Limelight Networks' (LLNW) CEO Robert Lento on Q2 2016 Results - Earnings Call Transcript

| About: Limelight Networks, (LLNW)

Limelight Networks, Inc. (NASDAQ:LLNW)

Q2 2016 Results Earnings Conference Call

July 27, 2016, 04:30 PM ET

Executives

Dan Boncel - Chief Accounting Officer

Robert Lento - President, Chief Executive Officer and Director

Sajid Malhotra - Chief Financial Officer

Analysts

Jonathan Charbonneau - Cowen and Company

Richie Deloria - JMP Securities

Mark Kelleher - D.A. Davidson

Sameet Sinha - B. Riley & Co.

Operator

Good day, ladies and gentlemen. Welcome to the Limelight Networks 2016 Second Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the call over to Mr. Dan Boncel, Limelight's Chief Accounting Officer. Sir, you may begin.

Dan Boncel

Good afternoon and thank you for joining Limelight Networks’ second quarter 2016 financial results conference call. This call is being recorded on July 27, 2016, and will be archived on our website for approximately 10 days.

Let me start by quickly covering the Safe Harbor. We'd like to remind everyone that we will be making forward-looking statements on this call. Forward-looking statements are all statements that are not strictly statements of historical facts, such as our outlook for 2016 and beyond, our priorities, our expectations regarding pending litigations, our operational plans, and business strategies. Actual results could differ materially from those contemplated by our forward-looking statements, and reported results should not be considered as an indication of future performance.

For more information, please refer to the risk factors discussed in our periodic filings, including our most recent annual report on Form 10-K. The forward-looking statements on this call are based on information available to us as of today's date, and we disclaim any obligation to update any forward-looking statements, except as required by law.

Please note, that our non-GAAP second quarter 2016 results discussed today in this call exclude the $51 million provision related to the Akamai 703 litigation.

Joining me on the call today are Bob Lento, our Chief Executive Officer; and Sajid Malhotra, our Chief Financial Officer. We will be available during the Q&A session at the end of the prepared remarks from Bob and Sajid.

I would now like to turn the call over to Bob Lento.

Robert Lento

Thanks, Dan, and good afternoon. Today, we announced our second quarter results. This was a solid quarter that demonstrated our continued progress to improve our financial and operating performance.

Revenue in the quarter was $43.6 million, down 1% from the first quarter of 2015 and essentially flat year-over-year excluding the impact of foreign currency exchanges. More importantly, our GAAP gross margin expanded to 43.2% this quarter, up from 180 basis points from 41.4% in the year ago quarter.

We also continued to manage operating expenses which were down 9% year-over-year despite an additional $1.3 million of litigation costs this quarter. As a result of this financial discipline our cash position increased by $6.7 million, one of the best quarters in our history.

We also reported a GAAP loss of $0.53 per share and a non-GAAP EPS of $0.01 per share, our first positive result on this measure since 2007. We are very pleased with these results. As Dan has already mentioned the non-GAAP amount excludes $51 million provision related to the Akamai 703 litigations.

I am very proud of our continued ability to expand margins and generate cash. We remained disciplined on pricing this quarter to ensure we did not generate revenue at the expense of margin and the cash. Our financial results in the quarter indicate that the strategy is working.

We also continued to expand and optimize our network during the quarter. We rolled out optimized versions of H-Prism [ph], a software that controls our network dramatically adding to our capacity to deliver for our customers. With the software improvements we achieved higher than expected capacity expansion allowing us to slow our CapEx investments.

In fact, we added almost as much capacity in the first half of 2016 than we did in the full year of 2015 while spending $7.6 million less in CapEx year-to-date. This is a very positive outcome for our customers and our shareholders.

As I look at the first half of 2016 I am proud of the significant progress we have made over the past few years through fundamental structural changes in our business. As a result, after years of poor financial performance we delivered in 2016 a good first quarter and an even better stronger second quarter while continuing to prove our operational performance. The business is showing evidence of its potential and gaining momentum.

I am encouraged that this progress is showing up across multiple metrics and not just a single dimension. When we compare ourselves to where we were three years ago, two years ago, last year, last quarter, we look much improved across multiple dimensions. For example, we generated more cash from operations this quarter than we have in any quarter over the last five years.

Our year-to-date gross margin was 650 basis points higher than three years ago and we posted positive non-GAAP earnings this quarter for the first time since 2007. Our current year-to-date customer churn is nearly half the level of what it was three years ago as our customer satisfaction has improved dramatically with our NPS score increasing over 60 points since 2013.

Our network performance as measured by third-parties has improved dramatically. We now rank in the top-three for CDN throughput and response times and we remain a leader for storage performance. Over the last two years our service performance has improved with a 50% drop in service ticket despite more than 50% increase in traffic.

And finally, while higher than last year levels our employee turnover this quarter is down materially since the second quarter of 2013. We believe these are impressive results and we expect these improvements to continue.

There have been recent developments on a couple of fronts with respect to our ongoing litigation with Akamai. First, our long-standing dispute with Akamai over the 703 patent finally appears to be coming to an end. On July 1, the District Court in Massachusetts issued final judgment in this case awarding Akamai approximately $5.5 million in prejudgment interest which brings the total damages in the case to approximately $51 million.

This is just over half the damages that Akamai requested in December of 2015 pain and also less than the $63 million we disclosed as the top end of the range last quarter. We view this as a good result all things considered. As a result, we have regained access to approximately $12 million of the $63 million that was held in a letter of credit supporting the damages award.

The patent infringement case we filed against Akamai and XO Communications in the eastern district of Virginia continues to move at a brisk pace. We intend to continue to vigorously enforce, protect, and defend our intellectual property rights.

During the quarter we had a few successes that I'd like to share. In May, we announced that Neustar had selected Limelight to support their DDoS mitigation network. Neustar, based in Virginia is a provider of real-time information services and security solutions to protect against DDoS attacks. We are very excited to be working with them and believe that the coupling of our network and their technology will result in a security solution capable of handling the world's largest DDoS attacks.

In June we announced that we have joined the Google cloud platform's CDN interconnect program. Customers will be able to leverage Limelight's network interconnectivity and CDN capabilities with Google cloud platform's product offerings. As part of this relationship, Google and Limelight will work together to drive customer success through technical integrations and mutual sales engagements.

Joint customers will benefit from faster project delivery, global scale, and the flexibility to use both Limelight and Google cloud platform. Our relationship with Google is a strong indicator of our capabilities and commitment to securely deliver Internet traffic to organizations and consumers around the world.

In June we continued our cloud leadership with our state of online video report. The research continues to show increasing adoption of over-the-top content especially among millennials. While online video consumption continues to grow at a steady rate, online video quality is becoming increasingly important. We believe this research will help us and our customers better understand consumer trends and expectations and how those trends and expectations translate into requirements for our customers.

As we have in previous quarters, we continue to add important customers to our roster across all regions and across our key use cases of software download, video-on-demand and live streaming including the delivery of website content and DDoS protection.

As I say every quarter, customer satisfaction was, is and will remain our top priority. It is the motivation for everything we do. Customer demand is healthy. Market trends are positive and our customer satisfaction is improving.

Our financial priorities for 2016 continue to be cash generation, margin expansion and revenue growth. We consider generation to be most important and we are delivering on this goal through margin expansion and discipline on operating expenses and CapEx. We have a strong team in place that is aligned and focused and I remain optimistic about Limelight's ability to meet our goals and generate shareholder value in 2016.

With that, I'll turn the call over to Sajid to discuss this quarter's financial performance in greater detail and provide an update to our guidance for 2016.

Sajid Malhotra

Thanks Bob and good afternoon. I am happy to report one of the best quarters in Limelight's history. Second quarter 2016 revenue was $43.6 million. Gross margin was 43.2%. Cash gross margin was 54.5%. Non-GAAP EPS was positive $0.01 and adjusted EBITDA was approximately $6.2 million. Keep in mind that GAAP EPS was a loss of $0.53 per share.

In the quarter the impact of foreign exchange fluctuations increased revenue by approximately $100,000 year-over-year. Excluding foreign exchange rate fluctuations our revenue was essentially flat compared to prior year and up 4.4% sequentially. In Q2 international customers accounted for 40% of total revenue compared to 38% a year ago and approximately 19% of our second quarter revenue was in non-US dollar-denominated currencies.

In Q2 2016 our top-20 customers accounted for approximately 62% of total revenue and over 90% of total traffic. We have remained focused on generating revenue growth from our largest customers. Revenue related to these customers grew year-over-year at a higher rate than company average.

Over the past several quarters we have improved our market share position with Microsoft and in the second quarter of 2016 revenue from Microsoft represented more than 10% of our total revenue. Growth margin of 43.2% is up 180 basis points from 41.4% in the prior year quarter. Cash flow margin of 54.5% is also up 180 basis points from 52.7% in the second quarter of 2015.

Contributing to this improvement, collocation fees increased by more than 20% year-over-year due to the consolidation and upgrade of our network equipment in our data centers. Partially offsetting the collocation fee deductions is an increase in bandwidth expense. Compared to the second quarter of 2015 our deliver traffic volume increase 8%.

In the second quarter of 2016 total GAAP operating expenses were $73.2 million. Excluding the $51 million dollar provision for litigations and $1.3 million of litigation related expense, our operating expenses would have been $21 million or 48.2% of revenue. Q2 of last year included a credit $1.2 million for the reversal of accrued litigation fees. Excluding that one-time credit, total operating expenses decreased $4.6 million dollar or 18%. This is a good outcome and demonstrates the work we have done to control our operating expenses.

G&A expenses increased by $1.2 million or 19%. However, when we adjust for litigation expenses incurred this quarter, as well as the credit in the prior year quarter, G&A expenses decreased $1.3 million or 18%. Payroll and related employee costs decreased due to disciplined hiring and a reduction in force in the fourth quarter of 2015. Bad debt expense decreased as well due to continued collection efforts and an improving quality of our customer base.

Sales and marketing expense decreased by $1.9 million or 19% versus a year ago quarter. R&D expense was lower by $1.4 million or 18% versus Q2 2015. Both decreases are largely attributable to lower payroll and related expenses and the reduction in force end of fourth quarter of 2015.

Interest and other expense was $400,000 in the second quarter of 2016 compared to $100,000 in Q2 2015. Fluctuations are primarily driven by changes in foreign currencies and interest expense related to our revolving credit facility.

GAAP net loss was $0.53 per share in the second quarter of 2016 compared to $0.06 loss last year. We achieved non-GAAP net income of $0.01 per share in the second quarter of 2016 compared to a non-GAAP net loss of $0.04 per share in the second quarter of 2015. This is the first time we have achieved non-GAAP net income since the first year we were a public company in 2007.

Adjusted EBITDA was approximately $6.2 million in the second quarter of 2016 up from $900,000 in the second quarter of 2015. Year-to-date adjusted EBITDA is $10.2 million an increase of 700% from the first half of 2015. This is our highest adjusted EBITDA results in almost five years.

Moving to the balance sheet, at the end of the first quarter of 2016 we had cash and restricted cash of $86.9 million. This included a draw on our revolving credit facility of $12.8 million. At the end of the second quarter we had cash and restricted cash of $93.7 million and the same $12.8 million drawn on our revolver an increase in cash of $6.7 million. This increase in our tax balance was generated through our operating activities without significant variations in working capital and is the most cash provided from operations in over five years.

We expect to pay Akamai $51 million as final judgments on 703 patent litigations in the third quarter. We are confident in our tax position and do not expect to require any additional financing. In fact, earlier this month we repaid all outstanding amounts drawn on our revolving line of credit with Silicon Valley Bank.

During the quarter we spent $300,000 in capital expenditures and acquired additional assets with a cost of $1.2 million through capital leases bringing the total cash paid and finance for CapEx to $1.5 million in the quarter. We were able to lower our capital investments in the quarter even as we expanded capacity in our network at a rate well above growth in traffic.

You heard Bob say it and it is so consequential that I want to repeat again. We have added almost as much capacity in the first half of this year as we did all of last year at a fraction of last year's cost. This achievement is tied directly to the investments we have made in R&D and software enhancements and there is more efficiency to be gained.

DSO at the end of June 30, 2016 was 48 days versus 65 days at the end of the second quarter of 2015 and 52 days at the end of the fourth quarter. Based on our global revenue distributions, we typically expect DSO in the range of 50 to 55 days. As of June 30, we had approximately 104 million shares outstanding. Total headcount at the end of the quarter was 512, up 11 from the end of the first quarter 2016 and down 51 from the year ago quarter.

So from a financial progress standpoint this is a very noteworthy quarter, coupled with the operational and business aspects we are very pleased with our results this quarter. As I look back and compare the second quarter of 2015 to the second quarter of this year or the first six months of last year compared to this year, we have a very pronounced range in our profitability profile and cash generation ability over this period.

We have exceeded external expectations on key financial items that we can directly control such as gross margins, operating expenses and non-GAAP earnings per share. Additionally we have been able to increase our capacity through software enhancements while reducing CapEx.

Based on performance data received from independent third-party [indiscernible] we believe our infrastructure is operating more efficiently than our direct competitors and performing at levels that allows us to compete favorably in the market.

As a result, with a smaller, more efficient footprint our future capital requirements will continue to be lower than our competitors as we continue to refresh and expand our network. As an example, we believe in approximate terms we deliver 1/5 the traffic using 1/20 the infrastructure when compared to our largest competitor. This gives us a marked advantage in our capital requirements to refresh our growth. It also makes us a lot greener in our energy footprint and utilizations.

With that, let me move to forward guidance. After six months in this role, here is how I think of our business performance. There are clearly elements over which we have less control, namely revenue and pricing, but we can be and need to be disciplined in these areas and we have been.

Then there are things we have a better control over, such as costs, gross margins, expense management, R&D investments and capital deployment. Based on the segment we target, our largest competitors are Akamai, Level 3’s CDN and Verizon Edge Catch [ph] businesses.

There are other regional and sub segment competitors, but these are the three that show up often and have similar capabilities and global footprint. Two out of three of them have no public financial performance data. Akamai does provide detailed financial reporting and therefore is a good proxy for the industry in which we compete.

In the near term, next two to three years, success should be measured in the form of revenue growth rates at or above our industry growth rates and gross margins and operating margin expansions at a high rate than our competitors. To us that would be success and we set that as our goal.

Based on current market conditions we can provide forward guidance as follows. For the balance of the year and after declining in first half of 2016 we expect revenue to grow in the single-digit percentage wise in the second half of this year compared to the second half of 2015.

We plan to be disciplined in our approach to revenue generation and we believe this expected revenue growth rate will result in our continuing our gains in market share that we have already seen in the first half of this year. I take full responsibility for temping our revenue growth as we pursue profitability. We take a lot of pride in our cash generation because six months ago we were being asked if we would survive as a company based on a cash conduction history. In the first half of 2015 we consumed $4 million of cash from operations.

In the first half of this year we generated $10 million of cash which is $14 million swing in cash generated from operating activities. This has very few analogues in our industry or any industry. Everyone at Limelight has contributed in the phenomenal success of turning us from a cash consuming to a cash generating enterprise. We believe industry traffic will continue to grow at a healthy rate for the foreseeable future. We believe that during the first half there was a set capacity in the industry. We did not and will not devalue our services and sacrifice margin for revenue growth. This was will better position us for the future.

Turning to gross margins, even with slightly lower revenue we are increasing our expectation for gross margin improvement. We previously communicated we expect gross margins to increase in excess of 200 basis points for the year. We now expect gross margins to increase in excess of 250 basis points for the year.

We are also moving up the lower end of our expectations for non-GAAP earnings per share. We previously expected non-GAAP EPS to be between negative 5 and positive 5 for 2016. We currently expect it to be between breakeven to $0.05 positive. Our non-GAAP guidance excludes the provision for litigation, litigation related expenses and stock based compensation.

We expect CapEx to be below $17 million for the year inclusive of any vendor financing down from our previous expectation of less than $20 million. Excluding the payment of $51 million we expect to continue to generate cash from operations throughout the year. As a reminder, that at the start of the year we had planned on being cash flow positive excluding litigation related expenses.

This is a milestone year for Limelight and we want to be able to complete this turnaround in a sustainable and decisive way over the near term. We believe this path builds a strong balance sheet, generates cash flows from our growing business and is one that creates prolonged shareholder value.

With that, we can open the call up for questions. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question comes from the line of Jon Charbonneau with Cowen and Company. Your line is now open.

Jonathan Charbonneau

Great, thanks for taking the questions. Obviously there continues to be a lot of concern around very large customers increasingly shifting traffic in-house especially following Akamai's results last night. Can you give us an update on the trends you are seeing with your largest customers and has there been any notable change over the past couple months? Thanks.

Sajid Malhotra

I did say this clear Jon that we focus on the largest customers and we have been growing at a faster rate than the overall company growth in terms of traffic and revenue and sequential revenue growth was 4.4%. So that is evidence of what we are seeing and I think it is quite different than what some in the marketplace are experiencing.

Robert Lento

Yes, I think Akamai, when I read their transcript they specifically named six customers. Some of those customers are customers of ours and some are not. The ones that are we do see them building in-house capacity, but we don’t see them moving exclusively to in-house capabilities and show where they might have been exclusive with namely in this case Akamai previously. They are likely to move to a mix between in-house delivery as well as third-party CDNs and we believe that we can participate in delivering for those customers in the future.

Jonathan Charbonneau

And then just real quickly if I may, can you just talk about kind of the pricing trends you did see in the second quarter, did you see those three big competitors you noted, do you see them get even more aggressive in pricing than what you saw I guess in the first quarter? Thanks.

Robert Lento

So we have seen more aggressive pricing in the market. We believe that as you look at things like Akamai announced last night with many customers reducing or leaving them, I don’t know the exact words to use, but I think there is excess capacity in the industry and the prices we've seen over the last few months have been lower than the historical price depreciation that you would normally see until, I think that price compression has accelerated and I think it's based on capacity that is idle in the industry.

So I think it's a short term phenomenon and excited that we are trying to be very disciplined in terms of how we participate in those kinds of opportunities, both last quarter and going forward.

Sajid Malhotra

And Jon, just kind of bear in mind, I mean price compression is characteristic of our industry, so we expect some. I think what you should take away from our results is that our ability to take costs out is actually exceeding our price compression and that is why we are not hesitant to raise our gross margins from 200 basis points which we've been saying over the last six months to now 250 basis points for the balance - for the full year.

So we will do the catch up and more. And to that, if you can stay disciplined, if you've got the right opportunities and if you stay focused on cost and can continue to go take that out, you have to do that.

At some level, price compression creates new business models and that leads for more traffic and all of the things that we witnessed for many, many, many years in our history and expect to continue to see those trends going out in the future. I think the ebbs and flows is just a given.

Jonathan Charbonneau

Great, thank you.

Operator

Thank you. And our next question comes from Michael Turits with Raymond James & Associates. Your line is now open.

Unidentified Analyst

Hi guys, this is [indiscernible] calling in for Michael Turits. Congrats on the quarter. Can you talk of any updates you mentioned last quarter some customers moved to platform, then they were moving onto your platform as expected? Thanks.

Sajid Malhotra

Yes customers, I mean by and large, this is again this is not so much an excuse, but you plan for the best and hope for it and then you wait because things happen along the way. I mean this is no different than any other industry. There are some events that don’t move around, so you can take the Olympics for an example or you know sports events and there is a calendar and you know there is traffic and that is going to happen.

But when you get to things like the launch of a software or a game, which is big business for us, if it moves from March to April, you do notice revenue moves along with it and so that is that. I wouldn’t kind of dwell anymore on it except that, that is what we dealt with. For the most part, it is a nature of our business also. It is reason to explain some of the revenue and then some of it is just not being more disciplined.

Unidentified Analyst

Great, thanks guys.

Operator

Thank you. And our next question comes from Richie Deloria from JMP Securities. Your line is now open.

Richie Deloria

Hey guys, thank you for taking my questions and congrats on the solid quarter. Couple of questions I wanted to get a little bit of clarity around. First, it looks like employee count increased from quarter-to-quarter where it's been decreasing, I mean is this kind of in anticipation of coming demand and seeing that revenue kind of acceleration in the back half of the year, you guided to?

Robert Lento

It's really more tied to execution plan that we've put in place at the beginning of the year and filling positions that will help us achieve our goals whether it on the sales, but more importantly on the operations side continuing to drive the efficiency improvements that work, we're looking to drive.

It's not, it's not material amount of additions and I don’t think, yes I think we're more likely to remain fairly flat through the rest of the year, but they were positions that we deemed is necessary to helping us achieve our goals.

Richie Deloria

Got it and I wanted to get a little bit of clarity on the guidance, so we're expecting single-digit revenue growth in Q3 and Q4 on a year-over-year basis, so that I guess implies just looking at doing the math low single digit revenue full year growth which would be a little bit below 2015 and that's understandable just given the turnaround and desire to be fiscally disciplined, I guess can we start to expect revenue to continue to accelerate looking out to 2017 as the turnaround continues and as you get more efficiency out of the co-location projects?

Sajid Malhotra

You know Richie, I think I've been very explicit. We are very fortunate to be in an industry where traffic growth grows and it grows year after year and it grows for different reasons, but it does grow. There are new businesses, there is efficiency, there is quality of video, there is 4K, 6K, virtual reality. I mean you've got so many different events and confluence of all of these that creates a healthy environment for the industry.

So this is no reason to believe that traffic growth will change. You just hope that it keeps in step with pricing. From time to time, industry has excess capacity, this isn’t the first time and when it does, it needs to work its way through and from time to time, the industry is starved of capacity and those are times when pricing goes through and begins to go up. So I think this is kind of a constant, but I do not see anything that would justify that traffic growth is not a multi, multi-year phenomenon.

Richie Deloria

Okay. And I wanted to get a little bit of clarity around the gross margin guidance, so if you're guiding gross margins higher than what you expected in spite of maybe lower revenue growth than you initially looked for and part of this is going to be the co-location and the software improvements. Are there any other drivers that are giving you confidence and rising that gross margin guidance?

Sajid Malhotra

You know gross margin is a function of a couple of different things. It will start off with the revenue and what price you took it on and then you work your way down. So the people cost is essentially flat maybe even up a little bit. The D&A as you can see has just been relatively flat as well and so the rest of it is all coming from calls and that is made up of bandwidth which we've told you has exactly gone up a little bit and the rest of it is in co-locations.

And we have done - I mean look at the capital expenditures, look at the co-location as a function of equipment that is out there and how efficiently you can use that equipment. And through the efficiency of what we can do with the equipment that we have deployed, we've been able to add almost as much capacity in six months without the equivalent capital expenditures as we did all of last year.

Robert Lento

And 2015 was a record year for adding capacity.

Sajid Malhotra

Yes, so this is largely driven by what we've been able to achieve and we've laid it out in the Investor Day if you go in you can pull off some of the sites and what we've been able to do, you get a run rate of that, you get more, you get more. We are feeling good about what we've been able to do.

Richie Deloria

Okay. Great and last question from me and I will jump off, but I mean with 40% of your revenue coming from overseas have you seen any or plan for any initial impact on - from a business perspective from the Brexit vote?

Robert Lento

No, except for the fact that the currency, I mean we have got exposure to the Pound at some, overall as a company we don’t have too much exposure to international currencies, but when I look at that blend, the big exposures are to the Yen, to the Euro and to the Pound. And so, what happens with the Pound matters at some level to us, but I think it is very manageable and we have got costs in there as well, so to the extent it impacts revenue, it has from the cost front a little because we do pay rent and co-lo fees and all that in local currencies in those markets as well.

Richie Deloria

Okay. Great, thank you so much.

Robert Lento

Thanks Richie.

Operator

Thank you. And our next question comes from Mark Kelleher with D.A. Davidson. Your line is now open.

Mark Kelleher

Thanks.

Robert Lento

Hi Mark.

Mark Kelleher

Hi, yes just wanted to – you've put behind you the 703 litigation, but there are still some outstanding patent issues between you and Akamai and you have got some things asserted to them and they have got some things still asserted to you and that probably seems to be coming to a head next January. Could you just kind of run through the timing of what is happening there and maybe the scope of possible outcomes that might happen?

Robert Lento

We don’t really know the scope or the possible outcomes yet. The last sort of two big steps in the case are damages reports are due by the experts by the end of August. So we will get views into that and at the same time, the claim construction hearings will happen, so within the next, sort of think about it as 45 days we will know what claim construction looks like on both sides.

We will know what damages the reports from the experts look like on both sides. And then in October there is a court mandated mediation. Obviously the goal of that is to avoid trial. If that is not successful, then there will be a trial that starts at January 3 and will last approximately three weeks. So, those are the facts and then the only thing I would add which is purely opinion, we feel very, very good about the team that is representing us and the strength of our patents and our ability to come out as a net plaintiff.

Mark Kelleher

Okay and should we assume some increasing litigation costs in the operating lines as we run through?

Robert Lento

Well, we had $1.3 million last quarter. I think it was about 1.2 in Q1. So, I think as we move forward it is likely that the number will increase but not, not a ton. I think something in the kind of less than $2 million range and more likely in the 1.5 on average. So something in that range is likely.

And Mark, just as a reminder right, when we started the year we had said we'd be cash flow positive excluding that expense, given our view of what that expense is and how much it can be and what the business is doing. We have revised our guidance to say, we will be cash flow positive including that expense.

Mark Kelleher

Okay, great. Thanks.

Robert Lento

Thank you so much.

Operator

Thank you. And our next question comes from Sameet Sinha with B. Riley. Your line is now open.

Sameet Sinha

Yes, thank you very much. Couple of questions here, so Sajid you made a statement about excess capacity that needs to be worked through and you spoke about that in context of the second half guidance. So, are you implying that there are certain businesses so, pricing is coming down obviously and are you participating in that or are you not participating, you are staying away from those sort of contracts and that’s why your revenue is being impacted?

Sajid Malhotra

Well, I think to cover the balance every year for as long as I can do a look back on this business, pricing comes down.

Sameet Sinha

I don’t think incremental prices will decline.

Sajid Malhotra

Yes, but sometimes it is a little bit faster and sometimes it is a little bit slower. Mostly it is a function of capacity and somebody has desired to move share around or the inability of some people to go supply at price points or whatever it might be, but that’s kind of an industry phenomenon.

For us we are being more disciplined. We don’t want to be, I’m trying to solve for multiple things as we go ahead and get to the right outcomes and this year the most important thing for us at least when we started the year was to stay discipline on the pricing and make sure that we can get to cash generation.

And keep in mind that company was using $20 million of cash literally every year as we look back and we needed to turn that around and turn that around quickly because at the start of the year we were looking at total cash balance of around $23 million.

So the priority exchange and as they will be focus more on this and got a little bit more discipline around it and we knew well – that the ratification of that could be that if revenue did not come as the right point we would be willing to stay disciplined around that. And so we have, that doesn’t mean we haven’t gone after some strategic account that does not mean we’ve not taken on some business, but that does means that what would be a normal course and speed we've kind of gone ahead and altered that and tried to put more discipline around what kind of business and at what margins?

Sameet Sinha

Got it, thank you. So looking at your top 20 customers, revenue growth was about 8% in Q1, was about 5% in the second quarter. How should we think about that, because I’m looking at the customers outside of the top 20 and there, revenues declining on a year-over-year basis. So, as we look into the second half considering what we heard from Akamai yesterday is most of the growth in the second half is going to continued to come from your top 20 or are there customers in there which might be slowing down their spend or may be even bringing it down.

Sajid Malhotra

We have at least over the course of the last two, three years, placed a much greater emphasis on the largest customers. So, you want some in the top 100 to move into the top 50. You want some from the top 50 to move into the top 20, but there is pronounced effort to go ahead and get a larger wallet share of the spend with our larger customers and so we will see that.

Now when you report flat revenue at the first half of this year we were down compared to first half of last year, that just implies that if one segment is growing at a good rate, so this must be not growing at equivalent rate. They just got to even reason to make them ask [ph]. So, I think that begins to change some, but it’s a gradual change.

Sameet Sinha

Got it.

Robert Lento

And then I would say that the traffic trend is a different answer than the revenue trend. Right? Because the health of the industry in some way should be measured by the traffic that's available in addition to the money that somebody gets in exchange for delivering that traffic, and the traffic trends are healthy both across the top segments within the customer base.

Sameet Sinha

Got it, thank you. Now in terms of Neustar, can you elaborate on that relationship, how do you see that building out, kind of the go-to-market strategy there is it going to be combined sales team, if you can elaborate and in terms of what would be the size of the customers that you're going after?

Robert Lento

So I think it's going to take us good two to three quarters to get the network fully enabled from a Neustar technology perspective. So you're working out sort of Q1 of next year until they are fully enabled on our network, they have currently basic customers that would be transitioned on to our network from their internal network, and then they'll continue to market their security offerings in the market.

And every time they make a sale that customer will be put on our infrastructure that is good for us, it is good for them. Additionally once we are fully enabled we will start to work with Neustar and work on some joint sales opportunities, but which are a few quarters away from that activity.

Sameet Sinha

Okay, one final question, can you tell us what are the revenues from Microsoft in the same quarter last year?

Sajid Malhotra

No we do not break out.

Robert Lento

But it was less10%.

Sajid Malhotra

That is not a comparative number, but clearly its grown to a point where on flat revenue they will become a larger portion of those numbers.

Sameet Sinha

Okay, thank you very much.

Robert Lento

Thanks so much.

Operator

At this time, I'm showing no further questions. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now all disconnect. Everyone have a great day.

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