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LLNW > SEC Filings for LLNW > Form 10-Q/A 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/A 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/A 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, or SEC, on March 2, 2012. This Quarterly Report on Form 10-Q/A contains "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. 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 the Quarterly Report on Form 10-Q filed on August 7, 2012 and in our other SEC filings. 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.

Restatement of Previously Issued Financial Statements

In the previously filed financial statements included in our Form 10-Q for the three and six months ended June 30, 2012, we improperly classified cash collected from DG related to the 2011 sale of EyeWonder and chors as cash provided by operating activities of continuing operations in the unaudited Condensed Consolidated Statements of Cash Flows. The correction of the classification error resulted in a decrease to net cash provided by operating activities of continuing operations and a decrease to net cash used in investing activities of continuing operations of $6.8 million for the six months ended June 30, 2012. The classification error has no impact on the net


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decrease in cash and cash equivalents for the three and six months ended June 30, 2012 or the cash and cash equivalents balance as of June 30, 2012. In addition, the classification error has no impact to the unaudited Condensed Consolidated Balance Sheet as of June 30, 2012, or the unaudited Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2012, or the unaudited Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2012. The change in classification also had no effect on the compliance with regulatory requirements or other contractual obligations.

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.

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 June 30, 2012, we had 1,494 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.

In May 2012, our board of directors approved a common stock repurchase plan in compliance with Rules 10b-18 and 10b5-1 of the Exchange Act that authorizes 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 month period ended June 30, 2012, we repurchased and cancelled approximately 4.5 million shares at an average price per share of approximately $2.61 per share. The price range of the shares repurchased was between $2.38 and $2.75 per share. The total amount expended was approximately $11.9 million under the repurchase plan.

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 June 2012, Sony Computer Entertainment Inc. (Sony) entered into a definitive agreement to acquire Gaikai for approximately $380 million. We expect to receive gross proceeds of approximately $11 million related to the sale and will record the transaction when the sale is completed.

Traffic on our network and our VAS business continued to grow during the three month period ended June 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 revenue generated from such traffic decreased approximately $0.2 million during the three month period ended June 30, 2012, compared to the three month period ended June 30, 2011. During the three month period ended June 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 June 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 June 30, 2012, we averaged 1.7 products per customer. For new customers added during the quarter we averaged 2.0 products. We continue to have success selling new products to our existing customer base.


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Our international revenue continued to grow during the three month period ended June 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. We anticipate that our Asia Pacific revenue may continue to grow as a percentage of our total international revenue. During 2011, no single country outside of the United States accounted for 10% or more of our total revenues. For the three month periods ended June 30, 2012 and 2011, revenue derived from customers outside of North America accounted for approximately 31% and 30%, respectively, of our total revenue. For the three month periods ended June 30, 2012 and 2011, we derived approximately 48% and 51%, respectively, of our international revenue from EMEA and approximately 52% and 49%, respectively, of our international revenue from Asia Pacific. For the six months ended June 30, 2012 and 2011, approximately 31% and 30%, respectively, of our total revenues were derived from our operations located outside of North America. For the six months ended June 30, 2012 and 2011, we derived approximately 49% and 53%, respectively, of our international revenue from EMEA and approximately 51% and 47%, respectively, of our international revenue from Asia Pacific. During the three and six months ended June 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 six months ended June 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 June 30, 2012 and 2011, sales to our top 10 customers accounted for approximately 32% and 33%, respectively, of our total revenue. For the six month periods ended June 30, 2012 and 2011, sales to our top 10 customers accounted for approximately 32% and 35%, respectively, of our total revenue. During the three and six month periods ended June 30, 2012 and 2011, we had one customer that accounted for more than 10% of our total revenue. During each of 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 six month periods ended June 30, 2012 and 2011, respectively, revenue generated from sales to reseller customers accounted for approximately 3% and 4%, respectively, of our total revenue.

In addition to these revenue-related business trends, our cost of revenue decreased in absolute dollars and decreased as a percentage of our total revenue for the three month period ended June 30, 2012, compared to the three month period ended June 30, 2011. The decrease in absolute dollars was primarily due to decreased bandwidth and co-locations costs, which was primarily due to lower transit costs, offset by an increase in paid peering, and increased payroll and related employee costs for our operations personnel who are responsible for monitoring and managing our network and delivering our VAS.

For the six month period ended June 30, 2012, our cost of revenue increased slightly in absolute dollars and decreased as a percentage of our total revenue compared to the six month period ended June 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 over 700 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


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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.

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 continue to increase in absolute dollars as a result of expected higher traffic levels, partially offset by continued 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 June 30, 2012, operating expenses increased in absolute dollars and increased as a percentage of revenue compared to the three month period ended June 30, 2011. This increase was primarily due to increased sales and marketing expenses, increased research and development costs 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 and increased travel, 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 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. For the three month period ended June 30, 2012, general and administrative expenses decreased compared to the three month period ended June 30, 2011. The decrease in general and administrative expense was primarily due to lower share-based compensation and reduced litigation costs.

For the six month period ended June 30, 2012, operating expenses increased in absolute dollars and increased as a percentage of revenue compared to the six month period ended June 30, 2011. This increase was primarily due to increased general and administrative expenses, increased sales and marketing expenses, increased research and development costs and increased non-network related depreciation and amortization. The increase in general and administrative expenses was primarily due to increased professional fees, primarily due to increased legal fees associated with intellectual property and general corporate legal matters, increased accounting fees and increased outside services and recruiting costs. The increase in sales and marketing expenses was primarily due to increased payroll and related employee costs, due to increased staffing and increased travel, 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 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 six month periods ended June 30, 2012 and 2011, we made capital investments of $10.1 million and $19.3 million, respectively, which represented 11% and 23%, 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. For 2012, we anticipate making aggregate capital expenditures of approximately 8% to 10% 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 six month periods ended June 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;

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;


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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 June 30, 2012, there have been no significant changes in our critical accounting policies.

Results of Continuing Operations

Three and Six Months Ended June 30, 2012 Compared to Three and Six Months Ended
June 30, 2011

Revenue



                          Three months ended June 30,                                       Six months ended June 30,
                                             Increase        Percent                                          Increase        Percent
            2012            2011            (Decrease)       Change          2012            2011            (Decrease)       Change
                       (in thousands)                                                   (in thousands)
Revenue   $ 44,447     $        41,558     $      2,889             7 %    $ 88,763     $        82,961     $      5,802             7 %

Revenue increased 7%, or $2.9 million, to $44.4 million for the three months ended June 30, 2012 as compared to $41.6 million for the three months ended June 30, 2011. The increase in revenue for the three month period ended June 30, 2012 compared to the same period in the prior year was attributable to an increase in our VAS revenue of approximately $3.1 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 web content management, video publishing and mobile product offerings, and cloud storage revenue. The increase in VAS revenue was offset by a decrease in our content delivery services revenue of approximately $0.2 million. During the three month period ended June 30, 2012, we continued to increase the amount of traffic moving through our network; however, our content delivery services revenue decreased approximately $0.2 million.

For the six month period ended June 30, 2012, total revenues increased 7%, or $5.8 million, to $88.8 million as compared to $83.0 million for the six months ended June 30, 2011. The increase in revenue for the six month period ended June 30, 2012 compared to the same period in the prior year was primarily attributable to an increase in our VAS revenue of approximately $8.5 million. The increase in VAS revenue was primarily attributable to increases in our web content management, video publishing and mobile product offerings, and cloud storage revenue. The increase in VAS revenue was offset by a decrease in our content delivery services revenue of approximately $2.7 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 June 30, 2012, we had approximately 1,494 customers compared to approximately 1,630 as of June 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.

Cost of Revenue



                                                  Three months ended June 30,                                            Six months ended June 30,
                                                                     Increase          Percent                                              Increase         Percent
                                   2012             2011            (Decrease)         Change            2012             2011             (Decrease)        Change
                                               (in thousands)                                                        (in thousands)
Cost of revenue                  $ 27,563      $        28,377      $      (814 )            (3 )%     $ 54,893      $        54,642      $        251             -  %


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Cost of revenue includes fees paid to network providers for bandwidth and backbone, costs incurred for non-settlement free peering and connection to ISPs, and fees paid to data center operators for co-location of our network equipment. Cost of revenue also includes depreciation of network equipment used to deliver our content delivery services, payroll and related costs and share-based compensation for our network operations, and professional services personnel.

Cost of revenue decreased 3%, or $0.8 million, to $27.6 million for the three months ended June 30, 2012 as compared to $28.4 million for the three months ended June 30, 2011. This decrease was primarily due to a decrease in bandwidth . . .

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