base remained relatively flat, ending at approximately 1368 excluding customers to the former Kiptronic. We continued to sign up substantial numbers of new customers over 100 in the quarter but also eliminated many customers as we focused on quality.

We worked our DSOs down approximately 20 days and drove aggressive collection activity. We have become more diligent with upfront customer qualification and with how we address customers at the credit risk, which is the right thing to do in this business environment.

Average annualized revenue per customer in Q2 was approximately $95,000 a year which is about level with last year’s second quarter. Bookings were down slightly from Q1 as a few large deals delayed in the Q3 but most those have since closed and our pipeline is growing. So we believe we will see a return of bookings growth which is our best leading indicator in Q3.

In the media entertainment market segment, we continued to be a platform choice for leading content internet brands. One highlight for this quarter was our work delivering US Open Golf Tournament for MSNBC.

Another highlight which demonstrates the value of a robust and scalable CDN partner was a recent experience of our customer TMZ.com. TMZ is a Hollywood celebrity news site and was the first organization to break the news of Michael Jackson’s passing. As soon as the news was posted at the TMZ website, millions of other global news stories, personal portals and blogpost referenced to TMZ’s report via hyperlink.

The result was a surge of traffic unlike anything they had ever seen. Limelight’s global infrastructure absorbed this incredible traffic spike which is what is designed to do and kept TMZ opened for business in reporting the news, even as other sites and other CDN choked on the sudden uptick of traffic.

This event also showed the value that our professional services organization which provides consulting in technical supports online businesses including TMZ can deliver to customers and this instance our team engaged in capacity planning and site optimization work to help TMZ’s internal infrastructure reliably to connect dials and handle such unforeseen traffic spikes.

This upfront work is partly initial customer engagement resulted in the Russel performance throughout the entire system and the event period.

In the enterprise market segment, we signed 13 new customers including cash software designer Bentley Systems, Casio electronics and Clifford Chance, the largest law firm in the world. We will also continue to make good progress in the government market with three key wins at the federal level, the names, all of which must be kept confidential.

Also this quarter, we are pleased to announce Limelight’s first acquisition, the Kiptronic Inc., a privately held company that provides solutions for device optimized content delivery as well as ad insertion monetization on mobile and connected devices.

This acquisition represents a calculated expansion in the value added services outside of core bit delivery and provides us with an opportunity to have valuable strategic discussions with our customers.

We are excited about the growth potential for these value added services. Although we want investors to understand that revenue in this sector is small today as we are in the early stages of content publishers developing their mobile content delivery monetization initiatives.

As you will see in the details of our 10-Q that will file in the next few days, we acquired substantially all the assets of Kiptronic for approximately $1 million. Additionally, revenue generated during the second quarter related to the acquisition was less than $100,000.

However, this newly acquired technology gives our network more intelligence about how content should be delivered to connect the devices particularly mobile phones. This capability is become increasingly important to our customers. As they see, consumer media consumption habits changing.

A recent Nielsen study showed that consumption is happening not only on the TV and PC but also on a wide variety of internet connected mobile devices and that mobile consumption rates are growing faster than TV and PC consumption rates.

The Limelight customers, the content publishers represents both an opportunity and a challenge. The opportunities that publishers can more precisely target viewers on the device that their audience is choosing. The challenge distributing contents to the wide variety of devices that are out there and then monetizing that content is complex and difficult to implement in a scalable fashion.

Kiptronic services now integrate in the Limelight’s global computing platform, eliminate this complexity by integrating directly into a publishers’ content management system, hosting trafficking and recording platforms, and providing a seamless workflow for building audiences whatever their viewing content.

The first service we offered called LimelightREACH also offered auto detects end user devices and then adapts media files as necessary. The solution enables publishers to distribute properly formatted content in almost any media enabled mobile handset, from early video capable phones to smart phones like Apple iPhone 3GS, Palm Pre and the latest BlackBerry. LimelightREACH delivers the right file over the right protocol network to the specific device that requested the content.

The second service called LimelightADS helps the advertisers to reach audiences in mobile applications, video games, widgets and more by providing an easy way to stitch targeted video and audio advertising into a media file before that file is delivered to a mobile or connected device.

LimelightADS works seamlessly with the publishers existing ad insertion process, integrating directly into leading ad decision engines like DoubleClick DART and Microsoft Atlas, which means that publishers maintain their existing management interface for measuring campaign success.

Publishers can change ads dynamically and even rotate multiple campaigns and advertisers within the same content segment. There over 20 customers using a solution today including NBC.com, NPR, FOX, The Guardian, Conde Nast, The Economist, and Minnesota Public Radio. Every large global publisher we have talked today as mobile is a top priority for the next six to twelve months. With this solution now integrating in their portfolio, we believe we are in the leading edge of being able to provide the right blend of service and consultation to help publishers to reach new devices with their content.

You can go to reach.llnw.com if you would like to see a demonstration on your multimedia phone.

In the second quarter, we continued to see our average traffic levels arise and again experienced new records for peak traffic through the network. We also continued to build out our network capacity and expand our geographic footprint. We also announced the upgrade of our global computing platform to Internet Protocol Version 6. The next generation protocol that the internet community will use to address and communicate with each device connected to it.

This is an important milestone for Limelight and the CDN industry at large. The current protocol widely used on the internet, IP Version 4 is running out of new addresses. As we move into device centric access where every mobile phone Blu-Ray player, Netbook and TV comes within internet connection built in as well as washers and dryers and refrigerators, we will very quickly deplete those remaining IPv4 addresses.

The IPv6 protocol resolves this issue by adding literally trillions of new addresses as well as improvements in areas such as bandwidth efficiency in routing and network auto configuration.

We are pleased to offer the service today to our customers so that they can begin planning and building applications for the next generation internet.

I will now turn the call over to Doug Lindroth. He will take you through the financials and other key points.

Douglas Lindroth

Thanks Jeff. During the second quarter, we reported revenue of $32.3 million, up 7% compared to revenue from the same period last year and down 3% from Q1. We reported second quarter adjusted EBITDA of $6 million compared to $4.7 million for Q1 and $3.9 million for the second quarter last year. Our adjusted EBITDA increased to 18% of sales from 13% in the same period last year.

Our GAAP net loss was $5.3 million or $0.06 per basic share.

We also reported second quarter non-GAAP net loss before stock-based compensation and litigation costs of $0.7 million or $0.01 per basic share compared to a non-GAAP net loss of $1.6 million and $0.02 per basic share for the same period last quarter. Please refer to the tables included in our press release for a reconciliation of GAAP measures to these non-GAAP measures.

During the second quarter, Limelight’s international operations represented 19% of total revenue, which was consistent with the previous quarter. Gross profit margin, which includes both depreciation and stock based compensation, was 35% during Q2, flat to last quarter and Q2 of 2008.

Cash gross margin was 56% for Q2 down from 57% in Q1 and in the same period last year. Cash gross margin declined in the second quarter from Q1 of 2009 due to slightly lower revenue and some of our previously discussed network expansion activities.

As Jeff highlighted earlier, we believe we have instituted the operational discipline to monitor our business based on the environment. We kept to closed watch on our customer activities, the overall economic environment and traffic levels across our network.

Certain network expansion activities were pushed to Q3 based on these factors and as a result our gross margins did not decline to the extent we have previously guided. However, in the third quarter of 2009, we anticipate a gross margin compression of approximately 2 to 4 points from Q2.

We expect to see a sequential decline in our gross margins primarily as the result of the continued expansion of the scale and capacity of our network. We anticipate that gross margins will expand back to first half levels in Q4.

Although we are operating in a difficult economic environment, we are continuing to effectively manage our expenses and as a result our operating expenses were $16.6 million in Q2 down $5.9 million from the first quarter and down $3.5 million from the same period last year.

Our operating expenses decreased during the quarter due to a decrease in litigation costs, reduced marketing expenses, lower bad debt expense, a reduction in compensation related expenses and a decrease in sales and property taxes.

Total depreciation and amortization for the second quarter was $6.7 million, down from $7.1 million in the first quarter and up from $6.5 million in the same period last year. Depreciation and amortization in the current quarter includes $6.1 million of network related deprecation.

Stock based compensation expenses for the quarter were $4.3 million compared to $4.5 million last quarter and $4.3 million for the same period last year.

Second quarter interest earnings were approximately $300,000 compared to approximately $400,000 for Q1 and $1.3 million for the same quarter last year. The reduced interest income is associated with lower market interest rates and a lower average cash balance from last quarter and the same quarter last year.

Moving on to the balance sheet, our combined cash and marketable securities balance on June 30 was $164.3 million, up from $162 million in the first quarter. The increase in cash and marketable securities is primarily related to $7.5 million generated from operating activities offset by our capital expenditures. Capital expenditures for the second quarter were $4.1 million compared to $4.6 million for Q1 and $5 million for the same quarter last year.

Days Sales Outstanding for the quarter were 73 days, down from 93 days in the previous quarter and up from 66 days in the second quarter last year. The decrease in our DSO from Q1 levels is related to our extensive collection efforts throughout the second quarter. We are pleased with the reduction in our account receivable balance and the corresponding reduction in bad debt expense during the quarter.

Regarding guidance, for third quarter of 2009, we expect to achieve revenues in the range of $32 million to $33 million. Stock based compensation expenses for Q3 are expected to be approximately $4.5 million and capital expenditures are expected to be approximately $9 million.

With that I will turn it back to Jeff.

Jeffrey Lunsford

Thanks Doug. At this time, we have no further comments. We will turn the call over to the operator to begin the Q&A section. Operator?

Question-and-Answer Session

Operator

(Operator Instruction) Your first question comes from the line of Derek Bingham - Goldman Sachs.

Analyst for Derek Bingham - Goldman Sachs

This is [Joe] on behalf of Derek Bingham. A couple of questions, first of all, could you give us some guidance on how we should think of operating expenses especially G&A and sales marketing, also could you give us a comment on bandwidth pricing changes versus how pricing is being affected due to competition in the pipeline?

Douglas Lindroth

What was the first part of your question on operating expenses for Q3?

Analyst for Derek Bingham - Goldman Sachs

Yes.

Douglas Lindroth

What I would look at for operating expenses is because of some of the items that I have mentioned that we are lower in Q2. So, if you exclude side to side litigation cost for a second and think about the other items, marketing, bad debt and some of our compensation related, I would probably model Q3 total operating expenses excluding litigation more in line with the levels that we had in Q1. If you go back to where our Q1 results were, I would say operating expenses would be more in line with those levels.

And then on the pricing question, gross margins were relatively consistent quarter-to-quarter and so the underlying bandwidth cost you asked about is a substantially component of our cogs and I think just in a quarter-to-quarter comparison. We would say those two were relatively consistent that the compression in bandwidth cost was roughly equivalent with the compression in pricing.

Analyst for Derek Bingham - Goldman Sachs

Okay, thanks. Just one more question, could you comment on your headcount addition plans? Do you have any headcount addition plans for the rest of the year?

Jeffrey Lunsford

We do. We believing that Q2 was a trough and believing that we will see a return to sequential growth here. In the second half, we are making calculated investments in areas of the business that are growing and in products, value added services that we believe will create long term value and we have certain geographic markets that are growing. We have certain lines of business that are growing and so we are planning on adding heads between now and end of the year.

Operator

Your next question comes from the line of David Hilal - FBR Capital Markets.

David Hilal - FBR Capital Markets

First question is a bit of follow up. You guys did a good job this quarter on expenses and really can pretty down close to breakeven on a pro forma basis. It sounds like EBITDA margins will go down a little bit in Q4, but Jeff, you are talking about sequential growth returning in the back half of this year but we think of that expense growth, will that be kind of in line with the revenue growth or is there more leverage that with another two quarters of sequential revenue growth we can get back to kind of breakeven levels?

Jeffrey Lunsford

Yes. I would think of it in two buckets, Dave. I would think of the cogs costs and I think in the OpEx cost that Doug talked about.

On the cogs side, as Doug said we delayed a few things in Q2 and so we did not see the gross margin compression. We have talked that in the last quarter. There is real network, build outwork to do expanding in the new geographies, adding new backbone capacity because of the growing traffic and so on and so forth. So you should expect to see that uptick in Q3 and then that gives us a bunch more capacity that we will work to monetize as quickly as possible.

We are only giving one quarter guidance so we cannot look too far out because the economy is pretty uncertain still. The market is uncertain. And then on the OpEx, as Doug said consistent with sort of Q1 levels but we are definitely focused on getting the business to pro forma profitability but you also want to make sure you are investing for the long term and not just trying to solve a short term upticks win but actually make in the right investments and striking the right balance there.

Douglas Lindroth

And the last one I would make there David is on when I referenced back in the Q1 levels that would also include within the OpEx, the ongoing cost related to the Kiptronic acquisition and so that is factored into what those levels would be for Q3 and going forward.

David Hilal - FBR Capital Markets

Okay, I understand. On the customer ad, if we are going to back into a churn number, it looks pretty high and I guess I wanted to understand how many of those? Are those kind of low end maybe on profitable customers that you guys are voluntarily turning off versus those customers that live on their own will and go somewhere else?

Jeffrey Lunsford

We had broken it out. In that way I mean we always do have involuntary and voluntary attrition and you try to minimize both. The involuntary where we would actually quote sort of eliminated customer. You have really rather just have a frontend screening process that was rigorous enough that you did not have those folks to begin with because there is too much cost in bringing someone on, realizing they are not going to pay the bills and then shut them down.

And then on the voluntary where we have some competitive loss or someone is just going out to business or they stop using a CDN. You do see that and it does happen and usually we are winning more than our fair share of those on the competitive situations and growing the customer base. In this quarter, I would tell you that the major driver in the net customer growth was the basically extra focus on cleaning out the customers that are really customers to begin with.

Douglas Lindroth

And that was part in my remarks where I talked about part of our extensive collection efforts and I was putting a more robust front end process in place that we did without a lot of smaller customers, unprofitable customers and we made sure that on a go forward basis, we are not going to have that type. There will still be more waiting to do but we made a lot of progress during Q2.

David Hilal - FBR Capital Markets

Okay and on pricing, Jeff, your comment on aggressive pricing or it is pretty comparable to what Akamai had said last week and I do no think it is probably a surprise to anybody at least in common sector but maybe you can talk to us about the pace of that aggressive pricing and I mean pricing war sometimes can last a long time and sometimes can be short and you obviously need to manage your business based on how you forecast that. So, when you think add over the next year or so, do you think the pricing environment stays equally tough or starts to improve or could possibly get worse from what you have seen recently?

Jeffrey Lunsford

Sure, so let us give you some historical context here. So, three years ago, we were modeling about 20% to 25% annual unit price decline and about a year ago, we started looking at and talking to investors about probably you should model 25% to 30% annual price decline. What we saw in Q2 was in between 30% and 35% so if you want to be conservative, you would model a 30% to 35% going forward.

If you look back over a decade, that is much more rapid price decline than the industry has historically had and so, we do think that that will improve. We think we should return back to 25% to 30% and then ultimately back to 20% to 25% per year and we think there is two root causes for the compression going to this level.

Number one, the business environment, the economy customers are putting dramatic pressure on all of their vendors, CDNs included. Number two, which we have talked about in the past is that large telcos that began to offer CDN services are able to get paid when they deliver those bits on the ISP side and so to try to establish themselves in the business, they will subsidize CDN with other big delivery services. The effect of that second one, the entrance of the telcos into the market, we believe has now being felt and absorbed by the industry and so we believe that from here forward, we should be looking at a more return to normal.

What happened is that has caused a shakeout effectively. It is no secret that there are many smaller companies that were trying to make a run at the CDN sector have given up, shutdown or sold for $0.20 on a $1 and we now have a market that as I said earlier is solidifying around two or three market leaders. So, while at short term pain, we believe there will be a long term benefit and that this is a business that requires global scale and the analogy that we used is the package delivery business where you have that actual GPS and DHO and if you are going to build a global infrastructure to deliver anything where there is packages or bits, you only need two or three platforms.

And so with the way of a traffic that continues to grow and with the complexity of all the new devices people are accessing content with, we think that those two or three global platforms will going to have an amazing opportunity and an amazing amount of work ahead of them and so the shakeout when you look back a couple of years from now while short term painful, you will look back and say, "Well, I was a good there winning in shakeout and the markets are now really healthy around these two or three platforms."

David Hilal - FBR Capital Markets

Okay, that is helpful and then Jeff on some of the recent reseller agreements like the Barack Space and Global Crossing, any meaningful traction so far there that we are talking about?

Jeffrey Lunsford

We do not break out specific customers or specific resellers. So I would just say that we continue to focus on the channel. We recently signed another one that has not yet been announced and we think we have a pretty good opportunity there to leverage the platform that we have by selecting the right partners to take the service to market bundled with a lot of the other things that they do.

Operator

Your next question comes from the line of Srinivas Anantha - Oppenheimer & Co.

Srinivas Anantha - Oppenheimer & Co.

Jeff, just a follow up on the early question about pricing, what gives you the confidence that pricing is going to stabilize? People have talked about in bandwidth pricing. We have seen consolidation happens from time to time and the year of vending periods where we saw bandwidth pricing stabilizing a little bit but then it gets back to rational levels, what do you think is different with CDN services that give you the confidence that it is going to move back to normal level?

Jeffrey Lunsford

Well because Sri at the heart of it, the CDN business is a software business, not an infrastructure business. We talked before about the complexity of what we do and very few companies build global content delivery, not just because of the scale and the CapEx required but because of the IP required to actually build a platform and run the content and handle the complexity. If you think about Flash and Silverlight and QuickTime and Shoutcast and you think about all geographies and IPGO blocking and all the different bit rates, all the different transcoding that you need to do to optimize a file to be consumed over thousands of different devices both wired and wireless with different form factors and then how do you monetize and integrating with the monetization systems like the AdNetworks, there is a massive amount of software that have to be written here and there are very few companies on the planet that can handle that complexity and have developed platforms and we happen to be one of them.

And so you do get paid. When you saw a complex problem and there is an ongoing treadmill of increasing complexity and increasing problems to solve and that is what software companies do. When you saw a complex problem, you get paid for it because it is a lot easier people to work with you than elsewhere. So, we do not equate this industry with the historical raw bandwidth business at all.

Srinivas Anantha - Oppenheimer & Co.

Second one, I know Akamai had talked about adopting a pretty aggressive pretty strategy. Has that had any impact on your customer win in this quarter or are you seeing, or have you guys changed anything with respect to your strategy, how you approach the market?

Jeffrey Lunsford

Well, we do not talk specifically about any particular competitors. I am happy to talk about market dynamics and we have always taken a stance that we have the most efficient delivery platform because we do operate a more centralized network that is the right next gen architecture for content delivery as file sizes increase and we are generally able to leverage that efficiency by winning business head to head with those guys or any of the other ones that you would like to rattle all and we are here to grow, grow market share and so that as traffic growth continues to grow and pricing stabilizes that we will emerge and grow faster than the general market.

So, our philosophy has not changed. Of the eight years that Limelight has been in business and any particular announcement from any particular competitor this quarter or last quarter last year does not generally change our strategy.

Operator

Your next question comes from the line of Donna Jaegers - D.A. Davidson.

Donna Jaegers - D.A. Davidson

Few questions for you guys. I may have missed it but did you talk about the number of customers you had for the Limelight site product and frankly make it in a…?

Douglas Lindroth

We did not say how many we have in total. We just talked about how many we added during the quarter.

Jeffrey Lunsford

In the enterprise sectors. That is more of a market sector comment, not a product specific comment.

Donna Jaegers - D.A. Davidson

Can you repeat that number again? I missed it as far as the number of customers added in enterprise, I mean you only added two total customer so do you have any..?

Jeffrey Lunsford

We added 14 in enterprise.

Donna Jaegers - D.A. Davidson

Okay and then as far as the value, obviously with the pricing so competitive in sort of the commodity areas, at least your strategy is to move to these more complex areas. How much traction are you starting to get on the Kiptronic products or is it too early to tell?

Jeffrey Lunsford

We are actually very pleased with the early reception of both the mobility and monetization solutions we acquired from Kiptronic and then put on our platform and a few internal value added services that we have been developing and piloting more customers. The revenue from this will start small but they are all in high growth areas and so over a couple of years you should see this become nice substantial revenue sources and profit generators for us. But every one of our large global customers that we have taken the Kiptronic team into has been very excited about the problems they saw and about getting some kind of analysis underway so they can figure out if it works for them.

Donna Jaegers - D.A. Davidson

You pushed out of your cost of good sold through another quarter, if the volume does not pick up in the third quarter, can it be pushed out yet another quarter as far as taking the capacity from Global Crossing?

Douglas Lindroth

Well, Global Crossing is just one small component of it. So, that is not really the driver of it. The bigger driver for us is bringing up new locations so taking up new parts, new [kolo] and expanding in some of our existing co-locations facilities. So that is really the driver of the cost. The Global Crossing wave deal is just a small component of it.

Jeffrey Lunsford

Yes, and so the build out decisions are usually made on a 90 days at a minimum, six months usually in advance and so those wheels are in motion. Now, sometimes we still might over perform meaning have a lower cost on the cogs than normal because within the quarter, we were able to negotiate down some of the cost of cogs that may be bandwidth, that maybe kolo, that maybe a lot of different things.

But that sort of that up tick in cogs we telegraphed the last few quarters, it was coming and we believe that in Q3 now, it will come. Maybe we will over perform again but I would not plan on that. I would plan on that two to four points in margin compression in your model.

Donna Jaegers - D.A. Davidson

Okay and then just one last follow up on the big pricing controversy that is going on now. Obviously, a lot of the smaller players are getting shaken out but AT&T is still very aggressive in the space. They are not exactly a small player. Why would not they continue to price aggressively? So, it gets back to why are you still confident that second quarter is the drop in pricing?

Jeffrey Lunsford

Yes, so what we believe the second quarter's draft for the business environment and in the second half we will see a return to the sequential growth because we think you have the industry sort to have that a new baseline for pricing practices and again I am not sure which particular, we do not comment on any particular competitor but we do not believe, you are at the point where the activity we are seeing in the market would tell us that we think we should get back to more normal year-over-year unit price declines.

But we are only, we are trying to give you a one-quarter out and it is a very dynamic environment so it is very difficult to say we think this will happen in 2010 or even like that. At each quarter, we are trying to give you an update and that is how we see it right now.

Operator

Your next question comes from the line of [Michael Burtist] - Raymond James.

[Michael Burtist] - Raymond James

Two questions; first, what was going on at the traffic growth rate this quarter? Was that a stable growth rate than last quarter?

Jeffrey Lunsford

Yes, I think Mike you are a little broken out. Your question was traffic growth rate?

[Michael Burtist] - Raymond James

Yes, was the traffic growth rate the same as last quarter?

Jeffrey Lunsford

No, I would say that traffic grew slower this quarter than last quarter and that is why we ended up with revenue at the low end of our range.

[Michael Burtist] - Raymond James

Okay so the shortfall a function both of smaller traffic growth rate and of worse pricing.

Jeffrey Lunsford

It is probably more the traffic and the pricing. Pricing is kind of a forward indicator. The deals you close in any given quarter do not dramatically change your numbers that quarter so it is more the pricing environment would be what led us to guide the 32 to 33 for the quarter.

[Michael Burtist] - Raymond James

And then I guess, I apologize but sort of the same question again is it tends to be more specific about what you are seeing in the market that leads you to think in the new baseline and that you should start to see the drop in the return growth to be more specific quantitatively?

Jeffrey Lunsford

Well, we track go forward bookings. We track the rates on bookings. We have a pipeline with deals with a certain percentage of which we believe were close. We have traffic forecast from our customers and so on and so forth and those are all contributing factors and again we were saying is the return to sequential growth so that means we think we ought to grow Q2 to Q3 in our guiding 32 to 33. So, we are not guiding the dramatic growth that we think that the economy, our customers feels like are no longer in emergency mode as far as trying to find every dime under every rock. So we think the business environment is a bit more healthy.

Operator

Your next question comes from the line of Colby Synesael - Kaufman Brothers, LP.

Colby Synesael - Kaufman Brothers, LP

Just firstly I want to talk about your litigation expense, some news in the first half about some legal victories. I am just curious if you can give us some history of what the legal cost maybe were in 2008 and where your expectations are going forward. Should those continue to come down? Also just curious how much of your demand is coming from customers that are new to CDN services versus customers that are coming from competitors. So I would assume when you guys are winning business, you are realizing that when you talk to them. I am just trying to get an understanding our way of plan where the market is getting fascinated for CDN services because just now CDN are sloping back and forth. With customers, are there still new potential customers to go after?

Jeffrey Lunsford

So I will take the last piece and then Doug can get in the litigation cost but every quarter we are signing up both and we do not break it out but there are definitely customers that are new to CDN. There are businesses that are new to CDN and companies that are successful in growing and need something to help them scale and then every quarter, we also are in the existing accounts that use either one or multiple CDNs and if they are a multiple customer, we are working to increase our market share within that account and if they are using a competitive CDN 100% then we are working in there to win that account from that competitor and you see of those three buckets, you see a little bit of that every quarter.

Colby Synesael - Kaufman Brothers, LP

And has the trend shifted it on the last quarter too? Does it remain relatively the same?

Jeffrey Lunsford

It is hard to say. We have to go deep dive into bunch of data to actually give you some kind of accurate quantified answer to that. We are not prepared to do that today.

Douglas Lindroth

Alright, on litigation expense…Your question was, what did we spend last year? Last year was over $20 million and remember that was where one trial that occurred during the year and preparation for a second one that occurred in early this year and so far, in 2009 Q1, if we look at our press release schedules, we are about $4 million in Q1 but then it was just under $400,000 in Q2.

So as we have talked about for several quarters, the reason it is difficult for us to give full guidance is because of the uncertainties surrounding litigation expenses and it is very difficult to predict what those litigation expenses are going to be. What we can say is there are certainly not going to be $20 million like they were for trial. The appeal process which we are in and all patent litigations is going to be much less expensive but still very difficult to determine what those expenses are in a go forward basis.

Colby Synesael - Kaufman Brothers, LP

It seems to me and correct me if I am wrong that a lot of the upside from EBITDA in the second quarter came simply from reduced litigation expenses or there are really some operating synergies that I am just missing.

Douglas Lindroth

Well I think you are looking at it a different way that we do because the $6 million that I talked about in the prepared remarks exclude litigation. So set aside litigation, our adjusted EBITDA which adds back litigation expenses was driven from operating cost savings that I talked about which had to do with a reduction or bad debt expense reduction and property taxes and a few other items that I went through. So I think we drove that EBITDA leverage while we are operating the business very tightly and improving our collections and therefore reducing our bad debt expense a quarter.

Jeffrey Lunsford

Thank you. Operator, at this time, we have time for one final question.

Operator

Your next question comes from the line of [48.23] - JP Morgan Securities.

Unidentified Analyst - JP Morgan Securities

So, just trying to go on the pricing question again, if Akamai, do you think Akamai's moves to reduce pricing will force other people to reduce prices or was their actions more pricing coming down to more market rates?

Jeffrey Lunsford

You need to ask them that, Summit. We do not really comment on any particular competitor.

Unidentified Analyst - JP Morgan Securities

Sure, okay. Second thing, in terms of EBITDA, I know you do not give EBITDA guidance for the coming quarters but you could give EBITDA extra litigation cost. Any thing that you can provide from that context?

Douglas Lindroth

Well I think part of when you think about the range that we have provided at this point on gross margin compression for the quarter, we just feel with the difficult business environment that we are still facing, we feel that at this point we are still just going to give more top line guidance and then some color around that but not going to be providing full adjusted EBITDA guidance at this point. I think at these mis conditions overall, economic conditions improved and we feel a little more comfortable about the overall business environment that I believe we will return to giving more full guidance.

Unidentified Analyst - JP Morgan Securities

Sure. One final question, so this increased talk about TV everywhere where all the MSOs cable companies have been announcing how they allow their customers to carry the cable service with them. Today, DirectTV also announced something in that context. Do you think the MSOs have their own network as private networks and headwinds and everything so they do not need to really use CDN services from someone like Limelight or do you think there will be an opportunity for you there and if you can also comment on how satellite companies would look to distribute this?

Jeffrey Lunsford

I think the MSO question is, you probably better of asking them what their plans are. What we do again is very complex and requires a lot of software and we think that anyone who is trying to solve the problem of delivering content in a broadcast quality manner over the IP networks to a myriad of consumers is going to be a benefit from the technology that we have developed and are developing and if MSOs have that objective, then there are certainly would be an opportunity for us to work with them.

Unidentified Analyst - JP Morgan Securities

Okay, can I squeeze in one more question? I know I said last but this is my last one.

Jeffrey Lunsford

Yes.

Unidentified Analyst - JP Morgan Securities

Sure, any thoughts on the acquisition of On2 by Google? Does that the change the landscape in any rate? Is that a new technology which could be brought on board? Any thoughts on that from that acquisition?

Jeffrey Lunsford

No, we do not really comment on the M&A activity of others or stuff like that. We think Google is a big company.

Unidentified Analyst - JP Morgan Securities

I agree. Okay, thank you very much.

Jeffrey Lunsford

Alright, thank you. So operator, at this time, that concludes the session. We thank you all for joining the call and we look forward to talking to you in other earnings. Have a good day.

Operator

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect and have a great day.

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Source: Limelight Networks, Inc. Q2 2009 Earnings Call Transcript
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