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Executives

Paul Alfieri - Senior Director of Corporate and Investor Communications

Jeffrey W. Lunsford – Chairman and Chief Executive Officer

Matthew Hale - Chief Financial Officer

Analysts

David Hilal - Friedman, Billings, Ramsey & Co.

Michael Turits - Raymond James

Paul Beaver - Piper Jaffray

Raimundo Archibold - Kaufman Bros.

Dan Rayburn

Jennifer Adams - Cowen & Co.

[Geo John] - Goldman Sachs

[Eric Buckovski] - Jefferies & Company

Colby Synesael - Merriman

Chad Bartley - Pacific Crest Securities

Limelight Networks, Inc. (LLNW) Q1 2008 Earnings Call May 8, 2008 5:00 PM ET

Operator

Welcome to Limelight Networks 2008 first quarter results conference call. (Operator Instructions)

Representing Limelight Networks today are Jeff Lunsford, the company's Chairman and Chief Executive Officer, Matt Hale, Chief Financial Officer, and Paul Alfieri, Senior Director of Corporate and Investor Communications. I would now like to introduce Mr. Paul Alfieri. Paul?

Paul Alfieri

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 related to Limelight Networks market opportunity and future business prospects, guidance on 2008 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, and 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.

With that I'd like to introduce Jeff Lunsford, Chief Executive Officer, Limelight Networks.

Jeffrey W. Lunsford

The first quarter of 2008 was one of considerable progress on many fronts for Limelight Networks. We grew our business substantially from last year, with revenue rising to $30.2 million, up 29% year-over-year and at the low end of guidance we provided on last quarter's call. I will focus on three topics during my comments this afternoon the continued expansion of our customer base, operational highlights; including the new services we introduced this past quarter, and then general industry trends. I will also comment on our ongoing litigation with Akamai.

First, we were pleased with our customer addition rate, platform advancements and additions to our service suite in the quarter. We also made demonstrable progress toward our goal of delivering a brilliant client experience. During the quarter we signed over 180 new customers, up from 84 new customers in last year's first quarter. This brings our total number of active customers to over 1,200. Additions included Sun Microsystems, Harpo Productions and Citadel, among others, and we also renewed or expanded relationships with existing customers like MySpace, Viacom and [inaudible], among others.

It is important to note that in March 2008 we signed over 70 new customers alone, meaning approximately 40% of our first quarter customer additions occurred after an initial unfavorable ruling in our ongoing litigation with Akamai which occurred at the end of February.

These new bookings indicate to us that customers and prospects continue to value the differentiated performance and client experience Limelight offers within this growing market.

On the international front we added 35 new customers this quarter in Japan, the U.K. and German, including Nissan Corporation, LabelGate and RCC Broadcasting. We're pleased with the growth that our new international offices have generated in such a short time.

On the last quarterly conference call we mentioned that one large customer was considering discontinuing its presence in online video. The elimination of traffic from this customer, coupled with performance improvements in our platform, allowed us to reduce capital investment levels in the quarter but also contributed to margin compression. We believe our new customer additions should refill this margin gap as we increase traffic and revenue without having to ramp up delivery expenses. This large customer situation resulted in roughly flat revenue from Q1 to Q2.

As mentioned on the last call, underneath these more volatile customers is a nicely diversified based of customers growing in a predictable manner, and we expect that base to become the primary driver of growth in the second half of 2008.

Regarding addressable market expansion, this quarter we are placing increasing emphasis on expanding our presence in the enterprise and ecommerce market segment. We already have almost 100 accounts in this segment, and we see good opportunities for growth and improved margin in this space.

Next I'd like to update you on the products and services we announced this quarter.

First, our professional services organization introduced our latest turnkey solution, Limelight Live Event Services. This solution allows content producers to broadcast live events to a global online audience and formalizes the set of capabilities we've had in house for some time but had not productized. Limelight Networks, along with partners from our ecosystem where necessary, provides the technology and the consulting and on-site professional services a customer needs before, during and after live customers' live events.

Customers such as Microsoft, Harpo Productions, White Blox, Indy Car Racing and Hiroshima Toyo Carp Baseball team are already leveraging our live events service, and we expect this offering and others like it, to continue to be growth drivers going forward.

Second, I'd also like to mention our small object delivery performance, an area where we're starting to grow and excel. Limelight Networks is well known throughout the content delivery space as the network to turn to for the delivery of large libraries of large files such as video, music, games and software downloads. We have now made significant enhancements to our Limelight Deliver architecture which also make it an excellent competitive alternative for small object delivery.

In fact, we have one large customer with over 2 billion active objects in their library today with an average object size of approximately 30 kilobytes. Limelight Networks accelerates the delivery of over 500 million of these objects daily. This global capability is especially critical for the ecommerce and enterprise market segments.

This quarter we also introduced a new company brand identity and logo and re-launched our website. Our new brand identify reflects the maturity of the business and its unique approach to content delivery.

Finally, we're pleased to announce that we received our company's first U.S. patent award, one for digital rights management technology.

Now let me comment on some key industry trends.

In the quarter we continued to see aggressive pricing in the high volume media sector by carriers and CDNs. As we've mentioned, success in this business requires scale, both of network and of customer traffic. Limelight's global scale differentiates us in this arena, and we believe we are well positioned to compete in this environment. Note that this trend is a contributing factor to slower top line growth expectations.

To address this issue, we're actively diversifying into other attractive segments of the CDN market. The improvements in Limelight Deliver I just mentioned are an important component, and we're also working to develop complementary services which will enhance our value proposition in this market.

It is important to note that we are not seeing such aggressive price pressure in the enterprise, ecommerce and government areas of the market. We believe these sectors represent higher margin opportunities and, as I've mentioned, we're working diligently to expand into them as part of our growth and diversification plan.

Finally let me take a moment to provide you with a brief update on the ongoing Akamai versus Limelight patent litigation. I'd like to cover three main points.

First, approximately half of our business is not alleged by Akamai to infringe at all. These nonimpacted areas include software downloads, international business, live streaming and non-traffic-related CDN services.

Second, we were, of course, disappointed with the February jury verdict, but continue to believe we do not infringe on the patents involved and that we will prevail in the courts over the long run. We currently have several motions pending with the trial court, as does Akamai. As of this call, the court has not set a definitive schedule for resolving these motions. Regardless of the outcome of the motions, appeals by Akamai, Limelight or both may follow.

Third, we are taking specific technical and operational steps to mitigate the financial impact of accruing for potential damages and expect to be in a position to report on those to you by the end of the second quarter. We've also accrued for the damage award made by the jury, and Matt will discuss that further in his comments.

Beyond this short update, we will not comment on ongoing litigation during the Q&A portion of this call.

With that, I'll turn the call over to Matt Hale, our CFO.

Matthew Hale

During the first quarter, as Jeff mentioned, we reported revenue of $30.2 million, and that's up 29% from the same period last year. So we had a net loss per basic share of $0.22.

We reported first quarter EBITDA before stock-based compensation, litigation costs and the damage accrual of $2.1 million, and that compares to $4.9 million for Q4 and $7.6 million for the same quarter last year.

We also reported non-GAAP loss of $2 million or $0.02 per share compared to approximately breakeven last quarter and a non-GAAP profit of $0.02 in the same period in the prior year.

Please refer to the tables included in our press release for the reconciliation of GAAP net loss to these non-GAAP measures.

During the first quarter, Limelight Networks international revenue represented 14% of total GAAP revenue. That's an increase of 1% from last quarter and 1% from the same period last year.

During the first quarter, our active customer count rose to approximately 1,230, for a net increase of approximately 70 from the prior quarter and over 500 from the same period last year.

Our average annualized revenue per customer was approximately $98,000 in Q1 compared with $128,000 for the same period last year.

Revenue contributed by our top 20 customers represents 58% of total revenues last quarter, and that's down from 64% a year ago, as Jeff said, demonstrating the progress in diversifying our revenue stream.

Gross profit margin, which includes both depreciation and stock-based compensation, was 32% for the quarter compared with 37% last quarter and 38% in the first quarter of last year. The reduction in gross margin from a year ago is primarily attributed to higher fixed network costs as a percentage of revenue. This increased cost is related to the expansion of our network infrastructure associated with higher anticipated revenue and traffic levels.

Cash gross margin was 53% for Q1. That compares with 57% for last quarter and 59% for the same period last year due to the higher costs I just outlined.

We expect to see gross margins recover in the second half as revenue and traffic levels grow while growth in fixed network expenses are expected to only see modest growth.

Operating expenses were $23 million in Q1, up $5 million from the fourth quarter and compared to $12 million for the same period last year. These expenses exclude the provision we've made for potential additional damages from the Akamai litigation.

Cash operating expenses, which are expenses before stock-based compensation and potential damage accrual, were $19 million in the first quarter compared to $15 million in the fourth quarter and $7 million for the same period last year. This sequential increase in operating expenses relates primarily to increased litigation costs associated with the Akamai trial and the post-verdict activities.

The $12 million increase in cash operating expenses from Q1 2007 relates to an increase in G&A expenses of $7 million, increased sales and marketing costs of $4 million, and increased product development costs of $1 million.

The higher G&A costs related to increased litigation expense of $4 million, with the remainder associated with public company costs that weren't there a year ago and higher bad debt expense.

As we continue to invest for our future growth, sales, marketing and product development expenses rose from last year due to increased headcount and marketing programs.

During the first quarter, we recorded a provision of $7 million for additional damages associated with the alleged infringing revenue. Approximately 54% of our revenue for the quarter was generated using a delivery method that is alleged to infringe. The jury assessed damages of approximately 43% of the alleged infringing revenue plus interest. We expect the percentage of alleged infringing revenue to decrease as we take specific technical and operational steps to mitigate the financial impact going forward. As a result of these measures, we expect the accrual for additional potential infringement damages to decrease in Q2.

Total depreciation and amortization for the first quarter was $6.3 million. That's up from $5.7 million in the fourth quarter and up $4.8 million in the same period last year. Depreciation and amortization in the current quarter reflect $6 million related to network depreciation and $0.3 million related to operating expense depreciation.

First quarter interest earnings were $1.9 million compared to $2 million last quarter and $0.1 million for the same period last year.

Moving on to the balance sheet, our combined cash and investments balance on March 31 was $194.7 million. That's down from $197.1 million in the fourth quarter. The reduction in cash is primarily related to payments for capital expenditures.

Capital purchases for the first quarter were $3.1 million, down from $5.1 million in the previous quarter and $5.6 million in the same period a year ago.

Days sales outstanding for the quarter were 71 days. That's up from 69 days in the prior quarter and 70 days from the prior year.

Moving on to guidance, for Q2 we expect to achieve revenues in the range of $28 million to $30 million, and this guidance reflects the impact of the large customer shutdown as well as the market price dynamics in the rich media sector that Jeff mentioned earlier.

Due to the variability associated with litigation costs and calculating additional potential damage accruals, we're not providing earnings guidance at this time.

Stock-based compensation expenses for Q2 are expected to be approximately $4 to $4.5 million, and the details of stock-based compensation by category are providing in our press release supplemental disclosures.

Capital purchases are expected to be in the range of $4 to $6 million for the second quarter.

With that I'll turn the call back over to Jeff.

Jeffrey W. Lunsford

Looking ahead, we feel good about the quality and strength of our platform and the sales momentum with which we entered the second quarter. We feel Limelight is the best positioned pure play content delivery provider to compete within this rapidly growing and very dynamic marketplace.

We believe our expanding service suite, which attractively addresses the global scale, quality and performance requirements of the top Internet properties, when combined with our focus on operational maturity, diversification and highly responsive customer service positions us uniquely in the market for the long term.

We have laid clear plans to address the challenges and opportunities before us in our heads-down execution mode to deliver results.

Paul Alfieri

At this time we would like to ask the operator to begin the question-and-answer session.

Questions-and-Answer Session

Operator

(Operator Instructions) Your first question comes from David Hilal - Friedman, Billings, Ramsey & Co.

David Hilal - Friedman, Billings, Ramsey & Co.

Jeff, in your effort to diversify into the enterprise and ecommerce, tell us what that means to the extent you need to make any changes in your current business, both from a network as well as sales and marketing type of personnel.

Jeffrey W. Lunsford

So in reverse order, Dave, the field sales force that we've been hiring is all qualified or are all qualified for enterprise sales. So that's been part of the strategy, as you've known for the last 12 months.

On the platform side, this architecture was built and optimized for large file, large library. That's been the strength of the company, it's heritage, but we've made, as I've said, over the last six months some pretty substantial enhancements to the platform and are now seeing small object delivery performance that is highly competitive in the industry.

And so we now have the sales team in place; we have, as I mentioned, about 100 anchor accounts in this space. And we have some real live proof points where we're doing very large libraries of small objects at incredibly high volumes and performing, and we're seeing good success there.

David Hilal - Friedman, Billings, Ramsey & Co.

And then you had mentioned that at the end of 2Q you can talk about some of the technical workarounds that you're pursuing. Should I interpret that as we will get an update then or a workaround may be complete by the end of 2Q?

Jeffrey W. Lunsford

As I said, we're going to stay away from commenting anything more specifically than what we said, but at the end of Q2 you will get an update and obviously you'll see in the financials whether we felt that we needed to accrue for further potential damages.

David Hilal - Friedman, Billings, Ramsey & Co.

And my last question, CapEx was a little lower than we thought and guidance for 2Q looks lower as well. Should we maybe assume a trend of lower CapEx than what you've historically been spending will continue beyond 2Q?

Matthew Hale

Yes. We harvested quite a bit of network back from the shutdown of the large site, and then the network improvements, the throughput improvements for our servers has been better than expected. So we will be at a run rate that's less than we previously guided.

Operator

Your next question comes from Michael Turits - Raymond James.

Michael Turits - Raymond James

So the shortfall or the revenue at the low end of guidance this quarter and the guidance below previous for next quarter, should we attribute that really 100% to pricing differences? And if so, did pricing seem to get worse this quarter than it had been last quarter? I would have to assume so since you changed the guidance.

Jeffrey W. Lunsford

Yes. It was the first thing we commented on, industry trends, and in the large site rich media sector we are seeing pretty aggressive price moves. And they're move that actually we're actually quite well equipped to compete with. And Matt mentioned the large customer and last quarter we weren't certain they were going to shut down that site but they did, so really those two things are what led to the sequentially flat guidance you're seeing.

Michael Turits - Raymond James

And then it was a big change in the number of new customers signed as well as the net customers signed. What do you attribute those big changes to?

Jeffrey W. Lunsford

Well, the number of new customers signed is basic sales execution, generating leads and closing business. There's always some attrition every quarter, and then there's always some number of new customers that have been signed that are not yet implemented. And so the number signed is a sales number, new contract signed, and then the actual number that Matt gives you of actual customers in the spreadsheet are the customers that are live and paying us money each month.

Michael Turits - Raymond James

Did churn pick up?

Jeffrey W. Lunsford

I'd say on the low end of the market we had a little bit higher churn in the quarter than we've seen. It is one of the common, we've talked about it in previous calls, and I think the News Corp talked about it and Google talked about it. It's a very common theme you're seeing out there that in the social networking space folks are struggling with monetization.

And so as you know, we've always purposefully expose ourselves to this emerging sector. And we'll take aggressive young companies and sometimes you'll see that they don't get their funding and their monetization's behind their expense rate and they end up attriting because their businesses aren't viable. But the positive side of that is if you're exposed to that side of the market then you get the next super site and you build great loyalty with them when they're small.

Michael Turits - Raymond James

Matt, on the EBITDA it looks like your calculating it, I think, differently than you were. It looks like you're now fully excluding litigation expenses in the adjusted EBITDA whereas previously and in the guidance it had been to, what, the $2 to $4 million for this quarter. I think the assumptions there were the only thing you were adding back was the escrow piece of it. So if you looked at it on the prior basis, it should have been a couple million lower than you reported, right?

Matthew Hale

That's correct. We made the change. The escrow is no longer there. There's a lot more litigation than in the past. And we also noticed that the lion's share of the analysts in their models are backing it out. And then we also had to add into that this component of the damage accrual since we had a damage accrual this quarter and would expect one next quarter.

Michael Turits - Raymond James

So was there $1 million in escrow that came back? That's what I've been thinking.

Matthew Hale

Yes, I think there was about $1 million.

Michael Turits - Raymond James

So I figured that if I looked at it on last quarter's basis, apples to apples [with what you haven't got], it would have been about - EBITDA would have about zero, right?

Matthew Hale

Yes and maybe even a little lower than that because the litigation expenses came in significantly higher than we thought.

Michael Turits - Raymond James

I was just giving you the benefit of the doubt in say making the same assumptions about expenses in last quarter.

Matthew Hale

Yes, you're correct.

Operator

Your next question comes from Paul Kessler - Piper Jaffray.

Paul Beaver - Piper Jaffray

I think ARPU declined in the quarter, and I was wondering how much of that is due to seasonality and how much of it is due to the lost customer, or are the incremental customers that you're adding smaller than most of the existing customer base?

Jeffrey W. Lunsford

Paul, I'd say it's the latter two of the three. So we didn't really see seasonality in this quarter. We saw that one very large customer that was a substantial amount of revenue and traffic go to zero. It was not a competitive loss. They just shut down that site. And then we always, our average new customers signed are lower than our larger ARPC, and then they grow into that. So I'd say it was a combination of those two.

Paul Beaver - Piper Jaffray

Can you give us a sense of how the bit rate and carting rates are trending, and when you think that the carting rates will really increase significantly and drive overall volume [inaudible]?

Jeffrey W. Lunsford

On events, a lot of it depends on what format you're talking about and whether it's live or progressive download. But we're seeing average rates of anywhere from 400 to 700 KB. And we've also seen guys stream stuff that's encoded at, 2 and 3 meg. The last mile usually cannot handle that, right, so then you need some bit rate modulation technology perhaps to throttle that. We call that the condo cul-de-sac problem, that if you have a very large live event and there's a bunch of people on a culdesac all trying to watch it at the same time, depending on their last mile network architecture there may not be sufficient bandwidth there.

Then the other thing, just to add to that, we're seeing in places like South Korea, as an example, where they have 100 meg [inaudible] almost three to four times the amount of average data consumed per end client device is the intel that we're seeing there. So when those pipes open up, we believe there will be a substantial growth in consumer pull.

Paul Beaver - Piper Jaffray

How's the litigation impacting the overall sales cycle? I know you mentioned the number for customers added in March, but qualitatively can you just address that?

Jeffrey W. Lunsford

Yes. So we closed a bunch of business in March and we don’t believe that they're - it's obviously a topic of conversation, I should say, with existing customers and with new prospects, but it doesn't seem to be impairing the choice that customers are making, which is they like our platform, they like our service levels, and they like the rich feature set we bring to bear.

Operator

Your next question comes from Raimundo Archibold - Kaufman Bros.

Raimundo Archibold - Kaufman Bros.

Just in terms of the existing customer base and renewals, can you give us a sense as to what the tenor of those conversations have been, what's been the change in ARPU as a consequence of the renewals, so just an update in terms of how the renewal trends are going?

Jeffrey W. Lunsford

Normally we're renewing customers at a higher overall revenue rate. Their data volumes are growing, but our pricing goes down every year just like the rest of the industry does. And if someone is stepping up and committing to more volume, they're getting better unit price.

So all in all we would see, if you look at our existing customer base, growth in that customer base upon renewal. We don't actually have the exact quantification of that, but it is growing.

Raimundo Archibold - Kaufman Bros.

I was just trying to get a sense has it changed in terms of what you had been seeing, let's say, over the last several quarters in terms of how much more service they're buying, etc.?

Jeffrey W. Lunsford

No. We haven't seen a demonstrable change in the amount of bandwidth people are buying other than the typical growth rates that we've seen in the past.

Operator

Your next question comes from Dan Rayburn.

Dan Rayburn

Of the new customers signed up this quarter, can you say what the average contract size was? And the second question, the ability for Limelight to extend its market to other verticals outside of media entertainment is obviously crucial to the growth so I'd like to know if you're going to be giving any type of guidance on what percentage of 2008 revenue you expect or hope can come from the enterprise and government sectors.

Jeffrey W. Lunsford

We don't actually break out routinely the average new contract size, Dan. You could try to do some math and back into it somehow based on ARPC or something like that, but we're still - the average contract size, I don't believe, has changed radically from where it's trended in the past.

And then we're not going to break out those segments as separate financial segments for separate reporting or anything like that, but we'll certainly be giving investors milestones as we expand so that they can see progress.

Dan Rayburn

We've seen some other CDNs and networks talk about how the growth of traffic on their networks is slowing. Can you talk to the trends you're seeing in terms of traffic growth on the network?

Jeffrey W. Lunsford

When you're growing as fast as we are adding customers you look at the overall growth, and we haven't seen as Matt mentioned, we had one very large customer with a substantial portion of traffic just go dark but I'd say that within the blended customer base I haven't seen any dramatic slowdown in their growth rates.

Operator

Your next question comes from Jennifer Adams - Cowen & Co.

Jennifer Adams - Cowen & Co.

On the call you touched on the decline in cash margin and GAAP gross margin that you saw this quarter. I was just curious if you could just give a little bit more detail about the components and how the loss of the large customer affected the gross margins. And then just how we should think about gross margin going forward. I know you said you would expect a ramp throughout the year, but if you can give a little bit more flavor on that.

Matthew Hale

Well, the components of our cost of sales, the variable component is bandwidth. And then you have depreciation, which is the depreciation on all the network assets. And then you have a fixed cost associated with the infrastructure that those network assets are plugged into, and that's co-location and backbone.

So when you have a large customer that you've built for and then you're building for capacity on top of that and then they make the decision to close down their site, you can flex the bandwidth costs but you really can't do anything about those, once you have those commitments in place, for your equipment and your co-lo. So that portion is fixed for a determinant period of time.

Now that means we can add new customers and we have a relatively low bandwidth cost so we get a pretty high margin contribution to fill that back as we go forward, and that's why we believe we'll expand those margins back out.

Operator

Your next question comes from [Geo John] - Goldman Sachs.

Geo John - Goldman Sachs

Could you tell me something about the competitive environment in your sector, especially with regard to Level 3 and AT&T? Are you seeing the presence of AT&T in the market?

Jeffrey W. Lunsford

We don't really comment on specific competitors and the dynamics there. This has always been a very competitive market because it's characterized by high growth and a lot of opportunity and it's attracted a lot of folks. We think that there are a good number of players out there.

Geo John - Goldman Sachs

Could you also, just going to the bookings for this quarter, how has the large customers [inaudible] the bookings been in this quarter?

Jeffrey W. Lunsford

Well, we just talked about the number of customer additions. We don't actually break out or quantify bookings.

Geo John - Goldman Sachs

But could you give some color on how the large customers are faring, just [inaudible].

Jeffrey W. Lunsford

Well, we are still signing up some of the names you saw or heard in the comments. We're still signing up plenty of large customers, and we're also, as I said, by design signing up a number of aggressive smaller high growth profile customers.

Operator

Your next question comes from Eric Buckovski - Jefferies & Company.

Eric Buckovski - Jefferies & Company

I want to loop back on the large customer loss. Could you give any size data on the customer?

Jeffrey W. Lunsford

Well, no. We're under confidentiality with customers, and we've in the past said we can't really comment on traffic size or revenue size from them.

Eric Buckovski - Jefferies & Company

Is it a less than 10% customer?

Jeffrey W. Lunsford

We only had in Q4 one 10%-er and that's disclosed in the K. This customer was well on the way to -

Matthew Hale

I think if it had continued at its current trend, it would have been very close to a 10%. And we said that on the Q&A last quarter. I indicated that this customer is something just over a million a month. So it's not a trivial amount.

Eric Buckovski - Jefferies & Company

When did they go dark?

Matthew Hale

March 1.

Eric Buckovski - Jefferies & Company

I'm going to ask a cash flow question related to the potential damages against you at the Akamai trial. When would you technically be forced to potentially pay a damage settlement - I'm sorry, the damage amount in the event that the appeals process does not go your way?

Matthew Hale

Well, the way we see this happening is the trial will complete, and there'll be a final judgment. If we are in the same position we are now, we would file for an appeal. At that point, we would most likely be required to put up an appeal bond of some sort to securitize the damage amount, and maybe some cushion on top of that.

We're not sure exactly when that would take place. That would take the form of a surety bond or an irrevocable letter of credit that would likely require us to restrict - take some cash and pledge it and restrict it on the balance sheet.

As to when the final payment, I believe that would not happen until all the appeals have been exhausted, which is some time out in the future quite awhile.

Eric Buckovski - Jefferies & Company

And then on the CapEx number, the $46 million is obviously below what you had guided previously. One of the things you pointed was basically the reallocation of capital infrastructure from the customer that went dark back into the pool that's available for everybody else. When will you go burn through and use the rest of that excess capacity?

Matthew Hale

Well, with the growth rates, we think that gets - Jeff, what would you say - two or three months you feel a traffic void.

Probably the bigger thing, and while that's a step function when you recoup, the bigger thing that's influencing our traffic today is the improvements in server utilization. About 80% of our CapEx are the servers that are deployed in the network. And if we can push two, three or four units through a server that we used to only get one unit through, that takes a lot of pressure off the CapEx.

And we've foretold that the software improvements were in the pipe, and we're starting to see those come to fruition. And that has as much to do with the moderation of our CapEx spend as anything.

Operator

Your next question comes from Michael Turits - Raymond James.

Michael Turits - Raymond James

Did you talk about what you think the reasonable expectation for the litigation costs might be for the rest of the year?

Matthew Hale

Michael, we haven't. We have multiple litigation, and to some degree, once you're into the trial phase you're somewhat reactive to what goes on, and that's somewhat in the hands of the judge. So we have not provided further guidance on that.

I do believe it'll be higher than I previously guided based on where the Q1 litigation came in, but I don't have a good number for you right now.

Operator

Your next question comes from Colby Synesael - Merriman.

Colby Synesael - Merriman

As you move into the enterprise segment in terms of going after that space, can you talk about the types of products or services that you're going to offer them and how they might be different than what you're offering today? And do you plan on doing that through internal R&D or do you plan on making some maybe small acquisitions to help you get there?

Jeffrey W. Lunsford

We are primarily leveraging the Limelight Deliver architecture that we have today, and the suite of services that we offer today is very applicable to small object market segment, whether it's ecommerce or an enterprise or government. And we don't really want to comment too much on a future road map as far as product developments, and we certainly don't comment on M&A.

Colby Synesael - Merriman

So is it fair to say that right now the biggest change is from a sales and marketing perspective?

Jeffrey W. Lunsford

Well, the platform enhancements required R&D and the sales and marketing team that we've put in place, both the inside sales and the field sales team, is all quite capable of finding and closing business in these sectors.

Colby Synesael - Merriman

How far along you are in the cycle? Is this something that you've now been doing for a few months or is this something that's going to be starting up soon?

Jeffrey W. Lunsford

No, no, we've been doing it. We have almost 100 customers in this sector, and so, as I said earlier, we'll be giving you quarterly updates on progress, probably in the form of customer count and potentially some customer success stories.

Operator

Your next question comes from Chad Bartley - Pacific Crest Securities.

Chad Bartley - Pacific Crest Securities

First, in terms of the customer metrics, in Q4 you had 200 new customers and announced 171 were revenue generating. This quarter you had 183 new customers and only 73 were revenue generating. So what explains the change in that dynamic? Is it taking longer for them to turn on and generate revenue, or is it just purely a timing issue?

And then can you give us an update on the QBSR headcount number?

Jeffrey W. Lunsford

We mentioned earlier there's higher churn in the lower end this quarter, and so that would answer most of the net question. Quota bearing sales reps were about 50 at the end of the quarter. And I think I said on the last quarter, you should expect to see sales and marketing budgets from here forward trend in line with revenue growth.

Chad Bartley - Pacific Crest Securities

Should we think of maybe the 183 as a gross customer number and the 73 as a net customer number, then?

Jeffrey W. Lunsford

Well, no. There's also a number of customers that were signed and in the implementation queue at the end of the quarter that are not yet revenue producing and so are not in that net add number. And then that, minus churn, and you get your net.

Operator

And with no further questions, this will conclude the conference for today. We would like to thank you for joining us.

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Source: Limelight Networks, Inc. Q1 2008 Earnings Call Transcript
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