Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

LimelightNetworks Inc. (NASDAQ:LLNW)

Q32007 Earnings Call

November 5, 2007 5:00 pm ET

Executives

JeffreyW. Lunsford – Chairman and Chief Executive Officer

MatthewHale - Chief Financial Officer

Analysts

KatherineEgbert - Jefferies & Co.

SarahFriar – Goldman Sachs

DavidHilal – Friedman Billings Ramsey

BrianEssex - Morgan Stanley

AaronKessler - Piper Jaffray

RobertAnderson

MichaelCurtis - Raymond James

Operator

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

Matthew Hale

Thankyou operator. Some portions of this conference call may include forward-lookingstatements as defined in the Private Securities Litigation Reform Act of1995. Forward-looking statements are allstatements that are not strictly statements of historical fact, such asstatements regarding future events or future financial performance, includingbut not limited to statements relating to Limelight Network’s opportunity andfuture business prospects, and guidance on 2007 financial results andstatements concerning anticipated future growth and profitability, as well asmanagement’s plans, goals, strategies, expectations, hopes and beliefs.

Theseforward-looking statements are subject to risks, uncertainties and otherfactors that could cause actual results to differ materially from thosecontained, projected or implied in the forward-looking statements. Reported results should not be considered anindication of future performance.

Factorsthat could cause actual results to differ are included in the company’speriodic filings with the Securities and Exchange Commission (SEC). With that completed, I’ll turn the call overto Jeff.

Jeffrey W. Lunsford

ThanksMatt. Good morning ladies and gentleman and thank you for joining us. Todaywe’re pleased to report the results of Limelight Network’s third quarteroperations for 2007. First, let meprovide you with some updated statistics on the macro-landscape.

Webelieve there are three large-scale, long-term trends that are helping to fuelLimelight Network’s growth. First, the proliferation of multi-media viewing andlistening devices and a demanding consumer’s growing appetite for consuminghigh-quality content. Second, the funding of that consumption primarily throughshifting ad dollars into the online and rich media advertising segments. Andthird, the rapidly increasing file and library sizes of the professional anduser-generated content consumers are interested in.

Regardingthe first trend, we are now entering a $200 multi-media capable PCs and haveemerging initiatives to open up the mobile handset platforms. Proliferation oflower-cost and open platform devices will further enable publishers to reachconsumers over any device.

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

Webelieve this 8% share of online advertising is going to grow more rapidly thanthe 26% of overall ad growth as more standards are developed and as tool setsbecome easier to deploy and use. We believe this shift is evidence of along-term, sustainable trend of ad dollars moving to the online channels whereadvertisers have the opportunity to create more immersive experiences as theywork to reach out and influence consumer behavior.

Regardingthe third trend, there are no definitive data sources that quantify librarysizes and file sizes but we are seeing event sizes increase as much as 5-foldfrom where they peaked last fall, which is indicative of larger files, largerlibraries and larger consumer audiences.

Ingeneral, we are seeing that CDN customers offering up high-fidelity content aregrowing more rapidly than those who are offering lower-grade content. Webelieve consumers are searching and finding the same type of broadcastexperience they are used to enjoying through traditional high-fidelitytelevision, DVD and game consoles.

Nowlet’s turn to Limelight Network’s and our results in the third quarter amidstthese growth trends.

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

Weenjoyed strong customer base and traffic growth and achieved key deliverymilestones in our 5-year strategic partnership with Microsoft, all of whichcontributed to revenue performance, margin expansion and cash generation thatexceeded our expectations early in the quarter when we established guidance.

Asyou will see from our earnings metrics, a significant portion of theover-performance dropped directly to the bottom line. Year-over-year top linenon-GAAP revenue growth was 61% and sequential growth was 13%. We generatedrecord bookings in the quarter, signing new relationships with over 200 net newcustomers. Our live production customer ranks grew by 112, and we madesubstantial strides in reducing account churn through our investments inaccount management.

Thesestrong revenue, bookings and earnings numbers combine with reduced accountchurn are leading us to raise full-year earnings and revenue guidance for theyear. Limelight’s differentiated solution continues to allow us to grow morerapidly in this CDN market as a whole.

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

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

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

Matthew Hale

ThanksJeff. Before I get into the numbers, I’dlike to remind you that we recently filed restated financial statements for thecompany to correct for two errors that impacted our previously reportedresults. The restated financial statements increased revenue and improvedoperating results for those affected periods. Any reference that I make todayto historical periods will be to those restated balances.

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

Pleaserefer to the tables in our press release for a reconciliation of GAAP tonon-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 sameperiod last year.

Revenuethis 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 andamortized over periods ranging from 41 to 39 months, for GAAP purposes.Therefore, recurring CDN services revenue in the quarter of $26.4 million is up10% and 51% over the prior quarter and prior year respectively.

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

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

Ouraverage annualized non-GAAP per customer which we refer as ARPC was $114thousand in Q3 consistent with the prior quarter and compared to $112 thousandfor the same period last year. Now I’ll caution you again, while our businessand 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 negativetrends.

Grossprofit margin on non-GAAP revenue which includes both depreciation andstock-compensation was 39% for Q3 compared to 37% last quarter and 42% the sameperiod last year. The reduction in gross margin from the prior year isprimarily due to an increase in depreciation on a substantial increase innetwork access deployed over the last 12 months.

Lookingat 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 inQ3 which was flat with last quarter and compared to $7.7 million for the sameperiod last year. Operating expenses also include depreciation and stock-basedcompensation charges. Excluding these non-cash charges, our operating expensesfor the quarter were $13.3 million, up $2.3 million over the last quarter andup $8.3 million over the same period last year.

Thesequential increase in operating expenses relates primarily to increasedG&A costs associated with increased public company compliance, andlitigation expenses, increased headcount and variable sales and marketingexpense on expanded booking performance.

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

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

Netinterest income of $2.5 million in Q3 related to interest on our cash andinvestment balances, and compared to net interest expense of $0.2 million forboth last quarter and the same quarter last year. At the end of Q2 the companyretired substantially all of its debt and therefore incurred minimal interestexpense during the current quarter.

Movingon to the balance sheet, our combined cash and investment balance on September30 was $194.2 million up from a $187.7 million in the previous quarter. Cashincreased as cash flow from operations exceeded our capital investments andcash flow from operations was aided by a reduction in accounts receivables andan increase in deferred revenue.

Capitalpurchases for the quarter were $7.3 million, down from $8.7 million in theprevious quarter. Day sales outstanding for the quarter were 57 days down from90 days in the previous quarter.

Movingon to guidance, for Q4 we expect to achieve GAAP and non-GAAP revenue in therange of $28 to $30 million. Non-GAAP revenue guidance includes $0.3 millionexpected from non-GAAP professional services revenue as compared to $1.6million that was in Q3. So please note that some of the over-performance in Q3was non-GAAP professional services revenue that was slated for Q4 but wasdelivered early. So when you upgradeyour models please consider this as revenue that shifted forward from Q4 intoQ3 and it will not be replaced n Q4.

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

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

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

Capitalinvestments for the nine months were $21.6 million; we expect capitalinvestments for the full-year to be $30 to $31 million. With that I’ll turn itback to Jeff.

Jeffrey W. Lunsford

ThanksMatt. Looking ahead we feel good about the quality and strength of our platformand the sales momentum with which we enter Q4. We feel Limelight Networks isthe best positioned content delivery provider to execute within this rapidlygrowing and very dynamic marketplace.

We believe our service suite, which attractivelycombines quality, operational maturity, performance, flexibility and operatingefficiency positions us to continue to deliver growth that outpaces the rest ofthe market.

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

Lastweek in a gathering of approximately 200 customers and partners in Scottsdale, we introduced an exciting new offering fordelivering HD content: Limelight HD, which leverages Limelight’s uniquearchitecture to deliver high-definition media and digital content over theInternet. Leading Internet mediaentities, including Fox Interactive Media, MSN Video, Brightcove, and Rajshri.com, India’s leading broadband video portal are among thosewho announced they would offer HD content via the Limelight HD service.

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

At the heart of Limelight HD is LimelightNetwork’s advanced global CDN architecture, consisting of thousands of highperformance content servers distributed worldwide, connected to leadingbroadband access networks, interconnected via high-speed, dedicated opticalnetwork and built to store and deliver entire content libraries.

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

We have mentioned many times this wave of trafficsurging over the Internet and private lines is primarily a consumer drivenwave. We believe that compounding growthof this wave will continue for the next 3 to 5 years at a minimum given thethree macro trends mentioned earlier. Weare aggressively investing and building this company to help world classpublishers satisfy the insatiable consumer appetite for high-quality content asthis wave represents.

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

When you read about Google PCs for $200 and seeinexpensive handheld devices being used during your commute, think of how muchdata needs to be delivered to satisfy all those demanding consumers. LimelightNetworks is well-positioned to capture more than our fair share of thatdelivery business, and we look forward to reporting to you on reaching more keymilestones in the future.

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

Question-and-AnswerSession

Operator

(OperatorInstructions)

Yourfirst 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 itlooks like you’re being quite conservative in terms of growth for Q4; can youtalk to us why I think your seasonally strongest quarter you’re being soconservative. And then also talk about the expenses for Q4, they seem to beflat quarter-over-quarter.

Jeffrey W. Lunsford

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

Sofirst of all, we were establishing guidance and we can’t comment over theconservative or aggressive nature of that establishment; we believe this is theright range to set forth for investors. As we discussed last quarter there’shigh variability in this business Katherine as you know; also of import is theamount of revenue that we generated in Q3 as Matt mentioned in his preparedcomments: $1.6 million of revenue in Q3 that was really normally slated tooccur in Q4 and that’s consulting revenue associated with our largepartnership.

Ifyou look at the underlying traffic growth, the diversified business--almost1000 customers now--you have to back out that revenue you’ll get a moreaccurate sort of underlying growth number. And, you might not think that number’s quite as conservative, butultimately we believe this is the right place to guide investors for Q4.

Mattyou want to comment on expenses?

Matthew Hale

Yeah,Katherine we’ve held the line pretty well on expenses this quarter in spite ofa pretty healthy increase in litigation costs, and our Q4 contemplate a littlelower costs associated with that than we had previously, and that’s offset byincreased 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, canyou talk about that? Also, you pre-announced around 112 customers you said Ithink, but today’s press release says 175 new customers? What happened?

Matthew Hale

No,the press release says 112.

Katherine Egbert - Jefferies & Co.

Ohokay.

Matthew Hale

Whatwas the first part of the question?

Katherine Egbert - Jefferies & Co.

Itwas deferred revenue.

Matthew Hale

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

Katherine Egbert - Jefferies & Co.

AndI said that other question backwards, I’m sorry. It said 112 today; thepre-announcement was 175.

Matthew Hale

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

Jeffrey W. Lunsford

Yeahthere’s just a big implementation we have signed but not yet implementedcustomers, Katherine, this is the difference.

Katherine Egbert - Jefferies & Co.

Okaygot it. Thanks guys.

Matthew Hale

Sure.

Jeffrey W. Lunsford

Okayoperator, next question.

Operator

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

Sarah Friar – Goldman Sachs

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

Matthew Hale

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

Asit relates to the overall utilization, we are still running utilization of thenetworks fairly similar to what we talked about on the IPO in the lower- tomid-twenties.

Sarah Friar – Goldman Sachs

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

Jeffrey W. Lunsford

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

Sarah Friar – Goldman Sachs

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

Matthew Hale

Nowe’re still using the same 3-year depreciation on our network assets; we’ve notchanged that. I think what has changed is a percentage of CapEx to revenue, sowe’re slowing that down and again, related to overall throughput improvementsthat we are seeing in the network that don’t require CapEx.

Sarah Friar – Goldman Sachs

Okay.Thanks a lot.

Matthew Hale

Thankyou.

Operator

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

David Hilal – Friedman Billings Ramsey

Thankyou. Jeff your comments on HD, I wanted to drill a little bit into that, we allagree that that’s going to be a big wave but I wanted to try to get yourperspective on the timing. And so, if10% of your revenues is considered meaningful, what do you think HD generatedcontent will be meaningful to your annual revenue stream?

Jeffrey W. Lunsford

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

Wedefinitely see it driving traffic growth as we mentioned already from lastyear’s issue, just the, let’s call it, the increase in end-code rates weredefinitely driving more traffic, so the 5x increase in event size that Imentioned wasn’t just due to 5x more viewers, it’s a combination of moreviewers with higher connection speeds and content that’s encoded at higher bitrates, and all that combined gives you an event size or sometimes somethingthat’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 upnearly as much as we thought or I think maybe as you guys articulated backduring the IPO road show, I wanted to get your thoughts on the ramp-up on salesand marketing, have you slowed that down or, will we see that accelerate intoQ4 and into next year from what we saw in Q3?

Jeffrey W. Lunsford

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

We’rereally investing in all areas: R&D, the G&A required as a publiccompany, sales, people, marketing programs, sales support programs, you nameit. And then all the operations to handle the scaling of the network and allthe account management and operations to handle the growth and the customerbase. You know the customer base aloneis 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 thanmost expected and I think guidance for Q4 is the same. I know you guys were working on Pesto whichis going to help the utilization on the network and I want to just get anupdate 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 inwhat I call live test mode. We are going to start introducing Pesto intolimited network operations probably later in Q4, earlier in Q1. As we have saidbefore, Pesto is a big catch all name for probably more than 10 differentcomponents of the architecture that are being enhanced and we’re going to seethose components introduced into production not as one huge event butincrementally over probably the next 12 months.

Matthew Hale

Davidthose increases or that software as it goes in will influence the amount ofCapEx that we need going forward.

Jeffrey W. Lunsford

With that said, David, we are rolling newsoftware into production every month and almost every new release has in manycases 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 weare doing to continue to help the platform scale and be more and more efficient.

Operator

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

Brian Essex - Morgan Stanley

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

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

Jeffrey W. Lunsford

Thereare two questions. The proxy for what you would call quality would be ARPC andARPC was steady quarter to quarter with the addition of 112 new customers intothe denominator.

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

Sothis won’t be some we talk about each quarter. It’s just something which isvery much in operating highlight for Q3 and what we are focused on is growingthe 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 potentiallygo down because your new customers tend to be smaller than your existingcustomers. But we are focused on the quality customers who want to have growingbusinesses and are investing in their own businesses and value the services wedeliver.

Brian Essex - Morgan Stanley

Anycolor on the competitive dynamics on the large customer front and how that mayhave been in the quarter versus maybe some of the smaller customers?

Jeffrey W. Lunsford

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

Operator

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

Aaron Kessler - Piper Jaffray

Canyou give us any details on if there’s any litigation costs with regard toshareholder lawsuits in the quarter? Also on litigation, any update in terms ofnext major dates we should look for in the Akamai suit?

Jeffrey W. Lunsford

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

Matthew Hale

Relativeto shareholder litigation, we had just under $300,000 of expense for thequarter.

Aaron Kessler - Piper Jaffray

Interms of revenue as we go into ‘08, I know one of your major competitorsindicated recently that they thought growth would fill in a little moremeaningfully in ‘08 versus ‘07 until we get more adoption of HD or untilthere’s the next inflection point in the sector. Would you agree with thatanalysis or do you think the growth will remain robust next year even withoutreally adoption of any HD services as we go into ’08 here?

Jeffrey W. Lunsford

Ourbusiness is growing quite rapidly so we’re not in that more mature businessphase where we’re lookingfor inflection points in the market. We’re gaining market share and driving topline growth from both just the organic growth of the market itself plus byexpanding our market share within the market.

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

Aaron Kessler - Piper Jaffray

Interms of a reporting and analytics solution, when we would expect maybe to getmore on a solution to the market that can obviously also further improve yourchurn rate and all that and improve the value-added services of Limelight?

Jeffrey W. Lunsford

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

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

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

Operator

Yournext question comes from the line of Rob Anderson.

Rob Anderson

Youtalked in your prepared remarks about growing faster than the industry and youagain mentioned market share gains. But can you discuss that? Your Q4 guidancein the context of that comment just given the guidance of your primarycompetitor reflects the higher growth year-over-year and about twice the growthrate on sequential basis?

Jeffrey W. Lunsford

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

Matthew Hale

Alittle over 20%.

Jeffrey W. Lunsford

20%of revenue came from one transitory customer and that was a one-time project itwas known to be an in-and-out kind of one year project when we embarked on it. Whenwe think about how this business is growing, we look at the diversifiedbusiness under that and again you also need to look at just the Q3 to Q4 thatthe 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

YourQs and Ks discuss your exposure to MySpace last year, is that what you’rereferring to or can you tell us what that customer was this quarter as apercent 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 quarteror in our guidance for Q4.

Matthew Hale

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

Rob Anderson

Justone follow-up Matt, could you repeat what you said about your expectations forprofessional services revenue in Q4 previously versus what it is now?

Matthew Hale

FirstI’ll rewind to last quarter, we said that we’d expect from this strategicMicrosoft contract to be around $2 million for the second half of the year. Sowe’ve taken about $1.6 million of that in Q4 and then contemplated in thisguidance is about $0.3 million.

Operator

Yournext question comes from Michael Curtis - Raymond James.

Michael Curtis - Raymond James

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

Jeffrey W. Lunsford

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

Michael Curtis - Raymond James

Themidpoint.

Jeffrey W. Lunsford

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

Michael Curtis - Raymond James

Definitelywas a little bit of growth. The rate of growth, I guess I am trying to get somesense for how much seasonality you actually think that there is in the thirdquarter and fourth quarter, just to understand the business a little bitbetter.

Thenon gross margins, cash gross margins bumped up in this quarter and you had it bumpeddown 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

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

Michael Curtis - Raymond James

Thenon 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 itflatter than you thought?

Jeffrey W. Lunsford

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

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

Okayoperator, I believe that are no further questions at this time. Thank youeveryone for joining the call today and we look forward to seeing you out therein industry.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

This Transcript
All Transcripts