Limelight's (LLNW) CEO Bob Lento on Q4 2016 Results - Earnings Call Transcript

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Limelight Networks, Inc. (NASDAQ:LLNW) Q4 2016 Earnings Conference Call February 8, 2017 4:30 PM ET

Executives

Dan Boncel - Chief Accounting Officer

Bob Lento - Chief Executive Officer

Sajid Malhotra - Chief Financial Officer

Analysts

Michael Turits - Raymond James

Jon Charbonneau - Cowen and Company

Rishi Jaluria - JMP Securities

Sameet Sinha - B. Riley

Luke Morison - D.A. Davidson

Operator

Good afternoon. And welcome to the Limelight Networks' Fourth Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]

Please note, this event is being recorded. I would now like to turn the conference over to Dan Boncel, Chief Accounting Officer. Please go ahead.

Dan Boncel

Good afternoon. And thank you for joining Limelight Networks’ fourth quarter 2016 financial results conference call. This call is being recorded on February 8, 2017, and will be archived on our website for approximately 10 days.

Let me start by quickly covering the Safe Harbor. We would like to remind everyone that we will be making forward-looking statements on this call. Forward-looking statements are statements that are not strictly statements of historical facts, such as our outlook for 2017 and beyond, our priorities, our expectations regarding pending litigations, and our operational plans, business strategies and feature functionality announcements. Actual results could differ materially from those contemplated by our forward-looking statements and reported results should not be considered as an indication of future performance.

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

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

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

Bob Lento

Thanks, Dan, and good afternoon. Today, we announced our fourth quarter and full year results. This was an excellent quarter capping a year of hard work and improving financial and operating performance. We are confident that we will build on these results in 2017.

Revenue in the quarter was $43.8 million, up 2% from the fourth quarter of 2015 and up 11% sequentially. This includes observing a negative impact from foreign exchange of approximately $500,000 sequentially and $300,000 year-over-year.

Our GAAP gross margin expanded to 44.9% this quarter, a record for the company and up 390 basis points from 41% in the year ago quarter. We continue to manage our operating expenses which were flat versus the year ago quarter, excluding litigation costs.

Our performance this quarter resulted in record adjusted EBITDA of $7.5 million and non-GAAP earnings of $0.02 per share, which is the highest quarterly non-GAAP earnings since 2007. We set a high bar for ourselves with our guidance for the fourth quarter of double-digit sequential revenue growth, continued margin expansion and positive non-GAAP EPS. I am proud to say we accomplished these ambitious goals.

During 2016 we made the conscious decision to maintain pricing discipline in the face of aggressive competitive pressure as part of our focus on placing growing margins and profitability as a higher priority over revenue growth. The result of our effort was significant financial improvement below the revenue line.

Our 2016 gross margin was 42.4% for the full year, improving 250 basis points over 2015, even with revenue being relatively flat year-over-year. Also our adjusted EBITDA for 2016 was $22.8 million, which was over three times the prior year amount. We have built a strong foundation and I expect this trend to continue.

I am also very pleased with our cash and marketable securities position of $66.2 million at the end of the fourth quarter. This was down only $8.2 million from the end of the third quarter, despite making our second $4.5 million payment to Akamai related to our 703 patent settlement and investing $4.9 million in CapEx during the quarter. Even with these relatively large payments, our cash position remains strong and we continue to have a solid balance sheet.

We made progress on our other priorities as well, customer satisfaction levels as measured by Net Promoter Score improved significantly from 2015 to 2016 and was up over 70 points since 2013. We generated meaningful revenue growth with our top customers added over 100 new customer logos across the globe and reduce customer and revenue churn in 2016 to its lowest level in many years. Employee turnover declined in 2016 and it’s in a range that we believe is sustainable.

Our co-location savings efforts reduce our COGS expense run rate by over $6 million annually, while we increased our server capacity by 76%, our network capacity by 54% and lowered our capital expenditures by 54%. We also introduced many new key software capabilities and enhancements. We generated a record level of traffic in 2016 that was up 10% over 2015, while reducing incident tickets by 22%. We are now handling less than half of the trouble tickets then we did just two years ago, a very solid performance.

There have been recent developments with respect to our ongoing litigation with Akamai. As you know, we filed the claim of patent infringement against Akamai and XO Communications in the Eastern District of Virginia in late November 2015. The trial which was originally set to commence on January 3rd is now set for May 1st. We continue to believe that we are net plaintiffs in this case and we intend to vigorously enforce, protect and defend our intellectual property rights.

We are also announcing changes to our Board of Directors. Joe Gleberman has announced his intent to resign from our board before the next Annual Shareholders Meeting. I can't say enough about Joe's contributions and thank him for his years of service. Joe joined our Board in 2006 as the Goldman Sachs representative upon their initial investment. He remained in that role until 2015, when he left Goldman, but stayed on our Board as an Independent Director. We appreciate Joe’s contributions and wise counsel over his decade long tenure and we know that he will remain a friend of Limelight.

With Joe’s departure and the current vacancy, we are pleased to announce two new additions to our Board, Doug Bewsher and Scott Genereux. Doug is CEO of Leadspace, a leading venture-backed company in the predictive analytics and data management space. Doug was previously CMO at both Salesforce.com and Skype, and prior to that was at McKinsey where he led the North American CRM practice.

Scott Genereux is currently Executive Vice President of Veritas where he is responsible for worldwide field operations. Most recently, Scott headed up cloud infrastructure as a service sales for Oracle. Prior to Oracle, he served as CEO at Cloud Storage Pioneer Nirvanix and also held global sales leadership roles at QLogic and DataDirect Networks. Together, they have over 50 years of relevant industry experience and we look forward to their contributions.

During the quarter we had a few successes that I would like to share. The convergence of several internet events including popular video game releases and software downloads drove record traffic levels for Limelight in December. We exceeded 2015 peak traffic levels by 23% and December 2016 was our highest traffic month of all time.

Limelight also played a key role in the successful live streaming of all three presidential debates and the inauguration, which according to sources was the most viewed political live stream of all time. We continue to add new customers to our roster across all regions during the fourth quarter including one of Europe's largest broadcasters. Limelight continues to innovate and enable customers to do business online with greater speed and reliability.

Our top priority in 2017 remains customer satisfaction. We now believe that we are in the top quartile for Net Promoter Score compared to other technology service company based on third-party provided data and I expect this progress to continue. Our financial priorities for this year continue to be revenue growth, margin expansion and cash generation, and we have specific plans to deliver on each of these goals.

We have a multi-pronged strategy to achieve revenue growth in 2017. We plan to invest in our network to further expand capacity and improve our already strong performance and reliability. We are positioned to announce new feature functionality throughout the year, shifting our development efforts for playing catch-up with key competitors to offer unique capabilities that differentiate us.

We are also focus on geographic expansion to deliver at higher levels and more locations around the world. For example, we plan to expand our capacity in India this year by five to 10 times our 2016 capacity levels. This effort will create a dense local presence that can deliver more throughput and quality to India’s huge and growing market. We will also focus on growing capacity in Latin America, an increasingly important region for our customers.

Sales and marketing spend will increase in 2017 versus 2016 after having reduced our spent compared to 2015. Having built the strong financial foundation in 2016, we are focused on revenue growth and plan to hire indoor sales and expand our most effective marketing programs in a disciplined and targeted manner.

To generate margin expansion in 2017 we will continue to drive our efficiency program, improving our underlying cost structure, while optimizing and expanding our network through software enhancements and targeted CapEx investments. These efforts in 2016 gave us the ability to dramatically improve our gross margin and build capacity at one-sixth of the cost versus a year ago. We expect to build on this momentum.

Our focus on cash generation this year includes our efforts to generate revenue growth and margin expansion, as well as continued discipline around operating expenses and effective balance sheet management.

We generated $6.6 million of cash from operations in 2016, despite making $9 million of payments related to our 703 patent settlement. We will remain focused on maintaining a strong cash position and solid balance sheet. As we have said, we have built a good foundation, we have a structural advantage, we are seeing momentum in our business and we are focused on profitable growth.

I would like to thank our global workforce for all their hard work in making Q4 one of the best quarters in Limelight’s history. We will continue to invest in our employees through training, expand responsibilities and strategic hiring as we work toward meeting and exceeding our goals.

With that, I will turn the call over to Sajid to discuss this quarter's financial performance in greater detail and our guidance for 2017. Sajid?

Sajid Malhotra

Thanks, Bob, and good afternoon. I have been looking forward to sharing the results of a quarter like the one we just reported, a quarter in which we grow, this growth delivers incremental margin, the expenses then checked and the leverage of higher revenue becomes evident, a quarter where with little impact on the balance sheet, we invest in meaningful geographic expansion, break traffic records, operational improvements continue, our software investments further separate us from our competition and the quarter where outperformance metrics and financial trends outpaced the reported results of our primary competitive. This generates pride in our employees, pleased our customers and partners, and should add to the recent returns we have generated for our shareholders. So let’s dig into the financial performance.

Fourth quarter 2016 revenue was $43.8 million, gross margin was 44.9% and cash gross margin was 56%. We had a GAAP EPS loss of $0.04 and non-GAAP EPS of positive $0.02. Adjusted EBITDA was positive $7.5 million. First, let me start with revenue.

Revenue in the quarter of $43.8 million increased 2% year-over-year and a very strong 11% sequentially. We experienced foreign exchange headwinds in the quarter on revenue of approximately $300,000 year-over-year. This was primarily due to the devaluation of the South Korean yuan, Japanese yen and British pound. International customers accounted for 40% of total revenue in Q4, compared to 44% a year ago and approximately 20% of our fourth quarter revenue was in non-U.S. dollar denominated currencies.

Our top 20 customers accounted for approximately 64% of total revenue in Q4, delivered revenue with our top 20 customers in the fourth quarter of 2016 grew 14% compared to the prior year period. We also grew delivered revenue in the fourth quarter of this year from our top 20 customers from the fourth quarter of prior year. Included in our results is growth from Amazon, Apple, Microsoft and Google, who has improved, grew double digits year-over-year and sequentially. This demonstrates we are winning market share in the CDN segment we serve and are participating in the growth our customers are experiencing.

Pricing in the market continues to be aggressive. However, we believe the declines we have experienced are on the low end of the industry averages. Our largest customers value the performance, reliability and service Limelight provides.

Moving to gross margin, we increased gross margin by a very strong 390 basis points to 44.9% from 41% in the prior year quarter. Cash gross margin of 56% is also up 240 basis points from 53.6% in the fourth quarter of 2015. We reported significant margin improvement compared to the prior year in every quarter this year.

This is a tremendous accomplishment given the aggressive pricing environment. The improvement was driven by the realization of cost reductions due to the consolidation and upgrade of our network equipment in our datacenters and lower payroll and related employee costs. We believe further reductions in these areas and in our bandwidth cost give us confidence, the opportunity for additional margin expansion in 2017 and beyond, and will be reflected in the gross margin guidance we’ve provided.

Total GAAP operating expenses were $22.9 million, which is an increase of $1.6 million from the fourth quarter of 2015. Our operating expenses are unchanged at $20.9 million, excluding litigation-related expenses in the fourth quarter of 2016 and 2015.

G&A expense increased by $2.5 million. However, excluding litigation expense incurred this quarter of $2 million and $400,000 in the fourth quarter of 2015, G&A expense only increased $900,000. Sales and marketing expense increased by $100,000 versus a year ago quarter. These increases were largely due to payroll and related expenses. R&D expense was lower by $600,000 or 9% versus Q4 of 2015, a benefit of increased employee productivity.

Depreciation and amortization expense decreased by $400,000 year-over-year. Interest and other was $500,000 of expense in the fourth quarter of 2016 compared to expense of $300,000 in Q4 2015. The fluctuation is primarily driven by changes in foreign currency rates.

GAAP net loss was $0.04 per share in the fourth quarter of 2016. We achieved positive $0.02 in non-GAAP earnings per share in the fourth quarter of 2016. In the fourth quarter of 2015, we reported a $0.04 GAAP net loss and breakeven non-GAAP earnings per share.

Adjusted EBITDA was approximately $7.5 million in the fourth quarter of 2016, up from $5.3 million in the fourth quarter of 2015. Full year adjusted EBITDA was $22.8 million, compared to $6.9 million in the same period in 2015. This was an increase of $15.9 million more than three times the prior year.

Moving to the balance sheet and cash flow, we had cash and marketable securities of $66.2 million at the end of the fourth quarter. Cash flows used in operations would have been $100,000, excluding the $4.5 million payment under our settlement agreement with Akamai, driven largely by the increase in our accounts receivable balance due to timing of payments from our customers.

We spent $4.9 million in capital expenditures during the quarter. We ramped up capital expenditures in the second half of 2016 in anticipation of increased traffic requirements in our fourth quarter of 2016 and for further expansion in growing geographies.

DSO as of December 31, 2016 was 55 days versus 52 days at the end of the fourth quarter of 2015. We typically expect DSO in the range of 50 to 55 days based on our global revenue distribution.

We had approximately 107 million shares outstanding as of December 31st. Total headcount at the end of the quarter was 510, up eight from the end of third quarter of 2016 and essentially unchanged from the year ago quarter.

We confirmed our guidance for 2017 in late December based on strong end to 2016 and the operational and financial improvements made during the year. We expect revenue of between $175 million and $180 million.

Continued GAAP gross margin improvements of greater than 150 basis points, a two to three times improvement in non-GAAP EPS of between $0.02 and $0.06. We expect adjusted EBITDA of between $22 million and $27 million. We also expect to spend approximately $20 million in capital expenditures.

So let me summarize the fourth quarter results in relative terms. We reported 11% sequential revenue growth, which is the highest in 24 quarters. A 390 basis point GAAP gross margin expansion was the highest in nine quarters and resulted in our highest GAAP gross margin ever of 44.9%.

Our cash gross margin of 56% is the highest in 20 quarters and adjusted EBITDA of $7.5 million is the highest ever. Our non-GAAP earnings per share a positive $0.02 is the highest since 2007. Positive non-GAAP EPS for the year is the first for us and all achieved on relatively flat revenues for the full year.

We again increased our Net Promoter Score in 2016 for the third consecutive year. Our customers recognize the 24x7 customer service they receive from Limelight. We continue to achieve greater operational efficiencies in our service, increasing capacity over 300% over the last two years, delivering more bites per server and delivering more revenue per server than ever before. I believe and hopefully you will agree, we are stronger operationally and financially, getting share in our used cases and the transition to profitable growth is underway. During the quarter we launched our new Investor page at limelight.com. Please visit the site to get a view on to our upcoming events and to access investor presentations.

With that, we will open the call up for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Michael Turits with Raymond James. Please go ahead.

Michael Turits

Hi, guy. Solid quarter. First question, you called out that you had double-digit growth, but bunch of the large internet providers, well-known that your largest competitor has been seen decline there. Can you again talk about the market dynamics what maybe happened that you are seeing growth where the bigger guys not?

Bob Lento

Hey, Michael. It’s Bob. We really can’t speak for what’s happening relative to their relationship. What I can tell you is that they are obviously important customers to us. We are focused on delivering high-quality at a fair and reasonable price, and the relationships are important and growing.

Michael Turits

I know you can’t sort of comment either about specific customers but the general understanding some of them maybe regardless what their competitor might be doing to some of the desire to this large internet provider is that that they are doing it DIY or insourcing everyone we put it. But what’s your -- in your perception how that impacts you and what you are trying to do?

Bob Lento

Well, I think, that there is plenty of room for Limelight to work with those customers even as they build in-house capabilities. I think they have accomplished that. It’s their intention to continue to do that but I don't think that they view that initiative as meeting 100% of their needs and there always need -- always be a need to partner with people like Limelight to ensure that they can deliver the capacity and quality that they want their end-users, so I think, there is a place for us even as they undoubtedly will continue to go out with their own capabilities.

Michael Turits

And if I can one follow-up on, I think, that last quarter you mentioned that that there was a lot of aggressive pricing in the market that [inaudible] (23:51) when you came back with your pricing discipline caused you to lose share or at least lose some of those deals, I mean, that was part of the miss last quarter, but doesn't, I mean, you didn’t miss this quarter. So have that situation changed, were you still face those situations where you have to either lose business or come in lower but how is that going?

Bob Lento

So, there’s certainly more business to be hired if you are going to chase the lower price business, that’s still the case. What’s still the case is that our competitors are very aggressive. But I think that the in one particular case where we have a large competitor who had tremendous amount of excess capacity and some of that must be being used up because we are seeing more rational pricing come to the market. So I wouldn't say that the competitive forces are any less. Certainly a very, very competitive space and price competition is a big part of it. But certainly there seems to be more rational pricing coming to market. Sajid, do you have any other observations?

Sajid Malhotra

Well, I think, what we -- you saw us report 11% sequential growth is a very strong number and without having the benefit of look that -- looking at our competitors results, which were posted yesterday, we were quite pleased with that, because with that revenue growth we were able to deliver a fairly significant improvement in our gross margins and all of it, fair amount flows through to the bottomline.

What is really important is when I look at our results now in light of what the competition reported and keep in mind there is only one public competitor here that report results and discusses this in detail. I -- we were pleased before and I think I'm extremely pleased now looking at these results, because in comparison it shows not only did we do well, but I think we took share and I think we took share maintaining a very good price discipline in the industry.

Bob Lento

And I think there is one other follow-up comment, I think, you will see or customers and competitors will see us get much more aggressive in 2017, but that’s more about the cost structure that we've been able to develop and put in place through the work we did in 2015 and ’16, and we are better position today than we ever have been.

Michael Turits

Net expense are given, right?

Sajid Malhotra

We all talk about the fact that every year there is price compression and then the price compression less whatever it is in terms of what you go ahead and witnessed by way of growth in the industry result in the revenue growth for the industry. As I look ahead and you have seen us predict our business forward, what I again, all I can tell you is, the largest competitor is the proxy for the industry just because they have such a large share compared to the rest of us. And so what I heard was revenues in this part of the business are in decline for them and the rest of the business will make up for it to show up with a 5%, 6% growth in revenue. We are talking about a 5%, 6% growth in this business without having any of those other growth and without making the excuse that this business is in decline.

Michael Turits

Got it. Thank you.

Operator

The next question comes from Jon Charbonneau with Cowen and Company. Please go ahead.

Jon Charbonneau

Great. Thanks for taking the questions.

Bob Lento

Hi, Jon.

Jon Charbonneau

Can you provide a bit more color on how you recommend, we think about our revenue quarter-over-quarter for the first quarter of ‘17 especially given what we -- was a seasonally strong fourth quarter. Thanks.

Sajid Malhotra

So, thanks, Jon. Well, one, I think, you’ve kind of seen the seasonality that we have historically and I believe that this is consistent with them when I look at the analyst estimates for the quarter. No reason for me to call out that this is too high or too low, it is within the range of outcomes that we have. Things cause changes but those should be explainable. So when there is a large game release, when there is a large software release, when there is a large update to handheld device, all of that if it happens in March it results in one thing, in April it results in another outcome. But absent any of those which should be explainable. I think the estimates that are on the street are roughly in line with the expectations we have and same is true for the full year.

Jon Charbonneau

Great. And then just really quickly in terms of the Akamai, Akamai extra loss you are getting pushed out a couple months. At this point how do you recommend as we think about I guess legal expenses this year?

Bob Lento

So, Sajid, yeah, why don’t you take legal expense question.

Sajid Malhotra

So legal expenses we have said will be lower than what they were in 2016 and we believe that that will still be the case even with the case getting pushed out. We had indicated in the past that we expect fair amount of that expense for the total year to be frontend loaded. We still expect that. And something were to change, I think, they will come back and provide you with an update on that. But as things stand right now, we have spent a little bit less than $8 million last year. I think we will spend less than that this year and we expected to be frontend loaded.

Jon Charbonneau

Great. Thank you.

Operator

[Operator Instructions] The next question comes from Rishi Jaluria with JMP Securities. Please go ahead.

Rishi Jaluria

Hi, Bob and Sajid. Thanks for taking my questions. It’s nice to see some continued operating margin expansion here, a couple ones for you. So, it looks like, like you called out in the prepared remarks that headcount ticked up a little bit this quarter, back to where we were at this time a year ago. Just curious how should we be thinking about headcount going forward especially as you make the investments in sales and marketing?

Sajid Malhotra

I think, Rishi, when you look at the end of the year, same time, it won’t surprise me if headcount is about 5% higher than where it is today. So we are at 510, so add another 25 people or so there about, there is no reason for us to believe that that headcount addition is anything but evenly spread out across the four quarters. I think we may add a little bit more in the first half. But that’s the trajectory that we are on.

Rishi Jaluria

Okay. Got it. And touching on the topic of litigation, on Akamai’s earnings call yesterday, management did talk about them actually increasing their litigation expenses relating to patent infringement cases with Limelight. I am just trying to understand how to best think of the legal situation. I know you’ve said that you feel you are a net plaintiff here and given us kind of some dates to work with and what the legal expenses should be. But, I guess, just from a -- how -- what's the right way to think about the ongoing legal situation in all lawsuits between you and Akamai right now?

Sajid Malhotra

So I would not like to lay out what our legal strategy is. Having said that, from a financial modeling standpoint, we’ve kind of indicated what those expenses are and when they occur during the course of the year and if something were to change we’ll update, but this is the best information I have today.

I -- that’s a path way down. So, and you know, in our reconciliation between our GAAP and non-GAAP. I mean, I kind of saw the laundry list of what it takes to reconcile for some companies between those two numbers, for us we have this one item. We called out stock-based equity and we called out our litigation expenses.

Bob Lento

Yeah. Good news is, by the time we have our next conference call, we will have much better visibility in terms of the where we are against the lawsuit at least in Virginia and based on where we are we’ll be able to provide some -- maybe some better visibility on expenses.

Rishi Jaluria

Okay. Great. And Sajid, if, like you said it was a bit of negative free cash flow quarter, even excluding litigation, after four quarters in a row positive free cash flow and you discussed the increase in AR in the quarter, but just how should we be thinking about free cash flow and net working capital changes on a going forward basis?

Sajid Malhotra

So, I think, again, it is just the calendarization of the way our cash flow works. In the first quarter we do have the huge pay out from for the employee bonuses, the annual event that occurs every year, will occur again this year. So, that’s kind of driver of one use of cash in the first quarter. And other than that there is not much to do, the receivables we don't control, we don't try to accelerate in any way, we don't give our customers any incentive to pay us early so this number looks better or worse. The payables are pretty consistent with where they are, very range bound and you know the one item that we have is $4.5 million payment that we have been making and we have already made the January payment and that shows up in the quarter. So that’s, I think, it's fairly smooth, this is not had the gyrations or variations that you might expect given we are running such a small business. I think we have been running it as tightly as I would expected too.

Rishi Jaluria

Okay. Got it. So do you think that you could be free cash positive for the full year of ’17?

Sajid Malhotra

I expect to be, yeah.

Rishi Jaluria

Okay. Got it. Got it. And then last one for me…

Bob Lento

Let me…

Rishi Jaluria

Sorry, go ahead.

Bob Lento

I mean, we have given guidance, but I mean, we are trying, as a company we are, all the employees are working hard to make sure that we achieve those numbers, but if we do achieve those numbers we are not stopping, right. We are just trying to go ahead and do the best we can and get as far as we can.

Rishi Jaluria

Got it. Okay. And last one for me and I will hop up. But just in terms of geography, I know, Bob, you called out India as an area where you're making investments. But were there any -- are there any other particular geographies where you think you're maybe not under invested in but beyond India and Latin America that that are maybe the longer term investment opportunities going beyond 2017?

Bob Lento

So, we try to look at where the demand exists and so we don't -- what we don't do is spread our CapEx evenly. So, for example, in the U.K. between the work we did in 2015 and ’16, we grew the capacity there by almost the 100% and as we've indicated for next year we are going to focus on India, A, because a lot of our customers outside of India have a desire to enter into and deliver into that market. But we also have a pretty good pipeline of deals within India and so we know there is demand there.

Latin America is something our customers have been asking for a while and we are going to start to invest in there. So I think India as first half initiative, Latin America as a second half initiative. And the one area that we are looking at and we also know there is demand is Middle East. I am not quite sure how that will fit into this year’s plans yet. So that’s a reason why we didn’t talk about it. But clearly India, Latin America and then are going to get a lot of focus this year and then to your question probably the Middle East would be the next place that we would look.

Rishi Jaluria

Okay. Great. Thank you so much guys.

Sajid Malhotra

Thank you.

Bob Lento

Thank you.

Operator

The next question comes from Sameet Sinha with B. Riley. Please go ahead.

Sameet Sinha

Yes. Thank you. A couple of questions. First, I think, if you can talk about, you mentioned, 64% of your revenues came from your top 20 customers, which implies that outside of the top 20, in those customers are year-over-year -- seen year-over-year revenue declines, which in the case most of the year, but I just wanted to see what the dynamics there are, obviously you are getting share in the top 20, but can you talk about the dynamics in the other tier?

The second question was, continue with the trend -- the question about geographic expansion. Can you talk about what the strategies in those markets, what those actually dynamics sort of ARPU and margins that that we can think about for those geographies?

Bob Lento

So in terms of the revenue dynamics, what I would tell you, Sameet, is that going from third quarter to fourth to experience the growth we did, we had to have experience growth pretty broad-based growth and which we did. Now you know within that, I mean, there’s 100 stories within the story, so when you look at beyond the 20 there is kind of, you can keep breaking this up into the next 80 and then the next 400 and then the remaining 500. And all of this, some of this we are very focused on. We want them to grow. They are growing. They are early stage. There are relatively new customers coming on board. Some of them are still legacy customers, some of them are on older platform, some of them on remaining products that we are still trying to figure out what happen as a next stage to them.

So I have been, I think, fairly consistent in saying that the market and the opportunity for us is with the largest customers in any given industry and we do very well in that category. And I think that to me is kind of the proof point of how we are doing and are we really doing well. Because to do well with these 20 customers and get a little bit of growth here, if I had a choice, we are trying to do both for all segments, but some growth with these 20 versus a lot of growth with the last 100, I don't think in dollar terms adds up to being anywhere close to same at number. So that's a dynamic that, I think, you guys just be aware of. We have been talking about this so we continue do. Your second question was…

Sameet Sinha

Geography.

Bob Lento

…in terms of geography. There are catalysts that occur. So I mean for India as a market, everybody knows it’s a very large population based. But you are going from the availability of 2G to 3G and 4G on handheld devices, handheld devices and smartphones becoming more prevalent. And all of a sudden those become catalyst for a lot of mobile traffic, for a lot of phone upgrades, for a lot of media to be delivered to people that have mobile and the underlying infrastructure they finally catching up the point where it can deliver and those become catalyst for us to move into those market and have the local customers.

In addition, the international customers want to service that market as well, which we have continued to do and so we will just add to that. I mean, this is not new for us. We had been in that market for a long time, a physical presence. We have had employees there. So we are just going to go ahead and add to that. And now in a very meaningful way, because I think that the opportunity over there is truly exploring.

Sameet Sinha

If I can have one more follow-up question, just talking about the dynamic, you pointed out gaming and software download is a two key drivers. Yesterday, Akamai spoke about OTT and how that is seeing steady growth, actually because a year, two years now. What some of these trends, I mean, apart from OTT, virtual reality. How do you see this developing and are we -- should we see expect the steady growth or should be an inflection point. What are your customers indicating or telling you?

Bob Lento

So, we have seen good growth across both software and video, which includes on-demand live streaming over-the-top. We expect that to continue. I think in the foreseeable future we expect to see OTT add to that growth in a pretty sustained manner but we don't see any near-term inflection point where sort of OTT just start going through the roof. So we're focused on that market. We are working with some of the largest OTT providers in the world. So the good news for us is we are in that game. We are seeing growth. But we don't expect it to be sort of off the charts if you will in the near-term but more of a steady growth for us.

Sajid Malhotra

And again, you hear -- heard mention this before, the amount of time people spend in front of the screen may still be the same, but as the quality of experience improves, the amount of bits required to deliver that experience just keeps growing and growing exponentially. So, going from standard definition to high definition, from high definition to DVD to 4K to 6K to 8K to augmented reality to virtual reality, it’s a same movie, it’s a same one and half hour, 90 minute, the same three hour game, the same, whatever word you want to pick. But because of the richness of the experience the amount of bits required to deliver that experience just grows exponentially. That’s good for the whole industry and that's good for us.

Bob Lento

I think you see the same thing on the game side of software download, those games…

Sameet Sinha

Yeah.

Bob Lento

…and software attaches are getting larger and larger as the game get more sophisticated and so both of them are moving in the same direction with the sophistication and quality adding to size of files.

Sameet Sinha

Thank you.

Operator

The next question comes from Mark Kelleher with D.A. Davidson. Please go ahead.

Bob Lento

Hi, Mark.

Sajid Malhotra

Hi, Mark.

Luke Morison

Hi, guys. This is Luke Morison on for Mark.

Bob Lento

How are you and how do you look?

Luke Morison

Hi. So, I was hoping you guys should -- could, perhaps, provide some color on your security products, your cloud-based security and basically just how, perhaps, it’s impacted your topline and how it's been received?

Bob Lento

So it hasn’t impacted in a material way yet. As you know we -- in the last year or so announced DDoS capabilities, as well as more recently VAS capabilities, so we know that that’s important to our customers and we are excited to be able to offer them that capability and protection. We also announced in the third quarter of last year the partnership with Neustar that were equally as excited about. We are still in the process of building out that capability within our network and we expect that towards the second half of this year that will start to kick in with some revenue as well. And so we believe we are on a good path. We know that our customers are interested. We know that our products stand well -- stand up well to the competitor offerings. But at least as we currently sit here is not having a meaningful impact to our revenue.

Sajid Malhotra

And by the way that second half was the original plan.

Bob Lento

Right.

Sajid Malhotra

So, we are consistent with what we expected and how much time it would take and we believe that when we go ahead and provide and build out the infrastructure for them that will give them probably the ability to handle DDoS attacks larger than anybody else in the industry.

Luke Morison

Okay. Great. Thanks, guys.

Bob Lento

Thanks, Luke.

Operator

This concludes our question-and-answer session and the conference is also now concluded. Thank you for attending today's presentation. You may now disconnect.

Bob Lento

Thank you.

Sajid Malhotra

Thank you.

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