Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
LLNW > SEC Filings for LLNW > Form 10-Q on 5-Nov-2012All Recent SEC Filings

Show all filings for LIMELIGHT NETWORKS, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for LIMELIGHT NETWORKS, INC.


5-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations for the year ended December 31, 2011 included in our annual report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 2, 2012. This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act). Forward-looking statements include statements as to industry trends and future expectations of ours and other matters that do not relate strictly to historical facts. These statements are often identified by the use of words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "estimate," or "continue," and similar expressions or variations. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled "Risk Factors" set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q and in our other SEC filings, including the Risk Factors set forth in our Annual Report on Form 10-K filed with the SEC on March 2, 2012. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Prior period information has been modified to conform to current year presentation.

Overview

We were founded in 2001 as a provider of content delivery network services to deliver digital content over the Internet. We began development of our infrastructure in 2001 and began generating meaningful revenue in 2002. Today, we are a global leader in digital presence management and delivery, including mobility, web and video content management, web application acceleration, cloud storage and consulting, and content delivery services. We provide web and video content management services as Software-as-a-Service (SaaS) solutions and cloud storage and content delivery services as Platform-as-a-Service solutions, which other than content delivery services, are referred to collectively as value-added services (VAS). We derive revenue from the sale of content delivery services and VAS to our customers. In May 2012, we introduced a new digital presence solution, Limelight Orchestrate (Orchestrate), an integrated suite of cloud-based applications which allows organizations to optimize all aspects of their online digital presence across web, mobile, social and large screen channels. Orchestrate provides advanced features for website content management, personalization and targeting, video publishing, mobile enablement, content delivery, transcoding and cloud storage, combined with social media integration and powerful analytics. These services are provided in the cloud and leverage our global computing platform, which provides highly-available, highly-redundant storage, bandwidth and computing resources as well as connectivity to last-mile broadband network providers. Our global professional services organization help organizations analyze and identify their digital presence requirements. We also offer other platform and infrastructure services, such as transit and rack space services. Our solutions and services enable organizations to streamline processes and optimize business results across all customer interaction channels, helping them deliver a high quality online media experience, improve brand awareness, drive revenue and enhance their customer relationships while reducing costs. We operate in one industry segment.


Table of Contents

We provide services to customers that we believe view Internet, mobile and social initiatives as critical to their success, including traditional and emerging media companies, or content publishers, operating in the television, music, radio, newspaper, magazine, movie, videogame, software and social media industries, as well as enterprises, technology companies and government entities conducting business online. We provide services to customers in North America, EMEA and the Asia Pacific region. As of September 30, 2012, we had 1,493 customers worldwide.

In addition to our expanding suite of VAS, we continue to expand the capacity and capabilities, and to enhance the performance and efficiency, of our global computing platform. Although we believe that we may have improved margins in our content delivery services as we expand our customer base and use a greater proportion of our capacity, we expect the majority of our margin increases to result from our VAS increasing as a percentage of our revenue.

On August 31, 2012, the Court of Appeals for the Federal Circuit issued its opinion in our on-going patent litigation with Akamai. The court stated that the trial court correctly determined that we did not directly infringe Akamai's '703 patent and upheld the trial court's decision to vacate the original jury's damages award. The court also held that we did not infringe Akamai's '413 or '645 patents. A slim majority in this three-way divided opinion also announced a revised legal theory of induced infringement, remanded the case to the trial court, and gave Akamai an opportunity for a new trial to attempt to prove that we induced our customers to infringe Akamai's patent under the court's new legal standard. Just as we have successfully shown that we do not directly infringe Akamai's patent, we firmly believe that we ultimately would be successful in showing we do not infringe Akamai's patent under the majority's new induced infringement theory, and we will continue to vigorously defend against the allegation. We do not believe a loss is probable and therefore no provision for this lawsuit is recorded in our financial statements. For additional information, please see "Legal Proceedings" in Part II, Item 1 of this Quarterly Report on Form 10-Q.

In May 2012, our board of directors approved a second common stock repurchase plan in compliance with Rules 10b-18 and 10b5-1 of the Exchange Act that authorized us to repurchase up to $15 million of our shares of common stock, exclusive of any commissions, markups or expenses, from time to time through December 15, 2012. Any repurchased shares will be cancelled and return to authorized but unissued status. During the three months ended September 30, 2012, we repurchased and cancelled approximately 1.2 million shares at an average price per share of approximately $2.63 per share under the second repurchase plan. The price range of the shares repurchased was between $2.46 and $2.75 per share. The total amount expended was approximately $3.1 million ($3.2 million including commissions) under the second repurchase plan. During the nine months ended September 30, 2012, we purchased and cancelled approximately 5.7 million shares of common stock for approximately $15.0 million ($15.1 million including commissions) under the second repurchase plan. Our second stock repurchase plan is now complete.

In May 2010, we made a strategic investment in Gaikai Inc. (Gaikai), a private cloud-based gaming technology company that allows users to play major PC and console games through a web browser. In August 2012, Sony Computer Entertainment Inc. (Sony) completed its acquisition of Gaikai and we recorded a gain on sale of our cost basis investment in Gaikai of $9.4 million which has been reflected in other income (expense) in the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2012. The carrying value of the Gaikai cost basis investment as of the sale date was approximately $2.0 million. The aggregate selling price was $11.4 million consisting of $10.2 million of cash received and $1.2 million held in escrow for a period of up to 15 months to cover any potential indemnification claims. As of September 30, 2012, we are not aware of any potential indemnification claims and have recorded a long term receivable of $1.2 million which is included in other assets in the accompanying condensed consolidated balance sheets.

Traffic on our network and our VAS offerings continued to grow during the three month period ended September 30, 2012. This traffic growth was primarily the result of growth in the traffic delivered to existing customers and to a lesser extent to new customers. Our content delivery revenue is generated by charging for traffic delivered. While our traffic continued to grow, our CDN revenue decreased approximately $0.7 million during the three month period ended September 30, 2012, compared to the three month period ended September 30, 2011. The decrease was primarily due to lower reseller revenue and other non-traffic related revenue. In addition, we saw the rate of traffic growth accelerate; however we also saw an increase in price-compression. During the three month period ended September 30, 2012, all of our revenue growth was attributable to our VAS. During 2011, we added new customers through new business and through our business acquisitions, and we also elected not to renew some customers. During the three month period ended September 30, 2012, we continued to add new customers, experienced some attrition and elected not to renew some customers as we continue to focus on customer quality. During the three month period ended September 30, 2012, we averaged 1.8 products per customer. For new customers added during the quarter we averaged 2.2 products. We continue to have success selling new products to our existing customer base.


Table of Contents

Our international revenue continued to grow during the three month period ended September 30, 2012, and we expect this trend to continue as we focus on our strategy of expanding our network and customer base internationally. For the year ended December 31, 2011, revenue derived from customers outside of North America accounted for approximately 30% of our total revenue. For the year ended December 31, 2011, we derived approximately 50% of our international revenue from EMEA and approximately 50% of our international revenue from Asia Pacific. During 2011, no single country outside of the United States accounted for 10% or more of our total revenues.

For the three months ended September 30, 2012 and 2011, revenue derived from customers outside of North America accounted for approximately 32% of our total revenue. For the three months ended September 30, 2012 and 2011, we derived approximately 44% and 46%, respectively, of our international revenue from EMEA and approximately 56% and 54%, respectively, of our international revenue from Asia Pacific.

For the nine months ended September 30, 2012 and 2011, approximately 31% of our total revenues were derived from our operations located outside of North America. For the nine months ended September 30, 2012 and 2011, we derived approximately 47% and 50%, respectively, of our international revenue from EMEA and approximately 53% and 50%, respectively, of our international revenue from Asia Pacific. During the three and nine months ended September 30, 2012, we had two countries, Japan and the United States that accounted for 10% or more of our total revenues. No single country outside of the United States accounted for 10% or more of our total revenues during the three and nine months ended September 30, 2011. We expect our foreign revenue to continue to increase in absolute dollars in 2012. Our business is managed as a single segment, and we report our financial results on this basis.

During any given fiscal period, a relatively small number of customers typically account for a significant percentage of our revenue. For example, in 2011, sales to our top 10 customers accounted for approximately 34% of our total revenue, and we had one customer, Netflix, Inc. (Netflix), which represented more than 10% of our total revenue. For the year ended December 31, 2011, Netflix represented approximately 11% of our total revenue. For the three month periods ended September 30, 2012 and 2011, sales to our top 10 customers accounted for approximately 35% of our total revenue. During each of those periods, we had one customer, Netflix who represented more than 10% of our total revenue. During those periods, Netflix represented approximately 11% and 12%, respectively, of our total revenue. For the nine month periods ended September 30, 2012 and 2011, sales to our top 10 customers accounted for approximately 32% and 34%, respectively, of our total revenue. During each of those periods, we had one customer, Netflix who represented more than 10% of our total revenue. During those periods, Netflix represented approximately 11% of our total revenue. In 2012, we anticipate that our top 10 customer concentration levels will remain consistent with 2011. In the past, the customers that comprised our top 10 customers have continually changed, and our large customers may not continue to be as significant going forward as they have been in the past.

In addition to selling to our direct customers, we maintain relationships with a number of resellers that purchase our services for resale to their end customers. Revenue generated from sales to reseller customers accounted for approximately 4% of our total revenue for the year ended December 31, 2011. For the three and nine months ended September 30, 2012, revenue generated from sales to reseller customers accounted for approximately 3% of our total revenue. For the three and nine months ended September 30, 2011, revenue generated from sales to reseller customers accounted for approximately 4% of our total revenue.

In addition to these revenue-related business trends, our cost of revenue increased in absolute dollars and decreased as a percentage of our total revenue for the three month period ended September 30, 2012, compared to the three month period ended September 30, 2011. The increase in absolute dollars was primarily due to increased payroll and related employee costs for our consulting services personnel, operations personnel who are responsible for monitoring and managing our network and delivering our VAS.

For the nine month period ended September 30, 2012, our cost of revenue increased in absolute dollars and decreased as a percentage of our total revenue compared to the nine month period ended September 30, 2011. The increase in absolute dollars was primarily due to increased payroll and related employee costs for our operations personnel who are responsible for monitoring and managing our network and delivering our VAS, increased professional fees and increases in other costs associated with the delivery of our services as well as additional fees and licenses. These increases were offset by decreased bandwidth and co-locations costs which were primarily due to lower transit costs, offset by an increase in paid peering.

We enter into contracts with third party network and data center providers, with terms typically ranging from several months to several years. Our contracts related to transit bandwidth provided by network operators generally commit us to pay either a fixed monthly fee or monthly fees plus additional fees for bandwidth usage above a specified level. We entered into an agreement with Global Crossing Ltd. (Global Crossing) in January 2009 for use of private lines for additional bandwidth and backbone services with a term of four years from installation. We executed subsequent amendments in September 2009, March 2011 and January 2012 for additional bandwidth and backbone services. The agreement and subsequent amendments required substantial prepayment for such services, and the amendments extended the original term for some services through June 2014. In addition to purchasing services from communications providers, we connect directly to approximately 600 broadband Internet service providers (ISPs), generally without either party paying the other. This industry practice, known as settlement free peering, benefits us by allowing us to place content objects directly on user access networks, which helps us provide higher performance delivery for our customers and eliminate paying transit bandwidth fees to network operators. This practice also benefits the ISP and its customers by allowing them to receive improved content delivery through our local servers and eliminate the cost of transit bandwidth associated with delivery receipt of the traffic. We do not consider these relationships to represent the culmination of an earnings process. Accordingly, we do not recognize as revenue the value to the ISPs associated with the use of our servers nor do we recognize as expense the value of the bandwidth received at discounted or no cost. These peering relationships are mutually beneficial and are not contractual commitments. In addition to settlement free peering, we incur costs for non-settlement free peering as well as costs associated with connecting to the ISPs.


Table of Contents

During 2011, we continued to reduce our network transit bandwidth delivery costs per gigabyte transferred by entering into new supplier contracts with lower pricing and amending existing contracts to take advantage of price reductions from our existing suppliers associated with higher purchase commitments. We anticipate our overall transit bandwidth delivery costs will decrease in absolute dollars as a result of expected reductions in bandwidth costs per unit. In addition, during 2011, we entered into relationships for fixed price paid peering ports that we anticipate will assist in cost management as we continue to increase the volume of traffic moving through our global computing platform. We expect that our overall transit bandwidth delivery costs as a percentage of our total revenue will decrease slightly in 2012 compared to 2011.

For the three month period ended September 30, 2012, operating expenses increased in absolute dollars and increased as a percentage of revenue compared to the three month period ended September 30, 2011. This increase was primarily due to increased sales and marketing expenses, increased research and development costs and increased general and administrative expenses. The increase in sales and marketing expenses was primarily due to increased payroll and related employee costs, due to increased staffing, increased professional fees, primarily for consulting and recruiting fees, and increased costs associated with our website design. The increase in research and development costs was primarily due to increased payroll and related employee costs due to increased staffing. The increase in general and administrative expenses was primarily due to increased professional fees, primarily for outside consulting related to strategic planning for 2013 and beyond, and for legal fees related to intangible property and other corporate legal matters and an increase in stock-based compensation. These increases were off-set by decreases in payroll and related employee costs, and in litigation expenses.

For the nine month period ended September 30, 2012, operating expenses increased in absolute dollars and increased as a percentage of revenue compared to the nine month period ended September 30, 2011. This increase was primarily due to increased sales and marketing expenses, increased research and development costs, increased general and administrative expenses, and increased non-network related depreciation and amortization. The increase in sales and marketing expenses was primarily due to increased payroll and related employee costs, due to increased staffing, increased travel, increased professional fees and increased facility and facility-related costs, offset by a decrease in share-based compensation. The increase in research and development costs was primarily due to increased payroll and related employee costs due to increased staffing. The increase in general and administrative expenses was primarily due to increased professional fees, primarily due to increased consulting and outside professional services, legal fees associated with intellectual property and general corporate legal matters, and recruiting costs. The increase in non-network related depreciation and amortization was primarily due to increased amortization of intangible assets from our business acquisitions as well as increased general and administrative depreciation and amortization.

We make our capital investment decisions based upon evaluation of a number of variables, such as the amount of traffic we anticipate on our network, the cost of the physical infrastructure required to deliver that traffic and the forecasted capacity utilization of our network. Our capital expenditures have varied over time, in particular as we purchased servers and other network equipment associated with our network build-out. For example, in 2009, 2010 and 2011 we made capital purchases of $20.4 million, $33.5 million and $30.4 million, respectively, which represented 16%, 22% and 18%, respectively, of our total revenue. For the nine month periods ended September 30, 2012 and 2011, we made capital investments of $17.4 million and $26.9 million, respectively, which represented 13% and 21%, respectively, of our total revenue. We expect to have ongoing capital expenditure requirements as we continue to invest in, refresh and expand our global computing platform and support our VAS. For 2012, we anticipate making aggregate capital expenditures of approximately 9% to 11% of our total revenue.

We occasionally generate revenue from certain customers that are entities related to certain of our executive officers and directors. For the year ended December 31, 2011 revenue derived from these related parties was less than 1% of our total revenue. For the three and nine month periods ended September 30, 2012, revenue generated from related parties was approximately 1% of our total revenue.

Our future results will be affected by many factors, including factors identified in the section titled "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q and our ability to:

increase our revenue by adding customers and limiting customer cancellations and terminations, as well as increasing the amount of monthly recurring revenue that we derive from our existing customers;


Table of Contents
manage the prices we charge for our services, as well as the costs associated with operating our network in light of increased competition;

successfully manage our litigation with Akamai Technologies, Inc. (Akamai) to a favorable conclusion;

prevent disruptions to our services and network due to accidents or intentional attacks;

continue to deliver a significant portion of our traffic through settlement free peering relationships which significantly reduce our cost of delivery;

successfully integrate the businesses we have acquired; and

successfully manage the disposition of businesses we have divested from.

As a result, we cannot assure you that we will achieve our expected financial objectives, including positive net income.

Critical Accounting Policies and Estimates

Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011. During the three months ended September 30, 2012, there have been no significant changes in our critical accounting policies.

Results of Continuing Operations

Three and Nine Months Ended September 30, 2012 Compared to Three and Nine Months
Ended September 30, 2011

Revenue



                                                  Three months ended September 30,                                     Nine months ended September 30,
                                                                          Increase        Percent                                             Increase        Percent
                                      2012               2011            (Decrease)       Change           2012              2011            (Decrease)       Change
                                                    (in thousands)                                                      (in thousands)
Revenue                            $   45,001       $        42,352     $      2,649             6 %    $  133,765     $        125,313     $      8,452             7 %

Revenue increased 6%, or $2.6 million, to $45.0 million for the three months ended September 30, 2012 as compared to $42.4 million for the three months ended September 30, 2011. The increase in revenue for the three month period ended September 30, 2012 compared to the same period in the prior year was attributable to an increase in our VAS revenue of approximately $3.4 million. Our VAS revenue, which collectively refers to our mobility, web and video content management, web application acceleration, cloud storage and consulting revenue, includes revenue from the date of acquisition of Delve Networks, Inc. (Delve), Clickability, Inc. (Clickability) and AcceloWeb, (IL) Ltd. (AcceloWeb). The increase in VAS revenue was primarily attributable to increases in our video publishing and web content management product offerings. The increase in VAS revenue was offset by a decrease in our content delivery services revenue. During the three month period ended September 30, 2012, we continued to increase the amount of traffic moving through our network; however, our content delivery services revenue decreased approximately $0.7 million. The decrease was primarily due to lower reseller revenue and other non-traffic related revenue. In addition, we saw the rate of traffic growth accelerate; however we also saw an increase in price-compression.

For the nine month period ended September 30, 2012, total revenues increased 7%, or $8.5 million, to $133.8 million as compared to $125.3 million for the nine months ended September 30, 2011. The increase in revenue for the nine month period ended September 30, 2012 compared to the same period in the prior year was primarily attributable to an increase in our VAS revenue of approximately $11.9 million. The increase in VAS revenue was primarily attributable to increases in our web content management, video publishing and cloud storage revenue. The increase in VAS revenue was offset by a decrease in our content delivery services revenue of approximately $3.4 million. Of this decrease, approximately $1.8 million was due to a reduction in our network pop-build and license revenue from Microsoft Corporation (Microsoft).

As of September 30, 2012, we had approximately 1,493 customers compared to approximately 1,602 as of September 30, 2011.

We anticipate our revenues will increase in 2012 compared to 2011, which will include a full year of revenue from our business acquisitions. We expect to deliver more traffic on our network and expect continued growth in our VAS. Additionally, we expect our international revenue to continue to increase in absolute dollars and that our Asia Pacific revenue may continue to grow as a percentage of our total international revenue compared to 2011. In 2012, we anticipate that our customer concentrations levels will remain consistent with 2011. In the past, the customers that comprised our top 10 customers have continually changed, and our large customers may not continue to be as significant going forward as they have been in the past.


Table of Contents

. . .

  Add LLNW to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for LLNW - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.