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LLNW > SEC Filings for LLNW > Form 10-K on 20-Feb-2014All Recent SEC Filings

Show all filings for LIMELIGHT NETWORKS, INC.

Form 10-K for LIMELIGHT NETWORKS, INC.


20-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This annual report on Form 10-K 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 I, Item 1A of this annual report on Form 10-K. 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 network) and provide a suite of integrated services including content delivery services, video content management services, performance services for website and web application acceleration, and cloud storage services. These four primary service groups work collectively to enable organizations to deliver digital content to any device, anywhere in the world.
The suite of services that we offer collectively comprises our Limelight Orchestrate Platform (the Orchestrate Platform). Recently, we launched a revised website that brought further focus to what we offer to the market by aligning products to four core solutions-Video Delivery, Web Delivery, Mobile Delivery, and Software Delivery-that better reflect the core functionality and strength of the Orchestrate Platform. Included in this version of the website launch was the renaming of the Orchestrate Digital Presence Platform to the Limelight Orchestrate Platform again bringing a tighter focus to what we believe is the core service Limelight brings to the market, the delivery of digital content from publishers to end-users.
As a result of our renewed focus, on December 23, 2013, we sold our Orchestrate Content Management service for $12,341 in cash, net of preliminary working capital adjustments. The sale resulted in a gain of $3,836, which is included in Other, net in the consolidated statement of operations. Consistent with our focus on digital content delivery services, the integration of our services and the disposal of our web content management service line, going forward we will no longer distinguish between value added services and non-value added services. As of December 31, 2013, we had 1,295 active customers worldwide. The following table summarizes our revenue, costs and expenses for the years ended December 31, 2013, 2012, and 2011 (in thousands of dollars and as a percentage of total revenue). The information presented below has been revised to reclassify certain amounts to cost of revenues, research and development and sales and marketing expenses that were previously reported in general and administrative expenses. This reclassification is more fully described in Note 2, Revision of Previously Issued Financial Statements, in Part II, Item 8 of this annual report on Form 10-K.


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                                                            Year Ended December 31,
                                             2013                     2012                     2011
Revenues                            $ 173,433     100.0  %   $ 180,236     100.0  %   $ 171,292     100.0  %
Cost of revenue                       111,725      64.4  %     113,218      62.8  %     111,006      64.8  %
Gross profit                           61,708      35.6  %      67,018      37.2  %      60,286      35.2  %
Total operating expenses              101,185      58.3  %     105,569      58.6  %      92,732      54.1  %
Operating loss                        (39,477 )   (22.8 )%     (38,551 )   (21.4 )%     (32,446 )   (18.9 )%
Total other income                      4,888       2.8  %       8,997       5.0  %         142       0.1  %
Loss from continuing operations
before income taxes                   (34,589 )   (19.9 )%     (29,554 )   (16.4 )%     (32,304 )   (18.9 )%
Income tax expense (benefit)              387       0.2  %         481       0.3  %      (2,238 )    (1.3 )%
Loss from continuing operations       (34,976 )   (20.2 )%     (30,035 )   (16.7 )%     (30,066 )   (17.6 )%
Discontinued operations:
(Loss) income from discontinued
operations, net of
income taxes                             (426 )    (0.2 )%      (2,861 )    (1.6 )%       4,778       2.8  %
Net loss                            $ (35,402 )   (20.4 )%   $ (32,896 )   (18.3 )%   $ (25,288 )   (14.8 )%

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 evaluate results without the effects of share-based compensation, litigation expenses, amortization of intangibles, acquisition related expenses, gain on sale of cost basis investment, discontinued operations and the gain on sale of our Web Content Management (WCM) business. 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, discontinued operations and gain on sale of WCM. 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 share-based compensation, litigation expenses, and acquisition related expenses. 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, as well as across companies. 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 February 13, 2014 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;


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        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), EBITDA, 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 unaudited Non-GAAP financial metrics to the comparable U.S. GAAP measures.

           Reconciliation of U.S. GAAP Net Loss to Non-GAAP Net Loss
                                  (Unaudited)
                                                   Year Ended December 31,
                                              2013          2012          2011
U.S. GAAP net loss                         $ (35,402 )   $ (32,896 )   $ (25,288 )
Share-based compensation                      12,345        14,475        15,881
Litigation defense expenses                      450           527         1,376
Acquisition related expenses                     176          (388 )         776
Amortization of intangible assets              2,843         2,871         2,350
Gain on sale of cost basis investment              -        (9,420 )           -
Gain on sale of the WCM business              (3,836 )           -             -
Loss (income) from discontinued operations       426         2,861        (4,778 )
Non-GAAP net loss                          $ (22,998 )   $ (21,970 )   $  (9,683 )

       Reconciliation of U.S. GAAP Net Loss to EBITDA to Adjusted EBITDA
                                  (Unaudited)

                                                   Year Ended December 31,
                                              2013          2012          2011
U.S. GAAP net loss                         $ (35,402 )   $ (32,896 )   $ (25,288 )
Depreciation and amortization                 28,746        33,835        32,817
Interest expense                                  76           177           299
Gain on sale of cost basis investment              -        (9,420 )           -
Gain on sale of the WCM business              (3,836 )           -             -
Interest and other (income) expense           (1,128 )         246          (441 )
Income tax expense (benefit)                     387           481        (2,238 )
Loss (income) from discontinued operations       426         2,861        (4,778 )
EBITDA                                     $ (10,731 )   $  (4,716 )   $     371
Share-based compensation                      12,345        14,475        15,881
Litigation defense expenses                      450           527         1,376
Acquisition related expenses                     176          (388 )         776
Adjusted EBITDA                            $   2,240     $   9,898     $  18,404


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Critical Accounting Policies and Estimates The preparation of consolidated financial statements and related disclosures in conformity with U.S. GAAP requires management to make judgments, assumptions, and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Note 2 to the consolidated financial statements describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. The accounting policies described below are significantly affected by critical accounting estimates. Such accounting policies require significant judgments, assumptions, and estimates used in the preparation of the consolidated financial statements, and actual results could differ materially from the amounts reported based on these policies.
Revenue Recognition
We derive revenue primarily from the sale of services that comprise components of the Orchestrate Platform. Our customers generally execute contracts with terms of one year or longer, which we refer to as recurring revenue contracts or long-term contracts. These contracts generally commit the customer to a minimum monthly level of usage with additional charges applicable for actual usage above the monthly minimum commitment. We define usage as customer data sent or received using our content delivery service, or content that is hosted or cached by us at the request or direction of our customer. We recognize the monthly minimum as revenue each month provided that an enforceable contract has been signed by both parties, the service has been delivered to the customer, the fee for the service is fixed or determinable, and collection is reasonably assured. Should a customer's usage of our services exceed the monthly minimum commit, we recognize revenue for such excess in the period of the usage. For annual or other non-monthly period revenue commitments, we recognize revenue monthly based upon the customer's actual usage each month of the commitment period and only recognize any remaining committed amount for the applicable period in the last month thereof.
We typically charge the customer an installation fee when the services are first activated. We do not charge installation fees for contract renewals. Installation fees are recorded as deferred revenue and recognized as revenue ratably over the estimated life of the customer arrangement. We also derive revenue from services and events sold as discrete, non-recurring events or based solely on usage. For these services, we recognize revenue after an enforceable contract has been signed by both parties, the fee is fixed or determinable, the event or usage has occurred, and collection is reasonably assured. We have on occasion entered into multi-element arrangements. Revenue arrangements with multiple deliverables are divided into separate units of accounting if each deliverable has stand-alone value to the customer and there is objective and reliable evidence of the fair value of each deliverable. Arrangements not meeting these criteria are combined into a single unit of accounting.
For services sold in multiple-element arrangements, consideration is allocated to each deliverable at the inception of an arrangement based on relative selling prices. Substantially all services are sold on a stand-alone basis, providing vendor specific objective evidence (VSOE) of selling prices. In the absence of VSOE or third-party evidence of selling prices, consideration would be allocated based on management's best estimate of such prices.
We recognized approximately $1,914, $2,837, and $4,309 in revenue under multi-element arrangements for the years ended December 31, 2013, 2012, and 2011, respectively. As of December 31, 2013, we had no deferred revenue related to multi-element arrangements.
At the inception of a customer contract for service, we make an assessment as to that customer's ability to pay for the services provided. If we subsequently determine that collection from the customer is not reasonably assured, we record an allowance for doubtful accounts and bad debt expense or deferred revenue for all of that customer's unpaid invoices and cease recognizing revenue for continued services provided until cash is received.
Deferred revenue represents amounts billed to customers for which revenue has not been recognized. Deferred revenue primarily consists of the unearned portion of monthly billed service fees, prepayments made by customers for future periods and deferred installation fees.
Accounts Receivable and Related Reserves Trade accounts receivable are recorded at the invoiced amounts and do not bear interest. We record reserves as a reduction of our accounts receivable balance for service credits and for doubtful accounts. Estimates are used in determining both of these reserves. The allowance for doubtful accounts charges are included as a component of general and administrative expenses.
Our allowance for doubtful accounts is based upon a calculation that uses our aging of accounts receivable and applies a reserve percentage to the specific age of the receivable to estimate the allowance for doubtful accounts. The reserve


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percentages are determined based on our historical write-off experience. These estimates could change significantly if our customers' financial condition changes or if the economy in general deteriorates.
Our reserve for service credits relates to service credits that are expected to be issued to customers during the ordinary course of business, as well as for billing disputes. These credits typically relate to customer disputes and billing adjustments and are estimated at the time the revenue is recognized and recorded as a reduction of revenues. Estimates for service credits are based on an analysis of credits issued in previous periods. Goodwill and Other Intangible Assets
We have recorded goodwill and other intangible assets as a result of its business acquisitions. Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. In each of our acquisitions, the objective of the acquisition was to expand our product offerings and customer base and to achieve synergies related to cross selling opportunities, all of which contributed to the recognition of goodwill.
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 concluded that we have one reporting unit and assigned the entire balance of goodwill to this reporting unit at December 31, 2013. The estimated fair value of the reporting unit is determined using the Company's market capitalization as of its annual impairment assessment date or more frequently 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.

The estimated fair value of the reporting unit is determined using a market approach. Our market capitalization is 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, 2013, we determined that goodwill was not impaired. We noted that the estimated fair value of our reporting unit exceeded carrying value by approximately $24,800 or 11%, and $33,100 or 14%, using the market capitalization plus an estimated control premium of 40% on October 31, 2013 and December 31, 2013, respectively. Adverse changes to certain key assumptions as described above could result in a future charge to earnings.
Our other intangible assets represent existing technologies, trade names and trademarks, and customer relationship intangibles. Other intangible assets are amortized over their respective estimated lives, ranging from less than one year to six years. In the event that facts and circumstances indicate intangibles or other long-lived assets may be impaired, we evaluate the recoverability and estimated useful lives of such assets. Amortization of other intangible assets is included in depreciation and amortization in the accompanying consolidated statements of operations.
Impairment and Useful Lives of Long-Lived Assets We review our long-lived assets, such as fixed assets and amortizable intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Events that would trigger an impairment review include a change in the use of the asset or forecasted negative cash flows related to the asset. When such events occur, we compare the carrying amount of the asset to the undiscounted expected future cash flows related to the asset. If this comparison indicates that impairment is present, the amount of the impairment is calculated as the difference between the carrying amount and the fair value of the asset. If a readily determinable market price does not exist, fair value is estimated using discounted expected cash flows attributable to the asset. The estimates required to apply this accounting policy include forecasted usage of the long-lived assets, the useful lives of these assets, and expected future cash flows. Changes in these estimates could materially impact results from operations. Contingencies
We record contingent liabilities resulting from asserted and unasserted claims when it is probable that a loss has been incurred and the amount of the loss is reasonably estimable. We disclose contingent liabilities when there is a reasonable possibility that the ultimate loss will exceed the recorded liability. Estimating probable losses requires analysis of multiple factors, in some cases including judgments about the potential actions of third party claimants and courts. Therefore, actual losses in any future period are inherently uncertain.


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Deferred Taxes and Tax Reserves
Our provision for income taxes is comprised of a current and a deferred portion. The current income tax provision is calculated as the estimated taxes payable or refundable on tax returns for the current year. The deferred income tax provision is calculated for the estimated future tax effects attributable to temporary differences and carryforwards using expected tax rates in effect during the years in which the differences are expected to reverse or the carryforwards are expected to be realized.
We currently have net deferred tax assets consisting of net operating loss carryforwards, tax credit carryforwards and deductible temporary differences. Management periodically weighs the positive and negative evidence to determine if it is more likely than not that some or all of the deferred tax assets will be realized. Forming a conclusion that a valuation allowance is not required is difficult when there is negative evidence such as cumulative losses in recent years. As a result of our recent cumulative losses, we have recorded a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. In the event we were to determine that we would be able to realize our deferred income tax assets in the future in excess of their net recorded amount, we would make an adjustment to the valuation allowance which would reduce the provision for income taxes in the period of such realization. We have recorded certain tax reserves to address potential exposures involving our income tax and sales and use tax positions. These potential tax liabilities result from the varying application of statutes, rules, regulations and interpretations by different taxing jurisdictions. The Company's estimate of the value of its tax reserves contains assumptions based on past experiences and judgments about the interpretation of statutes, rules and regulations by taxing jurisdictions. It is possible that the costs of the ultimate tax liability or benefit from these matters may be materially more or less than the amount that the Company estimated.
Uncertainty in income taxes is recognized in the Company's financial statements under guidance that prescribes a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination. If the tax position is deemed more-likely-than-not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. Our unrecognized tax benefit from uncertain tax positions did not increase from January 1, 2013 to December 31, 2013. We anticipate that our unrecognized tax benefits may increase or decrease within twelve months of the reporting date, as audits or reviews are initiated or settled and as a result of settling potential tax liabilities in certain foreign jurisdictions. It is not currently reasonably possible to estimate the range of change. We recognize interest and penalties related to unrecognized tax benefits in our tax provision.
Our effective tax rate is influenced by the recognition of tax positions pursuant to the more likely than not standard that such positions will be sustained upon examination by the taxing authority. In addition, other factors such as changes in tax laws, rulings by taxing authorities and court decisions, and significant changes in our operations through acquisitions or divestitures can have a material impact on the effective tax rate. Differences between our estimated and actual effective income tax rates and related liabilities are recorded in the period they become known.
We conduct business in various foreign countries. As a multinational corporation, we are subject to taxation in multiple locations, and the calculation of our foreign tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in various taxing jurisdictions. If we ultimately determine that the payment of these liabilities will be unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine the liability no longer applies. Conversely, we . . .

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