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LLNW > SEC Filings for LLNW > Form 10-Q on 6-Nov-2013All Recent SEC Filings

Show all filings for LIMELIGHT NETWORKS, INC.

Form 10-Q for LIMELIGHT NETWORKS, INC.


6-Nov-2013

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 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, 2012 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC), on March 1, 2013 (Annual Report). 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. Forward-looking statements include, among other things, statements as to industry trends, our future expectations, operations, financial condition and prospects, business strategies 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 SEC filings, including the Risk Factors set forth in our Annual Report. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. 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. All information is presented in thousands, except per share amounts, customer count and where specifically noted.

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 operate a globally distributed, high-performance computing platform (our global computing platform) and provide a suite of integrated services including content delivery, web and video content management, mobility, web application acceleration, cloud storage, and related consulting services that enable companies and other organizations to create, manage, and deliver a global digital presence.

The integrated suite of services that we offer collectively comprises our Limelight Orchestrate Platform (the Orchestrate Platform). We provide the Orchestrate Platform as Software as a Service (SaaS) and Infrastructure as a Service (IaaS), which, other than content delivery, transit and rack space services, are referred to collectively as Value Added Services (VAS). We offer VAS both collectively as the end-to-end Orchestrate Platform and individually for customers that may not be inclined or able to adopt the entire platform. On October 15, 2013, we announced the next generation of our Limelight Orchestrate(TM) (the Orchestrate V2.5 Platform) Digital Presence Platform. The enhanced capabilities of the Orchestrate V2.5 Platform help organizations better engage digital audiences by ensuring consistent high-performance digital experiences across channels, devices, and geographies. As of September 30, 2013, we had 1,341 active customers worldwide.

The following table summarizes our revenue, costs and expenses for the three and nine months ended September 30, 2013 and 2012 (in thousands of dollars and as a percentage of total revenue):

                                            Three Months Ended September 30,                        Nine Months Ended September 30,
                                             2013                       2012                        2013                        2012
Revenues                            $  42,656        100.0 %    $ 45,001        100.0 %    $ 131,232        100.0 %    $ 133,765        100.0 %
Cost of revenue                        27,051         63.4 %      28,283         62.8 %       83,774         63.8 %       83,177         62.2 %

Gross profit                           15,605         36.6 %      16,718         37.2 %       47,458         36.2 %       50,588         37.8 %
Total operating expenses               25,828         60.5 %      26,231         58.3 %       77,731         59.2 %       78,998         59.1 %

Operating loss                        (10,223 )      -24.0 %      (9,513 )      -21.1 %      (30,273 )      -23.1 %      (28,410 )      -21.2 %
Total other (expense) income             (483 )       -1.1 %       8,917         19.8 %          328          0.2 %        8,979          6.7 %

Loss from continuing operations
before income taxes                   (10,706 )      -25.1 %        (596 )       -1.3 %      (29,945 )      -22.8 %      (19,431 )      -14.5 %
Income tax expense                        197          0.5 %          14          0.0 %          328          0.2 %          313          0.2 %

Loss from continuing operations       (10,903 )      -25.6 %        (610 )       -1.4 %      (30,273 )      -23.1 %      (19,744 )      -14.8 %
Discontinued operations:
Loss from discontinued
operations, net of income taxes           (15 )        0.0 %        (218 )       -0.5 %          (15 )        0.0 %         (918 )       -0.7 %

Net loss                            $ (10,918 )      -25.6 %    $   (828 )       -1.8 %    $ (30,288 )      -23.1 %    $ (20,662 )      -15.4 %


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Use of Non-GAAP Financial Measures

To evaluate our business, we consider and use non-generally accepted accounting principles (Non-GAAP) net income (loss) and Adjusted EBITDA as a supplemental measure of operating performance. These measures include the same adjustments that management takes into account when it reviews and assesses operating performance on a period-to-period basis. We consider Non-GAAP net income (loss) to be an important indicator of overall business performance because it allows us to illustrate the impact of the effects of share-based compensation, litigation expenses, amortization of intangibles, acquisition related expenses, gain on sale of cost basis investment and discontinued operations. We define EBITDA as U.S. GAAP net income (loss) before interest income, interest expense, gain on sale of cost basis investment, other income and expense, provision for income taxes, depreciation and amortization and discontinued operations. We believe that EBITDA provides a useful metric to investors to compare us with other companies within our industry and across industries. We define Adjusted EBITDA as EBITDA adjusted for operational expenses that we do not consider reflective of our ongoing operations. We use Adjusted EBITDA as a supplemental measure to review and assess operating performance. We also believe use of Adjusted EBITDA facilitates investors' use of operating performance comparisons from period to period. In addition, it should be noted that our performance-based executive officer bonus structure is tied closely to our performance as measured in part by certain non-GAAP financial measures.

In our November 5, 2013 earnings press release, as furnished on Form 8-K, we included Non-GAAP net loss, EBITDA and Adjusted EBITDA. The terms Non-GAAP net loss, EBITDA and Adjusted EBITDA are not defined under U.S. GAAP, and are not measures of operating income, operating performance or liquidity presented in accordance with U.S. GAAP. Our Non-GAAP net loss, EBITDA and Adjusted EBITDA have limitations as analytical tools, and when assessing our operating performance, Non-GAAP net loss, EBITDA and Adjusted EBITDA should not be considered in isolation, or as a substitute for net loss or other consolidated income statement data prepared in accordance with U.S. GAAP. Some of these limitations include, but are not limited to:

EBITDA and Adjusted EBITDA do not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

they do not reflect changes in, or cash requirements for, our working capital needs;

they do not reflect the cash requirements necessary for litigation costs;

they do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt that we may incur;

they do not reflect income taxes or the cash requirements for any tax payments;

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will be replaced sometime in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements;

while share-based compensation is a component of operating expense, the impact on our financial statements compared to other companies can vary significantly due to such factors as the assumed life of the options and the assumed volatility of our common stock; and

other companies may calculate EBITDA and Adjusted EBITDA differently than we do, limiting their usefulness as comparative measures.

We compensate for these limitations by relying primarily on our U.S. GAAP results and using Non-GAAP net income (loss) and Adjusted EBITDA only as supplemental support for management's analysis of business performance. Non-GAAP net income (loss), EBITDA and Adjusted EBITDA are calculated as follows for the periods presented.

Reconciliation of Non-GAAP Financial Measures

In accordance with the requirements of Regulation G issued by the SEC, we are presenting the most directly comparable U.S. GAAP financial measures and reconciling the Non-GAAP financial metrics to the comparable U.S. GAAP measures.


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           Reconciliation of U.S. GAAP Net Loss to Non-GAAP Net Loss

                                 (In thousands)

                                  (Unaudited)



                                                          Three Months Ended                                   Nine Months Ended
                                          September 30,        June 30,         September 30,         September 30,         September 30,
                                              2013               2013               2012                  2013                  2012
U.S. GAAP net loss                       $       (10,918 )     $ (11,233 )     $          (828 )     $       (30,288 )     $       (20,662 )
Share-based compensation                           3,223           3,227                 3,663                 9,800                10,835
Litigation defense expenses                          149             109                   148                   299                   166
Acquisition related expenses                         146              (9 )                  48                   113                  (372 )
Amortization of intangible assets                    711             718                   721                 2,161                 2,144
Gain on sale of cost basis investment                 -               -                 (9,420 )                  -                 (9,420 )
Loss from discontinued operations                     15              -                    218                    15                   918

Non-GAAP net loss                        $        (6,674 )     $  (7,188 )     $        (5,450 )     $       (17,900 )     $       (16,391 )

       Reconciliation of U.S. GAAP Net Loss to EBITDA to Adjusted EBITDA

                                 (In thousands)

                                  (Unaudited)



                                                          Three Months Ended                                   Nine Months Ended
                                          September 30,        June 30,         September 30,         September 30,         September 30,
                                              2013               2013               2012                  2013                  2012
U.S. GAAP net loss                       $       (10,918 )     $ (11,233 )     $          (828 )     $       (30,288 )     $       (20,662 )
Depreciation and amortization                      6,711           7,562                 8,451                22,403                25,313
Interest expense                                      15              21                    40                    64                   136
Gain on sale of cost basis investment                 -               -                 (9,420 )                  -                 (9,420 )
Interest and other (income) expense                  468            (222 )                 463                  (392 )                 304
Income tax expense                                   197              51                    14                   328                   313
Loss from discontinued operations                     15              -                    218                    15                   918

EBITDA                                   $        (3,512 )     $  (3,821 )     $        (1,062 )     $        (7,870 )     $        (3,098 )
Share-based compensation                           3,223           3,227                 3,663                 9,800                10,835
Litigation defense expenses                          149             109                   148                   299                   166
Acquisition related expenses                         146              (9 )                  48                   113                  (372 )

Adjusted EBITDA (loss)                   $             6       $    (494 )     $         2,797       $         2,342       $         7,531

Critical Accounting Policies and Estimates

Our critical accounting policies and estimates are disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012. During the nine months ended September 30, 2013, there have been no significant changes in our critical accounting policies and estimates. However, we have supplemented our disclosures contained in our Annual Report on Form 10-K for the year ended December 31, 2012, as noted below.

Goodwill and Other Intangible Assets

We test goodwill for impairment on an annual basis or more frequently if events or changes in circumstances indicate that goodwill might be impaired. We have concluded that we have one reporting unit and have assigned the entire balance of goodwill to this reporting unit. The fair value of the reporting unit is determined using our market capitalization as of our annual impairment assessment date or each reporting date if circumstances indicate the goodwill might be impaired. Items that could reasonably be expected to negatively affect key assumptions used in estimating fair value include but are not limited to:

Sustained decline in our stock price due to a decline in our financial performance due to the loss of key customers, loss of key personnel, emergence of new technologies or new competitors;

Decline in overall market or economic conditions leading to a decline in our stock price; and

Decline in observed control premiums paid in business combinations involving comparable companies.


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The estimated fair value of the reporting unit is determined using a market approach utilizing our market capitalization as adjusted for a control premium based on the estimated average and median control premiums of transactions involving companies comparable to us. As of the annual impairment testing date and at December 31, 2012, we determined that goodwill was not impaired. The estimated fair value of our reporting unit exceeded carrying value by approximately $23,000 or 10% using the market capitalization plus an estimated control premium of 40% on September 30, 2013. Based on this analysis, management believes goodwill is not impaired at September 30, 2013; however, adverse changes to certain key assumptions as described above could result in a future charge to earnings.

Results of Continuing Operations

Revenue

We derive revenue primarily from the sale of components of the Orchestrate Platform. We also generate revenue through the sale of professional services and other infrastructure services, such as transit and rack space services. We also maintain relationships with a number of resellers that purchase our services for resale to their end customers.

The following table reflects our revenue for the three and nine months ended September 30, 2013 and 2012 (in thousands of dollars and as a percentage of total revenue):

                                       Three Months Ended September 30,                     Nine Months Ended September 30,
                                        2013                      2012                      2013                       2012
Content delivery network        $ 26,978        63.2 %    $ 29,438        65.4 %    $  84,180        64.1 %    $  90,378        67.6 %
Value added services              15,678        36.8 %      15,563        34.6 %       47,052        35.9 %       43,387        32.4 %

Total revenue                   $ 42,656       100.0 %    $ 45,001       100.0 %    $ 131,232       100.0 %    $ 133,765       100.0 %

Our content delivery revenue decreased during the three and nine months ended September 30, 2013 versus the comparable 2012 periods primarily due to the expiration of our reseller contract with Global Crossing during the second quarter of 2012, customer churn, a decline in our average unit selling price, a decline in our transit and co-location services revenue and foreign currency impact. These decreases were partially offset by increased traffic delivered and the addition of new customers.

As of September 30, 2013, we had 1,341 active customers worldwide compared to 1,493 as of September 30, 2012, due in part to our continued selective approach to accepting profitable business by establishing a clear process for identifying customers that value quality, performance, availability and service. Despite adding many new customers during the quarter, we ended the quarter with a net customer loss.

In the past, the customers that comprise our top 10 customers have continually changed, and our large customers such as Netflix, Inc. (Netflix) may not continue to be as significant going forward as they have been in the past. As previously disclosed, our contract with Netflix was scheduled to expire on December 31, 2013. During the second quarter of 2013 we entered into an agreement to extend our relationship into 2014.

Our VAS revenue increased during the three and nine months ended September 30, 2013 versus the comparable 2012 periods primarily due to an increase in our video revenue and our performance services revenue. These increases were partially offset by decreases in our professional services and content management revenue.

Revenue by geography is based on the location of the customer from which the revenue is earned. The following table sets forth revenue by geographic area (in thousands):

                               Three Months Ended           Nine Months Ended
                                  September 30,               September 30,
                                2013          2012         2013          2012
             Americas        $   28,587     $ 31,199     $  89,463     $  92,799
             EMEA                 7,960        7,243        24,569        23,189
             Asia Pacific         6,109        6,559        17,200        17,777

             Total revenue   $   42,656     $ 45,001     $ 131,232     $ 133,765


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At this time, we anticipate revenues will decrease in 2013 compared to 2012. We expect to see an increase in our video revenue; however this increase will be offset by a decrease in our content delivery revenue and in our professional services revenue.

Cost of Revenue

Cost of revenue consists primarily of 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 housing of our network equipment in third party network data centers, also known as co-location costs. 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 was composed of the following (in thousands and as a percentage of total revenue):

                                               Three Months Ended September 30,                   Nine Months Ended September 30,
                                                 2013                     2012                     2013                     2012
Bandwidth and co-location fees           $  14,266       33.4 %    $ 14,030       31.2 %    $ 43,766       33.4 %    $ 40,868       30.6 %
Depreciation - network                       5,278       12.4 %       6,970       15.5 %      18,078       13.8 %      20,984       15.7 %
Payroll and related employee costs           4,703       11.0 %       4,614       10.3 %      13,993       10.7 %      13,431       10.0 %
Professional fees and outside services         600        1.4 %         388        0.9 %       1,785        1.4 %       1,180        0.9 %
Share-based compensation                       499        1.2 %         604        1.3 %       1,518        1.2 %       1,594        1.2 %
Travel and travel-related expenses             247        0.6 %         243        0.5 %         661        0.5 %         815        0.6 %
Royalty expenses                               225        0.5 %         246        0.5 %         675        0.5 %         657        0.5 %
Other costs                                  1,233        2.9 %       1,188        2.6 %       3,298        2.5 %       3,648        2.7 %

Total cost of revenue                    $  27,051       63.4 %    $ 28,283       62.8 %    $ 83,774       63.8 %    $ 83,177       62.2 %

Our cost of revenue decreased in aggregate dollars and slightly increased as a percentage of total revenue for the three months ended September 30, 2013 versus the comparable 2012 period, primarily as a result of a decrease in network depreciation as equipment becomes fully depreciated.

This decrease was partially offset by increases in:

Bandwidth and co-location fees which increased primarily due to increased peering costs and rack fees as a result of an increase in traffic delivered;

Payroll and related employee costs due to increased operations personnel; and

Professional fees and outside services which increased due to higher consulting fees.

Our cost of revenue increased in aggregate dollars and as a percentage of total revenue for the nine months ended September 30, 2013 versus the comparable 2012 period, primarily as a result of the following:

Bandwidth and co-location fees which increased primarily due to increased peering costs and rack fees as a result of an increase in traffic delivered; and

Professional fees and outside services which increased due to higher consulting fees.

Payroll and related employee costs increased due to increased operations personnel.

These increases were partially offset by a decrease in network depreciation as equipment becomes fully depreciated.

We anticipate our 2013 total cost of revenue will remain consistent with 2012 in absolute dollars and slightly increase as a percent of sales. We anticipate depreciation expense related to our network equipment to decrease compared to 2012 in absolute dollars.


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General and Administrative

General and administrative expense was composed of the following (in thousands
and as a percentage of total revenue):



                                               Three Months Ended September 30,                   Nine Months Ended September 30,
                                                 2013                      2012                    2013                     2012
Payroll and related employee costs       $   2,290         5.4 %    $ 2,004        4.5 %    $  7,612        5.8 %    $  6,904        5.2 %
Professional fees and outside services       2,137         5.0 %      2,279        5.1 %       5,873        4.5 %       6,136        4.6 %
Share-based compensation                     1,591         3.7 %      1,571        3.5 %       4,817        3.7 %       4,637        3.5 %
Litigation expenses                            149         0.3 %        148        0.3 %         299        0.2 %         166        0.1 %
Bad debt expense                               227         0.5 %        221        0.5 %         758        0.6 %       1,105        0.8 %
Travel and travel-related expenses             167         0.4 %        114        0.3 %         476        0.4 %         450        0.3 %
Other costs                                  2,048         4.8 %      2,420        5.4 %       5,212        4.0 %       5,732        4.3 %

Total general and administrative         $   8,609        20.2 %    $ 8,757       19.5 %    $ 25,047       19.1 %    $ 25,130       18.8 %

Our general and administrative expense decreased in aggregate dollars and increased as a percentage of total revenue for the three months ended September 30, 2013 versus the comparable 2012 period, primarily as a result of the following:

A decrease in other costs which was primarily due to lower facilities and facilities related costs; and

Decreased consulting and professional fees.

These decreases were partially offset by increases in:

Payroll and payroll related employee costs and share-based compensation due to higher headcount.

Our general and administrative expense decreased in aggregate dollars and slightly increased as a percentage of total revenue for the nine months ended September 30, 2013 versus the comparable 2012 period, primarily as a result of the following:

A decrease in other costs which was primarily due to lower non-income taxes due to a recovery of use tax, and decreased facilities and facilities related costs;

Decreased bad debt expense due to lower past due and unrecoverable amounts from certain customers; and

Decreased consulting and professional fees.

These decreases were partially offset by increases in:

Payroll and payroll related employee costs and share-based compensation due to higher headcount; and

Litigation expenses due to work performed related to the Akamai litigation.

In 2013, we expect our general and administrative expenses to decrease in absolute dollars and remain constant as a percentage of revenue compared to . . .

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