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Limelight Networks (NASDAQ:LLNW)

Q2 2012 Earnings Call

August 02, 2012 8:30 am ET

Executives

Douglas S. Lindroth - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Treasurer

Jeffrey W. Lunsford - Executive Chairman, Chief Executive Officer and President

Analysts

David M. Hilal - FBR Capital Markets & Co., Research Division

Michael J. Olson - Piper Jaffray Companies, Research Division

Michael Turits - Raymond James & Associates, Inc., Research Division

Donna Jaegers - D.A. Davidson & Co., Research Division

Fatima Boolani - Jefferies & Company, Inc., Research Division

Operator

Good day, ladies and gentlemen. Welcome to the Limelight Networks 2012 Second Quarter Financial Results Conference Call. [Operator Instructions] I will now turn the call over to Doug Lindroth, CFO. Please go ahead.

Douglas S. Lindroth

Good morning and thank you for joining the Limelight Networks Second Quarter 2012 Financial Results Conference Call. This call is being recorded on August 2, 2012, and will be archived on our website for approximately 10 days. If you are online, we have updated our standard investor presentation, and you can find it in PDF format within the investor section of our website.

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 Networks market opportunity and future business prospects; guidance on financial results, statements concerning anticipated future growth and profitability, as well as management's plans, goals, strategies, expectations, hopes and beliefs; and statements concerning the anticipated effects of pending or completed business combinations or other strategic transactions. These forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those contained, projected or implied in the forward-looking statements, including the inherent risk associated with litigation, particularly intellectual-property-based litigation. Reported results should not be considered an indication of future performance. Factors that could cause actual results to differ are included in the company's periodic filings with the Securities and Exchange Commission.

I would now like to introduce Jeff Lunsford, Limelight's Chief Executive Officer.

Jeffrey W. Lunsford

Good morning. In the second quarter, Limelight continued to make steady progress in our transformation from a provider of Internet infrastructure services to a provider of high-value Software-as-a-Service and cloud-based solutions that help companies manage their digital presence across all customer interaction channels.

Revenue, however, came in slightly below our expectations as a result of lower revenue on the CDN side of the business, and another soft quarter from professional services that held back growth of our overall value-added services portfolio. In spite of this, we operated in a disciplined manner and achieved our targeted bottom line results for the reporting period.

Most importantly, for the prospects of long-term value creation, our digital presence management strategy continued to be validated by pipeline growth by the fact that almost half of our Q2 bookings were for software-as-a-service and cloud-based services related to digital presence management.

Companies around the globe are focused on improving the management of their digital presence across web, mobile, social and large screen channels. Five years ago, companies could rely on 1 content management software package to manage their digital presence because the website was the only digital channel for customer interaction.

Today, in an attempt to keep up with the increasing ubiquity and complexity of mobile devices, the increasing importance and influence of social channels and broadband-fueled growth of over-the-top delivery to large screens, companies have ended up working with 4 to 6 different content management, publishing and processing systems and different infrastructure services providers. This approach is expensive, impedes efficient workflow, affects consistency and leads to a suboptimal digital presence.

Limelight is the first company to envision and build an integrated digital presence management solution, which allows our customers to accomplish all of this and more and to do it at the top one of the world's preeminent high performance digital presence delivery platforms.

YouTube brought many positive endorsements of our digital presence management strategy, including: one, a multi-year agreement with Broadridge Financial, a leading provider of investor communications and technology-driven solutions that leverages a full range of our digital presence management suite. Broadridge also engaged Limelight's global services team for their expertise, orchestrating their digital presence with a focus on website marketing acceleration. Two, an extension of our agreement with BMC Software to add video delivery in addition to web content management. BMC has been a CDN customer of Limelight's for several years. Three, a recently expanded reseller agreement with Ray Networks, a strategic partner in Israel, to sell our entire digital presence management solution set. Both companies see growing opportunities in Israel for our digital presence management suite of services, and we have already signed new customers as part of this 3-year extended agreement.

Additional customers embracing our digital presence strategy and utilizing one or more modules of the suite include F5 Networks, SunTrust Banks, Rhapsody International, InterfaceFLOR, TMZ and Deluxe Digital. We're excited to be thought leaders in digital presence management. We are helping define this new category and are unique in providing a comprehensive solution to a problem that so clearly needs to be solved.

Let's review a few highlights regarding specific applications within the suite. In the online video and mobile area, combined revenue for Limelight video platform and Limelight mobile, which are key components of our Orchestrate digital presence management solution grew in excess of 45% year-over-year. IDC estimates that online video platform's revenue will grow at a CAGR of 27% from over $400 million in 2011 to over $1 billion in 2015. Our online video platform service is differentiated through the integration of the service with our other SaaS services and through the efficiencies and advantages our customers enjoy through our global high performance network.

Coupled with this online video platform category is our SaaS solution for web content management, Dynamic Site Platform. According to Gartner, the web content management market was over $1.2 billion in 2011 and has a CAGR of 14%. Revenue here adjusted for deferred revenue write-downs caused by M&A accountings has now accelerated to 16% year-over-year from flat a year ago, as we had forecast for you on the last call. We expect growth rates to continue to increase into 2013, as we deliver on our growing pipeline of opportunities in this area.

Regarding Limelight Accelerate, the speed and performance of an end user's experience is a key element of our digital presence -- of digital presence. Limelight's Accelerate service decreases the time it takes for users of any device to interact with a website, resulting in more completed transactions, more successful conversions and increased visitor loyalty. Revenue for our Accelerate services grew in excess of 45% year-over-year.

Regarding Agile Storage, in the quarter, we continued to migrate new and existing customers to Limelight Agile Storage, our high-performance differentiated cloud storage offering, which leverages our massively provisioned global computing platform. Agile Storage offers unique global geographic placement, business process management and business policy controls to simplify administrative overhead, reduce long-term IT costs and ensure compliance to regulatory standards. Cloud storage revenue grew approximately 17% year-over-year.

Consulting services declined 19% on a year-over-year basis and held down overall VAS, value-added services, growth. Our services team is retooling into higher-value services, helping customers assess, design, plan and implement their digital presence strategies, which is moving up the stack from the prior practice, which was more infrastructure deployment related. We anticipate our new leadership and focus will reverse the downtrend, bringing us more strategic, longer-term and recurring revenue projects.

In the content delivery area, we continue to focus on signing only smart business and on being disciplined on price. That business was essentially flat with a very slight decline of something less than 1%, which was mostly currency, year-over-year. So essentially flat year-over-year.

To leverage our IP in this area, we launched the new managed content delivery offering called Limelight Deploy. Deploy allows network, mobile and cable operators to install and operate our caching technology within their own infrastructure and enables them to more efficiently handle the content congesting their networks, while also creating new and compelling value-added services revenue for both their business customers and end subscribers. Limelight Deploy, together with our complete stack of SaaS applications and professional services, uniquely qualify us to help operators capitalize on this opportunity.

Overall, we believe our strategy is sound, moving into higher-growth, higher-value solutions that leverage our unique technology and infrastructure resource, expanding our traditional customer segments and opening up longer-term, more strategic customer relationships.

I'll now hand the call to Doug Lindroth to review our financials. Doug?

Douglas S. Lindroth

Thanks, Jeff. Please note the following financial results that I will be discussing are for continuing operations and exclude EyeWonder and chors from current and prior periods. For more information regarding the discontinued operations, please see our earnings press release that we issued today and our Form 10-Q that we'll file in the next few days.

During the second quarter, Limelight Networks recorded total revenue of $44.4 million, up 7% from the second quarter of 2011 and up 0.3% from Q1 of 2012. As Jeff mentioned, we came in below our guidance range as a result of lower revenue on the CDN side of the business and another soft quarter from professional services that held back growth of our overall value-added services portfolio. The stronger U.S. dollar also had a negative impact on our revenue compared to our guidance and the prior periods.

Overall, our value-added services continued to demonstrate traction in the market. Value-added services revenue grew 28% year-over-year on an as-reported basis. Value-added services revenue was 32% of total revenue during the second quarter compared to 27% in the same period of 2011 and up 31% from Q1 of 2012.

While we're disappointed in the continued lag in revenue contribution from professional services, the rest of the value-added services portfolio performed in line with our expectations. We had strong year-over-year growth from the combined online video platform and mobile group and from web content management. As we announced last quarter, we brought in a new head of professional services group, formerly from Success Factors and IBM Global Services. We expect that this group will start scaling and contributing to year-over-year growth in Q4.

During the second quarter, Limelight's international operations represented 31% of total revenue, which was up from 30% in the same period of 2011. We reported second quarter adjusted EBITDA of $2.5 million compared to $3.3 million for the second quarter of 2011 and $2.2 million last quarter. Our Q2 GAAP loss from continuing operations was $9.4 million or $0.10 per basic share compared to a GAAP loss from continuing operations of $11.2 million or $0.10 per basic share in the same period in 2011.

We also reported second quarter non-GAAP net loss before stock-based compensation, litigation costs, amortization of intangibles, acquisition-related expenses and discontinued operations of $5.5 million or $0.05 per basic share compared to a non-GAAP net loss of approximately $4.9 million or $0.04 per basic share in Q2 of 2011. Please refer to the tables included in our press release for a reconciliation of GAAP measures to these non-GAAP measures.

GAAP gross margin was 38% during Q2, up from 32% in Q2 of last year and flat to Q1. Gross margin was flat in Q2 compared to Q1 as a result of higher depreciation expense, offset by higher revenue contribution from our value-added services. Gross margins increased over last year due primarily to the increased contribution of revenue from our value-added services and a reduction in our bandwidth costs. Cash gross margin was 55% for Q2, up from 51% in the same period last year.

During the second quarter, our operating expenses were $26.3 million, a decrease of approximately $0.3 million from last quarter and an increase of $2.1 million from Q2 2011. Our cash operating expenses decreased from Q1 as a result of reductions in employee incentive compensation, audit costs and the fact that we held our annual sales kick-off meeting during Q1. These costs were offset by increases related to additional headcount in sales and marketing and research and development, as well as non-income taxes and fees.

Total depreciation and amortization for the second quarter was $8.6 million, up from the first quarter of $8.2 million and up from $8.5 million in the second quarter of 2011. The increase compared to Q1 2012 is related to increased network depreciation. Depreciation and amortization in the second quarter includes $7.2 million of network-related depreciation. Stock-based compensation expenses for the quarter were $3.2 million compared to $4 million last quarter and $4.9 million in Q2 of 2011.

Moving on to the balance sheet. Our combined cash and short-term marketable securities balance on June 30 was approximately $125 million, down from approximately $137 million in the first quarter. The decrease in cash and marketable securities is primarily related to the repurchase of approximately $11.9 million of our common stock and capital expenditures of approximately $4.4 million, offset by cash flow from operations of approximately $5.5 million. Day sales outstanding for the quarter were 57 days, up from 56 days the previous quarter and flat to Q2 2011.

Regarding guidance. For the third quarter of 2012, we expect to achieve revenue in the range of $44 million to $45.5 million. Our value-added services revenue will be approximately 33% to 34% of total revenue in Q3. For this revenue range, we expect gross margins to be 38% to 39%. Stock-based comp expenses for Q3 are expected to be approximately $3.8 million. Capital expenditures are expected to be approximately $4 million to $5 million.

We anticipate our third quarter operating expenses, excluding stock-based compensation, litigation expenses and acquisition-related expenses will increase by approximately $500,000 to $700,000 from Q2 due to an increase in company-wide employee compensation, increased audit and consulting costs, offset by decreases in employee-related travel and event costs.

With that, I will turn it back to Jeff.

Jeffrey W. Lunsford

Thanks, Doug. Hopefully, this update provides helpful insight into what we've accomplished in the transformation of Limelight into an innovative provider of high-value, high-performance, integrated cloud-based services that help businesses more efficiently and more effectively manage their digital presence across web, mobile, social and large screen channels.

Our strategy is to keep scaling our high performance global digital presence delivery solutions with lower capital requirements, while building a complementary high-value suite of software-as-a-service and cloud-based solutions for digital presence and management, which are differentiated from other point solutions through their interoperability and the fact that they run on a global platform. While disappointed in the slight revenue miss in Q2, we're excited to execute on the opportunities our digital presence strategy presents for us in 2012 and beyond.

Factoring in Q2 run rate, we are targeting to exit 2012 with our value-added services on a $70 million to $75 million annualized revenue run rate, growing at 30% to 40% year-over-year. This will provide us with a great foundation for having a suite of value-added services that we believe can achieve a run rate of approximately $100 million in recurring revenue with SaaS-like gross margins in the latter half of 2013.

At this time, we will open the line up for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Dave Hilal from FBR.

David M. Hilal - FBR Capital Markets & Co., Research Division

A few questions. First, you talked about currency being a negative hit. Can you quantify the impact in the quarter as well as Q3 guidance?

Douglas S. Lindroth

Dave, it's Doug. Yes. In the quarter, when you look at it from where we guided, it was approximately $100,000 negative headwind based on the strong U.S. dollar. When you look at it, how it impacted us on a comparable basis from a year-over-year is about $200,000 impact.

David M. Hilal - FBR Capital Markets & Co., Research Division

And in terms of guidance?

Douglas S. Lindroth

In terms of guidance, we don't separate it out from how we guide and what we're expecting it. It's factored in where we think rates will be during the quarter. So it's factored into our guidance.

David M. Hilal - FBR Capital Markets & Co., Research Division

Okay. On the CDN business, it was down sequentially, and -- flattish year-over-year, down sequentially. Would you attribute that, Jeff, to pricing, volumes? I'm sure it's some combination of both, but maybe which one would you give most credit to causing it to be down sequentially? And it looks like it very well could be down sequentially again in Q3.

Jeffrey W. Lunsford

I think it was a blend, David, and Doug can give you more color but little bit less traffic than we anticipated, a little bit more price degradation than anticipated. Pricing is still in that 20% to 30% year-over-year unit price decline range, which is more healthy than we saw 2 years ago. But also, as we said, we're selective in the business that we're taking. We're driving -- we want to grow that business, but we don't want to take the capital-intensive deals, and so our focus is to build the SaaS business on top of the CDN revenue base. And we are not focused on -- I -- we could grow that business in a higher top line, but it would require more CapEx. So the strategy is keep growing CDN. Traffic is still growing, keep expanding it in key markets but don't do it in a way that consumes a bunch of capital because we're getting a much higher return on capital in the capital that we invest in the growth of the SaaS business.

David M. Hilal - FBR Capital Markets & Co., Research Division

So if we further drilled into volumes, it's not saying necessarily that existing customers, their volumes are growing slower. It's more that you are bringing on less new volume in terms of new customers because you are being a little bit more economically sensitive. Is that a different way to phrase it?

Jeffrey W. Lunsford

I -- well, there's 1,500 customers here, so I think it's just -- it's a general business practice, but on the Investor section of the webpage is the updated traffic graph, and you can see that traffic is still growing quite healthy. And so as I said, we -- there is business out there that we could take that would grow that business faster, but it would drive up CapEx. And in August, we said, I think, 3 quarters ago, when we first really started emphasizing sort of capital-like growth strategy where SaaS, the SaaS solutions are really getting traction and the digital presence strategy are really getting traction, and we think that's the best return on capital. And so we're not going to chase revenue or growth in areas of the CDN business where that's what you need to do. We're taking business from customers and looking at customers. Our favorite customers are the ones that believe in the integrated suite, and CDN is just part of why they come to Limelight. They actually come to Limelight because we help them manage their entire digital presence on one platform and consolidate, instead of working with 4 or 5 vendors and having poor workflow and an expensive solution, they can work with us. And that does include CDN, and so we'll focus on those folks all day long and not chase the big video guys who are trying to drive price for pure video delivery and not use the other value-added services.

Douglas S. Lindroth

I was just going to add the other way to look at it is, Jeff was talking about the capital-light piece. In the first half of 2012, our CapEx was about $10 million or roughly 11% of revenue compared to where we were last year at 18%. So for us, the strategy is paying off. When you look at cash flow during Q2, $5.5 million of cash flow from operations and a little bit of -- little over $4 million of CapEx. So between those 2 measures, we like that profile.

David M. Hilal - FBR Capital Markets & Co., Research Division

Right. Understand, okay. Let me switch to value-added services. You talked about the growth rates of some of the key components. Can you size again for us -- specifically, remind us on professional services, how big of a piece that is and then within the other value-added services that are growing quite well, Storage, platform, Acceleration, et cetera. Remind us, maybe which are the biggest pieces of that revenue stream?

Jeffrey W. Lunsford

Doug, can you take that?

Douglas S. Lindroth

Sure. Yes. It hasn't moved from a rank order, and as we've said in the past, we don't give out the specifics of each, but I'm happy to rank them. So Storage is the largest component in there, followed by WCM and then our combined online video platform in mobile and then next is pro serve, so the largest 2 being the Storage and the web content management. And then you jump down, and it's not too far apart between the OVP and mobile professional services, and then we have our Accelerate products.

David M. Hilal - FBR Capital Markets & Co., Research Division

Okay. And then my last question, what was the share count at the end of the quarter?

Douglas S. Lindroth

Let's see, I believe the final share count was right around 100.

Jeffrey W. Lunsford

Dave, just to chime in and add color on the PS, I mentioned that, that business and that revenue stream has shifted, in the prior years, our professional services team actually helped people deploy infrastructure. So they would help people take down rack space and install servers and open up POPs, and the new mission for that group, starting a couple quarters ago, is to actually go out and work with businesses to assess what their digital presence strategy is, what is the purpose of their digital presence strategy, how can they optimize it, what technology tools can they use. So it's a much more valuable relationship, and it leads to, obviously, cross-sell and upsell our digital products. And so those big infrastructure projects in the old days were lumpier and did not lead to us becoming a long-term, valued, trusted adviser to the executive team of our clients. Whereas today, the engagements that these guys are working on are increasingly, one, where we go and with the executive team and say, "All right, you have a regular business, and you have a digital side of your business. What is your strategy there? And what are your business objectives and how can we invest and advance your digital presence to achieve those business objectives?" That is what we're excited about, and again, it's sort of a situation where we're just not chasing big, lumpy, low-margin infrastructure deals in professional services because we're focused on the future and on the digital presence strategy.

Operator

Our next question comes from Mike Olson from Piper Jaffray.

Michael J. Olson - Piper Jaffray Companies, Research Division

Just a couple numbers questions. The $100 million value-added services revenue in 2013, is that the expected revenue from VAS in the year? Or is that the run rate that you think you'll exit the year at?

Jeffrey W. Lunsford

Yes. That'll be a run rate -- an annualized run rate that we said we believed -- or we're targeting to achieve at some point in the second half of 2013, Mike. And exactly when, I don't know, but that's sort of the SaaS methodology of taking your monthly run rate, multiplied by 12.

Michael J. Olson - Piper Jaffray Companies, Research Division

Okay. And then just -- I think you said this, but the value-added services of 32% in the quarter and what did you say it was in -- I could look this up, but what did you say it was in Q2 of last year?

Jeffrey W. Lunsford

Doug?

Douglas S. Lindroth

Q2 of last year was 31%. Sorry, no. Sorry, sorry, 27%.

Michael J. Olson - Piper Jaffray Companies, Research Division

27%, okay. And 31% last quarter?

Douglas S. Lindroth

Correct.

Operator

Our next question comes from Michael Turits from Raymond James.

Michael Turits - Raymond James & Associates, Inc., Research Division

A couple questions. First of all, in the quarter, any impact of Netflix moving -- starting to move off -- traffic off? And what was Netflix's percentage of revenue?

Douglas S. Lindroth

They were...

Jeffrey W. Lunsford

We don't talk about specific -- we do talk about their revenue if they were 10%-er, and Doug can comment on that, but we -- they announced publicly that they are going to start installing -- well, actually license or give open-source caching technology if telcos want to install it. And I think they had said 5% to 10% of traffic was being delivered on that. We still see them growing on our network, Michael. That's probably all I should say because our customers prefer that we not talk about their traffic patterns. Doug, can you talk about the percentage revenue?

Douglas S. Lindroth

Sure, yes. They were 10% or just under 11% in the quarter similar to Q1.

Michael Turits - Raymond James & Associates, Inc., Research Division

Okay. And then what -- on the value-added services side, can you tell us what the value-added services group overall grew excluding professional services? And if you've got it for comparison, what that was last quarter?

Douglas S. Lindroth

I don't have that separate breakout. I can do that and get back with you on pulling that number out. But we've always looked at it as a group.

Michael Turits - Raymond James & Associates, Inc., Research Division

Yes, I mean, that'd be helpful just because we all understand that pro serve can move up and down and trying to shift it around. So just to give us a better feel for what the demand trend is relative to products less -- in product services, what's going versus pro serve, that would be really helpful. I guess, sorry to flip back to this, but back on the CDN side, it does look like the guide implies down again next quarter. What are your thoughts on when that should start to see some sequential growth?

Jeffrey W. Lunsford

Well, again, we're -- our biggest focus on growth is getting the SaaS business to $100 million run rate and seeing the return on capital, and building those deeper relationships with customers. And our general strategy is to hold CDN revenue steady and to sort of find that sweet spot, where we're in a -- not chewing up a bunch of CapEx to chase revenue growth. And we feel like that's what we're doing. We were light this quarter, so we're not happy about that, but it was not wildly light. And so I think the guide is the guide, and it's a result of our business strategy and where our priorities are and where we think the best place to invest capital and hire people and all that good stuff there.

Michael Turits - Raymond James & Associates, Inc., Research Division

And I guess just one more and, Jeff and Doug, you had $1 million in free cash flow this quarter, which is great. Well, how committed are you to having -- to being free cash flow positive on a quarter in, quarter out basis? And are there any seasonal trends that we should expect in that over the, say, the next 4 to 6 quarters?

Jeffrey W. Lunsford

Well, I'd say, Michael, what we're committed to is growing our digital presence management platform, and that is the priority. That is where, I think, as you and I discussed after our last quarter, that is where we believe we will create substantial value for our shareholders. The customers in the market are delighted to have one vendor to work with, and they're delighted that it runs on a high-performance platform, so they get both. They get an integrated suite to manage digital presence, and they get the great performance that they're used to from Limelight. And so what we see there is less price pressure on all products. We see higher gross margin. We see longer multi-year contracts. It's just the revenue quality in that, that comes out of the software-as-a-service solutions is much, much higher than sort of typical year-to-year CDN deals. So that is our focus, is growing the digital presence management business. We have obviously deployed capital in buying back almost 15% of our shares outstanding, and so we also do think about cash gen, excess cash and that type of thing, but we believe the digital presence management opportunity is incredibly attractive, and growing that business is #1, #2, #3 priority .

Operator

[Operator Instructions] Our next question comes from Donna Jaegers from D.A. Davidson.

Donna Jaegers - D.A. Davidson & Co., Research Division

Jeff, last quarter, you had talked about your confidence in value-added services because the sale -- your sales funnel had doubled in the second -- in the first quarter. Can you give us any sort of update on what that sales funnel looks like, how it's moving through the funnel? Any sort of color there?

Jeffrey W. Lunsford

Yes. And I think what we've said is it had grown 50% year-over-year and that the percentage of value-added services is much higher year-over-year. And so the sales pipeline has held steady. Our bookings in Q2 were in the mid-40% of value-added services or in the 40s. I don't know the exact number, and we won't get that granular, but driving to where, in the second half of this year, we'd love to see over half our bookings in that, with that higher revenue quality business. And hopefully, that answers your question.

Donna Jaegers - D.A. Davidson & Co., Research Division

Yes, that helps. On the -- you called out Limelight Deploy on your script, but you didn't mention if you were in beta with any customers. Can you talk about prospects there?

Jeffrey W. Lunsford

Well, we announced the XO partnership, with their concentric business unit, and we have existing relationships with Bell Canada, with Bestel and with Bharti, and we have multiple active conversations going on with other telcos. These -- we're finding that these tend to be about a 1-year sales cycle because you're usually dealing with a large international telco, and it's complicated as far as, first they have to select a vendor and then take 90 days-plus to actually negotiate a contract. But we're -- we see very interesting deals in the pipeline that would allow us to expand the footprint of our CDN with very low CapEx, and this is a managed CDN offering where we install our software on their infrastructure and get that added reach and don't have to go take rack space down ourselves, and/or sometimes we invest the CapEx in the server, sometimes they do, and/or sometimes, they become resellers like XO did of our entire stack. So it's kind of a long answer to your question, but there is a pipeline out there and multiple very interesting opportunities.

Donna Jaegers - D.A. Davidson & Co., Research Division

Okay. And then last question, on the lawsuit timing, you guys getting any calls from the court that would give us any sort of a guide as far as when we might expect a decision from the -- on the patent infringement suit?

Jeffrey W. Lunsford

No. Unfortunately, we have no schedule, and we're just running our business.

Donna Jaegers - D.A. Davidson & Co., Research Division

And there's been no change in the people on the court or anything like that, that would postpone it, so it should be in the next few months?

Jeffrey W. Lunsford

I wouldn't hazard a guess at any time and this thing's been going on for 6 years, and so I'm not sure if it'll happen in a couple months, a couple weeks or a couple years. We've obviously prevailed twice and are -- have also built out a very interesting portfolio of our own intellectual property, and we're just running our business.

Operator

Our next question comes from Aaron Schwartz from Jefferies.

Fatima Boolani - Jefferies & Company, Inc., Research Division

This is Fatima on behalf of Aaron. I was wondering if you could help sort of quantify the CDN revenue that you're not taking on simply because it's lower margin and it's a directional sort of guidance, that would be really helpful.

Jeffrey W. Lunsford

It's hard to quantify that, Fatima. I think you can just sort of look at the CapEx profile. As Doug said, last year first half, 18% of revenue; this year first half was 11% of revenue. And so we're -- it's not an exact formula for if we took CapEx back to 18%, then revenue would grow X. There's probably some correlation there, but it's not an exact formula. I think the point is we could grow it. It would require more CapEx, and we think that, instead of spending an extra $10 million CapEx on the CDN business this year, we should -- if we were going to invest it anywhere, we should invest it at building out the SaaS products. And we definitely are still investing capital in the CDN platform, but we think it's at the right intersection of growth versus cash capital deployment when you look at the opportunities we have in the digital presence stack, as alternative places to deploy that capital.

Fatima Boolani - Jefferies & Company, Inc., Research Division

That's helpful. And just with respect to the number of products that customers are bundling, so as you're moving -- strategically moving away from kind of the lower-margin CDN-type services, are you seeing a steady uptick in the number of products customers are buying?

Jeffrey W. Lunsford

Our average new -- the new customers that we signed up in the quarter averaged about 2 products per or services per contract with the new relationships, and that's a good indication. And as we have more and more products in the market, our goal would be to drive cross-sell and upsell and increase that ratio, both for existing customers and for the new customers we sign.

Douglas S. Lindroth

Another way to that look at it is too, we had the most happen this quarter where we had 50 -- approximately 50 existing Limelight customers add either Limelight Video platform or web content management services to their existing delivery services. So that was the most uptick we had during one quarter.

Fatima Boolani - Jefferies & Company, Inc., Research Division

And in that instance, do you find discounting an opportunity or a challenge there because you have these sort of entrenched relationships with these existing customers?

Douglas S. Lindroth

Yes, we see that as an opportunity. We've talked about it on prior quarter calls too, the amount of discounting when we're doing that bundle, especially on the CDN pricing side is much less, so we're much closer to list price when we bundle than when we do it standalone.

Fatima Boolani - Jefferies & Company, Inc., Research Division

And then very last one for me. Could you speak to headcount addition expectations for the back half of the year and even at a high level for calendar '13? And where you're looking to add resources, is it on the professional services side or more on the sales and demand generation side? And that's all for me.

Jeffrey W. Lunsford

Sure. I think we've never really given hiring forecast other than to say, you can tend to think of headcount growing at the same rate as revenue, plus or minus 5%. I think we are still hiring people in international markets, as we expand our international footprint. And last year, we've hired a good number in Asia, and that team's doing great. We are still hiring in R&D. We are building out professional services team, and if you look at our target model, Fatima, it shows you where we anticipate we'll get leverage as we scale. So G&A, we've got about the G&A platform we need to support a $400-million company. So we should get good leverage from here forward off of G&A. Sales and marketing, we should get good leverage. You will see us investing and expanding the Limelight brand even into this whole digital presence management space, and that's just overall part of the strategy, but over time, we will get leverage off the sales and marketing as well.

Thank you. I believe, operator, it looks there are no further questions. Is that correct?

Operator

Yes, that's correct, Sir.

Jeffrey W. Lunsford

All right. Well, thank you, all, for joining us this morning and we will speak with you on any after-calls that you have scheduled, and thank you for your time.

Douglas S. Lindroth

Thank you, everyone.

Jeffrey W. Lunsford

Operator, at this time, we'll conclude the call.

Operator

Ladies and gentlemen, that does conclude today's conference. You may all disconnect, and have a wonderful day.

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Source: Limelight Networks Management Discusses Q2 2012 Results - Earnings Call Transcript
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