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Executives

Jeffrey W. Lunsford – Chairman and Chief Executive Officer

Matthew Hale - Chief Financial Officer

Analysts

Katherine Egbert - Jefferies & Co.

Sarah Friar – Goldman Sachs

David Hilal – Friedman Billings Ramsey

Brian Essex - Morgan Stanley

Aaron Kessler - Piper Jaffray

Robert Anderson

Michael Curtis - Raymond James

Limelight Networks Inc. (LLNW) Q3 2007 Earnings Call November 5, 2007 5:00 PM ET

Operator

Welcome to Limelight Networks’ 2007 third quarter results conference call. (Operator Instructions) Later we will conduct a question and answer session. Please note that this conference call is being recorded today, November 5, 2007 and will be archived on the company’s website, www.llnw.com. Representing Limelight Networks today are Jeff Lunsford, the company’s Chairman and Chief Executive Officer and Matt Hale, Limelight Network’s Chief Financial Officer. With that I would like to introduce Matt Hale, Limelight Network’s Chief Financial Officer. Mr. Hale, you may begin.

Matthew Hale

Thank you operator. Some portions of this conference call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are all statements that are not strictly statements of historical fact, such as statements regarding future events or future financial performance, including but not limited to statements relating to Limelight Network’s opportunity and future business prospects, and guidance on 2007 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. 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 (SEC). With that completed, I’ll turn the call over to Jeff.

Jeffrey W. Lunsford

Thanks Matt. Good morning ladies and gentleman and thank you for joining us. Today we’re pleased to report the results of Limelight Network’s third quarter operations for 2007. First, let me provide you with some updated statistics on the macro-landscape.

We believe there are three large-scale, long-term trends that are helping to fuel Limelight Network’s growth. First, the proliferation of multi-media viewing and listening devices and a demanding consumer’s growing appetite for consuming high-quality content. Second, the funding of that consumption primarily through shifting ad dollars into the online and rich media advertising segments. And third, the rapidly increasing file and library sizes of the professional and user-generated content consumers are interested in.

Regarding the first trend, we are now entering a $200 multi-media capable PCs and have emerging initiatives to open up the mobile handset platforms. Proliferation of lower-cost and open platform devices will further enable publishers to reach consumers over any device.

Regarding the second trend, in the second quarter of 2007, we saw $5 billion in advertising spend funneled to the online channel, according to the Interactive Advertising Bureau. This is less than 10% of enterprise advertising budgets and is growing at 26% per year. Of this $5 billion only 7% was spent on rich media advertising and only 1% was spent on broadband video advertising.

We believe this 8% share of online advertising is going to grow more rapidly than the 26% of overall ad growth as more standards are developed and as tool sets become easier to deploy and use. We believe this shift is evidence of a long-term, sustainable trend of ad dollars moving to the online channels where advertisers have the opportunity to create more immersive experiences as they work to reach out and influence consumer behavior.

Regarding the third trend, there are no definitive data sources that quantify library sizes and file sizes but we are seeing event sizes increase as much as 5-fold from where they peaked last fall, which is indicative of larger files, larger libraries and larger consumer audiences.

In general, we are seeing that CDN customers offering up high-fidelity content are growing more rapidly than those who are offering lower-grade content. We believe consumers are searching and finding the same type of broadcast experience they are used to enjoying through traditional high-fidelity television, DVD and game consoles.

Now let’s turn to Limelight Network’s and our results in the third quarter amidst these growth trends.

In the quarter, the market continued to embrace Limelight Network as an innovative and leading provider of content delivery services for the high-growth areas of online video, music, games, software and social media. Our differentiated architecture, which is optimized for large files and rich media traffic, continue to win business for us in head-to-head competition with both incumbent and emerging competitors.

We enjoyed strong customer base and traffic growth and achieved key delivery milestones in our 5-year strategic partnership with Microsoft, all of which contributed to revenue performance, margin expansion and cash generation that exceeded our expectations early in the quarter when we established guidance.

As you will see from our earnings metrics, a significant portion of the over-performance dropped directly to the bottom line. Year-over-year top line non-GAAP revenue growth was 61% and sequential growth was 13%. We generated record bookings in the quarter, signing new relationships with over 200 net new customers. Our live production customer ranks grew by 112, and we made substantial strides in reducing account churn through our investments in account management.

These strong revenue, bookings and earnings numbers combine with reduced account churn are leading us to raise full-year earnings and revenue guidance for the year. Limelight’s differentiated solution continues to allow us to grow more rapidly in this CDN market as a whole.

Turning to sales, key customer additions in the US, included TVO, PBS, Time-Warner Cable, Warner Brothers Entertainment, Burger King, Sega, Salesforce.com, GodTube and Ripe Digital. In Europe, notable wins were ITV, IMG, Myvideo.com and Lonely Planet, and in our recently opened operation in Japan, we signed VOD Systems, MSN and allabout.com and substantially expanded our existing relationship with Sony Computer Entertainment to deliver their PlayStation 3 updates globally.

In the quarter, we also continued to expand network capacity, opening two new delivery regions in the Asia-Pacific theatre of operations, and continue to train our expanded sales force and ramp up productivity. Lastly, we continue to drive innovative new solutions into the marketplace in conjunction with many of our forward-thinking customers.

Before I review those developments, I will turn it over to Matt to review the numbers.

Matthew Hale

Thanks Jeff. Before I get into the numbers, I’d like to remind you that we recently filed restated financial statements for the company to correct for two errors that impacted our previously reported results. The restated financial statements increased revenue and improved operating results for those affected periods. Any reference that I make today to historical periods will be to those restated balances.

During the third quarter, we reported GAAP revenue of $29.2 million, compared to $21.4 million in Q2. We reported a net loss of $3.1 million and $0.04 per basic share. We reported non-GAAP earnings of $2.3 million and $0.03 per diluted share. The Q3 GAAP revenue includes a $2.6 million of CDN services revenue which was deferred from Q2.

Please refer to the tables in our press release for a reconciliation of GAAP to non-GAAP metrics. We reported non-GAAP revenue of $28 million, an increase of 13% over the prior quarter non-GAAP revenue, and 61% over revenue for the same period last year.

Revenue this quarter includes $1.6 million of non-GAAP professional services revenue, associated with our strategic relationship with Microsoft. And that compares to $0.8 million last quarter. This professional services revenue is deferred and amortized over periods ranging from 41 to 39 months, for GAAP purposes. Therefore, recurring CDN services revenue in the quarter of $26.4 million is up 10% and 51% over the prior quarter and prior year respectively.

During the second quarter, Limelight’s international revenue represented 12% of non-GAAP revenue, consistent with the prior quarter, and it’s up from 7% of revenue for the same period in the prior year. During the quarter our active customer count rose to 988 for a net increase of 112 over the prior quarter and this compares to an increase of 149 in the prior quarter.

Our active or production customer count differs from our actual customer count, as we do not include in the active customer count new customers that do not promise to generate revenue for us. The difference between the 112 added to the active customers in the 200+ bookings that Jeff mentioned is simply a group of customers in our implementation queue.

Our average annualized non-GAAP per customer which we refer as ARPC was $114 thousand in Q3 consistent with the prior quarter and compared to $112 thousand for the same period last year. Now I’ll caution you again, while our business and customer base are growing are rapidly as they are, variations in the ARPC, either up or down, may not necessarily be indicative of positive or negative trends.

Gross profit margin on non-GAAP revenue which includes both depreciation and stock-compensation was 39% for Q3 compared to 37% last quarter and 42% the same period last year. The reduction in gross margin from the prior year is primarily due to an increase in depreciation on a substantial increase in network access deployed over the last 12 months.

Looking at cash gross margins for Q3 they were 60% compared to 58% for last quarter, and 60% for the same period last year. Operating expenses were $16.8 million in Q3 which was flat with last quarter and compared to $7.7 million for the same period last year. Operating expenses also include depreciation and stock-based compensation charges. Excluding these non-cash charges, our operating expenses for the quarter were $13.3 million, up $2.3 million over the last quarter and up $8.3 million over the same period last year.

The sequential increase in operating expenses relates primarily to increased G&A costs associated with increased public company compliance, and litigation expenses, increased headcount and variable sales and marketing expense on expanded booking performance.

Adjusted EBITDA was $4.9 million compared to $4.7 million last quarter and $5.9 million for the same period last year. Adjusted EBITDA increased over the prior quarter due to higher gross margin contributions which was partially offset by the higher cash operating expenses. I’ll once again refer you to the tables in the press release for a reconciliation of net loss to adjusted EBITDA.

Depreciation and amortization in the third quarter was $5.9 million up from $5.2 million for last quarter and $3 million last year. The current quarter included $5.6 million of network related depreciation and $0.3 million of operating expense depreciation.

Net interest income of $2.5 million in Q3 related to interest on our cash and investment balances, and compared to net interest expense of $0.2 million for both last quarter and the same quarter last year. At the end of Q2 the company retired substantially all of its debt and therefore incurred minimal interest expense during the current quarter.

Moving on to the balance sheet, our combined cash and investment balance on September 30 was $194.2 million up from a $187.7 million in the previous quarter. Cash increased as cash flow from operations exceeded our capital investments and cash flow from operations was aided by a reduction in accounts receivables and an increase in deferred revenue.

Capital purchases for the quarter were $7.3 million, down from $8.7 million in the previous quarter. Day sales outstanding for the quarter were 57 days down from 90 days in the previous quarter.

Moving on to guidance, for Q4 we expect to achieve GAAP and non-GAAP revenue in the range of $28 to $30 million. Non-GAAP revenue guidance includes $0.3 million expected from non-GAAP professional services revenue as compared to $1.6 million that was in Q3. So please note that some of the over-performance in Q3 was non-GAAP professional services revenue that was slated for Q4 but was delivered early. So when you upgrade your models please consider this as revenue that shifted forward from Q4 into Q3 and it will not be replaced n Q4.

GAAP revenue guidance includes amortization of deferred professional services revenue of $0.3 million which offsets this non-GAAP professional services revenue.

We are today raising full-year GAAP revenue guidance to a range of $102 to $104 million and full-year non-GAAP revenue guidance to $104.3 to $106.3 million. Adjusted EBITDA for Q4 is expected to be in the range of $4 to $5 million, and for the full-year to be in the range of $20.7 to $21.7 million.

Stock-based compensation expenses for Q4 are expected to be approximately $3.6 to $4.6 million. Details of our stock-based compensation by expense category are provided in our press release as supplemental disclosure.

Capital investments for the nine months were $21.6 million; we expect capital investments for the full-year to be $30 to $31 million. With that I’ll turn it back to Jeff.

Jeffrey W. Lunsford

Thanks Matt. Looking ahead we feel good about the quality and strength of our platform and the sales momentum with which we enter Q4. We feel Limelight Networks is the best positioned content delivery provider to execute within this rapidly growing and very dynamic marketplace.

We believe our service suite, which attractively combines quality, operational maturity, performance, flexibility and operating efficiency positions us to continue to deliver growth that outpaces the rest of the market.

Our investment in an openly architected platform is allowing our customers and partners to easily embed the Limelight Networks’ platform into their operations, providing for rapid leverage of our innovations in their efforts to bring their own compelling new offerings to the market.

Last week in a gathering of approximately 200 customers and partners in Scottsdale, we introduced an exciting new offering for delivering HD content: Limelight HD, which leverages Limelight’s unique architecture to deliver high-definition media and digital content over the Internet. Leading Internet media entities, including Fox Interactive Media, MSN Video, Brightcove, and Rajshri.com, India’s leading broadband video portal are among those who announced they would offer HD content via the Limelight HD service.

Media technology leaders supporting the Limelight HD initiative include Adobe Systems, Microsoft Corporation, Move Networks and Veoh Networks. Limelight HD will be available immediately on over 700 broadband access networks worldwide. The Limelight HD service is specifically designed to provide end-users with a high-fidelity, high-definition media experience by bypassing the often congested public Internet and delivering content directly to last-mile broadband access networks.

At the heart of Limelight HD is Limelight Network’s advanced global CDN architecture, consisting of thousands of high performance content servers distributed worldwide, connected to leading broadband access networks, interconnected via high-speed, dedicated optical network and built to store and deliver entire content libraries.

This global footprint reduces network latency and helps to ensure that every title in our HD content library, whether the most popular title or the least popular will be consistently available to every user on demand. Limelight HD is just one example of Limelight’s commitment to continued investment and innovation and collaboration with our customers and partners as this new industry develops.

We have mentioned many times this wave of traffic surging over the Internet and private lines is primarily a consumer driven wave. We believe that compounding growth of this wave will continue for the next 3 to 5 years at a minimum given the three macro trends mentioned earlier. We are aggressively investing and building this company to help world class publishers satisfy the insatiable consumer appetite for high-quality content as this wave represents.

Limelight Networks was founded to transform the digital experience and advance the way we live, work and play. We have made great progress toward enabling new business models in the online world, and realizing this original vision. We look forward to many more years of acting as a catalyst for advancing both the human experience and human interaction in the online world.

When you read about Google PCs for $200 and see inexpensive handheld devices being used during your commute, think of how much data needs to be delivered to satisfy all those demanding consumers. Limelight Networks is well-positioned to capture more than our fair share of that delivery business, and we look forward to reporting to you on reaching more key milestones in the future.

At this point we’d like to turn it over to the operator for questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from the line of Katherine Egbert - Jefferies & Co.

Katherine Egbert - Jefferies & Co.

Hi, a couple of questions: first of all, you reported a really good quarter, and it looks like you’re being quite conservative in terms of growth for Q4; can you talk to us why I think your seasonally strongest quarter you’re being so conservative. And then also talk about the expenses for Q4, they seem to be flat quarter-over-quarter.

Jeffrey W. Lunsford

Okay so I’ll take the first piece and then we’ll let Matt talk about expenses.

So first of all, we were establishing guidance and we can’t comment over the conservative or aggressive nature of that establishment; we believe this is the right range to set forth for investors. As we discussed last quarter there’s high variability in this business Katherine as you know; also of import is the amount of revenue that we generated in Q3 as Matt mentioned in his prepared comments: $1.6 million of revenue in Q3 that was really normally slated to occur in Q4 and that’s consulting revenue associated with our large partnership.

If you look at the underlying traffic growth, the diversified business--almost 1000 customers now--you have to back out that revenue you’ll get a more accurate sort of underlying growth number. And, you might not think that number’s quite as conservative, but ultimately we believe this is the right place to guide investors for Q4.

Matt you want to comment on expenses?

Matthew Hale

Yeah, Katherine we’ve held the line pretty well on expenses this quarter in spite of a pretty healthy increase in litigation costs, and our Q4 contemplate a little lower costs associated with that than we had previously, and that’s offset by increased sales and marketing costs, which leads us to a flat expense quarter.

Katherine Egbert - Jefferies & Co.

Okay, and then two quick ones. I noticed there’s a big spike in deferred revenue, can you talk about that? Also, you pre-announced around 112 customers you said I think, but today’s press release says 175 new customers? What happened?

Matthew Hale

No, the press release says 112.

Katherine Egbert - Jefferies & Co.

Oh okay.

Matthew Hale

What was the first part of the question?

Katherine Egbert - Jefferies & Co.

It was deferred revenue.

Matthew Hale

Deferred revenue. In the previous quarter we talked about a significant license deal we struck with Microsoft that is being deferred over just under 4 years and that involved a substantial pre-payment for that license, or a front-loading of that payment, and that was received during the quarter, so that’s what bloomed the deferred revenue.

Katherine Egbert - Jefferies & Co.

And I said that other question backwards, I’m sorry. It said 112 today; the pre-announcement was 175.

Matthew Hale

The pre-announcement talked about the number of bookings, the new customers that we achieved as Jeff said in his comments, we’re well over 200 on a net basis. As it relates to our active customer account that we used in the ARPC calculation, that’s 112 and the difference there is, a new customer that’s not generating revenue we don’t include in the ARPC calculation, until they start generating revenue.

Jeffrey W. Lunsford

Yeah there’s just a big implementation we have signed but not yet implemented customers, Katherine, this is the difference.

Katherine Egbert - Jefferies & Co.

Okay got it. Thanks guys.

Matthew Hale

Sure.

Jeffrey W. Lunsford

Okay operator, next question.

Operator

Your next question comes from the line of Sarah Friar – Goldman Sachs.

Sarah Friar – Goldman Sachs

Good afternoon guys. Just on CapEx, it came in a little bit lower than our forecast and I’m just wondering about what that will imply if we think about next quarter and next year in particular? And how you’re dealing with the capacity utilization on the network and how that scales with [inaudible] costs if you know what I mean.

Matthew Hale

We’ve kind of seen a slow-down of CapEx and that’s partly because we’re enjoying some of the benefits that we’ve seen in deployment of our new software and also the better servers that we have deployed, so we’ve been able to get increased network capacity on a lower CapEx dollar.

As it relates to the overall utilization, we are still running utilization of the networks fairly similar to what we talked about on the IPO in the lower- to mid-twenties.

Sarah Friar – Goldman Sachs

Okay. Is that where you’ll -- as we think through next year to allow for spikes and so on, or do you think that you’ll continue to build just given some of the excitement of what Jeff talked about new stuff coming online.

Jeffrey W. Lunsford

So Sarah, we will over time, dial-up network utilization, the more diversified your customer base the more diversified your traffic patterns and thus, the greater ability to run the network at higher utilization levels. The low- to mid- twenties that Matt mentioned is kind of the steady-state network utilization and you know, we still see spikes that get above 40% utilization and we want to be able to handle the largest events on the Internet, so we want to have that excess capacity, so, over a period of years we will slowly dial-up network utilization as the customer base grows but quarter-to-quarter I couldn’t give you any direct input we really just track things almost daily and make decisions on what’s daily.

Sarah Friar – Goldman Sachs

And just one final one for you, still related on the gross margin side: again, a very nice improvement there and looks like it’s actually the network costs that came down or depreciation that came down. Matt, I know we talked on the IPO that you were using quite an aggressive time frame to actually do that depreciation over, is that changing, is that what took that down? Or, what should we expect going forward?

Matthew Hale

No we’re still using the same 3-year depreciation on our network assets; we’ve not changed that. I think what has changed is a percentage of CapEx to revenue, so we’re slowing that down and again, related to overall throughput improvements that we are seeing in the network that don’t require CapEx.

Sarah Friar – Goldman Sachs

Okay. Thanks a lot.

Matthew Hale

Thank you.

Operator

Our next question comes from the line of David Hilal – Friedman Billings Ramsey.

David Hilal – Friedman Billings Ramsey

Thank you. Jeff your comments on HD, I wanted to drill a little bit into that, we all agree that that’s going to be a big wave but I wanted to try to get your perspective on the timing. And so, if 10% of your revenues is considered meaningful, what do you think HD generated content will be meaningful to your annual revenue stream?

Jeffrey W. Lunsford

You know Dave it’s a hard thing to predict, because these initiatives; you know first of all we’re not giving any specific forward-looking guidance around ’08 yet. I would estimate that would happen sometime in ’08. But when in ’08 I’m not sure, and you know the event sizes and there are a lot of players that are HD capable that are propagating out, there’s just way too many variables, even the definition of HD is variable depending on who you ask, so I don’t feel comfortable giving you a forecast of exactly 10%.

We definitely see it driving traffic growth as we mentioned already from last year’s issue, just the, let’s call it, the increase in end-code rates were definitely driving more traffic, so the 5x increase in event size that I mentioned wasn’t just due to 5x more viewers, it’s a combination of more viewers with higher connection speeds and content that’s encoded at higher bit rates, and all that combined gives you an event size or sometimes something that’s 5x what people saw last year.

David Hilal – Friedman Billings Ramsey

Okay. Let me ask you on sales and marketing, while up on a dollar basis, not up nearly as much as we thought or I think maybe as you guys articulated back during the IPO road show, I wanted to get your thoughts on the ramp-up on sales and marketing, have you slowed that down or, will we see that accelerate into Q4 and into next year from what we saw in Q3?

Jeffrey W. Lunsford

Well what we did was invested a bit ahead of plan leading up to the IPO, so there was a little sales and marketing overspend in Q2 that we talked about last quarter. Q3 was primarily about getting those resources engrained in our operations and ramped up and trained; we did achieve record booking levels in Q3 as I mentioned all-time record. And those folks are ramping into productivity and now you’ll see us in Q4; and we hired some in Q3 but it wasn’t as rapid as the ramp leading up to the IPO and in Q4 you should see us, probably hit the accelerator a little bit more on the sales and marketing growth.

We’re really investing in all areas: R&D, the G&A required as a public company, sales, people, marketing programs, sales support programs, you name it. And then all the operations to handle the scaling of the network and all the account management and operations to handle the growth and the customer base. You know the customer base alone is growing at 20% a quarter right now.

David Hilal – Friedman Billings Ramsey

Right. On CapEx, kind of a follow-up to the prior question, the CapEx was lower than most expected and I think guidance for Q4 is the same. I know you guys were working on Pesto which is going to help the utilization on the network and I want to just get an update on that.

Jeffrey W. Lunsford

Sure, the efficiencies that Matt talked were primarily due to new equipment types, more powerful servers and the like. We do have elements of Pesto that are in what I call live test mode. We are going to start introducing Pesto into limited network operations probably later in Q4, earlier in Q1. As we have said before, Pesto is a big catch all name for probably more than 10 different components of the architecture that are being enhanced and we’re going to see those components introduced into production not as one huge event but incrementally over probably the next 12 months.

Matthew Hale

David those increases or that software as it goes in will influence the amount of CapEx that we need going forward.

Jeffrey W. Lunsford

With that said, David, we are rolling new software into production every month and almost every new release has in many cases some focus on performance and scale. It may be reporting on the back end; you name it. It may be server throughput. There are a lot of different things we are doing to continue to help the platform scale and be more and more efficient.

Operator

Your next question comes from the line of Brian Essex - Morgan Stanley.

Brian Essex - Morgan Stanley

I was just wondering if you had any insight into some of the customer dynamics that occurred in the quarter? A nice result with 112 net new adds. What was the average retention rate behind that? What were the gross adds?

If you can speak a little bit to the quality of customers, I know in the past that you said you are trying to do pretty much improve the quality of the installed base. How is that working and kind of how do we expect this to move going forward?

Jeffrey W. Lunsford

There are two questions. The proxy for what you would call quality would be ARPC and ARPC was steady quarter to quarter with the addition of 112 new customers into the denominator.

What I mentioned earlier about retention and churn, we have always just talked about net gross numbers but we made substantial progress on reducing account churn in the quarter. We made so much progress, I don’t anticipate seeing that kind of advancement in each quarter. We are constantly going to set the bar higher for ourselves and our account management teams. But we almost cut the number of customers by count by 50% from Q2 to Q3. That’s just an account count number, that’s not a revenue-weighted number.

So this won’t be some we talk about each quarter. It’s just something which is very much in operating highlight for Q3 and what we are focused on is growing the net number of customers in our base and growing ARPC over time. As Math, mentioned ARPC, if we go add 200 customers in a quarter ARPC could potentially go down because your new customers tend to be smaller than your existing customers. But we are focused on the quality customers who want to have growing businesses and are investing in their own businesses and value the services we deliver.

Brian Essex - Morgan Stanley

Any color on the competitive dynamics on the large customer front and how that may have been in the quarter versus maybe some of the smaller customers?

Jeffrey W. Lunsford

This is a competitive and high growth marketplace, it’s like any other high growth tech marketplace that I and anyone else on this management team has ever been involved in. It is characterized by rapid unit growth with some price compression per unit over time. But the units are growing so much faster than the price compression that the overall market is growing quite rapidly. People see the success of Limelight Networks and other CDNs and so we have new entrants in the market on the low end, we have existing incumbent players on the high end, and our proxy for how competitive we are is what’s our head-to-head win rate? We talked about signing over 200 customers in head-to-head competitions in Q3. We think that number really says it all.

Operator

Your next question comes from the line of Aaron Kessler - Piper Jaffray.

Aaron Kessler - Piper Jaffray

Can you give us any details on if there’s any litigation costs with regard to shareholder lawsuits in the quarter? Also on litigation, any update in terms of next major dates we should look for in the Akamai suit?

Jeffrey W. Lunsford

I will cover the date and Matt can cover the costs. The date is simply that the trial is occurring I believe it’s the week of February 11 or February 12. That’s all that we can tell you about progress in that situation. Matt, do you want to talk about expenses?

Matthew Hale

Relative to shareholder litigation, we had just under $300,000 of expense for the quarter.

Aaron Kessler - Piper Jaffray

In terms of revenue as we go into ‘08, I know one of your major competitors indicated recently that they thought growth would fill in a little more meaningfully in ‘08 versus ‘07 until we get more adoption of HD or until there’s the next inflection point in the sector. Would you agree with that analysis or do you think the growth will remain robust next year even without really adoption of any HD services as we go into ’08 here?

Jeffrey W. Lunsford

Our business is growing quite rapidly so we’re not in that more mature business phase where we’re looking for inflection points in the market. We’re gaining market share and driving top line growth from both just the organic growth of the market itself plus by expanding our market share within the market.

Our inflection point is every morning when our sales people get out of bed and go into those head-to-head competitions and try to take market share and sign up new entrants into the market that don’t have a CDN yet.

Aaron Kessler - Piper Jaffray

In terms of a reporting and analytics solution, when we would expect maybe to get more on a solution to the market that can obviously also further improve your churn rate and all that and improve the value-added services of Limelight?

Jeffrey W. Lunsford

We are enhancing our analytics and reporting every month with new releases and that is an ongoing project. We have a lot of resources helping us with good experience in analytics, folks I’ve worked with in the past as an example, in that space.

That question goes to the larger question of overall additional products and services to deepen the relationship with customers and we’ve said in the past that our current strategy is to focus on more CDN. There is so much to do in this core business, expand new geographies, support emerging formats, deal with new channels like wireless, so on and so forth and that we are creating an open architecture and letting other companies do things up and down the stack and hopefully bake Limelight into their operating infrastructure and that strategy appears to be working very well right now.

So, the one area we are investing in that you could potentially call another service would be reporting and analytics. But this reporting and analytics around the content we deliver. It’s not broader analytics.

Operator

Your next question comes from the line of Rob Anderson.

Rob Anderson

You talked in your prepared remarks about growing faster than the industry and you again mentioned market share gains. But can you discuss that? Your Q4 guidance in the context of that comment just given the guidance of your primary competitor reflects the higher growth year-over-year and about twice the growth rate on sequential basis?

Jeffrey W. Lunsford

If you look, Rob, at the Q4 of last year for Limelight, you will see what was it Matt, 20% of revenue?

Matthew Hale

A little over 20%.

Jeffrey W. Lunsford

20% of revenue came from one transitory customer and that was a one-time project it was known to be an in-and-out kind of one year project when we embarked on it. When we think about how this business is growing, we look at the diversified business under that and again you also need to look at just the Q3 to Q4 that the swing in at $1.6 million in revenue and calculate your growth rates there, and then I think you’ll find the growth rates of our business absent that Q4 revenue from that one-time customer are higher.

Rob Anderson

Your Qs and Ks discuss your exposure to MySpace last year, is that what you’re referring to or can you tell us what that customer was this quarter as a percent of sales versus one year ago in the Q4 period?

Jeffrey W. Lunsford

Well, it was 20% of revenue in Q4 of 2006 and we haven’t broken it out this quarter or in our guidance for Q4.

Matthew Hale

We can say it’s less than 2% for the quarter and about 1% in the guidance for Q4.

Rob Anderson

Just one follow-up Matt, could you repeat what you said about your expectations for professional services revenue in Q4 previously versus what it is now?

Matthew Hale

First I’ll rewind to last quarter, we said that we’d expect from this strategic Microsoft contract to be around $2 million for the second half of the year. So we’ve taken about $1.6 million of that in Q4 and then contemplated in this guidance is about $0.3 million.

Operator

Your next question comes from Michael Curtis - Raymond James.

Michael Curtis - Raymond James

First of all, it looks like if you back out the $1.6 million and the $0.3 million and then you get to sequential growth which is around 10% in second and third quarter and around 10%, third to fourth quarter? I guess I was looking to see more of an effect of seasonality as you anticipated, therefore expected more of an acceleration on a sequential basis in the fourth quarter.

Jeffrey W. Lunsford

I don’t have my calculator out. I don’t know if you look at the low-end of the range or the mid or the high-end of the range.

Michael Curtis - Raymond James

The midpoint.

Jeffrey W. Lunsford

At the midpoint of the range. Again, given what we’re looking at right now we think the guidance we set for Q4 is the appropriate place to set guidance. If you look at year over year, we just put up 60% year-over-year growth which is substantially higher than the other folks in the industry that are public and that report. So those are the numbers we look at when we talk about gaining market share and then we look at the head-to-head wins signing of over 200 customers.

Michael Curtis - Raymond James

Definitely was a little bit of growth. The rate of growth, I guess I am trying to get some sense for how much seasonality you actually think that there is in the third quarter and fourth quarter, just to understand the business a little bit better.

Then on gross margins, cash gross margins bumped up in this quarter and you had it bumped down last quarter; if you could explain what would cause that this quarter vs. last quarter’s cash gross margins?

Jeffrey W. Lunsford

Matt, do you want to take cash gross margin?

Matthew Hale

We were definitely aided in the cash gross margin by the $1.6 million of professional services. So that was up about $0.8 million from the previous quarter. That helped about somewhere between 1% or 2%. So a lot of that gain that happened in the quarter was a result of the professional services.

Michael Curtis - Raymond James

Then on the seasonality issue? Do you think there is as much seasonality second to third and third to fourth as you were thought you might see or is it flatter than you thought?

Jeffrey W. Lunsford

Michael, I would answer that this way: when we established guidance for Q3 and we guided to 25.5 to 26.5, we were looking at the traffic and the numbers then and felt like that is where we should establish guidance and we ended up doing $28 million in non-GAAP revenue.

Right now, we are looking at traffic levels that indicate we should be guiding to $28 million to $30 million and we think that’s the right range. That doesn’t mean you should extrapolate what happened in Q3 is going to happen in Q4. What it means is this is a highly variable business with a thousand customers and a lot of variability within those customers from month to month and from event to event. We could have one event with one large customer that could generate $0.5 million or $1 million of revenue that could be a positive surprise to us, right?

Okay operator, I believe that are no further questions at this time. Thank you everyone for joining the call today and we look forward to seeing you out there in industry.

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Source: Limelight Networks Q3 2007 Earnings Call Transcript
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