Digging Deeper On Key Points From Limelight’s Earnings Call

Yesterday, on Limelight Networks Q2 earnings call, various segments of their business was talked about on a high level that is worth digging deeper into. For starters, one of the biggest questions Wall Street seems to be asking is why did Akamai have a weak Q2 for CDN and Limelight had a strong one? The reason is not pricing pressure, lack of traffic growth or any of the other reasons people want to give. The bottom line is that Limelight simply had a good sales quarter, were aggressive in the market and won some business from Akamai. In quarters past, Akamai has had good quarters while Limelight’s have been bad. That’s the way it works and the winner will be the one who shows consistency with sales. It takes more than one or two quarters to declare a real shift and change in the market landscape.

Based on what both companies reported, Limelight’s CDN traffic does seem to be growing faster than Akamai’s. Notice I didn’t say is larger than, as we don’t know, but simply growing faster. While not discussed on the call, all of the Stage6.com traffic that Limelight lost when Stage6.com closed down, has already been made up by Limelight with new traffic. That’s something to think about considering that Stage6.com was one of the largest traffic sites on the web, doing close to 20 million unique visitors a month when it was shut down. Limelight has replaced all of that lost traffic with new traffic, in only 4 months time, which is a good sign of traffic growth. Of course to be successful, and more importantly profitable, you need more than traffic growth, you need revenue growth. But if you can grow traffic and not have any pricing pressure, which I didn’t see Limelight having in the last quarter, that’s the fastest way to increase revenue.

Another interesting thing not mentioned on the call yesterday is that on the second Tuesday of every month, Microsoft delivers software security updates. Limelight delivers more than half of that traffic for those updates and yesterday, Microsoft released 11 security updates that addressed vulnerabilities in Microsoft Windows, Microsoft Office, and Internet Explorer. That means Limelight’s network was delivering a huge amount of traffic for software updates and the Olympics, all at the same time.

The most interesting thing Limelight said on the call, with very little details, is that they would spend more in the second half of the year to build out their network for business they had won, but traffic they would have to take away from competitors or from in-house. While that seemed to confuse many on Wall Street, it makes a lot of sense if you really follow the CDN market. While Limelight won’t talk about the NFL business that I have confirmed they have won, it’s a great example of a customer who’s business that have won, but so far, have only been committed to be given half the traffic. The other half is to be delivered by Akamai. Without coming out and saying it, Limelight is challenging Akamai head on to take all of that business and show customers it is going to ramp up the capacity of their network to a whole new level by the end of the year.

In addition, this buildout makes Limelight a much stronger acquisition target by the telcos in six months time. What telco wants to acquire a CDN who they then have to put a bunch of money into to have the network ready for the next phase of video growth? By Limelight spending the money now, in six months time they will have built out their network for round two and will be a more valuable acquisition target.